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EconMatters - Global Economic and Market Analysis That Matters

Donald Trump Will Be Impeached

June 3, 2018 by EconMatters   Comments (0)

By EconMatters

We have seen this pattern repeat itself throughout the history of politics where the initial incidence or transgression isn`t what caused the most damage but the process of trying to cover up the incident that brings the real trouble for politicians. We have already reached that threshold level in the Trump Administration's attempts to cover up whatever happened during the campaign and just after the election prior to moving into the Oval Office.

Just with the tidbits that have been leaked from the Mueller Investigation, and Trump having to verify multiple times that he and his team have lied to the media, congress, Mueller and the American people as new details emerge from the investigation. A circumstantial case can be made today for a consistent, strategic obstruction of justice campaign on behalf of Donald Trump and his team in the white house to cover up some of the politically compromising things that occurred during the campaigning process. Furthermore, we don't even know if there are more damaging issues yet to come from the Mueller Investigation.

Again, Trump and his team would have been much better off just taking the initial political hits from his meetings with the Russians, politically spun these to lessen the damage and move on, but the cover up, the trying to not have the political damage in the first place is what always gets these figures in the end. It is rather obvious that Trump is in trouble with his cover up approach, and this is where he has really crossed the line for a sitting president.

The only thing we don't have is a “Watergate Break-in Moment” but the rest is all there for a continual pattern of behavior obstruction of justice campaign conducted on behalf of Donald Trump and his Team. These latest pardons on behalf of Donald Trump only build the case along these lines of a President who is acting above the law, trying to circumvent the normal judicial process. When a President starts abusing the Pardon Authority along the lines of sending messages to those individuals who may have violated the law in an ongoing investigation where he could possibly be implicated with their cooperation in the Mueller Investigation this sets a bad precedent, is a conflict of interest, and furthers the case for a President acting above the law, obstructing an ongoing investigation, and builds the momentum for impeachment.

At some point, even Republicans will realize that you cannot have the President of The United States acting this way in office, it undermines the credibility of the entire system if a sitting President acts as if he is above the rule of law. In fact, there may have to be constitutional changes to more clearly provide various checks and balances to limit the powers and authority of the president of the United States. Donald Trump is pushing boundaries and presidential norms of behavior to such a degree that he is often teetering on the precarious edge of becoming a rogue, out of control president. Again much easier to just impeach the president, then rewrite the constitution going forward.

But there are more threats to Trump's survival than just the fallout from the Mueller Investigation, you just cannot have the President of the United States tweeting and getting caught up in all these petty, small minded beefs on social media. You are the President of the United States, not some high school teenager with nothing better to do with their time. If Donald Trump was in any other position in America, A corporate CEO, a Mid-Level Manager, an employee, you name the position, ironically, it is he who would be fired unceremoniously. You cannot act this way period, it is highly unprofessional, and wholly unacceptable behavior for the President of The United States. It is an embarrassing representation of America on the world stage to have the President of the United States Tweet and act like a 12 year old while in office, it makes us look ridiculous as a country in the world`s eyes. The President of the United States should not be conducting foreign policy via twitter, this should be self-explanatory for any president. This alone is grounds for impeachment, the fact that Donald Trump doesn`t or cannot control his behavioral impulses on twitter says a lot about his mental competency, or being publicly fit to serve as president of the United States.

Donald Trump is all over the place with his schizophrenic policy initiatives, public statements, cabinet management, and overall behavior while in office that one really has to question his basic competency as a leader, let alone his mental stability as the President of the United States of America. Really, this is the best of the best that America can find to represent its interests on the world stage? Frankly, the fact that Donald Trump could be elected, or thought competent to serve as President by a majority of voters says a lot about the entire two party system, the electoral process, and the critical thinking and reasoning abilities of Americans. Maybe it represents a desperation play by American voters who feel disenfranchised and exploited by globalism, monopoly corporations and the failures of socialized crony capitalism plus other unnamed factors too robust for this current discourse. However, whatever the causes, when Donald Trump is the end result, you know something has gone terribly wrong in the system. Moreover, just to have him viable as a presidential candidate in the first place speaks volumes about the dire underlying conditions of this country. When you start electing reality television stars to the presidency, you shouldn't be surprised when they behave and lead the nation like reality television stars!

Trump has been very lucky to be benefiting from an economy at the late stages of the business cycle, and his tax cuts which are providing a short term gain, are helping to push the last stages of this business cycle a little further. However, these same tax cuts have dire consequences down the line, are unsustainable going forward, and will be revoked maybe as soon as two years from now.

And when the economy starts to turn, and or the republicans lose a lot of power in the midterm elections this November Trump`s schizophrenic behavior and actions will not be so easily overlooked. I have been amazed with just how much bullshit shenanigans Donald Trump has gotten away with so far in office with the latest being the violation of the quiet period before the employment report. But political missteps will start sticking hard to Donald Trump as people start looking for somebody to blame for the inevitable downturn in the economy. Remember, all this Central Bank short term Monetary Shenanigans, and the out of control global debt spending of the last 10 years means a very bad global recession is coming, and coming much sooner than people realize. The Trade War escalations is really a fight over money, and the reason this is such an issue is everybody underneath the debt and central bank camouflaging is at the core desperately broke and in debt. Trade wars are going to get much worse in the global recession that is coming over the next two years.

Under the changing political landscape as republicans lose political power, the economy turns into recession, not just in the United States, but globally Donald Trump becomes not only the focus of blame, the natural fall guy for the world's problems, but the psychological outlet for the world`s frustrations.

His removal from office will solve very little of what is wrong with the political system, what led to his election in the first place, and what ails the United States and the world as a whole. Such bigger macro factors like too many people on the planet for too little resources, quality jobs, and basic standard of living resulting in the inevitable inequality that has only been magnified by incompetent Central Banks and governments around the world.

