Juggling Dynamite

The surest way to a reversal of financial fortunes is through negative cash flow (spending more than you earn). And over the past couple of years, cash flow has been plunging all over a highly levered (indebted) world.

The first natural response is to draw down cash reserves (savings), cut non-essential spending, tap available credit and sell assets (disposals) where possible. All options are finite.  Beyond these, continued negative cash flow is the universal cancer that ends solvency for households, companies and countries. This chart from oil giant BP yesterday clearly demonstrates the math of revenues that crashed by more than half in 6 months. See: One simple chart that shows the problems facing big oil.

Thanks to decades of taxpayer subsidies and preferential political and regulatory advantage, BP has more stored fat than most. In the short run, it may also be able to further cut capital investments in its business. But if oil prices are not bouncing back soon, dividend cuts to shareholders are the next obvious ‘non-essential spending’ up for the chopping block. And it is not just oil companies that will be eying these.

The trouble is that over the past few years as interest rates flat-lined, investors with low risk-tolerance have increasingly herded into highly valued shares on the promise of dividend yields. They are dangerously banking on those promises now to sustain their own spending needs.  This was always a bad plan.

Dividend cuts will prompt further cash flow reduction and thus spending cuts for customers, which will mean even less revenue for companies, further cuts, and so on.  In a world that has grown accustomed to spending more than it should, the new normal of falling income is a huge adjustment.

Today is my 50th birthday and I find myself grateful to have made it 5 decades, and reflective on how we chose to spend our time on earth. Perhaps we are wise to live with one eye on the present moment and one eye on what others will be able to honestly say about  our value after we are gone.  I am inspired by this insight from Albert Schweitzer, who died in the year I was born:  “Example is not the main thing influencing others. It is the only thing.”

This Tedtalk is on point. Here is a direct video link.

Within each of us are two selves, suggests David Brooks in this meditative short talk: the self who craves success, who builds a résumé, and the self who seeks connection, community, love — the values that make for a great eulogy. (Joseph Soloveitchik has called these selves “Adam I” and “Adam II.”) Brooks asks: Can we balance these two selves?

And so it goes:  following the latest manic episode that began in 2001 and peaked in 2011, gold is now neither desired as a currency nor a commodity. See: Gold prices sink to a 5-year low.

“Investors are selling the metal from gold-backed funds at the fastest pace in four months. Holdings in exchange-traded products declined 17.6 metric tons this week to the lowest since 2009, data compiled by Bloomberg show.

Of course it’s not just gold that has disappointed precious metals fans:

Silver for immediate delivery lost 1.41 percent to $14.4684 an ounce after touching the lowest since 2009. It’s also set for a fifth weekly loss.

Palladium fell 0.8 percent to $613.55 an ounce, while platinum was down 0.7 percent at $971.53 an ounce”.

With the price of bullion now below the 1115 to 1135 trading range that had held since 2013 (blue box on right below), there is little holding gold from joining silver at 2009 lows.  And if this is the typical end to the secular boom that was, a break below the 2009 cycle lows is also within reason, as mean reversion round trips previous secular boom gains.