Category: Economy

A Divided Country?

A poll shows that 70% of people want medicare for all. The article is here. On small issues, the country is divided. On the items that matter, everyone wants their handouts. The handouts will continue until the government goes bust.

Harassing Uber and Lyft

NYC council passed a regulation on the ride sharing apps, capping the number of vehicles on the road.

If you were to look closely at supply and demand curves, you will see that when you restrict supply, prices will rise (All other things being equal of course). Mayor Bill de Blasio had this to say:
“Our city is directly confronting a crisis that is driving working New Yorkers into poverty and our streets into gridlock. The unchecked growth of app-based for-hire vehicle companies has demanded action – and now we have it.”
As a native New Yorker, I can be the first to attest that NYC had a traffic problem long before Uber was ever even thought of.
The problem with Uber and Lyft in the mind of government officials is this:
It threatens their legitimacy.
Remember their is a lie by governments. That is, all of these laws passed by them are supposed to keep us safe. The government must licensee people! This will keep you safe!
If any of this was true, Uber would have been very dangerous when it first hit the market. I can also attest that yellow cabs in NYC are far more dangerous than Ubers. When Uber came out, there was no regulations on it. You could travel around NYC for cheap. Over the years NYC has passed more and more laws on these ride sharing apps. The results have been steady increases in prices.
Someone should show Mayor Bill de Blasio and the NYC council a supply and demand curve.

Market Update

Strong earning continue to hit the wire. Corporate profits for the S&P500 have risen above 20% and are beating the estimates. Positive economic news continues to be released. This will push stocks higher. Corrections will happen and should be used as a buying opportunity. I expect stocks to challenge their all time high very soon.

Tick, Tick, Tick…

“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that,  while now latent, are potentially lethal.”
-Warren Buffet

The rise in OTC derivatives from the low in the 1990’s to north of 650 trillion dollars in 2008 was always a sign of credit run amok and the stupidity of central bankers.

The current notional amount is about $525 trillion.
To put this number in perspective the world GDP is estimated to about 80 trillion. JPMorgan chase has a market cap of $392 billion, BofA has $325 billion, Wells Fargo $314 billion and Citigroup has $204 billion. If even 0.5% of the total OTC derivatives were called upon to perform that would equal 2.6 trillion dollars. It would sink all major world banks. Western world government are going to default. The debt is growing exponential across all of them. Once the imaginary line of confidence is crossed interest rates will sky rocket. Interest payments will consume all of their revenue. Governments will renege on their promises. The OTC derivatives market will be called upon to perform. They will find they all do not have the money at the same time. We don’t know when the confidence barrier will be broken. It could be tomorrow. It could be ten years from now. Moore’s law does not apply to debt markets without a day of reckoning in the future. Things that can not go on forever tend to end. Tick, Tick, Tick….

Bears Grasping and Faulty Analysis

This happens at least a few times a year. Housing starts, permits and/or completions ‘unexpectedly’ drop. A million articles are written about why this is the end of the housing boom. A few months pass and they are all proven wrong.
Obvious questions are, who is being polled that it was unexpected? The answer is economist.
There are two laws about economist.
The First Law of Economists: For every economist, there exists an equal and opposite economist.
The Second Law of Economists: They’re both wrong.
So housing starts unexpectedly plunged 12.3% in June.
Here are the details for those interested via census.gov.

Below is a long term perspective of these data points.

These numbers are no where near the absurd height of 2005-06. They are right at the median of the past five decades.
Below is a zoom in from  2009 to today on the same data points.

There is nothing to be said about these ‘unexpected’ plunges. It could just be statistical noise. It has happened many times since 2009. Looking at the bigger picture, we see that the trend is up.
Further, the world is far more complex than a econometric model. Actually, econometric models are useless. I don’t have an answer for this “plunge”. Neither does any one else. It could just be as simple as the price of lumber making all time highs.

It could be a million other factors no one has thought about.
The flashing indicators showing that a recession is imminent are not there. The doomsday websites have been calling for a recession since 2011. They have missed the boat on the greatest bull market ever. One day they will be proven right just as a broken clock is right twice per day.
In the mean time ignore the noise.

An Insiders View of Bailouts- 1982 Edition

The idea of bailing out banks is far older than the 2008 fiasco. During the next crisis, bailouts will come in one form or another. Secretary of the Interior under President Reagan gives an account from 1982 on third world countries not being able to repay their loans. From James Watt’s memoirs:

Secretary Regan was explaining the inability of those destitute countries to pay even interest on the loans that individual banks such as Bank of America, Chase Manhattan and Citibank Manhattan and Citibank had made. The President was being told what actions the United States “must” take to salvage the situation.
After the Regan and Stockman briefing there were several minutes of discussion before I asked, “Does anyone believe that these less developed countries will ever be able to pay back the principle on these loans?” When no one spoke up I asked, ” If the loans are never going to be repaid, why should we again bail out the countries and arrange payment for their interest?”
The answer came from several voices at once, “If we don’t arrange for their interest payments, the loans will go into default, and it could put our American banks in jeopardy.” Would the customers lose their money? No, came the answer, but the stockholders might lose dividends.
In amazement, I leaned back in my large, leather chair, only two seats from the President of the United States. I realized that nothing in the world could keep these high government officials from scrambling to protect and bail out a few very large and sorely troubled American banks.

Trump-The Money Printer Part II

Don’t think Trumps previous life as a builder has been lost on him. Trump will be very active with monetary policy. The only thing worse than a PHD being in charge of a central bank would be a politician. Trump is probably in the middle.
The problem is neither central bankers, nor politicians, nor Donald Trump know what interest rates should be. It is like asking, “What should be the price of Apples”? No one knows. The “market” takes care of it. Interest rates are a price, just like any thing else. The price of interest rates is the supply and demand of those who save and those who spend.

Foreign Holders of US Debt: Changes Over the Past Year

I don’t take serious articles that talk about the dumping of US bonds by foreign governments. There is a doomsday article at least once a week talking about this. The data does not show this to be the case. Not even a little. From May 2017 we see the top holders shown in the graph below.

From May 2018 we see the top holders shown in the graph below.

The total increase from last year by all foreign holders is 55.5 billion. China and Japan are still majority holders by a long shot. At this point, the most we could say is foreigners have stopped buying US government debt. During the first sign of a global crunch foreigners will rush back into the US government debt market. The US government debt market is a disaster, but foreigners perceive it as a safe place to be. The psychology of the market participants will change one day. Someone will become filthy rich shorting the US government bond market. I don’t believe the time has come just yet.

Fed Watch

The Federal Reserve is running the series danger of inverting the yield curve and crashing the money supply.

As can be seen from the graph above, as they raise interest rates the yield curve begins to compress more and more.
The money supply has not been robust and is sloped downward.

Comparing with prior years, we can see that this year growth has been below previous years by a large margin.

IF these trends continue, the fed will push the economy into a recession. The good news is there is a lag between these flashing indicators and when the economy finally breaks. There is no way to know if these trends will continue, accelerate or make a turn around. However at current pace, sometime in 2019, all of these indicators will be in the danger zone. Start to build up your cash position.