Thus, I find it highly likely that Donald Trump is impeached before his term in office expires in just over two years. Depending upon if the midterms are a bloodbath for republicans, or the US Economy starts sliding real fast this speeds up the impeachment process. Literally Donald Trump could very well be impeached within a year. This is part of the reason Donald Trump is trying all these politically risky actions from the most recent pardons to the Giuliani media campaign to the summit with North Korea, and the schizophrenic Trade War actions. These serve as great diversions from the Mueller Investigation story. Donald Trump may even be in more trouble than we realize with the Mueller Investigation. He sure is acting like a guy who is about to be impeached within the next year!

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The Most Overcrowded Bubble Market Trade

June 1, 2018 by EconMatters   Comments (0)

By EconMatters

This is the bubble of all bubble trades going on in financial markets and it is probably just about as good as it is going to get right now with a rate hike coming in two weeks. The Federal Reserve has been pretty dovish as the prior month`s economic data was pretty bad including a weak employment report. All the Fed speak was pretty dovish trying to back out of the June rate hike, but with the latest strong employment report, this locks the Fed into the June hike, and maybe 4 hikes for the year. The Bulls are so full of it, they cheer the bad employment report, as this means more dovish Fed, now they get a strong employment report, and they cheer a strong economy. Make up your mind: Is bad news good or bad for the economy and vice versa for good news?

We will narrow this most crowded trade of trades to seven stocks for the sake of simplicity, the trade probably includes about 15 to 20 in total, these are all technology stocks, supported at the core by large blue chip technology stocks in the Nasdaq, Dow and S&P 500 Indexes. This FANG PLUS 5 Trade which we will label for simplicity is heavily reliant on borrowed money which at some point will have to be paid back as many of these positive carry trades and carry trades unwind due to risk aversion, currency market turbulence, or currency policy changes from the status quo. There just isn't that much money created out of thin air when investors have been all in for a decade, it has to come from borrowed money. And one can look squarely at the emergency low monetary base rates of the European Union, United Kingdom, Switzerland and Japan for the starting points of this borrowed money program. This is why the VIX spiking at the end of January, and the initial China Trade War escalation, and the next major selloff is such a problem for this borrowed money and specifically this overcrowded Technology Bubble Trade.

It isn't a coincidence as the Euro weakens these technology stocks are putting in a great run, this isn`t the only carry trade funding market as there are several going on right now with such divergent Central Bank Policies occurring right now with major Trading Partners, but it is one of the dominant funding sources. A little Swiss Francs, A little Japanese Yen, some British Pounds etc and you are ready to rock and roll you some technology carry trades. These Central Bank Policies and the Resultant Market Shenanigans which have manifested themselves in the most crowded trade since the DOT COM CRASH is just crazy in that it has gone on this long and built to such degree that there is no way to even slowly prick the bubble, it all collapses in on itself, and continues to crash in multi leg down subsequent crashes like aftershocks of a Mega Earthquake.

These aren`t obscure technology companies, everyone owns these large cap technology companies in their portfolios, the collateral damage to financial markets, and global financial markets of the resultant carry unwind in this FANG PLUS 5 Trade takes down the entire global financial system. Think about that one for a moment, the Market has become so rigged, that traders figured that it would be much easier to rig the market by just concentrating on a handful of chosen high performers, that these stocks have basically become the market. This is how overcrowded this trade is, at no time in the history of financial markets have 10 stocks basically become the market, and have the entire Global Financial System on their shoulders. Yes 10 stocks versus the entire S&P 500, well how do you think that unwinds in a healthy, natural process? It doesn't, it crashes like nothing has ever crashed before!

Thank You Central Banks for causing such excessive risk taking. Lucky for them Donald Trump is the perfect fall guy, and he sure is doing his part to get impeached and run up even more debt on an already unsustainable trend. But make no mistake this crash is caused by central banks, and they need to be held accountable for putting the financial system in such a risky, precarious place which I will call a ‘tenuous liquidity cliff’ that is on the verge of breaking, sending everything and everyone free falling. This is the Mega Earthquake, the 10 Sigma Event, the Red Swan Risk Event built up to such a degree through crazy absurd cheap money policies and record debt levels that once the train gets started down the track there is no stopping the deflationary death spiral. As bad things lead to even more bad things, excessively rich stocks at exorbitantly high prices means losses lead to more losses, margin calls lead to bigger losses, carry unwinds of a decade unravel in 3 months, firms go out of business, instruments close down shop, trading curbs are hit at the open each day for weeks, and central banks are powerless to stop the carnage and the blame game begins while the global financial system collapses. We saw a hint of this in late January, and that broke one VIX instrument, sent it out of commission, just extrapolate by a factor of 35, and you see how extreme things are right now, and everyone is asleep at the complacency wheel. Think about when over 35 instruments just break, and go out of business with all these newfangled bullshit ETF offerings of the last decade; literally over 50 products will break entirely in this coming financial market crash.

Take a look at these charts I post in this article and tell me this unwinds in a healthy fashion, and is a good sign for financial markets, and financial market stability? The clock is ticking on this time bomb! Way to go Central Banks. This is just about as good as it gets, the end is near, and the world couldn`t be more clueless. There truly is no hope for humanity!


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Warren Buffett: The Technology Investor

May 30, 2018 by EconMatters   Comments (0)

By EconMatters

When it comes to stock picking I question what is going through Warren Buffett`s mind lately. First it was his stake in IBM, just a dreadful company, setting records for quarterly revenue declines, and bringing up the rear in the cloud space, and desperately trying to be cutting edge with IBM Watson. If IBM Watson is your business development deliverable for the last decade you know you are an antiquated old tired technology company on the decline. Yet Warren Buffett who routinely stated he didn't understand technology companies, and this reasoning was behind him avoiding the sector for decades from an investment standpoint, last year was pumping and promoting that IBM stock in any interview he could find. Warren when the only thing holding up the stock is your doubling down and their share buybacks with the fundamentals looking just terrible quarter after quarter what were you hoping to achieve with that technology investment? Did you even look at Amazon? How did Amazon`s fundamentals compare with IBM`s fundamentals at the time of the initial investment in IBM? He finally threw in the towel after continuously talking up IBM share buybacks quarter after miserable quarter and sold his entire IBM position.

