Geopolitics

Darkest Hour

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Saw Darkest Hour yesterday. Extremely well cast movie. Oldman plays Churchill impeccably well. Great storyline and is actually more relevant today than ever. The portrayal of Chamberlain after his disastrous run as PM is so indicative of the weak and feckless political class we have today across the Western democracies. Despite Chamberlain’s gross incompetence, out of power he still tries to undermine Churchill who ultimately roasts him alive. Well worth seeing. If only we had more Churchills today.   As there are more than enough dictators to stand up against.

The only thing that spoilt the film was the health and safety ‘environmentally friendly film making’ rubbish during the credits and an advisory that Churchill smoking cigars like a chimney was only a portrayal and people should be aware of the health risks of tobacco. Yet more evidence of the PC culture that overwhelms every walk of life,

What happens when you poke a Russian bear?

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As written earlier in the week, regardless of one’s views on the righteousness of any attack on Syria, Putin is being faced for the first time in a long time, a leader of a foreign nation (nations as it turns out) prepared to stand up to him. Obama fled the Syria battlefield after being given a two hour window when Russia first went to the aid of Assad. If that wasn’t the ultimate sign of a bully in the Kremlin it is hard to think of what is. While sanctions may have bitten to a degree post Ukraine and the shooting down of a Malaysian Airlines flight, Syria is essentially a testing ground for Putin to weigh up Western (specifically Trump’s) resolve. If we look at Russia’s response post the Syrian strike,

The worst apprehensions have come true. Our warnings have been left unheard…A pre-designed scenario is being implemented. Again, we are being threatened. We warned that such actions will not be left without consequences…All responsibility for them rests with Washington, London and Paris…Insulting the President of Russia is unacceptable and inadmissible.

Kind of says it all really – Russia hasn’t been insulted. Putin has. He must have a glass jaw  like Trump! Two bullies flexing muscle. In a show down Should Putin wish to pick a direct conventional fight against 3 nuclear powers (explicitly mentioned), he knows that ‘mutually assured destruction’ is the very last option in the drawer and next to no chance of being selected despite all of the media beat up. On a conventional basis, Putin wins more battles by stirring up the hornet’s nests in other regions. Lending more support to Iran, Lebanon and Yemen. Destabilize Saudi Arabia and antagonize Israel.

CM wrote,

It is worth nothing that Syria is Rosoboronexport’s (Russia’s military export wing) 2nd largest customer after Iran. Putin is sick of having the West try to remove his clients. Assad is key to Russia’s foothold in the Middle East. With an essentially pro-Iran Iraqi government and Syria as well as Hezbollah Putin has a geopolitical doormat from the troubled separatist states to Russia’s south to Lebanon.

Some arguments have been made about the risks of the American, French or UK strikes killing Russian troops or civilians on the ground in Syria handing Russia free will to attack its enemies. Scroll back to November 2015 when the Turkish Air Force shot down a Russian Su-24 fighter it claimed entered its airspace. Two Russian pilots were killed in the shooting and subsequent rescue. The Russians were incensed but President Erdogan is still in power and Ankara isn’t flailing after seeing its capitol turned into smoldering rubble.

This argument that the Russians weren’t given advance warnings of the attack is ridiculous. Had the Russian defence forces been on proper alert (they most definitely weren’t passed out behind their radar screens after a vodka binge) they would have detected the missile launches. Wind back to the 59 missile launch earlier last year against Syrian chemical facilities. We didn’t hear a peep from Putin. Why now? Of course he is incensed over the booting of diplomats on the nerve agent scandal but this is a showdown of ego.

Think of the long geopolitical chess board here. Should Trump have backed down on Putin’s threats, wouldn’t China’s Xi feel equally empowered to annex Taiwan by telling POTUS that he risks ‘grave reprisals if he meddles with Chinese sovereign territory’?

For all the initial snubbing of Trump by Macron on his historic election win in France, there is no way he would have gone in alone to attack a chemical facility without the guarantee of the military might of America. It is unlikely Theresa May would have done it either. So for all of the ‘unhinged’ lunatic rhetoric bandied about by the media, foreign nations don’t gamble their own sovereignty lightly, especially over something like Syria.

General Mattis has said they plan no further strikes at this stage. Does Putin order his forces to sink a US destroyer in the Mediterranean which launched those missiles? Highly unlikely. He does have the best weapon available to do that (the ‘Sunburn’) but sending US naval vessels to the bottom of the sea on a strategic strike would seem a big response to a targeted hit.

