Cyclical turning points tend to feature large numbers of people doing and
saying what in retrospect turn out to be amazingly dumb things. Think GM
highlighting its line of Hummers just before an oil price spike bankrupts the
company. Or half the world betting that tech stocks with infinite P/E ratios
would keep rising in 2000. Or pretty much everything that was said and done
in the housing market in 2006.
Today’s financial bubble is vastly bigger and more wide-spread than any of
its predecessors, so the stupidity is correspondingly global and varied. Some
examples:
GM bets big (again!) on gas guzzlers
(CNBC) – General Motors reported much higher-than-expected
third-quarter earnings on strong North American truck and SUV sales, calming
fears that a U.S. auto market slowdown would dent profitability.
Overall, GM said third-quarter net income more than doubled to $2.8 billion,
or $1.76 a share, from a year earlier. Rival Ford Motor, due to release
third-quarter results Thursday, warned in July that a slowing U.S. auto
market would put its full-year profit forecast at risk.
The contrast between the GM and Ford outlooks in part reflects different bets
on oil prices in the past. Ford during the past decade spent heavily to boost
the efficiency of its top-selling F-series pickup truck by engineering a
light, aluminum body, cut back production of large sport utilities and
focused on small- and medium-sized cars.
Ford executives have told analysts that with gasoline prices relatively low,
it is harder to recover the costs of fuel-saving technology from consumers.
GM stuck with the large SUV market, and now controls more than 70 percent of
that market in North America. Models such as the Cadillac Escalade start at
more than $70,000.
GM’s results and its outlook depend primarily on strong U.S. and Chinese
economies. The company said it lost money in Europe, South America and in
Asian markets outside of China.
That’s right, GM is once again on the wrong side of history, and not just
because 12-mile-per-gallon SUVs are vulnerable to the next (inevitable) oil
shock. Such vehicles’ high sticker prices also make them a luxury purchase
for most families, and luxuries will be the first things to go in a downturn.
Meanwhile, relying on the US and China for growth is classic
rear-view-mirror thinking. The US is at the tail end of a car loan binge that
saw pretty much everyone who walked into a dealership drive out with a 7-year
car mortgage. So new buyers will be scarce in coming years. And China, as
pretty much everyone (besides apparently GM execs) knows by now, is buying
its current growth with a tsunami of new debt that will, as excessive debt
tends to do, produce a slowdown if not a crisis in the near future. A safe
bet: GM will report losses in 2018 and beyond that more than wipe out the
past year’s record profits.
Someone tries to buy Time Warner, again
In 1999 America Online bought Time Warner in a deal that marked
the end of the tech bubble. Now AT&T has the same idea. Here’s a great
chart from Zero Hedge illustrating the rather terrifying symmetry:
Gigantic mergers are of course a traditional sign of a market top. Before
Time Warner there was the RJR Nabisco LBO in 1989 that helped burst the junk
bond bubble. See Corporate kleptocracy at RJR Nabisco. And so it
has been since the dawn of financial capitalism.
Why is this so? Because towards the end of cycles corporate CEOs and their
bankers are flush with cash and borrowing power but short on internal growth
ideas. New factories are boring and also risky, since so many of them have
already been built recently. But buying out a big competitor instantly
expands your empire while generating tons of fees that can be milked in
various ways. So the deals get bigger and more extravagant — until someone
notices that Time Warner is available. Then the system resets.
Bond maturities begin to exceed the human lifespan
(Reuters) – Italy sold its first 50-year bond on Tuesday
as some investors bet the European Central Bank may soon add ultra-long debt
to its asset-purchase stimulus scheme. About 16.5 billion euros of orders
were placed for the bond – 5-1/2 times the expected sale amount, despite
concerns over Italy’s banks and an upcoming referendum that could unseat its
prime minister.
Many of the fund managers who lend to Italy – and those who have already
bought 50-year bonds from France, Belgium and Spain this year – may not live
to see it paid back. Those who signed up to Ireland’s 100-year bond in March
almost certainly won’t.