So Warren Buffett`s next foray into the technology sector is Apple where he started an initial position last year and started adding to it to the tune of acquiring a 5% stake in the technology and hardware company. This sure looks a lot like his IBM stock purchase, just a little earlier in the inevitable fundamental decline cycle, but a large blue chip technology company that pays a dividend, and buys back a lot of stock through share repurchases, but hasn't created the next growth product since Steve Job`s departure from the company.

Remember how all the analysts were talking about the 10-year anniversary of the IPhone, with this release going to be a real game changer for Apple revenue growth? Well it frankly has been a disappointment at best, and certainly not a game changer for reviving Apple's stagnant revenue growth, and declining IPhone sales. Of course, this makes sense as the smartphone market which accounts for the majority of Apple's revenue is a mature market, and smartphones have been “gimmicked up” over the last 5 years to about peak gimmick that one can squeeze out of that marketing trick. Everyone that already has a capable smartphone at this point probably doesn't need another one, and the need to upgrade for one slightly new gimmick feature doesn't justify the $1,000 price tag that takes consumers three years to pay off. This money is better spent elsewhere for consumers discretionary income with inflation rising by the quarter.

But from a more meta-investment standpoint what is Warren Buffett thinking here? He avoided the stock like the plague for over a decade of the high margins and growth phase of the IPod launch and ITunes, and then the massive IPhone and Smartphone Supercycle decade, and every Tom, Dick and Harry and their cousin Ralph jumped in on this Apple Investment Stock in the most heavily owned issue on the street, and now he wants to come in and build a stake in the company? Furthermore, and is actually bragging on tv every chance he gets how this is such a great company, and he has made such an astute investment at this point in the investment cycle of not only Apple`s huge run over the last 20 years of which he sat on the sidelines for, but the end of the QE Central Bank liquidity era, top of the top in financial markets, i.e., bubble territory by historical standards, and likely the end of this 10 year business cycle, and looming recession probably spurred on by debt, inflation, and inventory cycle norms just around the corner. And now you build a 5% stake in Apple while all the smart money like David Tepper is running for the exits in this decade long crowded trade? Apple was downgraded again today with the analyst rightly sceptical that service growth is going to magically save the day from the end of the smartphone supercycle, just like the anniversary I-Phone talk was misguided by stock pumping junkies.

Apple is done as a growth company, they will be on the decline for the next decade plus as everything they produce becomes fully commoditized and generic. Shoot their best laptops have outdated specs by at least 8 months, and are overpriced by $1,000 bucks to the best comparable laptops with the same sleek, lightweight design features, with much better tech specs inside. Just research for yourself for a high end laptop configuration, Apple will stack up very poorly to the competition. Consumers might be fooled by branding over the short term, but with inflation rising each year, and everything Apple produces being fully commoditized, they will gravitate towards the best product with the best specs and a much cheaper price versus a stupid marketing logo that can be covered up with a protective case anyway. It appears Warren Buffett will be the bagholder of bagholders in this stock, as the most overcrowded trade in the history of Wall Street and Financial Markets unwinds over the next five to ten years.

I expect the next earning`s report to be quite insightful of where Apple is heading in the future, and more investors will realize that not only can Warren Buffett not stop declining fundamentals from occurring in a maturing smartphone market, but moreover, he is becoming a sign of when to exit a position in a company, especially when it comes to technology blue chip stocks. Everything that makes Apple look like an attractive investment happened in the past, and everyone piled into that investment thesis, now the commoditization phase takes hold, growth starts declining rapidly, investors run for the exits, and you get the classic “Value Trap” scenario that is all based on backward looking metrics and fundamentals. It's the future that matters from an investment standpoint, not what a company did 10 years ago!

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The NBA Is Rigged

May 27, 2018 by EconMatters   Comments (0)

By EconMatters

It has long been speculated that the NBA assigns certain refs to officiate games to get outcomes they want for either prolonging a series to get more game and advertising revenue or providing refereeing advantage where necessary to make certain more marketable NBA Finals take place which brings in higher ratings, more media coverage, and thus more money. I always say when in doubt, just follow the money trail.

This goes all the way back to the famous Lakers-Kings game 6 refereeing shenanigans where the NBA makes much more money if the large media market and sexy team the Los Angeles lakers advance to the NBA finals versus the small market Sacramento Kings without the likes of Kobe Bryant and Shaquille O'Neal.

Well even the casual NBA fan could see that the fix was on in the NBA last night as the NBA refs completely changed the tenor of the Houston Rockets and Golden State Warriors game last night right as the cash cow marketing machine Golden State Warriors where on the verge of being run out of the building.

The NBA is a often called a “Make or Miss League” because of the fact that if one team misses the level of talent is such that there is an immediate advantage gained by the defensive team that transitions to offense because this sets up a fast break the other direction against a defense that hasn't had time to set up its defense.

Well the lesser known truth is that the NBA has become a “Call Fouls or Don't Call Fouls League” which has the same result because if one team is allowed to foul the other team attacking or driving to the basket, or reach in and foul and cause a turnover, or body slam an opponent to the ground causing a missed shot these all set up fast break opportunities and often 4 on 5 scenarios on the other side of the court leading to easy baskets or wide open three pointers.

It was pretty obvious last night that the Houston Rockets were playing 5 on 8 from the start of the second quarter through the pivotal third quarter. The Houston Rockets made 8 out of 12 three pointers in the first quarter and were well on their way to upsetting the NBA`s Dream Team the Golden State Warriors. The Warriors were desperate they went into desperation mode, their only option at that point was to overplay the three point line, force the rockets to drive to the basket, and foul on every play, hoping that the referees would give them the benefit of the doubt. After All, they are the Dream Team, the favored media darling, the marketing cash cow for the league, there is no way the NBA referees will let them lose this series!

This was the strategy, but the Golden State Warriors didn't really have to hope the referees would oblige, just look at Game 2 of the Pelicans Series in the previous round at Oracle Arena, the fix was on in that game, and the small media market Pelicans Team would have won that game if the NBA Refs didn't step in and determine that game in favor of the Warriors.