Let there be no mistake. There is a new sheriff in town. Russia has a bloody nose it didn’t think it would find itself. Putin miscalculated that Trump isn’t all Twitter-fueled bluster. Uncertainty in foreign leaders is always a risk for enemies. Trump has shown Putin he won’t be bullied like his predecessor.

Putin doesn’t want a hot war with America. The best way to strike at the US is like the last 6 decades. Undermine her at every opportunity. Supply her enemies. As mentioned before, if the Russians didn’t think it worth hitting back at Turkey for deliberately targeting its fighters, it is unlikely that Putin, no matter how ‘insulted’ he might feel will take a strike not aimed at Russians as a pretext to pick a fight with Trump. Putin has worked out the US president’s measure. He miscalculated. He won’t make that mistake twice.

For the media, running all the scare campaign stories is not only highly irresponsible (as it did over Yemen’s attacks on Saudi Arabia) but proving the lack of depth of analysis. They can beat Trump over the head all they wish but should note the actions of Macron and May following him into the region as a tacit approval of the US leader. Was he the madman they portrayed him as in the first place they would have stayed well out of it.

Watch for Putin’s response (unlikely but will threaten it will come when the evil Americans least expect) and think deeply about why it is important that the real despots (Putin, Xi, KJ-U, Erdogan) around the world no longer have the ability to exercise free will in knowledge that the worst they face is a slap on the wrist from the UN.

Sounds more like grounds for congratulation than censure. 

Chapter 11 bankruptcy filing trends in the US surging

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The Chapter 11 bankruptcy trends in the US have been picking up in the last 4 years. While well off the highs of the months and years of the GFC and years following it, the absolute numbers of filings has exceeded the levels leading up to the crisis in 2007/8.

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Here we put 2006/7/8 alongside 2016/17/18. The average monthly bankruptcy filings were around 355 in 2006 moving to 429 in 2007 and then 718 in 2008. If we looked at the data in the 12 months prior to the quarter leading into Lehman’s collapse, bankruptcies averaged 463/month. The ultimate carnage peaked out at 1,049 in 2009 (1,377 in Apr 2009). For 2016, 2017 and 2018 (annualized) we get 454, 480 and 521 respectively.

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Bankruptcy filings tend to be seasonal and often show peaks in April when tax season coincides with businesses.

However the %-age spike in bankruptcies in 2008 ahead of Lehman’s downfall was 46%. In the latest recorded month from the American Bankruptcy Institute (ABI) was 81%. This March 2018 spike is the second highest since the GFC hit. April figures will be interesting if we get another lift on that figure. Not even seasonality can explain away the differences. The trends seem clear.

Thinking logically, we are at the end of the generous credit cycle. Interest rates are heading north thanks to a less accommodating Fed. Naturally ‘weaker’ companies will have more trouble in refinancing under such environments. The lowering of corporate taxes would seem to be a boon, but with loss making businesses it becomes harder to exercise tax loss carry forwards.

We’ve already started to see GFC levels of credit card delinquency at the sub-prime end of town. Sub-prime auto loan makers seeking bankruptcy protection have surged too.

Fitch, which rates auto-loan ABS said the 60+ day delinquency rate of subprime auto loans has now risen to 5.8%, up from 5.2% a year ago, and up from 3.8% in February 2014 to the highest rate since Oct 1996, exceeding even GFC levels.

growing number of car loans in the US are being pushed further down the repayment line as much as 84 months. In the new car market the percentage of 73-84-month loans is 33.8%, triple the level of 2009. Even 10% of 2010 model year bangers are being bought on 84 month term loans. The US ended 2016 with c.$1.2 trillion in outstanding auto loan debt, up 9%YoY and 13% above the pre-crisis peak in 2005.

The irony here is that sub-prime auto loan makers expanded lending because new technology allowed these companies to to remotely shut down and repossess vehicles of owners who were late on payments. That game only lasts so long before it forms its own Ponzi scheme.

Throw skittish financial markets, geopolitical instability and the mother of all refinancings coming the US Treasury’s way it is not to hard to see bankruptcies pick up from here.

Zucker feasted on your consent to be a sucker

Whatever the outcome of this hearing, much of the data collected was willingly offered by Facebook users. It was they who told people where they took vacation, the restaurant they ate or birthday they celebrated. It was they who adorned their avatar with a transparent French or rainbow flag as a back drop after another terrorist attack or to show support for same sex marriage. It was they who clicked the check box to agree to the “terms and conditions” immediately without reading it. Is that Zuckerberg’s fault? Questions however must be asked with respect to the ability to access microphones and cameras unbeknownst to users. How flagrantly was privacy law violated beyond that agreed by users?

