Embracing the Unexpected — The Ancient Art of Conceiving Systemic Risk

Woe was Heraclitus. Such was the weight of the world on the pre-Socratic Greek philosopher’s shoulders that he left this world known simply as the “weeping philosopher.” In his mind, life was not for those with the capacity to contemplate its meaning. Rather, life was lived fully by the innocent alone. In his words, no doubt misconstrued since he took his last breath in 475 BC, “Lifetime is a child at play, moving pieces in a game. Kingship belongs to the child.” As for those with designs on defying the odds, Heraclitus counseled that, “Everything flows, and nothing abides.” The beauty of paradox is that investigation lays bare the naivete of staunch doubters.

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Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Below to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America

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Qi, Quill Intelligence, Danielle DiMartino Booth, Chinese Yuan

The QI of FX — China Holds the ‘7’ Line on its Currency

Overachieving Western parents have no idea how indebted they should be to Zhou Youguang, the linguist who spearheaded the development of the Hanyu Pinyin Romanization in the 1950s. Shortened to ‘pinyin,’ the Chinese government published the system which converts characters to Roman script in 1958. Other international organizations followed suit including the United Nations in 1986. The formalization complete, helicopter parents who’d heard the buzz — that Mandarin was the next hot thing to get into Ivy League colleges — were capable of following along with their children’s homework progress without having to learn the Chinese characters themselves.

To Continue Reading Click Here — QuillIntelligence.com

 

Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Below to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America

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Housing’s Headwinds Are Getting Stiffer

Plans to buy a home in the next six months have tumbled to the lowest level since June 2016.

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Expectations were approaching ebullience heading into this spring’s U.S. home-selling season. The National Association of Realtors entered the year expecting home sales to grow by 3.7 percent in 2018 after last year’s lackluster 1.1 percent increase. But now, the NAR’s chief economist has tempered his call with existing homes changing hands at the slowest pace since September and new home sales having fallen to the lowest level since October 2017.

With home prices at or near record highs, it takes more than a small boost to income to call potential buyers to action. The average household has to save for almost six and a half years to cover a 20 percent down payment on a home at current prices, according to a recent study by Zillow’s HotPads. That’s based on the steep assumption that workers can sock away 20 percent of their monthly take-home pay. Saving money is especially tough for renters. Zillow calculated last year that just 42 percent of rentals were affordable, defined as requiring 30 percent or less of one’s median monthly income to cover rent payments.

Perhaps reflecting the affordability obstacles, the Conference Board’s consumer confidence data for July released Tuesday showed that plans to buy a home in the next six months tumbled to the lowest level since June 2016.

The cost to rent and buy has become particularly acute in major markets, especially if you prefer a home to an apartment. Renting a three-bedroom house is more expensive than buying a median-priced home in 54 percent of major markets, according to ATTOM Data Solutions. The average three-bedroom runs renters 38.8 percent of their annual income.

There are other factors that have hamstrung the housing market in 2018 besides record-high home prices. Mortgage rates for 30-year fixed loans are up by more than 0.8 percentage point on average. Separately, the new tax law limits all state and local income taxes and property taxes that can be deducted to $10,000.

Affordability is even more elusive among middle-tier income earners, who tend to be in the market for move-up homes after they’ve outgrown their starter home. And that’s in second-tier markets. In the nation’s costliest cities, median home prices often exceed the wherewithal of most regardless of how much they make. In San Francisco, average home prices exceed $1.6 million.

Let’s take the example of moving from what Zillow classifies as the middle third of homes nationwide, which is the median price we always hear quoted of $217,300, up to what Zillow categorizes as the top third of homes by price nationwide, the median price of which is $380,100. Those are what many realtors would call “move-up” homes.

For the sake of simple illustration, let’s compare the rate two years ago to what it is today for a 30-year fixed mortgage. Back then, the rate was (assuming no points) 3.63 percent compared with 4.75 percent today. The monthly payment for a couple who has just had a second child and wants to upsize would double from about $792 to $1,585. Had mortgage rates stayed where they were two years back, that same payment to move up today would be $1,386. It’s no wonder that according to the University of Michigan, buying conditions among middle-tier income earners has fallen out of bed of late. If you have designs on living in a better school district that doesn’t require private school tuition for the tykes, be prepared to pay a hefty premium.

