Ainslie Bullion - Daily news, Weekly Radio and Discussions

Discussion in 'General Precious Metals Discussion' started by AinslieBullion, Jun 12, 2014.

  1. AinslieBullion

    AinslieBullion Member

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    Gold Surges But AUD Spoils the Party For Now

    As widely expected the US Fed raised rates last night. In a combination of the classic 'buy the rumour sell the fact' and what was perceived to be a slightly more hawkish stance going forward gold (up $25), silver (up 55c), bonds and shares all surged on the news. The only loser of the night was the USD, and in a big way which saw our AUD soar over the 77c mark and wipe out all the gains in Aussie gold and most of it in silver. We also saw the incumbent party prevail in the Dutch elections with the Freedom Party come in a distant second. That could have been negative for gold but it wasn't. The resulting relief rally in the Euro no doubt added to the USD woes last night, and added to gold's rally.

    So the big question remains just how long will this Aussie dollar remain so strong? It may be a little instructive to look at our sister story of Canada (Canadia to Mr Abbott). Like us, Canada experienced a wonderful mining boom courtesy of China. Like us, China has experienced a rampant property market in part due to Chinese investment and record low interest rates fuelling speculation.

    In the last two days we have seen another couple of warning signs about how this could end. Firstly, courtesy of Fairfax yesterday:

    "The Reserve Bank is considering tighter bank lending standards amid concern about how the financial system would handle a collapse in housing prices, beginning with Brisbane apartments.

    The Bank's assistant governor (financial system) Michele Bullock told a business event in Sydney that the Reserve Bank was particularly uneasy about the "looming oversupply of apartments in Brisbane in particular, and possibly in some parts of Melbourne".

    "There are indicators that, in the event of a downturn, there might be systemic issues for the banking system," she said.

    "The worry is what happened in the United States: a big downturn in housing prices and negative equity. Hopefully what we've done with strengthening the resilience of the households and the banks means they can withstand that sort of thing if it happened."

    "But what we saw from the global financial crisis has made us more focused on the fact that just because one institution doesn't look to be doing anything particularly risky, it doesn't mean that if you aggregate it with the others the end result won't look quite risky."

    It is local investment speculators more than Chinese investors that has fuelled our property bubble, all fuelled by cheap credit. Indeed investors now account for over half of all housing loans in Australia, the highest ever save for the peak last year. The RBA know that if they raise rates they could not just risk popping the bubble but could be adding costs to all these loans to a point, in a near zero wage growth environment, they could become unserviceable. To wit the RBA said

    "We don't want households to find themselves in a situation where they have to emergency sell or whatever because they can't afford it any more."

    BUT, and this is the big but, they also know the underlying economy and that belligerently strong AUD could do with lower rates. They are stuck. For now.

    Also yesterday, the BIS (Bank for International Settlements, or 'the central banks' central bank) flagged Canada as joining China in their recession 'danger zone' measure of the gap between Credit and GDP. Have a look below who is next Australia. That rebound in GDP last quarter may have saved us but you've read enough by now to know that may not last. At some stage our massive private debt burden will come home to roost. Gold in USD is on the up. Whilst we may not be enjoying that ride here yet, a 77c AUD does not feel like a permanent feature.

    [​IMG]
    Source:
     
  2. AinslieBullion

    AinslieBullion Member

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    What Happens When the Rug's Pulled?

    As we discussed in today's Weekly Wrap the Fed was a little elusive this week about when they might look to reduce the $4.5 trillion of US Treasuries they bought to print all that money from 2009. Whilst the US Fed stopped it's QE program at the end of 2014, the Bank of Japan (BoJ) and European Central Bank (ECB) have gone hard since, to the tune of US$200b/month currently. No one seems to talk about the more opaque China but even on rough estimates they dwarf all.

    [​IMG]

    There is no doubt all this money printing saved the world from the GFC fully playing out. Few understand just how close it got to being a LOT worse before central banks jumped in and bailed out the system. So what happens when you inject that much money into the 'system'? Who are the winners? The graph below goes a long way to explain the Brexit, Trump, One Nation, and Euro far right phenomenon. It has enriched Wall Street and left Main Street behind.

    [​IMG]

    But it begs the much bigger questions of:

    What happens to all those financial assets when its turned off (whilst the BoJ is not flagging any reprieve the ECB is due to stop QE this December); and
    When will all those $trillions of freshly injected money see inflation take off (as Economics 101 says it must)
    The cynical title of the next graph probably answers 1.

    [​IMG]

    Especially in the context of world growth

    [​IMG]

    And as for 2., well that is clearly just starting to play out now, for despite the Fed maintaining that inflation is only just near its 2% target and manageable (and again extensively covered in today's Weekly Wrap) there are very clear signs of real inflation and more concerning stagflation as it is happening in a near zero wage growth and weak economic growth environment.

    The big bogey is that all this cheap money has seen $60 trillion of global debt added since the GFC, ironically a crisis brought of too much debt. Removing this support sees the cost of that debt increase at a time that the wage growth and the economic growth are not there to support it.

    Rather than taking the medicine at the GFC, central banks have arguably created a much bigger monster and spent all their ammunition doing so. There may be no silver bullet next time.

    We are going to break tradition here (but it's a Friday and you have all weekend.) and provide the following addendum to today's news for you to read if you wish. It is somewhat technical and long but we think it essential reading to gauge a bit more of what we've just said. It's courtesy of Doug Noland's Credit Bubble Bulletin and is only part of a much longer piece (here if you want to read the whole thing). If there is one takeaway, please note the constant comparisons with the amount of debt taken on last year compared to just prior to the GFC.

    "New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN a bogey I've used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous "neutral rate," the Fed rationalizes that it's not behind the curve. Robust "money" and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: "Taylor Rule Suggests Fed is About 12 Hikes Behind."

    Though not so boisterous of late, there's been recurring talk of "deleveraging" "beautiful" and otherwise since the crisis. Let's update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It's worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

    For 2016, NFD expanded $2.117 TN, up from 2015's $1.929 TN - to the strongest growth since 2007's record $2.501 TN. Household borrowings increased $521bn, up from 2015's $384bn, to the strongest pace since 2007's $947bn. Household mortgage borrowings jumped to $248bn, up from 2015's $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015's $812bn (strongest since '07's $1.117 TN).

