Nomi Prins: enhanced volatility

[don]

Best-selling author and former Wall Street investment banker Nomi Prins says no matter what you are told, “For all practical purposes, quantitative easing continues here as well as zero interest rate policy, and capital is available. The ECB (European Central Bank) has just announced their next version of quantitative easing (money printing) . . . of course, there is the fear that, at some point, there is just no powder left in that gun, and at some point, it will go down. The volatility you are beginning to see is indicative of that coming apart. There is nothing else that has been propping up the market, and when there is nothing left to prop up the market, the markets are going to come apart. It still hasn’t happened yet, but the enhanced volatility is a sign we are moving in that direction.”

[don]

Re: Nomi Prins: enhanced volatility

In a World of Volatility and Artificial Liquidity for Banks, Update your Cash Strategy

Tuesday, July 7, 2015 at 11:16AM
Nomi Prins

Global central banks are afraid. Before Greece stood up to the Troika, they were merely worried. Now it’s clear that no matter what they tell themselves and the world about the necessity or even righteousness of their monetary policies, liquidity can still disappear in an instant. Or at least, that’s what they should be thinking.

The Federal Reserve and US government led policy of injecting liquidity into the US and then into the worldwide financial system has resulted in the issuance of trillions of dollars of debt, recycling it through the largest private banks, and driving rates to 0% -- or below. The combined book of debt that the Fed and European Central Bank (ECB) hold is $7 trillion. None of that has gone remotely into fixing the real global economy. Nor have the banks that have ben aided by this cheap money increased lending to the real economy. Instead, they have hoarded their bounty of cash. It’s not so much whether this game can continue for the near future on an international scale. It can. It is. The bigger problem is that central banks have no plan B in the event of a massive liquidity event.

Some central bank entity leaders have admitted this. IMF chief, Christine Lagarde for instance, warned Federal Reserve Chair, Janet Yellen that potential US rate hikes implemented too soon, would incite greater systemic calamity. She’s not wrong. That’s what we’ve come to: a financial system reliant on external stimulus to survive.

These “emergency” measures were supposed to have healed the problems that caused the financial crisis of 2008 -- the excessive leverage, the toxic assets wrapped in complex derivatives, the resultant credit and liquidity crunch that occurred when banks lost faith in each other. Meanwhile, the infusion of cheap money and liquidity into banks gave a select few of them more power over a greater pool of capital than ever. Stock and bond markets skyrocketed as a result of this unprecedented central bank support.

QE-infinity isn’t a solution -- it’s a deflection. It’s a form of financial subterfuge that causes extra problems. These range from asset bubbles to the inability of pension and life insurance funds to source longer term less risky long-term assets like government bonds, that pay enough interest for them to meet liabilities. They are thus at risk of rapid future deterioration and more shortfalls precisely because they have nothing to invest in besides more risky stock and lower-rated bond markets.

Even the latest Bank of International Settlement (BIS) 85^th Annual Report revealed the extent to which global entities supervising the banking system are worried. They harbor growing fears about greater repercussions from this illusion of market health (echoing concerns I and others have been writing about for the past seven years.)

The BIS, or bank for the central banks was established during the global Great Depression in 1930 in Basel, Switzerland, when bank runs on people’s deposits were the norm. The body no longer buys into zero-interest rate policy as an economic cure-all. In their words, “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the remarkable symptom of a broader malaise in the global economy.”

They go on to note the obvious, “The economic expansion is unbalanced, debt burdens and financial risks are still too high, productive growth too low, and the room for maneuvering in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal.”

These are troubling words coming from an organization that would have much preferred to deem central bank policies a success. Yet the BIS also states, “Global financial markets remain dependent on central banks.” Dependent is a strong word. How quickly the idea of free markets has been turned on its head.

Further, the BIS says, “Central bank balance sheets remain at unprecedented high levels; and they grew even larger in several jurisdictions where the ultra low policy rate environments were reinforced with large purchases of domestic and foreign assets.”

Central banks are not yet there, but rising volatility is indicative of the accelerating approach to the nowhere left to go mark from a monetary policy perspective. This, after seven years of a reckless Anti-Main Street, inequality and instability inducing, policy.

Not only have the major banks been the main recipient of manufactured liquidity, they have also received consolidated access to our deposits, which they can use like hostages to negotiate future bailout situations. Elite bankers moan about the extra regulations they have had to endure in the wake of the financial crisis, while scooping up cash dispersed under the guise of stimulating the general economy.

Central banks seek fresh ways to keep the party going as countries like Greece shut down banks to contain capital flight, and places like Puerto Rico and multiple states and municipalities face economic ruin. But they are clueless as to what to do.

In this cauldron of instability and lack of leadership, cash is the one remaining financial possession that Main Street can translate into goods, services and security. That’s why private banks want more control over it.

