RuleNumberOne

The obstacle to studying more recent stuff is the news in Europe is not in the English language. Unlike these hedge funds, I can't go to Europe to investigate when and why things are going to crash. I will open a relevant thread to attract more discussion. I have some urgent questions, I will also read up on Nabiullina.

According to Wikipedia, Russia had hyperinflation in the first 6 years after the Bolshevik Revolution until the gold standard was put in. We could repeat the Bolshevik experience by making the ECB buy equities. They have already made debt free (i.e. nationalized it and removed free-market pricing.) The Bolshevik experience is promising. We could have the central bank own the equity of all companies and thereby generate prosperity.

I prefer free-markets with 1.5% inflation rather than a nationalized economy with 2% inflation. Whether the ECB can buy all equity and get 2% inflation can probably be answered by the Soviet Union's records. This FT journalist writes better than me, my thoughts are the same: https://www.ft.com/content/9a6295f6-aefa-11e9-8030-530adfa879c2 "Our senses have been dulled by increasingly extreme monetary policy over the past decade, so we must try and look at it afresh. What is being suggested here is that the ECB, a publicly owned institution, prints money and uses it to buy equity stakes in private companies. In other words, the only way to save capitalism is to begin to nationalise it. Global elites have a full-on meltdown every time the UK opposition leader Jeremy Corbyn suggests some kind of “people’s QE” or nationalising a couple of utility companies. Yet when BlackRock says this no one blinks. It isn’t quite the same — utility nationalisation isn’t good for big asset managers for starters. But it isn’t all that different either. Public equity purchases distort pricing signals; they are anti-free markets; they will be almost impossible to unwind; and think of the governance issues. BlackRock likes to promote the idea that big shareholders should be active when it comes to corporate governance. What if one of those big shareholders is a central bank? Should they be active too?" Finally, the ongoing shift towards increasingly bonkers monetary bazookas is surely more evidence that the whole thing just isn’t working. If the big financial firms could see beyond their own business models they wouldn’t be asking for more measures to stabilise the status quo."

47 billion in valuation for 1.8 billion in revenue which came with 1.9 billion in losses. The greedy investors are the exuberant ones, not the insiders. Insiders can create more stock from thin air for themselves. Have stupid-greedy investors, will create stock and sell.

Lightwhale, there is a lot to learn from office-space manager WeWork. $1.8 billion revenue, $1.9 billion losses, $47 billion valuation in the last round. IPO in September. https://www.wsj.com/articles/wework-aims-to-go-public-in-september-sooner-than-expected-sources-11563921401

https://www.wsj.com/articles/wework-aims-to-go-public-in-september-sooner-than-expected-sources-11563921401 Central bankers should be proud of their achievements. "WeWork Cos. is aiming to go public in September, earlier than many investors had expected, after boosting a loan facility the office-space manager hopes will pave the way for the listing. Indeed, one reason for the September launch target is executives at WeWork are worried that the good times won’t last, with the U.S. stock market trading near records. Once it does so, WeWork will have to address questions about its yawning losses; the nine-year-old New York company’s $1.9 billion loss last year outstripped the $1.8 billion of revenue it generated and helps explain its ravenous appetite for cash."

Someone from Blackrock suggested the ECB should buy stocks. Why not just buy entire companies Buffett-style? That way we can complete the journey to Soviet collectivism. It would lead to even greater prosperity. Companies do not need to generate a return on capital anymore since debt is free. Free-markets have a much diminished role in setting prices. If we go even further and have the central bank buy everything, we would all be rich.

Talk, talk, and more talk but no action from the ECB. They are out of bullets. They have been threatening monetary easing for several months and will continue to wave their empty gun. The easing is always going to happen at the next meeting, it has been that way for a long time now. German industry in "free fall". Ifo survey lowest in 9 years https://www.ft.com/content/08010baa-aeb6-11e9-8030-530adfa879c2 Eurozone manufacturing activity lowest in 7 years https://www.ft.com/content/7b7c5140-ade2-11e9-8030-530adfa879c2 Italy debt to GDP higher than before the crisis, youth unemployment in Italy 33%.