    The Bubble in Federal obligations runs unabated. Federal debt jumped $843bn in 2016, up from 2015's $725bn increase to the strongest growth since 2013's $857bn. It's worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt increased from 42% to end 2007 to 86% to close out last year.

    Yet Treasury is not Washington's only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

    The unprecedented amount of system-wide debt is so enormous that the annual percentage gains no longer appear as alarming. Non-Financial Debt expanded 4.7% in 2016, up from 2015's 4.4%. Total Household Debt expanded 3.6%, with Total Business borrowings up 5.6%. Financial Sector borrowings expanded 2.9% last year, the strongest expansion since 2008.

    Securities markets remain the centerpiece of this long reflationary cycle. Total (debt and equities) Securities jumped $1.50 TN during Q4 to a record $80.344 TN, with a one-year rise of $4.80 TN. As a percentage of GDP, Total Securities increased to 426% from the year ago 415%. For comparison, Total Securities peaked at $55.3 TN during Q3 2007, or 379% of GDP. At the previous Q1 2000 cycle peak, Total Securities had reached $36.0 TN, or 359% of GDP.

    The Household Balance Sheet also rather conspicuously illuminates Bubble Dynamics. Household Assets surged $6.0 TN during 2016 to a record $107.91 TN ($9.74 TN 2-yr gain). This compares to the peak Q3 2007 level of $81.9 TN and $70.0 TN to end 2008. Q4 alone saw Household Assets inflate $2.192 TN, with Financial Assets up $1.589 TN and real estate gaining $557bn.

    With Household Liabilities increasing $473bn over the past year, Household Net Worth (assets minus liabilities) inflated a notable $5.518 TN in 2016 to a record $92.805 TN. As a percentage of GDP, Net Worth rose to a record 492%. For comparison, Household Net Worth-to-GDP ended 1999 at 435% ($43.1 TN) and 2007 at 453% ($66.5 TN). Net Worth fell to a cycle low 378% of GDP ($54.4TN) in Q1 2009. In terms of Credit Bubble momentum, it's notable that Net Worth inflated over $2.0 TN in both Q3 and Q4."
     
  3. AinslieBullion

    AinslieBullion Member

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    What Happens After the Fed Rate Rise?

    So the Fed raises rates last week and gold surges what gives? History is what.

    Any reader, or in particular listener to the Weekly Wrap, will know the US economy is hardly on an economic tear, it's mild at best (the Atlanta Fed just revised down Q1 GDP estimate to just 0.9%...). The problem is that history shows that after previous rate hikes economic growth slows. The graph below shows that when this done in a low growth environment, as the US is currently experiencing, a recession has occurred within 3 to 9 months. For fun, try and spot when a rate hike has not preceded a recession or crash?

    [​IMG]

    Last week Business Insider Australia ran an article titled "The Fed's 3rd rate hike could be bad for stocks" based on the '3 Steps and a Stumble' adage familiar to many on Wall Street. This adage came about from the historic phenomenon of shares selling off after the 3rd rate hike in a cycle (as a reminder that happened last week). From that article, and referring to the graph below:

    ""The S&P 500 has endured significantly below average results from 1 to 12 months after 3rd rate hikes in 11 events back to 1955," they wrote in a note on Tuesday. "Six (more than half) of those hikes occurred within a year of a major cyclical top for stocks (1955, 1965, 1968, 1973, 1980, 1999)."

    The only exception was in 2004, when stocks continued to rally for another three years before the Great Recession [GFC].

    "Hikes are generally bad for stocks, somewhat bad for the US dollar, and bullish for 10-year yields and commodities [gold & silver]," Leveroni and Tian said.

    "Will rate hikes derail stocks this time around? In a general sense, yes. Is there a deterministic formula or trigger for precisely when? Probably not."". You just need to be ready.

    [​IMG]
     
  4. AinslieBullion

    AinslieBullion Member

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    Gold Surges, Shares Fall Dj Vu?

    Last night we saw a couple of recent records broken. US shares fell more than 1% in a session for the first time in 110 days, ending its 'bullet-proof' run, one of the longest in decades. Whilst most headlines are blaming the standoff in the GOP house on the health care bill flagging future problems ahead for Trump getting his tax cuts through likewise, it was probably also in part due to the spectacular fall of the USD, down the most in 2 years last night. The Dow slumped 1.24% (and now 500 points lower than its recent high) and the S&P500 down 1.24% whilst the USD sank below 100 for the first time since the election.

    Gold jumped 1.6% (1.8% in AUD) and silver up 1.5% (1.7% in AUD) and back up through its 50 day MA.

    Whether it is the events of yesterday or just more of the repeat of financial market trouble and precious metal strength after a Fed rate hike we've seen before. Reading our previous 2 articles you know full well the size of the debt issue and the effects of higher costs of debt (courtesy of rising rates) will have. The last Fed rate hike was not unanimous by the way. Minneapolis Fed President Kashkari dissented on the rate hike. His dovish comments in the press yesterday no doubt added fuel to the uncertainty in the market.

    Regardless today promises to be a hard day on the Aussie (and Asia more generally) sharemarkets and the actions after previous hikes could spell more trouble to come.
     
  5. AinslieBullion

    AinslieBullion Member

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    Bullion Demand Falls or Did It?

    There has been a little alternative press lately about the drop in physical demand for gold and silver. That seems a bit at odds with the price movement but it is missing 2 essential factors. One, it ignores Chinese demand, and secondly it ignores gold bought to back the 'paper' gold ETF trades.

    But it does appear to be correct from a bullion sales in the west perspective (to the end of February) and gels with our experience at Ainslie Bullion over that period. The following chart however puts a few 'barometers' of western demand (i.e. US Mint coin and Perth Mint sales) over that period (versus the same last year) against the well regarded proxy for TOTAL Chinese demand (in via Hong Kong and Shanghai) of the Shanghai Gold Exchange withdrawals. PS. Watch out for our Sunday morning email for more on this.

    [​IMG]

    Percentages only tell half the story too. That Chinese demand was 179 tonnes of gold, a record for that month. To put that into perspective that equates to two-thirds of global gold monthly mine supply. February 2016 saw 107.6 tonne by comparison, a 71.6 tonne increase this year or 2.3m oz. To put that into further perspective the above decreases in US Mint and Perth Mint gold sales total around just 67,806oz, a fraction of 2.3m.

