Monday, February 19, 2018

Housing Policy Feeds And Hides Growing Problems

An Estimated 80% Of New Units Are High-End Luxury Units
Some of the things occurring in the apartment industry have big implications for both the economy and society. Make no mistake the government is up to its eyeballs in housing and this extends into apartments. Low mortgage rates and a large amount of money being loaned might lead us to believe lower rents would be in our future but when it comes to housing policy we should not be surprised if everything is a bit off. It seems reality is starting to hit home as soaring rental costs in housing have rapidly eroded overall disposable income for the US middle class. The main driver of soaring rents seem to be following new building costs, in particular, land, material, and hard costs mostly driven by labor make it harder to build new buildings at a reasonable cost. This has resulted in some investors moving away from new construction and instead turn to rehabbing older rental stock, however, even these so-called value-add projects will also raise the rents on current tenants ever higher.

Ultimately higher cost for taxes, local fees, utilities, insurance, maintenance cost, general labor, and just about everything will be passed on to the renter. While the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability or desire to supply housing that is affordable for middle- and working-class renters this becomes very noticeable when we look at the population with very low incomes. It appears developers have little interest in, or they simply can't afford to add anything but luxury units. There's a huge unhealthy disparity in high-end rents versus low-end rents across the country and with building cost being similar between constructing high-end versus low-income units why would anyone want to deal with the low end of the market and all the trash that comes with it.
  • Currently our government is busy encouraging people who have no business owning a house to buy one regardless if they have any idea of how to maintaine  it. This government policy is to generate a slew of programs geared to assist first-time homebuyers and others with special incentives and aid. This often means anyone with any kind of credit and even getting all their income from government programs often move out of apartments to buy a house. This creates higher turnover rates and leaves the apartment manager forced to lease the unit to someone with even less income or no credit.
  • Building and providing housing to low-income people often proves to be a thankless job that nobody wants. This is beginning to put a great deal of pressure on the system as private sector landlords that do not partner with government programs suffer the abuse. Simply put, government housing policy has failed to address the housing needs of the growing group of dysfunctional individuals that are the bane of society. Few honest people desire to put up with the endless crap such a position constantly dishes out. Inventing market terms such as "sub-luxury segment" to describe basic housing only confuses rather than clarifying the issues that need to be addressed.

Housing Policy Throws Older Units "Under The Bus"
The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the growing number of tenants that are irresponsible. The main reasons for most evictions center around people not following the rules, damaging an apartment or not paying their rent. By making anyone with an eviction on their record "ineligible" for most housing programs the government shrewdly and cleverly has sidestepped having to deal with these people. The brutal truth is that government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments and dumps the rest on the private sector.  Even with close to half (47%) of all renter households (21 million) pay more than 30 percent of their income for housing, including 11 million households paying more than 50 percent of their income for housing, it is not enough when we are talking about "low incomes" and the amount of damage and grief they dump upon their landlords

The unintended consequences of government policy which sidesteps responsibility for America's dysfunctional poor over time has added a great deal to our housing woes by driving up the cost of renting for everyone else. Many people do not realize that over the years government in many areas of the country have put massive disincentives in place for those interested in renting housing. Those include competing with them on many levels. This means as a "private landlord" you pay taxes that subsidize government-backed competitors that reject the least desirable tenants then ask the private sector to provide them with shelter.  This allows them to provide a better product at a lower price which often results in such projects being poorly run. One way to address or level the playing field would be to move away from public housing and give those needing housing aid "rent only vouchers" that could be used with any landlord rather than putting these people into a quasi-government ran project. 

 By bending over backward in an attempt to "protect the consumer" the government and courts are creating an army of irresponsible people who go through life exploiting loopholes in the system.

The Fact Is Lazy, Dirty, Undisciplined People Make Many Of Their Own Problems

This even goes as far as making it much harder to check the credit of someone wanting to rent in an effort to protect a person's privacy, cast aside is the fact those of us renting an expensive piece of property are putting themselves at great financial risk. Landlords find their claims are usually pursued and disputed in the small claims division of the court where getting an eviction or judgment against a bad tenant has become increasingly time consuming and expensive. Adding to this ugly reality are limits often in place that mean only a fraction of their loss will be covered, these can be as low as $1,500. It is not difficult for unpaid rents and damages to greatly exceed this amount. It must be noted that getting a judgment in your favor does not mean it will ever be paid and that these people continue to move from place to place causing havoc wherever they go.

Stories that delve into what is happening in our communities are important, I consider them as "microeconomic" images of what is occurring in many places across America. A show on Netflix titled "Renters" is a reality series about the misadventures of property managers and their troublesome renters in New Zealand, it reveals similar housing problems exist in other countries and not just in America. My attitude may be skewed by living in one of if not the lowest rent areas in America. A recent ZeroHedge article states that "attractive rents" are a relative term as the monthly dues for a tiny studio apartment in NYC will still run you $2,681, or $64.92 per sq. ft. we're pretty sure that implies the average studio is roughly 495 square feet...or about the size of the average living room in all those "fly-over states" that elitist New Yorkers love to look down upon. Now, let's compare that to rents in my area and let them speak for themselves. Roughly $550 a month for a two bedroom one bath 950 sq. ft. plays out to $5.55 per sq. ft. for essentially the same product.

