Category Archives: Strategy & Scenarios

Nothing To See Here

I just saw that Charles Schwab, the brokerage company, in April announced that the number of new accounts increased 44% y/y in 1Q2017 as individuals were opening up stock trading accounts at the fastest pace the company has seen in 17 years.

Actually the company called them individual investors but I can’t stomach calling anyone trading stocks at these prices an investor.

A more recent announcement from the company showed new accounts in May at 115,000, up 42% from the prior-year month and the sixth consecutive month of 100,000+ growth.

Whoopee! Oh, and 17 years ago, that would be…?

Dreaming

FANG is so over. Now it is FANTASIA (Facebook, Amazon, Netflix, Tesla, Alphabet, SalesForce, Intel, and Apple)

The Future Is Now

Debt pulls demand forward in time. Borrowers use debt to pay for consumption today and commit future income to service the debt.

The amount available for consumption today represents the present value of that committed income, discounted by the prevailing interest rates.

The further that borrowers reach into the future, the more that discount lessens the amount available today. The Fed wants consumption today, so it attempts to induce inflation in order that borrowers are more confident of their future nominal incomes, while holding interest rates low so that the discounting of that income is minimized.

This strategy has sustained consumption in the short term, at the expense of reducing future income available for consumption.

The problem is that the future is now.

As consumption slows, so does production and inflationary pressure. Defaults rise – just look at the subprime auto loans. Yes, defaults eliminate debt – but only at the expense of the creditor who takes an immediate hit to income, charged against net worth or equity capital. Lenders are forced to reduce their assets.  Borrowers find that debt service takes more of their income than they had expected. Purchasing power erodes and deflation sets in. Spending capacity falls even more rapidly and the economy slides into recession and depression.

The larger the accumulation of debt, the longer it takes to purge the financial system and restore it to stability. Debt – credit – is a necessary and healthy part of the economic system. But the economy cannot depend on consumption funded by the continuous growth of debt. Debt must revolve, expanding and contracting within limits proportional to the size of the economy.

A Bit Of Math

Simon Mikhailovich of Tocqueville Bullion Reserve reminds us of the deadly numbers with a sobering tweet:

A bit of math. With the global debt / GDP ratio at 320% and the cost of average debt service at 2%, it takes 6.4% growth per annum just to service the debt. Not happening.

Jimmy

JIM ROGERS: The worst crash in our lifetime is coming

Amen.

No Joy In Mudville

Well the employment report this morning was a big miss to expectations on all fronts. The household report showed a net loss of jobs, and overall the quality of jobs declined as part-time, minimum wage jobs replaced full-time. However, the VIX sellers strode in to pump up stocks, leaving Treasuries as the main beneficiary of the report, with the 30-year yielding 2.86% as I write. TRIN at 2.03 shows that while the VIX sellers hold up the mega-caps, there’s a lot of distribution going on.

Oil is trading weak, in the low 47s. Wages disappointed as the employment mix changed unfavorably, even though shortages of skilled workers are widespread.

 

Hypocrisy

Apparently Warren Buffett, who publicly disclaims market timing, is sitting on $100 billion in cash, about 40% of the portfolio.

History says he has done this before, even going so far as almost all cash. Do what I say, not what I do.

Tipping Point

I think we’re close. Very close. Oil gave up the 50s again today, down about 4.5% as I write. Could be a tell. How about this:

Still, dip-buyers as enthusiastic as ever. It works until it doesn’t, then folks get trampled in the rush for the exits. Markets are making no sense because of massive government intervention. Markets are a voting mechanism, but government doesn’t like the results so it suppresses them.

Why I Like The Dutch

Mario Draghi visited the Dutch parliament today and received an “unenviable grilling” from Dutch MPs for nearly two hours which, as the FT said, left the usually implacable Italian confrontational and riled up as tempers flared.

At the end of the meeting, the Dutch gave Draghi a gift – a tulip.

At least someone still has a sense of humor.

The Swamp

President Trump promised to “drain the swamp” in Washington. In doing so, he took on not only the Democratic party but also the McCain-led Republican party establishment, both part of the same swamp, to say nothing of the “deep state” of politicized judges, bureaucrats and contractors.

While it clearly needs doing, the swamp is fighting back, obstructing him at every turn. So far his strategy has been appeasement and it has not worked. Does Comey’s firing mark a return to open hostilities?

We’ll see. But the conflict does mean that government is essentially at a standstill and will remain so indefinitely. It puts basis of the Trump rally in grave doubt. Taken together with an economic slowdown and the mess resulting from Obama’s disastrous international relations policies, the whole situation is an accident waiting for a place to happen.

Don’t believe the VIX as a measure of risk. These days, it is simply a trader’s tool for running short squeezes. Risk is as high as it gets.