Is it "Late 2007" For the Everything Bubble?

Timing the end of a major bubble is extraordinarily difficult as it entails figuring out when a critical mass of investors shift from greed to fear.

Having said that, we’ve recently seen a number of developments that would suggest we’re near the end of the current Bond Bubble.

Back in June the world saw the unveiling of perhaps the single most insane investment of all time: the 100-year bond.

To make matters more insane, the countries that were issuing these bonds (Argentina and Austria) both have experienced numerous sovereign dent crises in the last 100 years.

More recently, Austria almost went bust in 2015. And Argentina only just resolved issues with debt-holders from its 2001 default last year (2016).

Of course, 100-year bonds are not entirely new: Belgium and Ireland issued 100-year bonds last year (2016).

However, both of these issues were via private placements (meaning the bonds were sold at set prices to a select group of investors).

By way of contrast, both Argentina and Austria issued their 100-year bonds on the open market to anyone and everyone. Even more insane, both debt issues experienced tremendous investor demand!

Argentina sold $2.75 billion of a hotly demanded 100-year bond in U.S. dollars on Monday, just over a year after emerging from its latest default, according to the government.

The South American country received $9.75 billion in orders for the bond, as investors eyed a yield of 7.9 percent in an otherwise low yielding fixed income market where pension funds need to lock in long-term returns.

Source: Reuters

Austria has sold €3.5bn of 100-year debt in the largest century bond to hit the markets to date, the latest indication of hot investor demand for very long-dated debt. Bids from potential investors reached €11.4bn, dealmakers said.

Source: Financial Times

Let’s put this in very simple terms… two countries, both of which struggled with sovereign debt issues in the last four years, saw investors place between $3 and $4 in bids for every $1 in new debt issuance… on 100-year bonds.

This is beyond insanity. It is the textbook definition of a bubble. And it indicates we are nearing the end of the line for this current bubble.

The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

"People Ask, Where"s The Leverage This Time?" - Eric Peters Answers

One of the Fed"s recurring arguments meant to explain why the financial system is more stable now than it was 10 years ago, and is therefore less prone to a Lehman or "Black monday"-type event, (which in turn is meant to justify the Fed"s blowing of a 31x Shiller PE bubble) is that there is generally less leverage in the system, and as a result a sudden, explosive leverage unwind is far less likely... or at least that"s what the Fed"s recently departed vice Chair, and top macroprudential regulator, Stanley Fischer has claimed.

But is Fischer right? Is systemic leverage truly lower? The answer is "of course not" as anyone who has observed the trends not only among vol trading products, where vega has never been higher, but also among corporate leverage, sovereign debt, and the record duration exposure can confirm. It"s just not where the Fed usually would look...

Which is why in the excerpt below, taken from the latest One River asset management weekend notes, CIO Eric Peters explains to US central bankers - and everyone else - not only why the Fed is yet again so precariously wrong, but also where all the record leverage is to be found this time around.

This Time, by Eric Peters

“People ask, ‘Where’s the leverage this time?’” said the investor. Last cycle it was housing, banks.

 

“People ask, ‘Where will we get a loss in value severe enough to sustain an asset price decline?’” he continued. Banks deleveraged, the economy is reasonably healthy.

 

“People say, ‘What’s good for the economy is good for the stock market,’” he said.

 

“People say, ‘I can see that there may be real market liquidity problems, but that’s a short-lived price shock, not a value shock,’” he explained.

 

“You see, people generally look for things they’ve seen before.”

 

“There’s less concentrated leverage in the economy than in 2008, but more leverage spread broadly across the economy this time,” said the same investor.

 

“The leverage is in risk parity strategies. There is greater duration and structural leverage.”

 

As volatility declines and Sharpe ratios rise, investors can expand leverage without the appearance of increasing risk.

 

“People move from senior-secured debt to unsecured. They buy 10yr Italian telecom debt instead of 5yr. This time, the rise in system-wide risk is not explicit leverage, it is implicit leverage.”

