Tuesday, May 3, 2016

"Mania in Private Equity as Investors Throw Money at Funds"

From naked capitalism:
Anyone who has been around finance a while recognizes the blowout phase. Investors are desperate to put their money to work even when prices are look precarious. Deals go from being negotiated to being sell-side dictation. Rationalizations abound. Remember the line from Chuck Prince, then CEO of Citigroup from July 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Mind you, he was so bold to make that remark right as the Bear Stearns subprime hedge funds were imploding, which kicked off the first acute phase of the credit crisis.

But what most people don’t remember about that Prince quote was that it wasn’t about mortgages. It was about lending to private equity which had also gone into a moonshot in 2006 and early 2007. And as we’ll discuss in more detail soon, private equity again has the classic signs of being in another “devil take the hindmost” phase of frenzied capital commitments.

And the reason more of Citi’s loans did not come a cropper was that the “goose asset prices” that has housing prices and consumer confidence as its main targets incidentally bailed out private equity. Even so, private equity performance post crisis has been underwhelming, with investors on a widespread basis failing to meet their private equity benchmarks. That means they have not earned enough to compensate the risks of that strategy.

Even so, we know the reason Citi escaped being nationalized as a result of its overconfidence was the heavy representation of board member Bob Rubin acolytes in the officialdom, most important Timothy Geithner as New York Fed chairman and later Treasury Secretary.
Last year, average prices paid, measured in EBITDA multiples, were at record highs, exceeding the 2007 peak. Yet while past bubbles show that crazy prices can always get crazier, there are warning signs that a peak is probably coming sooner rather than later. The Fed is clearly eager to raise rates as soon as it has any thin justification to do so. A rising rate environment will hit long-dated and higher risk assets the hardest. That means private equity is doubly exposed.

And if the Fed does not continue tighetening, that would likely be the result of deflationary forces continuing to bite, say a downdraft from China, a shock wave from Europe due to a Brexit vote going through, or other centrifugal forces on the Continent strengthening (say Merkel losing her Chancellorship, or Marine Le Pen continuing to gain in French polls). Deflation is not a friend of risky assets. The best place for investors in inflation is in cash, cash-equivalents, and safe bonds. Inflation increases the cost of debt in real terms, which again is punitive to highly leveraged transactions, since deflation also leads businesses and consumers to tighten their belts, hurting corporate revenues and/or profits. And the popularity of negative interest rate policies only makes a bad situation worse. It hurts the incomes of retirees and other savers, leading them to curtail spending. It’s destructive to bank; bank pressure is reportedly one of the big reasons the Fed is so eager to ‘normalize”. It’s also destructive to investors like pension funds and life insurers....MORE

Old People Concert Confirmed: Rolling Stones, Bob Dylan, Paul McCartney, Neil Young, Roger Waters and The Who To Play At Coachella Venue

As always:
From Radio.com:

Desert Trip Details Announced: Rolling Stones, Paul McCartney, More to Play Coachella Venue
Rolling Stones, Bob Dylan, Paul McCartney, Neil Young, Roger Waters and The Who to play Empire Polo Field in Indio, CA, October 7-9
It’s confirmed. Rolling Stones, Bob Dylan, Paul McCartney, Neil Young, Roger Waters and The Who are set to play the Empire Polo Field in Indio, CA, October 7-9. If this location sounds familiar, it’s because it’s the same venue that the Coachella Music & Arts Festival has been held for 17 years. Goldenvoice and AEG Live, producers of Coachella, are behind this massive classic rock event. 
Desert Trip is the first-of-its kind, headliners-only multi-night concert featuring six Rock and Roll Hall of Fame inductees. 
The three night concert kicks off Friday night, October 7 with The Rolling Stones and Bob Dylan and His Band, followed on Saturday night, October 8 by Paul McCartney and Neil Young + Promise of the Real, with the weekend coming to a close on Sunday night, October 9 with Roger Waters and The Who. 
The bill consists of two acts per night with no supporting artists.
 
Tickets will go on sale Monday, May 9 at 10:00am PT via deserttrip.com. Similar to Stagecoach the giant country music festival held at the same location. But unlike Coachella and Stagecoach, single day tickets are available....MORE

Discussing Important Asset Correlations While Channeling Shakespeare

When I read this:
"...that bane of interesting narrative, that supporter of the yen, that acronym of dubious origin ..."
I thought this:
"This royal throne of kings, this sceptred isle...
...This blessed plot, this earth, this realm, this England"
Maybe it's just me.
On the other hand, if a writer is going to channel anyone, you definitely could do worse than Richard II.

David Keohane writing for FT Alphaville:

This re-correlated world
ICYMI, RoRo — or risk on/ risk off — is apparently back.
It’s not quite at peak levels but that bane of interesting narrative, that supporter of the yen, that acronym of dubious origin is getting back up there:
http://ftalphaville.ft.com/files/2016/05/Screen-Shot-2016-05-03-at-16.11.23.png
That’s from HSBC’s FX team last week as they reissued their RoRo charts and warnings. Remember, red means strong positive correlation, blue means strong negative correlation, green and yellow means correlations are heading to zero. So, as HSBC say: the RoRo ‘paradigm’ can be defined by three key features:
  1. “Risk-on” assets are positively correlated with each other
  2. “Risk-off” assets are positively correlated with each other
  3. “Risk-on” assets are negatively correlated with “risk-off” assets
This is what those correlations look like now:...MUCH MORE
http://ftalphaville.ft.com/files/2016/05/Screen-Shot-2016-05-03-at-16.22.24.png

"Unexpected" Australian Rate Cut To Record Low Unleashes FX Havoc, Global "Risk Off"

From ZeroHedge:
Three months ago, when Australia unexpectedly revealed that its recent "stellar" job numbers had in fact been cooked we asked, rhetorically, why the sudden admission it was all a lie? Simple: weakness in commodity prices "is far greater than people had been expecting,” the nation's top economist said. Australia is now "swimming against the tide" because of uncertainties in the global economy, he added. Which we translated as follows: "we need more easing, and to do that, the economy has to go from strong to crap." And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

