Steve Bull's Blog, page 1372
April 30, 2017
Bubbles? Schiller P/E Ratio Nears Roaring ’20s Bubble High as Home Prices Increased 43.6% Since Feb ’16
Supreme Court Justice Potter Steward said in 1964 in the Jacobellis v. Ohio case, “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [hard-core pornography]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.”
Asset bubbles too are difficult to define, but I know it when I see it.
Take Robert Shiller’s P/E Ratio measure for stocks. There was a Roaring ’20s bubble which burst in 1929 (Black Tuesday), there was the infamous Dot.com bubble. On March 10, 2000, the NASDAQ Composite peaked at 5,132.52, but fell 78% in the following 30 months.
Now we are seemingly in yet another stock market bubble and almost at the P/E Ratio level of the Roaring ’20s bubble (but not near the dizzying heights of the Dot.com bubble … yet).
[image error]
Stocks do seem awfully “frothy.” But what about home prices? The Case-Shiller 20 composite home price index has grown 43.6% since February 2012. While home prices are not growing as fast as they did during the home price bubble of the last decade, they are going at a rate that is twice as fast as earnings (wage) growth.
[image error]
These certainly look like asset bubbles. If it looks like a bubble and acts like a bubble, it probablyis a bubble.
“Shhh. Don’t say the word “bubble!”
[image error]
The Corporatocracy
The interests of Washington and large corporations have merged so completely they are now inseparable.
America’s large corporations and its government have merged. Or was it an acquisition? If the latter, who acquired whom? Unfortunately, the labels affixed to purely corporate combinations lose their analytical usefulness here. While the two retain their own distinct legal structures and managements, so to speak, such a close community of interest has evolved that it’s no longer possible to separate them or delineate their individual contours. Political labels are no help; the ones most often used have become hopelessly imprecise. The Wikipedia definition of “fascism” is over 8,000 words, with 43 notes and 16 references.
However, the conjoined blob is so big, rapacious, and intrusive that akin to Justice Potter Stewart’s famous non-definition of obscenity, everybody knows it when they see or otherwise come into contact with it. This article will use the term “corporatocracy.” It’s less letters, dashes, and words to type than “the corporate-government-combination.” No serviceable understanding of either US history or current events is possible without close study of the corporatocracy. Unfortunately, such study, like entomology or cleaning septic tanks, requires a stout constitution. But take heart, entomologists grow to love their creepy crawly things, and septic tank cleaners say that after a few minutes you don’t even notice the smell.
A cherished delusion of naive liberals holds that big government is a counterweight, not a partner, to big business. Such a rationale is touted when the righteous demand new regulation, the public and media endorse it, the legislators pass it, and the president signs it into law. However, there are always unpaved stretches on the road to hell—once regulation is law, the righteous, public, media, legislators, and president, and their ostensibly good intentions, are on to the next cause.
…click on the above link to read the rest of the article…
A Perspective on Electric Vehicles
An electric auto will convert 5-10% of the energy in natural gas into motion. A normal vehicle will convert 20-30% of the energy in gasoline into motion. That’s 3 or 4 times more energy recovered with an internal combustion vehicle than an electric vehicle.
Electricity is a specialty product. It’s not appropriate for transportation. It looks cheap at this time, but that’s because it was designed for toasters, not transportation. Increase the amount of wiring and infrastructure by a factor of a thousand, and it’s not cheap.
Electricity does not scale up properly to the transportation level due to its miniscule nature. Sure, a whole lot can be used for something, but at extraordinary expense and materials.
Using electricity as an energy source requires two energy transformation steps, while using petroleum requires only one. With electricity, the original energy, usually chemical energy, must be transformed into electrical energy; and then the electrical energy is transformed into the kinetic energy of motion. With an internal combustion engine, the only transformation step is the conversion of chemical energy to kinetic energy in the combustion chamber.
The difference matters, because there is a lot of energy lost every time it is transformed or used. Electrical energy is harder to handle and loses more in handling.
The use of electrical energy requires it to move into and out of the space medium (aether) through induction. Induction through the aether medium should be referred to as another form of energy, but physicists sandwich it into the category of electrical energy. Going into and out of the aether through induction loses a lot of energy.
Another problem with electricity is that it loses energy to heat production due to resistance in the wires. A short transmission line will have 20% loss built in, and a long line will have 50% loss built in.
