Financial Sarcasm Roundup for 01/31/16

Sarcasm on Sunday is way better than attending church. You could listen to some preacher lie about the nature of the universe, or you can listen to me tell the truth about finance.

Alphabet and Apple battle it out for the valuation world heavyweight championship. Both companies are symptoms of the Silicon Valley tech bubble. Investors have chased these stocks because ZIRP made savings accounts look stupid. Apple's (AAPL) P/E is deceptively low at 10 and Alphabet's (GOOG) is really high at 31. Both companies depend very much on smartphone users replacing costly phones more often than necessary in the developed world's saturated markets. Financial advisers who toggle their portfolio optimization searches with "high risk" aren't doing their risk-averse clients any favors by selecting overpriced tech stocks.

The IMF and its lending cartel will review Greece's bailout progress. It's really sick how the world's most important financiers play "extend and pretend" with a country that has no interest in paying its debts. Forcing losses on creditors would clear up credit quality questions a lot faster than extending maturities. I would have hung the foreclosure sign on the Acropolis by now but the IMF never called me to ask for advice. Athens should hire me to fix their problems if they can pay me in something other than gyros (which I really like to eat BTW).

Big SIFIs are cutting the biggest deals with the SEC to settle dark pool allegations. I have always wondered why investors deliberately walk into something they know is dark. The banks telling investors they will get the best execution in dark pools are also the same source of prime brokerage credit for HFT hedge funds trading in those pools. Willfully blind investors, duplicitous banks, and greedy HFTs all jumped into those dark pools to rip each other off. The traditional investors are always the dumbest money in the room, so of course they got taken to the cleaners.

I told you this was better than a church sermon. I'm more entertaining and honest than any religious leader. I should start my own religion so people can properly worship me.

Lancing The Financial Market Bubbles Of 2015

I blogged yesterday about the Fed's information operations campaign for an interest rate increase.  Gold is the obvious first victim of any move to strengthen an already strong dollar.  It is worth asking ourselves whether other assets will suffer as much.

Bubble economies happen all the time.  They tend to happen in isolation, when investors in one country or sector gets overly excited about a single, big story.  It is very unusual to see them happen in tandem across multiple asset classes in many countries.  The Bank of International Settlements and other disinterested international observers have noted the bubble conditions of the developed world's stocks, bonds, and real estate since at least 2013.  The march to new heights has gone uninterrupted without a major correction.

Low interest rates have transformed conservative savers into bold risk takers.  Venture capitalists throw every last penny they have into unicorn startups solving problems of convenience for the wealthy.  The Economist compares today's Silicon Valley unicorns to kitesurfers.  It's a valid comparison because engaging in either "sport" requires a lot of free time and money.  Higher interest rates mean money will no longer be free.

Paying something other than zero for capital means companies that have been throwing money away will reconsider their ways.  Borrowing to buy back stock and pay a rising dividend will no longer be a CFO's Plan A in the weekly C-suite conference.  The effect of a rate change on the stock and bond markets may not be immediate.  Federal Reserve policy changes normally have a six-month lag before they affect the larger economy, but the markets are not the economy.  Traders' reactions will be firmer if subsequent FOMC meetings keep interest rates moving up, in regular basis point increments, at regular intervals.

The Fed's messaging since the end of QE has been a gamble that predictability matters in market psychology.  The gamble presumes that messaging is more powerful than economic reality.  I do not believe the Fed can sustain regular interest rate increases from the ZIRP baseline without harming both its own balance sheet and the US economy.  It may not matter if an unsustainable interest rate increase becomes an uncontrollable one, should a panic selloff in the bond market cause the Fed to lose control of the yield curve.  September will be a test for the markets.

The Haiku of Finance for 04/23/15

Online ad spending
Driving second Web bubble
Multiple of none

The Haiku of Finance for 10/17/14

Warn systemic risk
Top elites see huge bubble
Falling on deaf ears

The Haiku of Finance for 12/27/13

Asset bubble doom
Ride the Fed all the way down
Hard mean reversion

Alfidi Capital Publishes New Venn Diagrams On The Bernanke-Yellen Asset Bubble

I've published my first ever professional use of the Venn diagram.  Check out the Alfidi Capital free flowcharts page and find the last link.  That's my "Bernanke-Yellen Asset Bubble Venn Diagrams" impression of what the Fed's monetary stimulus is doing to asset markets.  The circles are not drawn to scale because this arrangement depicts impressionistic relationships and not statistical ones.  The point of this report is to understand that investors riding the Fed's coattails are hopeless idiots.  Professional investment managers are even more hopeless than retail investors.  Anyone hedging outside the main asset classes, like me, is assuming that central banks cannot pump markets forever.