Footnote;  I may have understated how much regulations also add to higher rents. In some states, the government is even debating putting the burden and responsibility for keeping occupied units clean upon the landlord. Also, it is not possible to evict someone during the Christmas Holidays in my area for any reason, you can file but no action will be taken until after the holidays are over.

Saturday, February 17, 2018

Metal Prices And Higher Interest Rates

Copper prices recently popped upward with gold on inflation fears but a lesson learned back in 1979 has been long forgotten and that is high-interest rates trump inflation. At least they can or did in that era. I remember this well because as a young investor both believing in and seeing the effects of inflation I jumped into the markets not so much trying to catch a falling knife but believing silver would come back after its massive fall. This was after the Hunt brothers historic attempt to corner the silver market causing silver to soar from a spot price of around $6 per ounce in early 1979, to $50.42 in January of 1980. On “Silver Thursday,” March 27,  silver futures market dropped by a third to $10.80. These same contracts had been trading at four times that amount just two months earlier.

Jan 1980, Hunts controlled 69% of all COMEX silver futures
Back in 1980, Bunker, his younger brother Herbert, and other members of the Hunt clan owned roughly two-thirds of all the privately held silver on earth. When the futures contracts they bought expired, they took delivery and arranged to have the metal flown to Switzerland. This created a shortage of the metal for industrial supply which drove the price higher. Their historic stockpiling of bullion wasn’t a ploy to manipulate the market, they and their sizable legal team insisted later. Instead, it was a strategy to hedge against the voracious inflation of the 1970s and a monumental bet against the U.S. dollar. Whatever the motive, it was a bet that went very, very wrong.

The debt-fueled boom and bust of the global silver market not only decimated the Hunt fortune but threatened to take down the U.S. financial system. It is important to put this all in perspective, the 1970's were not kind to the U.S. dollar. Years of wartime spending in Vietnam coupled with unresponsive monetary policy pushed inflation upward throughout the late 1960's and early 1970's. Massively adding to America's problems was that in October of 1973, war broke out in the Middle East and an oil embargo was declared against the United States. This cause inflation to jump above 10% and it remained high for years. It peaked in 1981 following the Iranian Revolution at an annual average of 13.5%. 

Do Not Underestimate The Reset By Paul Volcker In 1980
Only by taking interest rates to nosebleed levels was then Fed Chairman Paul Volcker able to bring inflation back under control and in doing so he broke the back of those speculating that metal prices would head higher. Paul Volcker, a Democrat was appointed as Federal Reserve chairman by President Carter and reappointed by President Reagan. Volcker is widely credited with ending the stagflation crisis and causing inflation to finally peak. He did this by raising the fed fund rate which averaged 11.2% in 1979 to 20% in June of 1981. This caused the prime rate to hit 21.5% and slammed the economy into a brick wall.

Note; Rates Today Are Poised To Fall Off The Chart!
Volcker's action also affected and shaped the level of interest rates and "value of money" for decades. The increased interest rates are credited by many to have caused Congress and the President to eventually balance the budget and bring back some sense of fiscal integrity and price stability to America.  As the debt from the Vietnam war and soaring oil prices became institutionalized interest rates slowly dropped and the budget came under control. In recent years government spending has again started to rapidly grow and at the same time taxes have been cut. This has slowly occurred over years and been ingrained in the system but is unsustainable.
To clarify the timeline of these events, silver broke just when interest rates shot upward making the cost of speculating on prices to rise on goods you held for future sale much higher. While the panic of “Silver Thursday” that took place over 35 years ago there is little wonder why it still raises questions about the nature of financial manipulation. In the area of public opinion many people came to view the Hunt brothers as members of a long succession of white collar-crooks, from Charles Ponzi to Bernie Madoff, others see the endearingly eccentric Texans as the victims of overstepping regulators and vindictive insiders who couldn’t stand the thought of being played by a couple of southern yokels. Regardless of which opinion you embrace it did not end well for them. 

Note The Power Of High-Interest Rates On Prices
This post, however, is not about the Hunt brothers but a lesson from the past that has been forgotten by many investors. Decades of interest rates drifting ever and ever lower have allowed many investors and the general public to forget the power of high-interest rates exert on defining prices. Whether it is a case of birds of a feather flocking together or strictly a coincidence the prices of different metals tend to move in the same direction more than they should. I say this because what a metal is used for if it is a byproduct of mining another move valued metal or general supply and demand should override this link.

