Fraud

This can only end in tears

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As Sweden’s economy slows to the worst economic growth rate in 5 years under a negative interest rate policy, one would think the Swedish Central Bank (Riksbank) would be seeking to prudently manage its asset book on the basis of appropriate risk/reward as opposed to lecturing Australia and Canada on their respective carbon footprints. What we are witnessing is yet another discrete move by authorities to manipulate markets based on fantasy rather than fact.  The hypocrisy is extreme as we shall discover.

While the Riksbank should have complete freedom in how it wishes to deploy capital, we should view this is a pathetic sop to the cabal at the European Central Bank (ECB). Since when did central bankers become experts on climate change? The RBA is no better. Deputy Governor, Guy Debelle, gave a speech in March 2019 on the risks posed by climate change which based prophecies on the data accident-prone IPCC and Bureau of Meteorology. Why not seek balance? Easier to fold to group think so as not to be outed as a pariah. Utterly gutless. Our own APRA is also pushing this ridiculous agenda on climate change reporting. It is willful negligence.

While it is true that on a per capita basis, Australia and Canada’s emissions are higher than the global average, why doesn’t the Riksbank give us credit for lowering that amount 11.4% since 2000? Even Canada has reduced its carbon emissions by 7.3% over the last 18 years. Admittedly Sweden’s emissions per capita have fallen 21.9% according to the IEA. Greta will be happy.

Why hasn’t the Riksbank taken China or India to task for their 169.9% or 94.7% growth in CO2 emissions respectively? There are plenty of oil-producing nations – Qatar, UAE, Bahrain, Saudi Arabia and Oman that have worse per capita outcomes than Australia or Canada. Do these countries get special dispensation from the wrath of the Riksbank? Clearly.

The US has pulled out of the Paris Climate Accord. If the US has marginally lower emissions per capita (15.74t/CO2-e) than Australia (16.45t/CO2-e), isn’t a double standard to write,

The conditions for active climate consideration are slightly better in our work with the foreign exchange reserves. To ensure that the foreign exchange reserves fulfil
their purpose, they need to consist of assets that can be rapidly converted to money even when the markets are not functioning properly. Our assessment is that the foreign exchange reserves best correspond to this need if they consist of
75 per cent US government bonds, 20 per cent German and 5 per cent British, Danish and Norwegian government bonds.

Essentially Riksbank commitment to climate change is conditional. The US which is responsible for 13.8% of global emissions can be 75% of holdings. Australia at 1.3% can’t. No doubt sacrificing Queensland Treasury Corp, WA Treasury Corp and Albertan bonds from a Riksbank balance sheet perspective will have little impact on the total. In short, it looks to be pure tokenism. The Riksbank has invested around 8% of its foreign exchange reserves in Australian and Canadian central and federal government bonds. So perhaps at the moment, it is nothing but substitution from state to federal. Why not punish NSW TCorp for being part of a state that has 85%+ coal-fired power generation?

At the very least the Riksbank admits its own hypocrisy.

The Riksbank needs to develop its work on how to take climate change into consideration in asset management. For instance, we need a broader and deeper analysis of the issuers’ climate footprint. At the same time, one must remember that the foreign exchange reserves are unavoidably dominated by US and German government bonds. The Riksbank’s contribution to a better development of the climate will, therefore, remain small. This is entirely natural. The important decisions on how climate change should be counteracted in Sweden are political and should be taken by the government and the Riksdag (parliament).

Still, what hope have we got when Benoît Cœuré, member of the Executive Board of the ECB, lecturing those on “Scaling up Green Finance: The Role of Central Banks.” He noted,

2018 has seen one of the hottest summers in Europe since weather records began. Increasing weather extremes, rising sea levels and the Arctic melting are now clearly visible consequences of human-induced warming. Climate change is not a theory. It is a fact.

Reading more of this report only confirms the commitment of the ECB to follow the UN’s lead and deliberately look to misallocate capital based on unfounded claims of falling crop yields and rising prices (the opposite is occurring) and rising hurricane and drought activity (claims that even the IPCC has admitted there is little or no evidence by climate change). Sweden is merely being a well-behaved schoolboy.

