#TheZooHasGoneNuts: One press release about an EV, but no money, no tech, no prototype, no facilities, no plans, no nothing. Getting pretty thick, even for our crazy times. SEC, are you awake? By Wolf Richter for WOLF STREET. The Nasdaq might be down 12% from its high on September 2, and Apple might be down 21% from its high on September 1. But the day-trader nuttiness – the new technical terms is “Robinhood traders” though they may trade on any platform, not just on Robinhood – isn’t letting up, and hedge funds might still be trying to front-run them and fleece them for a quick buck. And that’s a huge temptation for a tiny Chinese company that installs solar-panel projects in various countries, with just $97 million in annual revenues in 2019, and nothing but annual losses going back years, whose penny stock, issued by a shell company in the Cayman Islands, is traded on the Nasdaq. It received a delisting notice on March 23 because its shares had been below $1 for 30 days in a row and because its market cap had dropped below $15 million. Given the Pandemic, the Nasdaq gave it till December to regain compliance. And so now the company launched this scheme that ruthlessly took advantage of these “Robinhood traders” to drive up its share price – and boy, did the Robinhood traders blow our ears off today, “literally,” so to speak 🤣 This is how it worked: SPI Energy, headquartered in Hong Kong, issued a press release this morning in which it said that it – the tiny solar-panel project installer – would launch an EV company, called EdisonFuture, and suddenly manufacture EVs. OK, there is no car, no prototype, no technology, no capital to develop anything, no nothing. In normal times, it would have been laughed out of the room. But Robinhood traders saw to it that these are not normal times. Upon the announcement, its shares spiked by 4,387% from $1.04 at the close yesterday to $46.67 at 2:06 pm today, for just the briefest moment before collapsing by 71%, giving up over two-thirds of those gains and closing at $13.28 (by-the-minute share prices via YCharts): In fact, trading was so nutty that shares went from $13.41 at 1:28 pm to $46.67 in 38 minutes. But I doubt many people could unload at levels above $40 because shares traded above $40 for just 7 minutes. Shares traded at 45:39 at 2:06 and then one minute later, they were at $33.53. WOOSH. For crying out loud, this a tiny outfit is a money-losing company that installs solar-panel projects, with a delisting warning hanging over it, and no money to develop anything – it had just $2.7 million in cash at the end of December, per its annual report that it filed late with the SEC on June 29, 2020. And it issues just one simple press release about creating a subsidiary that would develop EVs, and nothing to show that it’s actually seriously thinking about EVs, and Robinhood traders went hog-wild, triggering this massive idiocy in its shares. Clearly the company knew what it was doing. This wasn’t an accident. And with this scheme, it wrapped the Robinhood traders around its little finger. Fine with me. And if hedge funds were able to front-run them and fleece them too, fine with me. But I’m wondering: SEC, are you awake? In the grander scheme of things, it does shed light on just how crazy this market still is, how nutty, disconnected, logic-less, and as in this case, idiotic, the trading still is. And it tells me that the market isn’t going to stop going down until this nuttiness has been blown out. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
A struggle for basic survival and for new money to burn. By Nick Corbishley, for WOLF STREET: The summer of 2020 may have been unexpectedly grim for Europe’s airlines, but winter could be worse. The slow recovery in passenger air traffic that began in early June is already over. At the high point of that recovery, in late August, air traffic was still down 51%. But by then, covid cases were once again surging in many countries, prompting the governments of other countries to reintroduce travel restrictions and impose quarantine measures. In the first two weeks of September, air traffic was down 53% compared to the same period in 2019. Intra-Europe flow remains 50% down compared to 2019 while all other flows are down 70%. Passenger traffic has also started to fall from the dismally low levels in mid-August, with almost all major airports reporting a decrease: Madrid was down 16% from mid-August, Barcelona and Paris 14%, Athens 13%, Paris CDG 12%, Amsterdam 9%, London/Heathrow 7%, Frankfurt 6%, and Munich 5% from mid-August. They are many reasons why this is happening. As the International Air Travel Association (IATA) says, “stop-start quarantines are having much the same effect as lockdowns”, dissuading potential travelers from boarding a plane. Many people are choosing not to fly anyway, often out of fear of catching the virus. According to the U.S. Center for Disease Control, as many as 11,000 people may have been infected with the coronavirus on flights. Weak consumer confidence, unemployment, and surging business closures are also taking their toll. Another major problem for the industry is the collapse of the premium market (first and business class combined), which last year generated 30% of airlines’ international revenues. Many businesses right now will not send workers half way across the globe for a meeting that can be done remotely, at a tiny fraction of the cost and with none of the risk attached. Also, premium travel has lost some of its allure as many of its perks have been traded away for safety. Commercial airlines’ big loss has been a big boon for private aviation companies, which offer comfort, flexibility, and most importantly isolation — for those who can afford it. The rapid recovery of