Please note that I'm trying a different digital architecture with this particular document.  I've displayed it in Google Docs instead of uploading it to my business site.  I will probably migrate all of my existing reports to Google's cloud service in the next few weeks because I'm considering a redesign of the site.  I don't want my work to get lost after I launch a revised site.  I've been writing about the cloud long enough to know that it's secure and reliable.  If you have difficulty viewing my reports, keep trying.  Hit the reload button if necessary. 

The Haiku of Finance for 11/14/13

The Yellen bubble
Bent on asset inflation
No regard for risk

The Haiku of Finance for 05/07/13

Inflate the bubble

Stock, bond, housing all go up

Wait for this to pop

The Haiku of Finance for 04/10/13

Fed just keeps going
Blowing new asset bubbles
Unbelievable

The Haiku of Finance for 08/04/12

Peak defense bubble
Uncle Sam can't afford it
Budget cuts will come

You Can't See An Asset Bubble From The Inside

I can attribute some of my portfolio's success to the avoidance of asset bubbles.  If I had been invested in any of the crazes that hit the markets since the mid-'90s I'd be in a world of hurt.  Fortunately I don't follow crowds.  

I stayed in cash and fixed income while plenty of very smart people chased dot-com dreams in the late 1990s.  I remained in cash after that stuff peaked in March 2000 and wiped out plenty of people who thought they knew better than me.  I had a bad feeling about the Federal Reserve's stimulative monetary policy of the early 2000s and didn't want to pick the next bad thing by accident.  

In 2002 I attended a hiring conference in the San Francisco area (one of the Burlingame airport hotels to be precise) put on by one of the recruiting firms that love to place former military officers with large companies.  I sometimes wonder whether these recruiters collect the first-year bonus their candidates would otherwise get if they were hired on their own, but that's not germane to this article.  The clearest memories I have of that hiring conference were the pitches the recruiters gave for homebuilders, specifically Pulte and Centex.  The home mortgage bubble was in full swing and developers were busy paving over pristine farmland in Stockton, Pleasanton, and elsewhere to accommodate the Greenspan Fed's loose money policy.  The housing bubble sure looked great to the people inside homebuilders who thought they had it made.  I decided to pass on the homebuilding jobs available; they just weren't suited for my white-collar ambitions.

In 2005 and 2006 I was a trainee broker at UBS Wealth Management in The City, an outsider among the anointed children of our hereditary ruling class.  Some of top-producing brokers swore by real estate mutual funds tracking the Cohen & Steers Realty Majors Portfolio Index, thinking they were geniuses.  I went the other direction and bought a structured note (in my own portfolio) that bet on a decline in the homebuilding sector.  I was later fired from that brokerage job for having produced zero revenue, but I liquidated that structured note at a hefty gain when I was forced to transfer my account to another firm.  

My most loyal readers, all three of them, may be aware that I believe defense spending to be an unsustainable bubble.  I have tried in vain to convince my military friends not to pin their hopes on a second career with defense contractors.  The Pentagon itself is probably in denial about the bubble it helped inflate, with very little visible contingency planning underway for a radically austere future.  

Some things never change.  A lot of defense sector bulls are going to be let down.  That suits me just fine.  I'll be ready to buy the defense stocks they'll be forced to abandon.  

Full disclosure:  No positions in any companies mentioned.

The Limerick of Finance for 02/20/11

Nasdaq closes in on its high
Tech earnings give some reason why
But as we all learned
Last decade when burned
Tech results can still mask a big lie

Countdown Begins To Bursting Of Defense Bubble

Crashes were inevitable after the dot-com bubble and housing bubble.  U.S. sovereign debt is probably a bubble that in turn feeds yet another bubble  - in defense spending.  Uncle Sam's war on a radical Islamic mafia since 2001 has cost over one trillion dollars and has fed explosive growth in parts of the military-industrial complex that have little direct involvement in warfighting.  One such part is U.S. Joint Forces Command in Norfolk, VA. 

I recently had the opportunity to visit Virginia and spent some time in Suffolk, home to USJFCOM's Joint Warfighting Center.  The Center's businesslike complex is near a cluster of office parks occupied by the usual suspects:  Lockheed Martin, SAIC, Raytheon, Northrop Grumman, and smaller subcontractors too numerous or secretive to name.  All of them are enjoying the bubble times and flush feelings that come from riding a gravy train.

