Russia is once again ratcheting up the rhetoric, this time to a fever pitch. Just a day after Putin’s Security Council posted a remarkably accurate and amusingly concise assessment of US foreign policy aims on its website, a spokesman for the Russian Foreign Ministry as well as President Putin himself are out with strong condemnations of both the NATO presence in Eastern Europe as well as US plans to arm Kiev.
The comments come on the heels of a House vote which showed overwhelming support for the provision of lethal aid to Kiev and just a day after the first batch of American humvees received a warm welcome from President Petro Poroshenko. As a reminder, here’s what both sides had to say about Congress’s willingness to maybe start an all out proxy war in the Baltics:
The prepackaged spin is already ready: "sending weapons to the Kiev government would not mean involvement in a new war for America", claimed the abovementioned Eliot Engel who sponsored the document. “The people of Ukraine are not looking for American troops," Engel said. "They are just looking for the weapons.”
So the only question is how Russia will responds to this escalation: according to RT, "Washington's decision to supply Ukraine with ammunition and weapons would “explode the whole situation” in eastern Ukraine and Russia would be forced to respond “appropriately,” Russia's Deputy Foreign Minister Sergey Ryabkov said at the end of February.
While it’s not immediately clear what constitutes an “appropriate” response, and while the Russian Foreign Ministry’s Alexander Lukashevich contends that an outright military confrontation between the West and Russia “isn’t something anyone wants,” that’s where the ambiguity and niceties end. Here’s more via Bloomberg:
NATO drills in Europe are buildup of U.S. forces.
Russia says NATO members on Russian border planning to deploy planes capable of carrying nuclear weapons.
Airforce drills in Estonia are buildup of U.S. presence; U.S. jets may reach St Petersburg from Estonia w/in mins.
U.S. is heavily deploying weaponry in eastern Europe.
U.S. arms supplies to Ukraine are threat to Russia, won’t scare Russia.
The Estonia reference refers to the “bilateral training” being conducted by the Estonian air force and 14 F-16s from the US. As The Aviationist notes, “the purpose of the deployment is to enhance interoperability with a NATO ally and with other regional air arms however, the deployment is above all, another step in the U.S. Air Force’s ‘Forward-Ready-Now!’ posture in the European theater where the Pentagon has already strengthened its presence.”
In case the Foreign Ministry’s words weren’t clear enough, Putin himself had a few choice words for the US and its allies:
- PUTIN SAYS IT'S IMPOSSIBLE TO SCARE RUSSIA: INTERFAX
- PUTIN SEES ATTEMPTS TO BREAK NUCLEAR PARITY: INTERFAX
But even as Putin assures the West that the Kremlin fears no man and even though Moscow thinks that perhaps the US may be trying to undermine the global nuclear balance by making mutually assured destruction not so mutual, the Russian President is willing to talk about these things:
- PUTIN TELLS FSB WE'RE READY FOR DIALOGUE W/ OPPOSITION: IFX
Meanwhile, the Kremlin seems to believe that certain intricate plots are in the offing designed not only to destabilize Russia’s highly democratic political processes, but to undermine its thriving financial markets as well. Here’s more via Bloomberg:
Western intelligence services are planning operations to discredit, destabilize Russia, including for elections in 2016-18, Interfax reports, citing President Vladimir Putin comments to Federal Security Service meeting.
Putin tells FSB to uncover schemes on securities, currency markets.
* * *
So to summarize, Moscow will not be intimidated by NATO because it’s impossible to scare a Russian, Vladimir Putin is open to talking with the opposition but he does not appreciate the implicit attempt to tip the nuclear power balance, nor does the Kremlin approve of the US scrambling F-16s to the Baltics, and “schemes” of any kind will be ferreted out by the FSB.
But other than that, tensions seem to be abating.
Kraft shareholders woke up $12 billion richer this week and for that they should thank their lucky stars—–or at least send a case of Cristal to Janet and her merry band of money printers. Having passed-out free money to carry traders for 75 months running and after inserting a liquidity and verbal “put” under every market dip since March 2009, the money printers had generated downright giddiness (as of Tuesday night!) in the Wall Street casino.
And when it came to the shares of Kraft, the casino was indeed giddy even before the deal was announced. A few months ago when it was trading about $55/share, the company was already valued at 31X its $1.75 per share of net income for the year then ending.
So now those fast money traders who somehow “got wind” of the deal early are just plain tickled pink. At $83 per share they are up 50% on their cash position and several hundred percent on their call options. That’s quite the pay day, amounting to about 47X last year’s earnings on Jell-O, Kool-Aid, Lunchables, Maxwell House, Oscar Mayer, Philadelphia cream cheese, Planters peanuts and Velveeta spreads.
Setting aside the Kool-Aid, you might wonder how hot dogs, peanuts and sliced cheese are really worth such a snappy valuation multiple. Actually, however, that’s not the complete wonder of it. In the year just ended, Kraft posted an hardly impressive $2.9 billion of adjusted EBITDA less CapEx. Yet the casino is now pegging its total enterprise value (TEV) at $58 billion—-including about $9 billion of net debt.
Can you say 20X free cash flow? Well, Warren Buffet can. Gushing away in a statement accompanying the deal, the Oracle of Omaha said:
“I am delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”
We will get to Jorge (Jorge Paulo Lemann of 3G Capital) next, but here’s where the Fed and its casino come in. Kraft is a dead in the water financial engineering plaything of Wall Street. It was spun-off from its parent company in 2012 purportedly to unlock hidden value, but the only thing it has unlocked is a torrent of cash payments to its shareholders.
That started with a $7.2 billion “goodbye” dividend gifted to its parent company (Mondelez International) in conjunction with the spin-off. Including dividends and share repurchases since then, Kraft has distributed a total of $10.4 billion in cash to shareholders over its brief three-year life.
And where did it get the $10 billion? Not surprisingly, it wasn’t out of free cash flow from operations——-which amounted to $3 billion during the period. Thank you, Janet, the $7 billion difference was borrowed, including a sale leaseback of the corporate headquarters. All in, Kraft’s $10 billion of debt costs just 3.0% on an after-tax basis.
Needless to say, while its executives and Wall Street advisors were furiously stripping the cash and loading its balance sheet with cheap debt, Kraft’s tired, over-priced grocery store brands were not going anywhere—- notwithstanding all the promises that the spin-off would catalyse a new era of growth.
To wit, net sales of $18.2 billion in 2014 were just a tad above the $17.8 billion recorded in 2010, meaning that its four year growth rate amounted to, well, 0.5%. Likewise, operating income last year of $3.0 billion was actually identical to the figure back in 2010. In short, not the stuff of a 47X PE multiple.
To be sure, the Wall Street hucksters claim the deal multiple is much more reasonable because 2014 results were marred by large “non-recurring” pension charge. Yes, and the year before that the company’s results were pumped higher by the same accounting shenanigans. So in the analysis above we just took Kraft’s three-year average of operating free cash (EBITDA less CapEx) adjusted for its footballing of pension charges.
