Sunday, February 26, 2017

Legalizing Marijuana Would Quell Social Protest

Polls Show Americans Favor Changing Laws
President Trump would be wise to instruct his administration to give solid consideration to legalizing marijuana or ending Federal laws that attempt to control state rights over the issue. This would go a long way to quiet much of the social protest and angst that mainstream media has been able to stir up within liberal ranks. Polls clearly show most Americans agree marijuana users should not be sent to prison and see using it as a victimless crime. Due to current drug laws, there are far too many non-violent criminals filling up our prisons. This is an area that continues to polarize America while energizing and motivating our youth and huge segments of our population to hit the streets in protest.

This is a matter that many Americans feel very strongly about and just like those supporting gun rights they tie it directly to the issue of freedom. Liberalizing and changing the laws surrounding marijuana has become a more bipartisan issue over the years as a growing number of conservatives and Republicans have moved to supporting laws that reduce or eliminate prison sentences for drug use. Back in March of 2015, Republican Sen. Rand Paul of Kentucky, joined Democratic Sens. Cory Booker and Kirsten Gillibrand to end the federal ban on medical marijuana, now legalized in 23 states. Many of the  2016 presidential hopefuls including Jeb Bush, Sen. Marco Rubio, Gov. Rick Perry and Sen. Ted Cruz, all said they believe states have the right to make their own marijuana laws. The fact is this goes beyond using marijuana for medical use. While it is known that Trump does not drink because of personal reasons this does not mean those feelings and views transfer to this issue.

This Is A Hot Button Issue!
Over the years I have researched and written several articles about this subject and Americas war on drugs. As a resident of Indiana who supported Trump, I was not happy to see him select Indiana Governor Mike Pence as a running mate. Back in 2013, I wrote an article titled, "Indiana Marijuana Laws A step Back In Time" which condemned Pence for his backward and oppressive stand towards marijuana. It noted that with the rest of the United States moving towards relaxing marijuana laws, Indiana was bravely marching into the past by increasing jail time for minor possession. Many Americans fail to realize that Pence had generated within Indiana a solid "Pence Must Go" movement committed to ousting him from office.

In the last decade, due almost solely to the surge in drug-related arrests, U.S. prisons are massively overcrowded and underfunded. In another article, "War On Drugs Is Far Too Costly" it is pointed out that numerous reasons exist that Republicans should support marijuana reform. Republicans support state’s rights, smaller government, and want to stop wasteful spending. The war on drugs has been far too costly and much of it is over marijuana. It is time we grow up and end this costly polarizing and divisive war that damages so many young lives and has taken a huge toll on minority communities. This issue is a big part of a legal system that highlights inequality and injustice and serves as a magnet for those who feel oppressed.

Minorities Have Been Hit Hard By Current Laws
Last but not least we should not underestimate how the propaganda film, Reefer Madness has greatly and quietly influenced the views of a whole generation of Americans towards marijuana. The 1936-1939 American propaganda film revolving around the melodramatic events that ensue when high school students are lured by pushers to try marijuana. Now with prisons across America bursting at the seams, we are finally beginning to question the wisdom of these costly policies. Trump and those in Washington would be wise to heed changing public opinion and look past the myths about this drug that has resulted in many young people being sent to prison for until this is addressed and resolved the streets and prisons of America will be filled with the discontent.

A great deal of speculation and fear is that newly appointed Attorney General Jeff Sessions will enforce federal law and come down on states with a vengeance. Such a move could spark a rollback and retrenchment of recent efforts to bring marijuana use into the open. The well entrenched establishment in Washington marches to its own agenda and Trump with his efforts to dislodge them needs all the friends he can find so it makes little sense for him to go out of his ways to create more enemies. This issue takes our eyes off more important and pressing issues. Recent polls and a media campaign centered on bashing Trump tend to undermine his ability to create legislation and do not bode well for his ability to govern. Protest in the streets are also roadblocks for a positive agenda.

Saturday, February 25, 2017

Is War Is Good For The Economy? Well Not Always!

This Could Have Negative Implications!
Some investors have stated that war is good for the economy but it could be argued not always. While disputing the statement I also rail at the arrogance of such people who often have little regard for the lives that war destroys. I contend they are basing their opinion or observation on a rather limited view of warfare. If in some future war things escalate rapidly or someone makes a mistake and unleashes one or more nukes killing millions and turning the ground into an unlivable wasteland the cost of war may be proven far too heavy to bare. The fact that war can and has often rewarded investors in the past is no guarantee it will perform as well in the future.

Bubbling up through the forces that bring us to war is the stupid and shameful myth that it is good for the economy. While war does line the pockets of a few industrialists and businessmen the cost is great and outweighs the benefits. War brings about the wrong kind of economic growth and such spending quickly creates a wall of debt. While those who benefit from the production of weapons busy themselves with promoting war as a solution to our woes as an answer warfare often fails to be either easy, swift, or true. For proof, we need only look upon the millions of people displaced and forced to flee war-torn areas, these refugees often pay the price for the billions of dollars of military hardware produced at a profit and pumped into countries across the world.

China Boost Its Economy By Building Machines For War
When a country gorges at the trough of deficit spending to construct weapons it can easily manipulate a big temporary boost in its GDP. One of the best examples of building an economy on a foundation of military might or a massive move to militarization was demonstrated by how Germany was turned into a war machine during the 1930s. Hitler is often seen as the force guiding Germany's economy, how much he contributed is a matter of debate. Hitler's views on the economy were mixed and of secondary importance to his more overriding goals. Remember Hitler rose to power following the hardships of World War I and Germany's historic bout of hyperinflation in the mid-1920s.

