Sunday, December 31, 2017
Who didn't see this coming?
Baltimore Residents Blame Record-High Murder Rate On Lower Police Presence Following Controversies
Saturday, December 30, 2017
Friday, December 29, 2017
Grant's Interest Rate Observer,
The Credit Markets Will Change.
2018 Will Be the Year of the Lender.
Auld lang sign
On the eve of the eve of the New Year, we pause to take stock – actually no. We pause to take debt, like seemingly everybody else with a loose dollar to invest. By way of preview (spoiler alert!), borrowers have the upper hand the world over and have not been shy about throwing their weight around. As all things are cyclical, and as New Year’s forecasts are mandatory, we hereby anoint 2018 the Year of the Lender.
Free climbing
Back on Nov. 21, S&P Global Market Intelligence’s LCD unit reported that the volume of U.S. institutional loan issuance reached a fresh record high of $468 billion, surpassing 2013 high water mark of $456 billion with more than a month left in the year. As the quantity of debt has reached a record high, the quality is plumbing new depths.
LCD likewise relays that issuance of so-called covenant-light loans (meaning without certain contractual protections normally afforded to lenders) exceeded that of high yield corporate bonds by 36% in 2017 (for context, cov-lite issuance first exceeded high yield in 2016 after lagging far behind for most of the prior decade), while the share of cov-lite loans outstanding reached a record 75% of the S&P/LSTA index by the end of December. Yesterday, the Wall Street Journal also noted the increasing pervasiveness of cov-lite, noting that 81% of loans in Europe have been of the cov-lite variety this year compared to just 21% in 2013 and quoting Adam Freeman, partner at law firm Linklaters LLP, who observed that private equity issuers “can be more aggressive and lenders will take it” amid “far too much cash trying to find too few homes.”
Under the table
In mid-December, the California Public Employees Retirement System (CalPERS) investment committee voted to change its allocation of its $346 billion investment portfolio. Greater will be CalPERS’ exposure to the stock and bond markets; its allocation to public equities is set to increase to 50% of its AUM from 46%, while fixed income will rise to 28% from 20% (although direct comparison is obscured by the fact that inflation-protected securities will be consolidated into the fixed income category). Lesser will be CalPERS’ dry powder: Cash holdings will decrease to 1% from its current 4% of the portfolio. Bloomberg noted that the only dissenter in the vote, board member JJ Jelincic “has advocated for a higher risk portfolio,” while board member Richard Costigan concurred “I am concerned, we’re leaving money on the table.”
Public pension funds are rarely known for a contrarian mindset, and CalPERS is no exception. The March 24, 2006 edition of Grant’s (“Billions buy funds”) detailed the California capital stewards’ foray into the then-blazing hot commodity realm, with the Thompson Reuters/CoreCommodity CRB Index having logged a 78% advance over the prior three years. CalPERS’ didn’t top-tick the cycle, as commodity consolidation through the rest of 2006 gave way to a strong rally in 2007, but the party ended thereafter and by the beginning of 2009 the CRB index had dropped to those early 2003 levels. One day, California pensioners may wish that CalPERS had held more than 1% cash in 2018.
Come on in, the water’s warm
The animal spirit-heavy emerging markets investment realm is the final stop on our year-end 2017 tour. Last week, the Financial Times noted that investor flows and credit fundamentals are going in opposite directions: “Global investors have raised their holdings of emerging market bonds to a three-year high, even as average EM sovereign credit ratings have plunged to their lowest level since early 2010.”
Beyond the aspersions of the ratings agencies, the timeless creditor kryptonite of inflation could be set for a resurgence, as bottom-scraping nominal yields offer investors little in the way of protection. Yesterday, the Argentine Republic raised its inflation target for 2018 and 2019 to 15% and 10%, respectively, from 10% and 5%. That sent the Argentinian peso jumping above 19 per dollar (since recovered to 18.6), compared to less than five per dollar at the end of 2012. Argentina has defaulted eight times in the last two centuries (Almost Daily Grant 9;s, June 19), but holders of the 7 1/8s dollar bonds of 2117 are unconcerned. The century bonds, issued at 90 cents on the dollar, have remained near their recent highs above 103, currently sporting a nominal yield-to-worst of 6.86%.