Where to begin…well, these are euro-denominated bonds and the eurozone is
in crisis, with a growing chorus of former fans now predicting dissolution.
What happens to a 100-year bond when the currency in which it’s denominated
ceases to exist? Interesting question! And one that will be answered long
before these bonds mature.
Keynsians feel free to speak their minds
In normal times, arguing for massive government deficits or exotica like
helicopter money and guaranteed incomes is generally done behind closed doors
in order to find a way to hide the true nature of the proposal. But in
late-stage bubbles so many “innovative” ideas are being put into practice
that pretty much everyone’s wish list finds high-profile backers. The
following is excerpted from an article by Paul McCulley, a mainstream bond
fund manager and, as he is now freely admits, a full-on financial Keynesian.
Which of course means he loves government spending of all kinds in every
situation:
(The Hill) – First things first: I am (early, via mail)
voting for Democratic nominee Hillary Clinton. My progressive pedigree is
robust. I am proudly a liberal Democrat. Not a centrist Democrat, but a
liberal Democrat.
And I’m not just a socially liberal Democrat, but a fiscally liberal
Democrat.
Thus, while Clinton gets my vote, her insistence at the final debate that her
proposed fiscal program will not “add a penny” to the national debt is
fouling my wonk serenity this morning.
Every penny of new expenditure, she says, will be “paid for” with a new penny
of tax revenue.
Her deficit-neutral fiscal proposal is, I readily acknowledge, better than
the status quo, as her proposed new spending would add 100 cents on the
dollar to the nation’s aggregate demand, while her proposed tax increases
would not subtract 100 cents on the dollar.
Why?
Because she proposes getting the new tax revenue from those with a low
marginal propensity to spend, or alternatively, a high marginal propensity to
save. To wit, from the not poor, including yes, the rich.
Thus, in simple Keynesian terms, there is some solace in her deficit-neutral
fiscal package: It would be net stimulative to the economy, because it would
— in technical terms — drive down the private sector’s savings rate.
In less technical terms, it would take money from people who don’t live
paycheck to paycheck, who would still spend the same, but just have less left
over to save.
And I have no problem with that.
McCulley goes on to explain that the problem with current policy is that
the past decade’s trillion-dollar federal deficits were too small because
government spending is “investment” while private savings is apparently not.
And you can never have too much “investment.”
Again, it’s hard to know where to start. How about with the assertion that
private saving doesn’t contribute to growth and progress, when history implies
that it’s the only source of productive investment. If government
spending produced sustainable growth then the dozens of experiments with
massive deficits in pursuit of growth/equity/efficiency would have worked.
But they didn’t. Japan’s three decades of record-breaking stimulus produced a
flat-lining economy where deflation is now the norm. China’s epic post-2008
infrastructure program quintupled the national debt without making the
economy five times as large – thus setting the stage for what looks like an
epic and imminent credit crisis. Europe’s experiments with state takeovers of
major industries failed across the board.
Anyhow, suffice it to say that in late-stage bubbles lots of ideas that
have been previously discredited (or were never seriously considered) seem
new again to people who either don’t have a sense of history or do have
political agendas dressed up as science. And the result, so far at least, has
been the same every time: Debts implode, stocks plunge, economies contract,
financial assets fall out of favor and real things start attracting capital.
And the people who caused the mess go quiet for a while.
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John Rubino runs the popular financial website DollarCollapse.com.
He is co-author, with GoldMoney’s James Turk, of The Money Bubble
(DollarCollapse Press, 2014) and The Collapse of the Dollar and How to
Profit From It (Doubleday, 2007), and author of Clean Money: Picking
Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming
Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow,
1998). After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond
analyst. During the 1990s he was a featured columnist with TheStreet.com
and a frequent contributor to Individual Investor, Online Investor, and
Consumers Digest, among many other publications. He currently writes for
CFA Magazine.
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