US Federal Reserve

Crypto schmypto

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CM is not a fan of crypto currencies. Apart from the fact they are solely backed by greed (when you buy a share or bar of gold you get ownership of  a physical asset in return) there are too many of the damn things. We have approximately 190 fiat currencies in circulation. Of that only a handful trade. US$, GBP, euro, yen, A$, C$ and RMB. After that liquidity goes out the window. Try getting a good rate from the Travelex currency window on Malaysian ringit. If you invest in illiquid coins the same nasty spreads will ruin any thirst for making a fortune

With crypto currencies, there are over 2,000 variants. Bitcoin is the bellwether. It has a net worth of $94 billion. Only a handful of others trade. Many should have realised that when the Japanese started to get all excited over the craze the gig was up. Japanese variety show comedians were responsible for the promotion almost 12 months ago when Bitcoin was at all time highs. Some companies like Rakuten were offering to pay staff  in crypto in lieu of cash salaries.  Now Bitcoin is languishing at 20% of that value.

Take a look at some of the products being invented to become crypto. LivingOffset is a classic case in point. It used Wikipedia as a source for justifying the validity of its findings in its prospectus.  That settles it then. Who wouldn’t buy an asset backed by Wikipedia research?!?

From LivingOffset – “Global concern about climate change is growing rapidly. Five out of every 10 people now consider climate change to be a serious problem. In Chile and Peru the number is over 75%. Interestingly, 69% of Americans are concerned about global warming [if you believe Huff Post], despite their government’s position. There is no doubt demand for our offering is there, and like Airbnb, we can provide the means and the mechanism for easy participation. In just a few minutes ordinary people can start to make a real and meaningful difference.

In January 2017, IPSOS held a global poll asking what each country’s major problem was and climate change didn’t feature a mention.

Apart from the completely bogus stats on ‘69% of Americans being concerned by global warming, SUV sales remain a solid staple in the US. In fact the most popular car in America is the Ford F-150 pick-up truck where customers rank ‘fuel economy’ #28 in terms of reasons they buy it.

Here was the promise at prospectus time around March 2018. The launch was delayed on the basis there was a need to make it more global in appeal. It supposedly launches this month.

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Below lists how some of the other crypto currencies performed overnight. This is before heavy handed legislation has come down to regulate the industry. If you look at a crypto kiosk in Shinbashi, Tokyo you’ll likely see a Rolls-Royce parked out front, presumably owned by someone in the Yakuza. As far as money laundering goes, crypto’s are brilliant.

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In an event, crypto currencies are most at the mercy of cyber fraud. Don’t buy the bomb proof guarantees of blockchain. If state agencies want to destroy these markets, they can do it on a whim. Then again there is little need to do so given the numerous events of hackers breaking into crypto exchanges and costing them huge liabilities l. Coincheck in Japan lost $500mn in one day due to a breach.

In short, crypto is little better than betting on a roulette table. If the benchmark crypto is hemorrhaging like this, why put faith in the illiquid stuff being any better? Fiat currencies may not be good stores of value but there are far more sensible places to protect wealth than parking it in products which are underwritten by nothing more than greed.  If you like a flutter by all means throw some loose change into crypto.

CalPERS unfunded pension deficit approaches $1 trillion. Who is counting?

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

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

 

When Japan ruled the world

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30 years ago 32 of the 50 largest corporations by market cap were Japanese. Telco NTT was #1 followed by 4 megabanks. Scroll forward to today and there is only one Japanese corporation that makes the Top 50 cut – Toyota Motor (#35). Now, the top 33 of 50 companies are American – Apple, Amazon, Google, Microsoft and Facebook.

 

The gender unemployment gap

Changes in the Gender Unemployment Gap during Recessions

Another interesting piece was written by the St Louis Fed showing the gender unemployment gap of men relative to women. A negative spread shows that women have lower risk of unemployment relative to men in the 24 months after the start of a recession. Looking at the chart we see that in 1960 & 1969 female unemployment tended to rise relative to men after a recession began but in the following downturns of 1973, 1980, 1990, 2001 and 2007 the situation reversed. Participation rates for women in the workforce hovered at around 40% in 1970 vs 60% today. In 2007, the most aggressive spread emerged in favour of women by over 2%. The Fed report does not include what types of roles that women tend to do. Switching to the Bureau of Labor statistics (BLS) it makes sense that women over time have been retrenched at lower rates than males due to field of employment.

Women today tend to occupy more jobs in education, nursing, healthcare (defensive industries) whereas men tend to work in more construction, agriculture and manufacturing specialties (levered industries).