 

“Companies are leveraging themselves this cycle,” explained the same investor, marveling at the scale of bond issuance to fund stock buybacks.

 

“When people buy the stock of a company that is highly geared, they have more risk.” It is inescapable.

 

“It is not so much that a few sectors are insanely overvalued or explicitly overleveraged this time, it is that everything is overvalued and implicitly overleveraged,” he said.

 

“And what people struggle to see is that this time it will be a financial accident with economic consequences, not the other way around.”

The Time Has Come: Venezuela May Be In Default In Under 48 Hours

This past weekend, Venezuela failed to make $237 million in bond coupon payment, blaming "technical glitches" when in reality it simply did not have the money (or wish to part with it). Adding the $349 million in unpaid bond interest accumulated over the past month as of last Friday, that brings Caracas" unpaid bills to $586 million this month, just days before the nation must make a critical principal payment. And, as BofA sovereign debt analyst Jane Brauer writes, while the bank"s base case assumption is that Venezuela will make its debt service payments this year, "the probability of a short term default has increased substantially with coupon delays" and it could come as soon as this Friday, when an $842 million PDVSA principal plus interest payment is due, and which unlike typical bond payments does not have a 30 day grace period but instead is followed by a second $1.1 billion PDVSA coupon on Nov 2, also without a 30 day grace period.

As Brauer writes, Venezuela has been in as similar situation of payment uncertainty in the recent past, with bond prices plummeting right before a big payment. For example, just before a big principal payment was due in April 2017 Venezuela received a $1bn loan from Russia just one week before the due date. At that time Ven 27s dropped 16% in a month (from $52 to $45) and recovered completely within a month.  Ven 27 has fallen to $35, as Venezuela has demonstrated that it will be a challenge to make all payments on time.  The difference between now and April is that coupon payment delays then came after, not before the payment.

Meanwhile, Venezuela has managed to redefine the concept of payment "on time" which now means "by the end of the grace period"

As we keep track of missed payments, the 5 missed payments, so far totaling $350mn all have a 30 day grace period, as did the $237mn payments over the weekend.

The concern is that the principal payments coming up have:

• No grace period in the bond indenture for an event of default


• Three business day grace period before triggering CDS

The concerning principal due dates are coming up, the first of which is this coming Friday, which means in less than 48 hours Venezuela could be in default unless it can find $842 million:

• Friday, Oct 27 PDVSA 2020 $842mn


• Thursday Nov 2 PDVSA 17N $1,121mn

The collateral against the first bond is PDVSA"s Houston-based refining and retail subsidiary, and in just a few hours, the bondholders may be the (un)happy new ownders of said subsidiary.

"This weekend, there"s either going to be a lot of bond holders and traders drinking champagne, or there"s going to be a lot of stressed fund managers," said Russ Dallen, managing partner at Caracas Capital Markets

And to help everyone involved, here are some key tables, courtesy of BofA:

1. Table 1. Ordered by due dates, missed payments and payments due today for Venezuela sovereign and wholly-owned quasi sovereign issuers.


2. Table 2. Sorted by grace period end dates for missed payments and those due today


3. Table 3. Debt service due dates for the next 9 months


4. Table 4. Bond Attributes and face needed to block CACs

Table 1

Table 2

Table 3

Table 4

"Psycho"

Gold remains inside its 5 year wedge with no clear trend yet revealed.

But there are a number of near-term potential catalysts such as the German Elections, Debt Ceiling Debate & Commitment of Traders positioning  which may help give some clarity.

In the meantime, "People are literally losing their minds.”

So says Santiago Capital"s Brent Johnson in this clip regarding gold, global markets and cognitive dissonance.

 Whether it"s those on the Left that cannot handle Trump in the White House, or those on the Right who can’t understand how CNN is still in business.  Whether it"s the gold bugs who can’t understand why gold is not over $10k/ounce, or the equity bears who think equities are overvalued by at least 50%.   They cannot reconcile the fact that their minds are saying one thing while simultaneously trying to comprehend the information being broadcast on their T.V.s and computer monitors.