Overnight this was finally confirmed when in a surprise move, Australia’s central bank cut its benchmark interest rate for the first time in a year to a record low and left the door open for further easing to counter a wave of disinflation that’s swept over the developed world. The move sent the local currency tumbling and local stocks climbing.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, a move predicted by just 12 of 27 economists surveyed by Bloomberg. The rest had seen no change. Data last week showed quarterly deflation in the consumer price index and the weakest annual pace on record for core inflation, which the RBA aims to keep between 2 percent and 3 percent on average.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in a statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”
As Bloomberg reminds us, Australia’s central bank acted after two regional neighbors stood pat last week - New Zealand and Japan. Illustrating the impact of central bank decisions on exchange rates, the Aussie has the weakest performance among the G-10 since last Wednesday, a day before the Bank of Japan and Reserve Bank of New Zealand meetings. The announcement sent the AUDUSD plunging.

"They’re saying that there’s no point in messing around, let’s get in and do this, cut the cash rate and get some of the speculative money out of the Australian dollar,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne....MUCH MORE

"How severe is the current energy sector default cycle?"

From M&G's Bond Vigilantes:
To date the defaults we’ve seen in the US high yield market have largely occurred in the energy/commodity sectors. To see whether this trend is likely to persist I spent some time comparing the current default cycle with that of the US telco sector in the early 2000’s (see also James’ recent blog for the parallels between today’s high yield market and that of 2001).

The telco bust occurred slightly later and was around ten times larger than the better-remembered dotcom bust. Following the industry liberalisation in the 1990’s firms in the sector built up about $1tn of debt. This debt was used to finance the construction of huge networks which, as it turned out, there was not enough demand for. Defaults began to pick up in early 2001 and peaked around twelve months later with more than 35% of high yield telcos defaulting as seen in the chart below.
https://www.bondvigilantes.com/content/uploads/2016/05/16.04.29-MR-blog-1.png 
 
 https://www.bondvigilantes.com/content/uploads/2016/05/16.04.29-MR-blog-2.png
The default cycle in the US energy sector began around a year ago and as at the end of March the proportion of US high yield energy firms in default stood at 15.2%, according to Bank of America Merrill Lynch. There have been 52 defaults over the past year in the US high yield market, of which 26 have been in the energy sector. This represents a much larger proportion of total HY defaults (50%) than did the telco sector at its peak in 2002 (below 30%)....MORE

"Dollar Continues to Push Lower"

Plaza Accord II, anyone?*

From Marc to Market:
The US dollar's downtrend is extending.  The euro traded above $1.16 for the first time since last August. With Japanese markets closed for the second half of the Golden Week holidays, perhaps participants felt less hampered by the risk of intervention and pushed the dollar to almost JPY105.50.  Despite an unexpectedly large fall in the UK's manufacturing PMI (49.2 from 50.7), sterling has pushed to its highest level in four months (~$1.4770).  
The Australian dollar is the main exception.  It is off about 1% following the 25 bp rate cut that brought the cash rate to a new record low of 1.75%.  Given the OIS and indications from other derivative markets, the market seemed set for a symmetrical response.  Even the surveys showed a nearly evenly divided outlook.  Twelve of 27 in a Bloomberg expected a rate cut.  
We had not be persuaded that last week's soft Q1 CPI was sufficient to put the RBA over the edge.  However, in explaining the decision, Governor Stevens recognized that while inflation had been low for some time, it was exceptionally low now (CPI actually fell in Q1), and the outlook had diminished.  He also noted the "very subdued" growth in labor costs.  
Before the RBA's announcement, the Australian dollar had climbed to $0.7720.  Recall it finished last week near $0.7600.  However, after the cut, the Australian dollar fell a little below $0.7560.  The government forecast a little more than an A$37 bln deficit that was in line with expectations and set the stage for a national election in early July.    This consideration may have also pushed the RBA into action today.  If the election is called, as widely expected, the June 7 RBA meeting and the July 5 RBA meeting may be too close.  
Investors have been well aware the UK economy has lost some momentum.  This understanding was confirmed by last week's estimate of Q1 GDP (0.4%).  Nonetheless, today's manufacturing PMI was a surprise.  It fell below the 50 boom/bust level at 49.2, and the March series was revised lower (50.7 vs. 51.0).  Export orders were weak, and costs and output prices fell.    The construction and, more importantly, the service PMI will be released in the coming days.  Both are expected to generate a consistent signal that after slowing in Q1, the UK economy is slowing further at the start of Q2.....MORE
*The idea is not mine to claim.
In an April 28 FT Alphaville post I've been meaning to link to for other reason's, Izabella Kaminska quotes the Chair of the Jerome Levy Forecasting Center:
...Purportedly, the additional strengthening of the dollar in late 2015 and early 2016 — on top of the strong rising trend of hte previous 15 months — was the primary cause of the January-February global sell-off. Moreover, it is claimed, a set of central bank policy changes following the February G20 meeting in Shanghai sent the dollar back down, revitalising financial markets around the world....
He's dismissing the idea but it sure does seem as if something changed in February.

Monday, May 2, 2016

Oil: As Russia and Saudi Arabia Fight For China's Market, Price Is No Object (and Tony Blair's sweet deal)

As a side note, the Saudis have hired former British Prime Minister Tony Blair for a pretty nice deal.
As I tell the young people, if you want to make real money go into politics.
From Forbes, May 1:

Saudi Russia Fight For China Market Make Oil Price A Sham
Oil closing in on $50 per barrel has little to do with supply. Sure, stocks have dwindled somewhat in the U.S. and China is slowing down but what about the fact that three of the world’s biggest oil producers are in a pumping war to capture market share in China and Europe?

