Sunday, November 19, 2017

Where's the Leverage?

"And I hate to tell you this, but it's a bankrupt business model. It's systemic, it's malignant, and it's global...like cancer."
--Gordon Gekko (Wall Street: Money Never Sleeps)

In past bubbles, leverage was concentrated and easy to spot. In the late 1990s leverage clustered in dot.com. In the 2000s it accumulated in housing and mortgages.

This time around leverage is harder to recognize. Yet, derivative usage, corporate debt, duration, and sovereign debt are all at record levels.

It is tougher to see leverage when it is all around us.

Rather than being dormant and local, leverage and its associated risks have become malignant and systemic.

Saturday, November 18, 2017

Debt and GDP

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

Uncited but simple list that ranks debt as a percentage of central government GDP.
US is number four. Federal debt now exceeds $20 trillion.

Friday, November 17, 2017

High Anxiety in High Yield

This city's mad in the head
And sick in the soul
All the stars flew away 
A long time ago
--Flesh For Lulu

Bears are eyeing the recent weakness in high yield (read: junk) bonds as a harbinger of what's to come in stocks. From a technical standpoint, it is true that junk has broken from a near term uptrend:


But pull back the time horizon a bit and the current weakness barely registers:


Because credit weakness often precedes equity weakness, the situation is worth watching. As of now, however, the action in high yield seems to be stirring little more than high anxiety among the bears.

no positions

Thursday, November 16, 2017

Rates Never Lower

Maybe some day, saved by zero
I'll be more together
Stretched by fewer thoughts that leave me
Chasing after my dreams disown me
Loaded with danger
--The Fixx

Short rates have never been this low for this long in human history.


Rates are not where they are because of natural, peaceful factors. Instead, they have been forced lower.

Force builds distortion and instability into the system. At some point that potential energy will turn kinetic.

Wednesday, November 15, 2017

TINA Will Turn

Out from the ruins
Out from the wreckage
We can't make the same mistakes this time
--Tina Turner

I know several intelligent people with significant exposure to equities here under the primary thesis that, because they need income, they are willing to take the risk of using dividend paying stocks as their primary income avenue. Their rationale? Because fixed income yields are so suppressed, stocks are the only game in town.

In some circles, this rationale is known as TINA (There Is No Alternative).

There is an alternative, of course. It is called capital preservation. This alternative feels terrible when equity prices are flying high.

But its purpose is to protect against the inevitable crash.

Tuesday, November 14, 2017

Gross vs Net Standard of Living

I'm sick and tired of you setting me up yeah
Setting me up just to knock-a, knock-a, knock-a me down
--Bruce Springsteen

Assessing standard of living in a debt-laden society can be misleading. A portion of what is viewed as 'prosperity' has been borrowed from the future and must be paid back. This payback taxes, quite literally, future standard of living.

Where would US standard of living be today, for example, if the resources borrowed by current $20+ trillion in federal government debt could be factored out of the picture?

Suppose that you borrowed to the hilt. Jumbo mortgage, car loans, maxed out credit cards, student loans, et al. Of course, for many, this state is not merely supposition. On the surface, living standards would seem quite posh. But when debt is netted out, equity may be below zero.

When evaluating degree of prosperity among highly leveraged entities, gross standard of living provides one image while net standard of living paints an entirely different portrait.

Monday, November 13, 2017

Demand for Slant

You don't really need to find out
What's going on
You don't really want to know
Just how far it's gone
--Don Henley

Many fault the media for its slanted product. However, in a market where choices are available, then it must be concluded that biased media coverage is merely catering to demand for slant. Media outlets may have an agenda, but without customers willing to trade money for slant then their agenda would go unfunded and their operations would wither.

The only exception is for media outlets sponsored by the State. State funded media can operate whether consumers are willing to pay for slant or not.

Sunday, November 12, 2017

Uncompetitive Advantage

Life is a mystery
Everyone must stand alone
I hear you call my name
And it feels like home
--Madonna

Competitive advantage is often the stated goal of strategic management. Innovation, productivity improvement, brand building, etc are among the activities that can give an organization an edge in a competitive industry.

The challenge, as Schumpeter observed many years ago, is that competitive advantage is always fleeting. Rivals are also busy trying to gain an edge.

In free markets, gaining, and maintaining competitive advantage is hard.

Because managers, like all humans, prefer to economize effort, they will be prone to look for ways to make their quest for strategic advantage easier. In particular they will be tempted to find ways to bend the rules in their favor so that they do not have to work so hard innovating et al. Patents, regulations, and other forms of political favor can give an organization an edge without having to endure competitive assault from rivals.

Advantage without competition.

Saturday, November 11, 2017

Economic Charlatans

You better get back to your used-to-be
'Cause your kind of love ain't good for me
--Dave Edmunds

Hard to imagine an academic field populated by more charlatans than economics. So much drivel has been spoon fed to people by so-called experts in economics that it has clouded the public mind.

Don't succumb to the temptation of outsourcing your economic thought to these people. The fundamental truths of economics are accessible to all willing to engage their brains.

When the charlatans come knocking on the door to your mind, don't let them in.

Friday, November 10, 2017

Markets Compensate for Ignorance

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

Prof Williams reminds us that markets compensate for the ignorance built into the human condition. Despite the hubris of bureaucrats who believe that they could plan production and distribution for the masses, the fact is that the task of centrally planning an economy that works is impossible. The complexity is impossible for the human mind to grasp.

Markets are far more capable of doing the job. Why? Because no one single person needs to know all that's necessary to bring the products that consumers want to those consumers. Individuals focused on their local buying/selling situation chain together to get the job done far better than a brain trust ever could.

This, of course, does not stop the brain trusts from trying. And failing miserably.