Banks Want Your Cash For Their Latent Emergencies

One of the most inane reasons cited for restricting cash withdrawals for normal people is that they all might turn out to be drug dealers or terrorists. Meanwhile, drug-dealing-money-laundering terrorists tend to get away with it anyway, by sheer ability to use a plethora of banks and off shore havens to diffuse cash around the globe.

Every so often, years after the fact, some bank perpetrators receive money-laundering fines. For average depositors though, these are excuses for a bureaucracy built upon limiting access to cash whether from an ATM (many have $500 per day limits, some have less) or an account (withdrawals above a certain level get reported to the IRS).

As Charles Hugh Smith wrote at Peak Prosperity recently, there’s a difference between physical cash (the kind you can touch and use immediately) and the electronic kind, associated with your bank balance or credit card cash advance limit. If you hold it, you have it – even if keeping it in a bank means it’s probably slammed with various fees.

Banks, on the other hand, can leverage your deposits or cash, even while complying with various capital reserve requirements. That’s not new. But the expanding debates about how much of your cash you get to withdraw at any given moment, is.

The notion of a bail-in, or recourse to people’s deposits, is related to the idea of restricting the movement, or existence, of physical cash. Bail-ins, like any cash limitations, imply that if a bank needs emergency liquidity, your deposits are the place to find it, which has negative repercussion on your own solvency. This is exactly what the Glass-Steagall Act of 1933, coupled with the creation of the FDIC sought to avoid – banks confiscating your money at the worst possible times.

The ‘war on cash’ is thus really a war on the difference between the money you can hold on to and the money the banks can take away from you. The existence of this cash debate underscores the need for a personal policy of cash extraction from the big banks. If you don't have one, consider creating one sooner rather than later.

[Thailandnotes]

Re: Nomi Prins: enhanced volatility

Prins is spot on. I guess people don't get their money out of the bigger banks because it's too much hassle.

http://www.bankrate.com/rates/safe-s...r=&a=&c=&s=&z=

[Woodsman]

Re: Nomi Prins: enhanced volatility

Prins is spot on...

TreasuryDirect seems like a good way to park cash. Almost too easy to open one and about as compelling as watching paint dry (which is fine by me, thanks).

I can live with losses due to my knuckle-headed decisions. But the idea of taking a loss to cover the banksters' knuckle-headed decisions, well that's a bridge too far.

''I went to sleep Friday as a rich man. I woke up a poor man.''

His money was all in the Laiki ''Popular'' Bank which was the main casualty of Cyprus' bailout package set by the European Union. Laiki is to be dismantled. Savings of less than €100,000 are to move to the Bank of Cyprus. Anything more than that will almost certainly be wiped out as the bank is wound down, its remaining assets taken by the bank's creditors.

Last week he heard a rumour that the bank was in trouble and went into Aiya Napa to ask his bank manager - a friend - if he should move his life savings.

''There's no problem, nothing to worry about,'' he was told.

Not so. ''I go to bed and I can't sleep. I walk around, I have a coffee. I am thinking about my family.''

John's tears flow. As he chokes up, his son George, who moved to Cyprus in 1990, explains.

''The whole family, we used to work at the markets. I would work at the markets on the weekend to help my parents while my mates were off having fun. Honest work in honest jobs. Now all that hard work is paying the debts of other people and the government. It's disgusting, to be honest.''

http://www.smh.com.au/national/i-wen...328-2gxab.html

[Thailandnotes]

Re: Nomi Prins: enhanced volatility

Shaky big banks vs. very stable small ones...do they all get swept up in the worse case scenario?

[don]

Re: Nomi Prins: enhanced volatility

TreasuryDirect seems like a good way to park cash.

That's where I park my "unrecoverable" savings, Woody. You get nothing but capital security, minus the nibbling away via inflation (which now appears quaint in the grey-dawn light of bail-ins.)

do they all get swept up in the worse case scenario?

Great point, Thai. If your local, small bank is entwined with the big boys, it doesn't look good (and how possible is it not to be?)

[santafe2]

Re: Nomi Prins: enhanced volatility

Shaky big banks vs. very stable small ones...do they all get swept up in the worse case scenario?

We "park" a good part of our retirement savings in single family homes. I would never keep my life savings in a US based bank or a large corporate retirement fund. I prefer controlling my own life. Invest in your own business or with small groups of people you trust. I expect no investment will be perfect as the financial system finally washes out but tangible property will always have value.

[charliebrown]

Re: Nomi Prins: enhanced volatility

In a piece written ny John Hussman http://www.hussmanfunds.com/wmc/wmc090330.htm.
he explains that bank equity and bank bond holders have more than enough capital to cover a major bank blow up, before we start stealing from depositors. How are the creditors of the bank lined up for haircuts post 2008? I must say though that the bank bond holders are in your money market fund, pension fund, mutual fund etc. There will not be many escapee's.