Russia seems to have discovered China about a year or two ago. It’s building new pipelines. It’s signing deals between state owned enterprises. Oil is flowing. The Saudis are getting nervous as Russia eats into its China market. They’re shipping even more crude to China and some say they are doing it below market prices, taking a loss just to keep Aramco in China’s good graces.

With Brent crude settling at $48 on Friday, oil is close to hitting every Russian investment banker’s forecast — $50. There is very little upside left. The Russians and Saudis are still in pump and dump mode. More supply is coming.

According to Reuters, Saudi’s Aramco recently sold 730,000 barrels of crude to an independent Chinese refinery company called Shandong Chambroad Petrochemicals, one of about 20 independent refineries in China. What’s interesting about that sale is that it is apparently Aramco’s first spot sale to an independent. The company typically sells its crude through contracts of one year or longer, and under an Official Selling Price (OSP), rather than in spot market trades. But because Russia is making Aramco nervous, it’s offloading its crude at the spot market rate, only it’s not really the spot market rate because they are selling it at a discount to the Dubai benchmark, traders told Reuters. The 730,000-barrel cargo will be shipped to China in June from Aramco’s storage in Okinawa, Japan at below-market rate.

In other words, this oil price is a complete sham.

Then there is Iran. Iran was one of the reasons why oil prices were falling to the $30s only a few months ago. And they are only just getting started in the market. Iran’s government said it will increase oil production to pre-embargo levels eventually. Even though Iran claims to support the measures to strengthen oil price — as in reducing output, namely in Russia and Saudi Arabia — it’s state run oil companies would also like a piece of the action in China and Europe and a stronger oil price is not in Saudi’s interest. How do you keep oil prices deflated? You sell dollars and buy oil futures regardless of the fundamentals....MORE
The Daily Mail had the Blair deal April 29:

Revealed: How Tony Blair pressed the flesh with Chinese leadership on behalf of Saudi oil firm (in return for £41,000 a month and 2% of any deals done) 

If this keeps up Tony is going to pass Al Gore in net worth.
Seriously.

We have more on Mr. Blair's ventures, use the search blog box if interested.

Why Business Insider Is Losing Employees

From CNN Money:

Here's what Business Insider employees just said about why people are leaving
As 2015 drew to a close, it felt as though the year -- and the future -- belonged to Business Insider.
Emboldened by a $343 million sale to the German publishing giant Axel Springer, the company's co-founder, Henry Blodget, set his sights on global domination.

Business Insider, Blodget declared in November, was poised to become the "financial publication of record for the digital generation." He has shared with staffers another ambitious goal -- attracting a billion readers to Business Insider's constellation of sites.

But while Blodget was discussing his lofty vision, morale inside Business Insider's Manhattan newsroom had arguably never been lower.

The announcement of the sale to Axel Springer in September was followed by an exodus among Business Insider's editorial staff, which former employees have attributed to mismanagement on the part of a former top editor and exhausting pressure to grow the company's audience.

Four more staffers announced that they are leaving this month -- including a top editor on Wednesday -- bringing the total number of post-sale departures to 24, by CNNMoney's count.

The exodus has included some of Business Insider's most high-profile reporters and editors: Hunter Walker, Sam Ro, Caroline Moss and Julia La Roche.

Blodget, a former stock analyst who agreed to a lifetime ban from the securities industry to settle allegations that he gave out fraudulent advice, tried to ease concerns over recent departures during a staff meeting held last Wednesday at the company's headquarters.

He told those gathered in the newsroom that turnover is actually an encouraging sign because it means that employees are succeeding....MORE

"Islamic State turns to selling fish, cars to offset oil losses" (ISIS; ISIL)

From Reuters, April 28:
Islamic State earns millions of dollars a month running car dealerships and fish farms in Iraq, making up for lower oil income after its battlefield losses, Iraqi judicial authorities said on Thursday.

Security experts once estimated the ultra-radical Islamist group's annual income at $2.9 billion, much of it coming from oil and gas installations in Iraq and Syria.

The U.S.-led coalition has targeted Islamic State's financial infrastructure, using air strikes to reduce its ability to extract, refine and transport oil and so forcing fighters to reportedly take significant pay cuts.

Yet the militants, who seized a third of Iraq's territory and declared a caliphate in 2014, seem to be adapting again to this latest set of constraints, in some cases reviving previous profit-turning ventures like farming.

"The terrorists' current financing mechanism has changed from what it was before the announcement of the caliphate nearly two years ago," a report by Iraq's central court of investigation said, quoting Judge Jabbar Abid al-Huchaimi.

"After the armed forces took control of several oil fields Daesh was using to finance its operations, the organization devised non-traditional ways of paying its fighters and financing its activities," the report added, using an Arabic acronym for Islamic State.

Fishing in hundreds of lakes north of Baghdad generates millions of dollars a month, according to the report. Some owners fleeing the area abandoned their farms while others agreed to cooperate with Islamic State to avoid being attacked.

"Daesh treats its northern Baghdad province as a financial center; it is its primary source of financing in the capital in particular," Huchaimi said. Islamic State carries out frequent bombings in Baghdad against security forces and Shi'ite residents.

SELLING CARS, RUNNING FACTORIES

Fish farms have supplied militants with income since 2007 when Islamic State's al Qaeda predecessor fought U.S. occupation forces but the mechanism only came to the authorities' attention this year, the report said.

The militants also tax agricultural land and impose a 10 percent levy on poultry and other duties on a range of imports into their territory, it added.

"Recently there has been reliance on agricultural lands in areas outside the control of the (Iraqi) security forces through taxes imposed on farmers."

New revenues are also being generated from car dealerships and factories once run by the Iraqi government in areas seized by the militants....MORE

"What's the Mysterious Derivative Position Buffett Says Would 'Blow Your Mind?' (BRK.a)

That's one of the headlines at Berkshire's hometown newspaper (and wholly owned BRK sub.).
It was just a quick comment by Warren before he decided against going any further.
My guess is Deutsche but who knows-besides Warren and Charlie, the bank etc., that is.
Here's the quick hit from the Omaha World-Herald: 

What's the mysterious derivative position Buffett says would 'blow your mind?'