The crash in 1929 and the Great Depression that spread across the world created an environment where Hitler was able to become Chancellor of Germany in 1933. Under his leadership the Minister of Economics introduced the Mefo bills (Government IOUs) that existed alongside the Reichmark, industries were allowed to trade these bills among themselves. This was a scheme that allowed Germany to rearm by creating a huge off the book deficit and massive national debt.  As a result, employment soared and wages rose. The part of this story many people forget is the prosperity was false and temporary. The fast growth only masked real problems within the economy and resulted in rationing and shortages in things like poultry, fruit, and even clothing for many of the people.

War Is Ugly And Has Hidden Cost
A major problem of a war based economy is the issue of sustainability. It is expensive to maintain an army and war is a destructive force. Long gone are the days of conquering your enemy then raping and plundering your way to glory and riches. At least so it seems and we can only pray that part of mankind's history is fading into the rear-view mirror. In many ways, this lessens the appeal and lowers the risk reward ratio of war. When after winning a war if you have to pay and invest money in rebuilding the enemy you defeated, war becomes rapidly unappealing. The only real winners are those manufacturing the weapons and signing massive contracts to rebuild what has been damaged. Another problem is if society takes the position the lives of their soldiers have value, the cost of lives lost and the money spent to care for the wounded and other programs for those who have served quickly adds up.

The sad reality we face is that plans have been made that move us solidly in the direction of "automating war." The development of drones and killer robots is well under way and will massively change warfare and take mankind'' savagery to a new level. Seriously, are we to be impressed and inspired at the profits made from rebuilding cities and countries destroyed and devastated by war? This is akin to the broken window economic model where we celebrate and break windows thrilled because we are creating jobs employing those making glass as well as those that install it. Let us not forget America was broke and bankrupt at the end of World War II. If memory serves me correctly Vietnam and our outing in the Mideast have also come at great cost. This leaves me unenthusiastic whenever I hear warmongers and greedy investors urging war as a cure-all. 

Footnote; The two articles below were referenced for this piece. 

Monday, February 20, 2017

Elon Musk And Tesla Motors Overview

Elon Musk is one of those iconic figures the world occasionally conjures up to wow and entertain the masses. As media generated symbols of success go he ranks up there with the best of them. Much of the aura that surrounds Musk comes from his success at PayPal. Musk co-founded, an online financial service and e-mail payment company, in March 1999. One year later, in a 50/50 merger, joined PayPal a company that operated an auction payment system similar in size to Musk was instrumental in organizing this deal due to his belief in emerging online transfer technology. The combined company at first adopted as the corporate name, but in February 2001 changed its legal name to PayPal Inc. Musk is credited in driving the new PayPal to expand and focus on a global payment system, in October 2002, PayPal was acquired by eBay for $1.5 billion in stock, Musk, the company's largest shareholder, owned 11.7% of PayPal's shares.

Elon Musk, Visionary And Wonder-Boy?
With his youthful looks and forward thinking the media latched on to Musk and propelled him into being viewed as a visionary and wonder-boy that turns everything he touches to gold. When talking about the CEO of Tesla Motors, Bloomberg News almost always says "Billionaire Elon Musk", this happens so often that many people probably think his first name is "Billionaire". As to the source of his success, it seems Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. This figure includes a variety of government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups. He definitely goes where there is government money,” said Dan Dolev, an analyst at Jefferies Equity Research.

An example of how deep these subsidies feedback into the numbers is that Tesla collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. I have written several articles about Tesla and Musk over the years but as I continued my research for this update and a more in-depth piece my eyes literally began to glaze over at the magnitude of the subsidies. Government support is a theme of all three of these companies, and without it, none of them would exist. Then comes the issue of corporate incest, in August of 2016 Tesla formally announced it would be acquiring ailing SolarCity in an all-stock $2.6 billion merger. At the time Musk owned 22% of SolarCity which was founded by his cousins. The merger was promoted on the idea that Tesla's mission since its inception was part of Elon Musk's overall "Secret Tesla Motors Master Plan" to expedite the world's transition to sustainable energy and away from a fossil fuel economy. Musk called the merger a no-brainer and said it was an accident of history that Tesla and SolarCity were ever separate companies.

Only About 1 In 5,000 Cars Is A Tesla!
Tesla is in the news far more than a company with such a small footprint would merit. Much of its significance is derived from Musk who remains a master at getting press coverage, most of it "free" and positive advertisement. Please take note of how insignificant these numbers really are. Tesla Motors announced in early August 2009 that it had achieved overall corporate profitability for the month of July 2009 when it earned approximately $1 million on revenue of $20 million. Profitability arose primarily from improved gross margin on the 2010 Roadster, Tesla’s award-winning sports car known for its designs and "very sexy lines", similar lines have been on the drawing boards for years but were impractical because of the internal combustion motor and all the mechanical junk required to support it. Tesla, which like all automakers records revenue when products are delivered, shipped a record 109 vehicles at the time and reported a surge in new Roadster purchases. Even to date, Tesla's numbers remain small Tesla is said to have delivered 50,580 vehicles in all of 2015.

The value of Tesla's stock dramatically changed years ago following the report where it made its first quarterly profit, its market value soared to more than $10 billion. It should be noted a large part of the increase in the stock price occurred when people that had short positions in the stock were caught in a short squeeze and forced to buy back their stock. At the time Musk said, “I thought it would be quite difficult to raise the capital for Tesla.” he went on to state his realization the electric-car maker could retire its U.S. loan nine years early didn’t arise until Tesla shares unexpectedly surged. Since that time Tesla's fortunes have moved in lockstep with a surging stock market. In an upbeat article just published by Inside EVs, it was pointed out that Ford stock has fallen 23 percent from 2015-2017 and now sits at $12.65 per share. Tesla stock is on the rise, approaching an all-time high, at about $281 right now. This accounts for a market share of $43 billion for the electric startup, compared to Ford’s $49 billion.