private aviation in recent months clearly suggests that some customers are willing and able to splash out to be travel more safely. According to the Times of London, one operator, PrivateFly – which charges £10,000 for flights between France and the UK – saw its bookings triple in August. Meanwhile, commercial airlines have had to ground a large part of their fleets. Revenues, cash flows and earnings have all been obliterated, while costs, particularly for maintenance, remain high. Most airlines are in a struggle for basic survival. On Tuesday, a broad alliance of airlines and airport management companies exhorted governments to introduce airport COVID-19 tests for all departing international passengers, to replace the quarantines that continue to proliferate across the continent. But rapid antigen tests are unlikely to be a panacea since they are more likely to miss positive cases of the virus than laboratory-based tests; and there are other issues, such as the 14-day incubation period of the virus. In the continued absence of cut-and-dry solutions, airlines are cutting back capacity even more. EUROCONTROL now expects the number of flights in Europe to be down 60% year over year by January, compared to its prior estimate of a 20% shortfall. In its revised air traffic scenarios, it projects total flights this year of around 6 million — 55% below 2019’s total and a 1 million-trip reduction from its April forecast, resulting in total revenue losses for the industry of around €140 billion. “We’re going backwards now and it’s really worrying for the entire industry,” said Eamonn Brennan, Director General of EUROCONTROL. “There’s a lack of coordination between States on how to manage air travel despite good guidance from EASA and ECDC; there’s a lot of confusion and very little passenger confidence; and of course outbreaks of COVID-19 are picking up across Europe.” Ryanair, the continent’s biggest airline by passengers, on Friday unveiled plans to cut a further 20% of its flights from its October capacity, meaning it will operate at roughly 40% of October 2019 levels. It is also considering leaving its capacity below 50% for the whole of the winter. German travel operator TUI on Tuesday said it is weighing up balance sheet options amid further cuts to winter capacity and expectations of increased cash outflows. The company, whose shares have plunged 71% this year, has already launched a new restructuring program that will affect up to 8,000 jobs. It has cut winter capacity by a further 20%, on top of the 40% cut announced last month. To tide it over, TUI was given a €1.2-billion funding package from the German government in August. As bookings plunge, cancellations are rising. For October, Lufthansa seat reservations stand at less than 10% of year-ago levels. The UK-based and partly Qatari-owned International Airlines Group (IAG), whose holdings include British Airways (BA), Iberia and Vueling, is facing a similarly bleak winter. It’s already cut capacity for the Fall to 60% below 2019 levels. “Last week we flew 187,000 passengers. The same week in the previous year we flew almost a million,” said BA chief executive Alex Cruz last week. “We remain worried about the virus in the winter season. People are still afraid of traveling.” To shore up its finances, IAG is seeking to raise €2.75 billion of fresh capital in the capital markets. It makes a refreshing change from the tactic favored by Air France-KLM and Lufthansa — hitting up their respective national governments for €10.4 billion and €9 billion of bailout funds, respectively. It may not be enough to get the company through this kind of winter, but it’s a start. As of the close on Wednesday in London, IAG’s stock has plunged 61% this year. Before the rights offering was announced earlier in September, shares traded at 78 pence. With the announcement of the rights offering, shares nearly doubled the next day to 134 pence, but have since given up half of those gains, and today closed at 100.6 pence. By Nick Corbishley, for WOLF STREET. 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Hardware, software, peripherals: If it has to do with staying at home… By Adam H. Williams, Senior Associate at E911-LBS, LBSglobe.com, for WOLF STREET: Typically, revenue growth the year before a new console generation arrives is slow. But 2020 is the year of the Pandemic, with people losing their jobs or working from home and in many areas not being able to go to indoor venues and events, video games have exploded. Microsoft and Sony have now announced the details of next-gen consoles, and we are set for a banner year of an all-time sales high, despite the slow-down in the global economy. COVID has created a situation where virtual technologies advanced, international markets were shaken, and gaming just gets bigger and bigger. Strong Industry Performance When we looked at gaming in 2019, the US-China Trade War was the big upset, and companies were hedging by moving some production out of China. 