Category Archives: Business

Chilling Thing Insiders Said about Canada’s House Price Bubble, by Wolf Richte

Home Capital, Canada’s largest “alternative” mortgage lender, is borrowing at 15 percent to issue mortgages that will yield less than 15 percent. It’s an interesting business model, but it’s also probably a pretty good bet that Home Capital won’t be around too much longer. From Wolf Richter at wolfstreet.com:

What are homes & mortgages worth when push comes to shove?

Home Capital is Canada’s biggest “alternative” mortgage lender. It’s not a bank – which today is part of its problem because it cannot create money to lend out; it has to obtain it first by attracting deposits and borrowing money through other channels. Through its subsidiary, Home Trust, it specializes in high-profit mortgages to risky borrowers, with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. This includes subprime borrowers.

Since revelations of liar loans – What, liar loans in Canada?! – surfaced in 2015, things have gone to heck. Now it’s experiencing a run on its deposits. Teetering at the abyss, it obtained a $2 billion bailout loan on Thursday. The terms are onerous. And on Friday, the crux of the deal emerged – the amount of mortgages it has to post as collateral. It’s a doozie.

It sheds some light on what insiders think mortgages and the homes that back them are worth when push comes to shove. A bone-chilling wake-up call for the Canadian housing and mortgage market.

This is when the whole construct started falling apart:

On July 15, 2015, Home Capital announced that originations of high-margin uninsured mortgages had plunged 16% and originations of lower-margin insured mortgages had plummeted 55%, and that it had axed an unspecified number of brokers. Shares plunged 25% in two days [Largest “Alternative” Mortgage Lender in Canada Denies “Systemic Problem” in Housing Market].

On July 30, 2015, it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September 2014 into “falsification of income information.” Liar loans. It suspended 45 mortgage brokers who’d together originated in 2014 nearly C$1 billion in residential mortgages, or 12.5% of its total [Liar Loans Pop up in Canada’s Magnificent Housing Bubble].

To continue reading: Chilling Thing Insiders Said about Canada’s House Price Bubble

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The Corporatocracy, by Robert Gore

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The interests of Washington and large corporations have merged so completely they are now inseparable.

America’s large corporations and its government have merged. Or was it an acquisition? If the latter, who acquired whom? Unfortunately, the labels affixed to purely corporate combinations lose their analytical usefulness here. While the two retain their own distinct legal structures and managements, so to speak, such a close community of interest has evolved that it’s no longer possible to separate them or delineate their individual contours. Political labels are no help; the ones most often used have become hopelessly imprecise. The Wikipedia definition of “fascism” is over 8,000 words, with 43 notes and 16 references.

However, the conjoined blob is so big, rapacious, and intrusive that akin to Justice Potter Stewart’s famous non-definition of obscenity, everybody knows it when they see or otherwise come into contact with it. This article will use the term “corporatocracy.” It’s less letters, dashes, and words to type than “the corporate-government-combination.” No serviceable understanding of either US history or current events is possible without close study of the corporatocracy. Unfortunately, such study, like entomology or cleaning septic tanks, requires a stout constitution. But take heart, entomologists grow to love their creepy crawly things, and septic tank cleaners say that after a few minutes you don’t even notice the smell.

A cherished delusion of naive liberals holds that big government is a counterweight, not a partner, to big business. Such a rationale is touted when the righteous demand new regulation, the public and media endorse it, the legislators pass it, and the president signs it into law. However, there are always unpaved stretches on the road to hell—once regulation is law, the righteous, public, media, legislators, and president, and their ostensibly good intentions, are on to the next cause.

In the quiet obscurity they relish, regulators and regulated get down to doing what they do best: bending the law to their joint benefit. Business, whose P&L’s can be powerfully affected by regulations, hire armies of lobbyists and lawyers in a never ending effort to tilt the playing field in their direction, and improve bottom lines, stock prices, and executive bonuses. The return on such investment is far higher than on old fashioned expenditures like research and development, plant and equipment, and job-creating expansion.

PRIME DECEIT TORCHES THE SWAMP!