Tesla currently has a market cap that is 88% of Ford its much large competitor. It is important to note that in January 2016, Ford Motor sold 173,723 vehicles in January 2016 while Tesla made a little over 80,000 cars in all of last year and has sold only about 191,000 vehicles to date. Ford built over 6.5 million vehicles in just the last year alone. As for Tesla's stock which continues trading at incredibly high multiples, much of that can be contributed to the historically low-interest rates and the luck of being in the "QE moment" rather than the company's financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life. Remember the company had received a huge government low-interest loan to kick start its existence, also note that it has no legacy cost or issues that plagued so many of its competitors. Now thanks to the gobs of money looking for any kind of return, Tesla can borrow cheaply. Like several other high flyers lead by self-promoters and propelled forward by media hype Tesla has been on a roll.

While it has not received the attention Tesla has garnered it should be noted that most automakers have placed fuel cell electric vehicles with customers, and many plan to introduce a Fuel Cell Electric Vehicle better known as an FCEV to the early commercial market over the next year or so. By 2020, automakers expect to place tens of thousands of fuel cell electric vehicles in the hands of California consumers. Among the automakers which are trying to bring this technology closer to customers are Honda, Toyota and Hyundai Fuel cells could derail Tesla's vision of a world where its battery-powered vehicles fill our roadways. Currently, lithium-ion battery technology powers Tesla’s electric vehicles. It could be argued that Tesla could do a "switch-a-roo" and simply change out its power source from battery power to fuel cells. Adoption of the fuel cell as the most desirable way to power not only vehicles but other power hungry devices would be a big setback for Tesla because the company has invested a huge five billion dollars in a new battery factory. If fuel cells rule the day this would spell big problems for Tesla.

It does not take much research to see public subsidies for Musk’s companies stand out both for the amount, relative to the size of the companies, and for their dependence on them. No effort has been spared to spin Tesla and Elon Musk as a finished success, of course, the "proof will be in the pudding" when we look back years from now. Time will most likely determine whether Musk is viewed as an unabashed promoter or a serious visionary. Using government programs and loans as well as money from investors Musk has built a pulpit from which to position himself for praise and at times ridicule. David Stockman wrote in May of 2015, In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.

Tesla enters 2017 with the goal to launch a new car, open a large battery factory, and perfect autonomous driving. When all the hoopla ends, the question is whether larger competitors will simply overwhelm and crush Tesla, or will Tesla instead position itself to grow and maybe take over a competitor to help propel it forward. Remember this is a field where many have failed, one great example was the Delorean. I have become predisposed to discount, and have actually grown a massive aversion to "media hype", this is one reason you should color me skeptical. The city where I live, like other cities across the world, have a long list of bold men herald and declared to be "gods gift to business,"  many in the end flew too close to the sun only to crash and burn. In any case, what has happened at Tesla Motors and to Elon Musk's other ventures up until this point might be enhancing the meaning of the phrase, "I would rather be lucky than good!"

Footnote; Another company that was not so lucky and saw its fortunes fall was Fisker Automotive, for more on this folly read the post below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

Saturday, February 18, 2017

Auto Market Facing Over Supply And lower Prices

A Clear Sign Of Lower Prices Ahead
For a long time, I have had a problem with those pointing to the auto industry as proof that the American economy is on the mend. The auto market is facing oversupply and this means lower prices. This has been predicted by many of us for some time, however, it has been postponed by a wave of subprime auto loans that have allowed a buyer to purchase a car even when it makes no sense financially.  Years of rising auto sales driven by artificially low interest rates have driven sales and leases. While we hear claims that the auto market is hitting on all cylinders we also hear of far too many unemployed students buying new cars. Failure to focus on where the sales are coming from or originating is a mistake and a clear sign this industry is creating its own problems in future years. Recently, we have heard about sales, not about soaring profits. Record levels of channel stuffing will often produce sales gains, but no profits.

The lower prices have taken longer to arrive than many of us have anticipated, however, the facts behind what has held up prices and pushed this market forward are very disturbing. More of all new auto loans have been going to subprime borrowers. Subprime currently makes up about a third of overall car loans. The easiest way to become a subprime borrower is by defaulting on previous debt obligations. Auto loan delinquencies have been surging, this means subprime loan delinquencies now stand at 18%. Pretending to sell automobiles to people either dependent on money from the government or no means to pay for that automobile is not a good business idea. When you have huge financial lenders and the rest of the Wall Street banking consortium doling out 7 year 0% loans and subprime loans as if it were candy it’s easy to move inventory. Sadly, while this has temporary boosted the GDP the issuing of what is destined to become more bad debt always comes back to haunt us in the long run.
Auto Debt Is Now over 1.1 Trillion And Rising
A big problem is that such lending often increases the monthly obligations of people who are already struggling financially. Those defending this situation often see little reason for concern and say there is no financial crisis in the making. For one thing, the overall auto loan market is a comparatively small compared to the much larger mortgage loans market of $8 trillion. Cars cost a lot less than homes. Their logic is that historically, borrowers tend to make car payments a higher priority than mortgage payments or credit card bills because they need their cars to get to work, school and for many other daily necessities.While this is often true it avoids the reality that under the surface of these loans a larger credit problem continues to grow.

The Federal Reserve has been pumping in trillions of dollars of liquidity into the economy and much of it has resulted in pulling future consumption forward. These policies will soon become a headwind to both future sales and growth. This is more proof of just what an infusion of money from the Fed can produce and how it adds to the great distortion. The American people have been binge-buying cars and with the total stock of outstanding car loans jumping to $1.1trillion, Harry Dent, a financial commentator was recently forced to ask: “Could cars be the death of us this time round?” Auto loan debt has continued to ratchet higher every month since 2010 when the Fed, Wall Street, and the political class in Washington decided they needed new debt bubbles in auto loans and student loans to jump start our moribund economy. Recent figures showed that there are 65 million auto loans outstanding, and the average debt now stands at $17,352. Currently, over 30% of auto “sales” are actually leases. The rest are financed over an average of 65 months. This means that virtually all new car sales are nothing more than 3 to 7-year rentals.

