I. Observations & Questions
We had conversations with two interesting people this week. The first was with a middle-aged woman who grew up in a military family. She has been serially successful. Her father was an Air Force man. The family moved from Georgia to Michigan to San Francisco, then to Las Vegas and back to Georgia, this time to Valdosta. Her father spent additional time in Alaska, Spain and Vietnam, the latter during the war. The family traveled for a month at a time each summer or at least those when the father was able. The woman learned how to plan, adapt to new environments, meet new people and find herself amid change. She came to love travel with trips to six continents and dozens of global cities and outposts around the globe. She has noticed two things: First, the learning associated with global travel is hard to quantify because there is so much of it. ?It changes you in ways other learning doesn?t,? she said. Second, and much to her chagrin, places she once visited and would like to visit again are now too dangerous for Americans, even for her own free spirit. ?I?m not interested in being someone?s daily catch,? is the way she put it. . .
The second conversation involved Chicago, specifically the area in and around the United Center, where the Blackhawks and Bulls play. In the early 1980s when we first started going to what was then the ancient Chicago Stadium, the surroundings were foreboding. No matter what direction we took into the area a darkness hung over the streets. Poor people, trash-filled gutters, corner bodegas with iron bars on the doors and windows, and an unsavory crowd outside drinking from brown paper bags. More streetlights out than on. The police presence started no more than a block from the Stadium in all directions. Same with the lights. Run-down houses with little lighting were occupied by poor black people. Graffiti was everywhere that the cops were not. The year Michael Jordan arrived, 1984, the Stadium still was only half-full on an average night. No one lingered when one show or another was over, not even the police. Few took taxies to the Stadium for fear of not finding one later on when it was time to escape the shadows. That probably doesn?t sound like a nice way of putting it. But there was nothing nice outside the old cement building.
Thirty-five years and multiple debt cycles later, the Stadium is long gone, replaced by the United Center, a glistening piece of real estate and an example of what debt can accomplish. Two blocks away and down Randolph Street are some of the hippest restaurants and bar concepts in middle America. They have names like Au Cheval, Maude?s Liquor Bar, Bar Sienna, Cruz Blanca Brewery & Taqueria, Girl & The Goat, Booze Box and Bad Hunter. There are at least three hip hotels in the area, including Ace Hotel Chicago, The Hoxton and Soho House, with a member?s only bar-restaurant. The area has $500,000+ townhouses and condos, too. . . This kind of renaissance can be found all over Chicago, except on the south and west sides where gentrification runs hard into violence. Last weekend, Chicago found its way into discussions about mass shootings in Dayton and El Paso. At least seven people were killed in the city while 46 more were wounded. At least 17 of the victims, and we use that term loosely, were shot early Sunday morning. The surge forced Chicago?s Mount Sinai Hospital to temporarily stop accepting patients. Mount Sinai is one of five Chicago trauma centers. At one point, the hospital had 12 trauma victims with gunshot wounds. . .
We read another report by a world-class traveler, who noted the mass of humanity living amid trash and squalor under overpasses on the way to Orly Airport, just south of Paris.
Meanwhile, as we have discussed, homelessness is causing problems up and down the West Coast in boomtowns from San Diego to Seattle.
The rise of third-world communicable diseases is one result. Various drug epidemics is another. . . We wonder if the entire post-2008 show has been a flimflam, a fraud, a false front. Debt is piled in so many layers across so much land that it acts like a wet sweater suffocating real growth. Relative growth is everywhere. Today that?s called inequality. The closer you are to historically low-interest rates, the better your economy. Oaktree Capital?s Howard Marks has an excellent economy, so good in fact, that Mr. Marks struggles to deploy large stores of capital. A large fund raised in 2015 still hasn?t been fully invested. ?The economy is too good,? said Marks. ?Capital markets are very generous.? Mr. Marks always remains cautious. He?s never quite sure he knows even what he thinks he knows for sure.
To wit: ?Should we be happy to see the Fed trying to prolong the economic expansion and the bull market when they are already the longest in history? Should it try to produce perpetual prosperity and permanently ward off a correction? Are there risks in [the Fed] trying to do so? It all depends on which hand is doing the weighing.? Mr. Marks sold 62 percent of Oaktree to Brookfield Asset Management in March for $4.7 billion. The combined company is now one of the world?s largest alternative money managers. We thought Mr. Marks might have called the top with the sale. We?ll know in the future. But that?s not something he would crow about even if he turns out to be right. ?I?m never convinced enough that I?m right to be assertive,? he says. But . . . ?The lower base [interest] rate causes assets to inflate so there will be more wealth piled up by people who have assets, and it will be harder for people who have just a little bit of savings to get a return.?
With good news everywhere?the lowest unemployment rate in 50 years, $15 trillion of negative-yielding bonds globally, plenty of liquidity, record-high asset prices across equities and bonds?we remain skeptical. If it?s that simple, then why is the White House cheering ?the greatest economy ever? at the same time the president browbeats the Fed for lower rates?
Yet the higher the debt, the lower the yields. That?s an upside-down world. Ironically, the very thing Central Bankers fear the most?deflation?has been created by what they think they know best? inflation! In a high-debt world, inflation produces deflation. Lewis Carroll would find all of this amusing:
?If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn?t. And contrary wise, what is, wouldn?t be. And what it wouldn?t be, it would. You see??
??Alice in Wonderland?
We suspect that even the most imaginative inflating in history will struggle to budge the deflationary mindset slowly seeping into the economy. To avoid that prospect, economic effects will get ?curiouser and curiouser? as inventive finance finds an eager political audience. One effect, at some point, will reveal the swindle of quantitative easing, negative rates and the illusion of history pulled forward.