As indicated, the average number for this flat-lining collection of long-in-the-tooth brands is $2.9 billion. In short, the “lumpy” accounting doesn’t matter—–the casino is valuing a zero-growth enterprise at 20X operating free cash flow.
But wait. When you combine Kraft with some stuff that is even more yesteryear—-Heinz’s ketchup, sauces, soups, beans, pasta and Ore-Ida potatoes——there comes an explosion of synergies. Why, the companies said so themselves:
……. they estimated they could find savings of $1.7 billion annually by the end of 2017 through cost reductions and efficiencies of scale.
Right. Both Kraft and Heinz have been harvesting merger synergies and announcing cost-cutting campaigns for the last 30 years——billions and billions worth. So only in today’s Wall Street casino can it plausibly be claimed that another $1.7 billion of earnings will be plucked out of the same cost wells. No Sweat.
As a practical matter, virtually all of Kraft’s $3 billion of operating free cash flow is generated by its US and Canada operations. By contrast, 62% of Heinz’s $11 billion sales are generated outside of the North America. Indeed, Heinz has only $2.9 billion of cash costs in all of North America. So good luck with eliminating two-thirds of those dollars in a brutally competitive, drastically over-supplied industry of flagging mid-market grocery brands. To make that work will take more than Kool-Aid—–even the kind dispensed from the Eccles Building.
For the moment, however, the latter kind is just what Warren Buffet and Jorge Paulo Lemann are so thrilled about. The combined operation is claimed to be worth $70 billion today and going up from there:
Kraft will hold a nearly 50 percent stake in a company worth more than $70 billion. Because Heinz is private, its equity value is not publicly known, but people briefed on the matter said the combined company is expected to be worth as much as $100 billion by 2017.
Let’s see. Heinz’s 2014 net income was $650 million and that was down from about $1 billion prior to what amounted to an LBO sponsored by Berkshire-Hathaway and 3G Capital. Even after adjusting for the pension “one-timer”, Kraft’s net income was barely $1.9 billion. So call it $2.5 billion of net income on a post-merger basis.
Needless to say, at the hoped for $100 billion of equity value—– that’s a 40X multiple or one humungous pile of synergies. Indeed, the combined company’s entire worldwide payroll is only 46,000, which computes out to a total compensation expense of $3.5 billion, at best. Maybe Warren and Jorge plan to eliminate the whole thing.
In fact, the merger makes no business sense. Spread all over struggling but highly diverse consumer economies in Brazil, Europe and North America there are likely to be as many diseconomies of scale as there are synergy savings. Besides, there is nothing special about putting Heinz ketchup on Kraft Macaroni & Cheese, and certainly not 40X type of special.
But at the end of the day, Warren and Jorge are not counting on synergies and savings. They are counting on Janet and Mario to keep the cheap debt flowing and the casino smoking.
That’s been working for them for years. Thus, 3G Capital did not roll-up the Anheuser-Busch InBev global beer behemoth by scraping together nickels and dimes of new equity. In fact, in the process of buying up beer brands on three continents, the company’s debt grew from $5 billion in 2005 to $50 billion at present. Nor has St. Warren been loath to borrow against Berkshires trove of assets, either. During the last decade its debt has risen from $14 billion to $80 billion.
Any why not. Thanks to the 12 money printers domiciled in the Eccles Building, whom Buffet never stops praising for bailing out Wall Street and Berkshire’s enormous mountain of derivatives in 2008, the after-tax cost of capital is close to free.
Once upon a time that kind of blatant central bank distortion of capital markets would have been viewed as beyond the pale. Indeed, Jay Gould, Andrew Carnegie and JP Morgan were no saints, but they didn’t have a free money central bank financing their empire building, either.
Nor did their riches grow from strip-mining the cash out of already long-in-the-tooth/no-growth empires of beer, cheese, nuts and burgers. They actually built companies and invested massively in new technologies and new productive assets.
So what has transpired is another day and another play in the casino. This ketchup and mac merger could not be more emblematic of how the Fed’s destruction of honest financial markets has fatally deformed American capitalism.
Warren and Jorge are understandably singing Janet’s praise. Everyone else should be getting out the torches and pitchforks.
If you liked it at $83, you'll love it at $66... is apparently the message from Goldman Sachs as last week's transition of Sandisk to the company's "Conviction Buy" list has left clients with a Cramer-esque muppet-hole of around 17% (and rising). One wonders if it is still a conviction buy... or if Goldman should be convicted for selling it to clients...
Goldman on March 17th...
We add SanDisk to the CL given our increased confidence in 2015 S/D and attractive valuation (7% FCF yield) post the pull-back (-18% YTD vs. the SOX +2%).
We see a 34% total return (vs. the semi median of -3%) to our 12-month, $106 price target on:
1) Tight 2015 NAND S/D. Supply: 2H14 NAND SPE orders were very low, implying reasonable near-term supply. Demand: Our checks at MWC suggest the iPhone 6 has helped drive higher NAND per phone at other OEMs.
2) We expect gross margins to expand 400 bps by 4Q15 from the weaker yen, mix, and cost reductions.
3) There could be longer-term upside from SanDisk’s new hyper-scale all flash array product.
We remove SanDisk from the Conviction List post the negative preannouncement this morning.
Our positive call has clearly been wrong and the timing was particularly poor.
SanDisk negatively revised guidance for the second straight quarter, again due in part to company specific issues. We believe execution will need to improve for several quarters in order for the multiple to re-expand. In addition, the catalysts we identified (such as the May analyst day) no longer hold.
Since added to the Conviction List on 3/10/15, using the intraday price, SNDK is -17% (vs. the S&P +1%).
* * *
The meltdown at the Fukushima Daiichi nuclear complex in 2011 following the Japanese tsunami forced a major rethink of nuclear power as a safe form of electricity generation. As radiation from the plant spewed into the ocean and nearby communities following an immediate evacuation, the world reaction was swift and dramatic. Within days the spot price of uranium collapsed. Japan ordered the shutdown and maintenance of all its existing reactors. Germany, a major consumer of nuclear power, permanently closed 8 of its 17 nuclear reactors; other European countries shelved their nuclear plans.
While fear still lingers of a nuclear catastrophe on a similar scale as Fukushima, or earlier accidents such as Three Mile Island or Chernobyl, that hasn’t stopped a slew of countries from moving forward on plans to develop nuclear plants as an adjunct to existing power sources like hydro, coal, natural gas and good ol’ oil.
Especially in developing countries that lack access to fossil fuels, nuclear is seen as a viable and cost-effective form of baseload power.
