What next? Sell in May and Go Away

Sell in May and go away

That’s the mantra of many traders.  Nothing happens in the summer months because everyone is in the Hamptons.  It’s 5:00 Friday, July 1 and if I needed to reach one of my former bosses right now, my call would likely be returned sometime around Wednesday next week.  I know.  It happened more than once.

But this summer the roads back to NYC and Greenwich from the Hamptons may be clogged soon.

Here’s why.

blog 7 1 pic 2

Signaling a massive capital flight to an asset with universal value, gold has skyrocketed $300 or 30% in the last three months:

Source: Monex.com

Large amounts of capital are moving into the asset that has never gone to zero.

Global banks have plummeted over the last five years.  Deutshce Bank lost$7 Trillion in value in the fourth quarter by itself.  That’s Trillion – as in One Thousand Billion, times 7!!

blog 7 1 pic

Source: https://dentresearch.s3.amazonaws.com/EconomyandMarkets/images/2016/070116_ENM.gif

Why?  Because eight years into this “recovery” the global financial system has ingested $550 Trillion in credit default swaps and other derivatives.  Duetsche Bank has ten percent of the total.  One institution has 10% of the global total of what Warren Buffett called “financial weapons of mass destruction”.  “How is that possible, Joe?” you ask.  “I thought it was all about deleveraging after the Great Recession”.

That was what we all read in the financial press.  Financial regulators worldwide were forcing systemically important financial companies to rein it in, to decrease risk, to reduce reliance on borrowed funds.  It appears that was all window dressing.  Even the blog I wrote earlier this week about the eight largest US banks passing the new “stress tests” was evidence of the prevalence of this new story line that on the surface looks great but just below the surface is in reality probably not worth the paper the plans are written on.

To put the risk we are facing in perspective, the Gross World Product was $107.5 trillion in 2014 according to the CIA World Factbook.  Based on the $550 trillion figure above, we have hedged every financial transaction in the world more than four times over.  I just bought a $3 pack of gum at the Atlanta airport.  Global financial traders have already placed bets totaling $12 for and against that transaction.  Why?  Because financial engineering has taken precedence over actual engineering, actual goods and services.

If you don’t follow Harry Dent at DentResearch.com, you should.  Harry has spotted macro trends worldwide for almost 30 years.

Harry identified that many of the world’s largest banks are in deep trouble but regulators, even the vaunted European Supervisory Authorities are apparently ignoring the problem.

How big is the problem?

Italy’s banks have 18% non-performing loans.  That means bad loans are over two times larger than their systemwide collective capital.  I can tell you from personal experience (as the founder of Georgia’s largest community bank – one that failed in the Great Recession, I can say this with no risk of contradiction) that a bank has no hope of survival in this condition.  And this is the entire Italian banking system. Italy is part of the EU.  Losses of this magnitude could wipe out the entire capital base of the EU.

But Italy only takes third place in the deficit Olympics.  Greece has 34% non-performing loans and Ireland has 19%!  No slacker, Portugal has 12%.

If regulatory bodies had the resources to shut these institutions down, they would.  The fact is they are also undercapitalized.  It’s a house of cards that everyone hopes will miraculously remain standing but it simply can’t.  Our own FDIC operated in the red for a couple years but there was nothing anyone could do about it.  The option was to shut it down and start over.  Every bank in the U.S. would have had a run that day.  The next day, all banks would have failed.  Global financial meltdown.  We have been 48 hours away from this scenario a few times.  The first time was in September 2007.  I remember it well.  There was briefly no LIBOR.  Banks would not lend excess reserves to other banks overnight because they were afraid they would not get their money back the next morning.  The Fed and the European Central Bank engaged in coordinated flooding of over $250 billion into the financial markets over one weekend to maintain market liquidity.  I told my bank board that this had never happened before.  That was just a precursor of the tidal wave barreling down on all of us.

The Greater Recession

Enough doom and gloom.  I write about this so that it might give rise to the thought about what to do when the Greater Recession starts.  In the last one, the Great Recession, cash was king.  One client called me and excitedly exclaimed, “I just bought my four million dollar loan from the FDIC for eight cents on the dollar!”  He wasn’t bragging, he was genuinely excited at saving 92%.  He had just saved his company from certain financial ruin.

Be prepared.  Cash gives you optionality.  You can choose to spend it or invest it or you can simply hold it.  If another recession hits, you will have your pick of assets to purchase at very deep discounts if you have cash that you can access.  This is a great time to be building your reserves.  And if we miraculously avoid another recession, you have the option of investing in assets that have a more certain future.