The economist Herbert Stein once said that: “If something can’t go on forever, it will stop.” We venture an opinion that Stein’s philosophy can be applied to today’s credit markets at large. As to the timing of any such sea change, well . . . As much as we would like to furnish an exact month, date and year, we seem to have run out of space.
Thursday, December 28, 2017
Wednesday, December 27, 2017
This is big from the man who presaged Trumpism.
Pat Buchanan: FBI Senior Officials Conspired to Elect Hillary and Then Overthrow Trump
Tuesday, December 26, 2017
Monday, December 25, 2017
Sunday, December 24, 2017
My second favorite economist. Larry Kudlow.
With This Tax Cut, Trump and the GOP Are on the Side of the Growth Angels
Saturday, December 23, 2017
Friday, December 22, 2017
More Trump Tax Cut Bonuses!
Bank of America Paying $1000 Tax Cut Bonuses to 145,000 American Workers
Time to do something radical - legalize all drugs.
Ben Carson Breaks Rank With Trump And Sessions By Blasting The War On Drugs
Thursday, December 21, 2017
Doesn't sound like collusion to me.
Trump: Break Chinese, Russian stranglehold over mineral supplies
Time to get radical and legalize all drugs,
The Obama Legacy: U.S. Life Expectancy Declines For Second Straight Year
Wednesday, December 20, 2017
Never Trump National Review: Trump's 2017 A Very Successful Year
Trump was a joke until nominated, unelectable until elected, and incompetent until he succeeded on most fronts.
Tuesday, December 19, 2017
Monday, December 18, 2017
Sunday, December 17, 2017
Saturday, December 16, 2017
Friday, December 15, 2017
Thursday, December 14, 2017
Wednesday, December 13, 2017
My third favorite economist but I don't agree with this,
Gary Shilling: Repatriated Earnings Will Not Lead to a Surge in Capital Outlays
Andrew McCarthy: FBI Strzok Texts Show Political Bias Infected Investigation & Disqualifying
Andrew C. McCarthyVerified account
Andrew C. McCarthy Retweeted Bret Baier
Obviously, this is not political banter. Clearly indicates professional duties infected by political viewpoints, which is disqualifying. I was going on the published accounts I'd seen, which didn't include this one. Should follow my own advice to wait til all facts in.
Bret Baier
Verified account
Text-from Peter Strzok to Lisa Page (Andy is Andrew McCabe): "I want to believe the path u threw out 4 consideration in Andy's office-that there's no way he gets elected-but I'm afraid we can't take that risk.It's like an insurance policy in unlikely event u die be4 you're 40"
On this day in 1862,
Burnside's orders that his troops repeatedly attempt to scale Marye's Heights directly into Confederate fire called "butchery".
Guess where the description "sideburns" came from?
Lee Inflicts Decisive, Bloody Defeat on Burnside at Fredericksburg
Burnside's orders that his troops repeatedly attempt to scale Marye's Heights directly into Confederate fire called "butchery".
Guess where the description "sideburns" came from?
Tuesday, December 12, 2017
Grant's Interest Rate Observer.
Inflation Coming?
Inflate gate
Take a bow, central bankers of the world! Evidence of the long-sought after return of measured inflationary pressures is accumulating. A trio of sovereign sightings in the past 24 hours:
Swedish underlying consumer price inflation (which adjusts for fluctuations in mortgage prices) for November logged at 2.0%, above the 1.8% economist consensus and the 1.7% expected by the Swedish central bank, the Riksbank. Jonas Goltermann, economist at ING Bank NV, wrote that: “The [Riksbank] policy committee will be pleased with the confirmation that inflation is back to target. But we think the dovish majority will want to keep policy accommodative for some time yet to avoid the risk that inflation falls back again.” The central bankers may be pleased, but someone should wake up Sweden’s sovereign creditors and let them know. The Swedish Government Bond 0 3/4s of May 2028 are trading at 100.72 cents on the krona, for a nominal yield-to-worst of 0.68%. If inflation holds at this level, those notes sport an annual real yield of negative 1.3%.