Another factor always facing metals, in particular, is that when prices rise a great deal supplies often begin to come out of the woodwork. Across the world people rifle through their dresser drawers and sofa cushions to find dimes and quarters with silver content to sell, gold jewelry broken or no longer worn is gathered up, and garages are turned upside down to find metal to melt down. Also, industrial demand has a way of falling away as less expensive substitutes are used. The bottom-line here is that higher interest rates drastically increase the carrying cost for those holding not only metals but any item in inventory that sits idly with no real utility value. This means the "higher cost of money" has a negative effect on the value of future goods.

Thursday, February 15, 2018

China's Bold "One Belt One Road" Agenda Explained

China has a bold agenda that was put into play roughly four years ago that will play a major role in shaping the world. It is known as the "One Belt, One Road initiative" an all-encompassing and confusing "work in progress" that, as it unfolds will reshape world trade and the relationships China has with many countries. Also known as OROB. It consists of two major parts or projects that are known collectively as One Belt, One Road, or Belt and Road, or the New Silk Road. According to Chinese state media, some $1 trillion has already been committed to OBOR, with another several trillion due to be invested over the next decade. The plan aims to pump this huge sum of money into railways, roads, ports and other projects across Asia, Africa and Europe.

Part of the confusion surrounding OROB is the massive initiative lacks a clear name or even a settled upon abbreviation. While it might have originally had a comprehensible thesis behind it, OBOR is difficult to define. Criteria for how any given project would or could fit into the overall initiative remains elusive. At its root, the OBOR is a collection of interlinking trade deals and infrastructure projects throughout Eurasia and the Pacific, but the definition of what exactly qualifies as an OBOR project or which countries are even involved can be described as rather fluid. Yet, the concept has become so popular that Chinese officials tend to mention it regardless of what they're trying to promote.

OROB boasts some impressive numbers, it includes more than 68 countries that account for 60% of the world's population (4.4 billion people) that comprise just over a third of the world economy. Its boosters tout its massive economic promise and claim it could benefit the entire world lifting millions out of poverty. OROB is just one of several steps China has taken in recent years to increase its global clout, others include setting up a rival to the World Bank and pushing a regional trade deal in Asia. The leader of China Xi Jinping is styling himself as a defender of globalization and reaching outward at a time when American President Trump is pulling out of or threatening to kill major trade deals.

Chinese-Bullet-Trains On Display
With the slowing of economic growth in recent years, China has suffered from widespread overcapacity in heavy industries such as steel, cement, and aluminum. This means cutting jobs if they cannot find new markets for their goods. Obviously, China is looking to use OBOR as a way to increase exports while shoring up the country's economy against any potential slowdown in demand from Europe or the U.S. You could say that China is leveraging their own capital to get involved in helping other countries to get wealthier so they can buy Chinese products, but painting this as a "win-win" situation may be premature. China has a history of putting its interest front and center when entering such agreements.

The countries involved are expected to contribute 80% of global GDP growth by 2050. Projects in the works include thousands of miles of highways in Pakistan, an international airport in Nepal and a rail link between China and Laos. Projects such as the port of Gwadar in Pakistan is one part of China's plans to forge new trade routes. "One Belt, One Road" even includes a train line stretching from eastern China to London. Big global companies like GE and Siemens are aiming to cash in on the plans, alongside Chinese construction firms but China may have other plans on who gets the contracts. To be clear, this does not mean China has thrown open its doors to foreign investment, while China is happy to pump money into other countries around the world, it continues to limit and is still not willing to accept similar investments in many parts of its own economy.

This does not mean this grandiose plan to strengthen China's influence beyond its borders will be successful. Some critics of the plan debunk it as a murky program that could end up being a massive waste of resources. Because at times the plan comes across as somewhat undefined it has been described as "less of a practical plan for investment than a broad political vision". In light of the widespread corruption in China OROB is increasingly being used by Chinese companies, as an excuse to evade capital controls, smuggling money out of the country by disguising it as international investments and partnerships. This has fueled its detractors claim it may turn out to be an expensive boondoggle others fear it will result in a massive expansion of Chinese imperial power.

China Built A Ghost City Outside Angola's Capital 
Understandably, China intends to garner huge benefits from OBOR projects and by the nature of the project, it will be forced to accept a significant proportion of the risks involved in developing assets in central Asia, Africa and Southeast Asian countries that are prone to economic and political instability and corruption. Certainly, some of these projects funded by the Chinese government will fail and if enough fail or run into trouble at the same time the whole thing could collapse. China does not have a great track record with investments overseas. This is apparent from the history of widespread problems with Chinese projects in Venezuela, Sri Lanka and Myanmar.

