US Federal Reserve

Ding dong the switch is dead

Morgan Stanley has finally lowered its bearish scenario on Tesla from $97 to $10. CM wrote in October 2017 that the shares based on production of 500,000 vehicles was worth no more than $28 (refer to report page 5). That was based on rosy scenarios. Sadly CM thinks Tesla will be bought for a song by the Chinese. Maybe $4.20 a share instead of $420 “funding secured” levels.

The stock breached $200 yesterday for the first time since late 2016.

Morgan Stanley analyst, Adam Jonas, has still kept its base case scenario at $230 per share. His bull case is $391.

Where is the conviction? To drop a bear case target by 90% must surely mean the base case is far lower than presently assumed.

Jonas must assume the bear case is actually the base case. Sell side brokers love to hide behind scenario analysis to cop out having to get off the fence. His compliance department probably prevents him from realizing $10 is his true heart.

Tesla was always playing in a market that it had no prior experience. It is not to say the products didn’t have promise. The problem was the execution. Too much senior management turnover, missed targets, poor quality and too many Tweets from Musk.

The amount of bad press arising from a lack of service centers has driven customers to moan on social media at its amateur approach. The fragile dreams of being an early adopter are being shattered. Cash burn remains high and deliveries remain low. Some pundits think Tesla orders are under real pressure in 2Q 2019.

The recent all share deal with Maxwell Technologies has seen those holders -20% since the transaction a few weeks ago. CM argued how a company with such revolutionary technology could sell itself for all shares in a debt-ridden loss making like Tesla? If the technology was of real value PE funds would have snapped it up or at the very least made a bid in cash. That none was made speaks volumes about what was bought.

All of the arguments hold true in the above link, “Tesla – 30 reasons why Tesla will be a bug on a windshield

Tesla below $200 after a successful cap raise is not a good sign. It’s the faithful slowly tipping out. Await another imaginary Musk-inspired growth engine to be announced shortly to try prop up the stock price. Yet the momentum will continue to sink. The market is losing confidence in Musk. The 1Q results were diabolically bad.

Major holder T Rowe Price has stampeded out the door. The stock is too risky. Musk is a brilliant salesman but he has bitten off more than he can chew.

CM always thought that Toyota selling its Tesla stake was a major sign. Acknowledging that under the hood the company possessed no technology that Toyota didn’t already own.

Watch the free fall. The Tesla stock will be below $100 by the year end.

(CM does not hold Tesla stock)

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.

Aussies pay more tax than Japanese and Shorten wants to raise them higher!

CM is repulsed by the confetti blowing promises being made ahead of May 18. This election is about cost of living to be sure. It is not about climate change and not about resettling refugees. Yet there has to be a limit on the free give away with a growing deficit. Where is the fiscal responsibility? Do politicians run their own household budgets like this? Not in a million years.

Our federal tax receipts are A$430bn this year. Did you know Japan collects $A750bn at the national level? So Aus is 1/5th the population and raises 1/2 the coin of Japan. Having said that the Japanese government must raise A$500bn EVERY YEAR to plug the national deficit! That’s what happens with poor fiscal management. So doing the math including the debt financing, we still raise 31% the revenues than the Japanese on 20% of the population. We might argue our economy is 1/4 Japan’s but we’re following an unsustainable trajectory. It’s insane. How can we tax people more? Yet that is what Shorten will do.

We can debate til the cows come home about how GST is funneled back to the states from federal coffers but we need to wake up to our relative costs! Our budget deficit is c.$600bn yet here we see Labor throw confetti promises around everywhere. $1.18bn in new aid to foreign countries over the next 4 years. PNG spent our aid money on 40 new Maseratis. Shorten pledged $1bn to acquire land to put the VFT in place. Surely the private sector can deal with that. $2bn for a Melbourne metro. We can go on and on.

Everyone seems like a winner until everyone becomes a loser. The sad fact is that we must wake people up to reality. We need to spend smarter, not chuck more money and hope it has impact. Neither government will see a surplus. Take it to the bank. The economic growth projections aren’t there. No matter who wins this election, the global economy is slowing and either party will be handed a basket case of economy controlled by external forces which includes a slowing US and China. It won’t be pretty. The question is who can best manage that? Not Labor. Climate change will be so irrelevant in this downturn.

