Today’s News 4th March 2016

• Yuan Soars Most In A Month Ahead Of National People's Congress

  With all western eyes firmly focused on US payrolls tomorrow, China is preparing for the biggest leadership gathering of the year this weekend. Offshore Yuan (USDCNH) is soaring (up over 5 handles in the last 24 hours) ahead of The National People’s Congress as PBOC Deputy Governor hinted at support for the currency saying that it isn’t “strictly” pegged to the new basket.

   

  This is the biggest surge in Yuan in a month…

  

  Chart: Bloomberg

  Pushing Yuan back to 3-week highs…

  

  Chart: Bloomberg

  This is the richest Offshore Yuan has been to Onshore Yuan since 29th Sept…

  

  
  

  Chart: Bloomberg

  
  

  “The currency move is likely a psychological reaction to the National People’s Congress because the market is expecting to hear more comments from top officials stressing the importance of financial stability, curbing outflows and encouraging inflows,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “It’s unlikely to be any intervention.”

  

  

  

  

  

• The Stupid Things People Do When Their Society Breaks Down

  Submitted by Brandon Smith via Alt-Market.com,

  A frequent mistake that many people make when considering the concept of social or economic collapse is to imagine how people and groups will behave tomorrow based on how people behave today. It is, though, extremely difficult to predict human behavior in the face of terminal chaos. What we might expect, or what Hollywood fantasy might showcase for entertainment purposes, may not be what actually happens when society breaks down.

  It is also important to note that social and economic destabilization is usually a process, not an immediate event. This actually works in the favor of liberty activists and the preparedness minded. As a system moves through the stages of a breakdown, certain signals in the psychology of the population can be observed, and this gives us a warning as to how far down the rabbit hole we have actually gone.

  Except in the case of a nuclear or EMP (electromagnetic pulse) event (which unfortunately are concerns because of the powder keg situation in Syria), vigilant liberty proponents could have considerably more time than the average person to preposition themselves safely. That said, there will be a host of expanding problems of a psychological nature we will have to deal with before, during and after the final leg down in the unfolding mess that internationalists often refer to as the “great global reset.”

  The following list is based on social behavior patterns commonly seen during systemic crashes through modern history (the past 100 years). These are some of the stupid things people do as they begin to realize, at least subconsciously, that a SHTF scenario is in progress.

  They Do Nothing

  It’s sad to say, but the majority of people, regardless of the time or place in history, have a bad habit of ignoring the obvious. They may have an unconscious sense that danger is present, but never underestimate the power of men and women to waterboard their own instincts with a big bucket of intellectual idiocy.

  It is not uncommon for large populations to sit calmly and idly, sometimes for weeks, in the midst of an economic or infrastructure crisis. Part of this is due to normalcy bias, of course. There is an immediate assumption amongst first world populations that “help is on the way” in the form of government aid. Faith in this aid can be so deluded that it is not until food and water stores are nearly exhausted that they finally begin to panic, or attempt to help themselves.

  This gives the preparedness-minded a week or longer head start on the oblivious masses, but it is still a depressing state of affairs.

  They Sabotage Themselves With Paranoia

  Even in the early stages of a social breakdown when infrastructure is still operational, paranoia among individuals and groups can spread like a poison. Sometimes this is encouraged by a corrupt government, sometimes it just happens naturally.

  The tendency is to begin seeing every other person as a potential competitor or threat rather than a potential ally. They make the assumption that all they need to do is to avoid contact with others and “outlast” most people during the ugliest phase of the breakdown. This assumption is foolish on two fronts. First, a society needs security and production in order to rebuild. If survivors of collapse strictly isolate from each other, practical security is absolutely impossible and thus, production is unlikely. Eventually, they will die along with everyone else.

  Second, there are no guarantees whatsoever that our particular process of collapse will develop in a vacuum. That is to say, you might think that one day you will walk out of the hills after the worst of the crisis to a blank slate and rebuild, but certain organizations and systems may still be in place, or even dominate. Rarely in history have governments ever actually “disappeared” during societal collapse. In fact, governments have a habit of becoming even more powerful and despotic during and after large scale implosions of social systems. Survival is simply not enough if you walk out of those mountains alone only to find a totalitarian framework established on top of the ashes of the old world.

  Organization with trustworthy people of like mind is essential not only for your survival, but the survival of future generations and the principles which you hold dear. Furthermore, guarded associations with your surrounding community are also necessary. This kind of organization must begin BEFORE the breakdown hits critical mass. It is far easier to organize before a disaster than after a disaster.

  They Become Shaky And Unreliable When The Going Gets Tough

  This is why early organization is so important; it gives you time to learn the limitations and failings of the people around you before the SHTF. If you have a large family, have lived in the same neighborhood and attended the same clubs and churches for most of your life, then you are probably well aware of who is solid and who will leave you in the dust when times become difficult. Even then, you are liable to discover that some people will disappoint you.

  You do what you can with the help you have on hand, but the stresses of economic uncertainty, social unrest, increasingly oppressive government, and the lack of creature comforts can drive seemingly strong and confident people to do stupid and cowardly things.

  They may be close friends or family; individuals you care for. Or, they may be newer associates attempting to build a preparedness group from scratch. If you notice a penchant for running from adversity today when standing fast under pressure is necessary, then there is a good chance these same people will crumble when staring down a societal nightmare tomorrow. Always make a point to know which persons you can rely on before you might need them.

  They Become Hotheads And Tyrants

  On the other side of the coin, there are those individuals who believe that if they can control everything and everyone in their vicinity then this will somehow mitigate the chaos of the world around them. They are people who secretly harbor fantasies of being kings during collapse. These folks are usually not very successful or well-liked in times of stability, and they long for conflict and destruction to make way for their “rebirth” so that they will receive the respect they think they always deserved.

  Hotheads are a considerable liability as well, jumping headlong into strategically foolish situations and luring others into a zero-sum game. Their argument is always “If not now, then when!” As if the now and the when of a conflict are irrelevant and the fighting is all that matters. These people are the reverse of the unreliable cowards. They want blood. They want glory. They have something to prove, and they will sacrifice you and others to make this happen if the mood strikes them. Refusing to stand firm when calamity is on the horizon is a failing, but so is creating calamity because of a lack of intelligent planning. Finding people who understand the middle ground between these extremes will be a vital task for those who wish to survive and thrive during upheaval.

  They Become Political Extremists

  Throughout most modern collapses, two politically extreme ideologies tend to bubble to the surface — communism and fascism. Both come from the same root psychosis, the psychosis of collectivism. However, they are expressed is somewhat different ways.

  To summarize down to very simple socio-psychological terms, communism is collectivism based on the demonization of individual merit and the demonization of production based on individual gain. Communism sees individualists as anomalies that threaten the greater good of the greater number. They usually seek to remove or eliminate individualists and individualist philosophies so that the collective may succeed as a single homogenized unit. Communists steal from the strong to artificially support the weak until the strong no longer exist.

  Fascism is collectivism based on the idea that the strong prevail over the weak and that the weak survive only by the good graces of the strong. While communism demands forced charity to “harmonize” the unsuccessful with the successful until they are indistinguishable, fascism demands that the unsuccessful be erased so that there is no need to harmonize. It should also be noted that fascists see those who disagree with them as a “weakness” within their master collective that must also be eliminated.

  Communism and fascism have a kind escalating and abusive love affair. The more insane and pervasive communists become with their attempts to dominate language and thought, the more communists use organized mobs to control public discourse, the more other people see fascist solutions as a viable way to deal with them. Brownshirt gangs beating communists (along with many others) to death in the streets is usually one of these solutions. This is exactly what took place in Europe during the Great Depression, and it could very well happen again throughout the West.

  Both ends of the spectrum make it their top priority to gain control of government so they can use it as a weapon against the other side. The reality is, behind the curtain elitists are playing both sides, encouraging the public in the delusion that they can only choose between one or the other; between communism and fascism.

  Ironically, as people flock to these extremist political views, they will invariably accuse fair minded liberty activists of being the “vicious extremists.” The best liberty activists can do is to not fall into the trap of the false paradigm as well, and to fight smarter than either the communists or the fascists are capable.

  They Become Religious Zealots

  Extreme political views are not the only siren song during societal breakdown. Religious zealotry is readily abundant during crisis. Zealotry is essentially fanaticism to the point of complete moral ambiguity. Everyone who does not believe the way the zealot believes is the “other,” and the other is an enemy that must be annihilated. In the realm of the zealot there is no such thing as “live and let live.” Their ideology must reign supreme without question or opposition.

  Zealotry is also not limited to major religions; it is also common in the cultism of ideologies. Cultural Marxism (groups like "Black Lives Matter" and third wave feminism), for example, are perfect examples of a different brand of religious zealotry. There is no logic or reason behind their beliefs or worldview, and no room for dissent. They have their own taboos and their own dogma, their own high priests and their own gods (government, mother earth, etc.) Their directive is to eradicate other beliefs and ways of viewing the world as “heretical” while rationalizing what they do using their own broad interpretations of their own “religious texts.”

  The ultimate goal of any zealot is to establish a theocracy, in which their belief system becomes the only known system. All other belief systems are forcibly buried and forgotten along with any people who get in the way.

  They Abandon Their Moral Compass

  Hollywood it seems has half the world convinced that in times of great distress, only the amoral will survive. Morally relative characters are painted as “heroic” leaders that are willing to “do what is necessary,” while people with moral foundations who do not bend the rules of conscience or natural law in spite of terrible times are painted as weak or stupid, dying in horrible ways because they refused to adopt an “every man for himself” attitude.

  The truth is the complete opposite. Morally relative people when discovered are usually the first to be routed out or the first to die in survival situations because they cannot be trusted. No one wants to cooperate with them except perhaps other morally relative people. Such congregations of evil do collaborate successfully for a time based on the concept of mutual criminality for mutual gain, but eventually, they will be hunted down by those they have wronged and wiped out.

  Regardless of how they rationalize their activities or the short term gains they enjoy at the onset of collapse, moral relativists have the odds stacked against them in the long run.

  *  *  *

  Fear and instability are like a radioactive stew, a Chernobyl effect that breeds strange creatures in men. We look back at our history and think that we know and understand what we are capable of, or that such tragedies could never happen again. But chaos rises anew and the shadow side of each and every human being is put to the test. In most cases, it is self-ignorance in the individual that opens the door to collective demons. That said, the conditions of collapse that triggered societal fear in the first place are many times engineered by elitist interests for the very reason that in this way the masses can be made monstrous.

  We make the defeat of such elitists more possible every time we avoid the stupidity of the choices above and continue down the path of conscience, courage, truth and wisdom. When fear is made inconsequential, we cannot be manipulated. And if we cannot be manipulated into fighting shadows, or fighting each other, then the only people left to fight are the very people that originally sought to divide us.