2020 was going to be a slow year. And then with the Pandemic, all that went out the window. According to analytics company NDP Group, second-quarter US Video Game sales jumped 30% year-over-year to $11.6 billion, the highest in history: It was not just software that sold. Startlingly, despite next-gen systems coming out in just a few months, hardware sales across Nintendo Switch, PlayStation 4 and Xbox One exploded by 57% year-over-year to $848 million. And sales of video game accessories – gamepads, headsets, steering wheels, and other peripherals – soared by 50% to $584 million. Retailers both online and physical, even struggling GameStop [GME], saw a significant surge in business while other forms of entertainment, such as movie ticket sales, collapsed. The used market also remained strong, as did smaller independent games via digital stores. Nintendo’s Switch was a big winner and set a new record in August, with sales more than doubling from a year ago, likely driven by Animal Crossing’s success. In terms of peripherals, flight sticks were in hot demand, after the launch of Microsoft Flight Simulator 2020. The global console games market for the entire year is expected to grow by 41%, from $41 billion in 2019 to about $58 billion in 2020, according to Research and Markets, cited by Yahoo Finance. Growth in console games has also been driven by an increase of “gamers” worldwide: In 2017, there were an estimated 2.21 billion gamers; in 2021, 2.73 billion people fall under that bracket, with at least 63% of the people in the US being gamers. 9th Generation Console Systems on the Way. The big news is the announcement of both Sony’s PlayStation 5 and Microsoft’s Xbox Series X, both priced at $499, but both also offering stripped-down digital-only versions. The reception has been positive, though many are skeptical about digital-only. We can expect robust sales into the holiday season of the consoles. In terms of hardware specs, PS5 and Xbox X are relatively comparable, with PS5 offering a bit higher performance, according to IGN. In terms of market strategy, PlayStation seems to be winning, with PS4 the dominant 8th generation console. Sony is focusing more on hardware, while Microsoft’s strategy on software ecosystem – with the integration of PC and Xbox platforms with Gamepass – is highlighted by the surprise announcement of Microsoft’s acquisition of Bethesda/ZeniMax for $7.5 billion. Nintendo’s Switch remains very popular. Both Microsoft and Sony have stated their continued support for 8th generation platforms, and backward compatibility will be a well-received feature. Game prices will increase to $70 from the current $60 and potentially higher in international markets. This may create a drag in a tighter market as gamers feel economic pressure. The US market is maturing and quality is a big issue. Many gamers are tired of the incomplete “Game as a Service” model to release an unfinished product – proven by several recent high visibility flops. China still strong but clouds on the horizon. Despite heavy restrictions, the China Market has been growing strongly. Still, trouble like the ongoing conflict between Epic Games and Apple around Fortnite (China’s Tencent owns 40% of Epic) and issues similar to those around TikTok have shadowed the market. BGR reports: “The Committee on Foreign Investment in the US (CFIUS) has sent letters to Epic, Riot, and Blizzard, asking them about security protocols involving the personal data of American customers”. This may be a sign that after TikTok, Chinese gaming interests may be the next target (see: Trade War Effect). Still, the internal Chinese market seems strong. According to a report released at the 2020 China Digital Entertainment Congress in Shanghai, cited by China.org.cn, China’s gaming industry revenues rose 22% year-over-year so far, to 139.5 billion yuan ($20.5 billion). Cloud gaming and esports up were by 79% and 54% respectively, propelled by limited hardware access and cultural phenomenon. Virtual Reality (VR) starts to come into its own. That the Pandemic is accelerating VR is interesting. For the industry, training in VR increased, particularly in Telehealth. With Remote Work seemingly becoming the new normal, this area may continue to grow. VTubing (Streaming with a Virtual Avatar) is also becoming popular so VR may be making inroads, particularly amongst Gen Z and Millennials. VR Schools are not yet a thing, but soon may be more common. The global market of VR in gaming is expected to reach $11 billion in 2020 and is expected to grow at a compound annual growth rate of about 30% to 2027, according to Market Insights Reports. Still, VR remains limited, and a break-out hit for VR remains elusive. Valve’s Half-Life: Alyx was well-received, but was handicapped by high equipment costs for those that did not have VR available. Hardware costs remain prohibitive and until costs are driven down, or true next-gen “full-dive VR” (immersive VR) arrives, I suspect VR will grow slowly but steadily absent a larger motivation such as VR schools. Looking ahead, the 4th quarter is always the biggest for gaming, between the holidays and the winter cold. This year, with continued restrictions and disruption likely, the social aspect of games keeps people busy and connected. But with fears about the recession, will people invest in games and new hardware? Hard to say what’s in store in this environment. But for now, the trend seems clear – on the principle that if it has to do with staying at home, it’s booming – we can expect strong console sales and software throughout the rest of the year at least. By Adam H. Williams, for WOLF STREET. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