Warren Buffett says there is a time-bomb in the financial system, a badly mismarked derivative position, but he isn't saying where it is or who is on the hook.
The Berkshire Hathaway chairman and CEO made the startling proclamation while answering a question from a shareholder at the company's annual meeting Saturday at Omaha's CenturyLink Center  an all-day session attended by more than 30,000 people who come to hear the Oracle of Omaha testify about all things financial.

When asked about how he evaluates the derivatives exposure of banks Berkshire holds shares in, such as Wells Fargo, or those in which it has securities that one day will become share, such as Bank of America, Buffett unleashed a stunner.

He said he knows of one derivatives position unrelated to Berkshire he didn't say who, when or where that is very poorly accounted for. That usually means there is something wrong with the valuation of the derivative, perhaps a valuation that is outdated or which is based on flawed underlying assumptions or calculations.
"I know of one that would blow your mind," Buffett said....
...MORE

Oil: U.S. Producers Are Hedging At $45 and Up

Front month June's $45.63 off 29 cents.
From Reuters, May 2:

As oil plows through $45 a barrel, U.S. producers rush to lock in prices
U.S. oil producers pounced on this month's 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn.
The flurry of dealing kicked off when prices pierced $45 per barrel earlier in April. It picked up in recent weeks, allowing producers to continue to pump crude even if prices crash anew.
While it was not clear if oil prices will remain at current levels, it may also be a sign producers are preparing to add rigs and ramp up output.

This week, Pioneer Natural Resources Co (PXD.N), a major producer in the Permian shale basin of West Texas, said it would add rigs with oil prices above $50 per barrel.

Selling into 2017 tightened the structure of the forward curve, with December 2017's premium to December 2016 CLZ6, known as a contango, narrowing to $1.30, its tightest since June 2015. That spread had been as wide as $2.15 a barrel just four days earlier.

Open interest in the December 2017 CLZ7 WTI contract was at a record high of 122,533 lots on Friday, up about 20,000 lots from the start of April....MORE

The Dollar and The Yen: Not at All What Tokyo Desired

This chart is a disaster in the making (and not only for the carry trade):

https://1.bp.blogspot.com/-mKZohEI1dFo/VyVBKe8soHI/AAAAAAABM9o/l37uy0BbsIksGj3IRLgM75G4I37zd_0fACLcB/s1600/USDJPYDaily.png
106.41, down 0.09.
And from Marc to Market, May 1:


The die is cast.  The Federal Reserve is on an extended pause after the rate hike last December. The market remains convinced that the risk of a June hike are negligible (~ less than 12% chance).   The ECB has yet to implement the TLTRO and corporate bond purchase initiatives that were announced in March.  The impact of its programs have to be monitored before being evaluated.   It is unreasonable to expect any new initiative in the coming months.   
The Bank of Japan did not take advantage of the opportunity to ease policy as it cut both growth an inflation forecasts.   The focus ahead of the G7 meeting in late-May, being hosted by Japan, will likely be on fiscal policy, where the Abe government is reportedly trying to cobble together a front-loaded spending bill for earthquake relief and economic support.  There have been some calls for a JPY20 trillion (~$185 bln) package, in part funded by a new bond issuance that would be included in the BOJ asset purchase program.  (Note that Japanese markets are close for a couple days in the week ahead for Golden Week celebrations). 
The US jobs data is typically the data highlight of the first week of a new month.  It has lost its mojo.  This is more because of the Federal Reserve's reaction function than the ADP estimate that comes out a couple of days earlier.  The Fed accepts that the labor market continues to strengthen.  The nearest real-time reading of the labor market, the weekly jobless claims, has recently falling to its lowest level since 1973, and continuing claims are at 16-year lows.  It is clearly not sufficient for the FOMC to lift rates.   
The March core PCE deflator stands at 1.6%, which is a little higher than prevailed when the Fed met last December.  Similarly, the 10-year breakeven (10-year conventional yield minus the 10-year inflation-linked note) is also around 30 bp from where it was when the FOMC hiked.   
Another 200k increase in nonfarm payrolls is not a game-changer.  Even modest earnings growth is unlikely to do much to help the dollar.  The FOMC has already taken this on board.  The issue is not jobs or income; it is consumption and investment.  We suspect the dollar-risk is asymmetrical.  It is more likely to be sold on disappointment than rally on a stronger report.   
Another highlight at the start of a new month are the European PMIs, and so too next week.  The eurozone flash PMIs (Germany and France) were little changed, and that is likely to be seen in the final reading which includes more German and French data as well as other countries, notably Italy and Spain.   
Given the seeming urgency of the ECB and the doom-and-gloom commentary that continues to write eulogies for EMU, one would hardly know that growth in the eurozone in Q1 reached 0.6%.  This outpaced the UK, which slowed to a 0.4% pace.  Rather than report the quarter-over-quarter pace, America reports an annualized figure.  The world's largest economy grew at an annualized pace of 0.5%. Incidentally, the Atlanta Fed's GDP tracker projected 0.6% and the NY Fed's version, 0.7%.   The point is that eurozone growth looks fairly stable near levels that economists estimate is near trend growth (despite unemployment being above 10% in the region)....MORE 

Sunday, May 1, 2016

Attention: Your Trillion Dollar Bills Are Now Just Wallpaper

From Lowering the Bar:

Don't spend it all in one hundred trillion places
Improbable Research reminds us that Saturday is the deadline for turning in any Zimbabwean currency you may still have in your wallets, before said currency becomes completely worthless (except to collectors, maybe). The Zimbabwean dollar is basically worthless already, but the currency may not be, yet, at least assuming the bill has a sufficiently high denomination. Like, at least a trillion.