Cœuré made the explicit claim, “The ECB, together with other national central banks of the Eurosystem, is actively supporting the European Commission’s sustainable finance agenda.

CM thinks the biggest problem with this “agenda” is that it risks even further misallocation of capital within global markets already drowning in poorly directed investment. It isn’t hard to see what is going on here. It is nothing short of deliberate market manipulation by trying to increase the cost of funding to conventional energy using farcical concocted “climate risks” to regulate them out of existence.

Cœuré made this clear in his speech,

once markets and credit risk agencies price climate risks properly, the amount of collateralised borrowing counterparties can obtain from the ECB will be adjusted accordingly.

What do you know? On cue, Seeking Alpha notes,

Cutting €2bn of yearly investments, the European Union will stop funding oil, natural gas and coal projects at the end of 2021 as it aims to become the first climate-neutral continent.

All CM will say is best of luck with this decision. Just watch how this kneeling at the altar of the pagan god of climate change will completely ruin the EU economy. The long term ramifications are already being felt. The EU can’t escape the fact that 118mn of its citizens (up from 78m in 2007) are below the poverty line. That is 22% of the population. So why then does Cœuré mention, in spite of such alarming poverty, that taking actions (that will likely increase unemployment) will be helped by “migration [which] has contributed to dampening wage growth…in recent years, thereby further complicating our efforts to bring inflation back to levels closer to 2%.

Closer to home, the National Australia Bank (NAB) has joined in the groupthink by looking to phase out lending to thermal coal companies by 2035. The $760 million exposure will be cut in half by 2028. If climate change is such a huge issue why not look to end it ASAP? This is terrible governance.

Why not assess thermal coal companies on the merits of the industry’s future rather than have the acting-CEO Philip Chronican make a limp-wristed excuse that it is merely getting in line with the government commitment to Paris? If lending to thermal coal is good for shareholders in 2036, who cares what our emissions targets are (which continue to fall per capita)? Maybe this is industry and regulator working hand-in-hand?

The market has always been the best weighing mechanism for risk. Unfortunately, for the last two decades, global central bank policy has gone out of its way to prevent the market from clearing. Now it seems that the authorities are taking actions that look like collusion to bully the ratings agencies into marking down legitimate businesses that are being punished for heresy.

This will ironically only make them even better investments down the track when reality dawns, just as CM pointed out with anti-ESG stocks. Just expect the entry points to these stocks to be exceedingly cheap. Buy what the market hates. It looks as though the bureaucrats are set to make fossil fuel companies penny stocks.

Brittany lambasts the double standards of the lamestream media

MRCTV commentator Brittany M. Hughes points out the blatant hypocrisy and double standards at the ABC Network in America.

Teflon Trudeau

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At this stage, it seems that Canadian PM Justin Trudeau will form a minority government. Look forward to 4 more years of gaffes ahead. Having said that, the Conservatives need to take a long hard look in the mirror and realise they lost to a completely empty suit. That speaks volumes of their (lack of) popularity where it mattered. CM has said for a long time that Rona Ambrose was always the better choice to be the leader of the Conservatives. This was an own goal.

Trudeau had blackface, brown face, dressing like an Indian, using words like peoplekind, using two planes on the election campaign and the Trans Mountain pipeline debacle despite his climate emergency antics, found guilty of breaching ethics in the Aga Khan and SNC Lavalin scandals and even suggesting the use of haiku and poetry to assimilate returning ISIS fighters etc. against him but despite all that and more, it didn’t upset enough Canadians to sway their vote. All of this was on the ticket, much like Trump’s “grab ’em by the p#ssy” remarks. Say all you want about the morals or ethics of those that still voted for him despite all this. It is irrelevant. They did. Deal with it. For once Obama got a call right.

The Conservatives should have done far better but obviously failed to connect with the people. Scheer should step down as leader. Canada is obviously not that conservative despite a strong gain. Sadly, Scheer’s performances were quite poor in the final weeks when deflecting questions, especially related to hiring people that Trump used on his campaign. Just sounded disingenuous. Best to admit it and carry on. If there was a worry this would be discovered Scheer’s team shouldn’t have hired him.