“Some things actually work really well virtually”; but “the vast majority of us can’t wait until we can be back in the office.” By Wolf Richter for WOLF STREET. Apple CEO Tim Cook, during an interview at The Atlantic Festival, took on work from home, after having long been quiet about it, even as other companies have either jumped on the bandwagon with permanent work-from-home visions, such as Twitter and Facebook, or refused to jump on the bandwagon, such as Netflix’s CEO who called it a “pure negative,” or JP Morgan’s CEO who warned about the negative consequences of working from home. With Apple having just built one of the most stunning and expensive office buildings – designed for informal collaboration, and not for working from home – Cook’s verdict was mixed: On one side: “I don’t believe that we’ll return to the way we were, because we found that there are some things that actually work really well virtually.” On the other side: “The vast majority of us can’t wait until we can be back in the office.” Innovation has continued to take place, even as “85 to 90% of the company” was working remotely. “I’m incredibly impressed with our teams and their resiliency,” Cook said. “You can see from the announcements we’ve made this week with the Series 6 Watch, with the SE Watch, with the iPads, and with a new service called Fitness Plus. You can see we’ve continued on the innovation trail.” But… “It’s not like being together physically.” For creativity and serendipity, “you depend on people kind of running into each other over the course of a day, Cook said. “We have designed our entire office such that there are common areas where people congregate and talk about different things. And you can’t schedule those times.” “And so, I think the vast majority of us can’t wait until we can be back in the office again. Hopefully that occurs sometime next year, who knows exactly what the date may be,” he said. Other CEOs have lined up on different sides of the issue. Netflix CEO Reed Hastings told the Wall Street Journal earlier in September, when asked if he saw any benefits from people working remotely: “No. I don’t see any positives. Not being able to get together in person, particularly internationally, is a pure negative. I’ve been super impressed at people’s sacrifices.” And he said, “Debating ideas is harder now.” “If I had to guess, the five-day workweek will become four days in the office while one day is virtual from home. I’d bet that’s where a lot of companies end up,” he said. And when? “It’s probably six months after a vaccine. Once we can get a majority of people vaccinated, then it’s probably back in the office,” he said. JPMorgan Chase CEO Jamie Dimon said last week that it was time to get people back to the office. “Going back to work is a good thing,” he said. But added, “There will be permanent changes from this.” Dimon told analysts Keefe, Bruyette & Woods in a private meeting that working from home seems to have impacted younger employees, with Monday and Friday being particularly unproductive, and overall productivity and “creative combustion” has taken a hit. A JPMorgan spokesman then said that the productivity of employees was affected “in general, not just younger employees,” but added that younger workers “could be disadvantaged by missed learning opportunities.” Numerous social media and tech companies, including Facebook, Twitter, Okta, and Box, have made announcements about working from home becoming a permanent feature or option for employees. Facebook expects as many as half of its employees might be working remotely in five to 10 years. But Google, which extended its WFH policy at least until next July, has remained ambivalent about permanent aspects of it. All these companies have a huge footprint in the office sector, owning and leasing humongous amounts of office space that they figured they’d eventually populate. And what seems to be emerging is a hybrid model, depending on company, and depending on what particular employees do, to where part of the time is spent in an office – this could be four days a week, or it could be two days a month – and the rest of the time can be working from home, with many functions being completely manageable by working remotely. I do have to say, in my own experience, it’s kind of cute when you talk to a big-company or government employee, and there are kids making noises in the background. We’re just not used to it. But it works, and each time, the job got done. Each time this happens, I ask what they think about working from home, and I usually get a mixed message composed of these elements, with varying weights: “It’s great in many ways, it saves a lot of time, but I miss the interactions at the office, and some things are harder to do.” So it’s logical that Tim Cook would see opportunity in working from home – “we found that there are some things that actually work really well virtually” – and that for aspects where creativity and problem solving are involved, working in an office would be better, and more enjoyable. But as he pointed out, creativity and problem-solving too were successfully handled by largely working from home over the past six months. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. 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This whole Nikola phenomenon was only possible in a market gone willfully blind and nuts. By Wolf Richter for WOLF STREET. Shares of the electric truck maker Nikola that hasn’t made a single truck, not even a working prototype, started trading on June 4, 2020, through a reverse merger with special-purpose acquisition company (SPAC) VectorIQ Holdings – the boom in SPACs being another phenomenon that shows how nuts this market has gotten. By June 9, Nikola’s market capitalization had vaulted to $29 billion as day-trader fans were going nuts over it, trying to get rich quick on this supernatural phenomenon. Then the collapse began, the collapse in every aspect, including the collapse of hype. This morning, the company announced in an astounding SEC filing that CEO and founder Tevor Milton, who is immersed in fraud allegations, was out, and the way it was done, namely effective yesterday, September 20, suggests that this was an orchestrated firing over the weekend, dressed up as “voluntary.” Some excerpts from the SEC filing: The Executive hereby voluntarily hands over and otherwise relinquishes, and the Company accepts his relinquishment of, his position as Executive Chairman of the Company and all positions as an employee and officer of the Company and its subsidiaries (the “Company Group”), and his position as a Director