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El-Erian Warns “Bad Things Happen” When Markets Front-Run The Economy

El-Erian Warns "Bad Things Happen" When Markets Front-Run The Economy

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El-Erian Warns "Bad Things Happen" When Markets Front-Run The Economy Tyler Durden Thu, 06/11/2020 - 18:45

Authored by Mohamed El-Erian, op-ed via The FT,

Governments need to ensure durable growth that benefits more than the well-off in society...

For most of the last 15 years, the US economy has relied on a mix of public and private finance to liquefy financial markets, boost asset prices and drive economic growth.

What used to be a sequential process — private sector credit factories at full force during the good times, and massive injections of liquidity from the public sector during the more difficult times — has evolved into a simultaneous one. The resulting explosion in leverage has been cheered by markets and most economists, for now. But it will become a lot more problematic should finance’s front-running of the economy not be validated by strong growth that is also inclusive and sustainable.

Let us start with how we got to the great disconnect between economic and corporate fundamentals and appetites for risk, on the part of both providers and users of debt financing.

Going into the global financial crisis in 2008, private sector credit creation had operated in turbo-charge mode. In addition to buoyant issuance of bonds, there was a very rapid rise in securitisation, which found new ways to lever corporate and household balance sheets while reducing barriers to entry for creditors. But the whole process got carried away, resulting in excessive and unsustainable risk-taking by borrowers and lenders.

As the private sector went into a disorderly mode of deleveraging during the crisis, the public sector had no choice but to step in and do whatever it could to avoid a depression. Government debt and the Federal Reserve’s balance sheet soared — accompanied by assurances from officials that this growth would be reversed once economic growth recovered, and once the private sector had completed its de-levering in an orderly fashion. 

But exiting this regime proved difficult in the post-crisis years. A premature attempt to limit government deficits undermined growth, adding to households’ economic insecurity — especially as the benefits of the meagre growth flowed to the better-off segments of society. Rather than reduce its balance sheet, the Fed felt compelled to expand it, waiting for an elusive policy handoff to those more able to deliver genuine and durable economic growth.

Meanwhile, the private sector went on a borrowing binge as Fed-repressed interest rates encouraged and enabled not only the funding of operational expansion but also — in a much bigger way — the buying back of stock, the paying of high dividends and the pursuit of mergers and acquisitions. Then came the Covid-19 shock to the economy and markets.

Facing a new threat of depression, the public sector pivoted to a “whatever it takes” paradigm. The Fed’s balance sheet exploded — almost doubling to near-$7tn in less than a couple of months — as did US government borrowing, rising by an extra 15 per cent of gross domestic product.

The scale of such policies was once considered unthinkable. To overcome the risks of market malfunction and a credit freeze, the Fed is now underwriting not just liquidity risk and credit risk for high-quality companies, but also the risk of default in the junk-bond market. Fiscal measures have included sending cheques to US households as part of a broad-based relief effort.

The immediate impact on financial markets has been beneficial, and has extended well beyond the remarkable recovery in stocks that drove the Nasdaq Composite through the 10,000 mark for the first time on Tuesday and had the S&P show gains for 2020. Corporate bond issuance has been setting new records, as have inflows of investors’ funds into credit markets, despite very low yields. The spillover effects include more than $300bn of emerging-market bond issuance in the first five months of the year, exceeding levels for the same periods in 2018 and 2019.

This huge rise in financial leverage will prove advisable and sustainable if, and only if, economic growth picks up quickly and validates it. In such a scenario, companies’ and countries’ use of debt to bolster cash buffers and offset massive revenue shortfalls would be deemed to have been a wise way to avoid temporary liquidity problems turning into a crippling solvency risk.

But if growth disappoints, the economy and markets will have to cope with a massive debt overhang that results in even greater central bank distortions of markets and lower growth potential. There will be widespread debt restructurings too, and disorderly non-payments.

Given that this nascent economic recovery is subject to significant uncertainty, the answer is not to quickly de-lever balance sheets. Instead, there is a need for an evolution in approaches. Governments should ensure a stronger foundation for high and durable growth that benefits more than the well-off in society, and investors should be more disciplined in minimising exposures to bankruptcy risk and capital impairments.