For as much as Zuckerberg might look an evil violator of privacy laws (he may yet be proved to be so), if one wants real anonymity, social media is the last place to find it. It is doubtful anyone posts happy snaps on social media as a pure storage back up device. Many people crave attention and more than ever their self-actualisation stage in the ‘hierarchy of needs’ is driven by likes and shares rather than the Abraham Maslow’s original theorem of 75 years ago. The higher the ratio of “selfies” would probably be highly correlated to attention deficit disorder. Protesting the use of the data provided is a grossly naive assumption if not borderline negligent. Tucked away in the fine print of the words and conditions would surely have FB gaining their complete consent.

Ted Cruz took it to Facebook CEO Mark Zuckerberg on whether the social media giant ‘censors conservative’ news. He replied, “Silicon Valley is an extremely left-leaning place.While denying that he knows the political affiliations of the 15~20,000 staff who police content he said the group does its best to remove things that are considered hateful (e.g.hate speech, terrorism), hurtful or distasteful (e.g. nudity). It was brought to Zuckerberg’s attention that black conservatives (and Trump supporters) Diamond & Silk had their page blocked with 1.2 million followers on grounds of  “being unsafe to the community”. In any event, Zuckerberg deflected many of the questions in his testimony on grounds of the size of the organization but admitted not enough was done to police itself. Power corrupts…? Absolutely…?

Which brings the whole argument surrounding ‘free speech’ and social media sites exercising subjective political bias. It was only several years back that openly gay shock-jock Milo Yiannopoulos was banned from Twitter for causing ‘offence’ to a Ghostbusters actress. Yet what is offence? Where is the line drawn? What offends one might not offend another. However the censor would seemingly be able to use his or her subjective opinions, values and biases which makes it pretty clear what the outcome will be. President Trump learned that when a disgruntled Twitter employee temporarily suspended his account. Do not be surprised when we’re simply told to “get with the times” and accept the party line. Resistance is futile. It is the simplest way to shut down sensible debate.

Anyone active on social media is well aware of the risks of being targeted, trolled or attacked for expressing differing views. However do users require, much less want to submit to the machinations of the thought police? Shouldn’t they be free to choose what they view or pages they subscribe to? Indeed hate speech (not to be confused with difference of opinion) has no place but the majority of users are likely to be able to make that assessment without it having been arbitrarily made for them.

Then again, surely as a publicly listed corporation Facebook can decide what it wants to do with its site and let participants in the free market (who use it for no charge) decide for themselves that the obvious bias forces them to seek social media platforms elsewhere. Twitter share price was badly thumped for its blocking of certain groups and its share price is around 1/3rd the peak. It’s overall followers have fluctuated in the 316-330mn range since Q4 2016. The market works. It is taking Facebook’s shareprice to task on the grounds it will suffer for treating its users as mugs. Perhaps a look at activity post the hearings will show just how many mugs are still as active as before despite the threats to abandon the evil Zuck. The share price will respond accordingly.

It begs the question as to why a more conservative outfit hasn’t decided to make a Facebook equivalent which does not censor outside of clear violations of hate speech. Surely offering a replicated platform that didn’t censor free speech would be a massive winner. Users would also sign up to a simple (and SHORT) legal agreement that there is a risk of being offended and to commit to accepting it. Where clear violations of hate speech (e.g. threats of murder, terrorism etc.) are found such things can be reported to the authorities (with terms and conditions EXPLICITLY warning of such repucussions for violating easy to understand rules). Then again maybe Zuckerberg is right. Silicon Valley is indeed an extremely left-leaning [alt-left?] place! So this is why conservatives are behind the 8-ball on a free speech social media platform.

The sad reality is that social media is policed by the left and authorities seem keen to exploit the powers that provides. The examples are too many. Controversial conservatives have been blocked, banned and restricted for the most spurious of reasons. Diamond & Silk are hardly a danger to society. It is almost comical to think that.  Yet aren’t the subscription rates/followers of particular sites indicative of the ‘moods’ of people? Could it be that black, conservative and Trump supporter must be mutually exclusive terms in the eyes of the left’s identikit forcing the Facebook apparatchiks to enforce a subjective shutdown? If a public explanation was provided it would probably just say, “trust our objectivity’. Whaaaat?

At some stage if enough people feel they are being played around with they will choose of their own volition to leave and seek their social media thrills on other platforms. Or will they? It maybe too late. Blatant exploitation of social media by governments looks like an obvious trend. If we are only too willing to give up our data and cede any visibility of the inner circle’s terms of use of it we are on a slippery slope of our own making. Think about how your mobile device allows you to be tracked whenever and however. It can turn your camera or microphone on. It can triangulate your whereabouts anywhere across the world. What you’ve read, listened to and watched. Where are the privacy laws surrounding this? Is your local rep fighting in your corner? Probably not.