Of course, these plans immediately arouse suspicions that nuclear power is being used as a ruse for developing nuclear weapons. The most obvious example is Iran, which already operates a large nuclear reactor – Bushehr 1 – but continues to engage in uranium enrichment despite a requirement by the United Nations Security Council to suspend such activities. Iran’s nuclear ambitions have resulted in U.S.-led sanctions and raised the opprobrium of Israel, which in turn has found itself at odds with the United States, particularly the Obama Administration, which seeks an accommodation with Iran.
Pakistan is a nuclear power whose capability to develop nuclear weapons is of major concern to regional rival India. The country is not a party to the Nuclear Non-Proliferation Treaty and has refused calls for international inspections of its enrichment activities. In 1998 Pakistan exploded five atomic devices in Baluchistan. A U.S. think tank said last fall that Pakistan has the world's fastest growing nuclear program, with enough fissile material to produce between 110 and 120 nuclear warheads.
The threat of nuclear weapons aside, there are a number of countries that seemingly aspire to no nefarious goal other than to churn turbines that produce electricity to feed growing economies. The World Nuclear Association figures there are over 45 countries actively looking to embark on nuclear power programs. They range from first-world economies to developing nations, with Iran’s program being the most advanced.
Here are seven that the World Nuclear Association considers to be the next junior members of the world nuclear power club:
United Arab Emirates (UAE)
The UAE is mostly reliant on imported gas for its electricity needs, but a 2008 study indicated a near tripling of power demand by 2020, with natural gas supplies only capable of supplying half the demand. The Emirates Nuclear Energy Corporation (ENEC) in 2009 invited expressions of interest to build the country's first nuclear power plant, with the winning bid going to a consortium led by Korea Electric Power Co. (KEPCO). In a contract worth about $20 billion, KEPCO is planning to build four APR-1400 reactors at the coastal site of Barakah near Qatar. Earlier this month, Korea and Qatar built on their relationship, with South Korean President Park Guen-hye signing an MOU with Quatari Sheik Tamin bin Hamad Al Thani to cooperate on developing human resources for the peaceful uses of nuclear energy.
According to the World Nuclear Association, electricity demand has risen from 800 kWh/yr in 1990 to nearly 2,000 kWh/yr. In 2009 agreements were signed between the Turkish Atomic Energy Authority and Rosatom, Russia's state-owned nuclear energy corporation, presaging a Russian-built nuclear plant at Akkuyu on the eastern Mediterranean coast. Foundation construction of the $20 billion project consisting of four 1200 Mwe AES-2006 units is expected to start in the spring. The plant will be built and operated by Rosatom. Meanwhile the contract to build a second nuclear plant in Turkey was awarded to a Japanese-French consortium. The $22-billion plant in the city of Sinop, on the Black Sea, will produce 4,800 MW. Construction is expected to start in 2017.
Tiny Lithuania, sandwiched between Russia, Latvia, Poland and Belarus, in 2009 shut down its last nuclear reactor that was generating 70 percent of its electricity. In order to reduce its dependence on Russia, which now supplies almost 90 percent of its gas, Lithuania is working with GE Hitachi to build a new nuclear plant at Visaginas, a town in eastern Lithuania where the mothballed Ignalina nuclear power plant is located. Delfi, the Lithuanian Tribune, reported in July that Hitachi and the Lithuanian Energy Ministry are planning to set up a joint venture for the project. However, voters did not back the project in a 2012 referendum and the Lithuanian government has yet to make a final decision on it.
The Polish government in 2005 decided to enact a plan to diversify its mix of energy, which is heavily dependent on coal and gas. Four years later Poland’s Council of Ministers called for the construction of at least two nuclear power plants. In 2012 utility Polska Grupa Energetczna (PGE) approved a plan to install about 3,000 MWe of nuclear capacity, with the first unit to come online in 2025 and the second by 2035, World Nuclear News reported in January, 2014.
Like Lithuania, Belarus also derives nearly all of its gas from Russia. According to the World Nuclear Association, in 2006 the Belarus government approved a plan to construct a 2,000 MWe nuclear power plant in eastern Belarus that would provide electricity for half the cost of Russian gas. Three years later, the government announced that Atomstroyexport, Russia’s nuclear power equipment monopoly, would be the general contractor, with the project arranged through US$9 billion in Russian financing. The 2,400 MWe plant containing two AES-2006 units is expected to be operational by 2017.
With over a third of its power coming from hydro, a third from gas and the rest from coal, the energy-hungry southeast Asian juggernaut is poised to diversify its power requirements into nuclear. The Vietnamese government in 2006 announced its intention for a 2,000 MWe nuclear plant to come online by 2020, rising to 8,000 MWe by 2025. The reactors would be built at Phuoc Dinh in southern Ninh Thuan province and Vinh Hai in north-central Ha Tinh province.
Densely populated Bangladesh suffers frequent power cuts, and around half of its 160-million population lives without electricity. In 2009 the government accepted a Russian proposal to build a 1,000 MWe nuclear power plant at Rooppur for around $2 billion. A year later agreements were signed with Rosatom for two 1,000 MWe reactors, to be built by Atomstroyexport. Construction of the first reactor started in 2013 and the project is expected to be completed by 2022.
If yesterday's 5 Year auction was ugly across the board, today's 7 Year was even uglier.
The ugliness started at the very top, where the High Yield came at 1.792%, tailing 1.1 bps to the 1.781% When Issued. But the Bid to Cover really stole the thunder, sliding from 2.368 in February to just 2.317. This was the lowest coverage since May of 2009. The internals were not as exciting, with Directs holding 12.3% (below the TTM average of 16.5%), Indirects left with 50.51% (above the 48.2% average), and Dealers virtually unchanged from a month ago at 37.2%.
The auction was so weak it has accelerated the selling across the curve, and the 10Y, after sliding to the low 1.80%s earlier this morning, is about to rise above 2.00% yet again.
As reported first thing today, while the initial phase of the military campaign against Yemen has been taking place for the past 18 hours and been exclusively one of airborne assaults by forces of the "Decisive Storm" coalition, Saudi hinted at what is coming next following reports that it had built up a massive 150,000 troop deployment on the border with Yemen.
And as expected, moments ago AP reported that Egyptian military and security officials told The Associated Press that the military intervention will go further, with a ground assault into Yemen by Egyptian, Saudi and other forces, planned once airstrikes have weakened the capabilities of the rebels.
Will this invasion mean that Yemen as we know it will no longer exist and become annexed by Saudi Arabia? According to coalition military sources, the answer is no, but that remains to be seen:
Three Egyptian military and security officials told The Associated Press that a coalition of countries led by Egypt and Saudi Arabia will conduct a ground invasion into Yemen once the airstrikes have sufficiently diminished the Houthis and Saleh's forces. They said the assault will be by ground from Saudi Arabia and by landings on Yemen's Red and Arabian Sea coasts.
The aim is not to occupy Yemen but to weaken the Houthis and their allies until they enter negotiations for power-sharing, the officials said.
