Establishment

Ford downgraded to junk

This week, Ford Motor Co’s credit rating was downgraded by Moody’s to junk. $84bn worth of debt now no longer investment grade. It will be the first of many Fortune 500s to fall foul to this reality. In 2008, there was around $800bn of BBB status credit. That number exceeds $3.186 trillion today.

CM has long argued that the credit cycle would be the undoing of the economy. For too long, corporates binged on easy money, caring little for credit ratings because the interest spreads between AAA and BBB were so negligible. The market ignored risk and companies went hell for leather issuing new debt to fu buybacks to artificially prop up weak earnings to give the illusion of growth.

Sadly this problem is likely to cause widespread sell offs by companies/investors which must stick to products (as woefully yielding as they may be) with an investment grade, exacerbating the problem of refinancing debt close to maturity. The thinking during easy credit times was simple – refinancing could be done with low interest rates because there was no alternative.

This is problematic for three reasons:

1) under the Obama era, much of the newly issued debt was short term meaning $8.4 trillion arrives for refinancing in the next 2.5 years, crowding out the corporate market.

2) more than 50% of US corporates are one notch above junk status. Refinancing will not be a simple affair.

3) more and more investment grade debt will be driven to zero or even negative yields as a result further exacerbating the problems for insurance companies and pension funds dealing with massive unfunded liabilities.

Last year, in relation to unfunded liabilities at US public pension funds, CM wrote,

California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumed an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. He suggested the use of a more realistic 4% rate of return last year. At that rate, CalPERS had a market based unfunded liability of $412bn (or the equivalent of 2 years’ worth of California state revenue). At present Nation now thinks the number is just shy of $1 trillion using a 3.25% discount rate. He expects that the 2017 data for CalPERS will be out in a week or so which should give some interesting perspective as to how much deeper the pension hole is for Californian public servants.

N.B. California collects $232bn in state taxes annually in a $2.3 trillion economy (around the size of Italy).”

This is just California, which in the last 8 years has seen a 2.62-fold jump in the gap between liabilities and state total expenditures.

Unfunded liabilities per household. In California’s case, the 2017 figure is $122,121. In 2008 this figure was only $36,159. In 8 years the gap has ballooned 3.38x. Every single state in America with the exception of Arizona has seen a deterioration.

Switching to Illinois, we have a case study on what happens when pension funds go pear shaped.The Illinois Police Pension is rapidly approaching the point of being unable to service its pension members and a taxpayer bailout looks unlikely given the State of Illinois’ mulling bankruptcy.

Local Government Information Services (LGIS) writes, At the end of 2020, LGIS estimates that the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following yearFund assets will fall from $3.2 billion at the end of 2015 to $1.4 billion at the end of 2018, $751 million at the end of 2019, and $143 million at the end of 2020, according to LGIS…LGIS analyzed 12 years of the fund’s mandated financial filings with the Illinois Department of Insurance (DOI), which regulates public pension funds. It found that– without taxpayer subsidies and the ability to use active employee contributions to pay current retirees, a practice that is illegal in the private sector– the fund would have already run completely dry, in 2015…The Chicago police pension fund held $3.2 billion in assets in 2003. It shelled out $3.8 billion more in benefits to retired police officers than it generated in investment returns between 2003 and 2015…Over that span, the fund paid out $6.9 billion and earned $3.0 billion, paying an additional $134 million in fees to investment managers.”

Therefore Ford’s downgrade to junk will have the effect of repricing over a decade of misplaced central bank policy across all markets. The dominos are only beginning to fall. The market can absorb Ford’s downgrade but not if it has to deal with the panic of dozens like it.

CM has long been warning of GE. Despite being the world’s largest stock in 2000, it is 1/5 the size today, trades in negative equity, wasted $45bn on share buybacks in 2015/16 and were it be classified as junk would increase the pile of junk by 10% on its own. Broadcom and American Tower are other monsters ready to be hurled onto the ratings scrap heap.