So the Warrior players know through experience that they can camp out in the lane with Draymond Green and not get an illegal defense call, knock players to the floor, set illegal moving screens on offense, reach in from behind when they are beat causing turnovers, and hand check and hold on every drive to the basket because they are going to get the “Dream Team Treatment” in the end from the referees. The warriors are actually pretty bad on defense if you call the game legitimately, they have a bunch of offensive players who are slight in build and can't guard a ham sandwich besides the licensed thug that is Draymond Green. They have no hope for stopping drives to the bucket with a 6 foot 7 inch center the only thing standing in front of a made hoop on the defensive end of the floor. Golden State`s only defensive option to stop other teams from driving at will to the basket is to foul on every single drive! Steph Curry and Draymond Green would foul out by halftime if Warrior games were ever officiated correctly. Steph cannot keep anybody in front of him, and reach fouls/hand checks on every single drive and Draymond grabs and holds much taller guys under the basket, and comes in to body slam opposing players as they blow past Steph Curry on every drive. The Golden State Warriors have always been given preferential treatment on the defensive end of the court because of the Branding of the Team and what this means to the NBA coffers from a money perspective. They are very good offensively, and easy for the NBA to Sell to the public, so give them the benefit of the doubt on the defensive end of the court. In other words, for the sake of the NBA let them get away with employing a fouling on every drive strategy on defense, and we will just not make the call the majority of the time. They literally foul on every drive to the basket because they have no legitimate rim protection, and no other legitimate way to stop other teams from relentlessly attacking the basket except for routinely fouling on drives, thus daring the refs to make the call and upset the league office and revenue dollars of the NBA Marketing Machine.

The Golden State Warriors strategy is simple they can`t stop anybody driving legitimately, they have no center to speak of to protect the rim, so their only real option as a defensive strategy is to foul on every play, expect the referees to only call 15% of the actual fouls maybe 20% on a bad day, get away with and benefit from the other 60% where the other team is fouled but not called, and live with the miracle shots the opposing team makes on the other 20% that happen to go in through superhuman effort. All this relies on the Branding Effect that they are the Golden State Warriors, the NBA Dream Team, there is no way the NBA is going to allow the Cash Marketing Cow that is the Dream Team not advance to the NBA Finals - we are entitled to preferential refereeing when necessary! And it sure was necessary last night, good job NBA you pulled out all the stops last night - you were going to make that happen one way or another just like you did to the Sacramento Kings in the 2002 NBA Playoffs!

It was real obvious what was going on last night as the ball would be knocked out of bounds by Golden State in a very obvious manner yet they got the ball back without discussion, they would get two ticky tack fouls on one end of the court, the rockets drive to the basket get knocked to the floor by two players in a no-brainer foul, and play on, and then another ticky tack touch foul on the other end. There were three or four refereeing sequences in that game where it was very apparent the refereeing fix was on in that game, this was more than just good old home court calls, this was a rigged game with a massive agenda to do anything and everything possible to swing the momentum of that game!

Good job NBA you keep losing more credibility by the day, you allow a system where only 3 teams have a legitimate chance to compete for a championship every year, you fix games routinely through rigged officiating, either sending certain refs to various games who will guarantee a given outcome, or just blatant rigged officiating, and you now have the nerve to want in on the gambling money betted on your games - geez no conflict of interest looming there! Not going to watch a Golden State Warriors Finals - I can spot a Rigged Game or System a Mile Away!

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The Last Straw of “Shadow” National Debt

May 25, 2018 by EconMatters   Comments (0)

By EconMatters

America is truly a debt nation.  Our national debt is now $21 trillion on course to approach $29 trillion by the end of the next decade with more than $1 trillion in annual deficits according to the Congressional Budget Office (CBO).  Debt held by the public will be driven to nearly 100% of GDP by 2028.    
Consumer debt in America amounts to $14.9 trillion in mortgage debt.  Other types of debt such as credit card, car loans all exceed $1 trillion.  But the more troubling trend comes from the student or education-related loan. 
Boomers Carry More Student Debt than The Millennial  
Our entire nation has over $1.48 trillion in student loans, spreading out among about 44 million borrowers.  However, a recent analysis of American debt revealed boomer borrowers now owe more money in education-related debt, on average, than do millennial college graduates.  According to data from the Fed’s 2016 Survey of Consumer Finances, 65- to 74-year-old borrowers owe an average $35,400, while people under age 35 owe $32,900 on average in student debt. 
A recent study by the Consumer Financial Protection Bureau (CFPB) also finds the number of consumers age 60 and older with outstanding student loan debt hit $2.8 million in 2015, a whopping 400% increase in 10 years from 2005 to 2015.  (FIGURE 1).  
During the same period, CFPB says the share of all student loan borrowers that are age 60 and older increased from 2.7% to 6.4%.  That percentage is still relatively small, but the rate of acceleration is quite alarming.  While some of those older borrowers may have carried their own student debt, the majority took out or cosigned loans to help pay for their kids or grand kids college education.   
A separate report by Nerd Wallet paints a similar picture.  The share of federal student loan borrowers holding a Parent PLUS loan—a federal student loan available to the parents of dependent undergraduate students—roughly quadrupled over the period between the 1989-90 and 2011-2012 school years. 
There is also another compounding factor against older borrowers of the student loan.  Loan experts say parent PLUS loans can carry higher interest rates, and a higher origination fee than other types of financing. 
Default Risk Rising  
Blame it on the spiraling cost of college education tapping out the parents and/or grandparents, the most convenient candidates, to take out these educations loans than they might have been in the past.
The conventional thinking is that typical student debtors are younger, in the 20s and 30s, with increasing earning power in the coming years so debt re-payments should become easier, therefore, the default risk is lower.  The opposite is true for older borrowers. 
One in three or 37% of federal student loan borrowers aged 65 and older are in default, according to a recent GAO report, much higher than the younger age brackets.  Some of them even got their social security benefits garnished to repay a federal student loan.  
I imagine a lot of parents and grandparents probably took out second mortgages or other funding means to finance the education of their young.  The debt and default numbers are most likely far worse than the official books of student loan.    
Solving Problems, the Millennial way
For decades, the millennial has been complaining about how their generation is so special, but instead so sadly strapped down by high student debt, rising rent and housing prices and poor job prospect. 
One way to counter rising rent is to live with their parents or even grandparents.  That maybe a diminishing possibility as parents of grandparents, saddled with additional student loan, could lose their homes.  (The boomer generation also went through high inflation and recessionary periods without this "home with parents" phenomenon.)         
I now realize it seems the way around high student debt is getting their elders to share the debt load with little regard how the debt would affect their older family members. 
Of course, we all have seen the “poor job prospect” could be mitigated by long brainwashing corporations that the only way to save America is to replace older boomers in key managerial positions with inexperienced and barely qualified millennials.  
“Shadow” National Debt, The Last Straw  
The profile of the student debt portfolio has shifted dramatically towards the nation’s seniors on behalf of their next generations.  It is a debt bomb across multi-generations and nobody seems able to pay it back.  Eventually the government will need to come in and do another bailout.  There is already a U.S. corporate debt crisis in the making, and now student debt has escalated close to another debt crisis in the making. 
The $21 trillion nation’s debt is what’s on the books.  President Trump just signed a $1.3 trillion budget earlier this year.  His “tax cut” benefits primarily the corporations to pay less taxes.  The short-fall “deficit” will still come from the taxpayers. 
Student debt and corporate debt are two examples of “shadow” national debts that are off the books  and eventually will fall on regular taxpayers.  These additional debts the government may need to take on by issuing more Treasuries and bonds.  With rising interest rates and interest payments, how long do we think our nation could go on financing debt with even more debt?  The outlook is indeed grim, my fellow Americans.  The quietly off-the-books "shadow" national debt would be the last straw breaking this camel’s back.   