Lastly, companies need to resist the temptation to use debt for more financial engineering and higher executive pay.

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The Gall Of Lockdowners Who Support China’s Anti-Lockdown Protests

The Gall Of Lockdowners Who Support China’s Anti-Lockdown Protests

Authored by Michael Senger via ‘The New Normal’ Substack,

If the intent…

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The Gall Of Lockdowners Who Support China's Anti-Lockdown Protests

Authored by Michael Senger via 'The New Normal' Substack,

If the intent was to get western elites to simultaneously support totalitarianism in their own countries while pretending to oppose it in China, then Xi Jinping has certainly made his point...

Across the political spectrum, voices have risen up in support of the Chinese people who’ve launched protests of unprecedented scale against the Chinese Communist Party’s indefinite Covid lockdown measures.

As well they should. Even by Chinese standards, the lockdowns that Xi Jinping pioneered with the onset of Covid are horrific in terms of their scale, their duration, their depravity, and the new totalitarian surveillance measures to which they’ve led. Anyone who participates in a protest in China runs a risk of being subject to cruel and arbitrary punishment. For ordinary Chinese people to brave that risk in defiance of this new form of inhuman medical tyranny is an act of courage worthy of admiration.

There are notable exceptions to the otherwise widespread support the protesters have received. Apple has been silent about the protests, and had the gall to limit the protesters’ use of a communication service called AirDrop in compliance with the CCP’s demands, even as it threatens to remove Twitter from its app store over Elon Musk’s free speech policy. This comes even after Apple has long ignored requests by FCC officials to remove the Chinese-owned app TikTok from its app store over unprecedented national security concerns. So Apple complies with requests by the Chinese government, but not the United States government. Let that sink in…

Apple is, unfortunately, far from alone in its CCP apologism. Anthony Fauci told CNN that China’s totalitarian lockdowns would be fully justified so long as the purpose was to “get all the people vaccinated.”

This kind of apologism for the CCP’s grisly bastardization of “public health” is horrific, especially coming from the man most widely seen as the leader of America’s response to Covid.

But what may be even more galling than this apologism is the widespread support China’s anti-lockdown protesters have received even among those who demonized anti-lockdown protesters in their home countries and wished their lockdowns were more like China’s.

In 2020, the New York Times denounced anti-lockdown protesters as “Anti-Vaxxers, Anticapitalists, Neo-Nazis” and urged the United States to be more like China.

But in 2022, the New York Times admired the bravery of China’s anti-lockdown protesters fighting Xi Jinping’s “unbending approach to the pandemic” that has “hurt businesses and strangled growth.”

In 2020, CNN published an open letter from “over 1,000 health professionals” denouncing anti-lockdown protests as “rooted in white nationalism” while admiring “China’s Covid success compared to Europe.”

But in 2022, CNN admired China’s anti-lockdown protesters as “young people” who “cry for freedom”

In 2020, the Washington Post denounced anti-lockdown protesters as “angry” populists who “deeply distrust elites,” and wished the United States was more like China.

But in 2022, the Washington Post celebrated global “demonstrations of solidarity” with China’s anti-lockdown protests.

In 2020, the New Yorker denounced anti-lockdown protesters as “militias against masks” while marveling at how “China controlled the coronavirus.”

But in 2022, the New Yorker admired the protesters standing up to Xi Jinping.

Earlier this year, Amnesty International issued a statement of concern about Canada’s anti-lockdown Freedom Convoy protests being affiliated with “overtly racist, white supremacist groups,” even as Justin Trudeau invoked the Emergencies Act to crush the protests.

But now, Amnesty International has issued a statement urging the Chinese government not to detain peaceful protesters.

These headlines are, of course, in addition to the hundreds of other commentators, influencers, and health officials, such as NYT journalist Zeynep Tufekci, who used their platforms in 2020 to urge for lockdowns that were even stricter than those their governments imposed, but now join in support for those in China protesting the same policies they were urging their own countries to emulate.