Spekulatius, I completely agree. It is hard to believe grown-up, purportedly literate adults could create such an environment. I was trying to work out maturity by maturity, using zero-coupon bonds. It probably went something like this: 1. One-year bonds. Eurocrats: "We have engineered the one-year yields to be negative. Why aren't you pension funds buying?" Pension fund says: "We are not suicidal. We have pensions to pay." Eurocrats: "Hey, fu. Who do you think you are? You little pension fund, you! The law says you have to buy, just buy it!" The one-year zero-coupon bond bought at $102 turns into $100 at the end of the year. Soon, companies reduce pension fund contributions and pay the money directly to employees instead, since money in the mattresses/bank vaults is a better investment. 2. Five-year bonds. Eurocrats: "Here are 5-year bonds. We have negative rates guidance for the next few years. Spread the word and trade this with your friends." The one-year zero-coupon bond bought at $102 turns into $103 at the end of the first year, and $105 at the end of the second year. Then they head south because they turn into $100 at the end of the fifth year. By now the banks are busily building more vaults for clients, insurance companies are going broke. The ECB has even started regulating the number and size of bank vaults. 3. Ten-year bonds. Eurocrats: "Hey, this time we have increased our negative rates guidance and you can trade the 10-year with your friends." The bonds go up for the first few years and then head south. Since bank employees still need bread to eat and clothes to wear, they have to punish depositors even more to create a spread. By now, all wealthy Europeans have moved all their assets abroad in the dark of night. Housing bubbles and rent controls pop up everywhere. 4. 100-year bonds Eurocrats: "At last we have found the solution. We created a 100-year Tulip bond, as in, we take real Euros and return Tulips a 100 years from now. You can trade this to the skies. Tell your friends. Spread the word. It is just like a stock without a P/E, your imagination is the limit!" Bond fund managers: "If we don't buy these 100-year Tulip bonds right now, we will miss our benchmarks and be out of a job. Look at my former classmate over there, he made 55% on those Austrian Tulip bonds bought 2 years ago. I need to take some of that imagination medication he uses." Politicians: "Everybody lives in a marble palace from now on. You don't need to go to college, even if you do, you don't need to graduate. We will give everyone a big free house and a new car every 2 years. Everybody makes the same income as a brain surgeon. But, to get all this, you will have to vote for me first!"

Viking, negative rates will never come to the US, because they harm the economy rather than help. Bernanke, Greenspan have spoken against it. They don't make any sense anywhere. I think the Fed is making the 25bp cut to expand the NIM for banks. The ECB force-fed negative yields to their savers/pension funds/banks/insurance companies just so that they could keep Italy and Greece in the European Project and French banks solvent. The upside of driving Italy/Greece borrowing costs so low, has come at a great cost. They have created a huge bond bubble that they are too afraid to prick. I think the Eurocrats started by ramming the negative yields down the throats of their savers. But then it took on a life of its own as evidenced by the 100-year bond where you take the risk of huge downside for the upside of a 1% yield. At least with the S&P 500 the upside is unlimited. In the current bond bubble, unscrupulous politicians could probably issue a 0.01% rate 200-year Tulip bond - the bond buyer can choose to get redeemed in either Tulips or Euros (since Tulips are guaranteed to be around in 200 years, and be worth something at least, unlike the Euro.) With the proceeds of the Tulip bonds, the politicians can provide everyone a new car every 2 years, a new boat every 3 years, and a new plane every 5 years.

Apart from the huge losses if interest rates move up even by 1%, the USD/EUR has gone from 0.74 five years ago to 0.89. Buying the 100-year Austria bond is so much more risky than the S&P 500. A 1% increase in rates would result in a capital loss of 35% for the 100-year bond. It would take a severe bear market for the S&P to give you a 35% loss. At least you know if the S&P goes down 35%, it will surely be back up in a few years. Today's news as Italian coalition government looks like it might fall apart (their 10-year yield jumped 7 bp to 1.62%): https://www.bloomberg.com/news/articles/2019-07-19/salvini-under-the-gun-as-clock-ticks-down-on-italy-snap-election "The spread between Italy’s benchmark 10-year bonds and German debt of similar maturity widened almost 10 basis points to 195.5 basis points. "

I would tend to believe the BofA CEO because he has the whole of Merrill Lynch at his disposal to find out what's going on (does anyone here know why the Treasuries held by "private investors" has more than doubled from $6 trillion to $14 trillion in the graph from the same website linked below?). But whether or not it is foreign buyers, let us look at the duration risk. - The Austria 100-year bond first issued in 2017 saw a few more taps some days ago at 154% of face value (yield around 1.1%). If it were to revert to 100% of face value, buyers would get an immediate capital loss of 35%. - Italy 50-year bond yields were at 2.85% recently. - One-percent rate increase in the Bloomberg-Barclays sovereign debt index results in a loss of $2.4 trillion. - Greek and Italian government debt yields less than US government debt. The only way you would not buy US Treasuries is if the European regulators block it. I mean US 3-month Tbill yields more than Greece 10-year. https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuries/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

I think all the parties below would prefer to buy Treasuries and not worry too much about currency hedging costs. ECB is looking to make rates more negative. Maybe people who invest other people's money and chase "benchmarks" might buy peripheral debt. But if it is your own money, you would want Treasuries. https://www.wsj.com/articles/negative-rates-designed-as-a-short-term-jolt-have-become-an-addiction-11558363559 "Larger banks have shielded individual depositors while charging negative rates to large clients such as pension and hedge funds. Some banks report major depositors have asked to park their physical cash in vaults—where it avoids incurring negative rates it might when in the form of electronic deposits but also does no good to the economy. In Switzerland, some individuals are putting cash into real estate, prompting fears of overbuilding. “Holding cash,” said Swiss Bankers Association chief economist Martin Hess, “is simply more expensive than building an empty house.”"

