Explaining #BREXIT

Why is this such a shock and what does it mean?.

brexit

 

SHOCK

The financial world is in shock  because they like the status quo.

The BREXIT was approved because the world aka the 99% including Britain wants change, any kind of change.  Which of course explains Donald Trump’s success in the US.

The polls probably did not reflect the last minute decision makers and instead reflected the people who were able to be polled aka the retired people on the street who had time to answer silly polling questions.  These are generally conservative people who do not like change.

WHAT DOES BREXIT MEAN? 

Well the financial world is in turmoil because they also do not understand what this means.  So you can expect the stock markets around the world to be very negative for quite a while.  There may be enough negativity that we may experience a recession, which a number of respected economists have predicted for months.

ANALYSIS

Change is coming.  The demographics show the population is becoming more diverse aka less Caucasian.  Also the young voters are saying “We are tired of inequality and of politicians paid by the rich to do their work.  Your generation had your chance.  Now it is our turn and we are going to do something different.”

If you want some other financial advice, see this.

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

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Why GLD Is Bad and GOLD Is Good

Friends, here is why the GLD fund aka ETF is the worst investment if you like GOLD.

gold2confetti

1.  GLD Is Paper Gold

GLD is actually the SPDR Gold Trust Electronic Traded Fund.  It is a promissory note for GOLD.  It is backed by physical gold but the real ratio is controversial.  See

http://www.forbes.com/sites/afontevecchia/2011/11/15/is-gld-really-as-good-as-gold/#7b10e4f93ca1

2.  GLD Is Supported By The Fed Which Wants the US Dollar High and Gold Low

In a previous post, I discussed how the US Dollar and GOLD move in opposite directions.

In that post, I explained that the Federal Reserve wants to keep the dollar high so to do that, it depresses GOLD prices by encouraging the sales of paper GOLD.  See

https://michaelekelley.com/2015/07/20/dear-fed-plz-raise-gold-price/

3.  GLD is a CDO aka Tranche

Remember the Great Recession of 2008?  It was brought on by CDOs and tranches based on bundled mortgages.  GLD is a tranche aka a bundle of paper gold.

Statistics prove that 13% of CDOs before the Great Recession were sold to multiple buyers.  It is like selling an acre of land in Florida multiple times.

https://michaelekelley.com/2015/01/28/remember-cdos-theyre-baaaack/

4.  Paper Gold is rumored to be oversold by 200 times

You need to read this.

http://www.zerohedge.com/news/2015-11-30/paper-gold-dilution-hits-294x-comex-registered-gold-drops-new-all-time-low

5.  GLD Has Lagged Gold Mining Stocks Year To Date

NEM, a gold mining stock, is up 34% from 01/01/2016 to 2/5/2016.

Meanwhile GLD is up only 10% from 01/01/2016 to 2/5/2016.

That is probably because investment companies are avoiding GLD.  So NEM is a GOOD investment right now not GLD.

 

Here are Solutions when a Recession Comes

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

 

Here is Some More Information

Lessons From How The Great Recession Happened and What A CDO Is

http://www.ase.tufts.edu/gdae/Pubs/te/MAC/2e/MAC_2e_Chapter_15.pdf

Good luck!

PS  I own NEM and care about you but I cannot be held responsible for your decisions.

VIX Predicts Pits While Pundits Have Fits

VIX, measuring stock market volatility, last spiked this much in 2007.

vix_predicts_pits_while_pundits_have_fits

Coincidence?  This spike in VIX is predicting a recession (aka the pits) much like it did in 2007.

The result is recession-deniers aka pundits are having fits.  They are saying, “This can’t be happening.”

Meanwhile, believers in the predictability of VIX are saying “It is deja vu all over again. (Thanks to Yogi Berra)

Here are some other signs of a possible recession.

https://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/

/https://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/

https://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/

http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/

Here is how to prepare yourself.

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Good luck!

Dear Federal Reserve: Please Raise The Price of Gold

This sounds selfish but this is the only solution to prevent a world-wide recession.

prayingtogold

There are two possible solutions to the problem of the high dollar value and low gold price.  But before discussing the solutions, we need a little background information.

The Federal Reserve, the European Financial Organizations and the largest banks in the world have agreed to keep the US Dollar as the monetary standard.  To do that they need to manipulate the price of gold so it does not replace the dollar.  This means keeping the dollar high and the price of gold low.

Keeping the dollar high has the added advantage of keeping imports low which improves the US trade deficit.  Having a good trade deficit and a strong dollar gives the impression of a strong US economy.

