Implode-Explode Heavy Industries news feed Tracking the many faces of the global credit implosion. en-us iehi-feed-63174 Sat, 21 Oct 2017 14:40:36 GMT Schiff: Sanguine Market Optimism At an All-Time High iehi-feed-63173 Sat, 21 Oct 2017 14:22:39 GMT Catalonia: Rajoy urges removal of region's leaders Spanish Prime Minister Mariano Rajoy said Saturday that his government was seeking to remove the leaders of Catalonia's regional government from power and call new elections as soon as possible.

The unprecedented measures -- intended to end Catalan leaders' independence bid -- would be taken under Article 155 of the Spanish constitution and must be sent to the Spanish Senate for approval. This would happen within the next week, Rajoy said.


On Thursday, Catalan President Carles Puigdemont threatened that the wealthy northeastern region could formally declare independence if the Spanish government did not engage in dialogue.

iehi-feed-63172 Sat, 21 Oct 2017 02:09:32 GMT Prof.: "Unicorn" Companies On Avg. Worth Half Claimed Valuations Those eye-popping valuations regularly fill articles and water-cooler conversations in Silicon Valley, all under the umbrella of "unicorn" companies -- a term for private companies that are said to be worth more than $1 billion. That moniker now applies to at least 135 businesses, making the descriptions of them as unicorns, well, less apt. (Maybe donkeys?) Early investors and employees spend countless hours calculating and recalculating how much their stake is worth.

Here is some bad news for them: Those valuations may be a bit of myth -- or perhaps wishful thinking.

In Palo Alto, Calif., just down the road from many of the biggest tech companies and the most influential venture capitalists, a professor at Stanford University has quietly been working on a project to crunch the valuation numbers behind some of these private companies.

Ilya A. Strebulaev and another professor working with him, Will Gornall of the University of British Columbia, have come to a startling conclusion: The average unicorn is worth half the headline price tag that is put out after each new valuation


That black box increasingly has relevance not just to gossips in Silicon Valley, but also to public investors. Big mutual fund companies like T. Rowe Price and BlackRock have aggressively begun investing in unicorn companies in recent years on behalf of public investors -- yes, you may own a stake in Uber and not even know it -- helping to increase the valuations even further.

And even the big public mutual funds, the researchers contend, are not properly valuing the assets. "It is inappropriate to equate post-money valuations and fair values," the professors said, explaining how, more often than not, public funds use the headline price that comes after a round of financing, and don't distinguish between various types of shares.


To cite one example from the research: In 2015, Appdynamics issued a Series F round with special terms for certain investors, including "a provision offering a 20% bonus in down I.P.O.s," meaning one that fell in price. Legg Mason, already an investor, then revalued its shares in the company at a higher price, "despite not being eligible for the 20% bonus," the professors wrote. "These examples are representative of common industry practices."

This is mostly a big deal because of the major, "main street" funds buying into these companies. As far as the VC world, everyone knows that post-money valuations are more "aspirational" than anything -- if the company is ultimately successful, you end up with a much higher "valuation" provided through IPO and the stock market anyways. And if the company is not (which is the only other possibility, and the most likely one), the "real" valuation is of course zero. So post-money valuations while a startup is growing are really more of an internal benchmarking metric than anything else; they are nothing like a cash-flow valuation of a mature company, or a share price in the stock market.

iehi-feed-63171 Fri, 20 Oct 2017 21:19:09 GMT Is the Fed Getting Cold Feet about the QE Unwind? We're now two and half weeks and three weekly balance-sheet releases into the QE unwind period. How much has the Fed actually reduced its balance sheet?... You read correctly: Since October 4, the balance sheet gained $10 billion, all of it in the week ending October 18. The Fed is supposed to unload $10 billion in October. But curiously, so far, it has done the opposite.


There is willfulness in it -- a sign that they're not ready, or that they want to give the markets more time to get used to the idea of it, etc. And this could be the case. [Or] They're seeing something that worries them, and they're holding off for now to get a clearer picture. But I doubt this because their decision to commence the QE-unwind on October 1 was unanimous, and since then nothing of enough enormity has changed.