Buy Gold. The US Fed will likely embark on QE. It requires an act of Congress to approve the purchase of equities but don’t be surprised if this becomes a reality when markets plunge.

This will be the reset of asset prices which has been long overdue thanks to almost two decades of manipulation by authorities. It has 1929 written all over it. Not 2008.

And student loans should be footed by the taxpayers?

OK, so University of California Berkeley is offering a course (that will be counted towards a degree) in The Right to be Lazy: shifts in Marxist thought

What better way to bash those capitalists than become even more lazy than they already are.

It is run by the University’s DeCal program which is run by students to offer classes that aren’t available in the school curriculum. De stands for ‘democratic education’

It notes,

Each semester there are over 150 courses on topics ranging from Taiwanese Language to Simpsons and Philosophy. Around 3000-4000 UC Berkeley students take DeCals each semester. DeCals are an excellent way of meeting the University’s minimum unit requirement, developing a new or past interest, and meeting peers in a small, comfortable environment.

CM never knew there were two philosophers named Homer.

Should we be surprised when students applying for jobs in the real world wonder why they can’t catch a break when prospective employers ask to see their academic transcripts littered with irrelevant subjects.

And the Democrats think Americans ought to foot the bill for student loans so they can learn about Homer Simpson when a Netflix subscription would be 1/100th the price?

Was the CIA too white at the time of 9/11?

Central Intelligence Agency

According to the BBC, it was. The UK taxpayer-funded broadcaster is buying into this hypothesis that the CIA may have been too “white” and not diverse enough to spot the terrorist activity around September 11, 2001. Weren’t the whites that founded the agency in 1947 the same thinkers who had the nous to use “diversity” (Navaho Native Americans) to devastating effect to transmit sensitive information during WWII? That was 54 years prior to the 9/11 attacks.

What a spectacular own goal. How could the BBC be so careless? It should be completely down to the CIA’s white supremacist backgrounds that led to an agency completely driven by irrational fear to facilitate any old excuse to bomb the crap out of shithole nations. Does CM need to do the BBC’s work for them?

Passing the CIA aptitude tests are bound to be pretty tough in the intelligence areas. The day the CIA starts to prioritise skin tones, sexual proclivity and what is between the legs of candidates as opposed to what is between their ears one should expect even more misses to result. It might be too late – find the CIA Diversity webpage here.

Diversity of thought is all that matters. The BBC would do well to seek introspection. If the CIA had been predominantly staffed by blacks and Hispanics, would this article have ever seen the light of day? Of course not. Good to know BBC practices racism. Or is the journalist gunning for a position on the NY Times editorial board alongside the sweet #cancelwhitepeople Sarah Jeong?

My Homeless are Your Homeless?

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The phrase, “my home is your home” is enshrined in cultural norms. However, is this applicable to the homeless? A lot of articles are circling around the rising crisis in homelessness in America. According to the terrible statistics of the National Alliance to End Homelessness, the overall trend has actually been declining over the last decade. According to the President of Environmental Progress, Michael Shellenberger,

The crisis [in California] is worsening. The number of homeless people in LA increased from 52,765 in 2018 to 58,936. Homelessness increased by 43% and 17% in Alameda County, which includes Oakland, and 17% in San Francisco, respectively. Deaths on the street rose 76% in LA and 75% in Sacramento over the last five years. Murders and rapes involving the homeless increased by 13% and 61% between 2017 and 2018. And 2019 data show that both deaths and homicides are continuing to rise rapidly.

In 2018, the people of California elected Gavin Newsom governor with 62% of the vote and a mandate to take radical action to significantly increase both temporary and permanent housing. He promised 3.5 million new units by 2025, which is 580,000 units per year. And he promised to create a homelessness czar with the power of a cabinet secretary to “focus on prevention, rapid rehousing, mental health and more permanent supportive housing.”