on the Board and a director of any of the Company’s subsidiaries, including all committees thereof effective as of the Effective Date and without the need for any other action. There are some claw-back provisions in the filing: To help preserve capital and assist the Company in retaining world-class talent to succeed the Executive, the Executive hereby relinquishes each of the following: (i) 100% of the 4,859,000 performance-based stock units (the “PSUs”) granted to the Executive on August 21, 2020, (ii) any right or claim to enter into a two-year consulting agreement with an annual fee of $10,000,000 and (iii) any other right and entitlement that the Executive may have or claim pursuant to the Employment Arrangement, except as set forth in this Agreement. Milton was forced to announce his departure in the social media: Following the Effective Date, the Executive will promptly revise the Executive’s employment status on social media, including LinkedIn and other social media sites so that the Executive is no longer identified as holding any position with the Company or serving on the Board. Milton has to get approval before posting anything on the social media about the company: Prior to using any social media site, blog or other online platform to make any statements regarding the Company Group or any of their respective employees or directors (a “Statement”), the Executive agrees to consult with the Executive’s counsel and the Company’s Chief Legal Officer as may be reasonably necessary to determine that the Statement complies with the Executive’s obligations to the Company. And this is what Milton did this morning, when he tweeted – presumably with approval of said Chief Legal Officer: “I will be cheering from the sidelines with you. Your greatest fan.” Nikola’s shares [NKLA] are currently down 22%, at $26.59, with plenty of true believers still thinking that this is a buy. Shares are down 65% from their closing high of $79.73, and down 70% from their intraday high of $93.99: On September 10, Nikola got hammered by detailed allegations of short-seller Hindenburg Research that the company was “an intricate fraud built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton’s career.” In explaining its short position on the stock, Hindenburg Research summarized: “We have never seen this level of deception at a public company, especially of this size.” Then Monday last week, Bloomberg, citing sources, reported that the SEC was examining Nikola “to assess the merits” of the fraud allegations of Hindenburg Research. Milton had responded to the allegations with some tweets, that made things only worse. The company, still on Monday, came out with a rebuttal, that didn’t help matters either. The deal with GM, announced on September 8 – though the media and Wall Street analysts oohed and aahed over it and caused the shares of both companies to soar briefly – raised red flags about the Nikola’s so-called industry-leading core technology upon which all the hype had been built, namely its battery and fuel cell technology that were supposed to power its trucks. In the deal with GM, however, it was revealed that GM’s own Hydrotec fuel cell technology and Ultium battery systems would power Nikola’s trucks, not Nikola’s technology, which raised further doubts about the validity of Nikola’s technology breakthrough claims. Not only would GM provide the core technology for those trucks, Nikola also disclosed that GM would “engineer, validate, homologate and build” the trucks. So that leaves just the name that GM was apparently interested in and the hype surrounding Nikola. And true to form, following the announcement of the partnership, GM’s shares jumped 10%. This morning, GM’s shares are down 7%, and below where they’d been before the announcements. And it’s uncertain what remains of the value of Nikola’s tainted name. What is certain is that this whole entire Nikola phenomenon was only possible in a market gone willfully blind and nuts. Selling classic cars during the Pandemic is hard – and even harder at the high end. Affordable Classics rise, American Muscle Cars fall, Ferraris flat, after big drops earlier this year. Beautiful machines all of them. Read… Asset Class of Vintage Cars During the Pandemic: Sales at High End on Ice, After Steep Price Drops Earlier in the Year Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
It just looks so tempting. By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube or download it at Apple Podcasts and others. We are in the miraculous process of borrowing and printing ourselves to prosperity or whatever. Short-term interest rates on essentially risk-free money, such as US Treasury bills or insured bank deposits, are near zero. For folks in many countries in Europe, they’re below zero. Long term risk-free interest rates are below 1% in the US and below zero in some other countries. With the Federal Reserve leading the charge, central banks have jumped with both feet into the “let-inflation-run-hot” dogma. Inflation means the destruction of purchasing power of the currency, and thereby the destruction of purchasing power of labor paid in that currency. This is no biggie at the top, where folks get raises to the tunes of millions of dollars. But it’s a biggie for the lower 50% on the income scale. For them, the dogma of letting inflation run hot is going to be very tough. And as inflation saps the purchasing power of their incomes, they’ll cut back. And for investors, the thin income streams from low-risk investments are not nearly enough to compensate for the loss of purchasing power of that investment due to inflation. So, to dodge these issues, let’s put or keep our hard-earned nest egg in the stock market? The US stock market is ridiculously overvalued, though