Tuesday, November 29, 2016

We grew up in Magical Times

The great expansion started in 1981.  Alan Greenspan called it the start of the Great Moderation.  Public debt went from $4,069 per person to $59,874 per person by June 2016.  So much income and wealth accrued during this period of time.  It was Magical Times for us.

Here is how the credit Magic works.  Say you have debt of 1 million dollars and you have to pay 10% interest per year.  The interest expense to you is $100,000 per year.

Then interest rates decline to 5%.  So you borrow another 1 million dollars for a total of 2 million dollars owed and the interest expense is still $100,000 per year.

Then interest rates go to 2.5%.  So you borrow another 2 million dollars for a total of 4 million dollars you owe.  But the interest expense is still $100,000.

By G_d, that is Magic.  So much money over the decades for so little interest expense.

Chart: public debt per person. Click to enlarge.

A note on the presidents as shown in the chart.  I am not being partisan in any way.  Each president just goes along with what the Force of the trends dictate.  They are victims of what went before, and powerless to change anything.

In the Middle Kingdom, magic existed among sorcerers.  But things changed and magic withered away as people stopped believing in it.  If President Trump reduces the increase in debt, it will be because nobody believed in Magic any longer.

Maybe we can get to $100,000 of public debt per person within the next decade.  If you are grandparents with three married children who each have three children your tight little family of 14 together will owe $1.4 million.  That is $560,000 more than you all owe today, which is $840,000.

It is easily achievable with inflation.  The increase is 66.7% but divided by 10 is only 6.7% a year uncompounded.  Let us say real growth is 3% per year during that time so inflation only needs to be 4.7%.  We can do it.
Magic lives.

Besides.  The $560,000 increase in your family debt is split between 14 people so it is only $40,000 per person and only $4,000 more each year for each family member.  Doesn’t sound that bad, really.

And face it, $560,000 is just a nice house today.  Or two median priced houses.  Not so bad sounding now is it?  And these house prices I quote are in today’s prices.  Houses have been going up in price, what, 6% per year.  Compounded in ten years your $560,000 house will be worth $1,000,000 which is $440,000 more which offsets a big chunk of the increase in debt your family will owe.  Really, this is great Magic.  Of course you won’t own that house but someone else will.  It is collective Magic.  You and yours will get yours some way or another and it just might be in a couple of houses too.

The magic wand of declining interest rates is broken, but we have the magic of inflation. Believe in Magic.  We all depend on it.

And we know we will never have to pay off the debt.  Magic just doesn’t work that way.

Monday, November 21, 2016

S&P Earnings Optimism Q3 2016 up 10.47%

Last quarter I said bad.  This quarter I say good.  10.47% growth from 3rd quarter 2015.  Energy and financial did the yeoman's work.  Oh yeah.  And buybacks.

S&P 500 GAAP Earnings per share
quarter %
per share
Year over
as reported

Friday, November 18, 2016

Rising dollar to the Chinese yuan problem 11/18/16

QE ended October 2014 and the dollar never looked back.

This time as of today, the sharp rise in the dollar hasn't fazed the stock market.  But in August 2015 the rising dollar yuan problem spilled over to the stock market.  See the sharp rise.  It was a sudden unexpected depreciation of the yuan by the PBoC.  And stocks got slammed.

And note the sharp rise leading up to stock market being slammed in Jan & Fed of this year.


Total Liabilities of Commercial Banks - November 2, 2016

If this stalls, the economy stalls.

The great expansion of debt, that Alan Greenspan dubbed The Great Moderation, started in 1981.  How old were you then?  You have lived in magical times since then.

Below is a weekly look at the rate of change of bank liabilities since the great debt crisis, which is alternatively called the Great Recession, the Financial Crisis, and the real estate crisis, among others.

Below is the S&P added with weekly Friday closing prices.  After things started calming down the S&P and bank liabilities are correlated.


And GDP.


Monday, November 14, 2016

z A Strong Dollar and FX Reserves 11/14/16

March 2015 intraday high 100.72  close  100.04
Nov/Dec 2015 intraday high 100.60  close 100.21
Today intraday high 100.24  close 100.02

It really matters to the Chinese yuan.  The EM exports the most to China, replacing the US as the biggest destination for their materials.  When China’s yuan depreciates, China loses purchasing power and buys less from the EM as prices are higher.  But in actuality, when the yuan is going down, so are the EM currencies.  Capital flows both out of China and EM countries to the US.

With a shortage of dollars the EM and China scramble to obtain them because there is so much debt in these countries in dollars.  Dollar loans have to be service in dollars.

Additionally, varying degrees of bank funding is done in dollars.  So banks are really hard hit as they need dollars for both their clients and themselves.

A strong dollar can be characterized as a run on the dollar.  And it is monetary tightening.  Easy flowing dollars is liquidity.  Liquidity is what is left over for the financial system when economic transactions are satisfied.  It is liquidity that makes the financial system work for itself and for business that relies on financing, which is most.

A strengthening dollar hurts the rest of the world.  Monetary tightening creates economic contraction.

I don’t understand it but I think foreign exchange reserves at central banks may not consist of a lot of actual money, you know, accounting debits like cash or gold.  I think they are mostly accounting credits just like commercial banks create credits to the system when lending creates deposits which are in fact a liability.  These liabilities always remain liabilities until they are paid back.  They never become debits to cash in the commercial banking system.

As I said, I don’t understand it, but I think central banks of the world create dollar denominated credit money instruments that they then call reserves.  The whole central banking world trades in these credits, these liabilities.  I think.

