Economic Commentary

Wednesday, February 24, 2016

Are Investors Smarter Today? Can You Distinguish Between Intelligence and Wisdom? A Vast, Vast Chasm Separates the Two.

During a student visit in 2005, Warren Buffett was asked if investors were more knowledgeable today than 10 years ago, and this was his response:

"There is no doubt that there are far more 'investment professionals' and way more IQ in the field, as it didn't use to look that promising. Investment data are available more conveniently and faster today. But the behavior of investors will not be more intelligent than in the past, despite all this. How people react will not change – their psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think investors are now acting more intelligently, despite the intelligence. Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.

Take Long Term Capital Management. They had 100's of millions of their own money, and had all of that experience. The list included Nobel Prize winners. They probably had the highest IQ of any 100 people working together in the country, yet the place still blew up. It went to zero in a matter of days. How can people who are rich and no longer need more money do such foolish things?"

Tuesday, February 23, 2016

Choppy Seas, Train Wrecks, and Bear Markets (Tony Sagami)

“It is worse than in 2008.”
—Nils Andersen, CEO Maersk

“This crisis is worse than a divorce. I’ve lost 50% of my net worth, but I’ve still got my wife.”
—Anonymous

"Here it comes again: Another one of my warnings about the transportation industry… specifically the cargo container and railroad sector.

Very Sea Sick: A.P. Moller Maersk (AMKBY), one of the largest container shipping companies in the world, reported awful results—a $2.51 billion loss for the quarter.

Maersk CEO Nils S. Andersen didn’t mince his words: “Maersk has been hit by the perfect storm, with the low energy prices dealing a serious blow to the oil unit and minimal benefits for the container business.”

“It is worse than in 2008,” said Andersen. “The oil price is as low as its lowest point in 2008-09 and has stayed there for a long time and doesn’t look like going up soon. Freight rates are lower. The external conditions are much worse.”

Maersk also warned that 2016 profits will be “significantly below” what it made in 2015.

It is the same problem I’ve been talking about for months: overcapacity. The global container fleet grew by around 8% last year, but container demand was basically unchanged for the year.

Train Wreck: Kansas City Southern (KSU) is one of the largest railway companies in the US. Unlike most other railroads, which run east-west, the company mainly operates lines running north-south from Mexico through the middle of America’s heartland.

Unique business footprint or not, Kansas City Southern reported a mixed bag of results—better-than-expected profits, but worse-than-expected revenues.

The profit upside was mainly due to lower fuel costs, which dropped by 26%, while revenue came in light at $598 million versus the Wall Street forecast of $602 million.

Revenues were down primarily from industrial, consumer, and intermodal carloads. (Intermodal is transportation talk for containers.)

The real meat of the quarterly report, however, was the railroad’s outlook for its future. Here is what Pat Ottensmeyer, CFO of Kansas City Southern, had to say:

“As you’ve heard from all of the other rails that have reported so far, the short-term outlook is very uncertain. And as a result, we’re just not in a position to provide more definitive guidance regarding volume, revenue or operating ratio.”

“Many of you on the call this morning have as much or better information regarding the economic outlook, commodity, and currency markets than we do. I was at a rail industry conference last week and I thought one railroad executive characterized the current landscape quite well when he said, and I am paraphrasing here, we’re in an energy market depression, an industrial and manufacturing recession, but somehow the consumer is doing okay.”

Kansas City Southern isn’t the only railroad having problems. In fact, there has been a clean sweep of lousy results from the railroad industry. First, CSX Corp. (CSX) missed forecasts, then Union Pacific (UNP), then Norfolk Southern (NSC), and now Kansas City Southern.

I could go on with other transportation examples, but it doesn’t matter which part of the transportation food chain you’re looking at… they are all in trouble.

As you probably know, another thing I find very worrisome is negative interest rates.

Various Fed heads recently have been making approving noises that make me think the time may be near when you’ll have to pay for the privilege of having a savings account with your bank.

And there are already government plans in place to keep you from simply pulling all of your cash out of the bank…."

Original (Read the data, forget the advice.)

READ THIS: Are We On the Verge of Another 2008?

"For six years, the world has operated under a complete delusion that Central Banks somehow fixed the 2008 Crisis.

All of the arguments claiming this defied common sense. A 5^th grader would tell you that you cannot solve a debt problem by issuing more debt. Similarly, anyone with a functioning brain could tell you that a bunch of academics with no real-world experience, none of whom have ever started a business or created a single job can’t “save” the economy.

However, there is an AWFUL lot of money at stake in believing these lies. So the media and the banks and the politicians were happy to promote them. Indeed, one could very easily argue that nearly all of the wealth and power held by those at the top of the economy stem from this fiction.

So it’s little surprise that no one would admit the facts: that the Fed and other Central Banks not only don’t have a clue how to fix the problem, but that they actually have almost no incentive to do so.

So here are the facts:

1)   The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.

2)   The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.

3)   Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.

4)   Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of US GDP.

5)   The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.

6)   The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion (back in 2009). Today it’s over $4.5 trillion.

We are heading for a crisis that will be exponentially worse than 2008. The global Central Banks have literally bet the financial system that their theories will work. They haven’t. All they’ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.

The situation is clear: the 2008 Crisis was the warm up. The next Crisis will be THE REAL Crisis. The Crisis in which Central Banking itself will fail."

Graham Summers, Phoenix Capital Research