  

  

  

  

  

• How This Default Cycle Is Different: Record Low Recovery Rates

  At the end of January, when looking at some recent liquidating energy companies selling off their assets in “stalking horse” bankruptcy auctions, we found something disturbing: total recovery rates under liquidation of oil and gas companies were paltry, ranging anywhere between 5 and 20 cents on the dollar, and averaging a little under 15 cents.

  

   

  While we had a rather limited universe of cases we made the following observation: “these bankruptcy auctions confirm recoveries on existing debt will be paltry, and based on our limited dataset, average to roughly 15 cents on total debt exposure, which includes both secured and unsecured debt.”

  A few months later we have a more complete data set and we can confirm that it is indeed the case that one novel feature about this particular default cycle are the record low recovery rates on bankrupt bonds.

  First, here are some thoughts from JPM’s Peter Acciavatti, who first notes the dramatic surge in default volume which in February soared to a four-year high:

  Default activity increased notably in February, as eight companies defaulted totaling $9.3bn in high-yield bonds ($8.5bn) and leveraged loans ($766mn). This month’s activity marked the highest number of defaults since nine companies defaulted in August 2009 and the highest monthly volume since November 2011’s $9.5bn (excluding 2014’s defaults of TXU and CZR in April and December, respectively). By comparison, five companies defaulted totaling $5.25bn in January, which followed five defaults totaling a 2015-high $8.2bn in December and three defaults totaling $5.26bn in November. Default activity has picked up over the last several months, as February marked the fourth consecutive month of greater than $5bn in default volume, and the sixth $5bn month over the past nine. Further evidencing the recent pick up in activity, an average of $5.4bn has defaulted per month over the last seven months, compared with a $2.1bn average over the prior seven months and a modest $1.6bn monthly average from 2010 through 2014 (ex-TXU and CZR). Year to date, 13 companies have defaulted totaling $14.6bn in bonds and loans, compared with five defaults and $4.4bn during the first two months last year. As a reminder, 37 companies defaulted totaling $37.7bn in bonds ($23.6bn) and loans ($14.1bn) in full-year 2015, the sixth highest total on record and the second highest total since the credit crisis, behind FY14’s 27 defaults and $69.9bn

  

  None of this is surprising: the default onslaught is by now well known, and the fact that it has so far remained isolated to the energy sector is the reason for the recent junk bond euphoria across other industries. Just yesterday, Credit Suisse wrote that “speculative bonds default rate reached a 6yr high of 3.3% in February. However, if you exclude energy, the US HY default rate actually went to 2.2% in Feb from 2.4% in January. This tells us that the market contagion is not translating (yet) into default contagion. Our high yield group compared it to the 2002 TMT blow-up (WCOM) , when everything sold off very hard but the defaults were confined to TMT.”

  Others, however, such as UBS’ Matthew Mish have disagreed:

  … while there may not be another ‘energy’ sector this cycle, our proverbial list of candidates includes lower quality high yield (ex-commodities) and commercial real estate (CRE). More broadly, the OCC’s own examiners would also likely add asset-backed and auto loans to the list. The stark conclusions these credit officers draw with respect to the massive easing of credit standards due to competitive pressures seems clear enough – but unfortunately they seem to largely fall on deaf ears.

  Whether or not Credit Suisse, and the recent influx of record retail fund flows into junk is right…

  

   

  … or just a momentary bout of euphoria, remains to be seen and is largely irrelevant for the time being. What matters far more is what else Acciavatti writes further on in his latest weekly default report: it confirms what we first observed over a month ago.

  Recovery rates in 2016 are extremely low... for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%. Final recovery rates in 2015 for high-yield bonds were 25.2%, compared with recoveries of 48.1%, 52.7%, 53.2%, 48.6%, and 41.0% in full-years 2014, 2013, 2012, 2011, and 2010, respectively. Notably, average recoveries for Energy and Metals/Mining bonds were 18.3% and 20.0%, respectively, which weighed down overall high-yield recovery rates. Excluding the troubled commodity sectors, high-yield recoveries were a more respectable 46.1% (32.1% Ex-Energy only). As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%. Final 2015 1st lien recoveries were 48.2%, while average recoveries for Energy and Metals/Mining 1st lien loans were 44.1% and 38.4%, respectively.

  The record collapse in recovery rates is shown below.

  

  It is not just JPM who points out what we first noticed in January: in an interview with Goldman’s Allison Nathan, credit guru Edward Altman reiterates that same warning, although he focuses on the 2015 recovery rate which already is more than two times higher than that seen in 2016 defaults:

  Allison Nathan: What is your view on recovery rates?

   

  Edward Altman: Our approach to recovery rates is not centered on sectors. What we’ve looked at carefully over 25 years is the correlation between default rates and recovery rates. As you would expect, when the former rise to high or above-average levels, you always observe the latter dropping to below-average levels. This strong inverse relationship is as much a function of supply and demand as it is of company fundamentals. So if we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default. This is primarily due to the heavy concentration of energy companies whose recovery rates depend on their ability to liquidate their assets at reasonable prices, which in turn depends on the price of oil. Low oil prices have pushed recovery rates in the energy sector below 25% and even into the single digits for some companies. And that’s going to continue. So this year I expect recovery rates much below average, producing a double-whammy of high default rates and low recovery rates for credit investors.

  So why do recovery rates matter? Simple: they determine the exit IRR calculation for distressed investors in the case of a bankruptcy.

  A simple analysis on the importance of how recovery rates play into purchase assumptions was made once again by UBS’ Matt Mish three weeks ago, when he calculated at what yield bond investors should start to buy the numerous distressed opportunities. This is what he said:

  In our 2016 US high yield outlook we posited there is one central question that will dictate the outlook for high yield: will credit markets be able to absorb refinancing needs of almost $1tn stressed and distressed credit. And we continue to believe this should be THE debate in the market. In our view, if the lower quality rung of the market cannot stabilize the balance of risks is for contagion to spread further. So what is the clearing level for what we believe is upwards of $750 – 1tn in stressed credit? First, investors will require compensation for loss risks; cohorts of triple Cs typically experience 5yr cumulative default rates of 55 – 65% near the end of the cycle, implying half of the universe defaults before the end of year 5 and no longer pay coupons. Assuming recovery rates of 35% an investor should require roughly 12% yield to compensate for loss risks alone… 

   

  Further, although our prior analysis assumes hold-to-maturity, investors will need to be compensated for the fact that illiquidity may prevent them from selling when needed. Bottom line, our conversations with investors suggest yields in the 20 – 25% context could be attractive enough to draw in marginal capital – although several investors noted that is reasonable for triple C risk excluding commodities. In short, we’re not there yet.
  

  Keeping everything constant, and assuming these new, if not improved, record low recovery rates, what it means is that for Mish’ analysis to hold, the yield required to compensate for loss risks doubles to over 20%, while the all-in liquidity risk analysis moves the 20-25% yield threshold to over 30%, if not 40% if one indeed is expected to recover 10 cents on the dollar in the upcoming default wave.

  That record lower recovery rate also explains what we discussed earlier, namely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson’s Michael Lipsky put it: “we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.“

  And so, one by one the pieces of the puzzle fall into place: banks, well aware that they are facing paltry recoveries in bankruptcy on their secured exposure (and unsecured creditors looking at 10 cents on the dollar), have engineered an oil short squeeze via oil ETFs…

  

   

  … to push oil prices higher, to unleash the current record equity follow-on offering spree…

  

  … to take advantage of panicked investors who are desperate to buy the new equity issued. Those proceeds, however, will not go to organic growth or even to shore liquidity but straight to the bank to refi loan facilities and let banks, currently on the hook, leave silently by the back door. Meanwhile, the new investors have no security claims and zero liens, and are in fact at the very bottom of the capital structure, face near certain wipe outs.

  In short, once the current short squeeze is over, expect everyone to start paying far more attention to recovery rates and the true value of “fundamentals.”

  

  

  

  

  

• Desperation Moves: Romney Plots To Block Trump At Republican Convention

  Only in America's so-called democracy could a proven "loser" so vehemently and shamelessly condemn a current "winner" with the goal of overturning 'we, the people's' prospective leader in favor of himself. In the latest (and most desperate) action from the neocon establishment, CNN reports Romney has instructed his closest advisers to explore the possibility of stopping Donald Trump at the Republican National Convention (by revising rules for instance). As The GOP self-immolates, perhaps Romney – as the mouthpiece of the establishment – should pay heed to Florida Governor Risk Scott who explained "I trust the voters, so I will not try to tell the Republican voters in Florida how to vote." Democracy, indeed.

  Following his attack speech this morning, CNN reports that Romney is quickly mobilizing Plan B…

  Mitt Romney has instructed his closest advisers to explore the possibility of stopping Donald Trump at the Republican National Convention, a source close to Romney's inner circle says.

   

  The 2012 GOP nominee's advisers are examining what a fight at the convention might look like and what rules might need revising.

   

  "It sounds like the plan is to lock the convention," said the source.

   

  Romney is focused on suppressing Trump's delegate count to prevent him from accumulating the 1,237 delegates he needs to secure the nomination.

   

  But implicit in Romney's request to his team to explore the possibility of a convention fight is his willingness to step in and carry the party's banner into the fall general election as the Republican nominee. Another name these sources mentioned was House Speaker Paul Ryan, Romney's running mate in 2012.

  Because nothing says "success" like an old establishment "loser" when the American people are screaming out for change… and not this kind of change (again)…

  

  According to the source, CNN reports that Romney does not expect Rubio, Cruz or Kasich to emerge as the single candidate that can accumulate 1,237 delegates and outright defeat Trump before the convention. So the only way to rob Trump of a victory would be to keep him from reaching that magic 1,237 number.

  Most Republican states allocate their delegates proportionally, or in a hybrid format that gives delegates both to the statewide winner and at the congressional district level. This means rather than winnowing the competition down to a single Trump alternative, it could make more sense for all of the current candidates to stay in the race for a stop Trump movement, according to one source.

   

  In addition, two senior Republican Party insiders told CNN that the convention scenario is now dominating a lot of conversation in GOP fundraising circles. To be sure, both of these sources are skeptical about Romney being able to execute this plan, but both believe that there is a real attempt underway to try to do this.

  Even Lou Dobbs was shocked…

  "@MittRomney and @SpeakerRyan are despicable. They are absolutely dishonorable," says @loudobbsnews pic.twitter.com/4E9cGVHyee

  — FOX Business (@FoxBusiness) March 4, 2016

  Perhaps Mr Romney should listen to Republican Florida Gov. Rick Scott:

  Republican Florida Gov. Rick Scott is not endorsing a candidate in the party's presidential race ahead of his state's March 15 primary.

   

  "I have made it my practice to not get involved in primaries because picking the Republican candidate is the voters’ job," Scott wrote in a statement posted to Facebook on Thursday.