Issuing billions of debt to subprime borrowers for housing proved to be a disaster and going forward we should expect the same trend to reveal itself in autos forcing a slowdown in American factories and a dampening effect on growth. New-vehicle sales in the U.S. were up 13% in 2012 and up another 7.6% in 2013, since then it has been up, up, and away. The problem is that now more used cars are about to enter the market. Manheim Auto Auctions expects millions of off-lease cars to hit the market this year and says that will continue to rise in coming years. This is good news for used-car shoppers but does not bode well for the automakers. When used car prices are strong consumers are more inclined to consider and buy a new car that cost only a little more. Because many people have chosen to lease cars in recent years we are now positioned that millions of used cars will soon be thrust onto the market as leases expire. This flood of used cars is expected to put massive pressure on the prices of used cars as well as reduce the need for many people to buy a new vehicle because of a secondary market that offered only limited choice and selection.

Going forward all this will dampen new car sales in several ways. First car shoppers can expect their trade-ins have less value meaning they will face both larger loans and bigger payments or forgo the purchase. This will carry over and make leasing more expensive because automakers base lease rates on predicted resale or "residual values," which is an estimate of what the new car will be worth at the end of its lease. Another factor we should not underestimate is that many of the used cars entering the market will be attractive top of the line models with all the bells and whistles. These lower used-car prices are a delayed response to the new-car market's revival from the recession: From a bottom at 10.4 million in 2009. John Rosevear who has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007 has suggested that if you want a nice car you might want to wait a little longer. 

Millions Of Cars Coming Off Lease Now Flooding Market
The number of used cars coming off lease has already started rising, and if you go shopping for a good clean used car that is two or three years old with around 30,000 miles on it the odds are that you'll be looking at a lot of cars that just came off-lease. The bottom-line is the automobile market is about to get "down in the dirt competitive" as more than ample supplies and other factors hit both dealers and manufacturers. Adding to the idea auto prices will not be rising anytime soon is a decline in metal prices from overcapacity in China, factors such as lower commodity prices are beginning to work their way into overall production cost. It is also logical to expect companies exporting cars into the united States to push hard to offset flagging sales in their own countries and take advantage of their weak currencies which play out to their advantage.

Much like the airline industry, the auto sector has always had a history of being a "glamour" industry, this means it tends to attract individuals who enjoy both risk and attention. It also means it is full of stories marking past failures and littered with names that no longer exist. A chief reason the automobile industry took a beating during the 2008 downturn was because the world was mired in overcapacity. When this occurs companies are forced to cut prices and are faced with reduced profit margins. It is important to note that as competition sharpens it will most likely result in the demise of many of the weakest players in coming years. Any slowdown auto sales or the economy will only hasten this event and put the stock prices of auto companies under a lot of pressure, do not be surprised if the issue of bailouts or downsizing again becomes necessary. Most at risk are the smaller players that will have difficulty raising capital in this industry that constantly demands a company invest huge sums of money to stay competitive.

Footnote; It is surprising how it often take a long time for problems to become apparent. Many people claim that those in control of the economy have a better handle on how things unfold but I think not. More on why many of us see a strong similarity between what is happening today and prior financial meltdowns that have resulted in crisis can be found below.

Tuesday, February 14, 2017

Derivatives Could Explode Like A bomb!

On occasion, it is important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don't understand exactly what derivatives are or why this market is so important. Trying to regulate this complex market is easier said than done.  These are usually lengthy complex legally binding agreements that are very difficult to dissect and often reek with possible contagion. Derivatives fall into many categories from futures, options, credit default swaps, and any complex combinations of these. They can also be used to wager, bet, and spectate on a market move or direction. Regulation is difficult and spotty at best in that a derivative transaction in one country might be considered a simple spot trade in another. I have become convinced after studying derivatives that QE following the 2008 financial crisis may have been geared to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy.

Derivatives Could Explode Like A Bomb!
While QE was able to halt an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system following the 2008 financial crisis next time we may not be so lucky. In the middle of 2014, the Bank for International Settlements revealed that the amount of over-the-counter (OTC) derivatives outstanding reached 710 trillion dollars at the end of 2013, a 12 percent increase on the year before. Most of that exposure is held by banks. The US Office of the Comptroller of the Currency at the time reported the exposure of US banks to derivatives totaled 237 trillion dollars. Of that, four big banks, JP Morgan Chase, Citibank, Goldman Sachs and Bank of America account for over 219 trillion dollars. The staggering size of this market is beyond science fiction or anything that can be comprehended.

When I tried to get more recent numbers I ran into fairly stiff resistance which I contribute to the fact nobody really knows and the true exposure is difficult to assess, hopefully, much of the derivative exposure somehow nets out so that real exposure is far less than the hundreds of trillions of dollars on the books. Still, the situation is so worrying to the Federal Reserve that after announcing the third round of quantitative easing which included printing money to buy bonds (both US Treasuries and the banks’ bad assets) it also announced that it was doubling its QE 3 purchases. In other words, the entire economic policy of the United States appears to have been dedicated to saving four banks that are too big to fail. Yes, the main purpose of QE has been to keep the up prices to support the debt on which banks have loaned money.

Everyone paying attention knows that the size of the derivatives market dwarfs the global economy. Paul Wilmott who holds a doctorate in applied mathematics from Oxford University has written several books on derivatives. Wilmott estimates the derivatives market at $1.2 quadrillion, to put that in perspective it is about 20 times the size of the world economy. The world’s annual gross domestic product is around 55 trillion dollars. The Bank of International Settlements regularly publishes tables showing the amounts of different types of derivatives but these categories are ambiguous making it hard to get a good handle on what’s really out there.

The top markets regulator in the EU, the European Securities and Markets Authority have asked the European Commission to clarify what a derivative is. There is no single commonly adopted definition of derivative or derivative contract in the European Union. This plays havoc with what and when reporting rules apply. It also highlights divisions in how national regulators view reporting rules for the $693 trillion over-the-counter derivatives market. Remember this is only part of a much larger market that includes hundreds of trillions of dollars in non-reported agreements and private contracts. The efforts to achieve more reporting, more platform trading and central clearing of derivatives have fallen behind because of the "complexity of crafting mutually consistent regulations at the jurisdiction level, for a market that is highly globalized in operation".