Newsom has not kept his campaign promises and the crisis is worsening. The number of people living outdoors has increased and violence both by and against them has risen by 30% and 37%. In June, the governor let a package of housing reform measures die. In August, he announced would not appoint a homelessness czar. And now the data make clear that less housing will be built this year than in any other year over the last decade.”

While collating statistics on homeless people is a challenge, one has to wonder whether the policies provided by largely Democrat-run states – e.g. California, NY, Washington – to provide ‘free everything’ are creating a marketplace to attract the homeless, hence why numbers in California are swelling while the national total is decreasing.

To flip the argument on its head, sanctuary cities have often spoken about the misguided altruism of their policies with respect to protecting illegal immigrants.

CM wrote back in July,

Remember when Trump said he’d ship illegals to sanctuary cities when Democrats held their resolve over funding border security? Why weren’t sanctuary cities, all publicly open arms about accepting illegal immigrants, instead of baulking at receiving busloads of them? The great irony is that a growing number of illegal immigrants are choosing to move OUT of sanctuary cities. In 2007, 7.7mn (63.1%) lived in the 20 largest sanctuary metros to 6.5mn (60.7%) in 2016 according to Pew. During that time 1.5m illegal immigrants were deported (12.2mn ->10.7mn).”

We can all accept the harsh realities of homelessness and the need to care for them. However, do politicians need to reevaluate how they are dealing with the problem? Solving it is one thing. Creating an environment that attracts caravans of ‘legal citizens’ which might be compounding the problem is another.

Follow the hips, not the lips. The system in California is clearly failing.

Pete Buttigieg compares the challenge of climate change to defeating Nazis

Democratic presidential candidate nobody, Pete Buttigieg, has made the claim that the fight against climate change poses a bigger threat than the struggle against the Nazis in WW2.

Hmmm. So Nazis with StG-44s, MG-42s, 88s Panzers, Tigers, Heinkels, Messerschmitts, V1s, V2s, pocket battleships and U-Boats were less of a threat than fighting for climate change where this mysterious control knob of C02 (a trace gas) will somehow cause wide scale death and destruction.

The only equivalencies that could be drawn between Nazis and climate alarmists are that of twisted propaganda and blind devotion to demagoguery rather than hard facts. Before the left loses its mind, CM isn’t equating climate alarmists to Nazis. They’re more like rusted on communists given their desperation to shut down dissenting views.

By the way, CM was blocked from Extinction Rebellion’s FB page after supplying data sources to a question asked by one of their followers. After pointing out that a junior school level of mathematics was more useful than a degree in climate science (based on simple fractions of the data produced by their own side) with the hard data, CM was banned.

The telegram above is actually from CM’s grandfather who sent this telegram to his beloved wife to say that he was still alive despite repeated efforts by the Nazis to end it. His telegram said virtually nothing. Then again, everything.

Lt. Norman Peterson stared death in the face everyday for almost 6 years. Pete Buttigieg has probably done little more than exchange glances with Anderson Cooper at a CNN Town Hall.

We keep getting told that 100s of millions of climate refugees will result from rising sea levels. We keep waiting. Climate change is a gift that keeps giving. No matter what garbage is espoused, junior high school maths proves time and time again that humans just can’t move the dial in any meaningful way. If only the Nazis were such easy beats…Norman Peterson, and most veterans like him, would have gladly accepted climate change everyday of the week.

The depression we have to have

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In his 1967 presidential address to the American Economic Association, Nobel laureate economist Milton Friedman said, “… we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and as a result, in danger of preventing it from making the contribution that it is capable of making.

What we are witnessing today is not capitalism. While socialists around the world scream for equality and point to the evils of capitalism, the real truth is that they are shaking pitchforks at the political class who are experimenting with economic and monetary concoctions that absolutely defy the tenets of free markets. As my learned credit analyst and friend, Jonathan Rochford, rightly points out, central banks have applied “their monetary policy hammer to problems that need a screwdriver.