When we visited Mayo Clinic in 2017, the first doctor we visited was a neurosurgeon. The gentleman had grown up in northern Wisconsin where his grandfather ran a dairy farm. The grandfather was nearly 90 years old when his grandson announced that he wanted to be a doctor. The older man considered doctors intrusive and mostly unnecessary, at best. He shook his head and said, ?There?s nothing bad enough that can?t be made worse.? . . . We were reminded of that wisdom this week when multiple countries issued warnings to citizens considering a holiday to the world?s richest country. Following last weekend?s mass shootings, Amnesty International issued a global warning to those traveling to the U.S. The travel advisory ?called on people worldwide to exercise caution and have an emergency contingency plan when traveling throughout the USA. This Travel Advisory is being issued in light of ongoing high levels of gun violence in the country.? Monday, Uruguay?s Foreign Ministry warned about ?growing indiscriminate violence? in the U.S. and warned visitors to avoid ?theme parks, shopping centers, festivals, religious events, gastronomic fairs and any kind of cultural or sporting events.? The Japanese Consul in Detroit published and alert that said Japanese nationals ?should be aware of the potential for gunfire incidents everywhere in the United States,? which it described as ?a gun society.? France, New Zealand, Germany, Ireland, Canada, the Bahamas, UAE, Mexico, and even Venezuela issued similar warnings. . . How can all of that be made worse? President Trump threatened vague retaliation threats against countries and organizations that issued warnings due to gun violence. Said Mr. Trump, ?If they did that, we?d just reciprocate. We are a very reciprocal nation with me as the head. When somebody does something negative to us in terms of a country, we do it to them.? At the same impromptu briefing, the president said that he received another ?beautiful letter? from Kim Jong Un.
II. Energy Conundrum
Energy seems to be the new retail. Shoppers tend to notice store closures, however. Outside of price increases, energy issues are much harder to spot. Antoine Halff is chief analyst and cofounder of Kayrros, a global energy analytics firm. Mr. Halff questions the staying power of the U.S. shale revolution. ?For all its revolutionary impact on the oil industry, shale remains poorly understood. Publicly available data based on old-fashioned company reporting have their limits. Hard measurements unlocked by new data technologies show that, contrary to public belief, there is no great buildup of DUCS [drilled but uncompleted wells] just waiting to be brought online. The whole idea that the market can rely on this sort of de facto spare production capacity is an illusion. The industry is actually running on a much tighter leash than that? . . . Worldwide investments in renewable energy declined to a six-year low in the first half of 2019, according to Bloomberg. In the Permian Basin and elsewhere, shale companies seem to be reacting to tighter economic scrutiny in one of two ways, both risky. Some are trying to drill their way out of trouble while others are cutting costs. ?Turbulence and desperation are roiling the struggling fracking industry,? read a note from the Institute for Energy Economics and Financial Analytics. Indeed, shale producers are starting to look like coal producers. Most are trimming spending in 2019, according to executives at companies providing drilling and fracturing services. Those companies began taking steps in late July to idle more oilfield equipment. . . Politics also is playing a part, which is sure to further complicate things for frackers. The Texas Railroad Commission sided with a company that wanted to flare, or burn off, natural gas in the Eagle Ford Shale even though there is a pipeline nearby. It was the first case of its kind in Texas. Williams, a pipeline company, argued there was no need to burn off the gas. The railroad commission routinely approves thousands of uncontested flaring permits a year because there is no available pipeline. Exxon-Mobil is known to be one of the biggest practitioners of pollution-causing flaring in West Texas? Permian Basin. The World Bank estimates that the flaring of 140 billion cubic meters of flared natural gas annually is producing 300 million tons of carbon dioxide to be emitted into the atmosphere. Exxon-Mobil, Shell, BP and Russia?s Lukol are among the global energy companies to sign a World Bank pledge to stop flaring gas by 2030. Meanwhile, Texas is starting to take a much closer look at flaring activities.
III. This Week in Bonds
Markets lead, the Fed follows. On Tuesday, negative-yielding debt increased to $15 trillion in 48 hours, according to Bianco Research. Negative debt almost reached 27% — a record — of all developed country sovereign debt. Bond yields were negative going out:
A. 50 years in Switzerland
B. 30 years in Germany, Netherlands
C. 20 years in Denmark
D. 15 years in Japan, Austria, Finland, Sweden, France, Belgium
E. 10 years in Slovakia, Ireland, Slovenia
F. 8 years in Spain
G. 7 years in Portugal
H. 3 years in Cyprus
I. 2 years in Italy
J. 1 year in Bulgaria
K. Other Notable Anomalies:
1. Austria?s 100-year bond yields 0.84 percent
2. Germany has $1.43 trillion of outstanding Bunds; 97 percent of them have negative yields.
3. Germany?s 10-year government bond reached 0 percent in one-third of the time Japan required.
4. Value of global bonds surpassed $55.255 trillion.
5. Mish Shedlock: ?Negative debt implies a negative time preference. In easy to understand terms, negative time preference means someone would rather have 90 cents ten years from now than a dollar today.?
IV. Another Reason To Be Canadian
Aside from the good humor and all-around wonderful guy that is our fearless leader, David Wiley, the Great White North delivered another kind of bounty this week. J.P. Morgan Chase forgave all credit debt for its Canadian Chase customers. The bank decided to exit the Canadian credit card market early last year. In March 2018, the bank closed all existing accounts and blocked customers from making new charges. Chase continued to accept payments, however, until Friday?s decision to speed up the process. Chase said it would erase remaining individual card balances to complete its exit from Canada. What?s unusual?other than credit card debt being forgiven, of course?is that the remaining debt could have been sold to a third party. In an ode to the brazenness of youth, one 24-year-old in Montreal said she stopped making payments on her card five years ago. ?It?s kind of like I?m being rewarded for my irresponsibility.?