Could private conversations with a lawyer (client-attorney privilege) be bugged and used as evidence? Don’t laugh. As an aerospace analyst many moons ago, teams of specialists with anti-bugging devices trawled through the suites of the aircraft manufacturers’ chalets to ensure the opposition didn’t get wind of negotiations with airlines they were both competing to win large orders from. Illegal in the extreme but seemingly exercised by all parties. It was an unwritten rule.

However social media censorship hides deeper problems. It is also increasingly a tool to shut down debate and people like London Mayor Sadiq Khan has met with social media execs to collude on cracking down on ‘hate speech’. Surely policing spurious claims of hate speech is a lesser issue to the immediate threat faced by a capitol which saw its murder rate surpass that of New York. Not so. This is the dangerous turn in social media. Not whether our data is used for targeted advertising for cheap flights but used to pillory, interrogate and shut down innocents. After all social media has a half-life of infinity.

Take the controversial figure Tommy Robinson in England. The UK authorities and media wish us to believe he is an unhinged far right wing bigoted racist thug. Yet despite all of the times he has been jailed (for mostly trumped up charges), silenced and muzzled for publicising what he sees as a major problem in his community (i.e. radical Islam), the growth in followers continues to rise on his Facebook page (706,000). Maybe the authorities should keep tabs on them? Arrest them on suspicion of potentially causing hate crimes. Surely they are cut from the same cloth as Tommy? Afterall it is better to arrest a comedian for teaching a dog to do a Nazi salute to annoy his partner as it is less controversial to the state than tackling real issues. Perhaps authorities should pay attention to why Robinson’s following is so large? It is irrelevant whether one finds his viewpoints offensive or not, a majority of over half a million clearly don’t. He is no saint and would be the first to admit it. Still the authorities are trying everything to shut him down. Social media is being used as a watchdog.

Robinson has two best selling books –  ‘Enemy of the State’ and ‘Mohammad’s Koran: Why Muslims kill for Islam’. Is that not evidence that there are more people than the authorities would care to admit to that actually concur with his assessment? Maybe some want to read it out of curiosity? However when many of those same people see an undercover scoop done by the left leaning publicly funded Channel 4 on the inner workings of one of England’s most conservative mosques, praised by politicians as they true face of a peaceful religion. Even though the mosque had promised to clamp down on radical imams, the documentary revealed that despite assurances to government authorities, teachers still encourage students to believe that the only remedy for gays and apostates is to be killed. So maybe Robinson’s followers aren’t as fringe or minor in number as we would be made to believe? With the widespread outing of child grooming gangs across the UK, maybe Brits have had enough of the political hand wringing over politically correct discourse. The more the movement is pushed underground the harder it will be to stop vigilantism. We’ve already seen signs of it emerging. Think of the Guardian Angels in NY during the crime waves in the 1979.

What the Zuckerberg testimony brings to the surface is yet another example made clear to the public of the two tier dispensing of free speech. What worries the public more is that justice seems to be operating under the exact same framework. What the Channel 4 programme exposed with respect to blatant hate speech is incontrovertible. Yet will authorities arrest, charge and jail them as they would a Tommy Robinson? Not a chance. To encourage the murder of people that aren’t part of an ideology can’t be viewed as anything other than a willful threat.  Will the judiciary demand that scholars have their pages scrubbed from social media?

The shoes are on the wrong foot. Earlier this year, Austrian conservative Martin Sellner and his girlfriend Brittany Pettibone were arrested on arrival in the UK, detained and deported. Sellner for wanting to deliver a speech at Speaker’s Corner in Hyde Park (later delivered by Robinson) and Pettibone for wanting to interview Tommy Robinson (which he later conducted in Vienna). Neither look in the least bit dangerous. In this case, social media backfired on the state. In both cases, the public once again saw the double standards and the pervasive political posturing to beat the ‘controllable’ element into submission. Just as it is easier for the police to fine speeding motorists than actively pursue solid leads on catching grooming gangs the public rightly grows increasingly livid. Social media is being used more widely as a policing tool, with negative connotations. It isn’t just being used to foil terror plots but stomp on the rights of the average citizen.

Still there is some sympathy for Zuckerberg in that many people volunteered their information. If it was used in ways that violated ethical and more importantly legal rights it only goes to prove that power corrupts and absolute power corrupts absolutely. To that end, can we really expect lawmakers to cramp their own style when Zuckerberg has only highlighted how powerful the information he possesses can be used to sucker us more than they already do. That is the real crime we are seemingly becoming powerless to stop. Talk about the real Big Brother!