No point in Conservatives wheeling out the old “we won the popular vote” excuse as the Democrats did in the 2016 US election as Trudeau has held onto power by the rules. In the end that is all that counts.

Still, Canadians, nor the Liberals should be cheering the outcome. Minority governments are poisonous. Australia’s 2010 election proved how disastrous compromise can be. As politicians look to serve their own interests, poor compromise is often made. Note that Singh’s NDP has been slaughtered so even as a coalition partner, he can’t wield so much power with such a poor outcome, so net-net Trudeau won’t face much of a different landscape.

On a positive note, by losing their majority, the Liberals will also lose a majority on parliamentary committees. This will mean far less ability to shut down investigations of scandals. A strengthened opposition may look into a deeper investigation on SNC-Lavalin but is that what Canadians want?

So with bitter disappointment, congratulations still go to Teflon Trudeau. CM believes it will be a case of buyer’s remorse in Canada. Conservatives have 4 more years to get their house in order. Much like Albanese is struggling with Labor’s platform in Australia, Conservatives need to wake up and smell the coffee.

It is worth assessing what has happened in Canada translating south of the border in next year’s US presidential election. Can people see how despite being cloaked in scandals, gaffes, blunders and many other flaws, Trudeau didn’t lose enough voters to cost him his job? That is why, despite the hateful media, Trump is set to romp home in 2020. Ultimately people care (and vote) about issues affecting them, not the morals or actions of those that hold power. Do people really think the Democrats are in with a shot with the current crowd of candidates? Trump has a Teflon coating too.

Forget the return “ON” your money. Just look to the return “OF” it

CM knew a lot of passive indices existed but not to this crazy extent. Probably explains why there is so much stupid money tied up in me too commoditised investment products. 4 years ago CM wrote a piece on the dangers of ETFs (especially leveraged)  and passive products in a downturn. These products predominantly follow the market, not lead it. So if these products end up stampeding toward the exits in a market meltdown, the extent will be amplified, especially those levered funds potentially making market panic look worse than it really might otherwise be. Don’t be surprised to see the mainstream media sensationalise the size of any falls in the market.

According to Bloomberg, 770,000 benchmark indexes were scrapped globally in 2019…however  2.96 million indexes remain around the world, according to a new report from the Index Industry Association…There are an estimated 630,000 stocks that trade globally, including c.2,800 stocks on the NYSE and c. 3,330 on NASDAQ or 5x as many indices as there are securities globally.

CM wrote back in October 2015,

ETFs are hitting the market faster than the dim-sum trolley can circle the banquet hall. Charles Schwab, in the 12 months to July 2015, saw a 130-fold preference of ETF over mutual funds given their relative simplicity, cost and transparency….

…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 as a percentage of total outstanding shares 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. As more bearish market activity has arrived since August 2015 we investigate how ETFs may impact given a large part of recent existence has been under more favourable conditions…

CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that
leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index. As illustrated in the following chart FAS in volatile markets tends to overshoot aggressively

…The point Mr Fink is driving at is more obvious with the following chart which shows in volatile markets, the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis, the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.”

CM has said for many years, where CDOs and CDSs required the intelligence of a mystical hermit atop a mountain in the Himalayas to understand the complexities, ETFs are the complete opposite. Super easy to understand which inadvertently causes complacency. Unfortunately, as much as they might try to do as written on the tin, the reality could well turn out to be the exact opposite.

Hence CM continues to believe that stocks with low levels of corporate social responsibility (CSR) scores like tobacco companies such s Philip Morris, JT and Imperial Tobacco, as well as gold/silver bullion,  look the places to be invested. Cash won’t necessarily be king because the banks are already in a world of pain that hasn’t even truly started yet. Aussie banks look like screaming shorts at these levels. The easiest way for the plebs – without access to a prime broker – to do this is to buy put options on individual bank names. Out of the money options are dirt cheap.

Banks

Forget the return ONyour money. Just look to the returnOFit.

NB, none of this constitutes investment advice. It is a reflection of where CM is invested only. 

 

Pot calling the kettle black?

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Ukrainian MP Andriy Derkach revealed yesterday that former VP Joe Biden received $900,000 from Burisma Group (the one his son Hunter worked for) for lobbying activities.

