Greater Depression

Banker Buster?

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Before the GFC in 2008, bank shares across the globe were flying. Financial engineering promised a new paradigm of wealth creation and abundant profitability. They were unstoppable.

However 12 years later, many banks look mere shadows of their former selves. We are told by our political class to believe that our economies are robust and that a low-interest rate environment will keep things tickety-boo indefinitely. After all the wheels of the economy have always been greased by the financial sector.

If that were true, why does Europe’s largest economy have two of its major banks more than 90% off the peak? Commerz has shrunk so far that it has been thrown out of the DAX. Surely, Japan’s banks should be prospering under Abenomics so why are the shares between 65% and 80% below 2007 levels?

Ahh, but take a look at those Aussie beauties! How is it they have bucked the global trend? How can Commonwealth Bank be worth 6x Deutsche Bank?

Although we shouldn’t look at the Aussie banks with rose-tinted glasses they have mortgage debt up to the eyeballs. Mortgages to total loans exceed 62% in Australia. The next is daylight, followed by Norway at 40%. Japanese banks, before the bubble collapsed, were in the 40% range. CM wrote a comparo here. There is a real risk that these Aussie banks will require bailouts if the housing market craps out. It carries so many similarities to Japan and when anyone ever mentions stress tests – start running for the hills.

If you own Aussie banks in your superannuation portfolio, it is high time you dumped them. Franked dividends might be an ample reason to hold them, but things in finance turn on a dime and this time Australia doesn’t have a China to rescue us like it did in 2008-09. More details contained in the link in the paragraph above.

In closing, Milton Friedman said it best with respect to the ability of central banks to control outcomes,

“… 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.

 

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.

Chopping down a tree with a herring

How wonderful to have the elite try to lecture on our behaviours. Sir Ian Boyd, the UK Government’s chief climate scientist, has proclaimed that Brits must eat less meat, buy fewer clothes and reconsider heading off to Malaga on EasyJet during the summer break. He suggested that zero net emissions by 2050 will be unsustainable unless the government stops focusing on economic growth. Must have been talking to NZ PM Jacinda Ardern.

Unfortunately, politicians who run a campaign based on crimping economic growth won’t last very long in office when more constituents fall foul of such changes. Never mind, Sir Ian is likely to escape any hardships.

Sir Ian made reference to New Zealand, which has made a lot of effort to include wellness into the economic metrics. Despite the fact that evil Australia explicitly lacks “social wellbeing” in the wording of the official paperwork, CM has already shown the land down under outstrips NZ on a per capita basis across the desired metrics of mental health and so forth that Ardern champions.

Unfortunately, Sir Ian may get his wish, although not perhaps the way he intended. He can make reference to the fact we’re all consuming too much but the reality is that central banks have helped trade us into a corner that relies on front-loading ever more consumption to prevent the economy from imploding. Sadly, when the peons catch the brunt of this, they will be demanding the government dump environmental policies in favour of reviving the economy because marvelling at wind towers won’t fix their malaise. Jonathan Rochford of Narrow Road Capital sums this up nicely,

Just as the first step for an alcoholic is to admit their addiction and the damage it has done, central banks need to start by admitting they have gone too far with monetary policy and have caused substantial economic damage. An apology is owed to savers that have been punished for their prudence and to a generation of young people that have been substantially disadvantaged in their quest to purchase property without incurring excessive levels of debt. Central banks also need to admit that they have tried to use monetary policy to solve problems it simply wasn’t suitable for.”

Everything is a trade-off. However, ceding more control and regulation to governments and central banks around the world that have failed us so terribly to date have no track record to be demanding even more restrictions.

That means if governments want to hit “zero emissions”, stop telling the public how they must comply. Refrain from telling auto-makers they must be all-electric by 2040. How about just giving them the target and letting them decide by what means they will overcome the technological hurdles. That is how ingenuity is created, not by some new quango that will impose ever greater restrictions for next to no palpable return other than inconvenience and shared misery.

Monty Python described it best in the Holy Grail. The Knights of Ni demanded that King Arthur chop down the mightiest tree in the forest with a herring. Sir Ian is expecting that of industry and the Britons themselves. Understandably the “It” word that eventually tortures the Knights of Ni to their demise is actually sustainable “economic growth.”