We think it actually could be the latter reason -- but it's not that something ominous happened since the Oct. 1 planned start of the QE-unwind; rather, that the market condition has always been ominous since QE began (i.e., dependent upon massive credit inflation), and the Fed knows it's going to cause a crash.

iehi-feed-63170 Fri, 20 Oct 2017 16:08:41 GMT Greenwich Mansion Listings Pulled to Wait for a Better Day Luxury-home listings in the Connecticut town plunged 31 percent from a year earlier, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. That's largely because sellers who failed to get their hoped-for price quit trying to find buyers and took their properties off the market to wait for a better day.


Tastes are changing in Greenwich, home to many Wall Street executives who take the 50-minute train ride to Manhattan. Lavish mansions on several acres have languished, while smaller homes closer to downtown get scooped up. In the third quarter, sales of luxury homes -- the top 10 percent of deals by price -- fell 13 percent from a year earlier to 21, the firms said. Condo purchases, meanwhile, jumped 35 percent to 58 transactions, the most for a quarter in data going back to 1999.

iehi-feed-63169 Fri, 20 Oct 2017 16:06:13 GMT U.S. Senate Adopts Budget, Giving Momentum to Trump's Tax-Cut Plans The Senate adopted a fiscal 2018 budget resolution Thursday that House GOP leaders agreed to accept, a show of unity aimed at speeding consideration of President Donald Trump's plan to enact tax cuts. The budget cleared the Senate 51-49, with all Democrats and Republican Senator Rand Paul of Kentucky voting against it.


The GOP budget compromise took shape Thursday evening. It allows for more defense spending in the first year, in line with the House budget, according to a Republican aide. It eliminates House language to expedite $203 billion in entitlement savings, while leaving in place Senate language that would allow drilling in the Arctic National Wildlife Refuge. Senate Democrats tried without success to strip out the drilling provision.

On taxes, the compromise would keep the Senate's language allowing tax cuts that add up to $1.5 trillion to the deficit, not including the effects of economic growth, according to the aide. The House plan had required tax changes not to lose revenue.

iehi-feed-63168 Fri, 20 Oct 2017 15:53:47 GMT Senate Will Probably Confirm Trump's Fed Pick, But Not Without Some Drama There could be some awkward moments if Powell is selected and sits down with Republican Banking Committee members Toomey of Pennsylvania and Dean Heller of Nevada, both of whom voted against him in the past. The two were among 20 Republicans who opposed him in 2012 when he was confirmed to complete an unexpired Fed term. Powell was opposed by 23 Republicans, including Crapo, South Carolina's Tim Scott and Senate Majority Leader Mitch McConnell when he was confirmed for a full 14-year term in 2014.

... Powell has been criticized by Republicans for failing to stand up to Daniel Tarullo, the former Fed governor who pushed for tougher oversight as the central bank's point man on financial regulation. He is also opposed by conservatives who would like to see a more hawkish, rules-based monetary policy.

iehi-feed-63167 Fri, 20 Oct 2017 14:45:06 GMT What would happen if Amazon brought 50,000 workers to your city? Ask Seattle. Maybe no city could have built housing fast enough to keep prices from spiraling upward during Amazon's growth, but Seattle - despite nearly leading the nation in new apartment construction - hasn't come close.

On the sidewalks, alongside rentable neon bikes, people subsist in tents and sleeping bags in places locals say they did not congregate at 10 years ago - a warning sign for cities nationwide trying to capture a version of Seattle's glory.

"We don't have enough housing for low-income people especially, but we also just don't have enough housing," said Myers, a longtime Seattle housing advocate. "And Amazon obviously impacts both of those things."

Officials at Bellwether Housing, the city's largest nonprofit manager of affordable housing, at 2,000 units, report a vacancy rate of 1 percent. "It's very rare that someone moves out, because they have nowhere else to go," said chief executive Susan Boyd.

A state analysis of evictions found they were driven not by social problems but by economics. As Amazon's boom has continued, the city approved a rule this year requiring landlords to accept the first viable renter who applies - rather than cherry-picking a tech worker. The government also adopted an inclusionary zoning policy requiring developers to set aside some new units at below-market rates or pay into a fund to develop other affordable units.

iehi-feed-63166 Fri, 20 Oct 2017 00:30:52 GMT Varoufakis: Capitalism is ending because it has made itself obsolete ``Capitalism is going to undermine capitalism, because they are producing all these technologies that will make corporations and the private means of production obsolete. And then what happens? I have no idea."

