Tuesday, February 13, 2018

Interest Rates And Savings

One single chart: Ten year Treasury yields and the personal saving rate (ie the percentage of income saved).

The correlation is interesting.



Friday, February 9, 2018

Yes, Virginia, There IS Volatility

What happened with US stocks?  Why did they tank so suddenly after months of steady gains?

No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.

There was, however, a sort of  “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit.  It worked like a charm - until it didn’t.

The following chart makes things quite clear.  It’s the price of an ETF (exchange traded fund) that shorts VIX futures.  Yes, Virginia, there IS volatility!

In my opinion that’s all there was to it - the snap unwinding of short vol trades.




Tuesday, February 6, 2018

USA Margin Debt

Given the stock market plunge of the last few days, the following chart is interesting.  It is current to year-end 2017 (latest available), the data comes from FINRA.

Given that total market cap at the time was approx. $32 trillion, margin debt of $650 billion doesn't seem all that excessive.  In other words, selling due to system wide over-leveraging isn't the likely culprit of the sell-off.



Friday, February 2, 2018

Greek PMI Near Record

Manufacturing in Greece is staging a strong and rapid comeback.  The Purchasing Manager's Index for manufacturing is now at the highest level since 2007.  Increasing new orders is the biggest contributor to the rise, with new employee hiring also boosting the index.

The PMI is a diffusion index, with levels over 50 indicating expansion and under 50 indicating contraction. The light blue area is annual GDP change, left scale.
Manufacturing accounts for only 12-15% of Greek GDP, but the correlation between PMI and GDP is pretty solid.  Interestingly, the last time PMI was at current levels the Greek economy was growing over 5% per year.

Thursday, February 1, 2018

USA Debt: Is It A Threat?

US federal government debt is now at 106% of GDP, the highest in decades.  It got there because it was forced to bail out the financial sector during the 2007-10 Great Meltdown, essentially having the Federal Reserve "print" money with its Quantitative Easing (a.k.a. Ben's helicopter).

 This debt load certainly looks formidable and perhaps threatening to the economy's health.  Is it so?  Well, yes.  And, no...

Yes, because a highly leveraged economy has, by definition, a lower capacity to overcome recessionary downturns without painful asset liquidations and capital losses, perhaps even social unrest.  Just ask the Germans and how scared they (still) are of the Weimar hyperinflation period which paved the way for Hitler.

And no, because it matters very much to WHOM the debt is owed.  Just ask the Japanese today, who owe their huge debt (250% of GDP) mostly to themselves (i.e. they are self-financed through a high saving rate).

 In the case of the US national debt, 25% is inter-government (mostly held by the Social Security Trust Fund), another 25% is held by American investors (e.g. pension funds, banks, individuals) and 12% by the Federal Reserve.  Thus, a total of 62% of the debt is owned directly by American holders. This leaves 32% owned by foreigners, but even there I expect that a chunk is owned by Americans through entities in tax havens such as the Virgin Islands, Channel Islands, Switzerland, etc.
 


 More important still, is how the government is managing its finances. It is doing quite well, as the following chart shows: government spending is back to 34% of GDP, very near a 50 year low.
 
 Bottom line - even though it may seem high, US debt is not a threat to the economy.

Wednesday, January 31, 2018

Disruption

Buffett, Bezos and Dimon announced they are going to massively disrupt US healthcare by designing and implementing an in-house system for their combined 1+ million employees on a not-for-profit basis, and potentially rolling it out to the rest of the country.

This is simply huge.

The US has arguably the world's most inefficient healthcare system, entangled in a mess of legal, insurance, pharmaceutical (need I mention Valeant?) and hospital concerns, all jockeying for legitimate and illegitimate profits.

The following chart says it all:  The US spends 17% of GDP on healthcare, far more than other countries. Even a 2% reduction means savings of almost $400 billion per year.

 If the trio manages to streamline the healthcare industry it will create a paradigm shift akin to Henry Ford's automobile assembly line.

There is another American "industry" that has also become very expensive when compared to the rest of the world: College education.  I don't think it will be long before some other leaders get involved there.



Friday, January 26, 2018

A Funny Thing Happened On The Way To The Forum

The World Economic Forum at Davos is in the news these days, as it is every year at this time. The world’s leaders - political, business and financial - gather to rub shoulders and, very occasionally, achieve something more than self-congratulation.  Going back a quarter century, however, the WEF wasn't nearly as famous as it is today.  

And that's when yours truly comes into the story..


It was around 1992 when I saw an ad in The Economist for a position at the WEF.  They were looking for someone that combined knowledge in engineering/energy with finance. It fit my profile pretty nicely so I sent off a resume, mostly on a lark since I wasn't quite ready to move from the Big Apple to Geneva or some remote village in the Swiss Alps, no matter how glamorous. 

About a month later, however, I was surprised to get a call inviting me for an interview to be held in Manhattan.  More surprising still was that the lady on the phone spoke Greek and introduced herself with a last name that was instantly recognizable: a very, very large Greek tycoon shipping family.  