   

  "The political class opposed me when I first ran for office, they did not want a businessman outsider, but the voters had other ideas," he said.

   

  "I trust the voters, so I will not try to tell the Republican voters in Florida how to vote by endorsing a candidate before our primary on March 15," Scott continued. "I believed in the voters when I first ran for office, and I still believe in them today."

  Ah – we love the smell of democracy in the morning; or is that the burning smell of a Republican party on fire? As The Patriot Post's Nate Jackson so eloquently sums up the farce:

  Millions of Americans are fed up with the establishment of both parties. And the Republican base is fed up with nominees like Bob Dole, John McCain and Mitt Romney, all of whom lost to younger, more energetic and appealing Democrats. So naturally, the solution to that frustration yielding the rise of Donald Trump is to … roll out Mitt Romney to denounce him. That’s exactly what the last GOP presidential loser did Thursday.

  …

  But the most important takeaway is that the messenger is deeply flawed, which will only reinforce in the minds of Trump supporters that they should stand by their man.

  That said, Romney’s speech isn’t for Trump supporters. It’s to stem the tide of elected Republicans conceding the nomination to Trump without continuing to fight.

  Romney lost in 2012 because he implemented ObamaCare in Massachusetts before there was ObamaCare. He was a moderate technocrat who spoke conservatism as a second language. That doesn’t mean he would’ve been a bad president; on the contrary, his generally non-ideological philosophy and his history of turning around both companies and the Salt Lake City Olympics perhaps uniquely qualified him to serve at that moment in American history. But he lost, despite the fact, as Trump said, he “should have beaten Barack Obama easily.”

  Even Trump’s endorsement couldn’t save Romney in 2012.

  …

  Going forward, Romney’s advice is simple:

  “[T]he rules of political history have pretty much all been shredded during this campaign. If the other candidates can find common ground, I believe we can nominate a person who can win the general election and who will represent the values and policies of conservatism. Given the current delegate selection process, this means that I would vote for Marco Rubio in Florida, for John Kasich in Ohio, and for Ted Cruz or whichever one of the other two contenders has the best chance of beating Mr. Trump in a given state.”

  Translation: Aim for a brokered convention. If Trump loses in such a way, however, it would surely drive away Trump supporters, and Trump himself would no doubt launch a third-party run after having been not “treated fairly.”

  So we have many in the establishment signaling they would be just fine with a Washington dealmaker like Trump — Chris Christie, Mike Huckabee and others come to mind, but also conservatives like Jeff Sessions. And we have conservatives like Sen. Ben Sasse and a growing list of others who vow not to support Trump. Many among the conservative intelligentsia (for lack of a better word) also have declared Trump unacceptable. Meanwhile, Marco Rubio, Ted Cruz and John Kasich show no signs of exiting the race, even amidst growing calls on the Right for a Cruz/Rubio unity ticket.

  Now we have the two previous Republican nominees denouncing the current Republican frontrunner. Are we witnessing the collapse of the Grand Old Party? And is there any way to win a gimme election this year with such a fractured party?

  

  Source: Ben Garrison

  And in tonight's debate (the 23781st we believe), Trump destroys Romney with his response to the first question:

  "He was a failed candidate. He should have beaten President Obama very easily,"

   

  "He failed miserably. And it was an embarrassment to everybody, including the Republican Party."

   

  "So I don't take that. And I guess obviously he wants to be relevant. He wants to be back in the game."

  

  

  

  

  

• Revolutionary Guards: The Way Of The Iranian Future

  Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

  Iranian elections have supposedly put a very nice ‘moderate’ spin on Iranian politics in parliamentary ranks, and more importantly, Assembly of Experts composition. While it would be churlish to deny, it represents a significant step forward for President Rouhani’s agenda to 2017, albeit a number of vital caveats remain for how real any political shift actually is. We’ll do the Parliament first, and then move onto the Assembly second. With a ‘grand finale’ of what it means for Iranian Presidential outcomes, and associated production profiles at the end.

  The first point to flag on the Showra is that it still actually remains more Conservative than moderate in composition (both of which are obviously relative terms in Iranian politics given 12,000 candidates were already barred from standing by the Guardian Council). The final composition of the 285 seat body will only be complete in May 2016 once votes are counted and around 50 second round run-offs are completed where 25% thresholds weren’t reached. But broadly speaking, we can expect more conservative creep in rural areas given moderate gains have already been counted in urban areas. Most notably taking all 30 seats in Tehran. That accounts for the vast majority of the 40 scalps won by the last minute ‘Reformist & Government Supporters (RSG) coalition thrown together under a Rouhani umbrella. The group broadly consists of pragmatic conservatives, centrists, and a sprinkling of reformers that undoubtedly did better than expected. But ironically the main reason for that was rather than picking the ‘wrong’ pre-screening fight with the Guardian Council, Rouhani, Rafsanjani and Mohammad Khatami oversaw a very clever broad church ‘branding exercise’ that essentially lumped them all into the same moderate RSG camp.

  Despite that, the Conservative Comprehensive Principlist Alliance (CPA) still holds 41 seats, with further gains likely to be made in rural areas. It’s entirely true; the harder-line Steadfastness Front lost considerable ground on the political right. But many of the spoils didn’t go into RSG pockets; rather independent candidates picked up 58 seats as an eclectic political bunch instead. So much for all the numbers here, what are the political implications in play? While this undoubtedly gives Parliament a more moderate slant than it’s had since the early 1990s, it’s vital to note that political parties don’t really exist per se in Iran, but merely constitute loser coalitions and groupings. Moderates won’t ever vote as a unified bloc, which means Rouhani will have to keep tweaking his agenda to secure votes, and essentially still work with stauncher Conservative elements. In Western parlance, this is basically a ‘hung parliament’. In Iranian parlance, it’s a reasonable political balance where endless ‘camel-trading’ should allow for progress beyond hard line intransigence to be made. No more, no less. On no counts is this a ‘liberal panacea’.

  Indeed, things get far more interesting when you turn to the Assembly of Experts. The headline news for the 88 member body is the conservative chair of the Assembly, Mohammad Yazdi and arch conservative Mesbah Yazdi, both lost their seats, while Rafsanjani, pragmatic cleric, Mohammad Emami Kashani and Rouhani himself, all got in as the leading names amongst Tehran’s 16 Assembly candidates. That matters not only because the body sits for eight year terms, but because ‘formally speaking’, it’s the primary organ responsible for selecting the next Supreme Leader (Rabhar) when Ayatollah Khamenei’s health gives out. A near certainty within the eight year window we’re looking at here. The naïve spin is this gives ‘moderate’ voices far more clout when the time comes. But a more realistic discussion of how that unfolds, actually reveals the true nature of the regime, and why recent elections don’t shift the political needle that much. Again, the first point to note is you have to separate what the Iranian Constitution formally states, and who’s actually going to calls the shots.

  Sure, the Guardian Council, Expediency Council, the Assembly of Experts and even the sitting President will all have a say on the next Supreme Leader. But the fundamental power behind the ‘theocratic throne’ is ultimately going to be the Revolutionary Guards who’ll be working hand in hand with Khamenei to eventually anoint a successor. For some, that could portend a ‘collective leadership model’ where the Guards basically orchestrate a silent coup at the top towards ‘leadership by committee’. For others (and in our view a more realistic call), is any future leader will merely be far weaker than Khamenei to make sure any new Ayatollah is ultimately answering to the Guards, not the other way round.

  Where Mr. Rouhani comes back into that loop, is far from directly challenging that outcome, he’s ultimately likely to quietly support it. For all the liberal pledges made in 2013 to ‘de-securitize’ Iranian politics, Rouhani comes from (and remains) part of the security establishment; aka he’s not any kind of threat to it. Any reform based impetus is entirely designed to prolong, reinforce, and if needs be, reinvent, the ‘revolution’ to maintain the status quo. That’s precisely why the Guards made its Faustian pact to push to the nuclear through with Rouhani, provided the core commercial (and ultimately political), gains ended up in their pockets. Strip away the ‘moderate gloss’, and the Guards remain the ‘political undercoat’ of the regime, with an extensive grip on business, military, and intelligence pallets across the board.

  For our sharper readers, that presents a very interesting question for what Rouhani does next. Both in relation to the never ending ‘IPC saga’, and indeed the associated issue of 2017 Presidential elections. Being deeply cynical, as much as Rouhani has just given hard-liners a good electoral kick in the head, he’s arguably tightened the political noose around his own neck in the process. At this stage, Rouhani has absolutely no excuses if he can’t prove that nuclear opening was the way to go ahead of Presidential polls in terms of big ticket investments into the Islamic Republic. He has the green light with the IAEA; to casual observers, he has the green light from ‘a new look’ Parliament that shouldn’t throw too many spanners in the FDI works. He even has a say in the succession debate, both as sitting President, and securing his seat on the Assembly of Experts. But in reality, his political window is very short here. Unless Rouhani can finally get the IPC ‘to market’ by May 2016, currently stuck in deep political weeds between the drafting committee and NIOC who can’t agree on credible terms in a low price environment, we think the President will have no choice but to ditch any hope of the IPC coming through, and start brokering bilateral deals instead.

  

  That’s likely to be the case with European IOCs, where Iran clearly wants them ‘front of house’ as prospective operators. Flimsy MoU’s won’t cut it much longer in Iran; Rouhani needs firm deals and hard European cash in the bank at this stage. He’ll also have to blink first when it comes to Chinese haggling if Iran wants to get to grip with massive infrastructure gaps in rail, roads and ports. That’s not to mention making sure Iran has a decent insurance policy from broader international investors, just in case the US has any snap back second thoughts come November 2016 Presidential polls. Without cash injections in place, any economic openings are going to come up very politically short for Mr. Rouhani, and especially outside Tehran in likes the likes of Qom. Given Iran has already announced real term 5.6% budget cuts next year, Rouhani knows he remains the potential fall guy here. Sure, the 2017 Presidency probably remains his to lose right now. But 12 months is a very long time in Iranian politics to April 2017. Moderate smoke, Conservative mirrors. It’s the way of Iran’s political future.

  

  

  

  

  

• "It Hasn't Been This Bad Since The Viking Age": Dry Bulk CEO Warns Of Bankruptcy Tsunami, Counterparty Risk

  In the past three months we have repeatedly shown that, despite the recent modest rebound off the all time lows, the bottom is about to fall out of the dry bulk shipping market in articles such as these:

  • It Is Now Cheaper To Rent A Dry Bulk Tanker Than A Ferrari
  • A “Perfect Storm Is Coming” Deutsche Warns As Baltic Dry Falls To New Record Low
  • “Nothing Is Moving,” Baltic Dry Crashes As Insiders Warn “Commerce Has Come To A Halt”
  • World’s Biggest Containership “Hard Aground” As Baltic Dry Crashes Below 300 For First Time Ever
  • The Next Big Leg Lower In The Baltic Dry Is On Deck: 360 New Vessels Are About To Be Delivered

  Overnight, the CEO of Dry bulk shipper Golden Ocean Group, Herman Billung spoke before an industry conference in Oslo, and made it clear that our worst-case expectations may prove to be optimistic.