These particular foreign exchange reserves are not permanent like commercial bank loans are not permanent.  I think.  I guess it is ok as long as these central bank foreign reserve credits remain intact.  That is, are able to be funded with liquidity especially dollars.

A dollar shortage can be a problem for these FX reserves, I think, and a stronger dollar indicates a dollar shortage.

Friday, November 11, 2016

z Present Day Bond Vigilantes

Pop quiz

Treasury bond yields have spiked higher because:

a - there is an increased risk of default by the United States
b - it means inflation is coming
c -  it means economic growth is coming
d – it means there is more supply of bonds coming

Answer: d

Remember the bond vigilantes during the Bill Clinton administration? They front ran Bill Clinton’s plans to increase deficit spending.  That is what is happening right now with the belief that fiscal policy will expand.  And bond investors know that it isn’t just the budget deficit (income statement); it is rather the total negative cash flow (includes balance sheet) that is the true amount of the problem.  Today’s bond vigilantes also know that there are reasons why China and other countries will not step up to buy the increased supply of bonds, meaning bond prices will have even that much more pressure to the down side. (I don’t know what those reasons are but I do read about it.  One thing I know, China has reduced its holdings.)

It is good when market interest rates are rising when the economy is growing.  It is a good sign.  Presently, the economy is not strong and there is more debt everywhere than before the great financial crisis.

As we now know, the Keynesian belief that interest rates are a reflection of preference for money is wrong, that interest rates in fact reflect the demand for loans.  In a growing economy interest rates rise as the demand for loans increases.  That is good.  In a weak economy, rising interest rates will reduce the demand for loans.

In a credit money based economy during weak economic times, the last thing the economy needs is reduced growth in credit money.

Thursday, November 10, 2016

Advance Decline line lags S&P 11/10/16

{click to enlarge}

This is a big divergence.  But which ways is it resolved?

Commercial Bankruptcies October 2016

Total Commercial Bankruptcies Year to Date - October
2016 2015 2014 2013 2012 2011 2010
31,867 24,935 29,820 38,128 49,709 63,450 77,883

First the high PE stocks stop outperforming when rates go up.  But financials outperform.  Then bankruptcies rise as debt becomes more burdensome.  Then earnings are affected and stock indexes decline. At least that is one theory.

Facebook    -12.5%  from 10/24/16
Amazon      -12.1%  from 10/05/16
Netflix        -12.1%  from 10/21/16
Google       -  6.2%   from 10/24/16
Tesla           -21.1%  from 07/29/16
Twitter        -26.1%  from 10/05/16
Go Pro        -40.5%  from 09/23/16

XLF            +13.6% from 09/29/16

Wednesday, November 9, 2016

We have a bear steepening yield curve 11/9/16

Before going into that, look at the extreme move in treasuries.

3-7 year

 7-10 year

20+ year


And this is a picture of extreme bullishness in the stock market:

A bear steepening curve is when long term rates rise faster than short term rates.  Here is proof of long term rates rising faster than short term rates because obviously you don’t believe me:

Above is the 10-2.

Note that the curve has steepened since the end of August.

A bear steepening curve assumes improving macroeconomics.  But you say it isn’t improving.  Maybe people only need to think it is improving.

The 4 macro monetary conditions with curve steepening and flattening

The four macro monetary conditions

1 Dovish Fed during Improving Macro economic conditions
2 Hawkish Fed during Improving Macro economic conditions
3 Dovish Fed during Declining Macro economic conditions
4 Hawkish Fed during Declining Macro economic conditions

The four macro monetary conditions with steepening and flattening yield curve

            1 DOVISH FED – BULL STEEPENING (bullish for everything)
                        Short term rates fall faster than long term rates
            2 HAWKISH FED – BEAR STEEPENING (renewed animal spirits)
                        Long term rates rise faster than short term rates

            3 DOVISH FED – BULL FLATTENING (secular stagnation)
                        Long term rates fall faster than short term rates
            4 HAWKISH FED – BEAR FLATTENING (recession risk)
                        Short term rates rise faster than long term rates

Sunday, November 6, 2016

Tax receipts, negative cash flow, fiscal stimulus through October 2016

Cumulative Tax Receipts
Calendar year to date
Oct                   Nov      Dec
2016 2,362,167
2015 2,304,985 2,497,852 2,803,236
2014 2,176,054 2,353,864 2,660,454
2013 2,018,433 2,189,716 2,456,383
2012 1,827,437 1,979,817 2,233,516
2011 1,714,698 1,860,368 2,082,137
Percent tax receipt growth year to year
of cumulative tax receipts
2016 2.5%
2015 5.9% 6.1% 5.4%
2014 7.8% 7.5% 8.3%
2013 10.5% 10.6% 10.0%
2012 6.6% 6.4% 7.3%

Slow down evident and fiscal stimulus up.

Cumulative Negative Cash Flow in dollars
Calendar year to date
          Oct              Nov                Dec
2016 883,279
2015               na 685,588 780,444
2014 585,185 653,573 789,467
2013 723,385 784,419 919,238
2012 1,038,527 1,146,605 1,209,786
2011 968,491 1,085,280 1,197,721

Cumulative Total Outflow percent of tax receipts
Calendar year to date
    Oct Nov Dec
2016    137%
2015      na 127% 128%
2014    127% 128% 130%
2013    136% 136% 137%
2012    157% 158% 154%
2011    157% 158% 158%