One problem is Russia and China.  They are not happy with the high dollar value and low gold value.  Consequently they are creating their own monetary standard and creating exchanges in their own currency.  This allows them to avoid the US dollar completely.

Another problem is the largest banks such as JPMorganChase are dealing in large quantities of gold derivatives which is lowering the price of physical gold.  See this:

http://www.zerohedge.com/news/2015-07-09/are-big-banks-using-derivatives-suppress-bullion-prices

The real problem is the amount of debt of many countries around the globe.  Greece and the US are just 2 of 12 countries out of 64 whose debt is greater than their country’s Gross Domestic Product (GDP).  That means almost 20%of the largest countries in the world are in debt as seen in this website:

https://en.wikipedia.org/wiki/List_of_countries_by_public_debt

Now to discuss the solutions to the problems of  high debt and the high dollar value and the low gold price.

One solution is to let the nations in debt exchange their US dollars for gold.  But this could result in the depletion of US gold reserves and then the world would find out that the paper gold value does not equal the physical gold valueThat would cause a run on banks, a rush to cash and possibly a global recession.

Chris Powell of the Gold Anti-Trust Action Committee said, “The system may end when one country pulls the plug on it, exchanging U.S. dollars and government bonds for more gold — real metal — than is available, or when ordinary investor demand exhausts supply, which is more or less how the London Gold Pool ended in 1968.”

So a better solution is to raise the price of gold to eliminate the debt around the world.  Some people are proposing a 7 fold increase in price.

Chris also said, “… a study in 2006 by the Scottish economist Peter Millar concluded that to avert such a catastrophic debt deflation, central banks would need to raise the gold price by a factor of seven to 20 times in order to reliquefy themselves and devalue their currencies and society’s debts…”

For more information on what Chris Powell said, read the following website:
http://www.gata.org/node/14839

Okay.  I admit I own GLD and UDN and this would benefit me.  But now I am giving you the chance to also profit from this information.  here is some more useful information:

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Thanks

Greece Is Like Lehman Brothers

Both Lehman Brothers and Greece were denied a bailout.

Specifically the United States Government and the International Monetary Fund (IMF) refused to bailout Lehman Brothers and Greece, respectively.

stop_bullrun

 

Unfortunately close behind were/are lots of other troubled and unstoppable financial organizations and debt-ridden countries.  [It is like trying to stop a bull run with your bare hands, oh yeah, and a red bandana.]

Countries like Italy, Portugal, Ireland, and Belgium all have public debt over 100 percent of their country’s GDP.  Japan is over 200 percent.  See the following for detailed statistics.

http://www.statista.com/statistics/268177/countries-with-the-highest-public-debt/

Unfortunately Greece had debt payments that looked like Mount Everest on a graph.

http://www.marketwatch.com/story/greeces-looming-debt-repayments-in-a-pair-of-charts-2015-06-02

The US Government and the IMF have been strict with Lehman and Greece, respectively.  Like the US Government, the IMF can be expected to panic with the next oncoming overwhelming group of debtors. 

To learn more about the Lehman Brothers bankruptcy, read this.

http://www.heritage.org/research/reports/2013/09/lehman-brothers-bankruptcy-and-the-financial-crisis-lessons-learned

Thanks

Mergers and Acquisitions Set Scary Record For May

Please read the quote from MarketWatch.com below and guess why this is bad.

fish_eat_fish

“U.S. mergers & acquisitions activity is on track for a record month in May, with $241.6 billion of deals already announced, topping the previous record of $225.8 billion announced in May 2007, according to Dealogic data.”

ANSWER: The previous record was just before the Great Recession.

Specifically, eighteen months later the Dow Jones Industrial Average (DJIA) was worth almost half of what it was in May 2007.

Here is a summary of why a recession is coming in plain English.

https://michaelekelley.com/2015/03/02/why-another-recession-is-coming/

Thanks to Team-Studer.net for the photo.

Stocks Could Have Worst April Since 1970

S&P 500 stocks dropped 9% in April 1970.  April 2015 could be similar.

buybacksbymonth

Our source for 1970 data is http://www.moneychimp.com/features/monthly_returns.htm

Here are the reasons April 2015 could be awful.