China Plans To Ship More Goods Across The World
Of course, China's vast container ports will play a major role in "One Belt, One Road." China loves the idea of opening new markets to its goods. The best way to create economic growth is to create good jobs and when you look at the emerging economies across the globe the most critical impediment to economic growth is lack of infrastructure. This means many of the projects being considered as part of OBOR have little economic rationale for China's involvement and in the end, OROB might be remembered as a huge white elephant with an enormous amount of wasted resources strewn along its path. The initiative's intended effects aren't likely to be seen for years. And some observers question whether the vast amount of investment will be effective. This is why some experts say Chinese money is mostly skipping the key developing nations targeted by the initiative and that China's main destinations for direct investment remain Europe, the U.S., Australia, and Canada.

In the end, for all its rhetoric about trade and development, OBOR is primarily a political project.
that has morphed into a "philosophy" or "party line," rather than anything concrete. State media has claimed OBOR will benefit: the Middle East peace process, start-ups in Dubai, currency trading, global poverty reduction, Xinjiang's medical industry, Australian hotels, nuclear power, Polish orchards, and, finally, the entire world. By forging new bonds with these countries China intends to expand its influence in the way America did after the Second World War which galvanized America as a global superpower. In fact, some people have compared OROB to the Marshall Plan which was the huge redevelopment initiative undertaken by the U.S. to rebuild Western Europe following World War II.

If OROB proves successful we could see China supplant the U.S. as the main superpower in much of the world but problems do exist. In Pakistan, more than 13,000 troops have had to be deployed to protect the China-Pakistan Economic Corridor project which runs through the South Asian country's restive tribal regions. This underscores not only the economic fragility some projects carry but also the significant security risks as well. Clearly, OROB is already impacting other issues such as strategic geopolitical relationships. After America's recent decision to cut nearly all American security aid to Pakistan, the country's defense minister announced that Islamabad will begin purchasing more weapons from China, Russia, and other Eastern European countries. Because weapons and the support system to maintain them are generally a long-term commitment this should not be taken lightly.

I want to reiterate this is not all new but clarifies and extends a trend or idea that has been going on for years. Previous Chinese overseas investments have also earned a bad reputation for not delivering on promises to local economies with the most notorious allegations of exploitation being placed upon Chinese investment in Africa. The area has seen large, state-owned companies set up shop, bring in workers from China rather than hiring locally. The main goal is often to control and then ship the mined raw materials back home. The OBOR project is so vast size that exercising effective supervision over the varying elements may prove difficult. China's economy has been slowing even with OROB already underway and after years of wildly printing money and expanding the money supply. If things go wrong, OROB could prove to be a major blight on China's reputation in much of the world. 

Footnote; To view a previous article as to how this impacts Americas recent decision to cut off aid to Pakistan see the article below.

Sunday, February 11, 2018

Amazon To Compete With UPS And FedEx, Seriously?

This May Become The Face Of Amazon's New Venture!
The Wall Street Journal has reported Amazon is ready to launch a delivery service for businesses that would compete toe to toe with United Parcel Service Inc. and FedEx Corp. According to people "familiar with the matter" Amazon is planning to undercut UPS and FedEx on pricing. Many companies have tried over the years to break into this difficult market and failed because they underestimated the difficulties of building out and operating such a complex network. The United States Postal Service is an example as it continues to struggle with losses year after year. Simply put, something as basic as delivering a package at times proves to be no easy task.

The idea Amazon is entering to this part of the business world should force any logical investor to question why their stock is trading at a PE 300 time future earnings. It is insane to think any "delivery company" can ever be worth such a high multiple. I almost have to laugh when people say the stock market has not disconnected from the economy and reflects the health of the American economy. Some peole remain oblivious to the fact much of the market gain has been in just a few stocks known as the FAANG stocks. These few stocks have far outpaced the rest of the market when it comes to gains in value.

UPS Has Made Delivery A Science!
The delivery arm of Amazon will be named “Shipping with Amazon,” or SWA. The service that will have Amazon picking up packages from businesses and getting them to consumers is expected to kick off in Los Angeles during the coming weeks. While some people say this should not be a surprise to anyone because Amazon spends billions of dollars each year shipping goods it still does not mean Amazon will be able to deliver products at a huge saving, and that is exactly what they will have to do if they want to keep the PE ratio of Amazon stock at the sky-high level it currently trades. It is understandable that Amazon wants to mitigate shipping cost but to think they are going to do it on the cheap is a reach.

It appears the new delivery service will try to maximize ties Amazon has with its "third-party merchants" that currently sell goods via its website. This will allow SWA to get it off to a fast start. While the program is being piloted with the company’s third-party sellers, it is envisioned it will eventually be open to shipping for other businesses after it is up and running. As it has in the past once the system is functional Amazon plans to expand the service to more cities possibly this could occur as soon as this year. Clearly, Amazon would not be planning to enter this business if they did not think they could undercut current delivery pricing, however, the exact rate structure is still unclear.