Tracing the source of this cognitive dissonance back to the real “Seven Psychopaths” (voting members of the FOMC), Johnson asks you to just listen (and keep an open mind) to see whether you are guilty of psychotic thinking as well.

While referencing characters from real life and the movies,  Johnson wonders whether the bears are overly focused on the equity market (symptom) rather than where the real psychos are focused, which is the bond market (problem). 

And also wonders, based on studies showing that “The feeling of knowing” is based on an involuntary brain mechanism much like lover or anger, is it reason or biology that is determining our opinions on the markets?

Johnson believes the danger that most people don’t see is in interest rates.  And whether due to a currency crisis, sovereign debt crisis, or the simple forgiveness of G20 sovereign debt,  rates may very well rise further and faster than most currently see possible. 

In the end, fundamentals always win.  But in the short term, markets are Psycho.

Putting Global Debt Into Perspective - 13 Stunning Silver Stats

Although gold has a bigger reputation today as a monetary metal, it was often deemed too valuable for everyday transactions throughout history.

But, as Visual Capitalist"s Jeff Desjardins notes, for the most part, common people in places like Ancient Rome used silver to buy daily staples like grain or wine. As a result, silver has a strong reputation through monetary history as the “people’s money”.

Even today, silver is still much more widely accessible. With one ounce of gold being 70x more expensive than an ounce of silver, it’s difficult for someone who is just starting to accumulate wealth to own gold.

Visualizing Silver

What do savings and debt look like, using the “people’s money”?

Below is everything from the average paycheck to global sovereign debt visualized as silver cubes.

1. A median U.S. family brings in $2,355 per pay period (semi-monthly) pre-tax.

2. However, the median American family only has about $5,000 of savings.

3. The standard silver delivery bar holds 1,000 oz of silver.

4. Average household debt is $98,312, with mortgage debt being the primary component.

5. A Lamborghini worth over $400,000 needs a silver cube with 16-inch (0.4m) sides.

6. Using a silver price of about $18/oz, here’s what $1 million looks like.

7. Every day, the world’s mines produce about 75 tonnes of silver, worth over $44 million.

8. Silver Eagle sales have jumped considerably since the Financial Crisis.

9. When the Hunt Brothers tried to corner the silver market, they hoarded 200 million oz.

10. Today, almost 900 million oz of silver is mined each year.

11. JP Morgan’s market capitalization, in comparison to previous cubes.

12. All silver ever mined would not compare to the Fed’s balance sheet, which is now $4.5 trillion.

13. Global sovereign debt is 13X bigger than all previous cubes combined.

Liked our visualizations of silver cubes?

Don’t forget to check out 11 stunning visualizations of gold.

The Most Un-Fun Bubble Ever

Via Kevin Muir of The Macro Tourist blog,

The other day in the midst of an epic food-fight-rally in the stock market, a younger kid from my office wandered by and expressed his disbelief at the incessant bid. Shaking his head he asked me if I had ever seen something so insane.

Ahhh…. the joys of being young - everything is new.

I explained to him that I had indeed seen this movie play out before. A few times actually.

But herein lies the problem. All the grizzled old guys like me have been burned by so many bubbles, we see them everywhere. Corporate bonds, real estate, sovereign debt, equities - all you need to do is open your inbox to be inundated with research pieces warning about the dangers of sky high asset prices.

Yet there are some differences between today and all the previous bubbles.

One of the twitter guys that I respect immensely said recently, “[German] bunds are not in a bubble. No one is buying them on margin and no one is bragging at cocktail parties that they are long ‘em.”

Yup, I can’t say I disagree. German bunds are nothing like Japanese stocks in the 1980s, dotcom stocks in the 1990s or real estate in the 2000s. There is no public euphoria speculating on German rates going even lower. The long side of the German bund market might be a little crowded within the fixed income community as bond managers hide in supposedly safe bunds, but there is no mania engulfing the average person on the street.

Do I think German bunds are insanely overpriced? You betcha.