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Corporate America vs. Margin Call, the Movie

May 17, 2018 by EconMatters   Comments (0)

By EconMatters

If you have watched the movie Margin Call, you should remember the scene where Stanley Tucci's character gets a knock on door by an HR woman and brought into a conference room in front of the entire floor.  Employees on the floor are all looking on and know exactly what's going on.  In the conference room, Stanley Tucci was coldly laid off by two paper pushers and immediately escorted by security out of the building.    

The movie also depicts how this "incident" has a reverberating effect on all employees.  I have always thought it was a dramatization of a movie script.  I get that laid-off has become a common event in Corporate America surviving in the less than prosperous bigger environment.  But I have always thought for sure American corporations go about it in a more dignified and respectful manner as the sudden job loss is quite traumatic for the employee to process already.  
Nevertheless, a recent event happened to one of my friends has totally changed my view and I am beyond flabbergasted how corporations have stooped so low treating employees.  

My friend has 20+ years of experience in her field with a Master’s degree and all the certifications to impress.  I'm flabbergasted not because of the fact she got laid off, but the way her company handled it.    
The New Order of "Public Lay-off"
She came to work as usual in the morning.  Then a lady she's never seen before and in a "not so inside voice" came over telling her to go to HR and take her belongings.  Mind you, she did not have an office, so essentially half of the floor, at the minimum, heard the exchange. 
This type of "direct" approach my friend experienced usually is "reserved" for employee facing termination due to some criminal or serious breach of ethics conduct.  Needless to say my friend was in a panic not knowing what she had done wrong. 
After she got to the HR office, another HR woman started by saying "I need to inform you that today is your last day of work and I'm here to go over some paperwork with you."  The HR woman went on to say the reporting managers of my friend were out of town not available in person (cowards!).  She then asked "Did you see this (laid-off) coming" and kept asking “Are you ok?"  

I mean what kind of question is that? 
Did You See It Coming?
Her company was acquired by a foreign competitor last year.  After the acquisition, the immediate impact was the laid-off of 1,000 U.S. employees.  There were 3-4 more rounds of laid-off and many employees quit within the past 14 months.  The senior management announced two weeks before that the department is “safe” from more layoffs.  Furthermore, my friend was recently assigned to a high profile project.  

So no, nobody could have seen it coming.    
Are You OK? What Do You Think?
   
Human Behavior 101:  
People usually are “ok” until someone asks “Are you ok?”.  

The more you ask "Are you ok?" to a person still processing the news of a job loss decided by somebody else, the more you are pushing that person into an emotional "bad place".  And I thought HR is supposed to be proficiently trained to handle this type of situation.     

After a bunch of paperwork and explanations how she needed to sign "The Release", my friend was taken into another conference room to an outplacement service person.  Her ex-employer of course outsources the outplacement service.  So she was forced to face yet another stranger while still sorting things out.

Are You OK? Again!

The outplacement service person also kept asking my friend "Are you ok?" (She and the HR must have gone to the same training class.)  Then the outplacement person went on asking if my friend has anyone at home to share "this" with and that it is best not to share "this" with kids as kids tend to worry more than adults.  My friend does not have kids and I think that person was just reciting a standard script. 

So here was my friend trying to process everything thinking about how to move on, but instead she was forced to dwell in the "job loss room" right there AGAIN.  Then my friend was escorted out the door by the outplacement person.
The Magic of Modern Communication
In Margin Call, Stanley Tucci at least was able to box up at his desk (albeit escorted by a security guard), but my friend was not allowed to go back to her desk.  So she had to think really hard what she had left behind to request her ex-employer to ship them back to her home.  

The next day, while my friend was still recovering, she got a Linkedin message from an ex-coworker who’s moved out of state that she had heard what happened.  From the way the message was worded, it seems none of my friends co-workers knew what happened and probably assumed my friend was terminated for cause.  

In this situation, her quite "public" and abrupt "departure" has also reverberated far and beyond, similar to Margin Call.   
How It Used to Be
The laid-off process I've witnessed usually starts with the employee getting a meeting invite regarding some vague subject, or a straight phone call by his/her manager.  Then when the employee appears in the meeting room, he/she sees the manager and the HR person.  The manager typically breaks the news and leaves before HR takes over.  The outplacement service comes later through email or phone calls outside the corporation after the employee has some time to process.   