Never has there been so much manipulation to keep this sinking global ship afloat. Manipulation is the complete antithesis to capitalism.  Yet our leaders and central banks think firing more cheap credit tranquillizers will somehow get us out of this mess. IT. WILL. NOT.

BONDS

As of August 15th, 2019, the sum of negative-yielding debt exceeds $16.4 trillion. That is to say, 30% of outstanding government debt sits in this category. Every single government bond issued by Germany, The Netherlands, Finland and Denmark are now negative-yielding. Germany just announced a 30-yr auction with a zero-interest coupon.

Unfortunately, insurance companies and pension funds are large scale buyers of bonds and negative interest rates don’t exactly serve their purposes. Therefore the hunt for positive yield (that ticks the right credit rating boxes) means the pickings continue to get slimmer.

Put simply to buy a bond with a negative yield, means that the cost of the bond held to maturity is more than the sum of all the coupons due and the receipt of face value combined. It also says clearly that controlling the extent of the loss of one’s money is preferable to sticking to strategies in other asset classes (e.g. property, equities) where TINA (there is no alternative) is the rule of thumb.

CM believes that there is a far bigger issue investors should focus on is the return “of” their money, not the return “on” it.

Rochford continues,

Central banks have hoped that extraordinary monetary policy would kick start economic growth, but they have instead only created asset price growth. In applying their monetary policy hammer to problems that need a screwdriver they have created the preconditions for the next and possibly greater financial crisis. The outworkings of many years of malinvestment are now starting to show with increasing regularity.

Argentina’s heavily oversubscribed issuance of 100-year bonds in 2017 was considered insane by many debt market participants at the time. The crash to below 50% of face value this month and request for maturity extensions is no surprise for a country that has a long rap sheet of sovereign defaults. Greece’s ten-year bond yield below 2% is another example of sovereign debt insanity…

…There have been three regional bank failures in China in the last three months, likely an early warning of the bad debt crisis brewing in China’s banks and debt markets. Europe’s banks aren’t in much better shape, there’s still a cohort of weak banks in Germany, Greece, Italy and Spain that haven’t fixed their problems that first surfaced a decade ago. Deutsche Bank is both fundamentally weak and the world’s most systemically important bank, a highly dangerous combination.”

What about equity markets?

EQUITIES

We only need look at the number record number of IPOs in 2018 where over 80% launched with negative earnings, you know, just like what happened in 2000 when the tech bubble collapsed.

Have people paid attention to the fact that aggregate US after-tax corporate earnings have been FLAT since 2012? That is 7 long years of tracking sideways. Where is this economic miracle that is spoken of?

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The only reason the markets have continued to remain excited is the generous share buyback regimes among many corporates which have flattered earnings per share (EPS). The “E” hasn’t grown. It is just that “S” has fallen. Credit spreads between AAA and BBB rated corporate paper has been so narrow that over 50% of US corporates now have a BBB or worse credit rating. Now credit spreads between top and bottom investment-grade bonds remain ridiculously tight. At some stage, investors will demand an appropriate spread to account for market “risk.”

Axios noted that for 2019, IT companies are again on pace to spend the most on stock buybacks this year, as the total looks set to pass 2018’s $1.085 trillion record total. Pretty easy to keep markets in the clouds with cheap credit fuelling expensive buybacks. Harley-Davidson is another household name which suffers from strategy decay yet deploys more cash to share buybacks instead of revitalising its core franchise. Harley delinquencies are at a 9-yr high.

Companies like GE embarked on a $45bn share buyback program despite a balance sheet which still reveals considerable negative equity. GE was the largest company in the world in 2000 and now trades at 20% of that value almost 20 years later.

Should we ignore Harry Markopolos, who discovered the Bernie Madoff Ponzi scheme, when he points to the problems within GE? GE management can protest all they like but ultimately the company is not winning the argument if the share price is a barometer.