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Not-so-naive liberals, professed conservatives, and apolitical opportunists work both sides of the street. The revolving door ensures that all concerned do well. Playing this game isn’t cheap, which serves as a barrier to entry to scrappy competitors who compete those old fashioned ways: innovation, hustle, and better products and services at lower prices. Regulation cartelizes industries; look, for instance, at banking and medicine. No surprise that regulatory barriers are one of Warren Buffett’s favorite “moats”: deep and hard-to-cross waterways that protect durable commercial advantages.

Washington doesn’t just fortify favored corporations’ business plans. A $4-plus-trillion-a-year enterprise, the government is the world’s largest purchaser of goods and services. Procuring those contracts employs more armies of lobbyists and lawyers, and has a powerful effect on policy. The shoddy premises supporting the welfare and warfare states, and their epic waste, are obvious to many of the taxpayers forced to underwrite them. They’ve decried them for decades, and voted for candidates promising to cut welfare, waste, war, and taxes. However, beyond voting, taxpayers can devote little time to stopping or slowing the gravy train. Their resources are infinitesimal compared to the resources its passengers expend to keep it running.

The modus operandi for Washington and big business have converged. Debt, its issuance and marketing, is the pillar of the financial nexus and revolving door between Washington and Wall Street. The government and its central bank artificially pump up the economy and hide its deterioration with debt and machinations: ultra low interest rates, quantitative easing, and debt monetization. Big businesses lever their balance sheets to pump up their stock prices or make acquisitions, machinations that do nothing to improve core businesses but often hide ongoing deterioration.

The history of any long-running government program is a catalogue of failures and expanding budgets. Washington cherishes failure, the fountainhead of larger appropriations and more power. Success would put bureaucrats out of work and give politicians less influence to peddle. Likewise in business, failure has become much more acceptable than it was during those bad old days of cutthroat capitalism. Marissa Mayer’s undistinguished five-year tenure at Yahoo, while perhaps not a complete failure, certainly can’t be termed a success. Nevertheless, she’s walking away from the company with at least $186 million for her middling endeavors. Given all that discrimination out there against women, one can only imagine what she would have made if she were a man.

Silicon Valley puts billions into companies like Uber, AirBnb, Snapchat, and Lyft that lose those billions and will continue to do so for the foreseeable—and probably the unforeseeable—future. Private equity shops load up companies with debt that gets paid out as special dividends to the private equity shops, leaving the indebted and enfeebled companies unable to compete and the rest of us wondering how such rape is legal in our rape-conscious age. This recipe for inevitable failure is now playing out in the beleaguered retail sector, which would be nowhere near as beleaguered if it wasn’t so beset with debt.

Tesla, a stock market darling and the quintessence of companies in which failure is the business plan, milks Wall Street for financing and Washington (and a bunch of state and local jurisdictions) for subsidies. It has lost billions during its ten years of existence, but its many admirers sing the praises of CEO Elon Musk, always using the term “consummate salesman”—perhaps it’s on his business card. Musk and fan club dream of “the next big thing” and engage in mutual masturbatory fantasies of transforming the world…and Mars. All this is harmless enough as fodder for dazzling audiovisual presentations and slick speeches, but downright dangerous when real billions, private and public, gets sucked in.

Meanwhile, the corporatocracy crucifies an old-line, profitable corporation, Volkswagen, that cheated on one of its hundreds of thousands of regulations. It undoubtedly wasn’t the cheating that got VW in trouble. Regulations are made to be cheated—it’s impossible to run a business without doing so—but the proper offerings must be made to the corporatocracy. If that were not the case, there would be Wall Street, Pharma, and Defense Contractor wings at federal penitentiaries. VW didn’t kowtow low enough or pay high enough to the bureaucrats and politicians, who retaliated, probably “nudged” by a VW competitor.

As a successful businessman, President Trump knows many of the corporatocracy’s skims, scams, and schemes. Perhaps that will enable him to keep his pledge and drain the swamp. However, it’s extensive, fetid, and teems with loathsome creatures, so a bet he’ll succeed involves exceedingly long odds. You’re probably better off buying Tesla stock.