Mark Carney, governor of the Bank of England, has a new homework assignment. As a result of the 3.1% year-over-year increase in November’s CPI reading (the highest since March 2012), Carney will be compelled to write a letter to the chancellor of the exchequer explaining why inflation has deviated by more than 1% from the central bank’s 2% target. Food and energy prices rose by 4.0% and 6.8% year-over-year, respectively, but diverse categories such as clothing and footwear (+9.8%), household goods (+4.4%) and autos (+5.5%) demonstrated the relatively broad base of the price pressures.
So far, U.K. CPI has averaged 2.4% in the eleven monthly readings of 2017, compared to 0.6% year-over-year through 2016 and zero in 2015. Lucy O’Carroll, chief economist at Aberdeen Standard, wrote that: “It’s quite possible that inflation is now close to its peak.” For the sake of U.K. creditors’ prospective returns she had better be right. The 10-year gilt currently sports a 1.22% nominal yield (just a basis point above its simple average for 2017) and a negative 1.9% real yield, based on the November inflation reading.
Stateside, this morning’s release of the producer price index for November showed the same trend: up. The headline final demand component rose by 3.1% year-over-year and by 2.3% ex-food and energy (the highest and second highest readings in five years, respectively), bringing the average 2017 gain to 2.3% in the headline series with just one month remaining. In contrast, 2016 averaged a 0.4% year over year advance, while 2015 PPI declined by 0.9%. In this context, at least, investors in U.S. Treasurys are in slightly better shape than those in gilts or Swedish government bonds. The 10-year note yields a relatively superior 2.40%, while the Federal Reserve is expected to raise overnight interest rates at tomorrow’s meeting (futures price 100% odds).
The July 15, 2016 historical analysis in Grant’s (“Remember the Shell Union Oil 2 1/2s of 1971”) featured a cautionary tale for potential fixed-income accidents that involve no default or corporate distress.
Shell Union was a substantial and creditworthy borrower. In 1945, it showed net income of $28.7 million, cash and government securities of $118 million and a current ratio of 3:1. From balance sheet details as the press revealed, there appears to have been little net debt.
In the spring of 1946, any clairvoyant could have seen that credit risk was yesterday’s worry, particularly with so solid a citizen as Shell . . . Obviously, interest-rate risk was the coming thing. Only later, and at much higher yields, did this great truth penetrate the mind of the market.
Is the credit cycle, notorious for its generation-length (or longer) trends, finally turning? Maybe not, but it sure doesn’t hurt to consider the possibility.
I sure am glad I didn't say this.
Denise McAllister:Women love the sexual interplay they experience with men, and they relish men desiring their beauty.
The man who presaged Trumpism.
Pat Buchanan: Americans are not willing to go to war to promote the Beltway elites' idea of a new world order.
Monday, December 11, 2017
Grant's Interest Rate Observer
Canada Real Estate Crash Coming?
HELOCopter money
The adage that “trees don’t grow to the sky” is being put to the test in the Great White North. Despite a pullback in Toronto-area home prices in recent months, the Canadian housing market stands out even in this bull market-in-everything world: The Canadian Real Estate Association’s MLS Home Price Index has risen by 130% since the beginning of 2005, more than double the 53% rise in nominal GDP over that period.