  

  Photo: Golden Ocean Group

  He said that Dry Bulk shippers should expect little respite for another two years, adding that an enormous oversupply of vessels isn’t sustainable: “It’s a fair assumption to make that only half of the orderbook in 2016 will be delivered.”

  He warned that “in the coming months there will be a lot of bankruptcies, counterparty risk will be on everybody’s lips.”

  Useful tip: any time a CEO is warning about counterparty risk, it’s probably a good idea to listen.

  Just to emphasize his point to the local audience he said that “The market has never been this bad before in modern history. We haven’t seen a market this bad since the Viking age. This is not sustainable for anybody and will lead to dramatic changes.”

  Yes, it’s that bad.

  And what’s worse, is that once Billung is proven to be right and the dry bulk bankruptcy tsunami is unleashed sweeping away hundreds of ships with it, the next question will be just which  (mostly European) banks, have the greatest “secured” loan exposure to the dry bulk industry, a sector where we fully expect recoveries on secured loans to be in the pennies on the dollar.

  

  

  

  

  

• Fed Makes A Stunning Discovery: "Consumers Across The Country Are Borrowing More To Buy Cars And Go To School"

  Roughly four year after our readers were well aware that contrary to infantile suggestions that the US consumer is deleveraging, and was instead being burried under trillions in new auto and student loans…

  

   

  … the Fed has finally “figured it out.”

  Consumers across the country are borrowing more to buy cars and go to school https://t.co/mkKAoVya2o pic.twitter.com/DxMiHo7kki

  — St. Louis Fed (@stlouisfed) March 3, 2016

  Since we have said everything there is to say on the topic, here is the shocked Fed discovering that it has enbaled the biggest consumer debt spree in history.

  And yes, before you ask, taxpayer money was spent on this “study.”

  From the St. Louis Fed

  What Has Happened to Consumer Debt Since the Great Recession?

  In Figure 1, total real per capita consumer debt for the nation and the Eighth District is presented relative to their respective balances in 2003 to compare debt growth. Between the first quarter of 2003 and the third quarter of 2008, total per capita debt in the nation increased around 50 percent. Much of this rise stemmed from increased mortgage borrowing. From that peak, per capita debt declined until the second half of 2013, a process known as “deleveraging” whereby consumers discharge or pay down debts. After reaching a turning point in 2013, total per capita debt has been growing at a gradual pace in the District and has been essentially flat for the nation.

  The pattern for consumer debt growth in the District is similar to that of the nation, although there are some important exceptions. In particular, the run-up in debt was milder than that observed for the nation. More affordable house prices within the District played a big role in moderating the growth of overall mortgage borrowing. In turn, this protected consumers from the worst of the housing crash. While the District did deleverage, the intensity was much milder.

  Borrowing for Higher Education and Automobiles Are Driving Debt Rebound

  Consumers across the country are borrowing more to finance car purchases and pursue higher education. For both the nation and the District, student and auto loans combine for around 90 percent of debt growth since the fourth quarter of 2012. In Figure 2, the remarkable growth is reflected by the average amount of auto and student debt held by borrowers. Average auto debt grew at a similar rate to student loans since the close of 2010. However, unlike auto loans, the recession did little to slow the growth of student loan balances. Since 2003, the average student loan balance has increased by more than 58 percent.

  Some reports argue that part of the slow recovery is due to recent graduates paying down student debt rather than buying houses and other goods. Figure 3 breaks down the growth in both student debt and auto debt by age groups and highlights the groups generating the majority of the economic activity.

  The vast majority of new student loan debt is concentrated in younger age groups. Coupled with consistently rising average balances, this heavy concentration of new debt among the young supports the theory that these borrowers will experience headwinds in the form of a longer deleveraging period before other spending or saving decisions may be financially sound. In contrast, much of the new auto debt is concentrated in the older age groups. This is especially true for the District, where 61 percent of new auto debt was accumulated by individuals age 56 and above.

  Serious Delinquency Rates Tell a Story of Financial Hardship

  As borrowers encounter unexpected setbacks—both financial and otherwise—they are more likely to fall behind on loan payments. If the duress is prolonged or worsens, then borrowers’ loans may fall into serious delinquency (defined as a payment is overdue by at least 90 days). Figure 4 shows the serious delinquency rates for both student loans and auto loans.

  Intuitively, the rate for auto loans rose during the recession and peaked at close to double the pre-recession rate. The rate for student loans also rose over the same period, but never declined substantially. However, these delinquency rates likely understate the effective delinquency rates, because many student loans are in deferment, grace periods or forbearance and are temporarily not in the repayment cycle.

  The implications of these alarmingly high rates is not immediately clear, especially given that many student loans cannot be shed in personal bankruptcy. However, a large share of young borrowers saddled with severely delinquent loans may inhibit aggregate economic growth as this group is unable to participate in other economic activities, such as buying a home or saving for retirement.

  Borrowing Differs Greatly Across Large Cities

  Data at the MSA level in the Eighth District also show different experiences for borrowers. As seen in Figure 5, Memphis’ student debt growth in 2015 well outpaced that of the nation and other large District cities.

  Serious delinquency rates for student debt rose across every city, while the rate fell for the nation as a whole. Of note, Louisville experienced a sharp increase over the year, representing the highest point in 13 years.

  For auto debt, borrowers in each large city, as well as the nation, were accumulating debt at a rapid rate. Serious delinquency rates for auto debt largely held steady and were a quarter of the rate for student loans. This largely reflects the greater financial security, on average, for borrowers in older age groups.

  Further Analysis Ahead

  This powerful dataset will allow us to monitor these statistics and several others across a wide range of geographic areas. In the next quarter, we will showcase trends for consumer debt across the nation, District and large District MSAs. Ultimately, we hope to provide valuable information to policymakers, business leaders, nonprofits and others interested in following this key component of household balance sheets.

  Figure 1

  

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  Figure 2

  

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  Figure 3

   

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  Figure 4

  

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  Figure 5

  

  

  

  

  

• Equity Markets Are The Most Complacent Since The Fed Stopped Printing Money

  Having risen to its highest level ever in August 2015, the volatility of volatility has collapsed. As traders position increasingly for negative interest rates in the US, the last month has seen ‘uncertainty’ crash to its most complacent in over 18 months.. and all this as well-chosen data corners The Fed (if it was truly data-dependent) to hike rates (or at best make hawkish over tones). Perhaps this is peak complacency ahead of tomorrow’s do-or-die jobs data?

   

  VVIX (the estimate of the uncertainty of the cost of insuring equity risk) has tumbled to its lowest level since the end of QE3…

  

  Chart: Bloomberg

   

  As we noted recently, it seems the VIX derivative market is expecting more easing. QE? Unlikely. But NIRP maybe… as bets on The Fed going negative soar to record highs…

  

  Chart: Bloomberg

  

  

  

  

  

• UBS: "There Is No Doubt That The Move In Oil Is TOTALLY Short Squeeze Led", Here's Why

  Earlier today we showed how, courtesy of massive synthetic positions where Oil ETFs are currently net long 272k lots of oil, equal to 56% of the front month open-interest in futures, the price of oil is being propped up by ETF buying, either outright or via an ongoing, relentless short squeeze.

  

   

  This was to be expected: as we warned a little over a month ago, as a result of a record number of oil shorts, there is a “constant threat of a short squeeze.” As SocGen further elaborated, “a positive surprise could happen quite sharply, as short positions are likely to be squeezed by a profit-taking move. On WTI, the in-the-money short positions are really dominating at the front end of the curve while out-of-the-money long positions are dominating at the long end of the curve: the front end of oil curve could thus be more exposed to some profit-taking.”

  

  It certainly has.

  Today, one Wall Street firm confirms that indeed the recent move in oil has nothing to do with fundamentals, and everything to do with positioning, and as UBS explains, “the performance is TOTALLY short-squeeze led.“

  Here’s why:

  RECENT ACTION/ SENTIMENT:

   

  Yesterday oil ended in the green despite a very large reported crude inventory build, a reflection of how biased to the downside sentiment and positioning already is. Today, crude started in the read and has been mixed from there but moving higher. And both days, the stocks have lead with energy the best performing subsector in the S&P.

   

  Now, there is no doubt that the performance today is TOTALLY short-squeeze led. Though it also shows how negative sentiment and positioning is.

   

  Interestingly, with energy outperforming the market the last few days for the first time in a very long while, I actually got a few long only generalist type calls yesterday. Nothing concrete but generalists who are underweight the space trying to figure out if this is a turning point…
   
  WHAT HAS HELPED FUEL THIS SHORT SQUEEZE?

  • Positioning and sentiment very biased to the short side/ underweight. And as we move up, the move is also exxacerbated by short gamma positions that have to cover at higher levels.
  • Despite high oil inventories (and still building), most upstream producers (from Exxon on down) have guided to lower than expected production as a result of lower capex.
  • Ongoing hopes of a potential agreement between OPEC and non-OPEC members (seems umlikely but now a meeting set for March 20th is reviving some market hopes).
  • A couple of supply issues like Kirkuk/Ceyhan pipeline damage taking longer to repair than expected and Farcados force majeure in Nigeria still on going issue.
  • Credit players covering equity shorts — evident today that “good credit names” are underperforming and “bad credit names” outperforming.
  • We took a day break from equity issuances in the space ystd and this morning… despite energy’s strong performance. Though rest assured we haven’t seen the end of issuances yet (RRC WLL, RSPP, MUR, CRZO GPORare all top of mind)… by the same token all this energy issuances are helping the credit side of things which has also been the culprit of the issue.

  One may wonder if the squeeze is forced, or simply momentum driven, although we would like to quickly point us that most of the recent equity offerings by O & G companies who have benefited from the rally have noted in the “use of proceeds” that the raised capital would be used to pay down secured debt, i.e., take out the banks. In other words, it is as if the banks are orchestrating a squeeze to allow the shale companies to raise capital which will then allow them to repay their secured debt to the banks, secured debt whose recoveries as we have recently shown are practically non-existent in bankruptcy.

  

   

  Which in turn means that all that is happening is a new layer of equity is coming in to take out the same banks who, as we recented noted, no longer have an interest in being in part of the capital structure. Impossible, you say? Recall what MatlinPatterson’s Michael Lipsky said two weeks ago:

  “we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.”

  Which leads us to the most important question: if the oil recovery is “real” why are the banks in such a desperate scramble to get the hell out of Dodge?

  As for what this means for returns to new equity investors, we believe the answer is self-evident.