Etymologically, Zeynep’s latter comment makes no sense. Lockdowns had no history in western public health policy and weren’t part of any democratic country’s pandemic plan prior to Xi Jinping’s lockdown of Wuhan in 2020. Though some countries, such as Italy, imposed lockdowns shortly before the United States, their officials too had simply taken the policy from China. Thus, because no other precedent existed, any call for a “real lockdown” or a “full lockdown” in spring 2020 was inherently a call for a Chinese-style lockdown.

Though by “full lockdown” Zeynep may have intended somewhere in between the strictness of lockdowns in the United States and China, there was no way for any reader to know what that medium was; it existed only in her own head. Thus, the reader is left only with a call for a “full lockdown,” and the only example of a “successful” “full lockdown” that then existed was a full Chinese lockdown.

Zeynep’s latter comment further illustrates the efficacy of what was arguably some of the CCP’s most effective lockdown propaganda in early 2020: The ridiculous viral videos of CCP cadres “welding doors shut” so poor Wuhan residents couldn’t escape.

CCP apologists have argued that these videos prove the CCP was not trying to influence the international response to Covid, because they make the CCP look so bad. But on the contrary, the over-the-top inhumanity of the idea of welding residents’ doors shut was precisely the purpose of this propaganda campaign. The idea had to be so absurd that no decent government would ever actually try it. It thus gave the CCP and its apologists an infinite excuse for why lockdowns “worked” in China and nowhere else—because only China had ever had a “real lockdown” in which residents were welded into their homes.

When those with a decent knowledge of geopolitics or a bit of common sense see a graph like this, which looks nothing like that of any other country in the world, from a regime with a long history of faking its data on virtually every topic, the conclusion is obvious: China’s results are fraudulent. But to simple minds, a weld is a strong, durable bond capable of incredible feats, from supporting skyscrapers to spaceships. Surely, if a weld can do all that, then it must be able to stop a ubiquitous respiratory virus?

The entire concept is, of course, utterly asinine. You cannot stop a respiratory virus by indefinitely suspending everyone’s rights. But this idea that lockdowns had worked in China because the CCP had gone so far as to weld people into their homes was invoked over and over again during Covid, creating a limitless “No-True-Scotsman” out for lockdown apologists as to why lockdowns weren’t “working” anywhere except China. Whether COVID-19 cases went up, down, or sideways, the solution would always be the same: “Be more like China.”

The use of this darkly humorous propaganda campaign of welding residents into their homes speaks to two key points as to how Xi Jinping and CCP hawks like him view China’s relationship with the west. The first is that westerners will never respect the CCP; thus, you can make westerners believe anything so long as it confirms westerners’ prior belief that the CCP is barbaric.

Second, Xi Jinping sees the concepts of democracy and human rights as mere propaganda that western elites use to further their own self-interest. So long as they approve of a policy, then it’s not a human rights violation, but if they oppose it, then it is. It remains to be seen whether the response to Covid will, in the long run, ultimately advance Xi’s goal of making the world China. But insofar as the intent was to get western elites to simultaneously support totalitarianism in their own countries while pretending to oppose it in China, then he’s certainly made his point.

*  *  *

Michael P Senger is an attorney and author of Snake Oil: How Xi Jinping Shut Down the World. Want to support my work? Get the book

Tyler Durden Mon, 12/05/2022 - 15:53

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Correction in Energy Provides High-Yield Buying Opportunity

By now, most investors have heard and come to understand how the yield curve for the bond market is inverted — where the two-year Treasury Note yields…

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By now, most investors have heard and come to understand how the yield curve for the bond market is inverted — where the two-year Treasury Note yields considerably more than the 10-year Treasury Bond.

An inverted yield curve historically marks a very difficult time for the economy in the coming months. Examples include major events like 13% inflation in 1979, the dot-com blowup of 2000, the housing crisis of 2008, the COVID-19 outbreak in 2020 and, in the current case, aggressive rate hikes to force a slowdown in demand after massive spending triggered rapid inflation.