While This Is Not A Current Chart Note The Trend Line!
Many of these writers of derivative might be called "too clever by half" if they think they have successfully controlled the risk or removed the implications and problems a default would cause. This is because they make money in the process of structuring and selling these agreements. A derivative is in many cases an insurance policy covered by collateral. Sadly, those who buy and write derivatives often play fast and loose with the value of the collateral or flat out lie about it. This moves them from an insurance policy and into the area of high risk. Although central banks and bank regulators are working hard to control banks' balance sheet leverage before the next crisis hits, the continuing growth in derivatives trading by banks is undermining those efforts. To view a good video to learn more about what constitutes a derivative clink on the link below;

My point of unquantified risk was reinforced with the now forgotten closing of  Mt. Gox, a major Bitcoin exchange in Japan. This bankruptcy has not only focused attention on the risk of digital currency, but it also rattled a still-newer market that regulators are just starting to monitor that of Bitcoin derivatives. The regulation of Bitcoin, let alone derivatives of it is unresolved in many parts of the world. Even as regulators and investors struggle to grasp Bitcoin’s many uses and where it fits into the complex world of currencies they are now confronted with the additional complexities of an emerging derivatives market where entrepreneurs say current rules don’t apply. How do you properly value and assess the risk of such transactions? While the top US derivatives regulator, the Commodity Futures Trading Commission has lawyers considering if and how to oversee derivatives linked to Bitcoin and other digital currencies this area remains untamed. 

The Growth In Derivatives Is Troubling
The point of this article is to call attention to the insanity of derivatives as an instrument or tool to add stability to our financial system. By stacking risk upon risk and transferring it off to another party who may not be able to perform or is over-leveraged you do not increase stability. Derivatives do just that with the parties involved often not even understanding the terms and implications of what they have signed. To make things more complicated cross-border agreements blur regulations, legal jurisdictions, and laws. A collapse or default often results in years of legal wrangling and finger pointing rather than a swift payout or settlement.

Possibly Why Deutsche Bank Stock Has Fallen
It seems that the leverage problem these days is not excessive lending on housing, as it was in 2005-06, but exposure to derivatives. By far the largest type of derivatives trading involves interest rate swaps, in which two parties agree to exchange interest cash flows, usually with one of them paying a fixed-rate and getting a floating rate in return. It's simply a way of betting on interest rate movements instead of horses and always involves significant leverage. It's true that banks are able to use interest rate swaps to hedge their exposure to a certain movement interest rates, but for example JP Morgan's total assets are 1.5 trillion dollars while its exposure to derivatives is a massive 70 trillion dollars or 47 times its assets, so you'd have to think there is rather more gambling going on than hedging.

This is why I refer to derivatives as a house of cards. When one party fails these agreements are often so highly leveraged the transfer of the obligation or debt can put massive pressure and strain directly upon another party. We must question the quality of many of these contracts and worry about the potential of them to turn toxic. Contagion from insuring a contract or acting as an agent in case of default can be devastating with the obligation shifting to another party rather than simply vanishing. My father often said, "squeeze all you want but you can't get blood out of a turnip." This will be the case with those on the hook for trillions of dollars when the silly but real derivatives market heads south. Again this issue is about paper promises that can vanish rather than tangible and hard assets. Derivative bets are not a zero sum game and have far reaching consequences in the real world. Often debt crisis become apparent as or when a liquidity crisis appears in the financial system and have no doubt derivative have the potential to be the catalyst for such an event.

Footnote; For another article that delves into the environment that has allowed the number of derivative to surge see the link below, as always comments are welcome and encouraged.

Sunday, February 12, 2017

Euro-zone Woes Continue Enshrouded By False Hope

If things were not already difficult for the Euro-zone they became even more so with the election of Donald Trump. President Trump has dramatically changed the balance of power in Britain’s trade negotiations with the EU. No matter how they try to camouflage and talk up the prospects for the monetary union of nineteen countries that share a common currency and the other nine members of the European Union which continue to use their own national currencies the road ahead remains challenging. For years this poorly constructed union has been criticized for being unable to resolve difficult issues but rather kicking the can down the road, postponing and delay have become the standard operating procedure for which they are known.

Greece's Debt Remains Unresolved And On The Books
Several stories at the end of January called to light that Greece’s embattled government is again deadlocked in difficult talks with creditors and this poses the risk the country’s debt crisis may again becoming an issue. This is because the European Stability Mechanism which is the Euro-zone’s financing arm announced that short-term relief measures would be frozen with immediate effect. One of the world’s leading rating agencies voiced concerns this will move Greece’s seven-year debt crisis into a troubling new phase. Faced with the dilemma of agreeing to additional austerity the fears of further uncertainty in Europe’s weakest member state are again mounting. To make matters even more dire the International Monetary Fund (IMF) now predicts that Greece’s debt load could become “explosive” by 2030. If a compromise is not found the scenario of Gr-exit may return.

An article that appeared recently on MarketWatch pointed out how the euro jumped to intraday highs after the head of President Trump's recently formed National Trade Council, Peter Navarro, told the Financial Times that Germany is using the currency's low valuation to exploit the U.S. and the European Union. Navarro also told the FT that Germany stands as one of the main hurdles to a trade deal between the U.S. and the EU. The advisor to Mr. Trump went on to say the euro was like an "implicit Deutsche Mark" whose low valuation gave Germany an advantage over its main partners. The comments suggest the new administration is focusing on currency as part of its hard-charging approach on trade, however, many other factors flow into the complex issue of trade and the value of currencies.