  

  

  

  

  

• It's Official: Canada Has Sold All Of Its Gold Reserves

  One month ago, when looking at the latest Canadian official international reserves, we noticed something strange: Canada had sold nearly half of its gold reserves in one month. According to the February data, total Canadian gold reserves stood at 1.7 tonnes. That was just 0.1 per cent of the country’s total reserves, which also include foreign currency deposits and bonds. 

  As we noted, the decision to sell came from Finance Minister Bill Morneau’s office.

  “Canada’s gold reserves belong to the Government of Canada, and are held under the name of the Minister of Finance,” explained a spokesperson for the Bank of Canada on Wednesday. “Decisions relative to gold holdings are taken by the Minister of Finance.”
  Reached by Global News on Wednesday evening, a spokesperson for the finance department said the sale “was done in the normal course of business for the government. The decision to sell the gold was not tied to a specific gold price, and sales are being conducted over a long period and in a controlled manner.”

  This latest sell-off is indeed part of a much longer-term pattern of moving away from gold as a government-held asset. According to economist Ian Lee of the Sprott School of Business at Carleton University, Ottawa has no real reason to keep its gold reserves other than adhering to tradition.

  “Under the old system, (gold) backed up currencies,” Lee explained. “The U.S. dollar was tied to gold. One ounce was worth US$35. Then in 1971, for lots of reasons I won’t get into, Richard Nixon took the United States off the gold standard.”

  Gold and dollars were interchangeable until that point, he said, but in the modern financial world, the metal is no longer considered a form of currency.  “It is a precious metal, like silver … they can be sold like any asset.”

  The amount of gold the Canadian government holds has therefore been falling steadily since the mid-1960s, when over 1,000 tonnes were kept tucked away. Half of those reserves were sold by 1985, and then almost all the rest were sold through the 1990s up to 2002.

  By last year, Canada’s reserves were down to just three tonnes, and the latest sales have now halved that. At the current market rate, the value of 1.7 tonnes of gold comes in at just under CAD$100 million, barely a drop in the bucket when you consider the broader scope of federal finances.

  According to Lee, there may soon come a time when Canada’s gold reserves are entirely a thing of the past. There are better assets to focus on, he argued, calling the government’s decision to dump gold “wise and astute.”

  * * *

  Lee was right, because fast forward one month when earlier today Canada’s Department of Finance released its latest official international reserves and as of this moment it’s official – Canada has fully “broken away with tradition” and has exactly zero gold left.

  

  

  This is what it said:

  The Government of Canada sold 21,851 ounces of gold coins for settlement in February. On February 29, gold holdings stood at 77 ounces. The valuation is based on the February 29, 2016, London p.m. fix of US$1,234.90 per ounce.

  And now, Canada can focus on buying “better assets.” As to whether “the government’s decision to dump gold was wise and astute”, we’ll check back on that at some point in the near future.

  

  

  

  

  

• The 2016 Presidential Vote Decision (Explained In 1 Cartoon)

  Lesser of two evils?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• A Conversation With My Neighbor "Sam"

  Submitted by Mark Brandly via The Mises Institute,

  Lately, I’ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget.

  When I asked him about this, Sam asked, “Do you think I’m spending too much?”

   

  “That depends,” I said, “How much money do you make?”

   

  “I take home $100,000 a year.”

   

  That surprised me. I would guess that he’s spending more than that. But I tried to be encouraging, “That sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.”

   

  “But my finances are a mess,” Sam replied. “I spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.”

   

  “Well maybe things will be better this year,” I said, hoping that Sam’s spending issues was a one year problem.

   

  “No,” Sam replied. “Actually, in the first three months of this year, I’ve already spent $19,000 more than I’ve made. It looks like my budget deficit this year will be much worse than it was last year.”

  Now I was starting to worry. “Have you been borrowing money to cover your spending for a long time?”

   

  “Oh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.”

   

  I wondered if Sam misspoke, “Wait, wait, wait, you owe yourself $150,000? Why do you think that you’re in debt to yourself?”

   

  “Well you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children’s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children’s college tuitions.”

  Obviously Sam doesn’t understand the definition of the word “debt.”

  I tried to be polite in my response:

  “That doesn’t make any sense. It’s true that you’ve made some horrible decisions regarding your spending, but it’s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn’t mean that you’ve borrowed money from yourself.

   

  “So the first thing you need to do is to think clearly about the amount of debt you have. You don’t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?”

   

  “Alright, I think I see your point. Let’s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.”

  Sam often lies about his income and spending issues, but he always understates his budget problem. If he’s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.

  “That a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you’ve borrowed that money at low interest rates.”

   

  “I have some good news and some bad news,” Sam said. “Interest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That’s because interest rates have collapsed during that time. Isn’t that good news?”

   

  “I suppose, but do you know that interest rates are going to increase over the next several years?”

   

  “Yes, that’s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.”

   

  “That’s a huge problem. So to be able to make your loan payments, I assume that you’ve taken out some long-term loans.”

   

  “No, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal payments on these loans totaled $207,000.”

  “Let me get this straight. Your loan payments, including principal and interest, are well over twice your take home pay?”

   

  “Yes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it’s no problem. In the past year I borrowed $223,000 to cover everything.”

  Shocked, I said “How can you say borrowing more than twice your income is not a problem?”

  “I simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I’ve been doing this for years, ever since I started spending more than I make.”

   

  “Okay. Most of your borrowing goes to cover your increasingly large principal and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending.

   

  When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?”

   

  “Well I don’t have a plan for correcting anything, because I don’t see how I can cut my spending.”

   

  “What if the banks stop loaning you money to make your payments on your loans? What happens then?”

   

  “I guess I’m assuming that won’t happen.”

  Sam’s Budget Situation in Real Numbers

  If one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam’s spending.

  However, Sam’s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:

  • In FY (fiscal year) 2015, the feds had a budget deficit, counting only debt held by the public, of $339 billion, which is about 10 percent of their tax revenues of $3,248 billion. The deficit has been declining the last few years, but that is now changing.
  • In fact, in the first three months of FY 2016, according to the Treasury Department, federal debt held by the public increased $548 billion. Admittedly, some of this debt was due to the fact that the feds were cooking the books in FY 2015 when they hit the debt ceiling limit. Nonetheless, the first quarter 2016 deficit is already 60 percent larger than the overall 2015 deficit.
  • The federal government claims to owe itself over $5 trillion (they call it intragovernmental debt here). This $5 trillion represents tax revenues that were earmarked for specific spending programs, such as Social Security, but were spent on other programs. Since the feds collected taxes to pay for Social Security, but spent the money on something else, they conclude that they owe it to themselves to collect those tax revenues again. That’s the essence of intragovernmental debt. We should not count this as debt. Give the Treasury Department credit for ignoring this type of “debt” in their Daily Treasury Statements and in their end of the year debt reports.
  • As of September 30, 2015, the feds had $13.1 trillion of debt owed to the public. FY 2015 tax revenues totaled $3.248 trillion. So just like Sam the government has a 4 to 1 debt to tax revenue ratio.
  • In the past fourteen years, from September 30, 2001 (the start of George Bush’s first budget) to September 30, 2015 (the end of Barack Obama’s sixth budget), debt owed to the public increased from $3,339.3 billion to $13,123.8 billion. That’s an increase of 293 percent.
  • According to the Daily Treasury Statements, in the past fourteen years, interest on treasury securities increased from $162.5 billion in fiscal year 2001 to $233.1 billion in fiscal year 2015. That’s a 44 percent increase during the same period when federal debt owed to the public almost quadrupled.
  • In FY 2015, again according to the Daily Treasury Statements, the feds borrowed $7,251.4 billion (see the Public Debt Cash Issues for September 30, 2015), an average of almost $20 billion per day. They spent $6,740.3 billion of this borrowing rolling over their debt. So, Federal principal and interest payments are more than double federal tax revenues.
  • According to the Congressional Budget Office’s baseline projections, debt held by the public in 2025 should exceed $21 trillion and during that time interest rates are expected to increase. Interest rates have been kept artificially low for years. If interest rates return to a more normal level, say to the rates they were paying when George Bush took office fifteen years ago, then interest payments in 2025 will exceed $1.2 trillion. That’s over a 400 percent increase compared to the FY 2015 interest payments. I should note here that the baseline budget projections are optimistic. We should expect the debt situation in 2025 to be significantly worse than these projections.

  The federal government’s debt has exploded under the Bush and Obama administrations. Low interest payments due to the low interest rates have masked their budget problems. As interest rates and the spending gap on entitlement programs such as Social Security both increase, the budget problem will compound.

  The government’s plan is to borrow all of the money they need to pay all of their principal and interest payments and to also pay for the budget deficits in their spending programs. The question we should ask is: what’s going to happen when the world’s lenders refuse to bankroll DC’s spending schemes?

  

  

  

  

  

• The Tragedy Of California's Public Pensions

  Submitted by C. Jay Engel via The Sullivan Group,

  It is well known that California has a pension problem that offers a challenge for public officials and current and future retirees alike. Even if people aren’t aware of the details, it has been talked about for quite some time that there are underlying aspects of the public retirement system that need to be addressed, sooner or later. The fact of the matter is that such problems can’t be ignored by the State forever; and what is perhaps more important to me, as one who professionally helps people secure their financial futures, is that the beneficiaries of these public pensions need to understand what is going on and work to prepare themselves for what is ahead.

  Thus, the purpose of this short overview of the problem is to help awaken people to their own unique scenarios, to inspire them to make the proper moves before it is too late.  Everyone is in a different situation and there is no one-size-fits-all approach to figuring out what one should do personally; but hopefully after considering the following, the reader will be encouraged to reflect deeper on how the pension crisis may affect their futures.

  The first thing to understand is that California’s public pension system is made up of a conglomeration of “6 state plans, 21 county plans, 32 city plans, and 27 special district and other plans” according to the Independent Institute Senior Fellow Lawrence J. McQuillan (McQuillan, page 3). The majority of these operate on a “defined benefit” model, which means that, upon retirement, these plans pay a specific amount per month for the rest of the retiree’s life. By far, the three largest of these 86 CA pension systems are CalPERS (1.68 million retirees), CalSTRS (868k retirees), and UCRP (253k retirees). For the remainder of this article, we will refer to these as the Big Three.

  The “defined benefit” for these retirees rests on a relatively complicated formula which includes the number of years employed with the employer, one’s age at retirement, and one’s “final compensation.” There are fluctuations and other variables within this formula as well and factors can also include the specific employer, the occupation, and even variations of contract specifics. However, as Jon Ortiz reports in the Merced Sun-Star:“the largest group of state workers is under a "2 at 55" formula. To give an example here, assume an employee has worked for 30 years before retiring at age 55, her final compensation being $100,000. The “2 at 55” formula would indicate that she gets 2% of her salary (100k) multiplied by the 30 years she worked. 2% of her salary is $2k, which multiplied by 30 giving her a total of $60k per year for the rest of her life.