They said three to five Egyptian troop carriers are stationed off Yemen's coasts. They would not specify the numbers of troops or when the operation would begin. They spoke on condition of anonymity because they were not authorized to talk about the plans with the press.
Egypt's leadership role in the next stage of the campaign has come as somewhat of a surprise to observers. Egypt's presidency said in a statement Thursday that its naval and air forces were participating in the coalition campaign already. Egypt is "prepared for participation with naval, air and ground forces if necessary," Foreign Minister Sameh Shukri said at a gathering of Arab foreign ministers preparing for a weekend Arab summit in the Egyptian resort of Sharm el-Sheikh.
This may be just the beginning:
The Arab Summit starting Saturday is expected to approve the creation of a new joint Arab military force to intervene in regional crises. The Egyptian security and military officials said the force is planned to include some 40,000 men backed by jet fighters, warships and light armor. Hadi is expected to attend the summit.
The locals do not sound much enthused about the prospect of allowing foreign troops to enter their country uncontested, and as AP notes, support for the Houthis is far from universal in Yemen - but foreign intervention risks bringing a backlash.
On Thursday, thousands gathered outside Sanaa's old city in the Houthi-organized protest, chanting against Saudi Arabia and the United States.
Khaled al-Madani, a Houthi activist, told the crowd that "God was on the side of Yemen." He blasted Saudi Arabia saying it is "buying mercenaries with money to attack Yemen. But Yemen will, God willing, will be their tomb."
Anger against the strikes was already brewing - particularly after airstrikes targeting an air base near Sanaa's airport flattening half a dozen homes in an impoverished neighborhood and killing at least 18 civilians, according to the health ministry.
For now Yemeni anger is focused on Saudi Arabia:
TV stations affiliated with the rebels and Saleh showed the aftermath of the strikes Thursday. Yemen Today, a TV station affiliated with Saleh, showed hundreds of residents congregating around the rubbles, some chanting "Death to Al-Saud", in reference to the kingdom's royal family. The civilians were sifting through the rubble, pulling out mattresses, bricks and shrapnel.
Ahmed al-Sumaini said an entire alley close to the airport was wiped out in the strikes overnight. He said people ran out from their homes in the middle of the night, many jolted out of bed to run into the streets. "These people have nothing to do with the Houthis or with Hadi. This is destructive. These random acts will push people toward Houthis," he said, as he waved shrapnel from the strikes.
Strikes also hit in the southern province Lahj and the stronghold of Houthis in the northern Saada province. In Sanaa, they also hit the camp of U.S.-trained Yemeni special forces, which is controlled by generals loyal to Saleh, and a missile base held by the Houthis.
But that will soon change, as it is a virtual certainty that the US will intervene at a point in the near future, with its own military assets. So while we await to see just where US troops make landfall, here is the most updated map showing the locations of US naval assets around the globe in general, and in proximity to Yemen in particular. Keep a very close eye on the LHD-7 Iwo Jima amphibious assault ship (which carries some 2,000 marines of the 24th Marine Expeditionary Unit), currently located just off the coast of Yemen.
Not too long ago we solved the mystery of America's missing wage growth by pointing to the fact that wage growth for the country's "non-supervisory" workers was in fact headed in the wrong direction, while America's bosses were seeing their pay increase. We went on to note that with the correlation between consumer spending and wage growth now nearly perfect, the US economy could well suffer given that non-supervisory workers account for four-fifths of total employment and consumer spending accounts for three fourths of GDP.
If you needed further evidence of the disparity in compensation for America's bosses versus what everyone else makes, look no further than the following chart from Bloomberg which shows that the pay gap between CEOs and workers is wider in America than in any other country in the developed world — and wider by a lot.
More from Bloomberg:
The CEOs of 350 Standard & Poor’s 500 companies made 331 times more than their employees in 2013, up from a ratio of 46-to-1 in 1983, according to the AFL-CIO. That’s more than twice the gap in Switzerland and Germany, and about 10 times bigger than in Austria. In Japan, CEOs make about 67 times more than workers (although the country’s highest-paid woman earns only 25 times more). Australian CEOs get 93 times more. A global Harvard Business School survey found that most people think pay gaps are far smaller than they are. That was particularly true in the U.S., where survey respondents thought the ratio of CEO to average worker pay was 30 to 1; they put the ideal ratio at 7 to 1.
Revelations about the NSA’s programs reveal the extraordinary extent to which the program has invaded Americans’ privacy. I reject the notion that we must sacrifice liberty for security — we can live in a secure nation which also upholds a strong commitment to civil liberties. This legislation ends the NSA’s dragnet surveillance practices, while putting provisions in place to protect the privacy of American citizens through real and lasting change.
– Rep. Mark Pocan on the Surveillance State Repeal Act
Whenever I hear “bipartisan bill,” the first thing that pops into my mind is that classic George Carlin quote:
The word bipartisan means some larger-than-usual deception is being carried out.
Nevertheless, when I looked at the sponsors and some of the language being used with regard to the Surveillance State Repeal Act, it became pretty clear to me that this bill might actually do what it says. While I’m unfamiliar with Mark Pocan, I’m familiar with Thomas Massie as a result of his close relationship with one of the few members of Congress I respect, Justin Amash.
Before discussing the bill in question, some background information is helpful. While the bill appears to have little chance of going anywhere due to the total embrace of fascism within Congressional leadership, its introduction seems in part related to positioning ahead of the expiration of key provisions of the Patriot Act, set to expire on June 1st.
The Hill covered the importance of this earlier in the year. Here are a few excerpts:
In five months, key provisions of the Patriot Act are set to expire, potentially eliminating spying programs that intelligence officials say are critical to keeping the nation safe from terrorists.
The battle over what changes should be made to that law — and whether it should be reauthorized at all — is likely to be an early test of Republican leaders’ ability to keep their party unified while controlling both chambers of Congress.
“I think there is going to be a very inconvenient and strong difference of opinion within the Republican Party about how to proceed here,” said Kevin Bankston, policy director at the New America Foundation’s Open Technology Institute and a supporter of reforms to the spying law.
On June 1, key portions of the Patriot Act that update the 1978 Foreign Intelligence Surveillance Act (FISA) are set to expire. Among them is Section 215, which the National Security Agency (NSA) has used to authorize the collection of bulk records about millions of U.S. citizens’ phone calls.
Section 215 has been highlighted previously here on this site. See:
The program — which collects only “metadata” about people’s calls, such as which numbers were dialed and when, and not actual conversations — was the most controversial part of Edward Snowden’s leaks about the NSA, and has become the prime focus of privacy advocates on Capitol Hill.
But supporters of the NSA are fighting back, and say the debate over phone data has overshadowed the national security imperatives that led lawmakers to empower the agency in the first place.
They say recent world events have helped their case.
Then last week, Speaker John Boehner (R-Ohio) credited the Patriot Act with helping to prevent a terror attack on the U.S. Capitol.