[don]

Re: Nomi Prins: enhanced volatility

from Nov 30, 2009

[don]

volatility? the media has the message

Flushing Cash Into The Casino—-The Media Stock Swoon Shows That It Works Until It Doesn’t

by David Stockman • August 8, 2015


If you don’t think the Fed and other central banks have transformed financial markets into debt besotted gambling casinos, consider the last few days of carnage in the media stocks. That sector is rife with bubble finance infections.

To wit, hedge fund speculators feasting on zero interest carry trades and cheap options own 10% of the 15 companies which comprise the S&P Media index. That happens to be the highest hedge fund ownership ratio among all 23 S&P industry sectors.

So given that the essential modus operandi of hedgies is leveraged gambling, not hedging risk, it is not surprising that they have ganged-up on the media stocks. Indeed, as Zero hedge noted with respect to this week’s sharp and unexpected sell-off:

The love affair between hedge funds and media stocks is being tested. As Bloomberg reports, hedge funds have been near-constant champions of the industry, drawn in by its high cash generation and buybacks, takeover speculation and the straight-up momentum of the stocks themselves. This week’s retreat represents the sharpest rebuke to that thesis — and one of its only setbacks in a bull market well into its seventh year.

Indeed, it has been a perfect fit. These companies—–such as Disney, Time Warner Inc., Fox, CBS and Comcast——are notorious financial engineers, using massive amounts of the dirt cheap debt enabled by the Fed to fund incessant M&A takeovers and prodigious stock buybacks. That’s exactly the kind of financial milieu in which hedge funds thrive; and one, by the same token, that would not even exist in an honest free market.

Not surprisingly, therefore, the S&P media index went parabolic in response to the Fed’s post-crisis money printing spree. From an aggregate market cap of about $135 billion at the March 2009 bottom, the index had soared by 520% to nearly $700 billion before this week’s $50 billion or 8% loss. Needless to say, it wasn’t the geniuses who inhabit Mickey’s house or the machinations of Rupert Murdoch that made all the difference.



No, the S&P media index was propelled upward during the last six years by an endless flood of fresh cash into the Wall Street casino that kept hedge funds and robo-traders upping their bets on the next M&A deal or stock buyback announcement. Viacom (VIA) is a poster boy for the latter.

As shown below, this week’s body slam—triggered by the belated realization that the cable companies’ long suffering customers are now “cutting the chord”—— has taken VIA’s share price all the way back to its late 2010 levels.

But since customer defection has been a long-standing risk and wasn’t exactly new news, the question recurs. Exactly what was it that caused Viacom’s stock price to double in the interim and thereby shower upwards of $20 billion in market cap gains on the hedge fund gamblers who chased it?

The cause for the rip pictured below would most definitely not be growth of earnings or free cash flow. In the fiscal year ending in September 2011, Viacom posted $8.7 billion of EBITDA and that turned out to be the high water mark. Even as its stock price was soaring in the next two years, its EBITDA slithered downward to $8.2 billion in its most recent (June) LTM report.

Likewise, net income of $2.12 billion in 2011 has now slide to $1.77 billion on an LTM basis.


VIA data by YCharts

In fact, Viacom levitated its stock the new fashioned way. During the last 19 quarters it has plowed $17.6 billion back into the casino in the form of stock buybacks ($15.1 billion) and dividends ($2.5 billion). But before you praise VIA for its seemingly shareholder friendly ways, consider this: During the same period it only earned $10.2 billion of net income.
That’s right. It distributed 175% of its net income!

Under the rules of old-fashioned finance that kind of reckless self-liquidation would have been considered a flashing red warning signal to hit the sell button. That would have been especially appropriate in this case since Viacom’s business model has always depended upon the improbable capacity of its cable distributors to extract punitive monopoly prices from their residential customers indefinitely.

Yet when the fundamentals reared their ugly head in this quarter’s round of media company earnings releases, the gamblers professed to be downright shocked, Why the resulting sell-off, which lopped $8 billion off VIA’s market cap in a flash, was purportedly not on the level, at all:

People are shooting first and asking questions later…this indiscriminate selling, to me, is just nuts,” exclaims on billion-dollar AUM hedge fund CIO as media stocks faced a bloodbath this week.

Well, this week’s action wasn’t exactly shooting first; it was more like asking questions way too late. In fact, the entire $20 billion market cap bubble that the most nimble-footed hedge funds feasted upon was just the result of a leverage trick. Nearly the entire $7 billion gap between what Viacom earned and what it distributed to shareholders over the last 29 quarters was borrowed!