  As McQuillan explains (page 6), however, there are also a variety of COLAs (cost of living adjustments) and automatic “step increases” that can substantially effect the annual increase in pension benefits. These are a result of a variety of collective bargaining aspects that are part and parcel of the California pension system. Essentially, what these features allow is for the “final compensation” levels to be boosted above their actual levels so that “lifetime annual pensions for some retired government workers exceed their final year’s pay.” In other words, due to this practice of “pension spiking,” future state obligations can in many cases exceed the levels that existed while the retiree was still employed. This has a significant “snowball effect” on the obligations faced by the state (and future taxpayers).

  There are two sources of funding for these pensions that are to be paid out to millions of California retirees: taxpayers and investment market returns. The taxpayer originated funds flow through both employer (the government agency) and employee payroll contributions. These contributions are invested and, at least in theory, both the contributions plus investment earnings are paid out as the defined benefits to retirees. In other words, the employer/employee contributions (originated as taxes) plus the investments gains needs to be at least equal to the pension obligation levels in order to be sustainable. Where things start to get interesting, and overwhelming, is that, according to McQuillan (page 12), over the last 20 years, “for every dollar paid in CalPERS pension benefits, CalPERS’s employer members contributed 21 cents, employees contributed 15 cents, and the remaining 64 cents came from investment earnings.” In other words, historically, 64 percent of the funds paid out needed to rely on the performance of capital markets.

  Now, what happens when the total assets (contributions + investment earnings) are less than the pension promise? The answer is that a deficit is created and these deficits are referred to as an unfunded liability. This unfunded liability is the total amount between the assets of the pension and the liabilities of the pension. Whenever the liabilities (what are owed) are greater than the assets (the contributions + investment earnings), there is an unfunded obligation. It is the sheer level of CA’s unfunded obligation that is the primary face of the California Pension Crisis.

  According to the U.S. Census Bureau, the pension obligations for the largest six pension systems in CA came to a stunning $613 billion in 2013. Of this, only a portion is covered by the pension’s current assets, resulting in a sizable unfunded obligation level. The specific dollar amount of these unfunded obligations depends upon which calculations are being used. According to the calculations of the Big Three pension systems themselves, the unfunded portions are as follows: CaPERS $85.5 billion, CalSTRS $50.6 billion, and UCRP $6.5 billion. These represent the amounts, calculated by the agencies themselves, that the pension plans are short what is needed in order to meet what they owe to retirees. Collectively, this number is $143 billion short of what retirees are expecting to live off of for the rest of their lives. To give the reader a sense of the absurdity of these numbers, these were calculated in 2011 and since that time the US stock market has experienced large multi-year rally; however, in that time, the assets have only gained $7 billion in investment earnings so that today the unfunded liability still sits at the impossible goal of $136 billion.  That’s $136 billion in the hole.

  This, after a massive stock market rally!

  This means that the “funding ratio” of assets and liabilities is such that CalPERS is only 77% funded, CalSTRS is only 67% funded, and UCRP is only 80% funded. McQuillan quotes the American Academy of Actuaries on the issue of funding ratios to say: “Pension plans should have a strategy in place to attain or maintain a funded status of 100 percent or greater over a reasonable period of time.”  McQuillian comments on this quotation by noting that “a lower funding ratio implies that a pension system has a greater potential not to pay its promised benefits.” And yet, as can be seen according to the pension’s own numbers, the funding ratio is troubling.

  Unfortunately, the bad news does not stop here. As emphasized above, the numbers thus far have all been merely reflective of the pension fund’s own estimates. According to a 2011 study conducted by the Stanford Institute for Economic Policy Research (SIEPR), the unfunded obligation levels for the Big Three pensions in CA were as follows: $169.8 billion for CalPERS, $104 billion for CalSTRS, and $16.8 billion for UCRP. This means that the funding ratios too are in a much worse condition, according to the SIEPR calculations.

  The chart shows the unfunded obligation levels and the funding ratios (in parentheses) for each pension according to both the agency and SIEPR estimates (remember, the greater the unfunded liability, the lower the funding ratio):

  

  Needless to say, in the words of McQuillan, “by [the above] measure, California’s Big Three public pensions are dangerously underfunded, putting current and future taxpayers at risk.”

  Without getting into too much detail, the reasons that there is such a severe discrepancy between the third party calculations and the agency’s estimates of itself have to do with the various assumptions that the agencies are making. Specifically, these agencies, in order to make their numbers look better (and, sadly, negative $136 billion is “better”) misrepresent the actual reality by massaging factors in the following ways:

  1. Overestimating investment return potential (they are assuming between a 7.75 and 8% average annual return— compare this to private pension assumptions between 3 and 4%).
  2. Implementing an abnormally large “smoothing recognition period,” which basically allows the potential market losses to be hidden in an average of many years (15 yrs, compared to the private sector smoothing period of 2 yrs).
  3. Refusing to include the reality of increasing life expectancy into their models, so that their numbers assume they will have to pay for a shorter “lifespan” than what the recent mortality data reflects. Even Governor Brown’s office calculated that “CalPERS needs an additional $1.2 billion a year to pay for added pension expenses due to longer life expectancy.”
  4. Overestimating the length to which public employees will keep working (therein overestimating how many years of contributions will be made and underestimating how many years these employees will be recipients of the pension system).

  McQuillan quotes Stanford Professor Joe Nation to say: “In short, public pension systems utilize assumptions and methods supporting a consistent theme of understating liabilities, overstating assets, and pushing costs into the future.” McQuillan himself goes so far as to say: “The bottom line is that officials at California’s public pensions are permitted to engage in behavior that would be considered criminal under ERISA [Employee Retirement Income Security Act—CJE] if done by officials overseeing private-sector pensions.”

  To bring things here to a close, let it be said that the systemic problems underlying the numbers themselves are such that there is no easy way to fix this. Even on their face, the numbers summarized above tell a frightening tale of severely underfunded pension obligations, problem which is growing worse and worse. 

  What needs to be remembered too, and this is the thing that far fewer people talk about, is that we are on top of a major bull market that has only since January threatened to come back down. The chart below is of the “S&P 500” which is an index of stock market price levels.

  

  As can be seen, we are at much higher levels than we were before both the 2000 “dot com” crash and the 2008 financial crisis. In other words, all these pensions that are relying on years of 7% returns in order to be, well, hundreds of billions of dollars in the hole, may in fact be facing an era of negative returns if we are confronted with the likely situation of a stock market correction.

  Needless to say, far from having “their future taken care of,” those relying on public pensions for their retirement are not only going to be requesting funds that simply aren’t there, they are going to be requesting funds from pension systems who have yet to face the third recession in 15 years. A recent report from Casey Research wrote that:

  "Public pensions are a slow motion train wreck that can’t be stopped. Millions of workers who expect a steady stream of income when they retire will get nothing. The U.S. public pension system is mathematically guaranteed to crash.

   

  According to the National Association of State Retirement Administrators (NASRA), U.S. public pensions expect to earn 8% per year on average.

   

  That’s a wildly optimistic number. They’re extremely unlikely to earn anything close to 8% per year.

   

  Earning 8% per year in normal times is difficult enough. And as Casey readers know, we’re not in normal times.

   

  Returns on both bonds and stocks will likely be low or negative for the next many years. With interest rates at historic lows, bonds barely pay anything. And U.S. stocks have very little upside because they’re so expensive today.

   

  Expecting returns to average 8% per year going forward is foolish. And we’re not the only ones who think so. BlackRock (BLK), the world’s largest asset manager, says state and local pensions should expect to earn 4% per year or less going forward.

   

  The average public pension earned just 3.4% last year. And Bloomberg Business reports that the California Public Employees’ Retirement System (CalPERS), the largest pension fund in the U.S., earned just 2.4% last year."

  Moreover, while many assume these pensions can “just go to the taxpayers” to fulfill their obligations, the fact of the matter is that this is politically and financially impossible in the context of a recession, especially when the taxpayers themselves are facing the reality of this very same market downturn. It is one thing to attempt to siphon off a little bit from taxpayers during a  7 year bull market, but it is an entirely other thing to do the same during a painful downturn. The long and short of the situation is this: those relying on public pensions for their retirement are quite possibly not going to receive the full extent of what they are expecting. 

  Practically speaking, therefore, any attempt to protect one’s non-pension assets, retirement accounts, and cash flows, is to be well heeded. This means that it is time to face the reality of the situation before retirement and before it becomes publicly obvious that there is a massive problem. There are many who are putting things off and looking to figure things out down the road. Unfortunately, I am not convinced that the prudent individual can afford this luxury. Some readers may need some creative strategies, capital preservation efforts, and an honest assessment of just how, exactly, one should minimize their dependency on public pensions. This is the key: separating one’s dependency on the pension system for retirement is the only way to avoid pain later on down the road.

  

  

  

  

  

• Earnings 'Optimism' Crashes To 7-Year Lows

  As the gap between GAAP and non-GAAP converges (and not in a bullish way), BofA reports the earnings estimate revision ratio (ERR) fell for the sixth consecutive month, to 0.47 from 0.49 – its lowest level since April 2009. So despite the exuberant, we're going back to record highs, rally off the lows, the real mother's milk data suggests more than twice as many cuts vs. increases to earnings forecasts over the last three months… and it's not just Energy anymore.

  This is the lowest S&P500 GAAP earnings per share since 2010.

  

  Needless to say, a GAAP P/E above 21 is the highest since the financial crisis.

  So what is going on here? The chart below showing the amount of EPS "writeoffs" and pro-forma adjustments should explain it. In 2015, 26.5 of the total non-GAAP in S&P earnings, is the result of accounting gimmicks.

  

   

  Just so there is no confusion: the GAAP to non-GAAP adjustment has nothing to do with the overall deterioration in corporate revenues and declining profitability. The two are parallel, because while both non-GAAP and GAAP EPS are clearly declining, what Wall Street is doing is using every possible contrivance to make the descent appear far less disastrous.

  And looking forward, BofA's earnings estimates revisions data points to further collapse…

  

  All ten sectors are seeing more below- than above-consensus guidance as Sales forecast revisions crash near the most since 2008/9 lows…

  

  

  

  

  

  

• Goldman Cuts More Than 5% Of Fixed Income Workers; BofA To Layoff 150 Bankers And Traders

  For years, we noted that despite Goldman suffering progressively declining revenue…

  

   

  … and occasional downward fluctuations in its bonus pool. one of its key “charms” for employees was that ever since the financial crisis, its total number of employees never declined. That is no longer the case.

  As Bloomberg reports, Goldman plans to eliminate more than 5% of traders and salespeople in its fixed-income business, cutting deeper into those operations than an annual companywide cull that has already begun. Furthermore, according to a notice filed on the DOL’s WARN website, Goldman announced that it would terminate 43 workers, with the layoffs set to occur between May 9, and July 1.