it has recently been through a little bit of a selloff, particularly among the biggest names in tech, or so-called tech, that are down between 8% and 13%, and in Tesla’s case by about 25%, from their peaks just a few days ago. They’re very fragile – after the enormous run-up they’ve had. Many of those stocks, if they dropped 50%, would still be enormously overvalued. If Tesla dropped 90% from its all-time peak, it would still be overvalued. The idea that stocks can only go up is nonsense. The US stock market has been the target of global buyers that have pushed US stocks higher because people around the globe believed that it can only go up, after their own stock markets have never gotten anywhere near their highs of many years or even decades ago. In fact, the US stock market has been the exception among major stock markets. Let’s look what other stock markets have done, right now, even after the blistering run-up in share prices since March. These are the biggest global stock markets, and every single one of them is down by a big margin from the peak many years ago. So let’s see… The Japanese Nikkei is still down 40% from 1989. That was 31 years ago. The Shanghai Composite index is down 45% from 2007. That was 13 years ago. Hong Kong’s Hang Seng Index is down 10% from the peak in 2007 The German DAX is a “total return” index that includes dividends. So it cannot be compared to the other indices here, or to the S&P 500. The German index that is not a total return index and therefore can be compared to the S&P 500 is the DAXK. Despite its red-hot surge in recent months, it’s still down 8% from the peak in the year 2000. That was twenty years ago. The early months of the year 2000 in Europe was the peak of the combined euro bubble and tech bubble. You see that year cropping up a lot here. The London stock exchange index FTSE is down 13% from 1999. 21 years ago. The Italian stock index, the FTSE MIB, is down about 60% from the year 2000. 20 years ago. The French stock index, the CAC40, is down 24% from its peak in the year 2000. 20 years ago. The Spanish stock index IBEX 35 is down 58% from its peak in 2007, which was the peak of the Spanish housing bubble that collapsed with devastating results. 12 years ago. So yes, the hopes that stock markets always go up has proven to be a very bad deal for believers in those markets. Buy-and-hold has been costly for these investors – unless they got the market timing right, buying low and selling high, but that’s trading not buy-and-hold. And the other traders that didn’t get the timing right got run over by an endless freight train. Those markets dove after a huge ridiculous bubble, and they never recovered. The US markets are now in the same kind of huge ridiculous bubble. And as we want to put money into the stock market, or keep our nest egg in the stock market, we need to keep in mind what happened in the other big stock markets around the world after huge ridiculous bubbles. And yes, in all those countries, with the exception of China, central banks have repressed interest rates to zero or even below zero. And in all those countries, including in China, central banks have engaged in money-printing policies, such as asset purchases or similar strategies. As you can see, whatever those policies did, we know one thing they didn’t do: take stocks back to their old highs. So maybe we don’t want to lose 20% or 50% or 60% of our nest egg. So we think we might put it in secure instruments, such as insured bank deposits or Treasury bills or high-grade corporate bonds or similar. So we might be earning 0.5% or 0.8% at the bank if we’re lucky. Short-term Treasury bill yields are near 0% now. If we buy a 10-year Treasury note, we’ll only get 0.7% in interest for the next 10 years. So-called risk-free investments – they’re called risk free because you have essentially no risk of losing your principal – just don’t pay much in interest. This wouldn’t be a huge issue, if inflation were 0%. But that’s not the case. The Fed has promised to let inflation run hot. Inflation has been rising for the past few months, and the Fed has given us to understand that it won’t even think about thinking about doing anything about inflation when it begins to overshoot its target. The Fed’s target is another thing. The Fed’s inflation target is 2% as measured by the core PCE inflation indicator. This core PCE indicator nearly always runs lower than the core Consumer Price Index. So 2% core PCE might be 2.7% CPI inflation. And if the Fed lets it run hot and it gets to 4% based on core PCE, inflation as measured by CPI will be over 5%. Meanwhile, we’re sitting on our just-bought 10-year Treasury securities that will pay 0.7% for the next ten years. And short-term interest rates will still be near 0%. High-grade corporate bonds are not much better. So if that sounds like a rip-off, it’s because that’s precisely what it is – designed and executed by the Federal Reserve. So we say, OK, I’m not going for that rip-off. And the riskier assets beckon. We want to get the 4% dividend yield that a company offers on its stock. We buy the shares to earn that yield, and two months later, the company eliminates its dividend, and our yield is now zero, and the shares plunge. We got whacked twice. That’s the risk. If you invest in a stock index fund, your nest egg might drop 20% or 50%. Nearly all asset prices rose in lockstep over the past few years — stocks, bonds, housing, commercial real estate, and the like. There was no diversification possible because they all did the same thing. And now they threaten to remain in lockstep, but in the other direction. In this environment, diversification has proven to not exist. Even precious metals have surged recently has stocks and bonds and real estate surged. For