For example, in mid-December of  2013 EU officials announced a "crucial breakthrough" on a fiscal backstop for rescuing or winding up failing banks in the Euro-zone but the details were inconclusive from the meeting of the Euro-zone countries and they were still being haggled over by all 28 EU finance ministers in Brussels 18 hours later. In reality, Germany had prevailed in its reluctance to assent to any pooled liability for the Euro-zone banking sector under the new regime of Euro-zone supervision known as the banking union. The key issue as always was who pays to wind up or recapitalize a failing bank, and who decides when a bank should be closed down. The bottom-line is the breakthrough means a "common" or pooled Euro-zone backstop would not be in place until 2025 at the earliest and would consist of money raised by the banks themselves via a levy starting in 2015.

This has resulted in a lower valuation of the Euro in recent years that reflects a growing number of economic hurdles facing the area rather than manipulation to benefit exports. Any rise in the value of the Euro will only exacerbate problems across Europe and strain the many social issues ripping away at the union. The fact remains the banks are in poor condition and the Euro-zone countries are not ready to backstop their losses. Even Greece remains a problem and is once again on the verge of collapse. Greek yields surged in the past week as the country didn’t secure a positive review at the Eurogroup on January 26th. Additional noise came after indications that the IMF still views the Greek debt as unsustainable and further measures from the Greek government are necessary as well as additional debt relief from European creditors.

The Unabated Flow Of Refugees Continues
Asset managers have acknowledged that political risks in Europe this year, including the French elections and German elections in September, could intensify pressure on Eurozone banks. It is impossible to rule out another global recession within the next two years which removes any incentive to invest in the Euro-zone banking sector anytime soon, as a matter of fact, such economic hardships would be a dagger straight into the heart of both the banks and the poorly crafted currency. As backlash grows the forthcoming French presidential elections in April could see Euro-sceptic candidate Marine Le Pen come to power, and with more problems facing the Italian banking system, it is clear to see many additional risks for Euro-zone banks loom in the near future. It is little wonder that many investors view continental European banks as being excessively risky.

Supporters of deeper financial integration have not, cannot, and will not break through a roadblock from Germany and some of the other better off countries to secure agreement on a common scheme to protect bank deposits. This means the poor countries remain poor and the economic divide continues to grow as money flows away from the weakest countries and banks and into the strongest.

Add to this the simple fact Turkey is rapidly becoming a horrible fit with other members of the Euro-zone that value human rights and the rule of law. Day by day the promises of a cohesive region of peace and prosperity are pushed farther and farther into the future. Several terror attacks have shattered the calm Europeans have come to expect. The situation has gotten so bad that many Americans will simply not risk a visit to the area even though the dollar has strengthened against the euro making such travel a bargain. Now we are hearing that the Euro-zone may turn towards China and Asia to buffer their prospects. All the above lead me to believe any hope that the region is about to suddenly turn the corner is more based on false hope and a wish than a reflection of events on the ground.

Footnote; This is only one of several articles I have written about the Euro-zone over the years and that I'm while it remains for me a top travel destination my concerns for its future are on the rise. The article below continues along this theme.

Tuesday, February 7, 2017

Pakistan Remains A Powder Keg In A Dangerous Region

Pakistan Is Home To Many Terrorist Groups
Many Americans do not understand why the American government continues to give and pour money into Pakistan. The fact is most Americans know little about the Islamic Republic of Pakistan a sovereign country in South Asia with a population of over 180 million people. What makes Pakistan a very important player in its neighborhood is that it has nuclear weapons and is politically unstable. Trouble has been brewing in our relationship with Pakistan for years even though America has poured billions of dollars in aid into the country, it could be argued that we were buying their loyalty rather than driven by the desire to be their friend.

Years ago when the Pakistan government failed to control extremist elements in the country America began to use drones to attack within the country's border, this has stirred outrage and protest against America. It is only because of the money we have given Pakistan that we have been able to pursue such actions. Many reasons exist to be concerned about Pakistan going forward, for years the country has experienced internal violence and attacks from extremist groups within the country. With the government sometimes struggling to maintain order, and a military that sometimes threatens to take control over the country the political stability of Pakistan is often questioned. As the number of terrorist attacks have continued to rise over the years it sometimes appears the country is unfit for the many Pakistanis that want to live in peace.

The fact that Pakistan, and India it's neighbor to the south both possess nuclear weapons and have a history of problems and tensions is a huge worry and concern for the region. Pakistan's motive for pursuing a nuclear weapons program was to counter the threat posed by its principal rival, India, which has superior conventional forces. The relationship went bad between India and Pakistan from the very moment Pakistan was created and has been affected by the seeds of discord in Kashmir. Despite being a new struggling state, the first Prime Minister of Pakistan launched an immediate war with India over Kashmir. That leader was assassinated and very soon Pakistan settled down under martial law. The military leader General Ayub Khan watched India lose the war with China in 1962 and decided to take advantage of the situation by launching another all-out war over Kashmir.

General Ayub Khan was replaced by Yahya Khan in 1969 and in just a span of two years conditions were created for the Bangladesh War of 1971. While Pakistan lost decisively and lost a huge amount of land in the form of Bangladesh little was done to resolve the bad feelings. Yahya lost office due to that debacle and gave way to Zulfikar Ali Bhutto and a whiff of democracy. If India thought that democracy would mean peace, they were sadly mistaken. Bhutto hated India and made the famous declaration: “Pakistan will fight, fight for a thousand years. If.. India builds the (Atom) bomb.... (Pakistan) will eat grass or (leaves), even go hungry, but we (Pakistan) will get one of our own (Atom bomb).... We (Pakistan) have no other Choice!...”  The bottom-line as to why Pakistan is important, it is in a position to start World War III.

