Category Archives: Financial markets

The Future of What’s Called “Capitalism”, by Charles Hugh Smith

What now gets labeled capitalism often is not capitalism at all, and sometimes its the opposite. From Charles Hugh Smith at oftwominds.com:

The psychotic instability will resolve itself when the illusory officially sanctioned “capitalism” implodes.

Whatever definition of capitalism you use, the current system isn’t it so let’s call it “capitalism” in quotes to indicate it’s called “capitalism” but isn’t actually classical capitalism.

Try a few conventional definitions on for size:

Capitalism allocates capital to its most productive uses. Does the current system actually do this? You must be joking.

Capitalism is based on private labor and capital freely choosing where to invest time/assets. Does the current system actually do this? You must be joking.

Capitalism enables comparative advantages which enrich everyone. Does the current system actually do this? You must be joking.

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Hubris, by Sven Henrich

The bull markets in bonds and stocks will not go quietly into that good night. From Sven Henrich at northmantrader.com:

One day this bull market will end and the age of the central banking enabled debt bubble will be exposed for the hubris that it is and all the sins of “potential side effects” that central bankers warn about but never do anything about will come back to haunt all of us. It’ll be the age of the great unwind. Nobody will tell us in the moment when it peaks and I suspect it will not start with a bang, rather a whimper, but only end with a bang.

And this great unwind will not last a month or a year, but many years as all the excesses will have to work themselves through the system and all the systematic buy programs will turn into systematic sell programs that will be just as relentless on the way down as they were on the way up.

They very notion of the permanent can kicking we are witnessing now will reveal itself to have been a fantasy. People forget that 2019 and into 2020 came about because of systemic failure of epic proportions. The single one time central bankers tried to tighten blew up in their faces. And the Fed’s forced re-expansion of their balance sheet has now bestowed this blow-off top that has pushed asset prices the farthest distance above the underlying size of the economy that we’ve ever seen. A perversion of the financial system that has created wealth for the few not seen since the 1920s.

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Green Economy is the New Black at Davos 2020, by Tom Luongo

Is climate change going to be the excuse when the world’s financial and economic systems collapse? From Tom Luongo at tomluongo.me:

Green is the buzzword of the day. And it seems everywhere you turn today there are only two topics that matter — Climate Change and impeaching Donald Trump.

Everything else has been put on the back burner, so to speak.

The annual convocation of oiligarchs known as Davos is underway and all that the dutiful media would report on was the intense focus on climate change.

President Trump, for his part, came into that room and did what he always does, step on the metaphoric duck and draw the ire of the globalist glitterati.

But nothing Trump said landed with any weight because The Davos Crowd is in the process of getting rid of America’s Loki anyway.

The Green economy is being touted by everyone now. It was one thing when it began with Alexandria Ocasio-Cortez and her insipid Green New Deal. When it was just her and the Justice Democrats pushing this it could be dismissed as a silly tactic to push the Democratic Party in the U.S. unacceptably left by a bunch of malcontent Bernie Bros.

But when it’s every major central banker in the world, including heads of major Federal Reserve Banks, it is quite another. When Greta Thunberg is speaking at both the United Nations and Davos, you know this is official policy.

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After Blowing $43 Bn on Share-Buybacks in 6 Years, Boeing Scrambles to Borrow $10 Bn, on Top of a $9.5 Bn Credit Line in Oct, to Fund its 737 MAX Fiasco, by Wolf Richter

Boeing wouldn’t be in the fix it’s in if it had spent more money on plane design and less on share buybacks. From Wolf Richter at wolfstreet.com:

Having become a master of financial engineering instead of aircraft engineering.

The first thing to know about Boeing’s mad scramble to line up “$10 billion or more” in new funding via a loan from a consortium of banks, on top of the $9.5 billion credit-line it obtained in October last year – efforts to somehow get through its cash-flow nightmare caused by the 737 MAX fiasco – is that the company blew, wasted, and incinerated $43.4 billion to buy back its own shares since June 2013, having become a master of financial engineering instead of aircraft engineering.