Macron talking utter bolloques on the Amazon fires

Jo Nova has done a cracking piece which undermines the hysteria surrounding the Amazon fires and how perfectly it fits in with the G7 summit angle on globalism. She tears shreds off Macron’s ludicrous claims and even more ridiculous antics at the G7. When the world needs to be focused on avoiding recession, these politicians are fixated on petty point-scoring issues where CO2 reduction will rapidly take care of itself if the world economy tanks. The peons will care not one jot about the climate once faced with economic hardship which is likely to be even worse than the Global Financial Crisis.

Jo Nova wrote,

“Global Fire Data shows this year is unequivocally a low fire season in the Amazon. But social media tears and outrage is running at 1000% driven by old photos and fake facts of the Amazon producing “20% of our planet’s oxygen”.

And the media experts reported the house was on fire in the lungs of the world or something to that effect. They didn’t check the data, didn’t ask hard questions.

Based on hyperbolic twitter pics French leader Macron is threatening to cancel a foreign trade deal. The hype serves the purpose of attacking the right-wing Brazilian leader Jair Bolsonaro in the lead up to a G7 summit this week…

Who’s feeding the twitter flames?

@EmmanuelMacron

The photo he used? It’s a stock photo from Loren McIntyre, a photographer who died in 2003.

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“US space agency NASA, meanwhile, has said that overall fire activity across the Amazon basin this year has been close to the average compared to the past 15 years.”

Remember when it comes to climate change, NASA are the definitive last word, but when it comes to Amazon fires, they’re just a casual addendum. “No comment”.

Jonathon Watts at The Guardian carefully words the panic. It’s almost as if he is aware of what is going on but not happy to make it too clear. With headlines like these, anyone would think the readers of The Guardian are 14-year-old girls.

Does this happen every year?

Yes, but some areas have suffered far more than usual. In the worst-affected Brazilian state of Amazonas, the peak day this month was 700% higher than the average for the same date over the past 15 years. In other states, the amount of ash and other particulates in August has hit the highest level since 2010.

Is the entire forest ablaze?

No. Satellite monitoring experts say the images of an entire forest ablaze are exaggerated. A great deal of misinformation has been spread by social media, including the use of striking images from previous years’ burning seasons.”

 

Actually, vote on the political emergency

No surprise to see The Guardian parrot on about a climate emergency. The editorial completely misses out on the political emergency we face. The economic climate is a massive issue facing Australia. When Bill Shorten tells us that he “will change the nation forever” we shouldn’t view that positively. It is probably the honest thing he has said. Labor’s policy suite is the worst possible collection one could assemble to tackle what economic headwinds lie ahead. Our complacency is deeply disconcerting.

First let’s debunk the climate noise in The Guardian.

The math on the climate emergency is simple. Australia contributes 0.0000156% of global carbon emissions. No matter what we do our impact is zip. If we sell it as 560 million tonnes it sounds huge but the percentage term is all that is relevant. Even Dr Finkel, our climate science guru, agrees. What that number means is that Australia could emit 65,000x what it does now in order to get to a 1% global impact. So even if our emissions rise at a diminishing rate with the population, they remain minuscule.

Bill Shorten often tells us the cost of doing nothing on climate change is immeasurable. He’s right, only in that “it is too insignificant” should be the words he’s searching for.

Perhaps the saddest part of the Guardian editorial was to say that the Green New Deal proposed by Alexandria Ocasio Cortez was gaining traction in the US. It has been such a catastrophic failure that she lost an unsolicited vote on the Senate floor 57-0 because Democrats were too embarrassed to show up and support it. Nancy Pelosi dismissed it as a “green dream.” At $97 trillion to implement, no wonder AOC says feelings are more important than facts.

With the 12-year time limit to act before we reach the moving feast known as the tipping point, it gets confusing for climate sceptics. Extinction Rebellion wants things done in only 6 years. The UK House of Commons still can’t get a Brexit deal done inside 3 years but can act instantaneously to call a “climate emergency” after meeting a brainwashed teenager from Sweden. It speaks volumes of the desperation and lack of execution to have to search for political distractions like this.

The ultimate irony in the recent celebration of no coal-fired power in the UK for one week was fossil fuel power substituted all of it – 93% to be exact. Despite the energy market operator telling Brits that zero carbon emissions were possible by 2025 (40% of the current generation capacity is fossil fuel), it forgot that 85% of British homes heat with gas. Presumably, they’d need to pop on down to Dixon’s or Curry’s to buy new electric heaters which would then rely on a grid which will junk 40% of its reliable power…good luck sorting that out without sending prices sky high. Why become beholden to other countries to provide the back-up? It is irrational.

