Category Archives: Financial markets

This Is How A State Goes Bankrupt, Illinois Edition, by John Rubino

Politicians have been buying votes with pension promises to government employees for decades. Now, in Illinois and other states, the bill is coming due. From John Rubino at dollarcollapse.com:

Somewhere back in the depths of the 20th century, a bunch of governors, mayors, and public sector union leaders got together and cooked up one of history’s greatest financial scams. They would offer teachers, cops, and firefighters extremely generous pensions but would avoid raising taxes to fund the resulting future obligations. Grateful workers would vote to re-elect their benefactors, while taxpayers would appreciate the combination of excellent public services and low taxes.

The beauty of the scheme flowed from its demographics: Most of the original public sector workers were young and therefore decades away from retirement, so the crime wouldn’t be discovered until long after the architects retired rich and revered.

Now, however, those baby boomer workers are retiring and the scam is revealed for all to see. Even in the absence of a pandemic lockdown, mass defaults on state and city obligations would be inevitable in the coming decade. But with the lockdown, they’re coming next year.

So what do the worst offenders do? What they’ve always done, of course, which is to look for ways to paper over the mess for one more election cycle. Illinois is the poster child for state financial mismanagement, with unfunded liabilities that have grown from virtually nothing to $137 billion in just the past two decades.

Continue reading→

 

The Corruptocracy, by Robert Gore

Most political philosophy is just an elaborate justification for theft and fraud.

What’s called the silent majority is really the ignored majority, who for the most part are happy being ignored. Their lives revolve their families, jobs, friends, and community, not the media, publicity, polls, or politics. They’re sick of elections well before they’ve seen their hundredth campaign ad, received their hundredth mailer, or ignored their hundredth telephone call. They know that politicians are phony and corrupt and make jokes about them, but hope that their rulers don’t screw things up too badly, cross their fingers, and vote for the perceived lesser of two evils.

There’s a shortage of blue-ribbon pedigrees, Ivy League degrees, and gold-plated resumés among the ignored majority, but a surfeit of hard-knocks wisdom and common sense. Benjamin Franklin said, “Experience keeps a dear school, but fools will learn in no other.” Everybody does foolish things, but by and large, the ignored majority learns from the dear school and puts its lessons to good use.

The gilded class denigrates those outside it: Hillary Clinton deploring the “deplorables,” Barack Obama saying working-class voters, “cling to guns or religion,” and Obama telling entrepreneurs, “you didn’t build that.” Yet, it consistently, almost invariably, demonstrates a complete lack of the common-sense street smarts found in abundance among those it disparages.

The quotes’ condescending arrogance rankles, but at a deeper level illustrate the real division in American politics—between the productive class and those it supports. At the intellectual level it’s the irreconcilable difference between those who believe that value can and should be conferred by the government, and those who know it must be created and produced. It’s believing or not believing that something can be had for nothing.

Amazon Paperback Link

Kindle Ebook Link

Freeloaders’ delusion stems from psychology, not ignorance. Every human faces a choice. They can produce value or they can beg, borrow, defraud, or steal it from someone else. For every advance humanity has made, there’s always been someone claiming their unfair share. Most of what we call history is merely an account of who’s stealing or defrauding from whom.

Continue reading

Dark Years and Fourth Turning, by Egon von Greyerz

Hard times are here. From Egon von Greyerz  at goldswitzerland.com:

In an ephemeral world, few things survive. I am not talking about species or human beings whose existence on earth is also transitory. Instead I am referring to social and financial systems which are now coming to an end.

In July 2009 I wrote an article called The Dark Years Are Here. It was reprinted again in September 2018.