BofA CEO said the same thing - European investors are buying our bonds and driving yields down. In Europe, clients have put cash into vaults instead of checking accounts (see WSJ link below). They must be buying Treasuries too. Who knows what wealth confiscation crookedness the European Collectivist Bank may come up with next. I think for Europeans, buying Treasuries is protecting themselves against wealth expropriation. https://www.wsj.com/articles/negative-rates-designed-as-a-short-term-jolt-have-become-an-addiction-11558363559 If you were thinking of buying real estate to shield against negative rates, Berlin showed the way with a retroactive rent freeze.

Negative rates in Europe have inverted the US yield curve. Dan Fuss: https://www.barrons.com/articles/why-bond-legend-dan-fuss-is-buying-at-t-stock-51563363000 "The flows of capital from abroad means the gulf between ultralow or negative yields elsewhere and the high U.S. yields will have to narrow, he continues. " Fed chief Powell said 2 days ago: https://www.cnbc.com/2019/07/16/feds-powell-says-uncertainties-have-increased-chances-of-a-rate-cut.html “We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking,” he said.

European Project continues at warp speed as Italian bank sells 7-year collateralized bond at 0.44% yield. Investors from Germany and Austria accounted for more than a third of the allocated orders. https://www.ft.com/content/c54a4dcc-a892-11e9-984c-fac8325aaa04 Former Bundesbank chief (and former ECB "Governing Council" member) Axel Weber is saying in a different way what Munger said about paying A+B for what ends up as A at the end of the day. https://www.bloomberg.com/news/articles/2019-07-17/europe-dived-into-negative-rates-and-now-it-can-t-find-a-way-out “I would never say you cannot go negative, you can do everything for a short time,’’ Axel Weber, chairman of UBS and a former ECB policy maker, said in Zurich this month. “But it’s like diving into water. You can stay under water for some time, you can’t stay there forever.’’

Buffett on negative rates in the video above: - "distorts everything" - "we do not know how this movie plays out" That video was over 3 years ago.

We need just a 1% increase in yields for $2.4 trillion in sovereign-debt losses because investors have been forced (some of them by regulators) to swallow long-bonds at zero/negative rates (Austria 100-year at 1%, Swiss 2064 expiry at 0%, and so on). Greece 10-year yields less than US 10-year!!! So far, its been a great ride as bond prices go past the stratosphere. https://www.bloomberg.com/news/articles/2019-06-26/trillion-dollar-monster-lurks-as-bonds-price-out-duration-risk "But just look at the math. The Macaulay duration on a Bloomberg Barclays sovereign-debt index is near a record high of 8.32 years, meaning just a one-percentage-point increase in yields would equate to more than a $2.4 trillion loss. One measure of the relative compensation investors receive to hold longer-dated obligations is a whisker away from a 58-year low. Over in Europe, they’re taking a century of risk for yields barely above 1% in order to escape a $13 trillion global stockpile of negative debt. All that is leaving duration, a measure of sensitivity to interest-rate changes, near all-time highs across sovereign debt markets. One gauge of the compensation investors demand to hold longer-term Treasuries versus rolling over short-dated obligations, known as the term premium, is near record lows -- underscoring the intense conviction in the low-rate, lowflation era in markets. Over in Europe, the ask yield on Swiss bonds due 2064 even fell below zero percent last week." I am waiting for the day when a couple of negative interest rate loans default. If indeed momentum and hope for capital gains (betting on negative interest rates becoming more negative) is the driving force, then everyone knows it’s a fools game and jut hopes they can sell before the rest does and once momentum turns, things could get rather strange when everyone runs for the exit. Can negative-rate loans default? Wouldn't the company just refinance at even lower rates? Maybe even negative-coupons? It's clear that monetary policy is reaching is limits in effectiveness. Rates are below zero without significant effect on economic growth and inflation. SD makes a good point, it is interesting that there's been such a lack of fiscal response..

Fiscal policy is impossible: German taxpayers are not going to pay Greek pensions. Draghi has to keep the treadmill (aka bond market momentum aka negative yields) going faster. The faster it goes the harder the crash when momentum reverses. The ECB is made up of charlatans who have blown a big fraudulent bubble. The US quickly cleaned up the bad bank assets, liquidated many large banks, strengthened the capital base of remaining banks, all this to get them lending. The European Charlatan Bank has done the reverse: cover up fraudulent accounting and bad assets, bailout everything in sight, erode banking capital base with negative rates and forced bond purchases. They are still in trouble, no change in debt to GDP in troubled countries, just more debt and a housing bubble in Germany, Netherlands, etc.