The “attack” Boehner is referring to was completely manufactured by the FBI. It was never a real threat, see:
The fact he is so willing to shamelessly lie in order to maintain surveillance powers is simply incredible.
Critics of the spy agency were quick to question Boehner’s take on the Capitol plot.
The FBI said it relied on Twitter messages and an undercover source to gather information about the suspect, Christopher Cornell — not wiretaps or call records.
Boehner told reporters there was more to the story, but declined to get into details.
So basically Boehner’s argument comes down to “we can’t tell you why we need to spy on you, but trust us.” The fact this clown is the leader of Republicans in the House of “Representatives” tells you all you need to know.
Fortunately, not all members of the House are such slimy liars. The Hill has also reported on the bipartisan bill to dismantle the Patriot Act, known as the Surveillance State Repeal Act. Here are some excerpts:
A pair of House lawmakers wants to completely repeal the Patriot Act and other legal provisions to dramatically rein in American spying.
Reps. Mark Pocan (D-Wis.) and Thomas Massie (R-Ky.) on Tuesday unveiled their Surveillance State Repeal Act, which would overhaul American spying powers unlike any other effort to reform the National Security Agency.
“This isn’t just tinkering around the edges,” Pocan said during a Capitol Hill briefing on the legislation. “This is a meaningful overhaul of the system, getting rid of essentially all parameters of the Patriot Act.”
The bill would completely repeal the Patriot Act, the sweeping national security law passed in the days after Sept. 11, 2001, as well as the 2008 FISA Amendments Act, another spying law that the NSA has used to justify collecting vast swaths of people’s communications through the Internet.
It would also reform the secretive court that oversees the nation’s spying powers, prevent the government from forcing tech companies to create “backdoors” into their devices and create additional protections for whistleblowers.
We should all do whatever we possibly can to move this bill forward, as well as thank Rep. Pocan and Rep. Massie for their efforts.
(Gary is an independant writer)
Take the S&P Index and multiply by the US dollar index. This removes most of the currency variation. Do the same with silver. The chart of silver times the dollar looks very much like silver priced in euros.
Note the following:
- The S&P times the $ has been rising since 2002, is now at all-time highs, and is above the top of the trend channel as I have drawn it. The massive increase in debt since 9-11 has created liquidity which has levitated the S&P.
- Silver times the $ has risen since 2002, is well below its 2011 high (markets correct) and has dropped almost to the support trend line as I have drawn it. The massive increase in debt since 9-11 created liquidity that helped silver spike higher in 2011, but it has since corrected.
Facts and Speculation:
- Debt is increasing rapidly. Global debt is approximately $200 Trillion and US debt exceeds $18 Trillion. Unfunded liabilities are much higher. Deflationary forces threaten central banks, hence they pump dollars, euros, and yen into the system to levitate the bond and stock markets. Interest rates have been crushed to multi-generational lows to further levitate the bond market and increase bank profitability. Currently the squeeze on the dollar has pushed it into a parabolic rally, and such rallies always correct. When the dollar corrects (crashes), silver and gold prices will benefit from the ensuing financial chaos.
Examine the silver times $ graph again with speculation regarding possible values after prices compensate for currencies printed to excess.
Dollar Index 0.99
Silver times $ 15.47
Zone 1 (perhaps 2017):
Silver $55.00 or $62.00
Dollar Index 0.90 0.80
Silver times $ 50.00 50.00Zone 2 (perhaps 2019-20):
Silver $125.00 or $155.00
Dollar Index 0.80 0.65
Silver times $ 100.00 100.00
The above are speculations regarding prices for silver and the dollar index. What is not speculation are the following:
- Markets always correct.
- Parabolic rises usually crash and burn.
- Unbacked paper currencies are being printed to excess and they will devalue in purchasing power.
- Silver and gold have been real money and valuable for thousands of years, in contrast to hundreds of paper currencies that have been inflated into nothingness.
- I don’t know what will happen to the S&P, but we can be relatively certain the prices for gold and silver will rally substantially as all paper currencies inevitably weaken.
Sadly, most people will continue playing on the Titanic financial system and believe it is unsinkable.
(Gary is an independant writer)
This last push higher in the S&P 500 and NASDAQ feels like a major top forming.
For certain the move is being pushed by fewer and fewer companies. Meanwhile, the NYSE, the largest US stock exchange, has been seesawing for a year now:
Regarding the other indices, ever since stocks began their near vertical climb in late 2012, the 126-day moving average (DMA) has been of critical import from a momentum perspective.
Indeed, the only time the S&P 500 has broken below this was during the October 2014 collapse when the financial world briefly realized that the global economy was once again contracting… DESPITE the Fed and other Central Banks having spent over $11 trillion attempting to prop it up.
Since that time, stocks have seesawed back and forth between worrying of economic weakness and hoping for more Central Bank monetary action. We’ve visited the 126-DMA no less than five times in the span of four months.
Meanwhile, the Dow Transport Index, which is far more closely associated with the real economy, has in fact already broken below the 126-DMA again.
This is particularly important because it was the Transportation index that peaked out first in 2007, collapsing long before the S&P 500 caught on that the economy was weakening:
1) Momentum is waning.
2) Fewer and fewer stocks are participating in the rally.
3) Economically sensitive indices are already rolling over.
All of these are signs of a top forming.
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
You can pick up a FREE copy at:
Phoenix Capital Research
With Washington throwing its full faith and credit behind a new Ukrainian bond issue, it appears it’s time for Moscow to play spoiler to current debt restructuring talks between Kiev and its creditors. Russia is the country’s second-largest creditor after buying $3 billion in bonds back in the days of Viktor Yanukovych (who was once the victim of an attempted assassination by egg and who famously fled the country amid widespread protests last year) and now the Kremlin wants its money and isn’t likely to be amenable to any haircuts imposed on private creditors. Here’s more from Bloomberg:
Ukraine, after gaining a lifeline from the International Monetary Fund, included Russia’s bond among the 29 securities and enterprise loans it seeks to renegotiate with creditors before June. Finance Minister Natalie Jaresko has promised not to give any creditor special treatment. The revamp will include a reduction in the coupon, an extension in maturities as well as a cut in the face value, she said.
Russian Deputy Finance Minister Sergey Storchak said March 17 that the nation isn’t taking part in the debt negotiations because it’s an “official” creditor, not a private bondholder.
Should Russia decide to stick with a hardline stance on the negotiations (and it’s likely they will) it could not only embolden other prospective holdouts, but may indeed force Ukraine into a default:
Holding out can lead to two outcomes: Russia gets paid back in full after the notes mature in December, or Ukraine defaults. The former option is politically unacceptable in Kiev, according to Tim Ash, chief emerging-market economist at Standard Bank Group Plc, while the latter would likely start litigation and delay the borrower’s return to foreign capital markets, which Jaresko expects in 2017.
“Russia will be holdouts, to try and force a messy restructuring,” Ash said by e-mail on March 19.