Here is an extract from my original article:

“The Dark Years will be extremely severe for most countries both financially and socially. In many countries in the Western world there will be a severe depression and it will be the end of the welfare state. Most private and state pension schemes are also likely to collapse. It will be a worldwide depression but some countries may only have a deep recession. There will be famine, homelessness and misery resulting in social as well as political unrest. Different type of government leaders and regimes are likely to result from this.
How long will the Dark Years last? There is a book called ”The Fourth Turning” written by Neil Howe. He has identified a pattern that repeats itself every 80 years. The pattern has been extremely accurate in the Anglophile world. We have recently entered the Fourth Turning which is the final 20 years of the cycle. According to Howe we are in the early stages of a 20 year period of economic and institutional upheaval. This is a period of Crisis when the fabric of society will change dramatically. Previous Fourth Turnings have been the American Revolution, Great Depression and World War II. According to Howe the Crisis will be substantially worse before it is over and it will last for another circa 20 years.
All of this is not good news and we hope that we and Howe are wrong regarding the severity and length of this crisis. But we fear that we are both right. We must stress again that never previously has the whole world entered a downturn simultaneously in such a fragile state both financially and economically which is why the Dark Years are likely to be so devastating and long lasting.”

Continue reading→

 

Global Debt Is Exploding At A Shocking Rate, by Tyler Durden

There is no way this will end well. From Tyler Durden at zerohedge.com:

The primary reason why the global financial system is on the verge of daily collapse, and is only held together with monetary superglue and central bank prayers thanks to now constant intervention of central banks, is because of debt. And, as BofA’s Barnaby Martin succinctly puts it, much more debt is coming since “the legacy of the COVID shock is debt, debt and more debt.” In short: use even more debt to “fix” a debt probem.

So in this world of explosive credit expansion coupled with tumbling economic output where helicopter money has become the norm, central banks – and specifically the ECB – are scaling their QE policies to monetize and absorb much of this debt (relieving the pressure on private investors to buy bonds), more debt “hotspots” mean more vulnerabilities for the global economy.

We won’t preach about the consequences of this debt binge which has catastrophic consequences – we do enough of that already – but below we lay out some of the more stunning facts of global debt levels at the end of Q1 2020 as compiled by the BIS, courtesy of Martin:

  • Global debt/GDP surged to an all-time high in Q1 ’20, with overall debt for the non-financial sector now worth 252% of global GDP. This is up from 241% at the end of 2019, the biggest quarterly jump ever according to BIS data.

  • The chart also confirms that central bank inflation targets are higher, much higher than the “”official 2%: to erase this debt, central banks needs inflation to be in the 10%+ range. Anything below that would require debt defaults instead of inflation to wipe away the debt… and that is unacceptable.

Continue reading→

Record Numbers Of Companies Drown In Debt To Pay Dividends To Their Private Equity Owners, by Tyler Durden

One day many of the practices described in this article will be illegal. From Tyler Durden at zerohedge.com:

One week ago we used Bloomberg data to report that in the latest Fed-fuelled bubble to sweep the market, now with Powell buying corporate bonds and ETFs, private equity firms were instructing their junk-rated portfolio companies to get even deeper in debt and issue secured loans, using the proceeds to pay dividends to owners: the same private equity companies. Specifically, we focused on five deals marketed at the start of the month to fund shareholder dividends, which accounting for half of the week’s volume, and the most in a week since 2017, according to Bloomberg.

Now, a little over a week late, the FT is also looking at these dividend recap deals which have become all the rage in the loan market in recent weeks, among other reasons because they are “ringing alarm bells since they come on top of already high leverage and weak investor protections and against a backdrop of economic uncertainty.”

Having updated our calculation, the FT finds that in September a quarter (24% to be exact) of all new money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4% over the past two years: that would be the highest proportion since the beginning of 2015, according to S&P Global Market Intelligence.

As we wrote a little over a week ago, while the loan market — where PE firms fund the companies they own by selling secured first, second, third and so on lien debt — had until recently not seen the same volume of issuance as other parts of the financial markets. That changed after the Fed stepped into the corporate bond market sending yields crashing to record lows, and forcing US investors into the last corner of the fixed income world to still offer some modest yields: leveraged loans. And since this is the domain of PE firms which desperately need to extract as much cash as they can from their melting ice cubes (another names for single-B and lower rated portfolio companies which will likely all be broke in the next 3-5 years), everyone is rushing to market with dividend recaps to pay as much to their equity sponsor as they can before the window is shut again.