Valuations are at extreme levels. Beyond Meat trades at 100x revenues. Don’t get CM started on Tesla. A largely loss-making third rate automaker which is trading at outlandish premiums. The blind faith put in charge of a CEO that has lost over 100 senior management members.

Bank of America looked at 20 metrics to evaluate current market levels of the S&P500. 17 of them pointed to excess valuations relative to history including one metric that revealed S&P500 being 90% overvalued on a market cap to GDP ratio. Never mind.

Then witness the push for diversity nonsense inside corporate boardrooms. CM has always believed if a board is best suited to be run by all women based on background, skills and experience, then so be it. That is the best outcome for shareholders. However, to artificially set targets to morally preen will mean absolutely nothing if a sharp downturn exposes a soft underbelly of a lack of crisis management skills. Shareholders and retirees won’t be impressed.

It was laughable to hear superannuation funds ganging up on Harvey Norman last week for not having a diverse enough board. Even though Harvey Norman is thumping the competition which focuses too much on ESG/CSR, the shortcomings of our retirement managers are only too evident. Retirees want returns and their super managers should focus on that, rather than try to push companies to meet their ridiculous self-imposed investment restrictions. Retirees won’t be happy when their superannuation balances are decimated because fund managers wanted to appear socially acceptable at cocktail parties.

PROPERTY

It was only last month that Jyske Bank in Denmark started to offer negative interest mortgages. That is the bank pays interest to the mortgage holders. Of course, the bank is able to source credit below that rate to make a profit however net interest margins for the banks get squeezed globally. What next? Will people be able to sign up to a perpetual negative interest mortgage? Shall we expect a Japan-style multi-generational loan?

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The RBA’s latest chart pack shows net interest margins at the lowest levels for two decades. With the Hayne Banking Royal Commission likely to further crimp on lending growth, we are storing up huge pain in property markets despite the hope that August clearing rates signal a bottom in the short term. Yet more suckers lured in at the top of a shaky economy and financial sector.

Of course, central banks will dance to the tune that all is OK. Until it isn’t.

Don’t forget former US Treasury Secretary Hank Paulson, said “our financial institutions are strong” right before plugging $700bn worth of TARP money to save many of them from bankruptcy in 2008.

CM has previously investigated the Big 4 Aussie banks who have equity levels that are chronically low levels. Our major banks have such high exposure to mortgages that a severe downturn could potentially lead to part or whole nationalisation. Of course, between signalling the importance of factoring climate change, APRA assures us the stress tests ensure our financial institutions are safe.

Back in 2007, Sydney house prices were 8x income. In 2017 Demographia stated average housing (excluding apartment) prices were in the 13-14x range. The Australian Bureau of Statistics notes that 80% of people live in houses and 20% in apartments. Only Hong Kong at 19x beats Sydney for dizzy property prices. In 2019, expect that price/income rates remain at unsustainable levels.

In 2018, Australia’s GDP was around A$1.75 trillion. Our total lending by the banks was approximately $2.64 trillion which is 150% of GDP. At the height of the Japanese bubble, total bank lending as a whole only reached 106%. Mortgages alone in Australia are near as makes no difference 100% of GDP. Where there is smoke, there is fire.

At the height of the property bubble frenzy, Japanese real estate related lending comprised around 41.2% (A$2.5 trillion) of all loans outstanding. N.B. Australian bank mortgage loan books have swelled to 64% (A$1.8 trillion) of total loans.

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Sensing the bubble was getting out of control, the Bank of Japan went into a tightening rate cycle (from 2.5% to 6%) to contain it. Unfortunately, it led to an implosion in asset markets, most notably housing. From the peak in 1991/2 prices over the next two decades fell 75-80%. Banks were decimated.