One Hick “Fortune 500“  

If you think my friend's ex-employer is some hick mom-and-pop company, you would be wrong.  We are talking about a Fortune 500 company that ironically keeps preaching “Respect” as part of its corporate culture. 
Respect, Decency, Dignity
It is entirely unnecessarily that corporations have to let employees go in such an undignified manner.  It seems corporations are eager to show that employees are just numbers and should be treated as such.  If money is all companies care about, then treating employees (even the outgoing ones) or anybody with respect, decency and dignity does not cost money.  Do you think how this whole thing played out has not traumatized my friend's co-workers affecting productivity and morale?  Or does the company even care?   

I believe this is also a reflection of increasing workers in Corporate America with lower quality of education, training and EQ which is a deep-rooted problem taking decades to materialize. It is part of the reason why America has gradually lost its dominant position as the world leader.     

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The Smartphone Super Cycle Is Dead

May 16, 2018 by EconMatters   Comments (0)

By EconMatters

Those Apple Channel checks that got investors all worried ahead of Apple's latest earnings report were spot on, it will show up in this next quarter, as these are forward looking due to the supply chain logistics cycle.

This makes intuitive sense though if you think about it as smartphones have become a mature product category they have become even more commoditized. In fact one can take a low end $50 dollar smartphone and compare it to a high end $800-$1000 smartphone and there are only minor differences in product specs with technological convergence of all the best and necessary features along with a healthy dose of innovation fatigue. There are only so many marketing gimmicks that Apple or Samsung can come out with at this point in the smartphone cycle, and none of these move the bar enough to justify even the time of buying a new high end Smartphone and transferring over your contact and data information, not even considering the cost of an additional $800-$1000 for the new phone.

In short consumers will keep their existing smartphones longer than ever before, as they value them enough given the high price tag to protect them with proper protective cases, all the features are about as good as they will ever utilize, and consumers would rather spend that $1000 elsewhere. These days consumers are going to hold onto smartphones for at least 3 years or several upgrade iterations, and not run out and buy the latest product upgrade. It is pretty hilarious watching Apple`s desperate marketing of the Red Phone when consumers can easily just buy a much cheaper stylish protective case in any color they desire.

In the latest quarterly filings of Hedge Funds you see the smart money getting out of Apple stock, and the dumb money in Warren Buffet and Apple themselves buying their own stock at the top of the market. Warren Buffet buying Apple Stock at this point in the Smartphone cycle after everyone else buying the stock for a decade in the most overcrowded trade on the street and the QE Supercycle also coming to an end will provide a nice parting shot into his retirement career. This is even worse than his foray into IBM where he finally threw in the towel after many double downs on that technology dinosaur. Apple will miss the next earnings report bad, investors will finally get that smartphones have become boring commodity products that nobody will ever stand in lines for ever again, and many people will keep their smartphones for five years going forward.

However, this is just the start of the downturn as Apple gets most of its revenue from smartphones, they have failed to come up with a replacement product, and everyone on the planet who needed a smartphone has already purchased one in a decade of a strong business cycle. Talk about terrible fundamentals, Apple is a short for the next five years at a minimum as the QE Central Bank money leaves financial markets, Apple continues to have declining smartphone numbers, and the global economy heads into recession with the debt and financial market bubbles finally bursting making this next recession one of the worst in a century. Good luck marketing a $1000 smartphone with some new marketing gimmick going forward in that economic environment. The Smartphone Supercycle is over, Apple has had its decade long run, and to cap it all off they built that stupid spaceship office in California, usually like stadium naming rights this marks the top in a company. The only people buying Apple stock will be Warren Buffet all the way down in a value trap and Apple trying to prop up the stock effectively trying to cover up massively declining revenue growth that comes along with the death of the Smartphone Supercycle.

Those channel checks are right and the pain is just beginning, think about how long you will wait to buy your next high end smartphone? Do you have the same compelling reason to run out and buy the latest Samsung or Apple iteration? The minute differences just don't amount to much in the overall scope of a mature smartphone market where they keep going up in price with only incremental new benefits for the consumer. Similarly to how the Commodity Supercycle ended with a crash in commodity prices, expect smartphone prices to start crashing, even at the high end, as these really are just handheld computers in the end.

And once the marketing hype fades away when all phones are basically the same damn device that can take pictures, make calls and watch videos and movies equally well, they have in essence become fully commoditized. Next to occur is the price crash in smartphones, once they become fully commoditized, prices start reflecting this fact, and start falling as any commodity product does in the end. Just wait until Apple has to start lowering prices on those high end smartphones just to get rid of excess inventory!

So I-Phone margins are going to go down considerably from here for the next decade! Think about that for a minute. It only makes sense that Warren Buffet is Apple's biggest fan, and he finally has an IPhone but it is too complicated for him to use, so he still uses his flip phone. He is basically a technology luddite who will be the last to know when the technology market has changed. He is just looking at Apple from all the value metrics that have occurred in the past, the classic value trap! All those pretty financial metrics have occurred in the glory days of the Smartphone Supercycle, Apple will trade going forward on all those pretty financial metrics going south along with the death of the smartphone as a sexy must have device.

Smartphones are actually pretty boring these days, like a hit song that has been played too much. The newness of the product category and technological innovation has run its course, and all the hype in the world isn't going to make consumers run out and pay a $1000 bucks to replace their current phone that works perfectly fine. In short, the Smartphone Super Cycle is done!

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Oil and Gasoline Spike While Trump Does "Deal Making"

May 15, 2018 by EconMatters   Comments (0)

By EconMatters
May 15, 2018

Calling it “a horrible one-sided deal that should have never, ever been made”, President Trump declared last Tuesday that the U.S. will pull out of the Iran nuclear deal made under the Obama administration. The United States is now preparing to reinstate all sanctions along with additional economic penalties on Iran.

French President Emmanuel Macron, German Chancellor Angela Merkel, and British Foreign Minister Boris Johnson all traveled to Washington in the past few weeks to lobby Trump to stay in the Iran deal. The withdrawal by the U.S. no doubt angers America’s European allies, plus Russia and China who all would like to see the deal go through.