Are people aware that the German electricity regulator noted that 330,000 households (not people) were living in energy poverty? At 2 people per household, that is 1% of the population having their electricity supply cut off because they can’t afford to pay it. That’s what expensive renewables do. If the 330,000 could elect cheap electricity to warm their homes or go without for the sake of the climate, which would they choose? 100% cheap, reliable power. Yet Shorten’s plan can only push more into climate poverty which currently stands at 42,000 homes. This is before the economy has started to tank!

If one looks across Europe, it is no surprise to see the countries with the highest level of fossil fuel power generation (Hungary, Lithuania & Bulgaria) have the lowest electricity prices. Those with more renewables (Denmark, Germany & Belgium), the highest. That is Australia’s experience too. South Australia and Victoria have already revealed their awful track record with going renewable. Why did Coca-Cola and other industries move out of SA after decades? They couldn’t make money with such an unreliable

Ahh, but we must protect our children and grandchildren’s futures. So low have the left’s tactics sunk that using kids as human shields in the fight for climate change wards off conservatives calling out the truth because it is not cool to bully brainwashed kids. We should close all our universities. As the father of two teenagers, CM knows they know everything already so there is little requirement for tertiary education!

The Guardian mentioned, “But in Australia, the Coalition appears deaf to the rising clamour from the electorate [on climate change].” Really?

CM has often held that human consumption patterns dictate true feelings about climate change. Climate alarmist Independent candidate Zali Steggall drives a large SUV and has no solar panels on her roof! Her battleground in the wealthy seat of Warringah is probably 70%+ SUV so slapping a Zali bumper sticker does nothing but add to the hypocrisy.

Why do we ignore IATA forecasts that project air travel will double by 2030? Qantas has the largest carbon offset program in the world yet only 2% elect to pay the self-imposed tax. Isn’t that telling? That is the problem. So many climate alarmists expect others to do the heavy lifting.

SUVs make up 43% of all new car sales in Australia. In 2007 it was 19%. Hardly the activity of a population fretting about rising sea levels. In Warringah, waterfront property sales remain buoyant and any bank that feared waves lapping the rooves of Burran Avenue would not take such portfolio risk, much less an insurance company.

Shorten’s EV plan is such a dud that there is a reason he can’t cost it. Following Norway is great in theory but the costs of installing EV infrastructure is prohibitively expensive. It will be NBN Mark II. Will we spend millions to trench 480V connectors along the Stuart Highway?

Norway state enterprise, Enova, said it would install fast chargers every 50km of 7,500km worth of main road/highway. Australia has 234,820km of highways/main roads. Fast chargers at every 50km like the Norwegians would require a minimum of 4,700 charging stations across Australia. Norway commits to a minimum of 2 fast chargers and 2 standard chargers per station.

The problem is our plan for 570,000 cars per annum is 10x the number of EVs sold in Norway, requiring 10x the infrastructure. That would cost closer to $14bn, or the equivalent of half the education budget.

The Guardian griped that “Scott Morrison’s dismissive response to a UN report finding that the world is sleepwalking towards an extinction crisis, and his parliamentary stunt of fondling a lump of coal”

Well, he might doubt the UN which has been embroiled in more scandals related to climate change than can be counted. Most won’t be aware that an internal UN survey revealed the dismay of unqualified people being asked for input for the sake of diversity and inclusion as opposed to choosing those with proper scientific qualifications. The UN has climbed down from most of its alarmist predictions, often citing no or little confidence of the original scare.

Yet this election is truly about the cost of living, not climate or immigration. The biggest emergency is to prepare for the numbers we can properly set policy against.

We have household debt at a record 180% of GDP. We have had 27 years of untrammelled economic growth. Unfortunately, we have traded ourselves into a position of too much complacency. Our major 4 banks are headed for a lot of trouble. Forget meaningless stress tests. APRA is too busy twiddling its thumbs over climate change compliance. While the Royal Commission may reign in loose lending, a slowing global economy with multiple asset bubbles including houses will come crumbling down. These banks rely 40% on wholesale markets to fund growth. A sharp slowdown will mean a weaker dollar which will only exacerbate the problem.

We have yet to see bond markets price risk correctly. Our banks are horribly exposed. They have too little equity and a mortgage debt problem that dwarfs Japan in the late 1980s. Part/whole nationalization is a reality. The leverage is worse than US banks at the time of the Lehman collapse.