As night follows day, rising prices are met with increased supply. Thus, Bloomberg reported on Friday that Canadian developers are undertaking a record number of multiple-unit construction projects as they seek to participate in the boom. Robert Kavcic, economist at BMO Capital Markets, commented that: “Canadian home building activity remains rock solid. Builders in the biggest cities appear to be responding to supply shortages as best as possible.” The severity of these shortages, in Toronto at least, is disputable. Supply of new listings in Canada’s largest metro area has jumped by 37% year-over-year in November.
Local regulators have likewise moved to slow down the housing market’s ascent. Canada’s Office of the Superintendent of Financial Institutions (OSFI) is introducing new regulations, set to take effect on Jan. 1, which aim to tighten lending standards. Among the new requirements is a mandate that borrowers who plunk down less than 20% of the value of the home must purchase mortgage insurance, a potentially significant additional cost. CBC News estimates that the insurance could cost buyers anywhere between 0.6% and 4.5% of the value of their home over the course of their loan.
It may come as no great surprise to learn that the great Canadian housing bull market has been built on a foundation of debt. Consumer debt as a percentage of disposable income has undergone a near-constant uptick since the turn of the century, reaching a fresh high water mark of 167.8% as of the end of the second quarter, compared to 144% in the U.S. in 2007. Seth Daniels, founding partner of JKD Capital in Boston, advises Grant’s via email that the encumbrances are particularly concentrated in home equity lines of credit, or HELOCS.
HELOCs, as a percentage of GDP [13.5% as of year-end 2016], are roughly three times higher in Canada then in the US at the peak of our housing bubble in 2006. In addition to consumption (“using your house as an ATM”) and borrowing to avoid delinquencies on other debt, Canadians have been using HELOCs to fund mortgages in the shadow banking market and buy additional speculative properties—I call them weapons of mass destruction.
In an echo of the 1980’s-vintage Japanese practice of “Zaitech,” Daniels also noted in an Oct. 16 interview with MoneyGeek.com that “People in Canada have been borrowing against their home equity line of credit - to lend to subprime borrowers directly.” Indeed, this linked piece from the Toronto Globe and Mail provides a detailed roadmap for readers who wish to use their home equity for investment purposes, in s ervice of “leveraging their real estate assets to increase their net worth.”
Back in June, executives at Home Capital Group, Inc. agreed to pay upward of C$30 million in settlements over alleged disclosure violations related to mortgage fraud in 2015. On Nov. 30, Reuters reported that “compliance officers at the Financial Services Commission of Ontario had evidence that syndicated mortgages were being marketed and sold in ways that broke the law . . . From 2011 to 2015, senior FSCO investigators rejected or ignored compliance officers’ multiple recommendations that the agency investigate or take action to rein in the marketing and sales of Fortress [Real Developments] syndicated mortgages.” Last week, Montreal-headquartered Laurentian Bank disclosed that it will need to buy back as much as $180 million of mortgages after discovering “documentation issues and client misrepresentations.”
François Desjardins, president and CEO of Laurentian, defended his bank: “We’re very different organizations and this is a very different situation than what happened at Home [Capital]. This, to us, is really a process and paperwork issue that we have to resolve.” This morning, Laurentian issued a follow-up press release stating that: “Given recent reports in the media, the Bank wants to clarify why it does not believe these matters are material to its business, capital, operations and funding.”
Daniels sees things differently, telling Grant’s that:
The mortgage inconsistencies reported at Laurentian Bank (the third major Canadian financial institution to fess up to this problem) underscores what we have long believed to be a systemic problem with Canadian underwriting practices.
Canada hasn’t seen a true credit cycle in nearly three decades, which warps the judgment of market participants and regulators alike.
Time for a refresher course?
Obama-voter Althouse: "CNN is hopeless."