If Russia holds out and litigates, there is a “real threat” that Ukraine will deem the Eurobond an odious debt, Lutz Roehmeyer, a money manager at Landesbank Berlin Investment GmbH, said by e-mail on March 23. This refers to a legal theory that a nation shouldn’t be forced to repay international obligations if they don’t serve the best interests of the country and its citizens.
Clearly, this is an opportunity for Russia to turn the restructuring talks into political leverage as it wrangles with Washington and the West over the fate of Eastern Ukraine. This is set against a particularly contentious situation in Eastern Europe that’s recently been characterized by a show of NATO force along the Russian border and the usual sabre-rattling out of Moscow (with the latter getting much louder this morning). As a reminder, just yesterday Vladimir Putin’s Security Council condemned what it called an “anti-Russian” US security strategy that it says is aimed at Russian containment by way of military posturing and the use of puppet governments. As far as Putin’s stance on Ukraine’s debt is concerned, well, he can always go the “nuclear route”:
The Russian bond has a covenant allowing the holder to call it if Ukraine’s public debt tops 60 percent of economic output, which the IMF said took place last year.
“It’s a kind of nuclear option, evaporating their leverage,” Rogge’s Ganske said. “If Russia accelerates, then Ukraine has to pay or default on it -- i.e. game over.”
More from Moody's on the restructuring:
The key driver of Moody's decision to downgrade Ukraine's long-term government debt and issuer ratings to Ca is the government's plan to restructure the majority of its outstanding Eurobonds as well as other public sector external debt and the rating agency's expectation that private creditors will incur substantial economic losses as a result of the restructuring. The debt operation is intended to provide $15.3 billion of the four-year, $40 billion external financing package agreed with the IMF and other multilateral and bilateral creditors. The package was approved by the IMF Executive Board on March 11.
Although negotiations over the specific details of the restructuring are only now getting underway, Moody's believes that the likelihood of a distressed exchange, and hence a default on government debt taking place, is virtually 100%. The bonds' recovery value will be determined by the terms of the debt exchange and is currently being discussed with creditors. The terms could include a grace period on principal repayments during the term of the IMF program, a reduction in the existing bonds' current coupons, which now average 7.1%, and a haircut on the outstanding principal.
How can it be? Services PMI was at 6-month highs. The Kansas City Fed Index tumbled to -4 in March (against expectations of +1) and was last below this level in Feb 2013. KC Fed has now missed for 6 of the last 8 months and the report is a disaster across the board. New orders plunged to -20 (2nd lowest print since Lehman), order backlogs imploded, average workweek collapsed to -17 (lowest since Lehman), and future capex expectations fell to a five-year low. As one respondent noted, "we do not see the economy as being as strong as a portrayed in the national media reports."
As for Capex, stick a fork in it: worst expectations in 5 years.
Ugliest... Selected Comments.
- “We continue to produce to fill orders we have in house but invoicing is down because customers are delaying shipments due to the large amount of snow in their yards. All of the suppliers have sent notices of a raw material increase. If those are implemented our projections will come to a grinding halt.”
- “The drop in oil prices is negatively impacting our business levels. We do not see the economy as being as strong as a portrayed in the national media reports.”
- “Due to the port disruption, we are diverting as many containers to east coast ports as possible.”
- “We are still hiring and operating at full capacity but the flow of new orders for delivery in 2016 has significantly slowed. Hopefully, this trend will improve as the oil & gas producers deal with their excess production issues.”
- “The low price for oil is taking its toll on the demand and price for energy related products we offer. Momentum we experienced earlier this year has left and we are again cost cutting and becoming lean. Our capital expenditures are focused on removing labor content in our processes and products due to the high cost and risk added by regulation and administrative action.”
- “With the strong dollar, we keep continuing to see flood of low prices imports thereby reducing our margins.”
- “Because of the West Coast port disruption, parts are tied up in transit that are several weeks late. Production lines have been shut down for days at a time and we have had customers cancel orders. We will not regain that business when the raw materials come in and in fact have lost some customers.”
But apart from that... everything is awesome.
The political pressure on Germany is rising in Europe. The country faces a choice: Continue business as usual or change the strategy?
Only the latter option may give it real influence on shaping the future course of economic and political affairs in Europe. Playing defense is the comfortable choice, but it may be the wrong strategy.
What needs to be done? Below is a proposal for saving the Eurozone in a way that would safeguard Germany’s interests, too:
1. Admit the facts: Policymakers need to communicate the message very clearly that between 3.0 and 5.0 trillion Euros of government and private debt in Europe will not be served in an orderly way. This excess debt needs to be written off.
2. Pool the debt overhang: Excess debt should be pooled into a debt redemption fund, with all the Eurozone countries bearing joint liability for it.
3. Pay off the debt: Start an orderly process for paying off this debt over a period of at least 20 years. Such longer maturity periods will help to reduce the cost saving pressures that many Eurozone countries are facing.
4. Issue Eurobonds: The debt relief fund (see #2 above) will be refinanced by Eurobonds specifically issued for this purpose. These bonds, with joint liability of all Eurozone countries, will have long maturity periods and low coupon rates and should be amortized on an annual basis.
5. ECB intervention: The ECB could purchase some of these bonds, thus ensuring long-term financing for this legacy debt at low interest rates. The risks are properly balanced: The greater the portion of these bonds purchased by the ECB, the smaller will be the burden on the domestic budgets of the member countries.
6. Show solidarity: Countries like Greece, Ireland, Portugal and Spain are unlikely to be in a financial position to be able to deal with their debt overhang by themselves. Better-positioned countries, especially Germany, will need to make generous contributions to counter this.
Economically, this is equivalent to offering debt waivers – though in this case, extended over a longer and hence more manageable – maturity period. Hard though this may be to swallow politically, it is the mature choice to be made. Leadership means to look for what’s right for the continent over the long haul.
7. Cap the liability: A mandatory feature of socializing the unserviceable debt across the Eurozone in this manner is the establishment of a fiscal union, in which individual member states give up their budget sovereignty.
Alternatively, there needs to be a clear understanding that, as in the United States, there will be no joint liability for servicing the debt obligations of individual member states in the future. In the latter case, all member states would start with debt levels of 60% of their GDP.
Capital markets would then be free to determine the interest rates on the outstanding debt – based purely on the creditworthiness characteristics of the respective countries and without interference from the ECB.
8. Implement real reforms: Relieved of the pressure of severe austerity measures, Eurozone countries would find it easier to agree upon a common growth agenda: Free up and mobilize the labor market, adopt targeted immigration policies, make investments in education, innovation and infrastructure.
On the face of it, these points sound pretty similar to the requests by the critics of the current strategy. Both European “rockstar economists,” Varoufakis and Piketty have suggested similar things — but with two important differences:
9. Varoufakis and Piketty want to have mutualization and monetization without any economic reforms and agreements with the creditors. They just want to get the help without offering anything in return.