In 2017, employment breakdown between men and women was as follows.

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Another interesting table from the BLS was that of educational standards of 1970 compared to 2010. As we can see more women are pursuing higher levels of education. 67% in 2010 took some college or higher degree vs only 22% in 1970. One would imagine in 2018 those numbers are higher again.

Where men once went to college in proportions far higher than women—58% to 42% as recently as the 1970s—the ratio has now almost exactly reversed with women comprising more than 56% of students on campuses nationwide, according to the U.S. Department of Education (DoE). Some 2.2 million fewer men than women will be enrolled in college this year. By 2026, 57% of college students in the US will be women.

It will be interesting to see how the gender unemployment gap develops during future recessions with a far higher level of educated women in the workforce.

The financial health of Millennials

Changing Balance Sheet across Generations

The St Louis Fed has published a report on Millennial balance sheets, comparing them to Gen Xers. The average value of total assets was lower among millennials than Gen Xers. Millennials held an average of $162,000 of assets relative to Gen X’s average of $198,000. The report also found that Millennials held a slightly higher level of total debt, at an average of $72,000 compared to Gen X’s average of $67,000. However the composition was markedly different – average student loan levels surged from $4,200 for Gen X to $14,700 for millennials. In short, millennials’ average asset position is lower, while they hold slightly more debt, which leads to an average net worth of $90,000 for millennials and $130,000 for Gen X.

In closing the report notes,

We observe that millennials have been going to school longer and delaying major life events. Thus, it makes sense that they hold lower levels of assets. They have had less time in the labor force, and a smaller share of them have moved out on their own, which contributes to the lower levels of residential assets. However, they have shown a higher propensity to save for retirement and to avoid credit card debt.

Why discontinue?

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This is a chart of the change in the US Fed balance sheet, a series that has just been discontinued. Is this because the Fed is about to step up its activity and offering wider disclosure on tapering activity might spook markets? Given that 72% of the growth in S&P earnings has been driven by buybacks since 2012, it stands to reason the market is not exactly providing the type of confidence inducing organic lift the index reflects. Bank of America revealed that “net buying of Tech sector in the 1H was entirely buyback-driven.” 

Kind of reminds CM of the day Bernanke’s Fed announced it would no longer report M3 money supply a year before the financial markets headed into the GFC. CM estimated on p.4 of a report several years ago that M3 money supply by 2018 on constant long-term growth rates would turn into around $35 trillion from the $10 trillion at the time it was discontinued.

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Nothing to see here? Throw a deteriorating fixed income market with fewer buyers and corporates that have binged on cheap credit to fuel buybacks, it doesn’t look like the stuff dreams are made of. The chart below shows that quarterly pre-tax US profitability is struggling since 2011. Earnings (E) are not doing so well. It is by the grace of falling number of traded shares (S) that makes the EPS look flattering.

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We took the liberty of comparing corporate profitability since 1980 and correlating it to what Moody’s Baa rated corporate bond effective 10yr yields. An R-squared of almost 90% was returned.

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Why not use the Aaa spread instead? Well we could do that but looking over the last decade the average corporate debt rating profile looks like this. We have seen a massive deterioration in credit ratings. If we look at the corporate profitability with Baa interest rates over the past decade, correlation climbs even higher.

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We shouldn’t forget that the US Government is also drunk on debt, much of it arriving at a store near you. $1.5 trillion in US Treasuries needs refinancing this year and $8.4tn over the next 3.5 years. Couple that with a Japan & China pulling back on UST purchases and the Fed itself promising to taper (but now hide the results of) its balance sheet. So as an investor, would you prefer the relative safety of government debt or take a punt on paper next to junk heading into a tightening cycle?

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Discontinuation of series always carries a sense of deep cynicism for its true intention. It is not an onerous data set to cull. Sure we can fossick around and try to find it hidden in the archives of the Fed website but the idea is that they probably don’t want to publicise how much more they intend to flog.

Jan 2008 again?

3mthTB

Back to Jan 2008 10yr Treasury – 3mth Treasury Bill spread levels of 0.84% overnight. Shaded areas are previous recessions. I’m sure it is nothing. The friend who sent me the link also sent a Barron’s article last week which interviewed Kiss legend Gene Simmons who believes the Dow is poised for 30,000. He may well be proved right, although I wonder just whether algo trading is linked to Twitter followers. Maybe if Katy Perry starts jawboning about Dow 40,000 we should shut up and buy the trend. More useful than some Goldman Sachs nerd with a PhD in nuclear fission to read the runes…

10-3mthTB