As of Dec. 1, the yield on the two-year T-Note stood at 4.27% while the yield on the 10-year T-Bond paid out 3.54%. The difference between the two yields is 0.73%, or 73 basis points, as illustrated by the graph below. This is the widest 2-10 spread since 1980, when the economy was in a deep recession. While there is one camp that argues such an inversion is a precursor to a hard-landing-type recession, others would contend that it marks a bottom for the economy followed by a gradual recovery.

What history tells us is that the economy does suffer a material slowing in the year following peak yield curve inversion, meaning 2023 will likely prove to be a challenging time for the U.S. economy that will include higher unemployment, lower housing prices, low gross domestic product (GDP) growth and lower earnings for the S&P 500. For the record, the past week’s rally has raised hopes that the economy will not fall into recession, but simply endure a slow growth environment.

Here is just one example of what’s happening in the housing market. The monthly payment on a 3%, 30-year fixed mortgage for a $400,000 home was $1,349 during December 2021. Today, the monthly payment on a 7%, 30-year fixed mortgage for a $400,000 home is $2,129 – a $780 increase. For a home buyer who wants to maintain that $1,349 monthly payment per their budget, she or he will have to settle on a home priced at $253,000. That’s 37% price differential. Either wages move higher or home prices decline further, or both occur.

History also shows that the year following a steep inverted yield curve, the stock market begins the next leg of the secular bull market. If past is prologue, 2023 should be a pretty good year for stocks. There are those who argue the bottom is in and the next bull leg has just begun. Some of this uncertainty will be sorted out by Dec. 14 at the Federal Open Market Committee (FOMC) meeting.

In another high profile and fluid situation, more volatility in the crude oil market can be expected. On Sunday, OPEC+ agreed to stay put on its production output targets as the energy markets contend with pricing in a slowing Chinese economy and a potential European Union boycott of most Russian oil imports and a price cap of $60 per barrel on Russian exports imposed by the European Union, the Group of Seven countries and Australia.

Some countries won’t sign on, and the policy directive is coming at a time when China and India are content to buy Russian oil at its current $66 per barrel price while WTI crude trades at around $81 per barrel. Russia has been effective at circumventing sanctions to date. If there were any teeth to this new set of sanctions and price caps, oil prices would likely be trading much higher. So, it stands to reason the status quo for an ongoing tight global energy market will persist.

The resurgence of COVID-19 in China has dampened sentiment for demand by oil traders amid a long-term timeline by which demand in China will increase when that economy full reopens. Overt pressure from the Biden administration on OPEC+ to increase supply had also weighed on oil prices heading into last Sunday’s meeting, but that obviously did not work out to the liking of the White House. WTI closed out the week around $80/bbl. and right where the Saudis want to maintain a floor.

Back in June of this year, the Royal Bank of Canada hosted an energy conference in New York with the highlight being a keynote speech by Mohammed Barkindo, the secretary general of OPEC. In his keynote speech, Barkindo warned that “OPEC is running out of capacity,” and that “with the exception of two or three members, all are maxed out.”  Further, “the world needs to come to terms with this brutal fact” and that it is a “global challenge.”

I’ll take that statement at face value. OPEC+ is running out of spare capacity that supports the bull case for a strong pricing environment for crude oil and natural gas into 2023. Amidst all the confusion, most exploration and production energy stocks have pulled back off their recent highs and offer, in my view, some attractive entry points — especially in those stocks with variable dividend policies and those high-yielding domestic infrastructure investments.

Foregoing major capital expenditure (capex) spending in the face of an anti-fossil fuel administration, returning free cash flow to shareholders in the form of variable dividends has turned out to be one of the greatest inflation-fighting asset classes from both fundamental and total return basis in 2022. In the E&P space, Coterra Energy Inc. (CTRA) yields 9.2%, Devon Energy Corp. (DVN) yields 7.9% and Pioneer Natural Resources Co. (PXD) pays out a 10.4% dividend yield. (I have no position in these stocks.)

