Archive - Oct 2013 - Story

"This new incursion by hedge funds and private equity groups into the American single-family home rental market is unprecedented, and is proving disastrous for many of the tens of thousands of families who are moving into these newly converted rental homes... Though it’s not uncommon for tenants to complain about their landlords, many who had rented before described their current experience as the worst they’ve ever had. A former inspector ...said he routinely examined homes just prior to rental that were not habitable. Though it wasn’t his job to answer complaints, he said he fielded “hundreds of calls” from irate tenants."

We knew from the start that this whole 'buy-to-rent' thing would be a disaster. Over the last decade or so, everything that Wall Street touched has turned into a scheme primarily focused on parasitically funneling wealth and resources away from society at large to itself. This is no different. They call it a “new asset class.” We call it Wall Street serfdom.

Once the economy's capital structure is distorted beyond a certain threshold, it won't matter anymore how much more monetary pumping the central bank engages in – instead of creating a temporary illusion of prosperity, the negative effects of the policy will begin to predominate almost immediately. Given that we have evidence that the distortion is already at quite a 'ripe' stage, it should be expected that the economy will perform far worse in the near to medium term than was hitherto widely believed. This also means that monetary pumping will likely continue at full blast, as central bankers continue to erroneously assume that the policy is 'helping' the economy to recover.

This week marked what we suspect will become an important inflection point when the world looks back at this debacle of a bubble. The Fed, having already warned in January of 'froth' in credit markets (and ths the fuel for 'hope' in stocks) proposed tougher underwriting standards for leveraged loans. Credit markets have underperformed since; but as Diapason Commodities' Sean Corrigan notes, the baleful impact of the central banks is still everywhere to be seen in the credit markets. From junk issuance to the rapid regrowth of the CDO business to the 'record' high multiples now being exchanged for LBOs; Central Banker's monomaniacal fixation on zero interest rates and artificial bond pricing is setting us up for the next, great disaster of misallocated capital and malinvested resources.

While Eike Batista's collapse from grace may be the poster child for the country, this deep dive into the Latin American economy concludes Brazil’s flaws are clear. Commodity prices have been volatile; global growth has been weak and inconsistent. Brazil can no longer depend on these factors for growth. A closer look reveals that internal conditions are progressively becoming Brazil’s main economic foe. Ironically this is good news as the country is increasingly in a position to take control of its destiny. What is needed is decisive leadership and effective solutions to the long-term problems plaguing the country. Short-term stimulus measures and even supply-side measures such as reduced taxes have clearly not stimulated the economy. Brazil must invest in its own future.

Ignoring the ongoing onslaught of one-off items that plague earnings reports and make apples to apples comparisons practically impossible, the fact of the matter as the following chart from Goldman so decisively points out, despite the ever-present hope that it's different this time, recurring margins (long-believed to be the great white hope that earnings multiples will grow into), have collapsed to their lowest in 3 years. Combine that with slumping sales, record high leverage (providing little room for moar financial engineering), record high margin debt (no room for error), and a growing sentiment shift to 'knowing' that it's all artificial and BTFATH seems like a stretch to us. It would appear Goldman agrees as 4 out of the 5 valuation approaches they use signal stocks are expensive.

Is it really so different from this?

The markets do not act like they once did. The trading in certain stocks is operating on time-scales so small that they cannot be in response to human thought. Not only are certain individuals able to access key information before others and so respond to news releases faster than the speed of light, but certain entities have free range to post and cancel orders on a microsecond basis, and queue-jump by shaving off (or adding on) tiny fractions of a penny from their orders. Stocks traded by humans tend to make significant moves on a timescale of minutes to days. Even when there is a news event that radically changes the apparent value of a company, if there are only humans in the market, the move takes time to occur. Below we a couple of charts

The rollout of Obamacare to date has been, as many predicted, the case study of everything that is wrong with a mandatory government-conceived, supervised and enforced program. Ignoring for a minute the daily embarrassment the Obama administration has to face with the well-documented failings of the HealthCare.gov website which on second glance should win Obama the Nobel Price for coding in Fortran (or  Cobol), and which seems set for a full-blown overhaul that would force a delay of the mandate whether Obama wants it or not, the several million "glitchy" lines of code have become the greatest gift the GOP could have asked for. A gift, which as the saying goes, keeps on giving. Because one of Obama's suggested loopholes has been to advise people who can't or won't sign up online, to do so using old-fashioned means: by paper, pen or phone. Unfortunately, that's where the rabbit hole just goes deeper, because as Politico reports, the glitches that started on line have rapidly shifted to the world of phone and mail, as virtually every pathway of enrolling into the enforced healthcare program is now hopelessly bottlenecked, if not entirely shut.