UPS And FedEx Have Honed Their Delivery Systems
We should remember that both UPS and FedEx have over the years honed their delivery systems for maximum efficiency and cut cost to the bone. The packages these companies deliver are often far too valuable to trust to low paid employees that come and go through a revolving door. Customers depending on receiving an important order have little tolerance on damaged or misdelivered packages and the cost of cleaning up these problems far outweigh the benefit of a less expensive delivery. While it could be argued the current economic expansion and surging e-commerce volumes are able to support a new competitor in the delivery business my personal experience causes me to question whether this is true.

This may be another case of Amazon's "engulf and devour strategy" that will eventually come back to haunt it. Almost every day we see articles about how Amazon is buying this or that company or expanding into another business sector. Amazon's announcement they were purchasing Whole Foods got me thinking Amazon's engulf and devour strategy will eventually max out then come back to haunt them by generating a backlash and scorn. With their constant efforts to extend their reach and to become everything to everybody as a one-stop total fulfillment center, they are stepping on a lot of toes. Any company stupid enough to hire Amazon to act as their agent and paying this competitor to ship their products to customers have adopted a destructive strategy akin to cutting their own throat so they can breathe more efficiently. Amazon is not their friend and of that, they should take note.

While many people have heralded Amazon's disruptive nature and technology as game-changing much of the companies success is based on making little or no profit and lucking into an era where easy money and low-interest rates have allowed its rapid expansion. These factors have also masked many of its core weaknesses as it devastates many small businesses across America. Again this brings front and center the fact we should consider and think about what kind of society and world future generations might want to live in. To some investors, this is why the current valuation of Amazon's stock seems outrageous and brings forth the image of a scheme held up and driven by hype and self-promotion.

Thursday, February 8, 2018

Is It Too Early To Call A Market Top?

A Few Really Bad Market Days Cause Fear And Dispair
Is It Too Early To Call A Market Top? Possibly but if the top has been put in which is possible what we are witnessing can without a doubt qualify as a "blowoff top." The wisdom of why stock markets around the world have suddenly taken a hard turn south may be debated for some time. Sometimes the real reason for market moves often remains hidden for a while and lost in speculation. In this particular case, at least five things are known.

  1.  Many of the investors in stocks today are new to the game and brimming with enthusiasm
  2.  Many of these newbies were playing fast and loose and strung out on margin
  3.  Few bears remained in stocks following a surge in stock prices that left them bruised and battered.
  4.  The fact stocks were greatly overvalued leaves a great deal of room for a pullback.
  5.  Concerns of inflation, rising bond prices, and central banks beginning to cut back have suddenly surfaced

Tops have been called in the past but every time the market or the economy began to stall another central bank stepped into the breach kicking fresh support to push markets forward and ever higher. Many investors have assumed the belief markets simply will not be allowed to crash because of the damage it would cause to the world's financial institutions. The reality, however, is this bull market has gotten long in the tooth and exceeded the average length they normally run. We should also remember this market has far exceeded upside expectations while the economy has in many respects has merely regained the ground lost after 2007.

Markets are emotional, how deep this pullback or correction will become is still unknown, however, many traders have been caught sideways and been dealt a solid blow. In this particular pullback, the longtime group of investors that have done very well and scream "buy the dip" during pullbacks in the past has joined with those with a "fear of missing out." It will be interesting to see how they handle adversity after being banged around a bit and a degree of uncertainty has now entered the picture. Both these groups have counted on central banks supporting prices and even going so far as buying stocks to drive this market higher. The central bank's large foray into stock ownership is just one indication of just how messed up and flawed the global markets have become.

In Times Of Financial Turmoil Values Take Wild Swings!
If indeed the market top has been put in a lot of wealth will most likely be lost as the market moves lower. How low or how fast it moves will depend a great deal on the fear level and psychology of investors. Studies have proven people tend to react more to losing money and the fear of loss than the joy they garner when things are going their way. This could explain several phrases describing market action such as markets climb a wall of worry, and the warning you shouldn't try to catch a falling knife during a crash or when markets are unstable.

History shows that when markets have indeed started a long-expected selloff it is not uncommon to see attitudes towards where to invest turn on a dime. We might witness a major shift in the value of one investment over another as investors seek firmer ground and a safe place to stash the wealth they have left. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all elements that must be considered. Several factors determine just how much influence can be applied to how current economic policies unfold.

In a situation where markets become unhinged the metaphor "let the chips fall where they may," could become the rule as investors scramble to get out of the way. This would mean things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. We could find ourselves up to our neck in chips in a blink of an eye, at that time all bets are off as to how successful efforts to stem a catastrophe might be. If the financial overlords lose control we may see the final stage of a global shakedown become very chaotic and wild swings occur as markets seek sustainable valuations.