In the following two decades, 181 Japanese banks, trust banks and credit unions went bust and the rest were either injected with public funds, forced into mergers or nationalized. The unravelling of asset prices was swift and sudden but the process to deal with it took decades because banks were reluctant to repossess properties for fear of having to mark the other properties (assets) on their balance sheets to current market values. Paying mere fractions of the loan were enough to justify not calling the debt bad. If banks were forced to reflect the truth of their financial health rather than use accounting trickery to keep the loans valued at the inflated levels the loans were made against they would quickly become insolvent. By the end of the crisis, disposal of non-performing loans (NPLs) among all financial institutions exceeded 90 trillion yen (A$1.1 trillion), or 17% of Japanese GDP at the time.

The lessons are no less disturbing for Australia. As a percentage of total loans outstanding in Australia, mortgages make up 65%. The next is daylight, followed by Norway at around 40%. US banks have cut overall property exposures and Japanese banks are now in the early teens. Post GFC, US banks have ratcheted back mortgage exposure. They have diversified their earnings through investment banking and other areas. That doesn’t let them off the hook mind you.

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Japanese banks have 90%+ funding from domestic deposits. Australia is around 60-70%. Our banks need to go shopping in global markets to get access to capital. Conditions for that can change on a dime. External shocks can see funding costs hit nose bleed levels which are passed onto consumers. When you see the press get into a frenzy over banks passing on more than the rate rises doled out by the RBA, they aren’t just being greedy – a large part is absorbing these higher wholesale funding costs.

Central banks need a mea culpa moment. We need to move away from manipulating interest rates to muddle through. It isn’t working. At all.

Rochford rightly points out,

Coming off the addiction to monetary policy is going to be painful, but it is the only sustainable course. It is likely that normalising monetary policy will result in a global recession, but this must be accepted as an unavoidable outcome given the disastrous policies of the past. Excessive monetary and fiscal stimulus has pulled consumption forward, the process of unwinding that obviously requires a level of consumption to be pushed backwards.”

Rochford is being conservative (no doubt due to his polite demeanour) in his assessment of a global recession. It is likely that this downturn will make the GFC of 2008 look like a picnic. CM thinks depression is the more apt term. 1929 not 2008. Central banks are rapidly losing what little confidence remains. If the RBA think QE will be a policy option, there is plenty of beta testing to show that it doesn’t work in the long run.

It is time to have the recession/depression we had to have to get the markets to clear. It will be excruciatingly painful but until we face facts, all the manipulation in the world will fail to keep capitalism from doing its job in the end. The longer we wait the worse it will get.

“It’s not what you don’t know that gets you into trouble…..it is what you know to be sure that just ain’t so! – Mark Twain.

Advertisers’ own goal as Alan Jones’ ratings remain top

So Alan Jones’ 17.1% share (-0.3%) on morning radio should be confirmed with the following month’s data. ABC came in second at 11.5% (+1.6%) according to GfK.

If we go back in time (Jan-Mar 2019 ) survey Jones’ breakfast program rated 15.0% (-2.9%). He has been as high as 19.0% (Jul-Sep 2018) figures. So recent relatives are important in giving a fair appraisal on popularity or any “hit” from Jacinda Ardern commentary.

Anyone that listens to Jones would hardly be surprised by his brand which has kept him #1 for so long.

Till, cue the lefties looking to celebrate plummeting ratings on a quarterly basis in the next survey and the self congratulatory back slapping pointing to their hard work in bullying spineless advertisers to fold to the likes of Mad Fucking Witches (which says something about the marketing departments to follow any campaign led by a group of radical feminists with profanity in the name). Talk about double standards.

Once again corporations are free to choose how they advertise. If Jones’ audience is relatively stable and #1 (presumably the right targets for companies that advertise), what purpose has sanctimoniously folding to a cabal of empty headed lefties who probably don’t even make a meaningful contribution to these brands or listen to Jones? Absolutely none. Complete own goal and sort of hilarious to be given lectures on morality by a bank or a mattress company that promotes the likes of the expletive laden, misandrist bile spewed by Clementine Ford.

To shareholders, the hope is that advertising is spent where its most effective in converting to revenue, not on proving they are answering questions no one of relevance to the business was even asking.