She explained that Professor Klaus Schwab - the founder of WEF himself - was in NYC for a few days and would I mind if I met him on short notice?  The meeting would take place at her apartment in Midtown, just a few blocks from my office.  I agreed.

On the appointed hour the door was opened by an attractive middle-aged lady who showed me to the living room and explained that the Professor was running a bit late, would I care for some refreshment in the meantime? A crudites, cheese and cracker platter was set on the coffee table.

We sat down and engaged in some idle remarks which quickly petered out.. that's when I noticed a portrait hanging prominently over the fireplace.

 This wasn't the painting, but close enough..

"That's a very nice painting, almost like an El Greco" I said, eager to re-start the conversation.

I will never forget the icy hauter in her voice as she responded:

"It IS an El Greco".

Professor Schwab came in a few minutes later and we proceeded with the interview, but it might as well have not happened.  My faux-pas with the painting had sealed my fate, since the WEF was - and still is - much more of a diplomatic institution than anything else...

I chuckle every January as news and images from snowy Davos hits my TV...

Thursday, January 25, 2018

Greece: Various Data

The situation in Greece continues to improve.  Latest data:
  
  • The 5-year CDS (credit default swap) dropped to 292.9, the lowest point since the crisis began.


    • S&P upgraded Greece one notch to B, with positive outlook.
    • The 2-year  government note now yields 1.25%, a multi-year low.
    • Building permits for  October 2017 were up 16.4% vs. Oct. 2016.  More importantly, the surface area represented in these permits was up 67% and the buildings' volume up 109%.  This means that large structures are involved, exactly in line with my predictions for major hotel building/renovation activity, right after the conclusion of the tourism season.
    • Electricity consumption for the whole year 2017 was up 3%, with the middle-power segment showing the largest increase at 5.84%.  That's demand coming from hotels, restaurants and other medium size businesses.

Friday, January 19, 2018

Greece, The IMF's Sugar Daddy

Today, a look at the Greece-IMF relationship from the only perspective that really matters: money.

When Greece imploded back in 2010 it turned to the IMF for help.  The IMF agreed and as of Oct. 2017 Greece owes it 9.5 billion SDR (Special Drawing Rights, the IMF's in-house currency), equivalent to 11.3 billion euro.  The loan carries an interest rate around 3.5% per annum. 

So, Greece pays the IMF roughly 340 million SDR per year in interest (=396 million euro). 

So what, you ask?  Greece is the IMF's largest borrower by far and without the income generated from these loans the IMF would be hard pressed to make any profit at all.  

An excerpt from the IMF's quarterly statement ending Oct. 31, 2017 (I have annualized all amounts, in million SDR).

Operational Income:         1,658
Operational Expenses:    -1,344  (mostly salaries and admin.) 
Operating Net:                      314
Other Income:                         94
 Total Net:                         408 million SDR

As you can see, the Greek loan interest is 20.5% of operating income and a whopping 83.3% of total net.  Given that IMF's expenses are basically inelastic - salaries and administrative expenses -  total net without the Greek interest income would drop to a mere 68 million SDR.

And here's the rub: Greek bond yields have now dropped so low that early repayment of IMF loans is very possible. They are due in several installments with average maturity around 2.5-3 years and cost 3.5%.  Compare that, for example, with the 2-year Greek government bond at 1.40% and the 5-year at 2.80%.  

Therefore, issuing new 2 and 5 year GGB's to pay off the IMF early is a very attractive possibility, one that would save Greek taxpayers some 200-250 million euro per year.  It would also mean lean times for the Washington boffins, but I'm sure no one will shed tears for them.

And what are them boffins doing about it? The relationship between Greece and the IMF has been testy for the last 3-4 years;  so much so that the IMF is no longer a "full" member of the bailout program (i.e. it provides no more financing), instead participating on an advisory role only.  It has frequently intimated that it would rather withdraw altogether.

So, here's the good part: in the last few days the IMF has done a complete about face and is now eager to participate in the Greek program, including fresh financing!

I think the IMF's income statement (here) explains a lot..



Thursday, January 18, 2018

Yadda, Yadda, Yadda And A Bottle Of Ouzo

Greece is highly indebted, bad loans swamp banks, the economy is in tatters... yadda, yadda, yadda.  Highly conventional wisdom, the one you get from the popular (and even specialist) media, is always last year's news and not only useless but potentially dangerous. 

Following up on my last post on the fast rise of Greek private sector debt during 1998-2008  (i.e. very much yesterday's news) and the resulting collapse, where does it stand now in comparison to other countries?

You may be surprised to know that the country's households and businesses are still very under-leveraged when compared to the rest of the world and the eurozone/EU in particular - just look at the chart below (Data: World Bank, 2016).

Furthermore, the same chart indicates that Greek banks' credit exposure to the private sector is likewise very modest.

 I'll let readers figure out what this means for the future of the Greek economy and its banks - but, yeah, I think its becoming more and more realistic to break out the ouzo bottle.