Describing the present economic situation as "unsustainable" and fearing the rise of "toxic nationalism", Mr Varoufakis said governments needed to prepare for post-capitalism by introducing redistributive wealth policies. 

He suggested one effective policy would be for 10 per cent of all future issue of shares to be put into a "common welfare fund" owned by the people. Out of this a "universal basic dividend" could be paid to every citizen. ''

Or perhaps technology is making "capitalism" obsolete (it's not even clear, however, that "capitalism" is what's being displaced, so much as an ad hoc set of public-private power relations mixed in with semi-free flowing capital and quasi-free markets...)

iehi-feed-63165 Thu, 19 Oct 2017 23:18:33 GMT $1 Trillion In Liquidity Is Leaving: "This Will Be The Market's First Crash-Test In 10 Years" iehi-feed-63164 Thu, 19 Oct 2017 23:12:00 GMT McDonald's Has Morphed Into a Buyback-Powered Fraud Having gained over 65% in the last two years, the stock of McDonald's Corporation (MCD) recently caught our attention. Given the sharp price increase for what is thought of as a low growth company, we assumed their new line of healthier menu items, mobile app ordering, and restaurant modernization must be having a positive effect on sales. Upon a deeper analysis of MCD's financial data, we were quite stunned to learn that has not been the case. Utility-like in its economic growth, MCD is relying on stock buybacks and the popularity of passive investment styles to provide temporary costume as a high-flying growth company.


Since 2012, MCD's revenue has declined by nearly 12% while its earnings per share (EPS) rose 17%. This discrepancy might lead one to conclude that MCD's management has greatly improved operating efficiency and introduced massive cost-cutting measures. Not so. Similar to revenue, GAAP net income has declined almost 8% over the same period, which rules out the possibilities mentioned above... If we use the adjusted EPS figure instead of the stated EPS, the P/E rises to 30, which is simply breathtaking for a company that is shrinking...

In addition to adjusting MCD's earnings for buybacks, investors should also consider that to accomplish this financial wizardry, MCD relied on a 112% increase in their debt. Since 2012, MCD spent an estimated $23 billion on share buybacks. During the same period, debt increased by approximately $16 billion. Instead of repurchasing shares, MCD could have used debt and cash flow to expand into new markets, increase productivity and efficiency of its restaurants or purchase higher growth competitors. MCD executives instead manipulated EPS and ultimately the stock price. To their good fortune (quite literally), the Board of Directors and shareholders appear well-deceived by the costume of a healthy and profitable company. Over the last three years, as shown below, compensation for the top three executives has soared.

iehi-feed-63163 Thu, 19 Oct 2017 22:59:07 GMT Don't Rely on U.S. Consumers to Power Global Growth (THEY'RE FALTERING UNDER DEBT BURDEN) U.S. consumers account for 18 percent of global gross domestic product, and it's tempting to rely on them to continue carrying the aging recovery to support world growth. The data and growing lender anxiety, though, suggest investors should prepare for what is increasingly looking like an inevitable slowdown in economic growth next year.

Although American households managed to maintain their spending levels in the face of dwindling prospects for future economic expansion, they have done so by taking on incremental debts, which could soon prove unsustainable.


"Through the use of credit, personal and government, U.S. households have pulled forward future consumption," said Michael Liebowitz, a principal at 720 Global/Real Investment Advice, an economic and investment consulting firm. "The weight of those outstanding obligations serves as a wet blanket on current and future economic growth."

... It was telling that fresh data revealed Americans ploughed more of their income to paying debts last year, the first increase in seven years. Moody's Investors Service warned the troubling finding would lead to further increases in default rates... stresses have been growing for almost two years when increases in credit card borrowing began to outpace that of incomes. The "something-had-to-give" moment appears to be arriving.

iehi-feed-63162 Thu, 19 Oct 2017 22:43:27 GMT Trump's FTC pick, Joseph Simons, is not an antitrust hipster Trump has landed on his pick to lead the Federal Trade Commission: Joe Simons, an antitrust lawyer who formerly represented Microsoft, as the White House announced Thursday. The FTC is the independent government agency tasked with reviewing mergers, scoping out anti-competitive behavior, and protecting consumer privacy and security. If Simons gets congressional approval, that means the agency that's supposed to keep watch on big companies will be led by a former corporate lawyer.