Waking up to a horror of our own creation

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Some will say I am a pessimist. I’d prefer to be called an optimist with experience. At only age 16 (in 1987) I realized the destructive power financial markets had on the family home. Those memories were etched permanently. We weren’t homeless or singing for our supper but things sure weren’t like they use to be. It taught me much about risk and thinking all points of view rather than blindly following the crowd. That just because you were told something by authority it didn’t mean it was necessarily true. It was to critically assess everthing without question.

In 1999, as an industrials analyst in Europe during the raging tech bubble, we were as popular as a kick in the teeth. We were ignored for being old economy. That our stocks deserved to trade at deep discounts to the ‘new economy’ tech companies, no thanks to our relatively poor asset turnover and tepid growth rates. The truest sign of the impending collapse of the tech bubble actually came from sell-side tech analysts quitting their grossly overpaid investment bank salaries for optically eye-watering stock options at the very tech corporations they rated. So engrossed in the untold riches that awaited them they abandoned their judgement and ended up holding worthless scrip. Just like the people who bought a house at the peak of the bubble telling others at a dinner party how they got in ‘early’ and the boom was ahead of them, not behind.

It was so blindingly obvious that the tech bubble would collapse. Every five seconds a 21 year old with a computer had somehow found some internet miracle for a service we never knew we needed. The IPO gravy train was insane. One of my biggest clients said that he was seeing 5 new IPO opportunities every single day for months on end. Mobile phone retailers like Hikari Tsushin in Japan were trading at such ridiculous valuations that the CEO at the time lost himself in the euphoria and printed gold coin chocolates with ‘Target market cap: Y100 trillion.’ The train wreck was inevitable. Greed was a forgone conclusion.

So the tech bubble collapsed under the weight of reality which started the most reckless central bank policy prescriptions ever. Supposedly learning from the mistakes of the post bubble collapse in Japan, then Fed Chairman Alan Greenspan turned on the free money spigots. Instead of allowing the free market to adjust and cauterize the systemic imbalances, he threw caution to the wind and poured gasoline on a raging fire. Programs like ‘Keep America Rolling’ which tried to reboot the auto industry meant cheaper and longer lease loans kept sucking consumption forward. That has been the problem. We’ve been living at the expense of the future for nigh on two decades.

Back in 2001, many laughed me out of court for arguing Greenspan would go down in history as one of the most hated central bankers. At the time prevailing sentiment indeed made me look completely stupid. How could I, a stockbroker, know more than Alan Greenspan? It was not a matter of relative educations between me and the Fed Chairman, rather seeing clearly he was playing god with financial markets.  The Congressional Banking Committee hung off his every word like giddy teenagers with a crush on a pop idol. Ron Paul once set on Greenspan during one of the testimonies only to have the rest of the committee turn on him for embarrassing the newly knighted ‘Maestro.’ It was nauseating to watch. Times seemed too good so how dare Paul question a central bank chief who openly said, “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.”

We all remember the horrors of the collapse of Lehman Brothers and the ensuing Global Financial Crisis (GFC) in September 2008. The nuclear implosions in credit markets had already begun well before this as mortgage defaults screamed. The 7 years of binge investment since the tech bubble collapse meant we never cleansed the wounds. We would undoubtedly be in far better shape had we taken the pain. Yet confusing products like CDOs and CDSs wound their way into the investment portfolios of local country towns in Australia. The punch bowl had duped even local hicks to think they were with the times as any other savvy investor. To turn that on its head, such was the snow job that people who had no business being involved in such investment products were dealing in it.

So Wall St was bailed out by Main St. Yet instead of learning the lessons of the tech bubble collapse and GFC our authorities doubled down on the madness that led to these problems in the first place. Central banks launched QE programs to buy toxic garbage and lower interest rates to get us dragging forward even more consumption. The printing presses were on full speed. Yet what have we bought?

Now we have exchange traded funds (ETFs). Super simple to understand products. While one needed a Field’s Medal in Mathematics to understand the calculations of a CDO or CDS, the ETF is child’s play. Sadly that will only create complacency. We have not really had a chance to see how robots trade in a proper downturn. ETFs follow markets, not lead them. So if the market sells off, the ETF is rapidly trying to keep up. Studies done on ETFs (especially leveraged products) in bear markets shows how they amplify market reactions not mitigate them. So expect to see robots add to the calamity.