Sunday, February 4, 2018

Pakistan Bestows New Concerns Upon The World

Last October Pakistani forces freed a Canadian-American family held captive by militants, they also captured one of the abductors. Caitlan Coleman, an American, and her Canadian husband, Joshua Boyle, and their children were freed in an October raid after five years in captivity. Pakistani troops confronted Haqqani militants as they ferried the family across the tribal lands of northwest Pakistan. At the time United States officials saw a potential windfall in that the abductor was a member of the Taliban-linked Haqqani network who could perhaps provide valuable information about at least one other American hostage. When America demanded access to the man Pakistani officials rejected those requests elevating the event to another troublesome disagreement in the increasingly dysfunctional relationship between the countries.

Many Americans Question If The Money Was Wasted
The United States has provided Pakistan more than $33 billion in aid since 2002, Just before Christmas Vice President Mike Pence reinforced the message of Americas's displeasure in a visit to Afghanistan when he told cheering American troops that “President Trump has put Pakistan on notice.” The reaction of his audience was notable since the Pentagon has historically been one of Pakistan’s defenders in Washington because of its longstanding ties to the Pakistani military. Afghan officials have pleaded with three American presidents to suspend nearly all security aid to Pakistan, an across-the-board freeze that would stop giving money billions to Pakistan, which is guilty of harboring the leaders of a Taliban insurgency that the United States has struggled to defeat

President Trump's recent action to halt almost all security aid to Pakistan suggests that his administration is carrying out the hard-line approach that he outlined in August. Trump's accusation that Pakistan has “given us nothing but lies and deceit” is driving this stand. The State Department has confirmed the suspension of security assistance including “coalition support funding,” which reimburses Pakistan for counterterrorism operations, and the Foreign Military Financing program, which pays for purchases of American military hardware, services, and training. Regardless of any knee-jerk reaction, it is important to remember the reason Pakistan is so important is that both it, and India it's neighbor to the south, possess nuclear weapons and that Pakistan is politically unstable.

For now, the halt in aid is said to be "temporary" and affects about $1.3 billion worth of annual aid. The decision came three days after President Trump complained on Twitter about Pakistan’s refusal to crack down on terrorist networks operating there. All this underlines how swiftly relations with Pakistan have deteriorated since Mr. Trump took office and highlights several previous rifts between the countries over Pakistan’s role as a sanctuary for extremist groups which has poisoned Islamabad’s relations with Washington since the terrorist attacks of September 2001. Interestingly it was noted that the joy this move created in Afghanistan quickly turned to worry about how it might affect the rather complex war that has pushed the Afghan government to the brink.

China's "One Belt One Road" Initiative Includes Pakistan
What is happening in Pakistan and that troubled part of the world should concern America. This includes rising tensions and military clashes in the Kashmir border region that have resulted in the death of soldiers from both Pakistan and India, this has dashed any faint hopes that the two estranged nations could soon normalize relations. Pakistan has also been experiencing a great deal of political turmoil following Pakistan’s Supreme Court removing Nawaz Sharif as prime minister last year for corruption allegations flowing from information that surfaced in the Panama Papers. Also, all indications are that Pakistan is turning hard towards Beijing and developing more ties with China as it pushes forward on its "One Belt One Road" initiative. Last but not least, top this off with Pakistan’s defense minister announcing that Islamabad will begin purchasing more weapons from China, Russia, and other Eastern European countries.

A great deal of this is mixed in the weird and tumultuous politics of Pakistan which in many ways has made the country unstable. For example, near the end of November newly freed Pakistani Islamist Hafiz Saeed, accused of masterminding the 2008 assault in the Indian city of Mumbai, called on Friday ousted former Prime Minister Nawaz Sharif a 'traitor' for seeking peace with their neighbor and arch-foe India. Saeed has a USD 10 million U.S. bounty on his head over the Mumbai attack, spoke at Friday prayers after being freed earlier in the day from 11 months of house arrest by a court that said there was no evidence to hold him. Saeed was placed under house arrest while Sharif was still prime minister, a move that drew praise from India, long furious at Saeed`s freedom in Pakistan. Yes, a great deal of Pakistani politics seems to revolve around its difficult relationship with India.

This sort of thing is why states that Pakistan's political system is broken: its political parties are ineffective, functioning for decades as instruments of two families, the Bhuttos and the Sharifs, two clans, both corrupt. Voting in Pakistan is intensely personal, with parties gathering votes primarily through allegiance to an individual candidate who is either feudal or has a proven ability to deliver services. Clearly, they have a point, here is a little background concerning the ouster of Sharif who has been ousted before. Sharif's government was dismissed over suspicions of corruption in 1993 by former president Ghulam Ishaq Khan and the military. He was elected again in 1997 but was overthrown in a coup two years later by the military that claimed he had tried to interfere with the armed forces.

Sharif is the second world leader to be deposed by revelations in the Panama Papers that exposed corruption and hidden wealth. Sharif was re-elected in 2013,  and his removal with a year to go in his third term continues a tradition. No prime minister has ever completed a five-year term in Pakistan since it became a parliamentary democracy in 1971. Pakistan is known for its multiple coups and has been ruled by the military for much of its existence since its independence from Britain in 1947.  Attorney General Ashtar Ausaf Ali said Sharif was "disqualified for life," although the court did not explicitly ban him from running again. Pakistan is not due to hold elections until next year.