a diversified portfolio, part of it must go down while another part goes up. If everything goes up together, we’re not diversified. We’re just fooling ourselves. Then there’s real estate as an investment. So let me say this first: if you’re ready to buy a home that you want to live in, and you have your reasons to buy it, and you understand that a home is an expense, and you can afford to buy that home, by all means buy it. Don’t put your life on hold, waiting for the right moment. But it’s important to understand that a home is an investment only during housing bubbles. And they cannot go on forever. The other times, a home is an expense. But if you’re comfortable with the mortgage payments, and you love your home, and you’ll intend to stay there over the long term, by all means, buy it. But if you’re looking at housing as an investment, because you don’t want to lose money fast in the stock market, and because you don’t want to lose money slowly to inflation with low-risk investments, well then, good luck, because you may need luck. Housing bubbles when they blow up are really rough because housing as an investment is highly leveraged. And housing bubbles have blown up plenty of times before. We can also try to put our money to work day-trading stocks and options. And that’s a lot of fun and excitement. A real adrenaline trip. But during the past stock market downturns, most day traders took huge hits, day after day, and it turned into the most frustrating nerve-wracking activity ever, and very expensive, until they finally threw in the towel and tried to get their old jobs back. Anyone can day-trade a relentless bull market. But when it turns on us, it gets really rough. And before we know it, much of our play-money is gone. So I’ve listed some of the choices and possible outcomes that investors have to struggle with. And there are no simple answers. This is the most treacherous investment environment I’ve ever seen. There is a good chance that the US stock market ten years from now will look like some of the stock markets I listed earlier, meaning way down from its peak in 2020. There is nothing easier, in this environment, than turning your hard-earned nest egg into scrambled eggs. You can listen and subscribe to THE WOLF STREET REPORT on YouTube or download it at Apple Podcasts and others. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Saving the Zombies in Europe. By Nick Corbishley, for WOLF STREET: Europe’s zombie firms are multiplying like never before. In Germany, one of the few European economies that has weathered the virus crisis reasonably well, an estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform. It’s a similar story in Switzerland. Zombie firms are over-leveraged, high-risk companies with a business model that is not remotely self-sustaining, since they need to constantly raise fresh money from new creditors to pay off existing creditors. According to the Bank for International Settlements’ definition, they are unable to cover debt servicing costs with their EBIT (earnings before interest and taxes) over an extended period. The number of zombie companies has been rising across Europe and the Anglosphere — due to of two main factors: Central banks’ easy money forever policies, which brought interest rates down to such low levels that even firms with a reasonable chance of default have been able to continue issuing debt at serviceable rates. Many large zombie firms have also been bailed out, in some cases more than once. Spanish green energy giant Abengoa has been bailed out three times in five years. The tendency of poorly capitalized banks to continually roll over or restructure bad loans. This is particularly prevalent in parts of the Eurozone where banks are especially weak, such as Italy. A Bank of America report from July posits that the UK accounts for a staggering one third of all zombie companies in Europe. They represent 20% of all companies in the U.K, up four percentage points since March, according to a new paper by the conservative think tank Onward. In the two hardest-hit sectors — accommodation and food services, and arts, entertainment and recreation — the proportion of zombie firms has soared by 9 and 11 percentage points respectively, to 23% and 26%. The number of zombie firms has shot up as companies have taken on huge volumes of fresh debt merely to weather the virus crisis while, in many cases, generating a lot less in revenues. Across the globe, non-investment grade companies issued $322 billion in the first eight months of this year — as much as in the whole of 2019, according to BIS data. At the same time, companies that were already zombies, instead of entering bankruptcy and having their debts restructured, have been bailed out by government and/or the central bank. For their part, smaller companies have also taken on more bank loans, largely or completely backed by government. Many firms, particularly in the sectors most affected by the crisis, have lower revenues and weaker cash flow. As a result, the borrowed cash gets used up quickly but the debt remains. If they weren’t zombies before the Pandemic, they’ll be zombies going forward. What is to be done with all these zombies? That’s the question many are now asking. The report by Onward proposes a cunning plan (in the Baldrick vein) — called New Start — that would convert any coronavirus debt that can’t be paid back into an income contingent loan collected as a share of trading profits. The debt would come due only when a company begins turning a profit. “The New Start scheme gives the option to intelligently delay repayments only for those firms who need it,” says the study’s author Angus Groom. “This can be rolled out as a scheme managed by HM Treasury and implemented and controlled