The Bottom of the Housing Market Falls out of the Middle

The protracted decline in top-tier home-buying conditions could be a mere starting point that trickles down through the lower tiers. The top third of income earners account for 60 percent of the dollar value of “owned dwellings,” as per the Bureau of Labor Statistics Consumer Expenditure Survey. This group, albeit small, has more incentive than ever to stay put or move to a lower-tax state.

Consider a homeowner who bought a home a few years back who locked in a low rate on a $700,000 mortgage. That home has appreciated to $1 million, but interest payments remain about $24,500 a year, or $15,500 when adjusted to a top 37 percent tax rate and principal paid down. If this homeowner upgrades to a $1.2 million abode with a $975,000 mortgage, which takes into account transaction costs, mortgage interest would jump to $45,500. Adjusted for taxes, the marginal cost would be $32,500.

The alternative to the $17,000 budgetary upcharge is a facelift. For the same homeowner, a maximum of $50,000 would be deductible on a home equity line of credit given they would bump up against the new $750,000 limit. Even so, if the homeowner plunked $100,000 into an upgrade, the tax-adjusted, bottom-line interest increase would only be $4,000.

It would seem mobility will no longer be a hinderance unique to the millennials. The economy has always keyed off residential real estate. Investors would be well-advised to keep housing at the top of their watch lists.


Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

Visit QuillIntelligence.com to find out more. Click HERE to SUBSCRIBE.

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America. Amazon.com | Barnes & Noble.com | Indie Bound.com  |  Books•A•Million

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A Moment with Danielle DiMartino Booth — The American Dreams Show with Alan Olsen

A Moment with Danielle diMartino Booth

Author of Fed Up: How the Federal Reserve is Bad for America

 

Question: Can you tell us a little about your background?Danielle: I’m a good old-fashioned product of the community college system in this country. I worked my way through school. I ended up with an MBA in finance and knocked on every door on Wall Street until somebody finally relented so I had a wonderful career there. 9/11 changed my perspective and I ended up leaving and using my second masters which was in journalism from Columbia. I’d gone to night school, I was probably the oldest night school student they’d ever seen and I ended up writing in a newspaper in the Dallas in the Dallas Morning News which is where Warren Buffett discovered my writing and eventually Richard Fisher, who was president of the Dallas Fed, learned of my work and he asked me to come join the Federal Reserve and I felt it was my duty to God and country so I did. When he retired, I retired with him and now I’ve written a book called Fed Up. It is it is a primer on financial literacy, it is opening the doors for millions of people and it’s a great source of pride. I also write and blog every week, every day on this mission to really expand improve financial literacy in this country.

 

Question: Can you share some of your thoughts on the recent financial crisis?  

Danielle: Well first of all I think people should understand that the basis of the financial crisis was created within the Fed. So Alan Greenspan- this came out in his biography- Alan Greenspan was aware of the magnitude of what was building in this subprime mortgage bubble that then became a crisis, but that was neither here nor there. When you were on the inside of the Fed it was DEFCON 1. You absolutely had to do something because we saw the dominos lining up. We knew that the financial system globally was at grave risk of collapsing and we absolutely had to do something to prevent that because things that take Wall Street down inevitably harm those on Main Street much much more. And so at the time it was absolutely the right thing to do when we were in the thick of the crisis and Lehman was going and AIG went right after it but at some point we should have stopped. I mean you spend time and Wall Street as a trader on the floor. I was in sales, and I was introduced back then to the idea of private equity which has now become this mammoth industry that lives outside of the conventional banking system. I started at a firm called Donaldson Lufkin & Jenrette and it was a highly entrepreneurial firm that taught me everything I know about running a business because they let each person work inside of their own silo that was that there. Prior to 9/11, I worked a lot in fixed income in the bond market and so I knew people who came down with that building. One of my sales assistants who was sitting outside actually watched the second plane fly into her father’s floor at Morgan Stanley, now he had gotten out which was a wonderful thing but it there was something about 9/11 that woke up my inner patriot and I knew what I was doing was great for me and it was fun to be single in New York City and have a lucrative career, but it told me that there was a purpose- that there was a deeper purpose for me and I didn’t know what it was at the time. I didn’t know what it was until the Federal Reserve came calling but when that happened I realized that I had been placed in the right place at the right time. 9/11 shifted my perspective. I left about a year after 9/11, moved to Dallas and got married- but I don’t think I’ve missed a month since then, I’m constantly back in my second home, New York City, and it is the city I love and embrace.