Charles Gave is the new Warren Buffett, he tells you everything you need to know about negative rates. Cigarbutt's "mailchimp" link held this treasure from Charles Gave: "One day he was called by a pension regulator at the central bank and reminded of a rule that says funds should not hold too much cash because it’s risky; they should instead buy more long-dated bonds. His retort was that most eurozone long bonds had negative yields and so he was sure to lose money. “It doesn’t matter,” came the regulator’s reply: “A rule is a rule, and you must apply it.” Back in May 2016, an institutional investor bought a five-year zero coupon bund at €103. Five years on, the bond will be repaid at €100, generating a loss of €3. How this loss appears will depend on the type of investor in question: • Pension fund. The €3 loss will reduce the market value of assets by €3. Holland also has a rule that pension funds must buy more government bonds the closer they get to being underfunded. Yet buying such negative-yielding bonds and keeping them to maturity ensures losses, making it more likely the fund will be underfunded, and so forced to buy more loss-making bonds (spot the feedback loop) Bank. As a leveraged player, let’s assume it lends a fairly standard 12 times its capital. This capital has to be invested in “riskless” assets that are always liquid. As a result, banks are loaded up with bonds issued by the local state. Now let us assume that a bank has just lost €3 on the zerocoupon bond mentioned above. The bank’s capital base will be reduced by €3. Based on the 12x banking multiplier, the bank will have to reduce its loans by a whopping €36 to keep its leverage ratio at 12. Insurance company. A standard solution is to cover the maximum amount of risk with a government bond of similar duration to the client’s contract period, and then put the remainder into equities or real estate to help build up the firm’s capital base. This gets very difficult when government bonds offer negative yields. Simply put, either the insurance company’s clients will pay the negative rates, or the company itself will do so by increasing its risks without raising returns. This means that either the client pays more for insurance, and so becomes less profitable, or the insurance company takes a hit to its bottom line."

The central providers are fond of warning us about $1.3 trillion in leveraged loans. What happens when the $13 trillion in negative-yielding debt threatens to unwind?

Great article about how negative rates in Europe benefit only bond investors but hurt everything else: https://www.ft.com/content/395f450c-a3be-11e9-974c-ad1c6ab5efd1 "The soft patch in Europe has investors clamouring for the ECB to act — yet not one of those same investors believes interest rate cuts or quantitative easing will have a beneficial impact. Aside from throwing a festival for fixed-income investors there appear to be very few benefits and high risks from ECB action. Central banks are obsessed with credibility and power. They may not be able to turn a blind eye to a slowdown, but do they really want to reveal the impotence of their current policy tools?"

Valeant had all kinds of BS reasoning about how great their assets were - "cash pay", not government insured, "brands", "low-R&D", "big pharma does not participate here", etc. One fine day, Philidor appeared in the news. Whether the purchased assets are truly long-lasting like a railroad, or whether they need to be replaced in a few years will be known only to people who work in that industry IMO. This kind of napkin math misses a lot. What are the assets that they bought? Do they have different economic characteristics than what they used to own? Suppose it depends on whether or not you include intangibles and goodwill in your ROIC calcs...yes they've bought more software/higher ROIC assets, but that's still $11 bn in cash out the door...what would the FCF CAGR have been without those acquisitions over the last decade? Is 8.5x revenue a reasonable price to pay?

https://www.ft.com/content/f176544a-a6ee-11e9-b6ee-3cdf3174eb89 "The fall in yield has pushed the gap between seven-year Greek and German debt — seen as a key barometer of the perceived risk of holding the paper — to around 1.8 percentage points, from 4 points late last year." Are spreads between Greek and German debt headed to 0?

This is the Second Tulip Bubble. Investors trading paper at higher and higher prices. https://www.wsj.com/articles/oxymoron-alert-some-high-yield-bonds-go-negative-11563096601?mod=hp_listb_pos3 "“And just because something is negative yielding, that doesn’t mean it can’t get more negative yielding.” Falling yields mean rising bond prices and gains for investors, at least on paper." “I expect to have a high-yield company issue a negative-yielding bond,” said Martin Reeves, head of high yield at Legal & General Investment Management." Why don't these investors trade my paper: bonds issued by my Smoke Weed All Day Inc. are rated AAAAA++. The money lent by investors goes straight into an escrow account from where it will be refunded upon maturity. Safer than Treasuries, you never have to worry about entitlement spending. We don't touch any of the principal. We just use the -0.01% interest to buy weed and smoke it, thereby stimulating the farming economy hurt by the trade war and also raising GDP. If you get in on the ground floor of -0.01% yield, you may be able to trade it all the way up to a yield of -10% in the coming weeks.