If Boeing had focused on its business – such as designing a new plane instead of doctoring an ancient design to save money and time – and if it hadn’t blown $43 billion on share-buybacks but had invested this money in a new design, those two crashes wouldn’t have occurred, and it wouldn’t have to beg for cash now. The chart below shows the cumulative share-buybacks in billions of dollars since Q1 2009. In Q2 2019, it belatedly halted the share buybacks (share buyback data from YCharts):

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Backlash, by Sven Henrich

The rich get richer and everybody else is responsible for the ever-mounting debt. From Sven Henrich at northmantrader.com:

There’s an old adage: There are two guarantees in life: Death and taxes. Let’s modernize this a bit shall we? While it’s true even the rich still die these days (for now), but taxes are already a debatable question. After all taxes for corporations and the rich have come down dramatically in recent years and gaming of tax codes is the professional obsession of myriads of full time lobbyists and accountants who have found and lobbied every which way for the ultra wealthy to  minimize tax exposure in tax havens, offshore accounts and clever deduction schemes.

No, the modernized version of the death and taxes adage has morphed into something more sinister:

There are two guarantees in life: The rich get obscenely rich, everybody else gets to carry ever more obscene public debt levels.

This week we again get to see an annual ritual: The rich and powerful meet in Davos (119 billionaires are attending) and they get to ravel in having gotten even richer versus the year before and obscenely so as easy money by central bankers have once again levitated the prices of the very assets disproportionally owned by the wealthy: Stocks.

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The Tight Rope Market, by Sven Henrich

By all the time-tested valuation measures and sentiment indicators, the stock market is ripe for a big fall. From Sven Henrich at northmantrader.com:

None of us can know where markets would be trading without the Fed’s constant massive liquidity injections, but now that the bubble recognition has gone mainstream (Bloomberg, FT) and acknowledged by at least one Fed president (Kaplan) I think it’s fair to say: Lower, much lower.

But while investors continue to dance on the liquidity driven momentum rally right into major resistance currently ignored data keeps suggesting that risk is much higher than anyone is willing to acknowledge. Indeed these data points suggest investors may be walking a precarious tight rope without even realizing it.

I do my best to keep pointing out these data points, but so far admittedly in vain:

Since the Fed is currently hosting the most expensive frat party of all time it’s no wonder that investors are currently ignoring everything else consequences be damned.

I’ll let the reader be the judge, but below are a few charts I think are worth documenting as they highlight what investors are entirely ignoring at this stage.

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944 Trillion Reasons Why The Fed Is Quietly Bailing Out Hedge Funds, by Tyler Durden

Usually financial crises start or quickly accelerate where leverage ratios (the amount of debt speculators take on relative to their equity) are the highest. The impending financial crisis will be no different, which makes highly leverage hedge funds speculating in derivatives markets a potential flash point. From Tyler Durden at zerohedge.com:

On Friday, Minneapolis Fed president Neel Kashkari, who just two months earlier made a stunning proposal when he said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth (at least Kashkari chose the proper entity: since the Fed has launched central planning across US capital markets, it would also be proper in the banana republic that the US has become, that the same Fed also decides who gets how much and the entire democracy/free enterprise/free market farce be skipped altogether) issued a challenge to “QE conspiracists” which apparently now also includes his FOMC colleague (and former Goldman Sachs co-worker), Robert Kaplan, in which he said “QE conspiracists can say this is all about balance sheet growth. Someone explain how swapping one short term risk free instrument (reserves) for another short term risk free instrument (t-bills) leads to equity repricing. I don’t see it.

To the delight of Kashkari, who this year gets to vote and decide the future of US monetary policy yet is completely unaware of how the plumbing underneath US capital markets actually works, we did so for his benefit on Friday, although we certainly did not have to: after all, the “central banks’ central bank”, the Bank for International Settlements, did a far better job than we ever could in its December 8 report, “September stress in dollar repo markets: passing or structural?”, which explained not just why the September repo disaster took place on the supply side (i.e., the sudden, JPMorgan-mediated liquidity shortage at the “top 4” commercial banks which prevented them from lending into the repo market)…

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