Derkach publicized documents which explained the channel of getting those funds. He said,

This was the transfer of Burisma Group’s funds for lobbying activities, as investigators believe, personally to Joe Biden through a lobbying company. Funds in the amount of $900,000 were transferred to the U.S.-based company Rosemont Seneca Partners, which according to open sources, in particular, the New York Times, is affiliated with Biden. The payment reference was payment for consultative services…According to the documents, Burisma paid no less than $16.5 million to [former Polish President, who became an independent director at Burisma Holdings in 2014] Aleksander Kwasniewski, [chairman of the Burisma board of independent directors] Alan Apter, [Burisma independent director] Devon Archer and Hunter Biden [who joined the Burisma board of directors in 2014]“…

Using political and economic levellers of influencing Ukrainian authorities and manipulating the issue of providing financial aid to Ukraine, Joe Biden actively assisted closing criminal cases into the activity of former Ukrainian Ecology Minister Mykola Zlochevsky, who is the founder and owner of Burisma Group…Biden’s fifth visit to Kyiv on December 7-8, 2015 was devoted to making a decision on the resignation of [then Ukrainian Prosecutor General] Viktor Shokin over the case of Zlochevsky and Burisma. Loan guarantees worth $1 billion that the United States was to give to Ukraine was the point of pressure. Biden himself admitted exerting pressure in his speech at the Council of Foreign Relations in January 2018, calling Shokin ‘son of a bitch who was fired.”

Derkach added that international corruption of this magnitude couldn’t have taken place without the participation of then Ukranian President Petro Poroshenko.

International corruption of this magnitude, as well as interference in the U.S. presidential election, could not have occurred without Poroshenko’s participation

…We see the conflict in which the new government of Ukraine faces due to the activities of the previous president. I want to emphasize that I’m almost sure, and not only I, but many journalists, that Poroshenko personally bears responsibility for the situation in which Ukraine has ended up, for dragging Ukraine into interfering in the U.S. presidential election, for a huge number of corruption scandals and international corruption that could not have occurred without his control or participation.

Of course, all this must be proven in a court of law, but isn’t it ironic that Biden is demanding Trump is impeached when it would seem the VP (undoubtedly in the full knowledge of the President) might have been complicit in quid pro quos with Ukraine himself.

Do we believe Joe Biden? Biden claimed he had never spoken to Burisma until a picture came out showing him playing golf with Devon Archer and his son, Hunter Biden, both directors of Burisma. Archer and Hunter were managing partners at Rosemont Seneca Partners. Archer was also a co-founder of the private-equity firm Rosemont Capital with Christopher Heinz, his college roommate at Yale. Archer had served as a senior adviser to Heinz’s stepfather, Democratic Senator John Kerry Kerry, during his 2004 presidential bid. Surely Joe never heard a peep about Burisma? Almost as believable as Bill Clinton’s chance meeting with AG Loretta Lynch on a Phoenix Airport runway, a day before her testimony on Hillary’s emails. Nothing to see here.

The Grim Repo

What a surprise to see markets show little reaction to the negative repo (repurchase agreements) market in the past week. So much nonchalance and complacency remain in financial markets. It is as if there is this false belief that the authorities can keep the ship afloat with magical modern monetary theory. Not a chance. The tipping points in the financial markets are quantum levels bigger than any that Sir David Attenborough could conjure up in his wildest pessimistic dreams. If we want to cut carbon emissions, the coming economic slump will take care of that.

On average there are $1 trillion of overnight repo transactions every day, collateralised with US Treasuries. Yet many missed that the repo market seized up late last week. Medium-term repos surged from the normal band of around 2.00~2.25% to around 5.25% on Monday. Some repo rates hit 10% on Tuesday.

Essentially what this said was that a bank must have seen that it was worth borrowing at an 8% premium overnight in return for pledging ‘risk-free’ US Treasuries at 2%. In any event, it allowed that particular bank to survive for another day. Banks use the repo market to fund the loans they issue and finance trades that are executed. It is like an institutional pawn shop.