It gets worse. The Reserve Bank and APRA are asleep at the wheel. Instead of navigating sensible policies to thwart the largest recession we will face in almost 30 years which will decimate housing, both are discussing climate change compliance reporting by corporates. Seriously? It is so telling they are focusing on the wrong message. Have they seen that the world’s central banks have printed $140 trillion in extra debt since 2008 and got $20 trillion extra in GDP. Shockingly poor returns. $7 of debt gets us $1 of GDP.

Yet our political system has only one pair of rose tinted spectacles where the prescription is 27 years out of date. They are equally as oblivious to the oncoming onslaught where our Aussie banks face a real risk of part of whole nationalization. Their position is as bad as the Japanese ahead of the collapse of their bubble.

Do not be fooled. CM personally believes that the Coalition is not deserved of government but the alternative is even worse. The last thing we need is to rest on that old Aussie saying of “time to give the others a go!” because this is a time when we can least afford change. It will be buyer’s remorse + alpha.

An Abysmal 7

US Corp Profits.png

As of March 28th 2019, the St Louis Federal Reserve updated the status of pre-tax US corporate profitability (ex inventory adjustments). It clearly shows that since 2012 they have tracked sideways. Despite the lowest sustained interest rate environment since WWII, US profitability has drizzled over the last 7 years. Is it any wonder Trump was calling for more QE?

GE still $15 billion in negative equity

GE.jpeg

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.

Drinking the UnKool-Aid

Related image

It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

STAY IN YOUR LANE!!!

Since when did the Australian Prudential Regulatory Authority (APRA) become an axe on climate change? Next thing we will see is 16yo Greta Thunberg, of school climate strike fame, adorning APRA releases and annual reports. APRA should stay in its lane as the only disaster on the horizon will be self inflicted.

In the AFR today, it was reported that the financial services sector regulator said, “there is no excuse for inaction on climate change, warning there is a high degree of certainty that financial risks will materialize as a result of a warming climate.”

APRA noted that only 1 in 5 companies are meeting voluntary climate risk disclosure targets which are set out by the Task Force in Climate-related Financial Disclosures, a private sector body chaired by none other than global warming alarmist Michael Bloomberg.

What in the world is APRA doing trying to implement guidelines put forward by a body backed by an agenda? Has APRA considered the wealth of literature debunking global warming? The plethora of scandals that have befallen the UNIPCC, NOAA and even our own Bureau of Meteorology! Has it considered the dozens of dud predictions made by the IPCC? The UN climate science body has publicly climbed down from so many alarmist claims, citing no evidence or extremely low confidence. Can APRA put hrs numbers on what global warming might do?

To be honest, APRA should stay in its lane. It follows on from the lunacy spread by the Reserve Bank of Australia (RBA) on the same topic. The only “high degree of financial risk” will come from their own terrible stewardship of the financial sector.

As CM wrote late last year Australian banks are in a terrible position financially. CM believes there is a high risk that some of Australia’s major banks will end up all or part nationalized when the property market bursts. To quote some excerpts:

In the late 1980s at the peak of the property bubble, the Imperial Palace in Tokyo was worth the equivalent to the entire state of California. Greater Tokyo was worth more than the whole United States. The Japanese used to joke that they had bought up so much of Hawaii that it had effectively become the 48th prefecture of Japan. Japanese nationwide property prices quadrupled in the space of a decade. At the height of the 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 63% (A$1.7 trillion) of total loans

From the peak in 1991/2 property 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.

In 2018, Australia’s GDP is likely to be around A$1.75 trillion. Our total lending by the banks is 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...

…In Westpac’s full-year 2018 balance sheet, the company claims around A$710 billion in assets as “loans”. Of that amount, according to the latest APRA data, A$411 billion of lending is ‘real estate’ related. Total equity for the bank is A$64.6 billion. So equity as a percentage of property loans is just shy of 16%. If Australia had a nationwide property collapse (we have not had one for three decades) then it is possible that the banks would face significant headwinds.

What that basically says is if Westpac suffered a 16% decline in the value of its entire property loan book then it would at least on paper appear in negative equity, or liabilities would be larger than assets. Recall in 2009 that BoA had over 16% of its residential loan portfolio which went bad.

We ought to be extremely worried if our financial regulators are devoting any time to this utter nonsense. It is highly doubtful that APRA could gain any meaningful insights on climate change even if there was 100% compliance with Bloomberg’s diocese. Utterly embarrassing.