Why the Iran Deal Is Important (to Everybody Else)

Why all the other countries care so much about the Iran deal? When in doubt, follow the money. The initial pact will impose strict limits on Iran’s nuclear program in exchange for lifting sanctions on the country. Once sanctions are lifted, many corporations in Europe, etc. seeking new growth and opportunities, are eager to do potentially lucrative business deals with oil-rich Tehran.

I am not going to do a full geopolitical analysis here regarding the potential impact of Trump’s “new” foreign policy on Transatlantic Trade and Investment Partnership (TTIP) and NATO, but will discuss some of my personal observations.

Oil and Gasoline Prices Get Squeezed

First of all, this announcement seems ill-timed coming out right before the official start of U.S. summer driving season with an immediate negative impact (for consumers) on oil and gasoline prices.

Iran is a member of OPEC and one of the top 5 oil producing countries in the world. U.S. benchmark WTI oil price hit above $70 for the first time since 2014, while Brent currently sits around $78. By reinstating and adding sanctions on Iran, the new pressure on geopolitics and supply will squeeze the oil and gasoline prices higher than they should have been. Not to mention this may upset the balance of the oil cartel production decision in the upcoming June meeting.

CNBC reported domestic gasoline prices are expected to spike to 4-year highs pushing the national average above $3.00 a gallon this summer. This is mostly due to higher oil prices from OPEC/Russia production cut and instability in Venezuela without even taking into account the additional premium resulted from Trump’s Iran deal decision.

Bad Business Brings No Goodwill

Another observation is that as a nation, going back on a previous promise or commitment is just bad business no matter how you slice it. This is not the first time either. Trump also withdrew from the 2015 Paris Climate Agreement. While it is important to not back out of campaign promises, backing out of deals with every new president will leave friends and allies alike wondering if, with every new president there will be a new policy, causing instability to foreign relations and the economy.

Most likely, this is one of Trump’s tactics hoping to leverage a new and “better” deal, but in his simple math, he fails to take into account and quantify many moving and intangible pieces. When You Need a Friend

The irony is that Trump still reiterated the importance of allies’ “support” in solidifying the meeting and negotiation with North Korea. In his Iran deal announcement speech, Trump specifically mentioned help from China, along with South Korea and Japan.

Well, I’m not sure this is a reflection of low EQ or just plain bullheadedness. Besides the fact that backing out of the Iran deal has infuriated many allies, Trump also seems to have forgotten about a few rounds of the tariff tit for tad with China. China has a lot of deals on the line with Iran as well, and Trump just expects Xi Jinping to “return a courtesy” supporting Trump’s other initiatives?

Isolation Is Never a Good Thing

According to Reuters, so far China, France, Russia, Britain, Germany and Iran remain in the accord to place controls on Iran’s nuclear program and leading to a relaxation of economic sanctions against Iran and companies doing business there. Similarly, the Paris Climate Accord has 194 states and the European Union signed on as of April 2018.

It seems the rest of the world is moving on with or without the U.S. In the end, this type of lone-wolf move may seem boutique and “a breath of fresh air” to Trump’s supporters. However, no matter how justifiable in Trump’s or anybody’s mind, this will only isolate the United States, alienating allies and other friendly countries U.S. does business with.

Is It Really Such a Bad Deal?

I think the better question would be if these two deals were as bad as Trump indicated, then why are so many countries willing to go through with them?

There are many opinions regarding the pros and cons of these two deals Trump withdrew from. That means Trump will find support regardless which direction he moves. Fundamentally, I think Trump is treating foreign relation and policy like a commercial negotiation “making deals” as he used to do before taking office.

BATNA for Thought

It is true combative Art of War could be applied in many situations; nevertheless, Washington has to come to terms with the reality that America is not the as big a “player” on the world stage with the greatest leverage any more. Playing hard ball is unlikely to get you anywhere.

Instead, think about BATNA, which is a famous term developed by negotiation researchers Roger Fisher and William Ury of the Harvard Program on Negotiation in their 1981 bestseller, Getting to Yes: Negotiating without Giving In. BATNA stands for "Best Alternative to a Negotiated Agreement.

In BATNA theory, the common pitfall is that most people involved in a negotiation overestimate their BATNA while investing too little time into researching their real options. This usually results in poor or faulty decision making and negotiating result. Does that sound familiar and adequately describe Trump’s “deal making” so far?

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Cryptocurrency: Money or Asset?

March 28, 2018 by EconMatters   Comments (0)

By EconMatters
March 28, 2018

Some of the hypes and speculations surrounding bitcoin and cryptocurrency is that central banks may create their own digital currencies thus replacing fiat money altogether. A G20 draft communiqué already states cryptocurrencies “lack the traits of sovereign currencies” and seeks cryptocurrency regulation recommendations by July 2018. The Bank of International Settlements (BIS) also published a report last month entitled “Money in the digital age: what role for central banks?” stating:

“… while cryptocurrencies may pretend to be currencies, they fail the basic textbook definitions. Most would agree that they do not function as a unit of account. Their volatile valuations make them unsafe to rely on as a common means of payment and a stable store of value.”

Currently, cash is still king and most of the central banks have not gone into the coin business, but the usefulness of cryptocurrency has not lost on all of us. Countries with serious currency or financial troubles may find cryptocurrency a more stable store of value providing stability to the economy.

Solving Sanctions One at a Time

For example, Iran and Venezuela are both subject to trade sanctions from the United States. Venezuela in particular is suffering from triple-digit annual inflation rate set to jump to more than 2,300 percent in 2018 according to IMF. The nation's official currency has lost much of its value amid recent political turmoil that Venezuela came up with an oil-backed “petro” cryptocurrency and raised more than $735 million.

Iran government also announced in February that state-run Post Bank is working on developing a cryptocurrency. There are also reports linking North Korea to cryptocurrency mining and other attempts to use the digital currencies as a way to evade sanctions and that Kim Jong-un could own as much as 11,000 bitcoins worth about $87 million at today’s price.