    Secondly, in last week's Weekly Wrap, we reported the "World Gold Council released their end of February figures showing total holdings in gold-backed ETFs and the like rose 4% or 90.6 tonne to 2,246.1t from January and the value of $90.7bn was up 8% with the strengthening price."

    So what is the takeaway? Well for a start the data is to the end of February and doesn't capture the risk off sentiment that entered the market this week. But moreover we are reminded of Warren Buffett's famous quote:

    "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"
     
  6. AinslieBullion

    AinslieBullion Member

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    US Debt Ceiling or Debt Target?

    With very little press or fanfare, on Wednesday, the temporary suspension of the debt ceiling negotiated by Obama just 16 months ago ended. No one probably thought it possible they could add $1.4 trillion in just that time but they did and now the US government is unable to go into any more debt until the debt ceiling is raised. The so called "emergency measures" accounting tricks can buy them some months but already, the U.S. Treasury has less cash on hand than Apple or Google.

    Trump's first budget, for all its headline grabbing cuts, included big increases in defence and still presents a deficit and hence more debt. That's not a new thing however the US has run continual deficits since 1969. The graph below shows the lead up to the now famous 2013 debt ceiling fiasco that saw government employees go unpaid, offices shut down and credit agencies downgrade the biggest economy in the world. That graph indicates that Clinton delivered a surplus but there is debate this was courtesy of some clever accounting shuffling and was still in deficit in real, conventional terms. Either way it is a small blip on what has been a staggering story of borrowing today at the expense of future generations, future generations that will at some stage wear the day of reckoning.

    [​IMG]

    From Bloomberg:

    "Euphoria has been pervasive in the stock market since the election. But investors seem to be overlooking the risk of a U.S. government default resulting from a failure by Congress to raise the debt ceiling. The possibility is greater than anyone seems to realize, even with a supposedly unified government.

    In particular, the markets seem to be ignoring two vital numbers, which together could have profound consequences for global markets: 218 and $189 billion. In order to raise or suspend the debt ceiling, 218 votes are needed in the House of Representatives. The Treasury's cash balance will need to last until this happens, or the U.S. will default.

    The opening cash balance this month was $189 billion, and Treasury is burning an average of $2 billion per day with the ability to issue new debt. Net redemptions of existing debt not held by the government are running north of $100 billion a month. Treasury Secretary Steven Mnuchin has acknowledged the coming deadline, encouraging Congress last week to raise the limit immediately."

    After the argy bargy we saw last night with the far right Freedom Caucus over the healthcare bill, that 218 votes is by no means a done deal. Republicans control 237 seats in the house and the Freedom Caucus numbers 29, that leaves 208 for the mathematically challenged

    In 2013 the government had to decide on paying interest on their enormous debt pile or their workers. With credit ratings at stake they chose the former. That interest bill is far bigger now with around $3.6 trillion MORE debt since 2013.

    Trump's love of tweets means we can be reminded of his position in the 2013 debt ceiling debate when he tweeted "I cannot believe the Republicans are extending the debt ceiling I am a Republican & I am embarrassed!" It will be interesting to see his reconciliation of that in a couple of months time when his government runs out of money

    Everyone seems to love Obama. He was charismatic to be sure, but he also accumulated a staggering amount of debt delivering record level deficits buying such popularity. I have no doubt I would be enormously popular with my friends if I borrowed heaps and lavished them with goodies. I would however leave my kids with a debt bill that may well see them homeless on the streets. In its very essence this is what governments are doing to us all now. But don't expect it to stop until it's out of their control.

    I read once "The debt ceiling should be called the debt target, and they hit it every single time."
     
  7. AinslieBullion

    AinslieBullion Member

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    Beware Gold ETF's

    There is a time to trust the system and a time to protect you and your family's future. This isn't a 'big brother is coming to get you' statement but merely one of practical reality. Exchange Traded Fund (ETF) ownership of gold sees a potentially costly combination of trust in the system and laziness.

    Forbes last week ran an article titled GLD vs. Physical Gold: Which Is The Better Investment Now?'. Their conclusion was clear physical gold. We wrote about some of the pitfalls of owning gold through ETF's back in June last year and you should read it here if you have forgotten or missed it.

    But Forbes raise some other details that we will summarise below. They use SPDR Gold Trust (GLD) as the example given it is by far the biggest and most popular ETF for gold.

    You cannot request physical delivery unless you own more than 100,000 shares ($1.2m worth) and even then there is a clause allowing them to settle your request in cash.
    An advantage for ETF's is you can employ leverage with options but then that of course introduces risk not available with bullion.
    Stating the obvious, but ETF's introduce counterparty risk. As they put it: "While gold ETFs can be a fine investment, they come with a lot of counterparty risk inherent in their chain of custody. And this risk will only grow commensurately with systemic uncertainties.

    Think about it: If you own GLD, you must rely on a counterparty to make good on your investment. If the fund's management, structure, chain of custody, operational integrity, regulatory oversight, or delivery protocols break down, your investment is at risk."

    Breaking down that chain of custody "When you invest in GLD, you buy shares through an Authorized Participant, which is usually a large financial institution responsible for obtaining the underlying assets necessary to create ETF shares.
    When it does so, it is buying shares in the fund's trustee, the SPDR Gold Trust. The trustee then uses a custodian (HSBC) to source and store the gold for it." To make it worse there is also the use of 'Sub Custodians' which HSBC can outsource to, adding yet another layer of counterparty risk. But it would be all underwritten yeah?...

    "There are no written contractual agreements between sub-custodians and the trustees or the custodians, which means if a sub-custodian drops the ball, the ability of the trustee or the custodian to take legal action is limited.
    This leaves the trustee on the hook for any negligence. But trustees don't insure the gold for gross negligence; they leave that to the custodian, who secures limited general insurance coverage for the contents of the vaults. The value of the gold in the vaults is likely to be much greater than this limited policy would cover.

    What this all boils down to is that if anything happens to any of the counterparties, you're the one who loses. And you have zero recourse."