A BLESSED TIME WHEN THERE WAS NO SWAMP

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Atlanta Fed GDPNow Forecast for Q1 Drops to Almost Zero, by Wolf Richter

The economy continues to lose altitude. From Wolf Richter at wolfstreet.com:

I hope the forecasting model is broken.

The Atlanta Fed’s GDPNow forecast for first-quarter 2017 economic growth in the US dropped further, this time to 0.2%. This seasonally adjusted “annual rate” of GDP growth means that if the economy grows like this for four quarters in a row, it would grow only 0.2% for the entire year.

Economic growth in 2016 was 1.6%, which matched 2011 as the worst year since the Great Recession. So the current forecast of Q1 GDP growth of 0.2% annual rate looks ugly. I just hope that the model is broken and that some internal gears have jammed.

The forecast is down from the already ugly 0.5% at the last publication of the GDPNow forecast on April 18.

As the GDPNow model picks up data for the quarter, it gets more accurate in predicting GDP growth to be reported by the Bureau of Economic Analysis in its first estimate for that quarter. With the last batches of March data piling up, the GDPNow forecast is now just a hair above zero. This has been a steep plunge from 2.5% at the end of February to my red marks today:

Since the last report on April 18, new data points have arrived and have left their marks:

Existing-home sales (April 21). No change in the forecast.

New-home sales (April 25). No change in the forecast.

Retail trade revision (April 25) pushed the forecast for consumer spending from already weak growth of 0.3% to near stagnation of 0.1%.

Durable goods manufacturing (reported today by Census Bureau) and the light trucks sales to businesses (reported by BEA on April 25) caused the forecast of real equipment investment growth to rise from 5.5% to 6.6%.

Wholesale and retail inventories (today) caused the forecast of the contribution of inventory investment to GDP to fall deeper into the negative (from -0.76 percentage points before) to -1.11 percentage points today.

To continue reading: Atlanta Fed GDPNow Forecast for Q1 Drops to Almost Zero

The global elite are headed for a fall. And they don’t even know it. by Damon Linker

The elite may be no more cognizant of how they, and the system that has so richly rewarded them, are perceived than was King Louis XVI and his court. From Damon Linker at theweek.com:

The global elite think they’re sitting pretty. How wrong they are.

Democrats keep telling themselves that Hillary Clinton “really” won the 2016 election (or would have, had it not been for interference by Vladimir Putin and James Comey). Republicans keep patting themselves on the back about how much power they now wield at all levels of government. And centrists throughout the West are breathing a sigh of relief about Emmanuel Macron’s likely victory over the National Front’s Marine Le Pen in the second round of the French presidential election on May 7.

You can almost hear the sentiments echoing down the corridors of (political and economic) power on both sides of the Atlantic: “There’s nothing to worry about. Everything’s fine. No need for serious soul searching or changes of direction. Sure, populism’s a nuisance. But we’re keeping it at bay. We just need to stay the course, fiddle around the edges a little bit, and certainly not give an inch to the racists and xenophobes who keep making trouble. We know how the world works, and we can handle the necessary fine tuning of the meritocracy. We got this.”

And why wouldn’t they think this way? They are themselves the greatest beneficiaries of the global meritocracy — and that very fact serves to validate its worth. They live in or near urban centers that are booming with jobs in tech, finance, media, and other fields that draw on the expertise they acquired in their educations at the greatest universities in the world. They work hard and are rewarded with high salaries, frequent travel, nice cars, and cutting-edge gadgets. It’s fun, anxious, thrilling — an intoxicating mix of brutal asceticism and ecstatic hedonism.

The problem is that growing numbers of people — here in America, in the U.K., in France, and beyond — don’t see it like this at all. Or rather, they only see it from the outside, a position from which it looks very different. What they see is a system that is fundamentally unjust, rigged, and shot through with corruption and self-dealing.

They see Marissa Meyer, the CEO of Yahoo, taking home a cool $186 million in stock (on top of many millions in additional salary and bonuses) for five years of “largely unsuccessful” work.