I could have sworn I’d mentioned Zimbabwe’s currency problems before, but the only mentions of Zimbabwe I can find are this one from 2013, when the ruling party was having some trouble finding the list of registered voters (for the whole country), and then of course this one about the ridiculous rumor that President Robert Mugabe fell down. So this’ll be my third flattering portrayal of the people running that country.

Zimbabwe first introduced its dollar in 1980, and at that time it was worth US$1.47, at least officially. The country’s economy left something to be desired, however, and the value of the Z-dollar declined accordingly over the next couple of decades to about one percent of its former value. Enter Gideon Gono, who was appointed to run the Reserve Bank of Zimbabwe in 2003. His approach included tried-and-true macroeconomic strategies like printing lots more money and (according to Wikipedia) personally visiting shops in Harare to demand the owners lower prices. Sure, that worked for Alan Greenspan, but only because he would instantly beat the crap out of anyone who refused. Gono doesn’t seem to have done that, but he did have people arrested.

As even I could tell you, and I’m a guy who thinks the term “voodoo economics” is largely redundant, if you print money like crazy you do not in fact end up with more money. Turns out each bit of money somehow becomes worth less than it was before. This is one aspect of what is called “inflation,” and if you hyper-print it turns out you get hyper-inflation. How hyper was Zimbabwe’s inflation? Well, hyper enough to have its own Wikipedia article (“Hyperinflation in Zimbabwe“), which says that the inflation rate was 16% in 1996, 48% in 1998, 599% in 2003 (when Gono took over), and by 2008 had reached 231,150,889%. For comparison, the inflation rate in the U.S. has averaged about three percent per year. In 2008 the rate in Zimbabwe was two hundred and thirty-one million, one hundred fifty thousand eight hundred and eighty-nine percent. Just to give you an even more ridiculous number, the rate in November of that year has been estimated at well over 79 billion percent. One U.S. dollar would have gotten you 2 x 1033 Z-dollars, assuming you could find a place to put them....MORE

The Billionaires Backing Nuclear Fusion: Bezos, Allen and Thiel

From the BBC:

The founders of Amazon and Microsoft are putting their fortunes into little-known fusion energy companies. Jonathan Frochtzwajg digs into a story that has strange parallels with fiction.
Inside a laboratory near Vancouver in British Columbia, an alarm is blaring. In the middle of the industrial warehouse stands what looks like a cannon from a spaceship, about five metres long and festooned in wires.

None of the lab's red-coat-wearing technicians seem fazed by the noise. The siren, which alerts workers to don protective earmuffs in case of a blown fuse, precedes every test “shot” on this prototype nuclear fusion reactor – and these engineers have performed well over 50,000 shots over the past five years.

That speed – currently, 50 to 100 tests a day – would not be possible within the bureaucracy of a public lab, where the most prominent research in long-awaited fusion energy is being conducted. But this is a little-known company called General Fusion – funded by Amazon CEO Jeff Bezos, and free to pursue technological revolution at its own, breakneck pace.

General Fusion is just one of a pack of private fusion firms to catch the attention of physicists and investors. Unencumbered by red tape, these venture-backed companies believe that they can find a faster, cheaper way to fusion than government-sponsored projects, and some very influential people agree: besides Bezos, Microsoft cofounder Paul Allen and PayPal cofounder Peter Thiel are also backing firms at the forefront of fusion development. Some of these enterprises are rather shadowy: the company Allen is invested in, Tri Alpha, operated for years almost entirely in secret – until recently, it didn’t even have a website.

The combination of wealthy moguls and fusion is curiously reminiscent of the 2012 Batman movie ‘The Dark Knight Rises’, in which Bruce Wayne’s company builds a fusion reactor behind closed doors. The movie wouldn't win any awards for scientific accuracy, but it got at least one thing right: this world-changing technology may indeed be ushered into existence by a moonshot-minded magnate.

To many of us, fusion, whose advent has been predicted and postponed as many times as doomsday, is still far from reality. To these uber-successful businessmen, it's a good bet. What do they know that we don't?...MUCH MORE
On the other hand there's Stanford's Paul Ehrlich:

"Giving society cheap abundant energy is . . .like giving an idiot child a machine gun"
-Los Angeles Times, April 19. 1989

Saturday, April 30, 2016

"Quantum entanglement is thought to be one of the trickiest concepts in science, but the core issues are simple..."

From Quanta Magazine:

...And once understood, entanglement opens up a richer understanding of concepts such as the “many worlds” of quantum theory.
An aura of glamorous mystery attaches to the concept of quantum entanglement, and also to the (somehow) related claim that quantum theory requires “many worlds.” Yet in the end those are, or should be, scientific ideas, with down-to-earth meanings and concrete implications. Here I’d like to explain the concepts of entanglement and many worlds as simply and clearly as I know how.
I.
Entanglement is often regarded as a uniquely quantum-mechanical phenomenon, but it is not. In fact, it is enlightening, though somewhat unconventional, to consider a simple non-quantum (or “classical”) version of entanglement first. This enables us to pry the subtlety of entanglement itself apart from the general oddity of quantum theory.
Entanglement arises in situations where we have partial knowledge of the state of two systems. For example, our systems can be two objects that we’ll call c-ons. The “c” is meant to suggest “classical,” but if you’d prefer to have something specific and pleasant in mind, you can think of our c-ons as cakes.
Our c-ons come in two shapes, square or circular, which we identify as their possible states. Then the four possible joint states, for two c-ons, are (square, square), (square, circle), (circle, square), (circle, circle). The following tables show two examples of what the probabilities could be for finding the system in each of those four states.
[No Caption]
Olena Shmahalo/Quanta Magazine
We say that the c-ons are “independent” if knowledge of the state of one of them does not give useful information about the state of the other. Our first table has this property. If the first c-on (or cake) is square, we’re still in the dark about the shape of the second. Similarly, the shape of the second does not reveal anything useful about the shape of the first.