Since GFC we’ve had the worst post recession recovery in history. We have asset bubbles in bonds, stocks and property. The Obama Administration doubled the debt pile of the previous 43 presidents in 8 years. Much of it was raised on a short term basis. This year alone, $1.5 trillion must be refinanced.  A total of $8.4 trillion must be refinanced inside the next 4 years. That excludes the funding required for current budget deficits which are growing despite a ‘growing economy’. That excludes the corporate refinancing schedule. Many companies went out of their way to laden the balance sheet in cheap debt. In the process the average corporate credit rating is at its worst levels in a decade. Which means in a market where credit markets are starting to price risk accordingly we also face a Fed openly saying it is tapering its balance sheet and the Chinese and Japanese looking to cut back on US Treasury purchases. Bond spreads like Libor-OIS are already reflecting that pain.

Then there is the tapped out consumer. Unemployment maybe at record lows, yet real wage growth does not appear to be keeping up. The number of people holding down more than one job continues to rebound. The quality of employment is terrible. Poverty continues to remain stubbornly high. There are still three times as many people on food stamps in the US than a decade ago – 41 million people. Public pension unfunded liabilities total $9 trillion. Credit card delinquencies at the sub prime end of town are  back at pre-crisis levels. We could go on and on. Things are terrible out there. Should we be in the least bit surprised that Trump won? Such is the plight of the silent majority, still delinquent after a decade. No wonder Roseanne appeals to so many.

A funny comment was sent by a dyed-in-the-wool Democrat, lambasting Trump on his trade policies. He criticized the fact that America had sold its soul for offshoring for decades. Indeed it had but queried that maybe he should be praising Trump for trying to reverse that tide, despite being so late to the party. Where were the other administrations trying to defend America all this time? Stunned silence.

Yet the trends are ominous. If we go back to the tech bubble IPO-a-thon example. We now have crowd funding and crypto currencies. To date we had 190 odd currencies to trade. Of that maybe a handful were liquid – $US, GBP, JPY, $A, Euro etc – yet we are presented with 1,000s of crypto currency choices. Apart from the numerous breaches, blow ups and cyber thefts to date, more and more of these ‘coins’ are awaiting the next fool to gamble away more in the hope of making a quick buck. Cryptos are backed by nothing other than greed. Yet it sort of proves that more believe that they are falling behind enough such they’re prepared to gamble on the biggest lottery in town. One crypto used Wikipedia as a source for its prospectus.

Yet the media remains engrossed on trying to prove whether the president had sex with a porn star a decade ago, genderless bathrooms, bashing the NRA, pushing for laws to curtail free speech, promoting climate change and covering up crime rather than look at reporting on what truly matters – the biggest financial collapse facing us in 90 years.

There is no ‘told you so’ in any of this. The same feelings in the bones of some 30 years ago are back as they were at the time of Greenspan and Lehman. This time can’t be avoided. We have borrowed too much, saved too little and all the while blissfully ignored the warning signs. The faith and confidence in authorities is evaporating. The failed experiment started by Greenspan is coming home to roost. This will be far worse than 1929. Take that to the bank, if it is still in operation because you won’t be concerned about the return on your money but the return of it!

Fasten your seatbelts!

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The “Fasten your seatbelts” edition (March 6, 2018) of the High-Tech Strategist by Fred Hickey is best read with antidepressants or a stiff drink. To be honest I hadn’t seen a copy of this research for at least 5 years. Today I’ve read it three times hoping I haven’t missed or misread anything. It is well reasoned and well argued. I would even admit to there being confirmation bias on my side but it is compelling. Usually confirmation bias is a worrying sign although prevailing sentiment or group think, it isn’t!

Perhaps the scariest claim in his report is a survey that showed 75% of asset managers have not experienced the tech bubble collapse in 2000. So their only reference point is one where central banks manipulated the outcome in 2007/8. S&P fell around 56% peak to trough. I often like to say that an optimist is a pessimist with experience. A lot of experienced punters have quit the industry post Lehman’s collapse, hollowing out a lot of talent. That is not to disparage many of the modern day punters but it does experience is a hard teacher because one gets the test first and the lesson afterwards.

Hickey cites an interview with Paul Tudor Jones who said that the new Fed Chairman Powell has a situation not unlike “General George Custer before the battle of the Little Bighorn” (aka Custer’s Last Stand). He spoke of $1.5 trillion in US Treasuries requiring refinancing this year. CM wrote that $8.4 trillion required refinancing in 4 years. In any event, with the Fed tapering (i.e. selling their bonds) couple with China and Japan feeling less willing to step up to the plate he conservatively sees 10yr rates hit 3.75% (now 2.8%) and 30 years rise above 4.5%. Now if we tally the $65 trillion public, private and corporate (worst average credit ratings in a decade) debt load in America and overlay that with a rising interest rate market things will get nasty. Not to mention the $9 trillion shortfall in public pensions.