If Germany takes the lead, it will be in a much better position to ask for something in return. That will also generate political goodwill with the European public.
10. They not only want to clean up the existing mess, but rather want to get a blank check for future spending. If Germany took the lead on debt restructuring, it could insist on either full integration or a return to the no-bail-out principle similar to the United States, where no state has to guarantee the debts of another state.
No doubt, the financial costs of these moves to Germany could turn out to be significant. Depending on the total value of debt that is mutualized and the conditions under which the debt relief fund is refinanced, Germany’s liability could run up to about a trillion Euros.
Large as that sounds, it is almost exactly as much as the estimated adverse impact of the energy transformation (“Energiewende”) that Germany hastily embarked upon.Unpopular decisions
I can already hear the critics shouting: Isn’t this unfair towards those who took care to keep savings? Why on earth should we be bailing out the creditors? Isn’t the ECB intervention tantamount to direct public sector financing, which in turn would have inflationary repercussions? How can we be sure that we won’t be in this same mess again in a few years? Why should Germany be doing this at all?
The answer to the first of these questions is easy: Yes, in fact it is really unfair! But the damage has already been done and all that we can decide upon now is how we want to bear it out. By unilaterally stopping the debtors from making repayments? By fueling inflation? Or rather by means of an orderly process? Given the potential collateral damage of the first two of these, I strongly favor the adoption of an orderly process.
Likewise, it is true that this would result in bailing out the creditors – in this particular case, banks and insurance companies. But here, too, what would be the alternative?
If we let banks bear the brunt of it, their losses would have to be salvaged by taxpayers’ money. Going for creditor participation – as in the case of Cyprus – would also have a severe adverse impact on the German depositors.
And if it is the insurance companies that lose out, their customers would end up bearing losses either directly, as in case of life insurance, or indirectly through higher premiums, as in the case of property insurance.
In short, there really are no scenarios where Germany exits from the present Eurozone mess in unblemished form. The only relevant question is what’s the least bad alternative?What about the ECB?
Getting the ECB involved in order to resolve this issue will also be viewed with a lot of skepticism, and quite rightly so. Are we again being confronted with the inevitable prospect of hyperinflation, following direct injection of funds into the public sector, as seen in Weimar before?
Contrary to the ECB’s recent decision, which raises the funding cap for Greek banks by €500 million, the mechanism proposed above would be a one-off action only. Its financial scale will have been defined and well-confined in advance.
Getting rid of the debt overhang problems would boost the European recovery, thus making further intervention by the ECB redundant. Finally, it would be possible to assess the monetary impact of such a proposal with much greater accuracy than is the case in the current scenario, where there seems to be no foreseeable end to the ECB interventions.
Make no mistake about it: Implementing the above measures is still no guarantee that we will not face a financial crisis again.
But that only makes it all the more imperative that, when negotiating the terms of the debt relief fund, binding provisions are incorporated which foster comprehensive European integration and/or enforce a no-bail-out clause.
These terms would then be equally binding upon future governments, too. In the light of recent developments, there might understandably be reservations regarding the feasibility of such a proposal. However, as long as we are committed to the Euro, we have no better alternative.
by Ron Rimkus, CFA, Enterprising Investor
Capital is fleeing the euro and yen and the US dollar is surging higher. The US Federal Reserve is ever so slowly positioning the United States for a rise in rates while the rest of the world is slashing theirs in response to weakening economies. It seems the capital that departed the United States after the financial crisis is coming home after a long journey.
Meanwhile, China’s economy continues to deteriorate as the housing slump there has gone from recession to depression, with dramatic declines in real estate transactions.
Of course, with the backdrop of aggressive monetary policy, the fledgling bitcoin cryptocurrency market is growing by leaps and bounds. Many high-profile Wall Street executives are jumping into bitcoin-related ventures, building a dizzying array of financial products and services as noted below.
Lastly, I’d like to draw your attention to some interesting comments made by Ray Dalio of Bridgewater Associates. Dalio suggests that the Fed raising rates in 2015 would be much like the Fed raising rates in 1937, warning that such a move today would lead to a recession like it did in 1937.
Here’s a wrap-up of key issues affecting global markets for fundamental investors.
- The trade-weighted dollar index is surging. (Federal Reserve Bank of St. Louis)
- “Regan: As Currency War Erupts, Buy American” (USA Today)
- “US Dollar Approaches Four-Year High after Fed” (MarketWatch)
- “Copper Stockpiles Rise Most in a Month as Chinese Demand Wanes” (Bloomberg)
- “Ukraine Hyperinflation; Currency Plunges 44% in One Week” (Mish’s Global Economic Trend Analysis)
- China’s property market has the bottom fall out. (The Sydney Morning Herald)
- China’s economy is slowing more rapidly than people thought. (Fortune)
- “For Chinese Economy, Strengths Are Now Weaknesses” (The New York Times)
- Credit spreads are drifting wider on investment grade bonds. (Federal Reserve Bank of St. Louis)
- High-yield bond credit spreads are spiking. (Federal Reserve Bank of St. Louis)
- Researchers find link between credit default swaps and mortgage default. (The Journal of Finance)
- “Retail Investors Flock to Derivatives for Income and Safety” (TheStreet)
- Banks change rules governing derivatives market — agree to give up right to close out deals when counterparty is failing. (Reuters)
- Bitcoin derivatives are now exploding worldwide. (Bitcoin Magazine)
- “Will the Oil Markets (And Shale Producers) Capitulate before Demand Recovers?” (Forbes)
- Rig count declines by 32%. (Econbrowser)
- Spanish Banco Popular now lending up to 113% loan-to-value. (The Telegraph)
- “‘The Fourth Reich': What Some Europeans See When They Look at Germany” (Der Spiegel)
- “Currency Wars Threaten Lehman-Style Crisis” (The Telegraph)
Hedge Fund Money
- “Ray Dalio: This Is Just Like 1937 and the Fed Could Drive Us into a New Recession” (Business Insider)
- “Greenlight Capital Discloses Short in Victrex” (ValueWalk)
- “Carl Icahn Adds to His Energy Bets after Suffering Losses” (Forbes)
Interest Rates and Central Banks
- “Fed’s Bullard Says Zero US Interest Rates No Longer Appropriate” (Reuters)
- “ECB ‘Chasing Own Tail’ as Bond Rates Turn Negative: SocGen” (Bloomberg)
- “Rate Cuts: 24 So Far and There’s More to Come” (CNBC)
Japanese Debt and Inflation
- “Japan’s Central Bank Warns of Temporary Return to Deflation” (The New York Times)
- “Japan Now Spends 43% of Tax Revenue to Fund Interest on Debt” (Zero Hedge)
- “Central Bank Moves Drive Market, Dollar at New Highs vs Yen, Euro” (Reuters)
The Stock Market
- “Market Valuations Based on CAPE — A Deeper Dive” (ValueWalk)
- We are in the “late innings” of a bull market in the S&P 500. (USA Today)
Follow the Bubble
- “NYSE Margin Debt Declined in January” (Advisor Perspectives)
- “The Canadian Housing Bubble Has Begun to Burst” (Zero Hedge)
Ray Dalio thinks the Fed is possibly repeating 1937 all over again. Back in 1937, the market was eight years removed from the start of the Great Depression when the Fed began to raise rates. Dalio thinks the parallels are striking. In the linked article, he cites six reasons why market conditions are similar today to what they were back then.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: ©iStockPhoto/kmlmtz66
Follow @RonRimkusCFA on Twitter
Copyright © 2015 Ron Rimkus, CFA, Enterprising Investor
Nearly a month after the Hype Alpe Adria bad bank Heta Asset Resolution "unexpectedly" imploded under a house of non-GAAP and misreported cards, and which led to only the second European creditor bail-in after Cyprus in what until then was considered the safest European nation, unleashing a herd of black swans which will result in not only the insolvency of one of Austria's provinces, Carinthia, but a week ago led to its first foreign casualty, German Duesseldorfer Hypothekenbank AG which had to be bailed out by the German FDIC-equivalent, the ECB has finally realized it may have a major problem at hand.
