Monthly Archives: August 2014

Ukraine crisis could halt Europe’s recovery, ECB warns

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“Economic fallout from the political crisis over Ukraine threatens to derail Europe’s ‘weak, fragile and uneven’ recovery in the months ahead, the head of the European Central Bank admitted.  Hopes early this year that Europe was on the road back to prosperity have evaporated amid tit-for-tat sanctions between the EU and Russia over Ukraine, sharply increasing downside risks, Mario Draghi warned as the ECB kept rates at record low levels.  With even Germany experiencing an unforeseen slowdown in industrial production, the 18-nation eurozone has returned to the state of nervousness and gloom that characterised the years after the global economic…”

http://www.thetimes.co.uk/tto/business/markets/europe/article4169631.ece

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Bill Bonner: Three Signs That Never Fail to Predict a Bear Market

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“Too much money (or credit) raises prices, lowers yields, forces investors into subprime investments, increases debt and dooms markets to disaster.   As ultra-low rates continue, milestones are hit. In 1946, the Union Pacific Railroad was able to borrow at 2.51% – a record low at the time. But it was a solid business. Today’s credit-financed lending bubble finds borrowers with neither tracks nor trains.  Rwanda recently borrowed $400 million – an amount equal to 5% of GDP –at less than 7% interest.  [LendingClub also has a] great business model, no? You get money from people who are desperate for yield… you lend it to people who are desperate for cash… and you take your fees off the top.”

http://bonnerandpartners.com/three-signs-that-never-fail-to-predict-a-bear-market/

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Moody’s, Goldman, feds fight the last war on financial excess

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“During the current five-year surge in stocks, confidence that a crash isn’t likely has remained below 40% among individual investors. During the comparable span of 2004 to early 2007, confidence was never as low as 40%, and peaked near 50%. ‘Twice bitten, thrice shy’ seems to be the prevailing attitude, after the market was cut in half twice in eight years’ time. This persistent mood of suspicion probably creates its own check against too much giddiness infusing the markets too quickly. But it doesn’t provide much protection against a whole new, unexpected financial bug coming to bite us from a place we haven’t thought to look.”

http://finance.yahoo.com/news/moody-s–goldman–feds-fight-the-last-war-on-financial-excess–are-we-safer-181328063.html

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How to Handle the Coming Bond Market Bust

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“One of the many consequences of the Fed’s ultra-low interest rates is that US corporations have gorged on credit.  In 2007, at the peak of the last credit bubble, US non-financial corporations had $7.2 trillion in outstanding debt. Today, they owe $9.6 trillion.  The Fed has built up a huge conflict of interest in its own policy making.  If it raises interest rates, it will depress the value of its balance sheet (which is now stuffed full of interest-rate-sensitive long bonds). But if the Fed backs off raising rates, for fear of the effect on bloated credit and stock markets, it risks losing all credibility… especially if the rate of consumer price inflation continues to rise.”

http://bonnerandpartners.com/how-to-handle-the-coming-bond-market-bust/

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What Happens When Share Buybacks Dry Up?

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“Ultra-low rates cause investors to pile into increasingly poor investment choices – overvalued stocks, bonds, real estate, etc.  But ultra-low rates have other, more subtle, effects, too…  As we’ve been reporting, it also makes it extremely easy for corporations to borrow. And as the chart below shows, they’ve been borrowing like crazy recently.  What have they been doing with all this money?  One major source of spending has been share buybacks.  Over the past four years, share buybacks have totaled between $75 billion and $159 billion a quarter.  And in the first quarter of this year they reached a high exceeded only by a couple of quarters in 2007.”

http://bonnerandpartners.com/what-happens-when-share-buybacks-dry-up/

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India central bank chief warns of another market crash

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“‘True, it (another financial sector crisis) may not happen if we can find a way to unwind everything steadily,’ Rajan, who is famed for predicting the 2008 markets crash years in advance, said in the interview posted late Wednesday on the journal’s website.  ‘But it is a big hope and prayer,’ said the Reserve Bank of India (RBI) governor, adding there is a risk of sudden price reversals and sharp spikes in financial volatility.  ‘We are back to the 1930s, in a world of ‘competitive easing’,’, Rajan said, referring to ultra-low interest rate policies pursued by the US Federal Reserve, the Bank of Japan and the Bank of England in a bid to stimulate their economies and spur growth.”

http://finance.yahoo.com/news/india-central-bank-chief-warns-another-market-crash-190447924–finance.html

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Former Fed Chair: ‘We Are Running Out Of Buffer In The Economy’

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“In an appearance on ‘In The Loop With Betty Liu,‘ Greenspan warned that the economy has almost no room to maneuver if faced with a security threat:  ‘We are running out of buffer in the economy. We don’t have the capability should, for example, we run into a major conflict in the Middle East or elsewhere where it requires a major increase in our defense budget. Our defense budget is heading in a direction where in a couple, two or three years it will be at the lowest level relative to GDP since before World War II. We don’t have the physical resources to respond.’  Greenspan believes a correction is likely given current valuations, but it’s impossible to say when it will hit.”

http://www.businessinsider.com/greenspan-we-are-running-out-of-buffer-in-the-economy-2014-7

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Sotheby’s? The best indicator you’ve never heard of

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“Need proof of a speculative bubble?  Closely watched hedge fund manager Jim Chanos says he has the best barometer for gauging where 1 percenters are putting their money, given the Federal Reserve’s easy money policies that have been fueling their portfolios to record highs. During an interview Thursday on CNBC’s ‘Squawk Box,’ he pointed to the stock chart of Sotheby’s.  ‘That’s what people are buying,’ Chanos said.  The chart shows that shares of Sotheby’s have peaked before every major financial bubble since 1987, starting with the leveraged-buyout spree that fueled the stock market before the Black Monday crash that year.”

http://www.cnbc.com/id/101551679

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JPMorgan Joins Goldman in Designing Derivatives for a New Generation

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“Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation.  JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt.  The instruments are springing back to life as investors seek new ways to boost returns that are being suppressed by central bank stimulus.”

http://www.bloomberg.com/news/2014-08-12/swaps-reincarnate-boosting-debt-bets-in-new-era-credit-markets.html

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FICO Recalibrates Its Credit Scores, Targeting Easier Credit

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“A change in how the most widely used credit score in the U.S. is tallied will likely make it easier for tens of millions of Americans to get loans.  Fair Isaac Corp. said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.  The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk.”

http://online.wsj.com/articles/fico-recalibrates-its-credit-scores-1407443549

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