One encouraging sign that things may improve is that in recent elections former Pakistani Prime Minister Nawaz Sharif has again been elected to lead the country. This is a remarkable comeback for the 67 year- old Sharif, who has twice served as the country's premier. Toppled in a military coup in 1999, he spent years in exile before returning to the country in 2007. Sharif has expressed a desire to work with all parties to solve the country's problems in a victory speech given to his supporters. "I appeal to all to come sit with me at the table so that this nation can get rid of this curse of power cuts, inflation, and unemployment," Sharif said. Despite a string of terrorist attacks, voter turnout was large, in the hope of pushing for a solution to the nation's woes in a historic election that marks the country's first democratic transition of power in its 66-year history.

There is hope on both sides of the border that Sharif will now take similarly bold steps to improve relations with India following his election victory, this would reduce the chance of a fourth major war between the nuclear-armed foes. The reason for this optimism is not only his track record of reaching out to India the last time he was prime minister but also his commitment to turning around Pakistan's mediocre economy. Closer ties with India would allow much greater trade between the two countries. Reducing the threat from India could also help Sharif accomplish another unspoken goal, reducing the clout of the Pakistani army, which has long used the potential for armed conflict to justify a huge defense budget. The army sabotaged Sharif's previous peace efforts in 1999 by secretly sending troops into India and eventually toppling him in a coup.

Prime Minister Muhammad Nawaz Sharif recently urged India to stop the bloodbath in the Occupied Jammu and Kashmir and allow the holding of a free and fair plebiscite, a type of direct vote in which the entire electorate is invited to accept or refuse a proposal bringing to an end this long-standing dispute. Speaking on Kashmir Solidarity Day the Prime Minister upped the ante, saying  Kashmir is the "core dispute" between India and Pakistan and the dream of peace and prosperity of the people of the region will remain elusive without resolving the issue." Kashmir's unfinished agenda of partition is one of the oldest disputes in the UN Security Council. Sharif said, "for the last seven decades India has denied the people of Kashmir the right to self-determination promised to them by the international community through numerous UN Security Council resolutions".   

Pakistan Continues To Rise On Terrorism Index
Still, the largest problem confronting the region is that while nuclear weapons can add to national security they also add layer upon layer of complexity to national defense, even efforts to deploy a missile defense system can be viewed as an offensive act. Indrani Bagchi, the Times of India's diplomatic editor wrote that India will retaliate massively even if Pakistan uses tactical nuclear weapons against it. India will protect its security interests by retaliating to a “smaller” tactical attack in exactly the same manner as it would respond to a “big” strategic attack. Yes, the reason Pakistan is important is that it has nuclear weapons and could be sucked into, or be the one to start a nuclear war. Adding to this concern is the fact Pakistan is ripe with jihadi organizations seeking a nuclear weapon or the fissile material needed to make one and both the military and the security services have been infiltrated by a number of jihad sympathizers.

The three key threats are a terrorist theft of a nuclear weapon, transfer of a nuclear weapon to another state like Iran and a takeover of nuclear weapons by a militant group during a period of instability. Pakistan is home to the harshest variants of Muslim Fundamentalism and headquarters of organizations that espouse extremist ideologies, these include Al Qaeda, the Haqqani network, and Lashkar-e-Tayiba. Nuclear bombs capable of destroying entire cities are transported in delivery vans on congested and dangerous roads. Sources say that since the American raid to kill Osama Bin Laden the Pakistanis have provoked anxiety inside the Pentagon by increasing the pace of these movements. Ironically the Pakistani government makes its nuclear weapons more vulnerable to theft by jihadis in an attempt to hide them from the United States that funds much of its military budget. Pakistan remains a powder keg but has been one for so long many people have discounted the risk.

Footnote; many of these points were written about in a similar article back on August 8, 2013. Sadly little progress had been made to stabilize Pakistan and India has recently been undergoing internal issues.

Sunday, February 5, 2017

Free Trade And Fair Trade Are Distinctly Different

Walmart Container Ship Example Of Bad Policy
Make no doubt about the fact that trade policy has massive long-term ramifications on the strength of a nation's economy. Why an event occurs or how it takes shape is generally the result of many factors coming together and not always a well planned and perfectly orchestrated plan coming together. Americans should expect the politically heated debate over trade agreements to continue. Many articles supporting and praising the way trade has grown over the years sight how it has raised many people out of poverty and misery, they tout free trade as the answer to many economic woes. I contend many people fail to note the difference between free and fair trade.

This article is in response to a slew of comments from my recent article titled, "Higher Prices On Import Goods A Fair Cost For Jobs" because many of those supporting past trade agreements use low consumer prices as a battle flag around which to rally. Critics of existing policy say these trade deals over the years have added to environmental problems across the world and exacerbated economic inequality within many economies as manufacturing jobs have been outsourced to low-wage countries. Internet activists also weigh in with claims these deals can curb freedom of speech and other detractors even charge it adds to the forces that enshrine currency manipulation. As we view the global economy we must ponder how much of this is about individual governments giving up control and becoming subservient to corporate “efficiency” and the desire of companies to both develop and control future rules

In many ways, the global economy has become an ill-regulated business model tilted to favor big business and giant conglomerates. The controversial TPP created as a new U.S. led Pacific trade pact pointedly excluded China, however, that was not just about trade but a tool designed to cause China to lose influence and key export markets. While signatories championing the benefits TPP claimed it would kick-start sluggish global growth, much of America's political motivation revolved around the idea it provided a strategic bulwark to China’s growing economic and military power. In truth, many people view the Trans-Pacific Partnership (TPP) that was pushed by the Obama administration and a slew of corporate allies as a blatant attack on labor, farmers, food safety, public health and even national sovereignty.

Details of the agreement had broad implications that were kept largely secret so most of us have little knowledge of its contents. While being negotiated even members of Congress didn't know much of its details because it is mostly the product of corporate lawyers. Making the agreement even more controversial was the belief held by many Americans that bad trade deals with low-wage countries have contributed to our current economic woes. When Massachusetts Senator Elizabeth Warren, came out strongly against these agreements Obama said the Massachusetts senator was “absolutely wrong” and accused her of speculating about the contents of the emerging 12-nation trade deal for personal gain. Obama's statement did little to quell the controversy, instead, it seemed to throw fuel on the fire.