On the other hand, we say our two c-ons are entangled when information about one improves our knowledge of the other. Our second table demonstrates extreme entanglement. In that case, whenever the first c-on is circular, we know the second is circular too. And when the first c-on is square, so is the second. Knowing the shape of one, we can infer the shape of the other with certainty.
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The quantum version of entanglement is essentially the same phenomenon — that is, lack of independence. In quantum theory, states are described by mathematical objects called wave functions. The rules connecting wave functions to physical probabilities introduce very interesting complications, as we will discuss, but the central concept of entangled knowledge, which we have seen already for classical probabilities, carries over....
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China's Warren Buffet Arrested

From the South China Morning Post, April 29:
Xu Xiang, a billionaire hedge-fund manager, has been formally arrested on charges of manipulating the securities market and inside trading.

Xu was in the custody of Qingdao police, Xinhua reported on Friday, almost six months after he was dramatically detained on Hangzhou Bay Bridge.

Cheng Boming, the president of CITIC Securities, the brokerage house at the centre of security forces’ probe into the stock market rout, was also formally arrested on criminal charges. So were other CITIC Securities executives, including Liu Jun, the manager in charge of brokerage businesses, and Xu Jun, the division chief of equity investment, Xinhua reported. The police investigation was continuing.

The downfall of Xu, often called China’s Warren Buffett, and the CITIC executives shed light on the corridors of power and money in China’s infamously volatile stock market. The hedge funds under the management of Xu’s company, Zexi Investment, were discovered to have large holdings in several stocks that were chased by the stock market rescue fund, according to data in the listed firms’ quarterly reports....MORE

"Warren Buffett: A dream deferred" (BRK)

Ahead of the Annual Meeting Q&A, a quick hit from FT Alphaville and a couple resources:
Our colleague Stephen Foley wrote a compelling analysis last year noting how much Warren Buffett’s Berkshire Hathaway Inc had taken advantage of deferred taxes to build its empire:
“In the latest and largest example, Mr Buffett’s Berkshire Hathaway has been able to defer $61.9bn of corporate taxes, the company revealed in its annual report. This figure — about eight years worth of taxes at Berkshire’s current rate — is a reminder that Mr Buffett understands how putting off the moment when taxes are due gives him more money today to invest elsewhere.
It is also a reminder that a savvy approach to taxes has always been a feature of Mr Buffett’s career, even as Berkshire has grown to become one of the biggest corporate contributors to the US Treasury.
The total of deferred taxes reported by Berkshire for the end of 2014 is more than five times the level of a decade ago, following Mr Buffett’s move into more capital intensive businesses, with the acquisition of BNSF railways and a string of US power companies.
The US tax code encourages capital investment through the way it treats the depreciation of assets such as power plants and rail infrastructure, allowing companies to record profits that are not taxed until later in the life of these assets. Congress expanded these incentives for business investment in the wake of the financial crisis.
Digging into Berkshire’s financial statements can reveal just how much the company is benefiting from the tax code.

But first, a quick accounting review: Deferred taxes don’t constitute tax avoidance exactly (Stephen’s story separately alludes to the cash-rich split-off M&A deals that Mr. Buffett utilises to shed assets where Berkshire simply eludes any tax owed.

Deferred tax liability and assets are the result of temporary differences between accounting books and tax books. Those temporary differences will eventually reverse. The company benefits because it captures the present value of of the delay in paying the IRS (an interest-free loan).

Here’s the classic textbook example of a deferred tax liability that arises from accelerated depreciation of physical assets. For financial statements, say a $100,000 asset would be depreciated on a straight-line basis (we assume a four-year life).

For tax purposes, the asset is depreciated on an accelerated basis. MACRS is the guide for this schedule but we make up an accelerated schedule here for illustrative purposes. (Congress has recently renewed the “bonus” depreciation scheme that allows for super-charged accelerated depreciation)....MORE
MoneyBeat has started their annual liveblog/analysis of the event and Yahoo is doing the livestream.

Looking at "Phil Falcone’s Long Game" (HCHC)

From Barron's:

The controversial HC2 Holdings CEO is looking to repeat the success he enjoyed at HRG Group. Shares could be worth more than double.
Phil Falcone made billions for his hedge fund, Harbinger Capital, when he bet against the housing market in 2007. He is also known for his past legal troubles with the Securities and Exchange Commission, and as a large owner of troubled wireless network LightSquared, now called Ligado Networks. 

Lost in the shuffle, perhaps, is his successful deal-making record at HRG Group, a holding company that he founded, and where he took major stakes in Spectrum Brands Holdings and Fidelity & Guaranty Life. From 2011, when HRG made its first investment, through 2014, its stock returned 129%, versus the Standard & Poor’s 500 index’s 64%.

A new Falcone play is a venture called HC2 Holdings (ticker: HCHC), a company in the same cut as HRG. While small, with a market value of just $135 million, HC2’s potential could be great, if Falcone can recreate some of his past success.

Over the last two years, HC2 has bought cash-generating businesses at cheap prices, often from motivated sellers. Its holdings include Schuff Steel, a steel-fabrication company; Global Marine Systems, which installs and services undersea fiber-optic cable; a long-term care insurance business; and smaller stakes in about half a dozen or so other businesses. 

After a strong start, HC2 shares have dropped 60% since last June, along with other leveraged investment companies, which have fallen out of favor. Selling related to redemptions at some fund holders may also have played a part. At a recent $3.85, the stock looks attractive, but it isn’t without risks. 

HC2 is burning cash at the holding-company level, meaning it isn’t collecting enough dividends from its subsidiaries to cover interest and operating expenses. Still, Falcone is on the hunt for a new deal, which could push the company toward break-even. 