To continue reading: The global elite are headed for a fall. And they don’t even know it.

This bubble finally burst. Which one’s next? by Simon Black

The days of Silicon Valley funding startups that perpetually lose money and burn cash, with no end in sight, may be drawing to a close. From Simon Black at sovereignman.com:

Like so many other high-flying Silicon Valley startups, Clinkle was supposed to ‘make the world a better place’.

Founded in 2011 by a guy barely out of his teens, the company picked up early buzz after proclaiming they would disrupt mobile payments. Or something.

Silicon Valley venture capital firms were apparently so impressed with the idea that they showered the company with an unprecedented level of cash.

(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)

The company went on to burn through just about every penny of its investors’ capital.

There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.

At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.

This is rapidly becoming a familiar story in Silicon Valley.

For the last 6-7 years, Silicon Valley startups have been able to raise unbelievable amounts of cash.

Yet so many of those companies haven’t managed to turn a profit. Ever.

There’s some of the big names like Uber and AirBnb which are supposedly worth tens of billions of dollars despite having racked up enormous losses.

(Last year ride-sharing company Lyft promised investors that it would cap its losses at ‘only’ $600 million per year. . .)

But there are countless other examples of startups being anointed with absurd valuations and continually replenished with fresh capital even though they keep losing money… and have no plan to ever make money.

Snapchat’s investment prospective summed it up best:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

It’s as if the more money these startups lost, the more popular they became with investors.

Clearly that was unsustainable.

To continue reading: This bubble finally burst. Which one’s next?

 

Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History, by Tyler Burden

This is how debt implosions get started. From Tyler Durden at zerohedge.com:

Call it Canada’s “New Century” moment.

We first introduced readers to the company we said was the “tip of the iceberg in Canada’s magnificent housing bubblenearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada’s largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices – most prominently noted short-seller Marc Cohodes – would constantly remind traders and investors about the threat posed by HCG.

Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.

As part of this inevitable outcome, one which presages the company’s eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17 percent, Street Capital Group Inc. fell 13 percent, while First National Financial Corp. declined 7.6 percent. In short, the Canadian mortgage bubble has finally burst.

To continue reading: Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History

A Miracle and a Tragedy, by Eric Peters

The federal government has put cars with V8 engines, which used to be commonplace, out of reach of everyone but the affluent. From Eric Peters on a guest post at theburningplatform.com:

Henry Ford gets the credit for putting America on wheels via the Model T – which was not only the first mass-produced car but also the first affordablecar, which is what made its mass production possible.

Ford’s other achievement, however, wasn’t a car. It was an engine. The first mass-produced and – like the T – affordable V8 engine. Chuck Berry sang about it in Maybellene:

I was motorvatin’ over the hill

I saw Maybellene in a Coupe de Ville

A Cadillac a-rollin’ on the open road

Nothing outrun my V8 Ford

The Ford flathead V8 came out in 1932 and – just like the T – it changed everything. It was light and inexpensive and easy to manufacture. So it could be sold inexpensively – and in quantity.

Previously – just as cars had once been for the affluent-only – V8 engines were ornate, complex and expensive. They were indulgences of the affluent – not unlike an electric car today.

The flathead Ford V8 upended that. For the next 60-plus years, the average American could afford to drive not just a car, but a car with a V8.

A big car.

These, too, became commonplace – and uniquely American. In no other country could you see fleets of big cars being driven by ordinary people. It was extraordinary.

V8s made that feasible.

And the V8s grew to be even bigger.

By the early ‘70s, it was common for sedans (and station wagons) to have engines in the seven liter range. These were middle-of-the-road family sedans and wagons. Not high-end models.

Everyone coulda had a V8 – or just about.

These were six passenger full-size (and rear-wheel-drive) cars and wagons – the wagons often being nine passenger-capable. The roads abounded with them. They were the analogs – from the ’50s through the ’60s and into the ’70s – of a Camry or Accord.   

Then along came Uncle – and once again, everything changed.

To continue reading: A Miracle and a Tragedy