So, doing what it does best, a month after the fact and long after the black swans have left the stable so to speak, Mario Draghi's ECB has asked Eurozone banks "to detail their exposure to Austria and provisions they plan to make after the country halted debt repayments by a "bad bank" winding down defunct lender Hypo Alpe Adria," financial sources told Reuters.
The questionnaire sent to banks and a video conference to discuss the potential fallout underscore the sensitivity of Austria's path-breaking move to invoke new European rules on ensuring creditors, not just taxpayers, fund bailouts.
"They are taking this seriously," one senior executive said of the ECB on the condition he not be identified. The ECB declined to comment.
Bankers say Austria's credibility is on the line after the second move in two years to impose losses on creditors of Hypo, many of whom assumed they had iron-clad backing from the state.
Odd how these things happen: first EURCHF longs "assumed" iron-clad backing from the SNB... until it was yanked from under their feet. Then, creditors in what many saw as the safest European nation "assumed" they would never suffer losses and would be bailed out for ever... until they saw 50% losses in a matter of minutes.
And if you can't trust an Aaa/AA+ rated country, just who can you trust? One can see why the confidence in a system in which risk until recently was illegal, is starting to crack.
For now, however, one can still keep kicking the can, as the creditor losses haven't been fully digested yet.
The debt moratorium gives the FMA time to work out a plan that ensures equal treatment of creditors. It has given no details on what size "haircut" bondholders might expect and has not ruled out sending Heta into insolvency.
The moratorium on more than 11 billion euros in Heta debt has sent shock waves beyond Austria.
Germany's Bundesbank central bank said German banks have around 5.5 billion euros in Heta exposure. Germany's deposit protection fund had to take over property lender Duesseldorfer Hypothekenbank AG after it ran aground over Heta exposure.
The Heta move comes after Austria entered uncharted waters for debt markets last year by wiping out via a special law holders of nearly 900 million euros worth of Hypo subordinated debt despite guarantees from its home province of Carinthia. That triggered lawsuits that the country's Constitutional Court is set to rule on by October.
Some creditors have said they are looking into taking legal steps over the Heta decision, and the FMA is preparing itself for legal action against its decisions.
And hell hath no fury like a bondholder who assumed par recovery is 100% assured, scorned.
Our only question now is that as the flock of Austrian black swans gets tired and prepares to land, just which "assumed" safe financial institution is about to lead to even more creditor scorn.
by Ann Hynek, Global Editor of The Blog, Blackrock Investments
There are 73 million millennials in the U.S. today, and roughly half of us are women. As my colleague Amy Schioldager notes, the theme for Women’s History Month here at BlackRock is “Make it Happen”. And making it happen is exactly what millennial women are doing when it comes to their investments.
According to our latest Investor Pulse Survey, millennial women are managing their finances more frequently than older generations and their investing habits are shifting. 31% of us describe ourselves as active investors while only 15% of our female baby boomer counterparts feel the same way about their own behaviors. We’re also twice as willing to take on higher risk investments to seek higher returns (41% of us versus 22% of female baby boomers).
Even though we’re more willing to take risks than older generations, we still lag our male peers in this department. Men also tend to enjoy managing their investments more than we do (70% versus 36%), which left me to wonder: Why the gap? To learn more about these gender discrepancies, I turned to behavioral finance expert and Blog contributor Nelli Oster.
Q: Nelli, let’s start with the millennial generation as a whole. What are their attitudes in general? And how do they feel about money and investing?
A: A study from Pew Research describes the millennial generation as confident, self-expressive, liberal, upbeat and open to change. Confidence and a flexible attitude are helpful traits when it comes to investing, and it seems more millennials are watching their spending more than they were nearly a decade ago. The Pew study found that 55% are keeping a close eye on their money today versus 43% in 2006. Overall, millennials are very focused on investing and building their savings; 77% worry that they aren’t saving or investing enough.
Q: Now to the gender issue. Why are millennial women more risk averse than millennial men?
A: While millennials as a whole are described as an upbeat demographic, the difference in tolerance for risk between male and female investors transcends generations. One study I found says that it’s not that women are that different from men when it comes to their perception of the size of possible gains and losses, but that they tend to be more pessimistic about the probability of high likelihood gains. A phenomenon known as the risk-as-feelings hypothesis tells us that when emotions conflict with rational assessments, emotions tend to dominate. And women often express feeling nervous more openly, as a result exhibiting more pessimism when faced with risky decisions.
Q: If women are generally more risk averse when they invest, how does this affect them in the long run?
A: Women’s tendency toward higher risk aversion can lead them to be under-invested in risky assets. The danger here is that they miss out on higher returns. But this isn’t all bad: given their generally lower confidence levels, women may have a more realistic picture of their investing skills, be more open to financial advice and research investment decisions more thoroughly before implementing them, relying on well-diversified buy-and-hold investment strategies rather than embarking on the futile exercise of trying to beat the market. This thoughtful approach can benefit women in times of stress. For example, during the financial crisis of 2008-2009, women were less susceptible than men to snap judgments and selling their stocks at market lows. Millennial women who take extra steps to educate themselves have that much longer to invest strategically for the future.
Q: How can women of all ages mitigate their investing biases?
A: My colleague Heather Pelant and I advocate focusing on your long term goals, such as buying a house, retirement etc. To consider: Are you less comfortable taking investment risk because you expect returns in the current market environment to be modest and more volatile than in the past few years? Or are you staying on the sidelines because behavioral biases push you to be nervous? While the former may be justifiable as a near-term strategy, the latter risks derailing you from achieving your long-term financial goals.
Nelli Oster, PhD, is a Director and Investment Strategist at BlackRock.
©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.