It's also another sign that Trump's occasional vows to crack down on particular tech companies like Amazon and NBC (which is owned by Comcast)--generally following coverage he didn't like--are not likely pan out. Remember, in May of last year when Trump chastised Amazon's CEO Jeff Bezos, who also owns the Washington Post: "He thinks I'll go after him for antitrust. Because he's got a huge antitrust problem because he's controlling so much, Amazon is controlling so much of what they are doing." But even from a president whose chief policy motivation seems to be spite, trustbusting by a Republican administration--actually, from just about any modern administration--was probably never likely.

iehi-feed-63161 Thu, 19 Oct 2017 22:41:15 GMT Trump leaning toward Powell for Fed chair, officials say Federal Reserve Governor Jerome Powell is the leading candidate to become the chair of the U.S. central bank after President Donald Trump concluded a series of meetings with five finalists Thursday, three administration officials said.

The officials cautioned that Trump, who met with current Chair Janet Yellen for about half an hour on Thursday, has not made a final decision.

Powell, known as Jay, has been heavily favored by Treasury Secretary Steven Mnuchin, who is leading the Fed chair search for Trump.

Other finalists include former Fed Governor Kevin Warsh, Stanford economist John Taylor and National Economic Council Director Gary Cohn.

"They're all at the same level of consideration at this time. The president said himself on Tuesday, he likes all of the candidates and has great respect for them all," White House spokeswoman Natalie Strom said.

Of the five finalists, Powell would likely face the least opposition to confirmation in the Senate, according to interviews with nearly a dozen members of the Banking Committee.

iehi-feed-63160 Thu, 19 Oct 2017 22:23:59 GMT Spain Sets Stage to Take Control of Catalonia in Independence Fight The government in Madrid ... announced that it would convene an emergency cabinet meeting on Saturday "to defend the general interest of Spaniards, among them the citizens of Catalonia."

The rapid succession of events moved what was already one of the gravest crises in Spain's relatively young democracy to a far more serious and unpredictable stage, with the prospect that Madrid could take over the running of Catalonia. At the most extreme, the Spanish government could arrest Mr. Puigdemont and charge him with sedition, as it has done with two other separatist leaders.

But such a step would risk provoking a popular backlash and new street demonstrations in a region where many are already bridling at what they see as a heavy hand by the government of Prime Minister Mariano Rajoy.

"A bad situation has become even worse today," said Argelia Queralt, a professor of constitutional law at the University of Barcelona. "Neither side seems really willing to yield an inch, which means there is only a very limited chance of any positive outcome to this conflict."


Last week, Mr. Rajoy initiated a request to invoke a broad and forceful tool that has never before been used -- Article 155 of the Spanish Constitution -- which would allow him to take direct control of Catalonia.

He said he could resort to such a step if Mr. Puigdemont did not clearly back down from a threat to declare independence.

But on Thursday, Mr. Puigdemont sent a defiant letter to Mr. Rajoy, blaming him for escalating the conflict by refusing to meet and negotiate.


It is unclear what Mr. Rajoy will propose to his cabinet on Saturday, but he may try to gradually raise pressure on the fragile coalition of Catalan separatists rather than risk a forceful intervention that could further galvanize the independence movement.

iehi-feed-63159 Thu, 19 Oct 2017 15:07:53 GMT Who Has the World's No. 1 Economy? Not the U.S. Economists try to correct for [flawed GDP measurement] with an adjustment called purchasing power parity (PPP), which controls for relative prices. It's not perfect, since it has to account for things like product quality, which can be hard to measure. But it probably gives a more accurate picture of how much a country really produces. And here, China has already surpassed the U.S....

In some dimensions, China's lead is even larger. The country's manufacturing output overtook that of the U.S. almost a decade ago. Its exports are more than a third larger as well. American commentators may be slow to recognize China's economic supremacy, but the rest of the world is starting to wake up to the fact...