The New Normal

What will the banks do this time?
 Life Post-Brexit

Will we have to adjust to a “new normal” the way we did in 2008 and beyond?

By 2010 it was clear that the recession was not ending anytime soon.  We began to talk to clients and capital providers about the “new normal” in many industries.  The metrics had just simply changed.  Most industries have recovered and the industry benchmarks have returned to where they were pre-recession and many industries have entirely new metrics.

Fortunately there have been structural changes, especially in the banking system.  In fact, the eight largest “systemically important” banks had to specifically test for the impact of severe UK recession coupled with similar conditions in the Euro Zone and Japan and a less intense recession in Asia, and they all passed according to a Federal Reserve report.  Click here for a link to the Bloomberg article on the topic.

banks post brexit

And these banks had to draft their own obituaries – a detailed plan of what to do in the event the bank failed (now wouldn’t that just put you in a bright cheery mood if you had had to do that?).  Bankers had to get much more deliberate about how they manage their operations and they have to plan for extraordinary events in ways they never did before.  The most important factor at the end of the day is cash capital, or, in banking terms, liquidity – the ability to meet cash demands when they are made.  Probably not a bad idea for your company to do the same.  Plan to have enough cash to meet the needs of your business for up to two years without borrowing or selling assets.

Can you do it?

We may have seen a permanent shift in banking in the last several years.  U.S. banks have more regulations and are under more pressures than they ever have been.  They are forced to look more closely at everything they do.  There has been an explosion of growth in the shadow banking system – non-bank capital allocators like hedge funds – that are filling in the gaps left by the banks withdrawal from certain sectors.  It’s a different game with these operators.  Vertical Capital Advisors LLC is built to help you navigate your company through the new new normal in the capital markets.

How is the Brexit going to affect my business?

If you are like me, last Friday you were pondering, “I wonder how the Brexit is going to affect my business”.

man with cigar

So I went searching for hard facts and analysis from leading authorities.  I found a post by Matthew Bishop, an editor at The Economist, perhaps the leading authority on global economics.  After all, they invented the Big Mac Index (http://www.economist.com/content/big-mac-index) that compares the cost of a Big Mac in every currency simultaneously, enabling the entire world to instantly view the relative strength/weakness of every currency.

In case you missed Matthew’s treatise, here’s the link:https://www.linkedin.com/pulse/uncool-britannia-how-britains-vote-brexit-hurt-your-business-bishop?trk=hp-feed-article-title-comment

And here is my post in response:

Don’t know that I agree with your police work there Matthew. We need facts.

Chaos – yes, definitely today, but give the markets ‘til Tuesday morning. When everyone realizes they weren’t hit in the drive-by, no bullet holes, it’s back to business. Remember, the vote was non-binding so Parliament must now do some dirty work and THEN a mandatory two year break-up process begins. The exit process was smartly designed to minimize collateral damage.

Likely and long period of uncertainty – hmmm, by Monday it won’t even be yesterday’s news. Donald, Hillary, or fill in the blank, will do something crazy by Sunday night then we will be on a fresh news cycle.

Intense stress – like the subprime mortgage stress? Probably less – significantly less.

We all feel bad that globalization took a hit but a subprime hit it was not. You hinted at the real villain lurking in the shadows – all the world economies are struggling to return to growth post-Great Recession, having been kept alive, limping along, supported by unprecedented printing of money. This massive monetary experiment is about to have its BIG reveal. The Brexit probably won’t even be a factor. It might be blamed as a “catalyst” but in reality the business world has already taken this in stride. Markets got hammered all the way back to last week’s starting values. London will still be the world’s financial center in ten years. The only difference will be the billions of pounds lawyers will make re-documenting everything they can get their hands on. British politics is always devolving into an ugly vicious battle over something. This at least gives MPs something material to argue about. Keep them off the streets and out of the pubs.

100 quid says it’s up from here

Brexit Frexit, Who’s the Nexit?

Brexit – done. Nexit?

Frexit, Swexit, Italexit, Czexit, Grexit, Finnleft?

A CNBC poll shows over half of respondents in Italy and France said their countries should hold a vote on exiting the European Union however less than half said they would actually vote for it:

EU Brexit

What does it mean for the U.S. anyway?

Very believable experts cover every point on the scale from no impact at all to complete financial and civil collapse. If your business is heavily dependent on international commerce, you will probably see short term impact in some way. For the average American, it will be life as usual.

Have a clever name for one of the EU country’s possible exit? Shoot me an email and we will get it in our follow-up blog on the Brexit.

The countries not yet mentioned are: Austria, Belgium, Bulgaria, Croatia, Denmark, Estonia, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.