Question: What was is like to work inside the Federal Reserve?

Danielle: Inside it was really like day and night. Trading floors are places where you smell the red meat. You eat what you kill, you are what you produce and you’re only as good as you are today and tomorrow everything the clock resets. I was very surprised when I stepped into the Fed because it was a quiet, sterile, almost hospital like feel. There wasn’t much noise, there wasn’t a lot of soul. Everything moved at a very different pace and I’m clinically hyperactive, I have to move all the time and it was quite a culture shock for me to be in that kind of an organization because I still had to keep moving whereas everybody around me it felt like was in suspended animation. I followed Richard Fisher into the Fed and I followed Richard Fisher out of the Fed. I was not exactly welcome after he left and I had a much different, unorthodox role within the Fed because of him.

Question: Can you tell us a little about the role that you had at the Fed?

Danielle: Richard Fisher started at Brown Brothers Harriman. He was an MBA in finance, I was an MBA in finance. We were some of the few people in the building who were not Ph.D. academics in economics so we looked at the world through a much different prism. So rather than take all of the markets intelligence from the New York Fed which was tradition among the other districts, he decided that he wanted to have his own markets intelligence. So he had me found his own his markets desk inside the Dallas Fed and sent me off- ferried me off to New York before every Federal Open Market Committee and walked into the room with Ben Bernanke and others armed with his own market intelligence which was much to the chagrin of a lot of people at the New York Fed. I will tell you what I did it was wonderful, I didn’t mind being the person behind the leader because I felt that he was doing something that was so very important in fighting what was going on at the Fed which really was devastating to our nation’s retirees.

Question: When Richard Fischer left the Dallas Fed, you decided to step into a new venture, can you tell us a little about that?

Danielle: Somebody who had read my book, Fed Up, was inspired by the way I thought, which again is very unorthodox. I don’t think like most people when it comes to economics and finance, so upon finishing the book, he put a call in to me and said, “we are wondering what we could do with the way you think. If we could marry it to the next generation of technology and we think that if we could plug your brain into a supercomputer that we could revolutionize the way research is created and delivered and help out every CEO, CFO, hedge fund manager, mutual fund manager in the country.” and I said, did you say supercomputer, and they said all you have to do is continue thinking the way you think, we’ll take care of the technology end of it and so almost a year later we are in the process of founding Quill Intelligence. The Quill is my written word, and the intelligence is the technology of the future. We cannot deny machine learning, we cannot deny artificial intelligence, but we can learn how to work with it to make something that is more accessible and better for everybody. If I could be cloned by a hundred and read in 396 different languages, what would my capabilities be, what would my views be, what would my analysis be if I’m already a thought leader in the field of economics and finance, what would putting that on steroids do and I think we’re going to find out.

Question: What’s your take on cryptocurrency?

Danielle: My take on crypto is that because governments have become involved it quickly became a matter of national security. So we know that the three countries that are the most advanced is Venezuela is for starters but that has more to do with China and Russia, the other two countries that are making great inroads into cryptocurrency. I think they have aims of monitoring and controlling what people buy in their countries but by that same token, Great Britain was very quick to come out and say we’ll be right behind you. The Federal Reserve under Jay Powell, who I had tremendous respect for, first non-PhD in economics to lead the Fed since Volcker was in office. They have come out and been very adamant in saying if we do roll out a national cryptocurrency, any transaction that takes place will be just as anonymous as if the two of us were to exchange a dollar bill. We’re not going to monitor our society so I think that the crypto and blockchain technology is a wonderful thing that we can learn from and venture off into the next way we transact.

Question: How successful do you think the Central Bank is going to be in intervening in cryptocurrencies?

Danielle: I don’t think there’s really a choice in the matter. I think that they’ll have to figure out a way. I know that the next generation of quantum technology is going to be a game-changer in terms of how efficiently crypto currencies behave. I’m no expert, but I don’t really think it’s a matter of choice I think it is something that will have to be figured out whether it’s the Fed, whether it’s Treasury, whether it’s a higher being not, that I want to create more bureaucracy, but we will have to figure it out.