    But HSBC is one of the world's biggest banks so you should be in safe hands, right?
    "Here's a look at HSBC's Rap Sheet:
    fined $1.92 billion for violating laws designed to prevent money laundering and other illegal financial activity
    allowed drug traffickers to launder billions of dollars in the US, and billions more across borders to countries facing sanctions, including terror-ridden Libya
    admitted to gross violations of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money-laundering program, failure to establish due diligence, and involvement in the laundering of over $881 million
    accepted $15 billion in cash across the bank's counters in Mexico, Russia, and other countries
    paid a $275 million penalty to settle with the Commodity Futures Trading Commission for manipulation of benchmark rates used in the foreign exchange markets
    fined $470 million for abusive mortgage practices during the 2008 crisis
    faces criminal investigations in the US, France, Belgium, and Argentina for helping wealthy clients across the world evade hundreds of millions of pounds worth of taxes"
    As we wrote last year ETF's are not a 'free ride' either. GLD comes at an annual cost of around 0.4% plus you have brokerage fees in and out. You don't need to hold gold for long before the buy/sell spread for physical becomes cheaper than holding an ETF. But to be frank, this is semantics as we are talking about protecting your wealth in an event that could see financial markets fall over 50%. As for physical gold lets leave with that article's thoughts:

    "Gold funds like the GLD ETF clearly don't offer the level of safety people expect, especially during times of economic downturn or other financial turmoil. This is why serious investors who are looking to put protections in place for their portfolios prefer gold bullion.

    Gold bullion refers to specific pieces of physical metal held in your name and title. It is not a paper proxy for gold, but the real thingand you own it outright.

    When you own gold bullion, you can never suffer a default. There's no counterparty to make good on a paper contract. Once you buy gold bullion, it's yours, and it doesn't require the backing of any bank, government, or brokerage firm.

    Physical gold offers advantages that GLD can't. In addition to hedging risk, gold also has specific physical attributes that make it highly valuable, and is an excellent wealth and portfolio diversifier. No other asset has all of these intrinsic financial traits."
     
  8. AinslieBullion

    AinslieBullion Member

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    An Insolvent US Fed Closer Than You Think?

    We often write of QE, bond yields v prices, and the Fed's balance sheet assuming at least a basic understanding of such things. We acknowledge that might not always be the case so when we come across a well constructed explanation it is worth sharing verbatim to make sure we are all on the same page. The following is courtesy of Simon Black of Sovereign Man who many will know. Even the more financially literate may not have thought this through like Simon explains.

    "September 10, 2008 was one of the last "normal" days in the world of banking and finance.

    That afternoon, the US Federal Reserve published its routine, weekly balance sheet report, indicating that the central bank had total assets worth around $925 billion.

    Just a few days later, Lehman Brothers filed for bankruptcy, kicking off the most severe economic crisis since the Great Depression.

    And almost immediately the Fed launched a series of unprecedented measures in a desperate attempt to contain the damage.

    They called it "Quantitative Easing", which was a fancy way of saying the Federal Reserve was printing money and giving it to the banks and US government.

    When the commercial banks needed to sell their non-performing toxic assets, the Fed printed money to buy that garbage.

    When the US government needed to borrow trillions of dollars to bail out failing companies, the Fed printed money and loaned it to Uncle Sam.

    By January 2015, the size of the Fed's balance sheet had more than quadrupled to $4.5 trillion.

    It was an astonishing increase; the Fed had essentially conjured more than 3.5 trillion dollars out of thin air.

    In exchange for all at printed money, the Fed had purchased a bunch of assets, including about $2.4 trillion worth of US government bonds.

    This ranks the Fed as one of the top owners of US government debt, just behind the Social Security trust funds.

    In fact the US government owes more money to the Federal Reserve than to China, Japan, and Saudi Arabia combined.

    Now, remember that interest rates were at historic lows during the time that the Fed was buying up all that US government debt.

    From the start of the financial crisis in September 2008 until the day the Fed's balance sheet peaked in January 2015, the average yield on the 10-year US Treasury was about 2.6%.

    That's close to where the 10-year yield is today; just last week it was 2.62%.

    This is where things quickly get out of control.

    If you don't know anything about bonds, there's just one important principle to understand: as interest rates go up, bond prices go down.

    Just like shares of Apple or Exxon, bonds are financial securities.

    Investors pay a certain price for bonds just like they pay a certain price for Apple stock. And just like stock prices, bond prices go up and down.

    Think about it like this: let's say you own a government bond that pays $25 per year in interest.

    That $25 per year is set in stone. It's a contract.

    And today, the market price for that bond is $1,000.

    So, in very simple terms, an investor is paying $1,000 for the bond's $25 annual income stream.

    That works out to be a 2.5% annual return (not including maturity).

    At the moment, investors are happy to receive 2.5% because that's the current rate across most of the market.

    But let's say tomorrow the Federal Reserve jacks up interest rates to 10%.

    Everything changes. Investors can now make 10% just holding money in a bank account.

    The bond you own, however, still pays $25 per year. That hasn't changed.

    So if you want to sell it, you'll have to slash the price; no investor will pay $1,000 to earn just 2.5% from the $25/year income stream.

    Investors can now get 10% elsewhere in the market.

    So in order for your bond's $25/year income stream to match the 10% return that a potential buyer can receive elsewhere, you'll have to drop your price to just $250.

    In other words, the price of your bond has dropped 75%, from $1,000 to $250.

    This is an extreme and simplistic example, but it paints the picture: when interest rates rise, bond prices fall.

    So let's go back to the Federal Reserve and its $2.4 trillion government bond portfolio.

    The Fed recently raised interest rates. And they claim they'll continue to raise rates for the next 1-2 years.

    But as we discovered earlier, as the Fed raises rates, the value of their bonds will fall and the Fed will suffer "unrealized losses".

    This is a gigantic problem because the Fed can't afford to suffer any losses.

    Since the start of the financial crisis, the Fed has whittled down its capital buffer to almost nothing-- right around $40 billion.

    This means that the Fed can only afford to lose $40 billion before going bust.

    $40 billion might sound like a lot.

    But considering the Fed has $2.4 trillion in government bonds, and $4.5 trillion in total assets, $40 billion is nothing-- just 0.9% of the Fed's total asset portfolio.

    So if bond prices fall by just 0.9%, i.e. interest rates go up just slightly, the Fed will be insolvent.

    This is already happening: as interest rates have risen, bond prices are starting to fall.