VIA data by YCharts

But here’s the thing. Viacom’s fundamentals are visibly deteriorating. Its $3.05 billion of revenue in Q2 2015 was down 10.6% from prior year and 17% from the June quarter two years ago.

Stated differently, Viacom’s peak price of $90 per share, which equated to about $40 billion of market cap one year ago, had nothing to do with “price discovery” in the equity capital markets. It was a pure case of debt-fueled speculation in the casino.

But VIA is a piker compared to most companies in the media index. Take Time Warner (TWX). Looking at the stock chart from March 2009 forward you would think that the company was a found of earnings growth and value creation. Alas, you would be wrong.

Time Warner’s pre-tax income was $4.5 billion in its most recent 12 month period—–compared to $4.4 billion way back in 2011. While 2% growth in three and one-half years is not much to write home about, the casino gamblers were not slowed in the slighted. Perhaps they were impressed with the 25% growth in its net income line, but if so they were capitalizing a one-time reduction in its tax rate—-from 34% to 19.4% over the period—-as if it represented permanent growth of earnings.

In either case, gamblers have been in a rambunctious mood. The companies stock price had rebounded by 6X from the March 2009 low. And even with this week’s sell-off, the TWX stock price had risen at a 35% compound rate during the last three years at a time when its actual pre-tax income was up by 2%.


TWX data by YCharts

Needless to say, there is no mystery as to how this disconnect occurred. The company simply pumped cash into the casino like there was no tomorrow. To wit, during the last six and one-half years, TWX distributed $29 billion in dividends and stock repurchases to shareholders compared to net income of just $20 billion.

So it was the same formula as Viacom’s. Distribute every dime of earnings, and then top it up with a big heap of money that could be borrowed on the cheap.

In TWX’s case, its net debt grew from $11.5 billion in 2009 to $20.7 billion in the quarter just ended. That is, it borrowed every single dime of its $9 billion of distributions over and above its earnings during the period.

The bottom line is pretty straight-forward. Just prior to this week’s correction TWX was valued at $90 billion versus operating free cash flow of $2.8 billion in the LTM period just posted. It could be said that 26X free cash flow is a pretty sporty valuation for a no-growth company.

But then you should try CBS. It too has been a stock market rocket, and it too flushed $11 billion into the casino in the last four and one-half years in the form of stock buybacks and dividends. That was 140% of it net income during the period.

Likewise, another member of the S&P Media index, Comcast, distributed $28 billion in stock repurchases and dividends during the last four and one half-years or just slightly less than its cumulative net income of $31 billion over the period. Needless to say, it made ends meet after hefty investments by borrowing; its net debt soared from $25 billion in 2010 to $45 trillion in the most recently ended quarter.

Even the mighty Disney had little use for its $31 billion of net income during the same four and one-half year period ending the recent June quarter. It flushed fully $27 billion or 88% of it net income back into the casino.

During the most recent quarter debt issuance by US companies reached an all-time high, raising a question as to why companies still need to borrow so much after selling $7 trillion of U.S. debt securities since 2008.

This weeks S&P Media index swoon leaves no doubt as to the answer. Companies have not been borrowing to grow; they have been borrowing in order to flush cash into the casino.

Charles Ponzi once had a scheme that was not essentially different. Yes, and it worked until it didn’t.

[don]

Artificial Resusitation

Since 2004, companies have spent nearly $7 trillion purchasing their own stock — that amounts to about 54 percent of all profits from Standard & Poor’s 500-stock index companies between 2003 and 2012.

Virtually every big company from Apple to General Electric to Walmart has participated.

[lektrode]

Re: volatility? the media has the message

Flushing Cash Into The Casino—-The Media Stock Swoon Shows That It Works Until It Doesn’t

by David Stockman • August 8, 2015


If you don’t think the Fed and other central banks have transformed financial markets into debt besotted gambling casinos, consider the last few days of carnage in the media stocks. That sector is rife with bubble finance infections....

and as woody put it on another thread:

Couldn't happen to a nicer bunch folks.

aka: the lamerstream media, aka the same 'folks' who facilitated putting the current occupants/criminals into office in 2008 and AGAIN in 2012

Gold Holds Its Own As Media Stocks Collapse

• Gold is holding its own but that hasn’t stopped many gold bears from using this as an opportunity to disparage the yellow metal
• A recent Bloomberg article points out that the gold rout has cost China and Russia $5.4 billion
  
• An amount that would sound colossal were it not for the fact that U.S. media companies such as Disney and Viacom collectively lost over $60 billion for shareholders in as little as two days last week
  
• Above are the weekly losses for just a handful of those companies. Compared to many other asset classes, gold has held up well, even after factoring in its price decline
  

[santafe2]

Re: volatility? the media has the message

Regarding Disney, it should fall another 40% from here to reach an investable valuation.