  The discussions started earlier than usual this year, and workers will be informed in conversations throughout this month and into April. The reductions will affect less than 10 percent of the fixed-income workforce, which is quite a sizable chunk for a business that until recently used to be one of Goldman’s top performing profit centers.

  Bloomberg adds that Goldman Sachs made its latest decision after evaluating client activity in this year’s early months, a period in which some firms signaled further slowdowns. JPMorgan Chase & Co.’s investment bank said Feb. 23 that revenue from equity and fixed-income sales and trading has tumbled about 20 percent this year. Goldman Sachs hasn’t provided similar guidance.

  The layoffs confirm that generating revenue in the increasingly more illiquid fixed income space has become increasingly problematic not only for Goldman but for other firms. Other Wall Street banks also have been eliminating jobs. When Morgan Stanley cut about 1,200 employees in the fourth quarter, it included about 25 percent of its fixed-income trading staff.

  And just to confirm that 2016 is set to be another poor year for compensation, not to mention worker morale on Wall Street, moments ago Bloomberg also broke the news that Bank of America plans to dismiss approximately 150 trading and investment-banking employees next week. Those who are about to join the ranks of initial claims recipients will learn their fate on March 8.

  

  

  

  

  

• For Those Rushing To Move To Canada Under "President Trump", A Few Warnings

  Submitted by Robert Appel via ProfitConfidential.com,

  

  A Zerohedge headline that shocked the world this week showed net searches for “moving to Canada” are up more than 1,000% since the “Trump bump.” The same report said that the Immigration Canada web site (one of the most boring sites on the planet) was blown because of excessive access. (Source: “Canada Searches Up 1000%,” Zerohedge, March 2, 2016.)

  If you are one of the many Americans thinking of making the switch to Canada, our exclusive “Canadian insider” offered these tips and answers about making the move to Canada and what you can expect when you arrive:

  1. Are Canadians as polite as the jokes say?

  In fact they are. One joke that even Canadians laugh at goes, “How do you get 47 Canadians out of the pool as quickly as possible?” The answer: simply yell, “Get out of the pool!”

  2. Is the weather in Canada as bad as the jokes say?

  No; it is actually worse. The beautiful East Coast becomes an ice cube in the winter—an endurance test equaled only by the weather in the capital, Ottawa, where the main distraction (aside from watching your breath freeze) is skating on the central canal, which freezes solid during winter. The prairies are no better. The outdoor parking spots accompanying most condos and hi-rises each have a built-in electrical outlet. No, not for your orbital buffer; they’re for your block heater. (If you don’t know what a block heater is, perhaps the Dominican Republic should really be your first choice for bugging out…?)

  3. Of course, there is always Vancouver, which experiences the best winters in the country (like Seattle, but with fewer serial killings).

  Keep in mind, however, that Vancouver currently has the largest housing bubble on the planet. (Source: “This is Freaking Nuts — House sells $750K above Asking,” Zerohedge, March 1, 2016.)

  4. Canada has cross-country “value added tax” (VAT), called HST, that can add about 13% to a typical purchase in the mere blink of an eye.

  If you are in business, you may be able to reclaim it. Most Canadians just pay it. Americans will find this unsettling. Of course, the whole idea of a VAT is that it theoretically obviates the need for income tax. Unfortunately Canada has not figured this out yet. They introduced income tax right after WWI, swore it was just temporary, and yet it is still here…? If, however, you are seeking the comfort and nostalgia of politicians who say one thing and then do another, Canada could be a dream come true.

  5. Speaking of politics, the wise voters of Canada just threw out the most conservative leader in decades (that is “conservative” with BOTH a small “c” and a capital “C”).

  This was mainly because they were bored with his conservatism, and (the irony!) they felt he was too close to the U.S.

  6. Social medicine will be a kick if you are making the journey north.

  It has its plusses and minuses. If you are in dire need, it is there. I have a friend who recently received a lung transplant, did not pay a nickel, and now loves Canada so much he moved back to Toronto from the Czech Republic. On the other hand, if you are looking for a simple MRI in a non-urgent situation, be prepared to wait several months or (more irony!) be prepared to cross into a U.S. border town and pony up cold hard cash.

  7. Supermarkets will be a shocker.

  Imagine that 70% of all the products you have come to know and love disappeared in the blink of an eye, like in a sci-fi movie, and, in many cases, they were replaced by brands you have never heard of. Your first time grocery shopping may possibly bring a tear to your eye. Good news? They do stock Kleenex, just like in the U.S.

  8. No, you don’t have to learn French, in spite of the millions of dollars a year Canadians spend translating and labeling everything that moves or squeaks into the official “second language.”

  Learning French is mainly useful only if you plan to live in Quebec or run for federal office. And if you learned history via U.S. textbooks, be prepared for some revisionism. Turns out that France did not lose the war for Canada to the Brits at the Battle of the Plains of Abraham. It was actually a “draw.” (Luckily, nobody bothered to tell the British or every province in Canada would have two tax systems and two levels of government, just like those freethinkers in Quebec.)

  9. The thing you will notice the most?

  Well, the whole money thing will be uncomfortable. First of all, everything in Canada costs more, ceteris paribus, than the equivalent item in the U.S., even before taxes. Why? Mainly because of the higher costs of labeling and moving goods in the sparser geography (hey! those French labels don’t put themselves on the items, do they…). Next, if you factor in the weaker loonie, well, let’s just say that as a Canadian newbie, your first experience with socialized medicine might be for anti-depressants. The good news? The doctor’s visit, and part of the cost of your meds, will be picked up by the very same country that depressed you in the first place!

  

  

  

  

  

• 3 Things: Recession Odds, Middle-Class Jobs, & Market Drops

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Recession Probabilities Rise

  As I penned earlier this week:

  “Speaking of weather, last year, the BEA adjusted the ‘seasonal adjustment’ factors to compensate for the cold winter weather over the last couple of years that suppressed first quarter economic growth rates. (The irony here is that they adjusted adjustments for cold weather that generally occurs during winter.) 

   

  However, the problem with ‘tinkering’ with the numbers comes when you have an exceptionally warm winter. The new adjustment factors, which boosted Q1 economic growth during the last two years will now create a large over-estimation of activity for the first quarter of this year. This anomaly will boost the ‘bullish hope’ as  the onset of a recession is delayed until those over-estimations are revised away over the course of the next year. ” 

  The reason I reiterate this point is due to a recent research note from Wells Fargo discussing the increased risk of a domestic recession. To wit:

  “One possible way to summarize the results from all these models is to calculate the average of these probabilities and then examine historical performance of the average probability. The current average probability is 37.3 percent and this method predicted all recessions successfully since 1980 without producing any false positives (Figure 11). Different models utilize different predictors to capture the state of different sectors of the economy and therefore an average probability may reflect the average risk posed by these sectors.

   

  At present, we are not calling for a recession within the next six months. However, given that the recession probabilities based on our official model and average of all models are somewhat elevated, it is not wise to dismiss recession risk.”

  

  The combined Probit Model based on the entire series of indicators utilized by Wells Fargo, (which includes LEI, VIX, Yield Spread, Stock Prices, Commodities and more) also confirms the same recessionary stresses shown in the Economic Output Composite Index (EOCI).

  

  (The EOCI Index is a composite of the Chicago Fed National Activity Index, ISM Composite, Several Fed Regional Surveys, Chicago PMI, LEI, and the NFIB Small Business Survey.)

  As shown, the economy is currently operating at levels that have normally been associated with recessionary environments. The only thing that has kept the economy from registering a recession in the past has been the interventions by the Fed that have led to a “forward-pull” of future economic activity. (Beginnings and endings of QE programs noted by gold squares)

  While there are many mainstream economists insisting that the U.S. economy is nowhere near recession, considering much of the current data will be negatively revised in the quarters ahead will likely prove those views wrong.

  With economic data having remained extremely weak in recent months, it will NOT be surprising to see a short-term pickup in economic activity as a restocking cycle once again leads to temporary bounce. However, as we have repeatedly seen since 2009, those bounces in activity have been transient at best. Without monetary support from the Federal Reserve to once again “drag forward future consumption,” the risk of sliding into recession becomes a very real possibility. 

  The Decline Of The Middle Class

  I have often written about the broad decline in the financial conditions of the middle class.

  “There is a financial crisis on the horizon. It is a crisis that all the Central Bank interventions in the world cannot cure.

   

  No, I am not talking about the next Lehman event or the next financial market meltdown. Although something akin to both will happen in the not-so-distant future. It is the lack of financial stability of the current, and next, generation that will shape the American landscape in the future.

   

  The nonprofit National Institute on Retirement Security released a study in March stating that nearly 40 million working-age households (about 45 percent of the U.S. total) have no retirement savings at all. And those that do have retirement savings don’t have enough. As I discussed recently, the Federal Reserve’s 2013 Survey of consumer finances found that the mean holdings for families with retirement accounts was only $201,000.”

  

  “Such levels of financial “savings” are hardly sufficient to support individuals through retirement. This is particularly the case as life expectancy has grown, and healthcare costs skyrocket in the latter stages of life due historically high levels of obesity and poor physical health. The lack of financial stability will ultimately shift almost entirely onto the already grossly underfunded welfare system.”

  Just recently the Pew Research Center confirmed the same:

  “After more than four decades of serving as the nation’s economic majority, the American middle class is now matched in number by those in the economic tiers above and below it. In early 2015, 120.8 million adults were in middle-income households, compared with 121.3 million in lower- and upper-income households combined, a demographic shift that could signal a tipping point, according to a new Pew Research Center analysis of government data.

   

  In at least one sense, the shift represents economic progress: While the share of U.S. adults living in both upper- and lower-income households rose alongside the declining share in the middle from 1971 to 2015, the share in the upper-income tier grew more.”

  

  “Over the same period, however, the nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top.Fully 49% of U.S. aggregate income went to upper-income households in 2014, up from 29% in 1970. The share accruing to middle-income households was 43% in 2014, down substantially from 62% in 1970.

   

  And middle-income Americans have fallen further behind financially in the new century. In 2014, the median income of these households was 4% less than in 2000. Moreover, because of the housing market crisis and the Great Recession of 2007-09, their median wealth (assets minus debts) fell by 28% from 2001 to 2013.”

  Importantly, this is why economic growth remains weak. While the Federal Reserve was focused on boosting asset prices for the wealthy, they forgot to create an economic environment that was conducive to increasing the consumptive power of the middle-class and their near 70% participation in economic growth.

  Oops.

  The True Definition Of A Bear Market

  The sharp rally over the last couple weeks, which has been primarily driven by massive short-covering, has brought the “bulls” out once again declaring the recent “bearish decline” over. However, is such really the case, or is this yet another of the many rallies we have seen as of late that ultimately fail?