    And based on the Fed's own data, they're already sitting on $14.2 billion in net unrealized losses.

    So a big chunk of their tiny $40 billion capital buffer has already been wiped out.

    As interest rates continue to rise, the rest of that $40 billion will vanish, at which point the Fed will be completely bankrupt.

    And the US government, which itself is totally insolvent, won't be in a position to bail them out.

    Look, I'm an optimist. I think these are exciting times and that there's a ton of incredible opportunity around the world.

    But it would be seriously foolish to ignore the looming insolvency of the world's most systematically important central bank.

    Two words: Own gold."
     
  9. barsenault

    barsenault Well-Known Member

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    Bravo. Very good article even for a simple minded man like me. Makes complete sense. Wow!
     
  10. AinslieBullion

    AinslieBullion Member

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    The Debt Wolf of Wall Street

    We talk of the US debt pile often and that can overshadow Australia's own. It shouldn't. Just in the last week there have been a couple of editorials in major newspapers that highlight the issue. Here's a couple of quotes:

    From Peter Van Onselen of The Australian:

    "The uncomfortable truth that no politician wants to confront is that Australia doesn't have a plan to pay down the national debt. Worse still, there isn't even a plan to develop a plan.

    There's lots of rhetoric about improving the budget bottom line, from both sides. But there is little or no focus on reducing the debt that has already accumulated. So bad has our addiction to debt become that we barely even discuss ways of paying down the accumulated debt any more. At best the focus is on lowering the deficit, which is a different thing entirely."

    Jeff Kennett just wrote for the Herald Sun:

    "WE ALL want to live in good times and here in Australia we have been doing that for the past 25 years. But the downside is that we fall into the trap of thinking the good times will last forever. We become complacent, even selfish." And

    "Consider the economic facts. Our federal government debt is just under five hundred and forty nine thousand million dollars. That's $549 billion. But consider all those noughts: $549,000,000,000.

    Our state and local government debt is $158 billion. On top of that is our household debt, debt Australians have individually built up and that now stands at almost $2 trillion. That is 123 per cent of our national gross domestic product, the second-highest rate in the world as a percentage of GDP.

    Those are unbelievable levels of debt. Add them together and you have a total of $2.707 trillion.

    Divided by our population, say 24 million and we all have a government and consumer debt of $112,791.

    If we continue along this path of spending more than we earn, borrowing more than we can afford, a day of reckoning will be upon us quicker than we thought possible."

    For some reason most people think anything but their own personal debt is somehow not real and it will all somehow 'fix itself'. It won't and there is nothing even remotely on the horizon to show a return to surplus let alone enough surplus to pay down debt. When, not if, the 'day of reckoning' Kennett refers to comes you will want to have your wealth in hard assets that don't go down with the house of cards this has become.

    Let's look at a graph produced by the independent, apolitical US Congressional Budget Office (CBO) illustrating the trajectory for the US.

    [​IMG]


    The graph is notable for the difference of approach after the GFC to other major crises. We have INCREASED debt when the natural economic cycle seen previously is a 'take your medicine' crash and cleanse and start over. Central Banks intervened before the GFC became what it would naturally have become (much worse) by creating more debt to bail out the system. The debt is still there.

    On the point of how this debt might bring down the system, the CBO provide one scenario:

    "Greater Chance of a Fiscal Crisis. A large and continuously growing federal debt would increase the chance of a fiscal crisis in the United States. Specifically, investors might become less willing to finance federal borrowing unless they were compensated with high returns [loss of faith]. If so, interest rates on federal debt would rise abruptly, dramatically increasing the cost of government borrowing. That increase would reduce the market value of outstanding government securities, and investors could lose money. The resulting losses for mutual funds, pension funds, insurance companies, banks, and other holders of government debt might be large enough to cause some financial institutions to fail, creating a fiscal crisis. An additional result would be a higher cost for private-sector borrowing because uncertainty about the government's responses could reduce confidence in the viability of private-sector enterprises."

    The timing is unknown. Some may suggest we have been 'crying wolf' for a long time and nothing has happened. That is correct. But the wolf is still out there, growing hungrier by the day and the sheeple are voraciously fattening themselves up on tasty financial instruments backed by debt.
     
  11. James

    James Member

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    Ainslie, you could offer a more realistic (and dire) diagnosis. To quote your calculation........

    "Divided by our population, say 24 million and we all have a government and consumer debt of $112,791."

    That is, you include ALL Australians in your assessment, as if ALL are able the support the debt burden of debt.
    There is a huge number who are non-income earning (ie, too young, old or otherwise on government welfare).
    So, for better relevence, divide the total debt by the number of wage/salary earners, numbering roughly 12 million.
    Consequently, that average debt figure works out to be about $250,000 - for each person who may potentially be able to support that debt burden.

    Otherwise, thanks for your helpful rundown of the situation.
     
  12. Holdfast

    Holdfast Well-Known Member Silver Stacker

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    Australian Bureau of Statistics
    http://www.abs.gov.au/

    MeasuresS Of Household Debt

    Average amount owed

    Total household debt stood at $1.84 trillion at the end of 2013, equivalent to $79,000 for every person living in Australia at that time.

    The rate of increase in real household debt per person has slowed since the onset of the Global Financial Crisis (GFC) in August 2007. After increasing at an average of 10% per year between mid 2001 and mid 2007, real household debt per person rose at the much slower average annual rate of 2% between mid 2007 and the end of 2013. This slowdown may, in part, reflect the tightening in mortgage lending standards after 2008.
    http://www.abs.gov.au/ausstats/[email protected]/lookup/4102.0main+features202014#MEASURES


    Per person

    Per person dollar values presented in this article have been calculated by dividing the published household sector aggregate dollar value for the particular stock or flow by the estimated resident population of Australia at the same time (in the case of debt and wealth) or at the end of the flow period (in the case of income).
    Household sector debt and wealth aggregates are published in Australian National Accounts: Financial Accounts (ABS cat. no. 5232.0), household sector income aggregates are published in Australian National Accounts: National Income, Expenditure and Product (ABS cat. no. 5206.0), and the estimated resident population of Australia at the end of each quarter (i.e. at the end of each March, June, September and December) is published in Australian Demographic Statistics (ABS cat. no. 3101.0).