We have yet to see 10% unemployment rates. We managed to escape GFC with a peak of 6% but this time we don’t have a buoyant China to rescue us. Consumers are tapped out and any upward pressure on rates (to account for risk) will pop the housing bubble. Not to worry, Shadow Treasurer Chris Bowen assures people not to panic if their home falls into negative equity! This is the level of economic nous on the catastrophe that awaits. It is insanely out of touch.

Are our politicians aware that the US has to refinance US$8.4 trillion in US Treasuries in the next 3 years? That amount of money will crowd out a corporate bond market which has more than 50% of companies rated BBB or less. This will be compounded by the sharp rise in inventories we are witnessing on top of the sharp slowdown in trade (that isn’t just related to the trade war) which is at GFC lows. The 3.2% US economic growth last quarter was dominated by “intellectual property”, not consumption or durable goods.

China car sales have been on a steep double-digit decline trajectory for the last 9 months. China smartphone shipments dwindle at 6 year lows. In just the first four months of 2019, Chinese companies defaulted on $5.8 billion of domestic bonds, c.3.4x the total for the same period of 2018. The pace is over triple that of 2016.

Europe is in the dumps. Germany has had some of the worst industrial production numbers since 2008. German GDP is set to hit 0.5% for 2019. France 1.25% and Italy 0.25%. Note that in 2007, there were 78mn Europeans living in poverty. In the following decade, it hit 118mn or 23.5% of the population.

Global bellwether Parker Hannifin, which is one of the best lead indicators of global industrial growth, reported weaker orders and a soft outlook which suggests the outlook for global growth is not promising.

This election on Saturday is a choice between the lesser of two evils. The LNP has hardly made a strong case for reelection given the shambolic leadership changes. Take it to the bank that neither will be able to achieve surpluses with the backdrop we are headed into. Yet when it comes to economic stewardship, it is clear Labor are out of their depth in this election. Costings are wildly inaccurate but they are based on optimistic growth scenarios that simply don’t exist. We cannot tax our way to prosperity when global growth dives.

Hiking taxes, robbing self-managed super fund retirees and slamming the property market might play well with the classes of envy but they will be the biggest victims of any slowdown. Australia has run out of runway to keep economic growth on a positive footing.

We will do well to learn from our arrogance which has spurned foreign investment like Adani. We miscalculate the damage done to the national brand. Adani has been 8 years in the making. We have tied the deal up in so much onerous red tape, that we have done nothing more than treating our foreign investors with contempt. Those memories will not be forgotten.

There will come a point in years to come where we end up begging for foreigners to invest at home but we will only have ourselves to blame.

The editorial closes with,

However you choose to exercise your democratic decision-making on Saturday, please consider your candidate’s position on climate and the rapidly shrinking timeframe for action. We have endured mindless scare campaigns and half-baked policy for too many decades. We don’t have three more years to waste.

This is the only sensible quote in the entire article. The time for action is rapidly shrinking. However, that only applies to the political and economic climate. One can be absolutely sure that when the slowdown hits, saving the planet will be furthest removed from Aussie voters’ minds.

GE still $15 billion in negative equity

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While GE might have rallied back above $10 on the back of its 1Q results released overnight, the company’s goodwill shrunk $5.5bn but the company remains deeply in negative equity to the tune of $14.7bn. Why do analysts perpetually focus on the revenue and profit, rather than look at the elephant in the room? Especially as we are at the top of an industrial cycle with warning signs that global growth is already slowing faster than originally anticipated. GE is heavily indebted.

Of the $53.2bn in goodwill and $ $17.1bn in intangible assets, GE shareholder’s equity (including non-controlling interests) is at $55.6bn. The gap is c. $14.7bn.

One of the interesting notes in the 10Q regarding the goodwill Oil & Gas accounts for 42% of the total. GE noted in point 8.

While the goodwill in our Grid reporting unit, Hydro reporting unit, and Oil & Gas reporting units is not currently impaired, the power and oil and gas markets continue to be challenging and there can be no assurances that goodwill will not be impaired in future periods as a result of sustained declines in BHGE share price or any future declines in macroeconomic or business conditions affecting these reporting units.

We can celebrate the short term but when an industrial stock, one which was the largest company by market capitalisation almost 20 years ago, has such an awful balance sheet (354% debt: equity) and blew $45bn in buybacks in recent years, one has to wonder how investors can look at GE as a paragon of value? Reminiscing on the halcyon days of a stock is not a method of sensible investing when staring at reality.