This doesn't mean China's population is the world's richest -- far from it. The countries with the highest income per person, in order, are Qatar, Luxembourg, Singapore, Brunei and the United Arab Emirates. But few would argue that Qatar or Luxembourg is the world's leading economy...

But there's good reason to think that China will overcome at least some of these obstacles. Economists Randall Morck and Bernard Yeung have a new paper comparing the histories of Japan and South Korea -- both of which climbed out of poverty to achieve rich-country status -- with the recent rise of China. They find that China's institutions are, broadly speaking, developing along the same path followed by its successful neighbors...

iehi-feed-63158 Wed, 18 Oct 2017 17:24:38 GMT Cohn: Overseas Cash Could Be Used For Stock Buybacks (I.E. CONTINUED PROPPING) iehi-feed-63157 Wed, 18 Oct 2017 16:43:15 GMT Ray Dalio's Shorting The Entire EU; Derivs-Clearing Could Be EU's Brexit Achilles Heel Great compilation today by Raul Illargi. On the derivatives-clearing issue:

Calling into question the continuity of tens of thousands of derivative contracts , [Carney] stated that it was "pretty clear they will no longer be valid", that this "could only be solved by both sides" and has been "underappreciated" by Europe . Carney had a snipe at Europe for its lack of preparation "We are prepared as we should be for the possibility of a hard exit without any transition...there has been much less of that done in the European Union."


Shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies, a global derivatives industry body says. [..]The London Stock Exchange's subsidiary LCH currently clears the bulk of euro-denominated swaps, a derivative contract that helps companies guard against unexpected moves in interest rates or currencies.

And on Dalio's bets against the Eurozone:

Dalio doesn't call the bluff of Italy, and this is not just like George Soros' shorting the British pound in 1992, he's calling out the entire EU and its financial system. He's saying I don't believe you can keep up the charade. He's making a mockery of Mario Draghi's "whatever it takes".

So what are Rome, Brussels and Frankfurt going to do? They can't ignore the no. 1 hedge fund forever. They will have to pump money into Italy, in large amounts. Merkel won't like that, neither will her new coalition partner FDP, and the Bundesbank may start legal action.


Bridgewater didn't enter that theater for nothing. $1.85 billion is not chump change for them. Intesa Sanpaolo CEO Carlo Messina may have said that Dalio will lose his bets, but according to the IMF Italy's non-performing loans levels were €356 billion at the end of June 2016, which is 18% of total loans for Italian banks, 20% of Italy's GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo holds a nice chunk of that.

iehi-feed-63156 Wed, 18 Oct 2017 14:41:00 GMT How money will divide Europe after Brexit iehi-feed-63155 Wed, 18 Oct 2017 14:31:02 GMT ‘Sometimes you don't feel human' -- how the gig economy chews up and spits out millennials The upsides of this sort of work have diminished over time. Huws says the golden age for the gig economy was some time around 2013, when companies took a smaller cut and there were fewer drivers/riders/factotums to compete with. "As Deliveroo pass on all risk to the rider, there's nothing to stop them over-recruiting in an area and flooding the city with riders, which is exactly what we saw last winter," says Guy McClenahan, another Brighton rider (Deliveroo maintain that the hundreds of riders in the area earn on average well above the national living wage). Over time, Uber has increased the commission it takes from drivers while reducing fares. Drivers are finding themselves working much longer hours in order to make the same pay -- or far less...

It is true that the unemployment rate among 16- to 24-year-olds in the UK is 12%, while in parts of Europe it is 40%. But that doesn't mean much if many of those people are in precarious "self-employment" -- the McKinsey Global Institute estimates this may be up to 30% of working-age adults across Europe. Huws says the notion of a career is being eroded, with young people often working a patchwork of different occupations. We laugh about George Osborne having six jobs; if he was a millennial, this would be par for the course.

... Dewhurst points out that the wider casualisation of work is a problem. She reckons about 50% of the union's members are millennials, although she stresses that the increase in political engagement among the young hasn't automatically resulted in mass union membership. She says millennials are used to outsourced work, and are adaptable and resilient. More than that, argues Huws, they have grown up in a climate of unpaid internships and terrifying probation periods, the first generation "expected to work for free". For many, all they know is being part of the precariat. Or, as Huws puts it in no uncertain terms, "today's model of the working poor".