Trade can be used as a stealth weapon resulting is massive shifts in wealth and that makes it a problem. Ironically, it is a Republican controlled Senate that was most inclined to give the Obama administration the approval it wanted for TPP while job protecting Democrats backed by unions railed at the deal. Senator Warren and those concerned that a trade agreement with low wage nations will not be a great job creator for America have history on their side. Economist Dean Baker said of the TPP, “This really is a deal that’s being negotiated by corporations for corporations, and any benefit it provides to the bulk of the population of this country will be purely incidental.” It is worth noting that in 2008, as a presidential candidate, Obama boasted, “I voted against CAFTA, never supported NAFTA, and will not support NAFTA-style trade agreements in the future.”

This Is Why Mexico Has Become An Issue
Historically, trade laws are geared to enrich the “mother” country and was often used to build a nation. Following World War II free trade arguably benefited the economies of the countries involved. This changed starting with 1994’s North American Free Trade Agreement (NAFTA), which recognized that capital is now mobile, it moves about the world and owes allegiance to shareholders rather than loyalty to any one country. At least it can be argued that NAFTA was intended to improve our own neighborhood and that as Mexico and Canada benefited, America would gain some degree of "safer borders" and a mutual interest would be served. NAFTA is the paradigm of what are most accurately called deregulation deals. It promised better jobs in both the United States and Mexico.

Instead, as well-paid workers in the United States were losing jobs to low-paid workers in Mexico, badly paid Mexican workers were losing jobs to those in China who would work for even less. This, in turn, places more pressure on workers in the United States. We should not lose sight of the fact that while free trade is important, fair trade is far more so and should be the main issue. Developing a long-term sustainable economic system that is balanced would contribute to both global cohesion and the world economy. Nationalistic exploitation of trade agreements has occurred throughout history and it is naive to think such schemes will suddenly end. The changes brought about by the development of the global economy have been hard for many. Promises of widespread prosperity have fallen short and we have seen the benefits flow to only a few.

This means a reason for grave concern over our current course does exist and at some point, the damage from continuous massive trade deficits may become irreversible. The trend of businesses and businessmen to cast away the nation's best interest for a place at the table of the global elite has come at a great cost. Considering this, it is little wonder trade has become such a heated issue. I see no quick fix nor can I be optimistic about another system and legal framework for long drawn out arbitration that dispenses solutions that neither thrill or satisfy. The promises made that increased trade will create new jobs has turned out to be largely a myth and politicians playing the "fear card" with statements such as "We can’t let countries like China write the rules of the global economy” imply we are powerless to control our own fate and are about to be devoured, I reject this premise.

Wednesday, February 1, 2017

Where Wealth Is Stored

An article presented to me delved into the subject of high-earning Americans, where their wealth came from, and just as importantly where it was stored. This got me thinking about the so-called wealth effect as well as how all that wealth was held. The really big earners in recent years have benefited greatly from the surging stock prices as much of their income has come from financial markets and gains in equities. Many people seem to think this is the way things will continue and the hope of our future. When you have more than you need or want to put money away for a rainy day where do you store it? If you rated people on a "wealth chart" by how many tangible assets they owned you might be shocked to find much of the wealth people own is in paper and this can be full of risk. In our world today the possibility of cyber-crime or cyber-theft takes this to even a higher level.
Safely Storing Wealth Easier Said Than Done

In many ways "paper wealth" is merely the promise of future value. Unfortunately, this leaves much of society and many rich individuals vulnerable to rapid financial loss if the tides of fortune shift or if values rapidly change. Currently not only are we faced with banks paying little in the way of interest but we must also fear they or the government might reach in and seize part of our money. By forcing people to pull their money out of banks and other safe investments in search of higher yields we have driven up stock prices. Some of these stocks have reached unbelievable multiples.

People often do not understand money and wealth. Myths about both run rampant and become intertwined with deeply rooted personal feelings passed down from parents or acquired, these feeling often muddy and skew how people deal with wealth. An example would be anyone who felt deep down that money was the root of all evil would react to winning the lottery far differently than someone with the belief that you can buy happiness. I have even heard poor people say they didn't see much point in winning a lottery of  several hundred thousand dollars because "that's not much money." When the B word "billions" is so prevalent in society today it is understandable many people live with distorted values.

Truth be told most people are not overly endowed with discipline this includes many people that amass a fortune. This often means that many wealthy people tend to "misplace" or lose track of where they have placed their wealth. Sometimes it is simply put into a system that is on autopilot. Years ago I purchased a property from a doctor on contract. The doctor having also bought the property on contract had me just send the payments to the man he bought it from so he would not be bothered. After many years I contacted the doctor to discuss a discount for a cash payoff and his accountant discovered the first seller had been paid off years before but continued taking the money he had no right to. The doctor was shocked and getting his money back proved difficult.

Annuities, pensions, stocks and such promises of future payment tend to dominate the list of favorite vessels in which to store wealth and many of these are leveraged to maximize returns and garner higher yields on our investment. Cash is another option but holding it in your possession leaves one open to theft and means the money will earn no interest. What is often missing or overlooked is tangible fully paid for items and things that are likely to hold their value and in the direct possession of the owner. People tend to avoid tangible assets in their control because they are often inconvenient. Valuables can be a pain to have about and they often need to be insured which also calls attention to their existence.

When you subcontract out control of your wealth or turn it over to a money manager you often get promises but no iron clad guarantee. Confidence in a money manager can quickly be dashed, all the people invested with Bernie Madoff discovered just how suddenly things can go south and promises turn hollow. While it has become both fashionable and common in recent years to let someone else who knows and specializes in financial planning and markets to control this segment of our lives I feel it is a big mistake and a dereliction of duty. Wealth should come with a warning notice saying "Holder Beware This Commodity May Vanish Spoil Or Grow Obsolete At Any Time!"