Archive - Aug 2, 2015

It is absolutely normal for employers to completely miss the signs of impending doom. The 2007 extreme occurred just before the carnage of mass layoffs that was to begin a couple of months later. Employers were still clueless that the end of the housing bubble would have devastating effects. If they were clueless then, they are in an advanced state of delirium and delusion now. The devastating 1973-74 bear market, which cut the value of stocks by 50%, was in its early stages. This was an early example of employers being late to the funeral. Similar employer hoarding of workers has been associated with bubbles in the more recent past and has led to massive retrenchment, usually within 18 months or so.

August 2 is the day when Russia celebrates its Airborne Forces, only this year something went very wrong, and it was all caught on tape.

Overnight something unexpected happened: Sheng Songcheng, the director of the statistics division of the People's Bank of China (PBOC), was quoted by the National Business Daily on Saturday whereby he essentially admitted China had been lying about not only its local debt exposure but the level of NPLs across the economy.  The punchline: Sheng warned about the risks of local government debt, saying that 2 trillion yuan in bond swaps may not be able to fully cover maturing debt, according to the report. What he really said, as paraphrased by Bloomberg, is that "local govt's tended to not report all their debts when audited in June 2013, thus the 2 trillion yuan debt swap plan arranged this year may not cover all debts due, Sheng cited as saying."

Oops.

Lately, a varied chorus of powerful union bosses, politicians and candidates, an asset management company executive, and a few ivory tower types have asserted that activism is short term in nature, engaged in by “hit and run”  investors who care only about making a quick buck while leaving a company and its employees in ruins. It might surprise people to hear that we agree completely that the sort of activism they describe is abominable.  Luckily, it does not really exist, and certainly not at Third Point.  Activists today are very different from corporate raiders of the ‘80’s (about whom these criticisms might have been leveled fairly).

Bubbles collapse, period; and government interventions don't stop them. Furthermore, we are beginning to see a crack widen in the foundations of China's capital markets that could end up undermining the whole economy. If Plan A fails, it is time for Plan B...

A report from the U.S. Army War College discusses the use of American troops to quell civil unrest brought about by a worsening economic crisis. The report from the War College’s Strategic Studies Institute warns that the U.S. military must prepare for a “violent, strategic dislocation inside the United States” that could be provoked by “unforeseen economic collapse” or “loss of functioning political and legal order.” [The report also warns of a possible “rapid dissolution of public order in all or significant parts of the US.”]

"This was nothing but a coup. In 1967 there were the tanks and in 2015 there were the banks. But the result is the same in the sense of having overthrown the Government or having forced it to overthrow itself."

A non-bombastic analysis of the events and data in the week ahead, with insulting anyone or resorting to conspiracy theories.

The IMF made some frowing decisions...

Be prepared for the now imminent equity valuation reset.  It is true the Fed now has the ability to manipulate the market well beyond anything we’ve ever seen before.  However, it is also still true that when the bursting bubble achieves full momentum the Fed will be helpless to stop it.   While the Fed feels increasingly omnipotent they will once again learn, that while natural laws can be bent, they cannot be broken.