One holder, Chris Mittleman of Mittleman Brothers, thinks HC2 is worth more than double its current quote. He puts the net asset value at $8.30 a share. A new acquisition could bump that up. As cash flow break-even gets closer, the stock, too, will probably attract a wider group of investors....MORE

Friday, April 29, 2016

Seymour Hersh On Killing Bin Laden, Syria, Saudis and Sarin

We've posted a couple pieces on/by Hersh, links below.
From AlterNet:

Exclusive Interview: Seymour Hersh Dishes on Saudi Oil Money Bribes and the Killing of Osama Bin Laden
A wide-ranging interview tied to his new book, "The Killing of Osama Bin Laden."
Seymour Hersh is an American investigative journalist who is the recipient of many awards, including the Pulitzer Prize for his article exposing the My Lai massacre by the U.S. military in Vietnam. More recently, he exposed the U.S. government’s abuse of detainees in the Abu Ghraib prison facility.

Hersh's new book, The Killing of Osama Bin Laden, is a corrective to the official account of the war on terror. Drawing from accounts of a number of high-level military officials, Hersh challenges a number of commonly accepted narratives: that Syrian president Bashar al-Assad was responsible for the Sarin gas attack in Ghouta; that the Pakistani government didn’t know Bin Laden was in the country; that the late ambassador J. Christopher Stevens was at the U.S. consulate in Benghazi in a solely diplomatic capacity; and that Assad did not want to give up his chemical weapons until the U.S. called on him to do so.

Ken Klippenstein: In the book you describe Saudi financial support for the compound in which Osama Bin Laden was being kept in Pakistan. Was that Saudi government officials, private individuals or both?
Seymour Hersh: The Saudis bribed the Pakistanis not to tell us [that the Pakistani government had Bin Laden] because they didn’t want us interrogating Bin Laden (that’s my best guess), because he would’ve talked to us, probably. My guess is, we don’t know anything really about 9/11. We just don’t know. We don’t know what role was played by whom.

KK: So you don’t know if the hush money was from the Saudi government or private individuals?
SH: The money was from the government … what the Saudis were doing, so I’ve been told, by reasonable people (I haven’t written this) is that they were also passing along tankers of oil for the Pakistanis to resell. That’s really a lot of money.

KK: For the Bin Laden compound?
SH: Yeah, in exchange for being quiet. The Paks traditionally have done security for both Saudi Arabia and UAE. 

KK: Do you have any idea how much Saudi Arabia gave Pakistan in hush money?
SH: I have been given numbers, but I haven’t done the work on it so I’m just relaying. I know it was certainly many—you know, we’re talking about four or five years—hundreds of millions [of dollars]. But I don’t have enough to tell you.

KK: You quote a retired U.S. official as saying the Bin Laden killing was “clearly and absolutely a premeditated murder” and a former SEAL commander as saying “by law we know what we’re doing inside Pakistan is homicide.”
Do you think Bin Laden was deprived of due process?
SH: [Laughs] He was a prisoner of war! The SEALs weren’t proud of that mission; they were so mad it was outed…I know a lot about what they think and what they thought and what they were debriefed, I will tell you that. They were very unhappy about the attention paid to that because they went in and it was just a hit.

Look, they’ve done it before. We do targeted assassinations. That’s what we do. They understood—the SEALs—that if they were captured by the Pakistani police authorities, they could be tried for murder. They understood that. 

KK: Why didn’t they apprehend Bin Laden? Can you imagine the intelligence we could have gotten from him?
SH: The Pakistani high command said go kill him, but for chrissake don’t leave a body, don’t arrest him, just tell them a week later that you killed him in Hindu Kush. That was the plan. 
Many sections, particularly in the Urdu-speaking sections, were really very positive about Bin Laden. Significant percentages in some areas supported Bin Laden. They [the Pakistani government] would’ve been under great duress if the average person knew that they’d helped us kill him. 

KK: How did it hurt U.S./Pakistan relations when, as you point out in your book, Obama violated his promise not to mention Pakistan’s cooperation with the assassination?
SH: We spend a lot of time with [Pakistani] generals Pasha and Kayani, the head of the army and ISI, the intelligence service. Why? Why are we so worried about Pakistan? Because they have [nuclear] bombs. ... at least 100, probably more. And we want to think that they’re going to share what they know with us and they’re not hiding it.

We don’t really know everything we think we know and they don’t tell us everything… so when he [Obama] is doing that, he’s really messing around with the devil in a sense. 
.... He [Bin Laden] had wives and children there. Did we ever get to them? No. We never got to them. Just think about all the things we didn’t do. We didn’t get to any of the wives, we didn’t do much interrogation, we let it go. 

There are people that know much more about this and I wish they would talk, but they don’t.

KK: You write that Obama authorized a ratline wherein CIA funneled arms from Libya into Syria and they ended up in jihadi hands. [According to Hersh, this operation was coordinated via the Benghazi consulate where U.S. ambassador Stevens was killed.] What was Secretary of State Hillary Clinton’s role in this given her significant role in Libya?
SH: The only thing we know is that she was very close to Petraeus who was the CIA director at the time ... she’s not out of the loop, she knows when there’s covert ops. ... That ambassador who was killed, he was known as a guy, from what I understand, as somebody who would not get in the way of the CIA. As I wrote, on the day of the mission he was meeting with the CIA base chief and the shipping company. He was certainly involved, aware and witting of everything that was going on. And there’s no way somebody in that sensitive of a position is not talking to the boss, by some channel.

KK: In the book you quote a former intelligence official as saying that the White House rejected 35 target sets provided by the Joint Chiefs as being insufficiently painful to the Assad regime. (You note that the original targets included military sites only—nothing by way of civilian infrastructure.) Later the White House proposed a target list that included civilian infrastructure.
What would the toll to civilians have been if the White House’s proposed strike had been carried out?
SH: Do you really think that at any time this is discussed? You know who’s sanest on this: Dan Ellsberg. When I first met Dan, it was way early—in ’70, ’71, during the Vietnam War. I think I met him before the Pentagon Papers were around. I remember him telling me that he asked that question at a meeting while planning the war [regarding B-52 targets] and nobody had even looked at it. 
You really don’t get a very good hard, objective look. You can see a movie in which they seem to do it, but that’s not really so. 