That gravy train may very well come off the tracks, at least where they end in this neighborhood.  The Defense Business Board is studying ways to make the U.S. military more cost effective and is recommending the shutdown of Joint Forces Command:

A Pentagon advisory board is recommending that the Defense Department eliminate the Norfolk-based Joint Forces Command as part of a plan to significantly cut defense spending.
(snip)

Joint Forces Command is the linchpin of Hampton Roads' blossoming high-tech industry, a segment that provided almost 4,500 high-paying jobs and pumped about $365 million into the local economy in 2007, according to a 2007 Old Dominion University report.
(snip)

It employed more than 3,000 contractors, 1,491 military personnel and 1,533 civilians as of May, said Lt. Cmdr. Robert Lyon, a Joint Forces spokesman in Hampton Roads. Those figures include personnel deployed throughout the world, he said.

It's worth noting that the number of contractors at USJFCOM just about equals the number of traditional staffers from the armed forces and civil service.  There is no clearer reminder than this of where the money went in the war on terror.  Many of these contractors are retired military officers themselves.  I'd love to find out how many are making more than what they made on active duty in addition to their standard pensions.

Scaling back defense spending is inevitable.  America's current wars are among the costliest in our nation's history when measured in inflation-adjusted dollars and we have little to show for the investment besides uneasy strategic stalemates.  World War II bought us new allies and revolutions in crossover technologies (radar, plastic, rocketry).  This war has bought us little so far.  The one remaining benefit is the prospect of opening up Afghanistan's hidden trillions in untapped natural resources for the world market.  The U.S. recently forgave the debts owed to it by Afghanistan as a down payment to ensure access to ore.  All those rare earth metals lying under the mountains are very necessary for our standard of living.  Many Afghan tribesmen are going to get rich.  Many defense and mining contractors will continue to get rich; just not as many as before. 

The end of the defense bubble is coming.  It may come with a bang if the global bond market revolts or with a whimper if defense spending gradually tapers off to the minimal level needed for a multi-decade Afghan footprint.  Defense spending will never end and in some ways it may increase if unmanned vehicles, smart sensors, and precision logistics are brought to maturity.  Some defense projects will be great investments but the low-hanging fruit has probably been picked clean.  Military historians define surprise as an event that occurs in the mind of a commander.  Deflating bubbles always come as surprise to those inside them. 

Full disclosure:  Long put under LMT as hedge against decline in U.S. defense budget. 

China Admits It's In A Bubble

Well, now we've heard it from the horse's mouth.  Chinese leaders state that their economy has assumed bubble proportions:

“We have to closely monitor China’s asset bubbles,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said yesterday at a conference in Beijing. Property prices have changed “quite a lot in the past five years,” he said.

This is in the context of further policy restrictions on lending to real estate developers.  China is trying to let the air out of this bubble slowly.  Good luck with that.  I'm just glad I trimmed my FXI holdings this month. 

Nota bene:  Anthony J. Alfidi is long FXI (with covered calls) at the time this post was published. 

China Approaching Bubble Territory

China may be one of my favorite long-term bets, but articles like this make me think it's about to overheat in the short term:

China is doing what it can to expand domestic demand and rebalance its economy, President Hu Jintao said Friday, calling for renewed efforts to improve international financial oversight to prevent future crises.

There's other evidence that retail loan growth is getting to the point where the average Chinese consumer thinks they absolutely must max out their credit to avoid being left behind. That's the same mentality that inflated the U.S.'s housing bubble all the way until it burst in 2005-6.

I've been long FXI for a while, but soon I may start to take some money off the table.

Bubble Lending Drives Chinese Manufacturing

Okay, now I'll finally admit that Chinese equities have probably formed a bubble. Here's some hard evidence:

China’s manufacturing expanded at the fastest pace in 16 months in August, driven by record lending in the first half of the year, two surveys showed.
(snip)

Gains in output, orders and jobs added to evidence that Premier Wen Jiabao can meet his 8 percent growth target for the year as a stimulus package counters
falling exports.

That second snippet goes to show that Chinese data is just as subject to puffery and political manipulation as U.S. data. This unfortunate tendency is something that investors all over the world will just have to accept. Chinese investors may be nervous but I'm not. Any bursting of this bubble makes it cheaper for me to add to my FXI holdings, on the premise that China's pursuit of natural resources lays a foundation for long-term growth.

Nota bene: Anthony J. Alfidi is long FXI with a short straddle.