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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Wednesday, December 6, 2017
Tuesday, December 5, 2017
Alan Dershowitz: A President Cannot Be Impeached For The Lawful Exercise of His Constitutional Authority
President George H.W. Bush stopped an investigation in its tracks — an investigation that could have pointed directly to criminal action by him during the Iran Contra scandal — when he pardoned Casper Weinberger and five others crucial witnesses that could have pointed the finger at him. The special prosecutor, Lawrence Walsh, was furious at this decision, claiming that it was intended to, and did, stop the investigation. Yet no one suggested that President Bush be charged with obstruction of justice, because in pardoning those witnesses he was exercising his constitutional authority under Article II.Andrew McCarthy: The FBI's Ambush Interview of Flynn Was A Political Hitjob By Obama Sympathizers
The FBI Knew What Flynn Told Sisylak Before They Talked To Flynn
Grant's Interest Rate Observer:
China Real Estate Bubble?
Red sea
Rising short term interest rates (almost) the world over have been one defining characteristic of financial 2017. For instance: The yield on China’s five-year sovereign bond, which traded as low as 2.41% in October 2016, briefly topped 4% last week, and has since recovered a bit to 3.91%. As is the case in the U.S., relative weakness in shorter-duration bonds has flattened the yield curve. China’s 10-year note yields a virtually identical 3.93%.
With that potentially significant rates action as a backdrop, a Reuters investigative piece published this morning serves as fair warning (not the first) to investors that China’s property-and-leverage-heavy financial system may be standing on shaky ground. Detailing an early 2016 apartment sale in the southern city of Shenzhen that fraudulently featured three separate purchase agreements, one for the bank with an inflated home value, one for the taxman with an understated home value, and a third, “real” document (the swindle was unveiled in court but no party was punished). Reuters asserted that the practice was far from uncommon, while noting the potential for far broader implications:
Mortgage fraud like the pair’s flouting of rules designed to protect banks is rampant in China’s roaring property market, according to interviews with buyers, sellers, and dozens of property market insiders including real estate agents, lawyers, bankers, valuers and loan middlemen from three of China’s major cities and four smaller cities. Many of these people declined to be identified because they were familiar with or involved in “re-packed” loan applications, the industry euphemism for these frauds.
“When everyone is doing it, you can’t put everyone in jail,” says [Hu Weigang, a senior partner at Guangdong Shen Dadi Law Firm], who specializes in real estate litigation.
While property prices in China continue to rise, mortgage fraud remains largely a hidden danger, much as subprime loans in the United States remained mostly out of sight ahead of the 2008 global financial crisis. The fear is that in a property correction, fraudulent mortgages would unravel, accelerating a collapse of housing prices in the world’s second biggest economy. This, in turn, would imperil China’s debt-laden financial system.
Writing in the Financial Times today, Chen Zhao, chief global strategist of Alpine Macro, offers a dissenting view to the opinion (held by Grant’s among others) that China is an economic disaster waiting to happen. Zhao argues that a high debt-to-GDP ratio, instead of signaling potential instability, is actually a function of high savings rates, which necessitate credit creation to transform savings into investment. Speaking of China in particular, Zhao writes:
Looking around the world, the levels of interest rates for different countries are negatively correlated with levels of total indebtedness. Countries that have borrowed aggressively – such as Japan, China and Singapore, have very low or zero interest rates.
China has a chronic current account surplus and has been a net creditor to the rest of the world for decades. Beijing’s outstanding public sector, valued at $4 trillion, is dwarfed by the vast assets controlled by the various levels of governments. Therefore, China’s sovereign risk is extremely low. Importantly, the balance sheets of the Chinese state-owned banks, the government and the People’s Bank of China are all interconnected. Under these circumstances, a debt crisis in China is almost impossible.
A high debt-to-GDP ratio may or may not portend trouble on its own, but China’s explosive credit growth has caused Victor Shih, associate professor of political economy at The University of California, San Diego, to sound the alarm. In a study entitled “Financial Instability in China: Potential Pathways and their Likelihood,” Shih invokes a provocative comparison to describe the Middle Kingdom’s increasing reliance on leverage:
China as a whole is a Ponzi unit. Total interest payments from June of 2016 to June of 2017 exceeded incremental increase in nominal GDP by roughly 8 trillion RMB. [$1.2 trillion]
This was not always the case . . . prior to 2011 incremental nominal GDP roughly matched or even exceeded interest payments.
The advent of high-yielding shadow banking led to the explosive growth in interest payments, and thus the need to capitalize interest payments, starting in 2012.
To be sure, the Chinese government has succeeded in avoiding the bursting of the asset bubble, but this has been achieved by a greater degree of leveraging.
This afternoon, Shih hopped on Twitter to respond to the Reuters mortgage story, commenting that: “That’s not fraud in China. That’s how every borrower, starting from the government, obtains loans in China.”
Grant's Interest Rate Observer: Is Bitcoin Another Beanie Baby Bubble?
Beanie babies redux
First came bitcoin, then came ICO’s, now comes: Cryptokitties, an ethereum-based game in which users spend real money to “buy, sell, and breed cartoon kittens.” Launched just last week, the game already represents 20% of all computations on the ethereum network. So far, the top-selling cryptokitty fetched just under 247 ethereum tokens, worth $117,712 at the time of purchase.
Grant’s contacted Zac Bissonnette, author of “The Great Beanie Baby Bubble” and paid-up subscriber, for his professional opinion on this bourgeoning digital collectible craze.
Cryptocurrencies have vastly more in common with collectibles than with investments.
There’s no utilitarian value, they don’t generate cash flows, and their value is entirely dependent on artificial scarcity—like baseball cards, Thomas Kinkade prints, comic books, etc.—all of which are categories with exceptionally poor long-term track records. Crypto kitties are a nice way of demonstrating the similarity: Once you attach cryptocurrencies to pictures of cute animals, you realize it’s a lot like a plush toy.
The man who presaged Trumpism
Pat Buchanan:
We're All Partisans Now
"It's hard to see how this ends well . . . Is Flynn's defection a death blow to Trump?"Monday, December 4, 2017
Hugh Hewitt: A special counsel needs to investigate the FBI and Justice Department. Now.
When a guy like Hugh Hewitt doubts the FBI, a serious constitutional crisis cannot be far away.
Don't tell the judges in Seattle and Hawaii
SCOTUS Approves Trump Travel Ban - Rejects Lower Court Judicial Tyranny
An intellectually honest liberal.
Dershowitz: ‘You Cannot Charge a President With Obstruction of Justice for Exercising His Constitutional Power’
Sunday, December 3, 2017
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