Ann Althouse
@annalthouse
Saw in the @nytimes there was an explosion in NYC so I turned on @CNN to get a live-on-the-street report. But CNN was covering the fact that the NYT says @realDonaldTrump watches TV 4 hours a day. The NYT article came out 2 days ago. CNN is hopeless.
http://althouse.blogspot.com/2017/12/theres-news-of-explosion-in-subway-in.html …
6:19 AM - 11 Dec 2017
Sunday, December 10, 2017
On this day in 1967, during my sophomore year at UW-Madison:
Otis Redding Dies in Lake Monona Plane Crash
The memorable whistling verse in "(Sittin' on) The Dock of the Bay" was an unfinished verse intended to serve only as a placeholder.You Tube Video (Sittin' on) The Dock of the Bay
Saturday, December 9, 2017
Friday, December 8, 2017
Grant's Interest Rate Observer.
Meanwhile, Barry Logan, senior vice president at air conditioning, heating and refrigeration equipment distributor Watsco, Inc., had this to say at the Credit Suisse industrials conference on Nov. 30:
Inflation in 2018?
Macro and micro
In a Twitter bulletin this afternoon, Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. writes: “For the 1st time in a decade the global economy has absorbed all of its excess capacity as it heads into 2018, per OECD data.”Meanwhile, Barry Logan, senior vice president at air conditioning, heating and refrigeration equipment distributor Watsco, Inc., had this to say at the Credit Suisse industrials conference on Nov. 30:
But pretty huge inflation bias coming into 2018, we can see the OEMs being very aggressive with price, needing to be very aggressive with price and it's very good for us assuming that price remains in the market for next year, because as a distributor, we pass it through, our gross profit production increases, our fixed costs do not and it's really good for business.Could the central banks of the developed world be finally on the cusp of getting their long-desired inflation? Be careful what you wish for.
Great November jobs report indicates a manufacturing renaissance
Manufacturing Unemployment Rate Down to 2.8%
Thursday, December 7, 2017
My second favorite economist,
Gary Shilling: Is the Fed inverting the yield curve and causing a recession?
Another interesting phenomenon is the declining yield spread between 10-year and 2-year Treasury. Most of the recent narrowing is due to rising 2-year yields, reflecting expectations of further Fed rate-raising. But 10-year yields have also fallen from 2.45% at the end of 2016 to 2.38%, probably due to continuing deflationary expectations as well as foreign demand for long-term Treasurys. Inflation continues to undershoot the Fed’s 2%
Target.
This narrowing of yield spreads is also shown by the fact that since the Fed started raising the fed funds rate in December 2015, the yield on 30-year Treasurys has actually fallen. This situation is indeed abnormal, but reflects unusual forces at work in global economies and financial markets. Our analysis of the entire post-World War II era reveals that, on average, a one percentage point rise in the fed funds rate leads to a 0.42% rise in 10-year Treasury yields and a 0.30% increase in 30-year yields. That's the reverse of recent action.
The narrowing in yield spreads is also interesting since it often is the prelude to recessions. In the past, when the Fed jacked up short-term rates in response to what it saw as an overheating economy, the yield curve inverted with short rates exceeding longer-term yields and a recession followed every time.
After the 2013 “taper tantrum,”—the market’s violent reaction to the Fed Chairman Ben Bernanke’s hint that the Fed might reduce its massive purchases of securities—the central bank is moving very cautiously to raise interest rates and reduce its huge portfolio of securities. Low inflation is also a reason for Fed caution.
Still, if the Fed persists in tightening, a recession is in the cards. By our count, in 11 of 12 post-World War II attempts by the central bank to cool the economy without upsetting the apple cart, a recession resulted. The only soft landing was in the mid-1990s. Now, in addition to raising interest rates, the credit authorities are selling off their horde of assets for the first time ever. It may be some time before the moment of truth, but what are the odds of a soft landing?
My second favorite economist.
Gary Shilling: Trump is doing a great job reducing government regulations.
On this day in 1941,
A Day of Infamy: Japan Attacks Pearl Harbor. 2400 Americans Killed.
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| U.S.S. Arizona During the Attack |
Grant's Interest Rate Observer: Does the Recent Surge in the Baltic Dry Index Portend a Stock Market Decline?
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