1. April 2015 is a buyback blackout period when corporations report earnings.

The dark columns in the above chart are the blackout months in which corporations cannot buy their own stock when reporting earnings.   After a blackout period in January 2015, corporation buybacks are the reason for the lift in the stock market in February 2015.  In fact, corporations have been buying twice as much stock as regular investors.  Like January, corporations cannot buy back stock during quarterly earnings reports in April 2015.  Here is more info.

http://www.zerohedge.com/news/2015-03-24/biggest-threat-sp-500-next-month-biggest-buyer-stocks-2015-enters-blackout-period

2. Oil companies will be reporting terrible earnings in April 2015

The price of oil has stayed around $50 a barrel, half of what it was a year ago, which is causing havoc with earnings.

“The Energy sector has witnessed the largest increase in the expected earnings decline (to -63.5% from -29.5%) since the start of the quarter. Overall, 30 of the 43 companies in this sector have seen EPS estimates cut by 20% or more to date”, per the website factset.com.

Also factset.com reports, “the Energy (-38.0%) sector is projected to report the largest year-over-year decrease in sales for the quarter.”

pe_ratio_10yrs

3.  Forward P/E Ratio is 17.0, above the 10-Year Average of 14.1

According to factset.com, “The current 12-month forward P/E ratio is 17.0. This P/E ratio is based on Thursday’s closing price (2089.27) and forward 12-month EPS estimate ($123.03).

At the sector level, the Energy (26.9) sector has the highest forward 12-month P/E ratio.

The P/E ratio of 17.0 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 13.7, and above the prior 10-year average forward 12-month P/E ratio of 14.1.

In other words, stocks are overpriced and the P/E ratio is the highest it has been for 10 years.

Be prepared

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Good news

The good news is that corporations will probably buyback over $170 billion shares in May 2015 as the blackout period ends.

http://www.marketwatch.com/story/why-goldman-sees-a-buyback-halt-as-a-big-opportunity-2015-03-24?dist=afterbell

Why Another Recession Is Coming – In English

Friends, here is a tutorial on how we got here and how to prepare for the worst.

ssminnow
Easy Money

The Federal Reserve (Fed) offered Quantitative Easing (QE) 3 times.  At first it saved the big banks and the stock market started going up.  But then the Fed kept giving out easy money to the big banks.

Leveraged Loans and Junk Bonds

The banks, that received the QE money, issued junk bonds and leveraged loans that were used for debt creation not real products and services.  Specifically QE went to Mergers and Acquisitions (M & A) and oil investments.  Here is an example.

Richard Baker, chief executive, along with his investment firm, NRDC Equity Partners, relied heavily on borrowed [leveraged loan] money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million [2%] came in the form of equity, with the remainder made up of debt financing. [The New York Times]

Do you think any of us could buy a house with 2% down? Nope.

New Bubbles

For 2014, three things happened.  The dollar reached a new record high, the Dow Jones hit a record 32 times and leveraged loans went back to 2008 pre-recession levels.  Some economists are calling this a bubble.  Here is a chart to prove it.

See https://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/

Some Good News

The good news is the stock market is up, gas prices are low and unemployment is back to 2003 levels.

But the Economy Struggles

The economy is struggling for several reasons.  First, the easy money went into debt rather than real products which creates jobs.  Secondly, very little money went into infrastructure which also creates jobs.

And Wage Inequality Is Greater Than Ever

The CEO to worker compensation ratio is 296 to 1 today versus 20 to 1 in 1965.   The rich have gotten richer.  Unfortunately the upper class does not change its spending patterns.  Several studies have proved this despite what politicians say.

So the economy has stalled even though the stock market is up.  Only the middle and upper classes have money to invest in the rising stock market.

Oil Price Drops and Leveraged Loan Bubble Bursts

Oil prices have dropped because of excess supply and over-leveraged oil investors.  For more information see this easy to understand website.

http://wolfstreet.com/2014/12/07/bloodbath-in-oil-patch-junk-bonds-leveraged-loans-defaults/

Solutions for the Federal Reserve and Congress

Here are some solutions because blogs should offer solutions rather than just complain about our problems.

There is still time for the Federal Reserve to pump up the economy by providing funding specifically for infrastructure which will create jobs and kick start the economy.  Also Congress, or better yet, each state can raise the minimum wage.  The economy will only take off if new jobs are created or lower class or middle class people get pay raises.

Here is a list of 7 suggestions that will not soak the rich.

http://www.marketwatch.com/story/7-ways-to-help-the-middle-class-without-soaking-the-rich-2015-02-05?page=1

But if the government drags its feet or does more of the same Quantitative Easing, here is what you can do to prepare for the worst.

Solutions for the Rest of Us

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Lessons From How The Great Recession Happened and What A CDO Is

http://www.ase.tufts.edu/gdae/Pubs/te/MAC/2e/MAC_2e_Chapter_15.pdf

Good luck!