If one (such as everyone at the Federal Reserve) thought that the world's greatest artificial "wealth effect" would also generate the world's happiest people, one would be dead wrong.

Take Venezuela - Hugo Chavez' socialist paradise, which was recently inherited by Nicolas Maduro, when he proceeded to not only completely devalue the local currency but to engineer, through such exquisite central-planning that even the Politburo at the Marriner Eccles building is green with envy, the highest returning stock market on earth in 2013. Alas, either the locals are not quite as impressed with the Caracas' "stock market" YTD return of over 300% (which doesn't quite cover the loss in purchasing power for what things one can actually purchase in Venezuela), or the chronic toilet paper shortages remind them that the phrase socialist utopia is the world's greatest oxymoron. As a result, president Maduro has decided to boldly go where no socialist has gone before and has unveiled a new Vice Ministry of Supreme Social Happiness, whose primary purposes will be to enforce "happiness." In other words,  something along the lines of the beatings will continue until happiness returns...

When three weeks ago, the FBI arrested Ross William Ulbricht - the creator of the now shutdown Bitcoin-only "alternative" marketplace Silk Road also known as Dread Pirate Roberts, some were surprised that the Feds only confiscated about $3.6 million worth in Bitcoins from Ulbrecht. Proving all doubters wrong, and that creating the first "libertarian" marketplace not subject to any rules and regulations, not to mention fiat monetary constraints, actually does pay quite well, moments ago it was revealed that Federal prosecutors had found an additional $29 million, or 144,336 BitCoins, belonging to the Dread Pirate. According to Reuters, the booty was discovered on "computer hardware" belonging to Ulbricht. The repossessed electronic money, whose encryption technologies seem to leave a bit to be desired, has now been impounded and will likely remain on the FBI's hard disks indefinitely.

This artificial prosperity plan for Wall Street has the added benefit of allowing the captured politicians in Washington D.C. to continue their $1 trillion per year deficit spending with no consequences for their squandering of future generations’ wealth. Bernanke and Yellen will never taper, because they can’t. The Fed balance sheet will continue to grow by at least $1 trillion per year until they crash the financial system again. Except this time, there will be no money printing solution. We are all trapped like rats in this monetary experiment being conducted by evil mad scientists. No one will get out alive. Welcome to the new normal. Now eat your cheese.

Russell Brand's excited exchange with stoic Brit Jeremy Paxman this week is a must-see "exchange of new ideas vs old." Among Brand's clearer moments were "stop voting, stop pretending, wake up. Be in reality now, time to be in reality now. Why vote, we know it's not going to make any difference, we know that already." The excellent discourse has prompted this open letter supporting the comedian.. concluding so legitimately nowadays, with Upton Sinclair's infamous quote "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

The basic predicament we are in is that the current crop of leaders in the halls of monetary and political power do not appear to understand the dimensions of our situation. The mind-boggling part about all this is that it's not really all that hard to grasp. Our collective predicament is simply this: Nothing can grow forever. Sooner or later everything must cease growing or it will exhaust its environs and thereby destroy itself.  The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what they consider to be "normal." But the problem is -- or the predicament I should more accurately say -- is that the recent past was not normal.

Sugar may be sweet, but excess consumption leaves a bitter aftertaste: millions of people worldwide are affected by type II diabetes or obesity, costing the global healthcare system billions of dollars every year. As the Credit Suisse Research Institute's 2013 study "Sugar: Consumption at a Crossroad" found, close to 90% of general practitioners in the US, Europe and Asia believe excess sugar consumption is linked to the sharp growth in these health problems.

If your neighborhood is not as safe as it used to be, then you have something in common with the rest of the country.  All over America, crime is on the rise.  According to a government survey that was just released, violent crime in the United States increased by 15 percent last year, and property crime was up by 12 percent.  If violent crime keeps increasing at this rate, it will approximately double in just six years.  But as we wrote about the other day, when the next major economic downturn strikes it will probably greatly accelerate the growth of the crime rate in this country.  Desperate people do desperate things, and as you will read about below, there are people out there that are already stealing entire truckloads of food.