Perhaps the best statistic was the surge in the number of articles which contained ‘buy-the-dip’ to an all time record. Such lexicon is often used to explain away bad news. It is almost as useless as saying there were more sellers than buyers to explain away a market sell off. In any event closing one’s eyes is a strategy.

Hickey runs through the steps leading up to and during the bear market that followed the tech bubble collapse. It was utter carnage. Bell wether blue chips like Cisco fell 88% from the peak. Oracle -83%. Intel -82%. Sun Microsystems fell 96%.

To cut a long story short, assets (bonds, equities and property) are overvalued. The Bitcoin bubble and consequent collapse have stark warnings that he saw in 2000. He recommends Gold, Gold stocks (which he claims are selling at deeper discounts than the bear market bottom) Silver, index and stock put options (Apple, Tesla, NVidia & Amazon) and cash. Can’t say CM’s portfolio is too dissimilar.

As Hickey says, “fasten your seatbelts

If the status quo is so good why would we vote out the incumbents?

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Almost everywhere we look, we’re told by the political class how good our lot is. Our blessed Aussie PM told us, “It has never been a better time to be an Australian.” Boosted asset prices, low unemployment and tepid inflation gives the illusion of real wealth for everyone. As an electorate, if all of that were true, why wouldn’t we be going out of our way to make sure the status quo gets voted back in with similar if not greater majorities? As it stands, more and more incumbent parties are hanging on by their finger nails, being forced to create alliances to stay in power rather than stick to the principles their parties were founded on. The irony is that these grand coalitions are formed on the tenets of ignorant ‘un-populism.’

The latest election cycle shows us that a growing number of people aren’t buying mediocrity. They’re sick of incumbent politicians ignoring them. The current crop of leaders seem to think that being less worse than the opposition is a virtue to be proud of. Yet poverty levels continue to rise and wealth is not trickling down to the masses. Even rising state entitlements have a finite life and the electorate knows it. Being married to the government is not seen as a desirable strategy long term. Deficits keep rising and look increasingly hard to pay down.

Searching through the St Louis Fed database, civilian employment under Obama managed to grow 2.5% on pre-crash levels. So the US loaded up on $9 trillion in short term debt to create 4 million net new jobs. That works out at $2.25 million per worker. Hardly an achievement. Yet despite that economic growth has dithered at the lowest post recession rates ever. As much as we might want to celebrate record low unemployment these are not proud statistics. The quality of jobs keeps going down. $8.4 trillion of this federal debt load needs to be refinanced inside 4 years. $12.3 trillion inside 10 years. While politicians can call the average voter stupid, the daily struggles of the average punter shows how out of touch the law makers are. This was the grand mistake made by Clinton. While she hung out with her elite mates at $1,000 plate dinners in Democrat strongholds in LA, NY and Chicago expecting a coronation, Trump hit the little people and had crowds flocking to see him.

While Trump’s trade tariffs seem daft on the face of it, it was done for the forgotten people who voted for him. He is not concerned about the consequences. That’s the point. So much of his platform appears abhorrent but he is the only politician in danger of being raked over coals for keeping his promises. That’s why he was elected. The status quo had failed to deliver over decades. 80% of the population didn’t benefit from the asset bubble post GFC. The 1% took 42% of those gains. The average Joe and Joanne see this. While they might not fully comprehend it they know enough to see their situation is not much better.

Take a look at Trudeau’s India debacle. Apart from the embarrassing wardrobe saga, the bigger problems came when he blamed the Indians for letting a known terrorist attend a state dinner. The Indians, unsurprisingly, were most unhappy at the accusation. Many look to Trudeau as the posterchild of the left, pushing peoplekind. Telling Canadians that he will convert returning ISIS fighters with haiku poetry, podcasts and comparing them to Italian migrants at the end of WW2 is utterly preposterous to his constituents. Telling his veterans they’re asking for too much flies in the face of love of one’s country. No wonder his popularity continues to dive. His speech to the UN – where he rattled off how Canada was ticking all the UN diversity boxes – was only a quarter full. Not even his own liberal mates rallied to show unity in numbers. It was telling that virtue signalling is all about appearing to do good rather than doing it.  Yet the day before Trudeau presented, Trump spoke of America First and the audience was packed. They might have hated every word that dripped from his tongue but they didn’t miss it for the world. It is hard talk. Not carefully prepared politically correct nonsense.