Question: Can you give your perspective on the U.S. debt?

Danielle: I’m gravely concerned for my children for my grandchildren. It’s one of the reasons I wrote Fed Up and one of the reasons that I became so disgusted with what was going on in this country is that our founding fathers they intended for us to save and invest in the future, not for us to borrow our way to prosperity. It’s not a finite solution and I promise you that our sovereign enemies are paying attention to how we’re trying to grow. I’m very concerned at the direction we’re taking. I don’t think we should be this profligate nation and depends solely on the fact that the dollar is the world’s reserve currency and rest on our laurels based on that indefinitely. The British Pound Sterling did fall and in times of extreme income inequality which we see in our country and populism and divisive enough sometimes the settings that that bring about revolution economically that can sometimes lead to other kinds of revolution the debt situation is a ticking time bomb and I don’t mean to be that I’m not there’s no scare mongering here but it is very unamerican and I hope that we have strong leaders going forward who address it like adults.

Question: What’s your take on the tariffs with china and how is it going to affect us?

Danielle: I’m beginning to feel like this is a high-stakes poker game that is going to have true ramifications. It was one thing when they were banding about twenty thirty billion dollars it’s a whole different story when you’re talking about two hundred billion dollars in magnitude that is a bonafide trade war and trade wars have often ended in true hot wars and that is really what bothers me. The most you look back in your history it’s terribly inflationary for US consumers as well and jobs will be lost and jobs will be sent overseas. There are tremendous negative consequences to what we’re doing and I’m not so sure that China is necessarily as worried as we think they are because we’re doing this because they’re going to accomplish what they’re going to accomplish. They look at the world through a much different prism, Their level of patience is unlike American politicians and I have serious concerns about where this headed.

Question: Why haven’t we seen major reactions to this on Wall Street?

Danielle: Well what we have seen is a major reaction to this in the bond market and one of the things that has been a hallmark of the current volatile year 2018 has been after 2017 was the year of complacency one of the hallmarks is that the bond market has been very steadily advertising that things are going wrong. Well the stock market in a very bumpy way is advertising the opposite so these things will be rectified, we just don’t know how but right now the bond market is flashing a very distinct signal that this going to slow the US economy. When Alan Greenspan took office and started allowing the markets to be manipulated under his watch, it’s documented, I’d like to see us go back to a more normal world where one market reflects where we’re headed and another market reflects the opposite- they’re supposed to move inversely to one another. I’m not so sure that the investing community is prepared for that, it’s interesting because it’s been over 30 years and this whole generation has grown up without seeing this. There are 13 million new entrants to the financial services industry since 2007, it’s safe to say there’s an entire generation that doesn’t even know what a rational bond market behave on market behaves like.

Question: How should average person prepare for the next crisis?

Danielle: If there’s one thing that is improved over the last 12 months or so, it’s that there’s no longer a stigmatization associated with holding cash. You can actually put your money into cash and make a decent return. You don’t have to be exposed to these markets, there’s no hard fast rule that says as long as you’re diversified and you’re invested for the long haul that you’re going to be fine. I have grave concern for the baby boomers because I think the next big market correction that we have is going to be a body blow to this generation the last time this happened a decade ago they were able to make the decision, they live longer, we’re all living longer, they were able to make the financial decisions, stay in  the workforce for another decade. I don’t think that it’s going to be the same for baby boomers as they segway into their 70’s. I think the optionality is lower, so again there’s nothing wrong with getting a return on cash at all. Though I did a study a few years back on demographics and of course in the U.S. the big person preaching demographic trends is Harry Dent, yes cult followers of him.

Question: How does a person get signed up for your blog and connected with you.

Danielle: Just go on Quill Intelligence.com and you’ll see everything you need to know about me and all of our offerings and how you can begin your journey to financial literacy.

-Edited for Concision

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What the GDP Report Won’t Tell You About the Economy

Surveys are starting to show a clear trend of corporate executives becoming much less confident.

Read Danielle DiMartino Booth Daily via The Daily Feather

Something is amiss in Corporate America. Both national and regional surveys reveal a sinking sense that the economy’s tailwinds are shifting to headwinds. The downtrodden confidence is a curiosity given many economists’ forecasts calling for second-quarter growth to have accelerated to a 4.2 percent annualized rate, the fastest since 2014.

