Shilling on inflation expectations, technology, productivity and the 35-year bond bull

Financial analysts who are diligent in their measurements, and independent (as opposed to those who are mandated to perpetually flog financial products), are able to recognize and anticipate financial trends, risks and opportunities. Mean reversion is the immutable law. The hard part is that turns take time, and people generally have short attention spans and limited patience. The financial industry and media make a fortune preying on this deficit of human nature. The urge for activity is great, even though risk is a good game played slow.

Gary Shilling is one of the very few economists/analysts that I read (he publishes a monthly subscription letter called Insight here). Like the rest of us, Shilling cannot see the future, but I find his work detailed and useful. For those who don’t have a subscription, this latest interview is longer than most, and covers many worthwhile points.

In 1981, Shilling proclaimed that the bond market was on the precipice of “the bond rally of a lifetime.” That was a long time ago. Back then, Ronald Reagan was in the early innings of his first term. Paul Volcker was only two years into his war against rampant inflation. The 30-year Treasury bond yield was an unbelievable 15.2%. Today, it’s 3%. Since Shilling’s “rally of a lifetime” call, the long bond has outperformed the S&P 500 by 5.5 times.  Here is a direct video link.

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Rise of the machines: here to stay

Machines will continue to bring manufacturing closer to where the products are consumed, while also eroding human jobs and wages in these areas. Major deflationary force in the world.

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Car execs charged, bankers still at large and wrecking havoc

I have been pointing out since 2009, that the Obama administration failed its calling when it chose to not prosecute bank executives for the criminal activities they directed, oversaw and willfully overlooked in their companies.  The financial crisis handed the new President the opportunity for global leadership in demanding personal accountability to curtail a corrupt and parasitical banking culture.  But they opted not to take it, the world followed suit, and the rest is history.   We are all continuing to pay the price to this day with the promise of much more pain yet to come.

The recent laying of personal criminal charges against auto-executives for massive fraud that misled customers, poisoned our atmosphere and led to illness, injury and death, is long overdue.  It also publicly opens the obvious question once more of why car executives are being held accountable, while bankers still are not.  An excellent reminder in the Globe today from Eric Reguly, see:  Who got a free ride? Bankers, not car execs:

Volkswagen is paying monster fines, but its managers are not being shielded from the consequences, as the indictments have shown.

Why the United States is letting bankers who behave badly go, but not the auto guys, is an open question – is it because Volkswagen is a foreign company? Whatever the case, the Obama White House and the Democrats in general did themselves zero favours by going easy on the bank bosses. Bankers are unpopular, and immoral bankers who walk free are especially unpopular – hated even. Their free passes no doubt help to stoke the anti-establishment sentiment that propelled Mr. Trump to power.

Incidentally, in a related point and also discussed in the Globe today, Canada has hired an ex-Goldman Sachs executive to head our critically needed Canada Pension Plan fund.  CEO Mark Machin’s so-called new big idea to achieve capital targets amid low yields and an aging population?  Not increase contributions and manage risk carefully to ensure sufficient capital, but rather increase risk and make bigger, bolder bets in the hopes of winning higher returns in the long run.  See:  “I understand lots of other things, but I don’t understand Canada. 

Bankers get rich by selling the public risk in exchange for our cash savings. They feed themselves first.  When the bets go bad and our savings blow up, the bankers keep their bonuses and commissions and explain how the losses we incur are not their fault. This is their DNA and business model. In the process they end up with the money and we–clients, customers, taxpayers–are left holding all the risk.  When will we learn to stop handing them our trust and financial vulnerability?  How much do we need to lose and suffer before we understand the financially suicidal folly of these choices?

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Confidence not enough to boost economy

Today the US Commerce Department reported retail sales rose 0.6% in December from a month earlier.  Though helped by strong car sales and higher gas prices, sales in other categories were flat on the month and underscored how bad the holiday shopping season was for many retailers.  A key takeaway is that the reported Trump bump in investor sentiment is not translating into consumer spending to date.

The truth is that an aging, indebted population, struggling with low savings’ yields, has less appetite and ability to spend.  Blind confidence won’t help.  What’s needed are wage gains, higher yields, lower expenses and less household debt.  Not things the new government can manufacture at all, let alone quickly.  See  Consumers Confident but not enough to spend:

For investors, one message from the sentiment and sales reports is that whatever good vibes people are feeling since the election, they may not be enough to meaningfully alter spending habits. The cautious spending habits Americans adopted in the financial crisis aren’t going to be unlearned based on who occupies the White House. Rather, wages and job growth will set the tone for how much people buy. How businesses behave will play a big role in how consumers spend during Mr. Trump’s administration.

For traditional retailers, the message is even starker. Consider: The unemployment rate is 4.7%, and the economy has improved to the point that the Federal Reserve expects to quicken its pace of rate increases. If stores can’t do well in this environment, what happens when the economy, as it always does, slows down?

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Progress: Takata executives criminally charged re air-bag fraud

Some good news. It’s about time.  See: Takata executives criminally charged in US probe of faulty air bags:

The indictment alleges the executives, who worked at Takata both in Japan and the U.S. for decades, participated in manipulating test data. The action comes as Takata is expected to separately plead guilty to criminal wrongdoing and pay $1 billion to resolve a U.S. Justice Department probe of the supplier’s handling of air bags that risk rupturing and spraying shrapnel in vehicle cabins, a safety problem linked to 11 deaths and 184 injuries in the U.S. alone.

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Auto sector fraud: widespread, profitable business model

As we thought likely, revelations of emissions fraud are now spreading beyond Volkswagen.  Fiat Chrysler shares were down more than 13% today as the U.S. Environmental Protection Agency accused the company of also using software to allow excess diesel emissions in about 104,000 vehicles.

In addition, Germany authorities told journalists last week that several manufacturers – three VW group marques (VW, Audi, Porsche) plus Mercedes-Benz and Opel, Vauxhall’s German counterpart, are to effect a voluntary recall in order to update the software in their cars to reduce their NOx emissions.

The German transport minister, Alexander Dobrindt, has since confirmed that the government’s official investigation into the VW emissions scandal has revealed “irregularities” in cars from 11 other manufacturers: Renault, Alfa Romeo, Chevrolet, Dacia, Fiat, Hyundai, Jaguar, Jeep, Land Rover, Nissan and Suzuki.  In other words, most brands.  See:  Diesel recall, which cars are effected.

At the same time we learn today that Takata Corp. is expected as soon as Friday to plead guilty to criminal wrongdoing and pay roughly $1 billion to resolve a U.S. Justice Department probe of the Japanese company’s rupture-prone air bags which have killed and injured many.  See:  Takata to plead guilty to criminal wrong-doing.

There is no word yet on whether the Justice Department plans to bring any criminal cases against Takata employees alongside the company’s expected guilty plea. The Wall Street Journal earlier reported that prosecutors were weighing pursuing company employees who had knowledge of the defects and cover-up.

Individual actors certainly should be prosecuted.  Corporations do not run themselves, if we do not prosecute and penalize the individuals directing the crimes (including disgorging their personal income and profits connected with the fraud) then we are living in a state anarchy and should expect lawlessness to spread.

On the upside, as we pointed out last year, the customer betrayal in emissions fraud, makes the case for electric vehicles all the more.  Why settle for lowering emissions by unknown amounts, when we can chose to eliminate them completely.

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