  In order to answer that question, we must first define what a bear market really is. The currently accepted definition of a “correction” is a 10% decline and an official “bear market” begins with a 20% fall in the market. However, both of these definitions are not accurate we have seen both such events occur during longer-term market trends.

  For investors, the difference between a “bull” and a “bear” market, regardless of the short-term fluctuation in prices, is whether the overall “trend” in prices is rising or falling. When the “trend” is positive, speculating in the financial markets is advantageous as the “rising tide” increases the value of portfolios. Conversely, when the overall trend is “negative,” speculating in the financial markets has a generally negative result.

  (We are not investors, we are speculators. Warren Buffett is an investor. When he invests in a company he can control its destiny by appointing operating managers, defining directives, etc. YOU are a speculator placing bets with your “savings” on ethereal pieces of paper that you “hope” will rise in price over time. Understanding this point is important.)

  The utilization of a simple moving average is one way the overall trend of the market can be determined. A moving average is an “average” of prices over a given period of time. In order for there to be an average price, prices must have traded at two points of extreme over the sample period. If prices are generally “trending” higher, the average will be positively sloped as each new low and high point is greater than the last. The opposite is true when prices are generally “trending” lower.

  Overall bullish and bearish trends are revealed when looking at longer-term price trends of the market. The chart below is an example.

  

  (Note: This is a WEEKLY price chart to smooth out short-term price volatility. We are using an 80-week moving average and a 52-week RSI for this example.)

  During “Bull Markets” – prices tend to remain above an “upward” or “positively” sloping moving average. Also, the relative strength index (RSI) stays above 50 during that period.

  During “Bear Markets” – prices tend to remain below a “downward” or “negatively” sloping moving average. RSI also remains below 50 during this period confirming a more “risk adverse” environment.

  Currently, all indications currently suggest the markets are in the early stages of entering into a confirmed “bear market” as the longer term moving average is turning from a positive to a negative slope and RSI has fallen below 50.

  Yes, things could change very quickly with the intervention of Central Bank action. The same was seen during the summer and fall of 2011 as then Fed Chairman Ben Bernanke quickly acted to stave off a more serious market decline. However, with the Fed more focused on “tightening” monetary policy currently, such a salvation seems to be a low probability event.

  The value in changing your definition of a “bear market” is by waiting to lose 20% of your portfolio before acting, it takes a 33% subsequent rise in the market to get back to even. That is “time” lost that you can never regain.

  As stated earlier this week, the rules for managing your portfolio are relatively simple:

  1. In rising market trends – buy dips.
  2. In declining market trends – sell rallies.

  Despite the ongoing “hopes” of the always bullish media, the recent rally has not changed the slope, or scope, of current market dynamics. The current “bear market” is not over just yet.

  Just some things to think about.

  

  

  

  

  

• Who Said It: "Donald Trump Has Shown An Extraordinary Ability To Understand Our Economy, To Create Jobs"

  Moments ago Mitt Romney concluded a fiery speech in which he blasted Donald Trump, accusing him of being a “con man” and asking republicans to choose “anyone else” but Trump. Among the points he brought up was that Trump’s domestic polices would sink America into a recession, that his foreign policies would make the world less safe, and criticized Trump’s personal qualities, calling him “a bully” and “a misogynist.”

  However, what we found particularly ironic is that Mitt Romney, who previously had led Private Equity firm Bain Capital, mocked Trump’s business acumen by pointing out his track record of having various bankruptcies under his belt which “have crushed small businesses and the men and women who worked for them.”

  This is precisely what he said: “But wait, you say, isn’t he a huge business success that knows what he’s talking about? No he isn’t. His bankruptcies have crushed small businesses and the men and women who worked for them.”

  We found this amusing coming from the man who made profits for himself and his investor for 15 years by saddling companies with massive debt loads to generate outsized returns on equity with a 3-5 year investment horizon.

  Here is how Romney himself fared as a businessman, based on a WSJ report from 2012:

  Mitt Romney’s political foes are stepping up attacks based on his time running investment firm Bain Capital, tagging him with making a fortune from the rougher side of American capitalism—even as Mr. Romney says his Bain tenure shows he knows how to build businesses.

   

  Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain’s involvement and shortly afterward.

   

  Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

   

  Another finding was that Bain produced stellar returns for its investors—yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.

   

  Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court

  

   

  So let’s get this straight: the man who led to 17 of the 77 business Bain invested in closing down in bankruptcy, and another 4 going Chapter 11 after Bain extracted all the possible value, is criticizing Trump for engaging in Chapter 11 bankruptcy protection?

  We wonder how many large businesses – because Bain does not bother with small business LBOs – “and the men and women who worked for them were crushed” as a result of Romney’s own attempt to extract as much value as possible by layering dozens of companies with massive debt loads?

  To be sure, we don’t criticize Romney’s business model: it is what he does, just like what Trump does is to run companies, and the ultimate result is always failure. But we do find it grotesquely ironic that Romney has the gall to mock Trump’s business record when he himself is a far greater abuser of US bankruptcy laws.

  This is, after all, capitalism. But for Romney to turn around and so blatantly ignore his track record when blasting Trump’s is, in a word, preposterous.

  * * *

  And speaking of ironic, we can’t help but be amused by what Romney said in February 2012 when Trump endorsed Romney’s presidential campaign:

  “I am so honored and pleased to have Donald Trump’s endorsement. Donald Trump has shown an extraordinary ability to understand how our economy works. To create jobs for the American people. He’s done it here in Nevada. He’s done it across the country. He understands that our economy is facing threats from abroad. He’s one of the few people who stood up and said China has been cheating. They’ve taken jobs from Americans. They haven’t played fair. We have to have a President who will stand up to cheaters.”

   

  Oops

  

  

  

  

  

• Ray Dalio Tells Investors: "Don't Trade Against Pros Like Us, You Will Lose… Own Gold"

  Before his presentation to the University of Texas, Bridgewater’s Ray Dalio gave a far-ranging interview to Bloomberg’s Erik Shatzker which we will have more to say about in the coming days, but the overarching theme was what to expect from markets going forward. He said that while there are “asymmetric” risks to the downside, asset prices will correct to a point where risk premiums return and investors come back, and predicted that equities will return about 4% in the long term. The concern he had was whether the slowdown in markets will have negative repercussions for the economy at a time when central bank policy is becoming less effective.

  Repeating comments he has given before, Dalio said that the “next big move I believe will have to be toward quantitative easing, rather than a big tightening,” he said in the interview. The recent developments have surprised the Fed, because it is not paying enough attention to the long-term debt cycle, adding that “If you look around the world, our risk is not inflation and our risk is not overheating economies”, something all too clear to the nearly 30% of global economies currently blanketed by negative interest rates.

  He also had some rather dire comments on China which we wil get back to in a future post, but what caught our attention was the following exchange in which Dalio discussed whether ordinary investors have a chance of making money in the current market when faced with institutional behemoths like Brigewater which as the world’s biggest hedge fund manages over $150 billion.

  His honesty was refreshing.

  SCHATZKER: Broadly speaking, what’s going to work? And what is working, perhaps more appropriately, today?

   

  DALIO:  I think there are two ways that the average investor should think of investing.  One is, are you going to create a good strategic asset allocation mix that is a balanced portfolio, that means you will not go to the betting table and bet against active investors like me? Look, I’m scared to be wrong in the markets.  It is not easy to win in the market.  It is more difficult to win in the markets than to compete in the Olympics.

   

  SCHATZKER:  Hang on a second.  Hang on a second. You guys have an extraordinary track record of winning.  Is it harder to compete in the markets today than it been since you founded Bridgewater?

   

  DALIO:  No, I don’t think so.

   

  SCHATZKER:  Really?

   

  DALIO:  Not the way we do it.  And the reason I’m saying not the way we do it is we do not take systematic biases.  I think for a lot of people, they are systematically long everything. And so when the world gets bad, it’s bad for them. In 2008, it was great for us.  I don’t know, we had nearly 10 percent return in 2008. So we have the opportunity to go either way.  We just my be wrong.

   

  DALIO:  So I’m so scared about being wrong that it has help reduce my chances of being wrong because I’m so scared.  I won’t take bets that I don’t feel good about.  And we diversify our portfolio.  And that is how we got the track record.  So you asked me about investors.  So I’m trying to go back what investors should do.

   

  SCHATZKER:  And what you think is appropriate for your investors.

   

  DALIO:  I want to just convey to investors, I think in the average investor, most everybody, do not compete against pros like ourselves or other people; do not making tactical asset allocation bets or moving around in the markets, because you will probably lose.

  It is worth noting that Dalio does not suggest that investors will lose because he thinks markets are rigged, something we and Eric Hunsader have been noting for years, instead Dalio’s point is that ultimately directional, “tactical” bets will rarely work.

  If you’re talking about tactical bets, in other words, I could come on the show and I can say, I think this is good.  But then what happens is if I come a month later and I then change my mind because something has happened, then I will mislead people.  So the tactical bets, I don’t think, are going to be helpful.

  Granted, Dalio is pitching his “All Weather” portfolio, and yet this statement is perhaps one of the more honest admissions of how the market “works” or rather doesn’t, because unlike the  empty suits who come on TV to pitch any given stock who ultimately have no idea what will happen and are merely flipping a coin (and who are never heard from again when the trade goes against them) Dalio is warning to give up on hopes for quick “long” (or short) bets leading to major winnings, and instead stick to broader market returns in the form of a diverisifed portfolio. Then again, since for most “ordinary” investors the stock market is merely an chance to strike it rich, fast, we doubt his advice will be heeded.

  But the surprising moment of biggest honesty came when Dalio laid out what should comprise a properly diversified portfolio:

  I would say that we are in an environment where it is very important to have a well-diversified portfolio, and that’ll include assets gold.  In other words, what could I tell investors, try to achieve balance in various ways.  That’s a whole subject about how to do it.

   

  And also I think that gold at 5 percent of your portfolio, 5 percent or 10 percent of your portfolio, under the circumstances, would be also a prudent thing to do.  Prudence is the important thing to do.  The reason I’m also referring to that is we have a situation where a debt is money. In other words, we have a fiat monetary system, too.  And so we are having problems as these central banks operate.  And so  think of it as another form of cash and when cash now has zero or 0 percent interest rates or less, think of it as one of those possibilities in terms of how do you create diversification.

  Debt is indeed money, and so is gold, and unlike debt whose yield increasingly more central banks are now artificially pushing into negative territory and will soon do everything in their power to eliminate physical money so that electronic money is subject to the same “financial repression” as every other asset, gold has and always will be an inert metal with intrinsic value, with zero counterparty risk, zero “central banker policy risk”, and whose only real risk is being confiscated through another presidential executive order.

  Yes, Bridgewater may have gone through a rough patch recently as we exclusively revealed a few weeks ago, but we applaud Dalio for the intellectual honesty and telling the truth.

  Full interview below

  

  

  

  

  

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