Soft though the survey data may be, the numbers don’t lie. If something doesn’t give — and fast — what follows is sure to be damaging to the real economy.

The University of Michigan consumer sentiment survey for July revealed that the business outlook had slumped to the lowest level in over two years. Odds are pretty good this number was dragged down by those with the highest incomes, many of whom are likely also business owners and corporate executives who’ve been on the front line of the rising costs to run their businesses.

But there may be more than meets the eye among those whose incomes rank in the top third of households. While the majority of these respondents expressed concern over the tariffs, what they’re reading, hearing and seeing may be dampening their outlooks even further. As things stand, it’s as if January never happened, a month in which confidence was so high, the “news heard” among high income earners hit a 20-year high. By the beginning of July, “news heard” had slid to minus 18, the lowest in two years. The six-month, 79-point swing is so severe it rivals August 2011, when the euro crisis shook world markets, Standard & Poor’s stripped the U.S. of its AAA credit rating and households were rattled by the debt ceiling debacle.

Are things really all that bad? Alcoa Corp. Chief Executive Roy Harvey certainly seems to think so. In the aluminum giant’s post-earnings conference call last week, Harvey explained that rather than benefit, the company is suffering from U.S.-imposed tariffs despite the original intent of the effective tax imposition on imports. The required “primary aluminum,” a key input for further processing into products Alcoa makes, comes from its own Canadian smelters, where tariffs have been levied. The firm’s raw materials costs have thus increased, crimping profits and leaving executives with the poor choice of paying tariffs on its own imports or selling its Canadian production outside the U.S. at lower margins. In addition, much of the increased domestic demand for aluminum has been satisfied by antiquated and inefficient production capacity that had been taken offline, further depressing profits.

Alcoa is among the minority of companies that have said tariffs are responsible for tempering their earnings outlooks. (Some of the concerns over trade eased after President Donald Trump and European Commission President Jean-Claude Juncker said Wednesday that they agreed to suspend new tariffs while continuing talks.) Most blame the strengthening dollar. Nevertheless, the law of unintended consequences is apparent in the first two regional Federal Reserve surveys released for July.

The first out was the New York Fed’s Empire report, which covers the New York area. Planned capital expenditure and technology spending sank in July, falling to the lowest in 11 months. A similar survey from the Philadelphia Fed echoed those results, with the outlook for employment falling to the lowest in 17 months, and the outlook for “business activity” dropping to the lowest since March 2016. The portion of the survey covering new orders and backlogs tumbled to the lowest since February of that same year.

Is Seeing, Reading and Hearing Believing? Today’s News Drives Today’s Business Outlook

Bleakley Financial Group Chief Investment Officer Peter Boockvar posed some difficult questions in the wake of the survey’s conclusion that while current activity remains brisk, the future is less promising: “Is it the tariffs? A stronger dollar? Did we pull a lot of activity into the second quarter because of supply constraints where everyone was double ordering?”

Anecdotal evidence certainly suggests as much, with firms reporting that they’ve been stockpiling for months to head off possible price increases brought on by future tariffs. In last week’s two-day testimony to Congress, Fed Chairman Jerome Powell expressed concern that the tariffs would compel companies to ratchet back activity. As if on cue, the day after his testimony, the Fed’s Beige Book of economic activity had this to say: “Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies.”

The Cleveland and New York District Feds, in particular, reported activity had already taken a hit. As is the case with Alcoa, the New York area engages in a good amount of trade with Canada, and manufacturers corroborated that costs had increased. Meanwhile, panic buying is reported to have pulled activity forward in the Cleveland region: “In some cases, manufacturers noted a rush to purchase metals in anticipation of additional price increases.”

Consider the starting point for many companies. Last year’s weak dollar and natural disasters had many struggling to satisfy overseas demands and the massive needs required to rebuild. Labor and raw material costs were already on the rise to correct for the imbalances. The tariffs were the insult to injury many manufacturers could simply not afford.

“The actual economic impact will really come down to time,” cautioned Boockvar. “The longer this goes on, the more actual business activity will be negatively affected.” To Boockvar’s point, the collapse in business sentiment suggests many companies don’t foresee the ability to withstand further blows to their ability to profitably conduct business. Businesses are saying as much.


Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

Visit QuillIntelligence.com to find out more. Click HERE to SUBSCRIBE.

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America. Amazon.com | Barnes & Noble.com | Indie Bound.com  |  Books•A•Million

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Danielle DiMartino Booth, Quill Intelligence, CRE

Controversial Real Estate — Is CRE Scaling New Heights or Structurally Unsound?

Why did Plato toy with our minds so, describing so richly Atlantis, a land that every credible historian denies existed? Why is it so hard for us to let go of the legend? If you are mildly flexible when it comes to chronological context, you can make the leap that Plato, who put pen to paper in 360 B.C., was playing loose and fast with the calendar. He is said to have written of the lost land some 9,000 years after its famed destruction. But what if Plato wrote of an event that preceded him by a mere millenium? Surely it was easier to fact-check with an additional 8,000 years on hand.

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Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Below to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America

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Danielle DiMartino Booth, The Daily Feather, Quill Intelligence, STATE PENSIONS TO UNCLE SAM.sm

State Pensions to Uncle Sam: “Gone to Texas” and Other Tall Tales

Why go to the devil or the dogs when you can instead go to Texas? That was the thinking throughout much of the 1800s by many Americans, including one bear-hunting, story-telling Tennessean, Col. David Crockett. What prompted Col Crockett’s trek where he would soon meet Gen. Santa Anna and his fate at the Alamo? One might say that he was most displeased by his failed Congressional re-election campaign. Just days before the Battle of the Alamo and his untimely death, Crockett was asked to speak before a group of Texian colonists in Nacogdoches, Texas. Anticipating inquiries as to what brought him to the country, Crockett replied that he’d have been happy enough to maintain his Congressional post if re-elected: “I would serve them faithfully as I had done; but, if not, they might all go to h—, and I would go to Texas. I was beaten, gentlemen, and here I am.”

To Continue Reading Click Here — QuillIntelligence.com

 

Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Below to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America

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FIXING WHAT IS NOT BROKEN, Danielle DiMartino Booth, Quill Intelligence, Monetary Policy, Finance,

Fixing it When it’s Not Broken

 Fixing it When it’s Not Broken

Unconventional Monetary PolicyDistorts the Principles of Finance 

 

 “A Diamond is _______.”

“Snap! Crackle! ___!”

“Just Do __.”

“Finger Lickin’ ____.”

Some accidents are preordained. In the prim and proper 1950s, ladies wore snow white gloves in public and gentlemen tipped their fedoras in acknowledgement of the era’s contained composure. Hence one disgruntled housewife’s horror in seeing Dave Harman (daughter Wendy) licking his fingers in broad daylight, for all the world to see, on live TV, no less! Harman had merely been along for the ride. He’d toted a box of Kentucky Fried Chicken to a local Phoenix TV station and having only come to observe, was chomping away in the background, albeit in full view of the camera, as his franchise manager Ken Harbough spun out the restaurant’s advertising. As for Harbough’s spontaneous reply to the scandalized woman on the other end of the phone he described as, “mad as the devil”? “Well, it’s finger lickin’ good!” An advertising legend was born, poor etiquette and all.

To Continue Reading Click Here — QuillIntelligence.com

 

 

Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America.
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DiMartino Booth, Bloomberg Opinion, Corporate bonds are a potential bomb ready to explode. Photograph: Three Lions/Hulton Archive

The Corporate Bond Market Is Getting Junkier

Few investors realize the ticking time bombs populating what they believe are the safest parts of their portfolios.

VIPs

  • Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion.
  • And then there’s the massive market for leveraged loans, where covenants protecting investors have all but disappeared.
  • In 2000, BBB bonds were a mere third of the market, net leverage was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times.
  • So why not treat the BBB portion of the bond market for what it is: a high-risk slice of the corporate debt pie.
  • Add the BBB market to what are already designated high-yield bonds and leveraged loans and you arrive at $5 trillion, twice the size of what investors should realistically classify as money-good investment-grade debt.
  • Ask yourself this question: How many small investors perceive the corporate debt market as two parts high-risk and one part low-risk? The reality is precious few retail investors conceive of the ticking time bombs populating what they believe to be the safest slice of their portfolio pie.