    The unemployment rate is the number of unemployed people expressed as a percentage of the labour force (employed plus unemployed).

    A household's wealth is the value of its assets less the value of its liabilities.

    A debt is an obligation which requires one unit (the debtor) to make a payment or a series of payments to the other unit (the creditor) in certain circumstances specified in a contract between them.

    Loan non-performance rates are non-performing loans as a share of all loans.

    Non-performing loans are loans that are either not well secured and where repayment is doubtful, or loans that are in arrears but well secured.

    An impaired loan is one that is not well secured and where repayment is doubtful.

    A secured loan is a loan for which the borrower has pledged assets such as real estate, shares or motor vehicles as collateral, so that if the borrower fails to repay the loan the lender can sell the assets to recover the amount owed.
    http://www.abs.gov.au/ausstats/[email protected]/lookup/4102.0main+features202014#Perperson
     
  13. AinslieBullion

    AinslieBullion Member

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    1st Quarter 2017 And The Winner Is. Silver!

    Today we look back at the first quarter of the calendar year, and the first full quarter under the presidency of Trump. The quarter also saw the US quietly pass a significant milestone which should have investors paying full attention. But first let's look at the numbers:

    From Zerohedge:

    Nasdaq best Quarter since Q4 2013
    S&P best quarter since Q4 2015
    Dow up 6 quarters in a row - since The Shanghai Accord (the longest streak since Q4 2006)
    Financials up four quarters in a row
    USD Index second worst quarter since Q3 2010
    Gold second best quarter since Q3 2012
    WTI Crude's worst quarter (and first losing quarter) since Q4 2015
    US Crude Production had biggest quarter since Q3 2014
    Or pictorially

    [​IMG]

    Zooming in on that right axis you can see gold, noted as the top performer, saw an 8% rise this last quarter. But the chart is incomplete Silver is up another 50% at 12%.

    At home:

    The perplexingly strong AUD took some of the shine off those USD spot rises with gold up 2% and silver up 7% in Aussie dollars. The All Ords was in between those, finishing the quarter in a late rush with its best week in a very long time to bring it up to 3.2% for the quarter.

    As mentioned above the quarter also was notable for the US having passed, just last month, the average interval between recessions in the modern era. Since 1980, deemed the 'modern era' in which we've enjoyed unprecedented financial deregulation, the average time between recessions in the US has been 7 years. So since the GFC ended in 2009 we are now freshly past that average. If you look more broadly, going back to the post war era since 1945 the average is just 5 years

    By contrast Australia looks on the cusp (this quarter) of breaking the world record of 26 years held by Netherlands. But that is not all it appears. We will discuss this in more detail tomorrow
     
  14. AinslieBullion

    AinslieBullion Member

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    Australia's Recession Record

    Yesterday we talked about the US now past the 'due date' for a recession whilst Australia is on the cusp of breaking the western world record for continuous economic growth.

    The technical definition of a recession is 2 consecutive quarters of negative economic growth. Australia just escaped that last quarter after the previous went into the red. We are now neck and neck with Netherlands as we near 26 years since 'the recession we had to have' back in 1991 (post war Japan holds the record at around 33 years but look what happened then!). Bloomberg recently ran an article on this and their opening 2 paragraphs are telling:

    "Australia is close to seizing the global crown for the longest streak of economic growth thanks to a mixture of policy guile and outrageous fortune. But the nation is creaking under the weight of its own success.

    While growth is being underpinned by population gains and resource exports to China, failure to spur productivity has meant stagnant living standards and electoral discontent; a property bubble fuelled by record-low interest rates has driven household debt to levels that threaten financial stability; and a timid government facing political gridlock could lose the nation's prized AAA rating as early as May because of spiralling budget deficits."

    That debt binge on housing has seen private debt balloon to a world record 187% of income. As for how this could trigger the next recession:

    "The RBA frets that anemic wage growth will force heavily indebted households to slash consumption, which could prove disastrous given their spending accounts for more than half of gross domestic product."

    [​IMG]

    Highly respected independent economist Saul Eslake believes the 2 quarter measure is not a good indicator, preferring the measure of unemployment rising by 1.5% or more in an 18 month period. Similarly Professor Gregory of ANU and ex RBA board from 1985 to 1995 looks at full time employment as a share of population. That's not a nice picture either. He says "What's happening in Australia now is a long, drawn out, sort of slow recession,"

    [​IMG]

    So whilst we staved off a technical recession by the usual rules last quarter, and may claim the 'west' record with 26 years from the "recession we had to have" we may be experiencing the "recession the data said we weren't having" right now.

    The only problem is, if the US enters one, and we will discuss that tomorrow, we will likely know full well we are in one then for sure.
     
  15. AinslieBullion

    AinslieBullion Member

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    Another Signal of a US Recession

    On Monday we discussed the US now having passed the modern era average of uninterrupted growth and very much past the recession 'use by date' in post war terms. As discussed yesterday Australia is on the cusp of a record run of not having a recession. Comments from the RBA governor yesterday may not instil much confidence though. From today's AFR:

    "Too many loans are still made where the borrower has the skinniest of income buffers after interest payments," Dr Lowe said late on Tuesday.

    The remarks came after the Reserve Bank left the cash rate steady at 1.5 per cent for a seventh-straight meeting effectively trapped by the need to avoid adding more fuel to the property market with another rate cut while being unable to hike because unemployment has worsened and inflation remains too weak.

    Amid concerns such loans are akin to the disastrous "subprime" mortgages that plunged the US and global economies into crisis in 2008, Dr Lowe warned Australian banks they needed to maintain a "very strong focus on serviceability assessments".

    "In some cases, lenders are assuming people can live more frugally than in practice they can, leaving little buffer if things go wrong".

    "Growth in employment is slow and wage growth is the lowest in some decades," he said.

    "We will want to see an improvement here before we can be confident that growth in the overall economy is strengthening."

    The RBA remains stuck between inflating the property bubble further and providing the fiscal stimulus the broader economy appears to need.

    The US on the other hand is presenting clearer signals that a recession may be closer than some give credit. And it is credit that is screaming a warning. London's The Telegraph's Ambrose Evans-Pritchard wrote over the weekend:

    "Credit strategists are increasingly disturbed by a sudden and rare contraction of US bank lending, fearing a synchronised slowdown in the US and China this year that could catch euphoric markets badly off guard.