But if you use cocktail chatter as the only way to measure bubbles, then there aren’t any bubbles anywhere (except maybe in calling bubbles).

Let’s face it. There is no Gatsby-esque celebration regarding the recent stock market rise. No one is bragging at parties at how much money they are making. In fact it is just the opposite. Most people are complaining bitterly about how the stock market is running away on “terrible fundamentals” and how there is nowhere to invest their money without taking crazy risk.

This “bubble” differs greatly from all the other ones I have experienced. Previously you were labeled an idiot for not embracing it. Not so now. In the late 1990s Warren Buffett was called a Luddite for not buying into the Dotcom bubble, but today he ridiculed as an out of touch Octogenarian for purchasing stocks such as Apple at all time highs.

I understand the rally of the past couple of months has pushed us up into record overbought territory. We have hit a point where there are more bullish newsletter writers than any time since 1987. I have no doubt we are due for a pause, and maybe even a correction that shakes out all the recent buyers.

But I do not buy the idea this is some sort of speculative frenzy. Look at the flow of funds since the credit crisis.

This chart of equity flows over the past decade shows that both institutional and private clients have been net sellers over the majority of the time since the credit crisis. Where is all this speculative froth that has pushed equities up over the past decade?

Yes, the last few months has seen retail chasing stocks, but are they buying in a frenzy? Or are they maybe “short” risky assets in their already depleted savings?

Most investors have saved far too little to fund their ever increasing longer lifespan. They are stuck between Central Banks’ financial repression era minuscule yields and their government’s continual reduction in retirement benefits. Not only that, but they got scared from equities’ collapse in the previous crisis, and have been steady sellers of risky assets, stuffing the proceeds into fixed income at the absolute worse time.

So although it might be fashionable to claim equities are in a bubble, be aware this “bubble” is completely different. It is not driven by speculation, but instead might be the most gigantic short squeeze of all time.

The reason there is little euphoria as stocks push up to new highs is that most investors are “under invested” in risky assets. Sure, the stock portion of their portfolio might be rising, but they don’t have enough to fund their retirement.

This overvaluation is still risky and dangerous, there is no doubt about that. Stocks are stupidly expensive. But they are up here on forced movement out the risk curve - not crazy speculation. There are no shoe shine boy stories.

Who knows what this will mean over the long run. The only thing I know for certain is that is not nearly as much fun…

Visualizing Gold's Value And Rarity

Since Ancient times, Visual Capitalist"s Jeff Desjardins explains, gold has served a very unique function in society.

Gold is extremely rare, impossible to create out of “thin air”, easily identifiable, malleable, and it does not tarnish. By nature of these properties, gold has been highly valued throughout history for every tiny ounce of weight. That’s why it’s been used by people for centuries as a monetary metal, a symbol of wealth, and a store of value.

Visualizing Gold’s Value and Rarity

With all that value coming from such a small package, sometimes it is hard to put gold’s immense worth into context.

The following 11 images help to capture this about gold, putting things into better perspective.

1. The U.S. median income, as a gold cube, easily fits in the palm of your hand.

2. A gold cube worth $1 million, has sides that are 2/3 the length of a typical banknote.

3. All gold used for electrical connections in the Columbia Space Shuttle would be worth $1.6 million today.

4. Trump’s entire fortune of $3.7 billion as a gold cube would be shorter than Trump himself.

5. As a gold cube, the entire value of the Bitcoin market would fit in a hallway.

6. The fortune of the richest man on Earth, Bill Gates, would take up a single traffic lane.

7. The world’s entire annual production of gold is just a 5.5m sided (18 ft) cube.

8. Take the 147.3 million oz of gold out of Fort Knox, and it’s only slightly bigger.

9. All gold held by the Central Banks pales in comparison to the Brandenburg Gate.

10. All gold mined in human history is dwarfed by the Statue of Liberty.

11. To pay off $63 trillion of global sovereign debt, you’d need a gold cube the size of a building.

Liked our visualizations of gold cubes? Check out this motion graphic video that shows how much money has been created by humans.

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.