Continue reading→

China is killing the dollar, by Alasdair Macleod

If a country is clearly bent on depreciating its own currency, why hold either the currency or assets denominated in that currency. From Alasdair Macleod at goldmoney.com:

In the wake of the Fed’s promise of 23 March to print money without limit in order to rescue the covid-stricken US economy, China changed its policy of importing industrial materials to a more aggressive stance. In examining the rationale behind this move, this article concludes that while there are sound geopolitical reasons behind it the monetary effect will be to drive down the dollar’s purchasing power, and that this is already happening. More recently, a veiled threat has emerged that China could dump all her US Treasury and agency bonds if the relationship with America deteriorates further. This appears to be a cover for China to reduce her dollar exposure more aggressively. The consequences are a primal threat to the Fed’s policy of escalating monetary policy while maintaining the dollar’s status in the foreign exchanges.

Introduction

On 3 September, China’s state-owned Global Times, which acts as the government’s mouthpiece, ran a front-page article warning that

“China will gradually decrease its holdings of US debt to about $800billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict,” Xi Junyang, a professor at the Shanghai University of Finance and Economics told the Global Times on Thursday”[i].

Do not be misled by the attribution to a seemingly independent Chinese professor: it would not have been the frontpage article unless it was sanctioned by the Chinese government. While China has already taken the top off its US Treasury holdings, the announcement (for that is what it amounts to) that China is prepared to escalate the financial war against America is very serious. The message should be clear: China is prepared to collapse the US Treasury market. In the past, apologists for the US Government have said that China has no one to buy its entire holding. The most recent suggestion is that China’s Treasury holdings will be put in trust for covid victims — a suggestion if enacted would undermine foreign trust in the dollar and could bring its reserve role to a swift conclusion.[ii] For the moment these are peacetime musings. At a time of financial war, if China put her entire holding on the market Treasury yields would be driven up dramatically, unless someone like the Fed steps in to buy the lot.

If that happened China would then have almost a trillion dollars to sell, driving the dollar down against whatever the Chinese buy. And don’t think for a moment that if China was to dump its holding of US Treasuries other foreign holders would stand idly by. This action would probably end the dollar’s role as the world’s reserve currency with serious consequences for the US and global economies.

There is another possibility: China intends to sell all her US Treasuries anyway and is making American monetary policy her cover for doing so. It is this possibility we will now explore.

Continue reading→

Unspoken Truth, by Sven Henrich

The Fed has become the deity of the financial markets. From Sven Henrich at northmantrader.com:

We all know it yet the unspoken truth deserves to be said out aloud.

You all heard the phrases ‘Don’t fight the Fed’, and ‘ there is no alternative’. Can we be clear what these phrases really mean? They mean people are buying assets at prices they otherwise wouldn’t because a central planning committee is putting in market conditions that changes their market behavior.

People are paying forward multiples that are higher than they would if they earned higher interest income. The ‘desperate search for yield’ they call it. Think of it as a forced auction. You must pay, and you must pay more because you can’t bid on anything else and neither can anyone else hence there are now bidders for ever less available product (i.e. think shrinking share floats) driving prices wildly higher. And as central banks have become permanently dovish over the past decade Fed meetings are the principal impetus for rallies. Indeed most gains in markets come around days that have Fed Day written on them, a well established history going back decades now.

A fact the Fed itself is very well aware of:

“In a 2011 paper, New York Fed economists showed that from 1994 to 2011 almost all the S&P 500’s returns came in the 3 days around an FOMC decision. Over this period the index rose by 270%, and most of those gains happened the before, the day of, and the day after a Fed meeting.”

So Pavlovian has the response become that shorts automatically cover ahead of Fed meetings and investors buy ahead of Fed meetings expecting a positive response. The Fed is the market as it’s driving its entire behavior. The “Fed put” they call it. Another phrase that explicitly acknowledges that investors are orienting their risk profile behavior on what this unelected committee does.

Continue reading→

California’s Real Wildfire, by MN Gordon

California’s public pension are burning forest fire-size holes in California’s budgets. From MN Gordon at economicprism.com:

Hot dry winds have returned to the land of fruits and nuts.  After baking away all summer long in the blistering sun, the dense sage and chaparral covering the coastal hillsides and canyons and the inland mountain forests are dry and toasty.  Vegetated areas are a giant tinderbox.