In August of 2017, Shahid Khaqan Abbasi was sworn in as prime minister of Pakistan in an oath-taking ceremony. Abbasi was elected prime minister by lawmakers in the National Assembly earlier in the day to become the successor to the ousted prime minister until a 'permanent' replacement is elected. Abbasi is expected to be replaced by Shahbaz Sharif, who is likely to compete for the National Assembly seat lying vacant following the ouster of his elder brother and then stand for the chief executive's office. during his acceptance speech, Abbasi said, "I am grateful to the people of Pakistan, and I am grateful to the 'people's prime minister', Nawaz Sharif," he continued. "I am also grateful to the opposition and Imran Khan for remembering us in their daily slandering," he jibed.

Former prime minister Nawaz Sharif. PHOTO: EXPRESS
Sharif Addressing A Gathering In Haripur, January 2018
This means the former prime minister is already out there bashing his opposition and commenting on the events impacting the country. Following the dust-up with America, he urged Prime Minister Shahid Khaqan Abbasi to devise a strategy to make the country self-sufficient and independent of the need for US aid. Sharif described as "disappointing" U.S. President Donald Trump`s accusation that Pakistan was granting "safe haven" to militants Washington was hunting in Afghanistan. "Pakistan has been involved in somebody else`s war for over 17 years. The country has suffered the brunt of the damage the world has seen since 9/11," Sharif said.
In January while addressing a gathering in Haripur, Sharif repeated his sharp criticism of the judiciary and attacked Pakistan Tehreek-e-Insaf (PTI) Chairman Imran Khan.

Referring to the PAT-led protest on Lahore’s Mall Road three days ago, Sharif questioned the stances of the leaders who joined the protest. “Those who used to hurl shoes at each other are now standing in the same line, which raises the question where their principled politics is,” he went on to say “I was disqualified but the people rejected the decision. The proponent of ‘the new Pakistan’ has given nothing but the politics of deceit and allegations.” The three-time prime minister claimed that his rally in Haripur was 10 times bigger than the opposition’s show in Lahore. In his speech, Sharif came down hard on Khan, the PTI chief. Calling him Ilzam (allegation) Khan, Sharif questioned his political values. Khan, he said, threatened the chief secretary and others with jail. “Imran Khan himself will go to jail,” Sharif said. “Five judges threw Nawaz Sharif out but the people’s court elected him again. Double standards of justice are unacceptable. Justice will be served if it remains the same for the rich, for the poor and for the prime minister.”

For many Pakistan watchers, a big concern is that the country is moving in the direction of forming deeper bonds with other countries and lessening American influence in the area. Following the U.S. decision to cut nearly all American security aid to Pakistan, the country’s defense minister announced that Islamabad will begin purchasing more weapons from China, Russia, and other Eastern European countries. “We have a long relationship [with the U.S.], and we want to keep it,” Khurram Dastgir Khan assured Bloomberg in an interview saying that his country would, nonetheless, increasingly acquire weapons from countries other than the U.S. This comes at a time when Pakistan has been increasingly turning to China for military aid. Beijing is now building an offshore naval base near a strategic Pakistani port.

Experts say it is typical for Pakistan to turn to other world powers when its relationship with the U.S. sours. “In the past when the U.S. has suspended military aid to Pakistan, such as following the 1965 India-Pakistan War and again in the 1990s because of the Pakistani nuclear program, Pakistan saw relations with other major powers, especially China, as a means of procuring arms and military equipment,” Harrison Akins, a security expert at The Howard Baker Center for Public Policy, told Newsweek. “In the current situation, it is the Trump administration’s behavior that is a distinct break from past patterns in this relationship, as it suspends aid and publicly rebukes Pakistan’s duplicity simultaneously with the ramping up of U.S. forces in Afghanistan,” he continued. Akins also noted that the U.S. usually adopts a pragmatic view of its relationship with Pakistan and only rebukes the country when it is disengaging from South Asia and therefore needs Pakistan’s support less.

The ambiguous and confused history of relations between the US and Pakistan is a clear example of the politically realistic view that in international politics, every state is motivated by its national interest which is frequently concealed as a moral concern. There is no friend or enemy when it comes to the national interest. Diplomacy, deterrence, bilateralism, multilateralism and blame-game tactics all provide areas for these interest grounds for these interests to surface. In terms of strategic geopolitics, President Donald Trump's Afghanistan policy and his criticism of Islamabad on the issue of terrorism marks a clear line of conflict between the U.S. and Pakistan. Trump's allegations against Pakistan and his support of India as a strategic ally on both security and economic fronts has caused grave concern in Islamabad. Pakistan's cool welcome for visiting U.S. Secretary of State Rex Tillerson in October indicates Islamabad's grievances over Trump's Afghanistan policy statement.