    One key measure of US corporate borrowing is falling at the fastest rate since the onset of the Lehman Brothers crisis. Money supply growth in the US has also slowed markedly. These monetary and credit signals tend to be leading indicators for the real economy.", and

    "Elga Bartsch and Chetan Ahya from Morgan Stanley said the credit squeeze is a warning sign and needs watching closely. "On our estimates, the credit impulse turned negative at the end of 2016. We have not seen such a sharp deceleration in bank lending to US corporates since the Great Financial Crisis," they said.

    "Historically, credit downturns have led recessions. The plunge could reignite concerns that a highly leveraged US corporate sector may react strongly to even limited interest rates increases," they said."

    This, combined with falling GDP estimates and company earnings, of course is in stark contrast to a market riding a wave of hope

    [​IMG]

    And whilst credit is coming off, so too is GDP and so when put against GDP we get another historic signal of an imminent recession:

    [​IMG]

    And so you can see why many are more than a little perplexed that the US Fed is raising rates in such a weak environment.

    "Corporate lending has ground to a halt and I am staggered that the Fed is raising rates. They have made a very big mistake," said Patrick Perret-Green from AdMacro." (from the same The Telegraph article).

    But you see, just as our RBA is stuck between a rock and a hard place, so is the US Fed. As we've said many a time, if they don't raise they both lose credibility and fuel more speculation with cheap money whilst also depriving themselves of any fiscal ammunition (via the ability to lower rates) on the next crash BUT If they do raise rates, or do so too quickly, they are likely to trigger the very crash they wish to prepare for. It may however be too late.
     
  16. AinslieBullion

    AinslieBullion Member

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    "It Is Clear That Something Is Wrong."

    JPM Morgan Chase & Co. is the world's most valuable bank. It's CEO, Jamie Dimon this last week presented his annual letter to shareholders. The normally 'everything's awesome' letter was far from it this time as he states that, in reference to the USA, "it is clear that something is wrong."

    It starts: "Since the turn of the century, the U.S. has dumped trillions of dollars into wars, piled huge debt onto students, forced legions of foreigners to leave after getting advanced degrees, driven millions of Americans out of the workplace with felonies for sometimes minor offenses and hobbled the housing market with hastily crafted layers of rules."

    Dissected, the key concerns are (and there were many others touched on above):

    The US has spent $trillions on wars over 16 years that could have been better deployed at home
    Student loans have gone from $200b in 2010 to over $900b just 6 years later raising default risk, disenchantment and inability to source 'normal' credit
    The regulatory environment is complex, confusing and strangling business, the economy and jobs
    Obamacare took health care costs so high they are now twice the developed world average per person; and
    Labour force participation, particularly in the key 25-54 cohort, is too low.
    When he breaks it down, it is this last point that he covers first.

    "Labor force participation in the United States has gone from 66% to 63% between 2008 and today. Some of the reasons for this decline are understandable and aren't too worrisome for example, an aging population. But if you examine the data more closely and focus just on labor force participation for one key segment; i.e., men ages 25-54, you'll see that we have a serious problem. The chart below shows that in America, the participation rate for that cohort has gone from 96% in 1968 to a little over 88% today. This is way below labor force participation in almost every other developed nation."

    [​IMG]

    "If the work participation rate for this group went back to just 93% the current average for the other developed nations approximately 10 million more people would be working in the United States. Some other highly disturbing facts include: Fifty-seven percent of these non-working males are on disability, and fully 71% of today's youth (ages 1724) are ineligible for the military due to a lack of proper education (basic reading or writing skills) or health issues (often obesity or diabetes)."

    "Our nation's lower growth has been accompanied by and may be one of the reasons why real median household incomes in 2015 were actually 2.5% lower than they were in 1999. In addition, the percentage of middle class households has actually shrunk over time. In 1971, 61% of households were considered middle class, but that percentage was only 50% in 2015. And for those in the bottom 20% of earners mainly lower skilled workers the story may be even worse. For this group, real incomes declined by more than 8% between 1999 and 2015. In 1984, 60% of families could afford a modestly priced home. By 2009, that figure fell to about 50%. This drop occurred even though the percentage of U.S. citizens with a high school degree or higher increased from 30% to 50% from 1980 to 2013. Low-skilled labor just doesn't earn what it used to, which understandably is a source of real frustration for a very meaningful group of people. The income gap between lower skilled and skilled workers has been growing and may be the inevitable consequence of an increasingly sophisticated economy."

    Why do we single out this point in a 45 page document? As we discussed in today's Weekly Wrap, tonight it's a pretty safe bet you will see an 'awesome' non farm payrolls print after the strong ADP print Tuesday night. But again the headline will need to be dissected as there is a very clear underlying problem as Dimon points out. We have financial markets buoyant on hope but the foundations are far less assuring. The world is looking to the US as the economic engine to pull it out of the post GFC lethargy. The picture above shows an engine running on only one cylinder.

    Oh, and if you think it's all awesome here.

    [​IMG]
     
  17. AinslieBullion

    AinslieBullion Member

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    So Trump was going to cut spending and make it all “great again”…

    Just a couple of months into his presidency and the March monthly budget statement saw a record amount of outlays, some $393 billion in one month. Now that wouldn’t necessarily be a problem if all that “greatness” saw incomes outstripping that record expenditure. But alas incomes actually plummeted in March, at only $216 billion and equating to a $167 billion deficit in just one month. The official deficit for the US fiscal year to 31 March stood at $527b, up considerably on last year’s $459b.

    But the real concern is the rolling 12 month total of receipts which not only just saw its 4th consecutive monthly decline but the biggest drop since the GFC. Indeed if you look at the chart below you can see the shaded areas of recession have seen that same phenomenon.

    [​IMG]

    Our Facebook followers saw a report via the Wall Street Journal over the weekend that points out the staggering scale of the interest on all their debt now, BEFORE interest rates really take off. For those who missed it, here is the link. In a nutshell however net interest payments rose $7b or 30% on last March.