Take the recent European elections. Germany gave Merkel the worst ever performance of the CDU post WW2. The SPD was even worse. The anti-immigrant AfD stormed to 16%. Is it any wonder that when Merkel’s misguided altruism  showed up on Election Day even she finally conceded we have a problem with “no go zones”. Some may wish to look at the Merkel miracle of growth and low unemployment but the public service in Germany has exploded from 9% pre 2008 crash to 16% today. Not private sector growth but public sector.

The Italian election showed over 60% of the vote went to eurosceptic parties. While volatility has always been a feature of Italian politics, this results showed the discontent underbelly of Italy which has seen poverty jump 50% to one third of the population since Lehman collapsed. While M5S said it wouldn’t form a coalition, all bets are off if it tied up with League. There are plenty of overlaps on the party platforms but the M5S would have to insist on the PM role. The EU would go into a tailspin on such news.

Austria voted in a wunderkind who put the right wing anti immigrant FPO in charge of immigration. Holland saw Wilders claw more seats. Nationalist Marine LePen in France doubled the number of seats ever attained by the Front National. Even Macron is changing his spots looking to introduce national service and take a harder line against migrant crime.

Whether the real statistics of migrant crime are wholly accurate or not is beside the point. It is increasingly seen as an election issue and more EU countries have had enough. They feel their lot is getting worse and view forking out billions in aid for people to settle here is pennies out of their pocket. If the stats are as the government sugar coats them to be in terms of the prevailing prosperity surely the citizens would overwhelmingly back them. Sadly the opposite is true meaning politicians aren’t selling their “compassion” effectively. Too many examples of gagging the police and muzzling the press have surfaced.

That is the thing. If the economy was rosy and bullish and more people felt secure there is a likelihood they would look at the immigration debate in a more positive light. All they see now is millions flocking to Europe as poverty is on the rise and the economy is on the back foot at ground zero. European EU-28 GDP hasn’t grown since Q4 2015. Despite a quadrupling of ECB assets net jobs created post GFC numbers 4 million, labour force participation remains below the peak. However we should not forget that Romania and Bulgaria joined in Jan 2007 and Croatia in 2013 which would add (at a 50% employment ratio) c.20mn meaning that employment in the EU on a like for like basis as a whole is down 16mn jobs ceteris paribus. Even if only Croatia was included then net jobs creation in EU-28 would be a paltry 2mn, or a smidgen above 1%. Anemic.

Yet the political class still doesn’t seem to be learning, especially the EU. Poland and Hungary have formed a pact to reject proposed quotas on migrants. The EU has failed to address the most important question. The wishes of the migrants themselves. It is one thing for the EU to appeal to voters as saving asylum seekers from war torn lands (when 80% are economic migrants by the EU’s own numbers), it is another to forcibly send them to countries that flat out don’t want them. Ask for a show of hands of asylum seekers looking to stay in Germany or head off to Hungary to settle and the likelihood is 100:0. Trying to make Hungarians or Poles feel guilty for being incompassionate is a price they’re clearly willing to pay with losing EU membership. Would we take kindly to a neighbor telling us how to arrange our furniture in the living room or sign a petition to prevent us building extensions even though it is not even in their way? Of course not. Still wagging fingers in disapproval is only likely to steel their resolve.

Flip to the Southern Hemisphere and Australian politics is also exposing the sordid state of the swamp. 5 PMs in 10 years. Now the Deputy PM has had to resign to the back bench and in a last ditched effort to claim some sort of moral high ground with the staffer he was having an affair with. He claimed he would still look after her even though a paternity test might show the kid wasn’t his. What a grub and a slap in the face for his partner to imply she may have been promiscuous. Once again the popularity of the incumbent parties in Australia continues to sink to all time lows. The Labor Party looks to have the next election in the bag but even then the popularity of the opposition leader is woefully tiny.

While the world seems to be in this state of blissful tranquility on the outside, we needn’t probe too deep before seeing how bad things continue to be on the inside. The little people may not have any financial fire power but at the ballot box they have an equal opportunity to stuff those that aren’t listening. Once again Italy shows us it wants change. Call it populism if you must but it is truly a reflection of just how bad things really are and how little ammunition to deal with any future crises remains. The little people are raising their voices. Best heed their words. It is the same reason why as zero chance as Trump looks in 2020, don’t bet against another 4 years in the White House. If the Dems hope that celebrities that talk of #METOO and gun control (all the while they attend Oscars semi-naked and collect their millions doing action films full of explosions and automatic weapons fire) will sway them to a return to the swamp they’re sorely mistaken.