With oil prices having declined for much of the fourth quarter due to concerns over demand by China, the next round of variable dividends may not be as juicy as recent quarters, but listening to oil execs, their outlook remains bullish. Speaking to the most recent earnings release, Pioneer CEO Scott Sheffield noted, “I still think they will probably get back to $120, sometime mid-next year, once China opens up,” in a Bloomberg Television interview. Sheffield also said China’s growing energy infrastructure could surpass the United States if the country doesn’t invest more in areas such as pipelines and liquefied natural gas terminals.

A couple high-yield energy infrastructure exchange-traded funds (ETFs) and closed-end funds that convert the K-1 MLP income into 1099 ordinary taxable income include:

  • Alerian MLP ETF (AMLP), paying 7.34%
  • InfraCap MLP ETF (AMZA), paying 7.14%
  • Kayne Anderson Energy Infrastructure Fund (KYN), paying 9.03%

(NOTE: I have no position in these funds.)

To ramp up domestic production, Sheffield added, Biden needs to speak not just with leaders of companies like his, but also with shareholders and financial players who fund the industry. Personally, I don’t see this dialogue being anywhere near constructive going forward. That reality will keep new development of energy sources limited and prices elevated. To this point, the risk/reward investment proposition continues to look very promising for energy companies dedicated to fossil fuels, as long as there is a major deficiency in supply by renewables.

The post Correction in Energy Provides High-Yield Buying Opportunity appeared first on Stock Investor.

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Disney Has Bad News for Marvel, Star Wars Fans

With Bob Iger back at the Disney helm, the company’s content strategy is already changing.

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With Bob Iger back at the Disney helm, the company's content strategy is already changing.

It's no secret that the last few years have seen a boom in the production of movies and television shows. Thanks to the presence of streaming platforms, audiences have more options than ever when it comes to choosing what to watch. As soon as vaccines made it possible for production studios to pick back up after the covid-19 lockdown, there was a surge in original content.

Leading the pack was Disney  (DIS) - Get Free Report, thanks in large part to its impressive library of valuable intellectual property. Under the leadership of Disney CEO Bob Iger and Head of Strategy Kevin Mayer, Disney acquired major studios Pixar, Star Wars, and Marvel. In 2020, Iger left Disney in the hands of Bob Chapek, who had 26 years of experience with Disney working first in the Home Entertainment department and then as Chairman of Parks & Resorts.

Thanks to political entanglements with Florida Governor Ron DeSantis and an unpleasant legal battle with actress Scarlett Johansson, the last few years of Chapek's leadership have left board members with something to be desired. In a surprising announcement over Thanksgiving weekend, Iger was reinstated as Disney CEO for a period of two years -- during which time, Disney will likely see some changes.

Getty Images/TheStreet

Disney is Trimming Down its Content in 2023

Shortly after the news of Chapek's leaving and Iger's return, Disney released its annual report stating that 2023 will see a reduction in television shows and feature programming. According to the document, "In fiscal 2023, the Studios plan to produce approximately 40 titles, which include films and episodic television programs, for distribution theatrically and/or on our DTC platforms."

To put that in perspective, 2022's annual report set a goal for 50 titles. In the last two years, both Marvel and Star Wars have released several major film and series titles, each of which cost millions of dollars to make and market. Each new addition to the brands' libraries drew praise and criticism alike -- but now it looks like Disney is looking for more precise hits that favor quality over quantity.

For Disney, Less Could Be So Much More

Cutting down production by ten projects next year is a strategy that could bring a lot of benefits to the House of Mouse. There's no such thing as a cheap Disney production, and prioritizing projects that are more likely to succeed at the box office could be a better use of company resources.

Earlier this year, Marvel Studios specifically was plagued by reports of overworked and underpaid graphic designers -- another bit of press that reflected poorly on Chapek's overall leadership. With less pressure to complete more projects and an increased budget per project, Disney and Marvel could work to repair its tarnished reputation among creatives.

Regardless of what the surplus budget is used for, Disney isn't the only streaming service moving toward a more fiscally-conservative 2023. Warner Brothers Discovery  (WBD) - Get Free Report service HBO Max has been itching to slice $3 billion from its own budget, cutting programming and even shopping animated content to Amazon. Meanwhile Netflix  (NFLX) - Get Free Report, it seems, is going full speed ahead into the new year.

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