    Here’s a break up of that $393b

    • Defense: $58 billion
    • Social Security: 79 billion
    • Medicare: $75 billion
    • Interest on debt: $30 billion
    • Other: $151 billion


    You can see that interest is already a very big percentage. From WSJ:

    “If that seems small, consider that interest payments rose $28 billion for the six months of fiscal 2017 to $152 billion. That’s a 22.2% increase, among the biggest in any single spending item highlighted by CBO. The increases reflect the growing debt but in particular the Federal Reserve’s decision to raise interest rates after years of near-zero rates.”, and

    “This not-so-free Fed lunch is starting to end. CBO estimates that $160 billion more spending will be required each year over the next decade if interest rates are merely one percentage point higher than in its current projections. As interest rates rise, the Fed will also have to pay banks more to keep excess reserves parked at the central bank. After its latest rate increase in March, the Fed now pays banks 1% on reserve balances or about $20 billion a year, and that will go up.”

    The other takeaway from the breakup above is the scale of social welfare and medicare, accounting for nearly 40% of outgoings. The Congressional Budget Office warn this is set to continue to increase as a percentage. We have often written of the fact that the US’s staggering $20trillion debt figure doesn’t include future commitments such as these as liabilities, as if they are just somehow going to go away. The trajectory of the expenditure depicted below speaks volumes of the Ponzi scheme that is the US debt situation, and indeed most western countries where politicians keep spending up to get votes at the expense of future generations. So far Trump is no different.

    [​IMG]
     
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  18. AinslieBullion

    AinslieBullion Member

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    “Value Is What You Get”

    There are many ways to assess the value of a company that you buy shares in. The table below is courtesy of Bank of America Merrill Lynch (BofAML) and it details no less than 20 different measures of value of the S&P500 against historical averages

    They highlight 15 metrics as being above the historical average and 3 of the 5 which are not highlighted are only because they are relatively ok compared to bonds.

    [​IMG]

    Now averages being averages means being ‘above’ does not necessarily mean we are near a crash. However a quick scan of the table shows many are very much above that average and indeed the highly respected CAPE Shiller is nosebleed 73% above and the forward consensus P/E is at its highest since 2002.

    But again, if everything is awesome, than high valuations would be expected yeah? Yesterday the Atlanta Fed maintained their Q1 GDP forecast for the US of just 0.5% and graphs like the following paint a very clear picture of everything not being awesome yet the sharemarket is trading like it is.

    [​IMG]

    [​IMG]

    We are reminded of Buffets famous saying:

    "Price is what you pay. Value is what you get."
     
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  19. AinslieBullion

    AinslieBullion Member

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    IMF Global Financial Stability Warning

    The IMF have just released their latest Global Financial Stability Report and it yet again screams warnings of the implications of all the additional debt accumulated since the GFC.

    The main message of the report is that as interest rates inevitably rise the servicing cost of all that debt could bring the whole system down. Before we get into that at a corporate scale lets remind ourselves of the headlines in Australia just 2 days ago “This thing’s gonna blow’: Top economists’ interest rate warning” –

    “Mr North's modelling shows 669,000 families (or 22 per cent of borrowing households) are in mortgage stress. That would rise to 1 million households, or one third of borrowers, if interest rates rose by 3 percentage points.

    But the main factors in Mr North's reckoning are the static nature of wages and the rising tide of under-employment.

    "This falling real income scenario is the thing that people haven't got their heads around," he told Fairfax Media.

    "Unless we see incomes rising ahead of inflation and under-utilisation dropping, any increase in interest rates is going to have a severe impact on [people's] wallets and therefore in discretionary spending and therefore on growth.

    "I have a feeling we are meandering our way, perhaps a little bit blindly, into a rather similar scenario to the US [referring earlier to this being like the US subprime market that caused the GFC]."”

    But back to the IMF report…

    Here is a graph showing median corporate leverage (the ratio of net debt to earnings) has risen higher than the onset of any recession in the last 40 years.

    [​IMG]

    Now debt is no big deal if you can service AND repay it, but like the Australian housing warning, corporate America has a similar issue with the threat of rising rates and how to even service it. The following graph shows the Interest Cover Ratio (ICR – or the ability for current earnings to cover interest expenses) for the S&P500, and again we are well into territory previously only seen in recessions:

    [​IMG]

    Their third chart then highlights the current phenomenon of “hope” driving markets in that in the past such a low ICR would see the market ‘pricing in’ (through widening corporate bond yield spreads) the clear and evident risk with corporate debt; but not this ‘everything’s awesome’ market….

    [​IMG]

    So where to from here? The IMF assesses that currently 10% of firms (measured evenly by assets) are what it calls “challenged” in that they appear unable to pay interest costs from current earnings. That is a high number but under an ‘adverse’ scenario of rising interest rates that jumps to a staggering 22% or $3.9 trillion. Such a mass default would dwarf that of the GFC’s subprime crisis which was ‘only’ around $1.5 trillion.

    [​IMG]
     
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  20. AinslieBullion

    AinslieBullion Member

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    Is The US In Recession NOW?

    Following on from yesterday’s article on the IMF’s Global Financial Stability report, today we discuss a key figure in that report putting the current cycle into context.

    What seems so apparent to us with so many of the charts we present to you is that the US, on a comparison with previous metrics, looks like it is in a recession now. Whilst the 0.5% GDP predicted for Q1 2017 by the Atlanta Fed is perilously close to zero growth and both soft and hard economic data is turning down, as we discussed yesterday markets are ignoring the signals seemingly based on hope. That was evidenced last night with Wall St surging simply on comments by US Treasury Secretary Mnuchin that they will still reveal their tax reform before the end of the year. The market is unconcerned that, like the failed health care changes, this still needs to get through a hostile congress. Hope, it seems, prevails again.

    So let’s look at the Figure below. We discussed the bottom left chart yesterday and the bottom right simply shows how widespread the issue is across most sectors. But check out the top left… yet again the last times we had valuations so high, credit conditions so bad and fundamentals falling like they are, the US was IN a recession.

    The top right graphic walks you through a (sub) credit cycle (we say sub as we believe we are in a far bigger credit super cycle that started when the gold standard was abandoned in 1973).

    The graphic is notable for two main reasons. Firstly the usual expansion (red) characteristics this time haven’t seen the usual strong profit growth yet markets have acted like we have, and secondly, as we discussed last week, we are seeing the characteristics of a downturn playing out right now.

    [​IMG]

    The trillion dollar question is… when will the market realise?
     
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