…click on the above link to read the rest of the article…
April 26, 2017
California Farmland To Plunge “20% Or More” As Returns Sink To Lowest Level Since 1992
Last August we questioned whether California farmland was overvalued by $70 billion (see our aptly named post: “Is California Farmland Overvalued By $70 Billion?“). Our reasoning was fairly simple, as we argued such a draconian outcome was the inevitable result of large institutional buyers scooping up 1,000s of acres of Cali farmland and massively overplanting almonds because, at least at the time, it was the hottest crop earning the highest returns…and that’s what NYC hot money likes.
Unfortunately, chasing short-term returns by massively overplanting a permanent crop with a 25 year useful life and creating a huge supply bubble in the process rarely works out all that well. Here’s what we said 9 months ago:
But the Midwest is not the only place where farmland has bubbled over. California farmland has been bubbling up for years now with unplanted farm ground with “decent” access to water currently selling for $20,000 – $30,000 per acre. Land with mature almonds, California’s cash crop, is more likely to trade at $30,000 – $40,000 per acre. This bubble, like so many others, has been caused in large part by institutional capital “reaching for yield” in a low interest rate environment…yet another Fed bubble lurking under the surface.The plan was relatively simple, in the absence of attractive fixed income yields, large asset managers (like TIAAmentioned above with $850BN of AUM) decided to purchase hard assets like farmland instead. Farmland could then be planted with the highest value crop, which just happens to be almonds in California, to drive attractive ROICs on invested capital. A few simple charts illustrate perfectly how the story played out.
And, right on cue, almond prices crashed leaving land owners with a ~4% ROIC, down from 16%, on land they likely purchased for north of $35,000 per acre.
…click on the above link to read the rest of the article…
This bubble finally burst. Which one’s next?
This bubble finally burst. Which one’s next?Like so many other high-flying Silicon Valley startups, Clinkle was supposed to ‘make the world a better place’.
Founded in 2011 by a guy barely out of his teens, the company picked up early buzz after proclaiming they would disrupt mobile payments. Or something.
Silicon Valley venture capital firms were apparently so impressed with the idea that they showered the company with an unprecedented level of cash.
(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)
The company went on to burn through just about every penny of its investors’ capital.
There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.
At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.
This is rapidly becoming a familiar story in Silicon Valley.
For the last 6-7 years, Silicon Valley startups have been able to raise unbelievable amounts of cash.
Yet so many of those companies haven’t managed to turn a profit. Ever.
There’s some of the big names like Uber and AirBnb which are supposedly worth tens of billions of dollars despite having racked up enormous losses.
(Last year ride-sharing company Lyft promised investors that it would cap its losses at ‘only’ $600 million per year. . .)
But there are countless other examples of startups being anointed with absurd valuations and continually replenished with fresh capital even though they keep losing money… and have no plan to ever make money.
Snapchat’s investment prospective summed it up best:
“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”
…click on the above link to read the rest of the article…
Canada Housing Regulator Warns Of “Strong Evidence Of Housing-Market Problems”
In an perculiar coincidence, just hours after Home Capital Group imploded in what we dubbed Canada’s “New Century” moment, Canada’s housing regulator, the Canada Mortgage And Housing Corporation, which describes itself as “contributing to the stability of the housing market and financial system” moments ago the CMHC issued a report, warning that there is “strong evidence of overall problematic conditions.”
In the report, the Housing regulator again warns that while conditions in Canada’s housing markets are showing some signs of improvement, the official overall rating from the Canada Mortgage and Housing Corporation (CMHC) will be held at “strong evidence of problematic conditions”.
Every quarter, the CMHC issues its Housing Market Assessment (HMA) “to provide Canadians with both expert and impartial insight and analysis, based on the best data available in Canada.” The report is meant to serve as an “early warning system” for the country’s housing markets “an important tool supporting financial and housing market stability.” Or lack thereof because as the CMHC said while “conditions in Canada’s housing markets are showing some signs of improvement” the official overall rating from the Canada Mortgage and Housing Corporation (CMHC) will be held at “strong evidence of problematic conditions”.
As noted in the press release, some of the report highlights are the following:
Overall rating to be held at “strong evidence of problematic conditions”.
Evidence of overvaluation at the national level has been downgraded from strong to moderate. It is now present in six centers instead of eight.
Evidence of overvaluation has increased from moderate to strong in Victoria, as fundamentals are not keeping up with higher prices. There is also moderate evidence of price acceleration and overheating, leading to strong overall evidence of problematic conditions.
Conditions have improved in Regina, Montreal and Quebec relative to home prices.
…click on the above link to read the rest of the article…
Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History
Call it Canada’s “New Century” moment.
We first introduced readers to the company we said was the “tip of the iceberg in Canada’s magnificent housing bubble” nearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada’s largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices – most prominently noted short-seller Marc Cohodes – would constantly remind traders and investors about the threat posed by HCG.
Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.
As part of this inevitable outcome, one which presages the company’s eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17 percent, Street Capital Group Inc. fell 13 percent, while First National Financial Corp. declined 7.6 percent. In short, the Canadian mortgage bubble has finally burst.
Some more details on HCG’s emergency source of funding: Home Capital will pay 10% interest on outstanding balances and a non-refundable commitment fee of C$100 million, while standby fee on undrawn funds is 2.5%. The initial draw must be C$1 billion.
…click on the above link to read the rest of the article…
April 25, 2017
‘Get lined up’: Alberta gas producer’s demise leaves long list of creditors and costly messes
Who will have to pay to clean up after Lexin Resources?
Maureen and Wendell Strong have two former Lexin Resources natural gas wells on their land near Nanton, Alta. The province’s energy regulator shut down the struggling company back in February. (Tracy Johnson/CBC)
Maureen and Wendell Strong started hearing the rumours early in 2016: Alberta landowners with Lexin Resources natural gas wells on their property weren’t getting paid.
The Strongs, who had two Lexin wells on their land south of High River, and decades of experience dealing with the energy industry, waited anxiously to see if they’d receive their money.
In Alberta, most landowners don’t own the mineral rights below their land and are required to allow access to energy companies that want to drill wells. Landowners like the Strongs are paid an annual lease rate that typically totals a few thousand dollars.
“We were on the alert, watching,” Maureen said, “and when the time went past, that’s when we got the name of the guy at Lexin and phoned him. Nice guy but he said, ‘Just get lined up, we’ve had 700 calls on this.'”
In March, Lexin Resources was forced into bankruptcy by the Alberta Energy Regulator (AER) — an order the company is fighting in court. Documents from the case show landowners like the Strongs have plenty of company on the list of creditors seeking payment from Lexin.
They range from a small scaffolding company to Baker Hughes, one of the largest oil services companies in the world. The Alberta government is also looking for unpaid royalties, rural municipalities are claiming unpaid taxes, and there are former workers who are looking for vacation pay and severance and are concerned about their pension plan.
…click on the above link to read the rest of the article…
Fed’s Policy of Price Stability Results in More Instability
For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index.
According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services. Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.
For instance, let us say that a relative strengthening in people’s demand for potatoes versus tomatoes took place. This relative strengthening, it is held, is going to be depicted by the relative increase in the prices of potatoes versus tomatoes.
Now in a free market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will lead to the wrong production mix of goods and services and will lead to losses.
Hence in our case businesses, by paying attention to relative changes in prices, are likely to increase the production of potatoes versus tomatoes.
According to this way of thinking, if the price level is not stable, then the visibility of the relative price changes becomes blurred and consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make correct production decisions.
This leads to a misallocation of resources and to the weakening of economic fundamentals. Unstable changes in the price level obscure changes in the relative prices of goods and services. Consequently, businesses will find it difficult to recognize a change in relative prices when the price level is unstable.
…click on the above link to read the rest of the article…
The Bait-and-Switch ‘War on Terror’
The U.S. “war on terror” has always been a bait-and-switch scam on the American people, with Washington putting the desires of its Mideast allies ahead of defeating Al Qaeda and ISIS, Gareth Porter reports for Middle East Eye.
New York Times columnist Thomas Friedman outraged many readers when he wrote an opinion piece on April 12 calling on President Trump to ”back off fighting territorial ISIS in Syria.” The reason he gave for that recommendation was not that U.S. wars in the Middle East are inevitably self-defeating and endless, but that it would reduce the “pressure on Assad, Iran, Russia and Hezbollah.”
Prince Bandar bin Sultan, then Saudi ambassador to the United States, meeting with President George W. Bush in Crawford, Texas, on Aug. 27, 2002. (White House photo)
That suggestion that the U.S. sell out its interest in counter-terrorism in the Middle East to gain some advantage in power competition with its adversaries was rightly attacked as cynical. But, in fact, the national security bureaucracies of the U.S. – which many have come to call the “Deep State” – have been selling out their interests in counter-terrorism in order to pursue various adventures in the region ever since George W Bush declared a “Global War on Terrorism” in late 2001.
The whole war on terrorism has been, in effect, a bait-and-switch operation from the beginning. The idea that U.S. military operations were somehow going to make America safer after the 9/11 attacks was the bait. What has actually happened ever since then, however, is that senior officials at the Pentagon and the CIA have been sacrificing the interest of American people in weakening Al Qaeda in order to pursue their own institutional interests.
…click on the above link to read the rest of the article…