Greatest Corporate Showman on Earth

Tesla’s 1Q 2019 results were dreadful. CM has long held that Tesla is a basket case. The ever charismatic Elon Musk is trying to fan the flames of his company with dying embers. The question is where do we start on this diabolical 1Q report?

1. Musk started off with cash to speak to solvency. Tesla talks to $2.2bn in cash and equivalents. Down $1.5b, partly due to a $920m convertible repayment. Don’t forget Tesla has $6.5bn in recourse debt and $3.5bn in non-recourse debt. It has payables and accrued liabilities of another $5.5bn offset with receivables of just over $1bn.

2. Model S/X deliveries fell from 21,067 in 1Q 2018 to 12,091 in 1Q 2019. That’s -56% at the high margin premium car end. Musk claimed it was due to demand pull forward with a reduction in tax credits. Well he just proved that without credits, demand suffers appreciably.

Model 3 production was 3% higher on the quarter but deliveries were 20% lower. Note customer deposits total $768m, marginally down on the previous quarter. If Tesla starts to implode, customers have a right to get those credits back. Residual values aren’t holding as we discuss in pt.5.

3. Solar deployed -38% year on year

4. (Battery) Storage deployed -39%YoY

5. CM made it clear in point 11 of the 30 reasons why Tesla will be a bug on a windshield report,

The Tesla Residual Value Guarantee, while well intentioned carried risks that crucified the leasing arms of the Big 3. After the tech bubble collapsed at the turn of the century, do you remember the ‘Keep America Rolling’ programme, which was all about free financing for five years? While sales were helped along nicely, the reality was it stored up pain…Goldberg & Hegde’s Residual Value Risk and Insurance study in 2009 suggested on average 92% of cars returned to leasing companies recorded losses on return of up to 12%. Any company can guarantee the price of its used product in theory, the question is whether used car buyers will be willing to pay for it. Sadly Tesla does not get a say in what the consumer will be willing to pay.”

In the 1Q 2019 result, Musk admits that Tesla suffered $121m impairment on residual value guarantees (RVG). Is it any wonder they stopped this scheme. Now it’s payback time. There are $480mn worth of RVGs still on the balance sheet that are unlikely to have been marked to market values.

6. Level 5 autonomous driving is a pipe dream in the near term. 20+ years away. A fleet of Tesla taxis is an even bigger thought bubble. Regulation will put that on the back burner. The current level 2 systems have already shown significant short comings given the numerous beta testing deaths at the wheel of the Tesla auto pilot.

7. Musk is doing a stealth cash raise by putting a time limit on auto pilot upgrades. The question is when will the next cap raise come. His noise around Tesla taxis, Level 5 autonomous systems, Model Y all speak to the snake oil promises that he needs to distract investors from what is clearly going on.

8. His public spat with his biggest supplier, Panasonic, will not end well. Suppliers have to be on board with production expansion. Panasonic is cooling off its relationship. Musk publicly slapped the Japanese battery maker. It doesn’t augur well for the rest of the supply chain either to see these ructions

Peter DeLorenzo wrote the following with respect to Musk,

That this latest charade from Musk is yet another desperate act in an attempt at saving his floundering company is obvious. Where it differs from other Muskian braggadocio is the fact that he is insisting that his AV technology is safe for mass application and consumption. Sorry to disappoint all of the St. Elon acolytes out there, but this is the insane part…

…Unleashing a fleet of zombie Teslas on the streets of America curated by a notorious nanosecond-attention-span personality such as Musk is the quintessential definition of flat-out crazy. You can’t even squint hard enough to suggest that this is, in some way, shape, or form, rational thought. It’s a case of an intermittently brilliant mind that has wandered over the line into the Abyss of Darkness. A dangerous mind that is so obsessed with pushing his perpetually sinking car company into some sort of elevated stratosphere that he is willing to treat real people as so much collateral damage...

This country is 25 years away – at least – from widespread adoption of autonomous vehicles. Yes, there will be scaled deployment in limited, commercial applications primarily in urban centers over the next two decades, but driverless Teslas careening around less than two years from now? It is a recipe for disaster the likes of which simply defies calculation.”

All the reasons CM has disliked Tesla remain. It is so chronically overvalued. This stock will be lucky to be $100 by year end. Sadly the economy is slowing meaning it will be tougher to compete with more competition launching this year. China may give cause for some future hope but don’t bet on it.

The more Musk talks, the more desperate he is. Don’t forget he is not learning from SEC requests to lay off Twitter. His guidance in 1Q is lower than recent tweets suggesting appreciably higher targets. Tesla is a time bomb.