Too many politicians each day confirms that going forward economic ideologies and economics trump past alliances. Economic prosperity, sustainable development, and resource exploration have become increasingly important factors in a country's ability to retain its national integrity. With the One Belt Road Initiative (OBOR) and the China-Pakistan Economic Corridor (CPEC), it appears those guiding Pakistan forward see strengthening their strategic and economic ties with China will help Pakistan reduce its dependency on the U.S. and its allies in the West. The ambitious OBOR development strategy China unleashed in 2013, has already resulted in investment projects that include thousands of miles of highways in Pakistan, an international airport in Nepal and a rail link between China and Laos. Couple this with the criticism flowing from Washington and we can understand why Pakistan clarify its relationship with the U.S.

Footnote; In coming days I will be posting an article about China's One Belt Road Initiative (OBOR) and some of the ramifications we can expect as it unfolds. 

Saturday, February 3, 2018

The FANG Stocks Have Potential To Really Bite Investors

The so-called FANG stocks have accounted for much of the stock market rally we are witnessing, however, it might be wise to step back and question the fundamentals behind the upward movement of these stocks. Fang is the acronym for four high performing technology stocks, it includes Facebook, Amazon, Netflix, and Google. Sometimes it is spelled FAANG to allow in another tech stock, Apple, this adds to the illusion of stability. Other stocks sometimes considered as part of this category of high flyers are stocks like Tesla which sadly starts with the letter T causing it to be left out. Not fitting neatly in the acronym, however, does not stop it from having a valuation exceeding that of Ford Motor Company which produces a profit and far more vehicles while Tesla loses money and continually burns through billions of dollars of cash each year.

Momentum traders have been aggressively buying tech stocks and as they do this creates a "short squeeze" where bears or short sellers panic adding fuel to the fire. In a short squeeze, short sellers panic and buy to cover to cut their losses. We are taught that the value of any company is the present value of all future cash flows. But this rule of measurement is often thrown out the window when it comes to FANG stocks. Netflix's recent earnings release showed the company as reporting negative free cash flow of over $2 billion. Not only that, but the company projected negative free cash flow of $3 billion to $4 billion for 2018. This means Netflix has a cash burn equal to the entire market capitalization of some mid-cap companies yet Wall Street reacted with a stunning 13% surge in the stock.

FANG Stocks Have Been The Momentum Behind This Market!
Stocks that trade at crazy multiples such as Amazon at around 350 times earnings ignore and defy reality. To give a stock such a valuation an investor has to almost believe in divine destiny and that the company will never encounter headwinds that will bring it back to reality. It is ironic that the online retailer Amazon bought Whole Foods paying top dollar to go against Kroger with a PE of 17 times earnings. This move was heralded as brilliant rather than a reality check. How can the earnings of a food chain leap in value from a multiple in the teens to a multiple of several hundred? Also, anyone who is rational must wonder how Amazon can continually float stories about building a Brick and mortar" presence without negatively affecting its multiple. It seems that with the faith of a gambler those driving the stock forward always think they will be able to leave the casino before losing their gains.

Part of this boils down to greed and that investors tend to get caught up in the emotional hype that the value of a growing company will continue higher and higher so they should get on that train and ride it all the way to the station. At the same time once aboard they delude themselves of the reality of new competition, market setbacks, and the possibility as the company matures its stock will be brought back into line with the market in general. We should never forget that even the tallest trees never grow to the sky and that at a certain point growth slows.

The Above Chart Details The Four Phases Of A Bubble
We should not forget that this market has been going up for a long time, this is the longest bull market in history. After roughly a ten year orgy of central bank stimulus many investors have become convinced of the idea that "central banks will never let markets go down." This has led us to the recent market melt up over the last year where the buy the dip mentality has been replaced by the fear of missing out. This, of course, has turned most of the few remaining market bears and those doubting the strength of the economy to capitulate and stampede to the exits or risk being turned to dust.

The fact is nobody can really predict what the future holds, however, it is difficult to deny a strong case for caution can be made in that the recent psychology of this market aligns well with that of a blow-off top. A key requirement of such a market is that almost all the participants are in complete denial of the risk they face and have borrowed strongly against their future to join in to get a share of the bounty that lays before them. This means not only do they accept the current sky-high valuations as rational but see a great deal of room for earnings to expand as the pace of global growth accelerates.

Circling around to the title of this piece, FANG Stocks Have Potential To Really Bite Investors, it is logical that these so-called bright spots that have pulled the market higher also have the most room to fall as valuations retreat. Today there are signs that central banks are becoming more concerned about asset bubbles growing as a direct result of their promoting the belief they will always be there backing economies with newly printed money. All this has driven a massive surge in debt across the globe as consumers, businesses, and governments have thrown caution to the wind setting up a scenario that ends in tears.