Looking at it another way, why weren’t other banks willing to lend and take an 8% risk-free trade? A look at the global bank’s share price action would suggest that these bedrock financial institutions that grease the wheels of the economy are not in good shape. We just pretend they are. We look at the short term performance but ignore the deterioration in underlying balance sheets. The Aussie banks are future crash test dummies given the huge leverage to mortgages. As CM has been saying for years, the Big 4 risk whole or part nationalisation.

This recent repo action is reminiscent of that before the GFC. The Fed stepped in with $75bn liquidity per day to stabilise markets by bringing rates into the target range. The question is whether the repo action is a short-term aberration or the start of a longer-term quasi QE programme which turns into a full-blown QE programme.

The easiest way to look at the repo market action is to say the private markets are struggling to be self-funding, requiring central bank intervention. Bank of America believes the Fed may have to buy upwards of $400bn of securities to back the repo market this year alone.  This is another canary in the coal mine.

CM wrote a long piece back in July 2016 titled, “Dire Straits for Central Bankers.” In that report, we described how the velocity of money in the system was continuing to drift. As of now, central banks have printed the equivalent of $140 trillion since 2008 but have only managed to eke out $20 trillion in GDP growth. That is $7 of debt only generates $1 of GDP equivalent.

This is the problem. Companies are struggling to grow. US aggregate after-tax profits have gone sideways since 2012. We have been lulled into a false sense of security by virtue of aggressive share buyback programs that flatter EPS, despite the anaemic trend.

Despite the asset bubbles in stocks, bonds and property, pension funds, especially public sector retirement schemes, are at risk of insolvency given the unrealistic return assumptions and nose bleed levels of unfunded liabilities in the trillions.

Also worthy of note is the daily turnover of the gold derivatives market which has hit $280bn in recent months, or 850x daily mine production. This will put a lot more pressure on the gold physical market and also to those ETFs that have promissory notes against gold, as opposed to having it properly allocated.

We live in a world of $300 trillion of debt, $1.5 quadrillion in derivatives – until this is expunged and we start again, the global economy will struggle. That will also require the “asset” values to be similarly wiped out. Equity markets will plunge 90-95% relative to gold. That suggests a 1929 style great depression. The debt bubble is too big. Central banks have lost control.

Buy Gold.

Emmy Awards turnout worst in history

It is Hollywood self-adulation season. It started last night with the Emmys which suffered its worst ever turnout, a 22% drop on last year in terms of those tuning in. No doubt the Oscars will show a similarly dismal outcome.

As usual all the pet causes of the champagne socialists were there – climate change, transgender rights, white privilege, gender pay gap, racial pay gap and anti-Trump slurs.

When the format has become so predictable is it any wonder why audiences have dwindled.

The 90th Oscars viewership slumped 16% to 25 year lows. They’d slumped 40% over the preceding 5 years. Things had become so bad that the network had to offer advertisers guarantees for the first time ever.

Maybe we only need evaluate Hollywood on its nearly two decades of failure as it has made its films more political. We need only look at the ratings of the Emmys, Grammys, Oscars and Golden Globes which are all well off the peak.

Cinema attendance in the domestic US market is back at 1993 levels. In the 1990s Hollywood made 400-500 films annually. It now pumps out more than 700. The average revenue per film continues to head south. The strategy seems to throw more at audiences in the hope that I t sticks. Are the movies the industry rates itself on actually reflected in the box office? Out of touch with the audience? It would seem so.

It should appear to Hollywood that movies about real life stories are the ones that seem to resonate most with audiences – Titanic, The King’s Speech, Argo and A Beautiful Mind. These 4 films grossed $1.04 billion at the box office. It has been 12 years since Hollywood has had a fictional film it chose for itself beat the worst of the 4 movies based off real stories in ticket sales. It has been 15 years since having a proper blockbuster like Lord of the Rings which is arguably pure fantasy and extends to child audiences.

Films are of course subjective. One film one person may enjoy, others may not share the same view. It is interesting though that $100m box offices were a cert for an Oscar Best Picture award til 2004 after which it has been hit and miss since. 9 films in the last 13 have failed to breach $75mn. So instead of Hollywood being so preoccupied with espousing politics, perhaps it should look to the audience it ‘preaches’ to and starts ‘reaching’ them instead.