What happens next is as predictable as night follows day.  Just one spark – from a downed powerline or a backfiring semi-truck – and the whole thing conflagrates into a blistering windblown wildfire.  The Golden State goes up in smoke.  The sky turns to an orange haze; the sunsets are magnificent.  And ash sprinkles down and coats the pavement with residue.

Of course, this happens every year.  And every year is the worst year ever.  The fires rage until the mild winter weather arrives.  Then everyone seemingly forgets the fires ever happened…until the mudslides.

Indeed, California is a whacky and wild place.  The Governor’s an absolute loon who fancies himself a leading presidential candidate for the 2024 election.  State and local governments are largely socialist.  The general populace generally wants first rate infrastructure, at a second rate price.  And nearly half of all U.S.’s homeless people live here.

Yet the real story with California.  The story only geeks and dweebs will tell.  Is a story of its state and local governments.  It’s a story that’s also being written in a state or city near you.  The story has nothing to do with wildfires, per se.  But it does have to do with conflagration.

This is the story of an army of public servants.  And the promise of retirements that are unaffordable.  More so than the wildfires ravaging the state are the wildfires ravaging the big pension fund.  This is the story of grand promises that must be broken.  And the painful level setting that comes with it.

Where to begin?

Continue reading→

We’re at Peak Insanity, by Mitchell Feierstein

I thought we had reached peak insanity some time ago, but they keep surprising me. From Mitchell Feierstein at lewrockwell.com:

The Fed’s fiscal profligacy and greedy tech oligarchs are sinking capitalism faster than the Titanic

During my 40-year Wall St career, I’ve never seen a mania like this. The problem is that central banks are rogue hedge funds with printing presses who are not elected or accountable and make policies that are consistently wrong.

US stock markets were rocked last week by massive volatility that saw the most significant declines since the March correction. The US Congress and Federal Reserve policy of endless bailouts, moral hazard and exponential money printing are extreme fiscal profligacy that will sink capitalism faster than the Titanic on its maiden voyage.

Stock market indexes have recently rocketed to record highs. The NASDAQ traded up at 12,050.46, and the Standard & Poor’s 500 index traded at 3,588.11, achieving another benchmark. Stock valuations are the highest they’ve ever been, exceeding the crash of 1929 and the 2000 technology bubble. Just six stocks have driven this rally: Apple, Amazon, Microsoft, Facebook, Google and Tesla.

Should you worry that the world has never witnessed a stock mania that has seen valuations skyrocket during the worst economic depression the world has ever experienced? Yes, indeed, you should step back from the cliff’s edge immediately.

The billionaire oligarchs of Silicon Valley, whose stocks are at all-time highs during an economic depression, will utilize censorship to manipulate the outcome of the 2020 election. These oligarchs demand one rule for thee and another for me. They demand equality of outcome and will implement laws that prevent equality of opportunity. The US is in a class war dressed up as a race war. Google, Facebook, Amazon and Twitter are “all in” on ensuring their power base is protected with the election of Biden and Harris.

Continue reading→

The Fed’s Brilliant Plan? More Inflation and Higher Prices, by Ron Paul

The only plan the Fed ever has is to create more fiat debt at low interest rates. From Ron Paul at ronpaulinstitute.org:

Federal Reserve Chairman Jerome Powell recently announced that the Fed is abandoning “inflation targeting” where the Fed aims to maintain a price inflation rate of up to two percent. Instead, the Fed will allow inflation to remain above two percent to balance out periods of lower inflation. Powell’s announcement is not a radical shift in policy. It is an acknowledgment that the Fed is unlikely to reverse course and stop increasing the money supply anytime soon.

Following the 2008 market meltdown, the Fed embarked on an unprecedented money-creation binge. The result was historically low interest rates and an explosion of debt. Today total household debt and business debt are each over 16 trillion dollars. Of course, the biggest debtor is the federal government.

The explosion of debt puts pressure on the Fed to keep increasing the money supply in order to maintain low interest rates. An increase in rates to anything close to what they would be in a free market could make it impossible for consumers, businesses, and (especially) the federal government to manage their debt. This would create a major economic crisis.

The Fed has also dramatically expanded its balance sheet since 2008 via multiple rounds of “quantitative easing.” According to Bloomberg, the Fed is now the world’s largest investor and holds about one-third of all bonds backed by US home mortgages.

Continue reading