I don’t know if [regarding Syria] they looked at collateral damage and noncombatants, but I do know that in wars in the past, that’s never been a big issue. ... you’re talking about the country that dropped the second bomb on Nagasaki.

KK: In a recent interview with the Atlantic, Obama characterized his foreign policy as “Don’t do stupid shit.” 
SH: I read the Jeff Goldberg piece…and it of course drove me nuts, but that’s something else....
Previously:

December 2013
What on earth does the West think it is doing in Syria?
Seymour Hersh writing at the London Review of Books:... 

December 2015 
 This is just a nasty, dirty story....

James Bianco Interview At Finanz und Wirtschaft,

From FuW:
James Bianco, president of Bianco Research, warns of unintended Consequences of negative interest rates and is concerned about a credit event triggered by defaults in the energy sector.
It’s getting suspiciously silent at the global financial markets. After a strong rebound the US stock market is losing steam and has been moving sideways for two weeks. Jim Bianco remains alert. The influential market strategist from Chicago who is highly regarded among institutional investors is especially concerned about the eagerness to experiment among central bankers. «The larger issue here is that nobody understands negative rates», says the outspoken president of Bianco Research. He is also skeptical with respect to the recent rally in the oil market. He draws worrisome parallels to the subprime crisis in the US housing market and spots the risk of a credit event if the price of oil tanks again.

Mr. Bianco, negative interest are causing a lot of stir at the financial markets. It looks like even the Bank of Japan is having some doubts now, since it didn’t launch more monetary stimulus this week. What’s your take on negative interest rates?
Even if you go back to the Egyptian pharaohs and the Fertile Crescent in Mesopotamia we have never consistently seen negative interest rates in the reported human history until two years ago. That’s why investors are worried that negative rates are going to create distortions and what you see out of Japan are some of those distortions. The Bank of Japan is not getting the market reaction that it expected. So if negative yields are not a mistake then central bankers have to do a better job in explaining to the world why this is going to work out just fine.

Why are many investors so skeptical about negative interest rates?
People are still staring at negative interest rates and still not comprehending them. When the ECB introduced negative interest rates two years ago the world viewed it just as a temporary gimmick. But then, on January 29th, the Bank of Japan comes in and they go negative as well. After the Bank of Japan decided to go negative, the number of outstanding bonds with a negative yield suddenly doubled in about two days. If you exclude the US market, around 45% of sovereign bonds in the world are now yielding negative.

Why is it so hard to understand negative interest rates?
The problem with negative rates is two-fold. Firstly, it’s a procedure problem. Even though we at the financial markets look at our screens and see negative numbers, negative interest rates don’t exist at the consumer level. The banks in Europe are not offering negative mortgages, they’re not offering negative deposits and they’re not issuing bonds with negative coupons yet. If a country like Switzerland was to issue a negative coupon sovereign bond that means that every owner of that bond has to pay the issuer. But how do you collect that money? Nobody’s got a system in place that can reach out to bondholders and get all those checks. Or how does a negative mortgage work? With a negative mortgage, instead of you paying the bank, the bank pays you. But how does the bank pay you? They don’t have a system in place to mail out all those checks.

And secondly?
Negative interest rates turn the whole credit process upside down. Let’s say we have a system in place and a company has thousand and thousands of bondholders that own its bond with a negative coupon. What’s the credit rating of that security? It’s not the credit rating of the company. It has to be some kind of total of the people that own this bond and that’s probably a junk rating. So how does the company get the money from everybody? What happens if some bond holders don’t pay? And what are the collection procedures for people that are in arrears? That’s the problem with such kind of securities and that’s why people thought it was just a gimmick.

So what are the consequences of negative interest rates?
In a negative interest rate world currencies yield zero and that’s actually a high yield. As a matter of fact, according to former Fed-chief Ben Bernanke the Federal Reserve did a very interesting study that looked at the volume of all of the vault space at the major banks in the US and they calculated a break-even. They calculated that if the Fed Funds Rate ever got below -35 basis points, the banks would be better off by stacking in the volume of their vault space with $100 bills yielding zero as opposed to taking a Funds Rate at -35. There is no such study for European banks. But Bernanke believes that their break-even would be even closer to zero, something like -20 or -15 basis points because they have a 500 Euro note which is six times the monetary value of a $100 bill and roughly the same size. Yet, we’re seeing no movement out of the European banks to stack 500 Euro notes in their vaults. That means they’re acting irrationally. They’re not acting that way because they don’t believe it or they don’t understand it. So we’re still all trying to feel around in the dark as to what this means. And that means that the chance of an accident is very high.

Also, when you look at the poor performance of European bank stocks, negative interest rates seem to cause severe concerns among investors in the financial sector.
Deutsche Bank’s share price is under its 2009 low. That was the level at which we thought the world was ending. So what does it mean that Deutsche Bank’s share price is lower than that? Does it mean the world is ending for the largest European bank by assets? And by the way, Credit Suisse (CSGN 14.57 -4.08%) is not far behind. Of course, Deutsche Bank’s on the hook for a lot of other things, too. They’ve missed on regulation, they’ve missed on capital, they’re in the wrong line of business and they have significant risk. Deutsche Bank (DBK 16.47 -5.13%) is the largest holder of Euro denominated derivatives. So what happens if it comes to a Brexit or if it comes to a Grexit? The problems in Greece never went away. We’ve just decided that we got bored to talk about it.

And what about the big banks in the United States. The performance of US bank stocks is pretty disappointing as well.
Coming out of the financial crisis, the five largest financial institutions in the United States now have a higher concentration of financial assets. Not only do they have a higher concentration of assets than they did before the financial crisis but it’s the largest concentration ever. So we’ve made the too-big-to-fail-problem worse because we have bigger, more systemically important financial institutions now than we did in 2007 – and nobody seems to know what to do about it....MORE
HT: ZeroHedge