 

Much has been made of the degradation of the $7.5 trillion U.S. corporate debt market. High yield offers too little, well, yield. And “high grade” now requires air quotes to account for the growing dominance of bonds rated BBB, which is the lowest rung on the investment-grade ladder before dropping into “junk” status. And then there’s the massive market for leveraged loans, where covenants protecting investors have all but disappeared.

How does that break down? Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion, according to Morgan Stanley. Put another way, BBB bonds outstanding exceed by 50 percent the size of the entire investment grade market at the peak of the last credit boom, in 2007.

But aren’t they still investment grade? At little to no risk of default? In 2000, when BBB bonds were a mere third of the market, net leverage (total debt minus cash and short term investments divided by earnings before interest, taxes, depreciation and amortization) was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times.

The True $2.5 Trillion Investment Grade Bond Market
Dwarfed by $5 Trillion in High Risk Debt

7.3.18-bonds-bloomberg

 

Given the marked deterioration in fundamentals, bond powerhouse Pacific Investment Management Co. worries that “This suggests a greater tolerance from the credit rating agencies for higher leverage, which in turn warrants extra caution when investing in lower-rated IG names, especially in sectors where earnings are more closely tied to the business cycle.”

In the event this warning rings a bell, be heartened that your memory is still largely intact. Investors blindly following credit rating firms’ designations on subprime mortgages despite a clear degradation in the due diligence upon which the ratings were assigned ended up regretting such faith when the financial crisis hit.

So why not treat the BBB portion of the bond market for what it is: a high-risk slice of the corporate debt pie. Keeping count of “fallen angels,” or those investment-grade bonds that are downgraded into junk territory, will become a spectator sport.

With that as a backdrop, add to the BBB market what are already designated high-yield bonds and leveraged loans and you arrive at $5 trillion, twice the size of what investors should realistically classify as money-good investment-grade debt. The leveraged loan market is generally where companies whose credit is so weak they can’t access the high-yield bond market go to attain financing. It just exceeded the high-yield bond market in size, growing to $1.22 trillion compared with high-yield’s $1.21 trillion, according to Fitch Ratings.

Query institutional investors and they will answer that they’re increasingly guarded in their approach to the market. The investment community’s suspicions are amply reflected in the awful performance put in by the investment-grade market this year, with the Bloomberg Barclays U.S. Corporate Bond Index dropping 2.80 percent through Friday. Among 19 major parts of the global bond market tracked by the Bloomberg Barclays indexes, only dollar-denominated emerging-market debt has done worse.

The extra yield investors demand to own investment-grade corporate bonds instead of U.S. Treasuries is equally indicative of investor skepticism. At about 1.25 percentage points, the spread has expanded from an average of 0.85 percentage point in February to the widest since 2016.

But ask yourself this question: How many small investors perceive the corporate debt market as two parts high-risk and one part low-risk? According to State Street Advisors, despite the underperformance of investment-grade funds, June saw continued inflows of $2.8 billion into the space while high-yield sustained outflows of $2 billion. Through the first six months of this year, investment-grade inflows totaled $5.6 billion while high-yield funds bled $5.9 billion.

The reality is precious few retail investors conceive of the ticking time bombs populating what they believe to be the safest slice of their portfolio pie.

 


Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

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Quill Intelligence, Danielle DiMartino Booth, Economy, Central Banks, Federal Reserve

Tales of Bonds & Bondage

Tales of Bonds & Bondage — Central Banks Put Markets in a Vise

Crocodile Shears elicit anything but crocodile tears. And the Rack extracts as almost no other device. But it’s the Head Vise that tops the list of the most brutal torture techniques of all time. Introduced during the Spanish Inquisition (when else?), vises of all stripes employed compression to extrapolate the desired intelligence. Hands, feet and especially knee caps could be twisted, contorted and irreparably damaged. You might have lived to tell, but you couldn’t write about it and the scribe would have to come to you. The head though, when targeted, produced the most pitiless and violent of outcomes.

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Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC

For a full archive of my writing, please visit my website Money Strong LLC at www.DiMartinoBooth.com

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America.
Amazon.com | Barnes & Noble.com | Indie Bound.com  |  Books•A•Million

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