Juggling Dynamite

Refreshingly frank discussion: Irish economist, David McWilliams in conversation with Greece’s ex-Finance Minister, Yanis Varoufakis.

In the first, Yanis speaks openly and frankly about the dysfunctional nature of European politics and why he fears the eurozone faces ‘disintegration’. In the second clip, Yanis questions David Cameron’s handling of the UK’s referendum on EU membership thus far and discusses the ‘centrifugal forces’ that may be unleashed on the rest of Europe if Britain votes for “Brexit”. Find part 1 and 2 at this direct link.

Howard Davidowitz, founder and chairman at Davidowitz & Associates, examines the influence of the Chinese consumer, the threat of bankruptcy for retailers, and the importance of pricing in the retail business. Here is a direct video link.

He also discusses the challenges faced by retailers in mall locations, the waning influence of Black Friday and how real estate plays into the business of retail. Here is a direct video link.

Acres of redundant retail space can be re-purposed for vertical urban farming and renewable energy collection…maybe affordable housing in some locations; other buildings will need to be demolished, building components (metals,wood,glass etc) recycled and the land turned back into green space. All far more productive than their original use as centers for mindless consumer consumption on credit. But also likely to extenuate the surplus of consumer goods and commodities in the world for some time–excess capacity artifacts left from the largest credit bubble in human history.

The desperation for yield has been unprecedented this cycle as central banks encouraged epic mal-investment through repeated bouts of quantitative madness since 2010.

High yield debt became an oxymoron with the riskiest corporate bonds paying investment-grade-like-rates of 5% and less into 2014.  In reality such low rates never were enough to compensate for the capital loss risk taken and corporations responded to irrational buyers by selling them more low-yield debt.  Weakening their credit quality further, this has driven the amount of debt on corporate balance sheets to twice the level seen before the 2008 credit meltdown.

We should not be surprised then to see that ‘high yield’ bonds have dropping in value since 2013.  As shown below from $96.29 in May of 2013 the high yield bond index (HYG) has fallen just under 14% to date and is now back at the same price is was in 2010.

Given the historical correlation between corporate debt (blue below) and equities (S&P in black) this weakness in credit should alarm today’s buy and hold stock investors.  Unfortunately they won’t likely awake until more severe capital damage has been done to their savings.  Then they will panic and sell when they should be liquid and buying. And so the cycle goes…

chart source: www.hussmanfunds.com