Big Banks Strategy

Some other countries such as China, Russia and Singapore also have been experimenting with developing their own digital currencies. Banks, on the other hand, are much more cautious. The volatility of Bitcoin et al has prompted major banks like JPM and Citigroup to ban purchases of Bitcoin and other cryptocurrencies on their credit cards. But that is not to say big banks are staying away forever.

Barclays and Coinbase and Barclays just recently revealed a first major partnership between a U.K. bank and cryptocurrency exchange. This is part of the effort by Coinbase to offer clients a faster and safer payment and transfer process.

Another move by banks and financial services firms is contemplating using blockchain as a record of asset ownership replacing a series of internal ledgers. The idea is to make tamper-proof databases costing a lot less than a conventional database. Santander Bank estimates that blockchains could save banks up to $20 billion a year by 2022.

Safety and Protection

Theoretically, cryptocurrencies' underlying blockchain technology eliminates the need for a third party and allows for instant, irrevocable and secure transactions. However, bitcoin and cryptocurrency was purposely designed with anonymity and lack of control in mind (think money laundering and terrorism financing), and user/consumer security and protection was not the main focus of the original protocol. That is one reason (among many others) why regulators around the world have widely viewed bitcoin and cryptocurrency with a critical eye.

Cryptocurrency NWO?

If crypotcurency is an asset class, then there’s a need to have cryptocurreny exchanges to trade one token or coin for another with digital encryption provides individuals with control over their data; privacy, security and fluid transfer of assets. The cryptocurrency world seems to envision a “new internet” is needed for a new “decentralized world”, which unfortunately is yet to be created/invented.

Right now, Cryptocurrencies have become more popular as trading instrument than a payment system. Bitcoin and cryptocurrency may one day become the world virtual currency on the “new internet” in the new “decentralized world”, but it is not now.

Disclosure:  No positions

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Tesla Cash Keeps Burning at $320 a Share

February 12, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 12, 2018

Financial markets are off to a good start today trying to stabilize after the worst week in two years for American equities. The tumultuous move in equities last week wiped $2 trillion from U.S. Tesla Inc. (TSLA) stock performance also took a beating at its worst week since July. The stock is trading around $316 at this writing, up 15% in the past 12 months. That compares with gains of 13% for the S&P 500 SPX, 20% for the Dow Jones Industrial Average (DJIA).

Tesla, EV and the Auto Industry

According to the latest sales data, the US auto industry has cooled off considerably with Americans keeping vehicles longer or purchasing lower-mileage used cars instead of new ones. Auto dealers have reduced prices and have extended loans to 72 months or more to move sales, but there is still an oversupply of new cars in the market. Crossovers, sport-utility vehicles and pickup trucks are the most popular making new car sales in the US.

For Tesla, Model X is supposed to be its answer to the SUV popularity in the US. However, even Musk said Model X is too complicated to configure and produce. So this means Tesla is missing out on roaring SUV boom. Adding insult to injury, Consumer Reports magazine rates the Model X second to last in its ranking of 15 luxury midsize SUVs.

For vehicle purchase, the deciding factor is still price (total cost of ownership, including resale value). Electric car prices are falling, but they still cost more than the gas counterparts due to their expensive batteries. With regular gas prices averaging $2.58 per gallon, it's hard to justify the price premium of an electric vehicle (EV).

Regarding resale value, according to Edmonds.com, electric cars haven't yet proven their durability, and buyers of used electrics are worried about battery costs. This could be another reason to deter consumers taking the plunge into an EV instead of a traditional gas car.

Many have debated when EV will take over the world. Well, here and now, at least not today nor in the near term. With this macro back drop, how did Tesla as a company perform so far?

A Promise of “Positive Operating Income”

Tesla just released its fourth quarter earnings last Wed posting its biggest quarterly loss ever in the fourth quarter -- negative free cash flow of $(276.8) million and an adjusted EPS of negative $3.04 for the quarter. For the whole 2017, Tesla’s free cash flow (FCF) was negative $3.48 billion.

To soften the blow, Tesla said it's on track to produce 5,000 Model 3s per week by the end of its second quarter, and 2,500 a week by the end of first quarter 2018. The Model 3, with a starting price at $35,000, is Tesla's first vehicle targeted at the mass consumer market. According to CEO Elon Musk, once that Model 3 production target is met, Tesla could begin to generate sustained positive operating income in 2018. That “promise” partly pushed the stock up 3% on the day.

You might wonder what the big deal is about “positive operating income”? Every company is in the business to make positive income, right? Well, In Tesla’s case, the company has never made any money, that is, the company has been burning cash fast and furious since day 1, and yet investors seem to think the lofty $300+ price per share is a bargain. So a promise by the CEO to have “positive operating income” in 2018 probably brought tears to the eyes of many shareholders.

Model 3 Production Ramp in Question

Model 3 production is an important cash factor to Tesla as the ramp-up could mean more money coming in from customers taking delivery thus alleviating concerns about whether the company had enough cash.

That production target for Model 3 has been delayed by Musk several times already. Apparently, Similar to Model X, Tesla has run into supply chain problem with Model 3 as well, which Musk has described as "production hell." Then last Friday, just two days after the earning release, Tesla filed with federal regulators to “clarify” CEO Musk comment regarding the Model 3 production schedule.

I’m not going to mince and interpret the words by Musk and Tesla, but I am inclined to share the lingering concerns by many analysts about the Model 3 production ramp and the company’s cash position.

Cash Keeps Burning

Furthermore, pay attention to the devil in the detail of Tesla’s earning call.

The company indicated its capital spending will rise “slightly” from the 2017 level. With $10.4 billion in long-term debt and capital leases (by the way, with negative earnings, Tesla does not even have a PE ratio), it is more than likely that Tesla will rip through its cash and raise capital again later in 2018.

Without this frenzy from central banks QEs, Tesla would have encountered serious financial problems long ago. Yet a charismatic CEO and a sexy vision (and promise) of a cleaner better world have kept investors cash coming.

 The highest price target among the Wall Street analysts who cover Tesla is $500 per share. Ideology aside, investors really need to think long and hard before paying $320 a share for a company that can’t effectively resolve its operational issues and has never made a profit.

Disclosure: No Positions

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