Remember CDOs? They’re Baaaack!

Like Poltergeist II, prepare for CDOs II.

poltergeistII

(Here is Poltergeist II trailer –  https://www.youtube.com/watch?v=rH-B6A04iK0 )

Remember those financial instruments known as Collateralized Debt Obligations that caused the 2008 Great Recession?  Well they never went away.  In fact they are baaack.

The Financial Crisis Inquiry Commission concluded that CDOs were one of the major causes of the 2008 Great Recession as shown at this website.

http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_conclusions.pdf

For 2014, global CDO Issuance is back to 2004 levels valued at about $135 billion.

Collateralized loan obligations (CLOs) are CDOs based on bank loans. Many of the subprime loans have been packaged and sold as CLOs.

The following chart shows that Collateralized Loan Obligations (CLOs) in 2014 have reached the same level as 2007 or $35 billion.  Total outstanding CLOs in the US amount to $300 billion.

clo_banks

Though the large financial institutions have backed away from collateralizing mortgages, they are now doing it for commodities such as gold, silver and oil.  Here is one example.

https://www.google.com/search?q=jpmorgan+precious+metals+as+collateral&ie=utf-8&oe=utf-8

 

http://theeconomiccollapseblog.com/archives/plummeting-oil-prices-destroy-banks-holding-trillions-commodity-derivatives

 

Another problem is not the collateral but the reselling of the same assets. In 2007 one financial firm sold 610 out of 3,400 CDOs more than once. That is nearly 18%.  Let me repeat.  More than once.

Because buyers are dealing with paper not physical assets, how do they know they are trading real, actual commodities? If the markets started to go down and everyone wanted their physical commodities such as gold, what if there was not enough gold to meet all the obligations?  Would there be an international panic?

Update
Evidently CDOs were not selling as well as desired.  So the banks have renamed them “bespoke tranche opportunities.”

BTOs are slightly different, as explained in this website.

http://thinkprogress.org/economy/2015/02/05/3619325/bespoke-tranche-opportunities-are-your-god-now-america/?utm_source=newsletter&utm_medium=email&utm_campaign=tptop3

Thanks

 

Leveraged Loans Predict 2015 Crash

Multiple charts exist which predict another recession soon!

us_overleveraged_201501

 

Normally I am a very positive person.   But recently I found not one but two charts which show we could have a repeat of the recent Great Recession.

The first chart above shows how the Federal Reserve and Quantitative Easing have allowed financial institutions to run wild again.  In summary, leveraged lending is out of control.   For two years, leveraged loans have risen as fast and to a greater level than 2007, the year before the Great Recession.

The New York Times reports that leveraged lending is greater and the associated rules more lax than in 2007.  Here is a portion of a news report.

What can’t be denied, however, is that standards in the leveraged loan market have become much looser in recent years. The companies that have taken out the loans are on average much more indebted than in recent years. Companies that have done deals this year have debt that is 4.9 times as large as their annual cash flows, measured using earnings before subtracting expenses like interest, taxes and depreciation, according to data from Standard & Poor’s Capital IQ. That multiple is up from 3.9 times in 2011 — and it is the same as the number for 2007, when the last boom in leveraged loans peaked.

This time around, however, one aspect of leveraged lending is much more aggressive. The special provisions within loan agreements that were once thought crucial for protecting creditors are fast disappearing. So far this year, 63 percent of leveraged loan deals lack such provisions, far higher than 25 percent in 2007, according to data from S.&P. Capital IQ. “Contractually, things are really at their weakest,” said Christina Padgett of Moody’s Investors Service.

You can read more details at one of these websites:

http://dealbook.nytimes.com/2014/11/04/a-recent-surge-of-leveraged-loans-rattles-regulators/?_r=0

http://www.zerohedge.com/news/2015-04-09/oil-hedges#comment-5977321

http://www.bloomberg.com/news/2015-01-06/private-equity-deals-spur-leveraged-loan-surge.html

~~~~o~~~~

A second chart shows that recent Dow Jones record increases also occurred in 2008.

http://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average

Unfortunately 10 out of 20 increases of 400 or more of the Dow occurred in 2008, the year of the last recession

~~~~o~~~~

Can another Great Recession be stopped?  No.  Apparently the Federal Reserve did not act fast enough nor aggressive enough in 2014 to stop the out of control leveraged loans.

To protect yourself, read this website:

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Thanks for reading this.