by banks — all the while maximizing taxpayer value for loans that the Government has already underwritten.” The term “scheme” in British English in this context means “program,” but the USian meaning of “scheme” seems to be at least equally appropriate. And taxpayers will likely never see those funds again. This is one of a number of proposals doing the rounds in Europe aimed at finding a way of keeping most, if not all, of Europe’s zombies upright, for as long as possible. They include a straight “state debt for equity” swap, which would essentially involve governments converting the emergency loans taken out by struggling companies into equity. This idea is particularly popular among senior bankers, such as Unicredit CEO Jean Paul Mustier, presumably because the unpayable coronavirus debt companies owe the banks would also be turned into equity. “It is a win-win all around,” says City of London grandee Lord Leigh of Hurley: “Taking equity stakes in borrower-SMEs would provide those businesses with interest-free liquidity, leaving their growth potential unimpeded, whilst correspondingly giving banks the opportunity to recoup more of the money they have committed in the medium to long term.” Former UK Chancellor George Osborne has proposed another solution: just forgive all small business coronavirus debt. As with most of the proposals, the plan is couched in terms of exclusively saving small companies. If past is prologue, it’s the larger ones — the ones that owe the banks millions or billions — they’re most interested in saving. “None of these options are ‘uncontroversial’ and each involves varying degrees of moral hazard, taxpayer loss and engineering complexity,” says Groom. “However our solemn conclusion is that some form of action is unavoidable.” Up to now, many — though not all — of the short-term rescue interventions by governments or central banks can be justified in some way or another, particularly if they support the unemployed and unlock credit that had frozen up even for healthy companies. But it’s quite another thing when the short-term rescue efforts become a long-term reality that helps to engender more and more new zombies as well as make preexisting zombies even bigger. There are plenty of reasons why filling the economy with ever larger numbers of zombie firms is not a good idea. For a start, zombie firms are less productive and crowd out investment in more productive firms. Researchers at the BIS found that each one percentage point increase in the prevalence of zombie firms means 0.25 percentage points slower employment growth and a 17% decline in the capital investment rate. Allowing zombie firms to proliferate in order to protect banks from the consequences of their bad lending practices and investors from the consequences of their bad investment choices doesn’t just reward — and by extension, incentivize — bad actions and decisions; it stores up bigger problems for the future. By Nick Corbishley, for WOLF STREET. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Still a lot of fawning coverage, but big dissenters are now given prominent spots, and loaded questions are used to politely hammer Powell into telling obvious nonsense. By Wolf Richter for WOLF STREET. This is an interesting turn of events, in a world of Fed-fawning mainstream media. In one version, the push-back takes the form of loaded questions about asset bubbles and wealth inequality caused by the Fed’s asset purchases. Fed Chair Jerome Powell then answers, following what looks like a script because these loaded questions are now being thrown at him regularly. He admits that the Fed’s policies have increased asset prices, then says the Fed as a matter of policy doesn’t comment on asset prices, and hence cannot comment on asset bubbles, but then assiduously denies that this increased wealth of the asset holders, which he admits the Fed has engineered, widened the wealth inequality to the majority of Americans who hold no or nearly no assets, and who got shafted by the Fed. It’s like getting pushed on live TV into saying that, yes, indeed, two plus two equals three! This happened many times, most notably during the July 29 FOMC press conference when a Bloomberg reporter pushed Powell on that (transcript of my podcast on the Fed’s role in wealth inequality); and during the interview with NPR which aired on September 4, when he was pushed on both, asset bubbles and wealth inequality. In another version, the push-back in the mainstream media takes more accusatory forms expressed with exasperation and dotted with exclamation marks. In early August, notable push-backers were former president of the New York Fed William Dudley and Bloomberg News which carried and promoted his editorial. Dudley said that the Fed purchased these huge amounts of Treasury securities and mortgage-backed securities in March to bail out hedge funds, mortgage REITs, and others through the backdoor as the Treasury market went haywire. Hedge funds, he wrote, “were caught in an untenable trade of being long cash Treasuries and short Treasury futures,” and those highly leveraged huge trades began to blow up (transcript of my podcast). And this, Dudley wrote in the editorial, “brings us back to moral-hazard problem: investors win during good times (they can assume more risk and earn higher returns) while the Fed and the U.S. Treasury (ultimately taxpayers) assume part of the downside risks when there is trouble in financial markets. This is likely to encourage even greater risk-taking down the road, making it more likely that investors and markets will need to be rescued in the future,” he said, adding, “This doesn’t seem to be a good road to stay on.” And this morning it was CNBC, which interviewed hedge-fund founder-manager Stanley Druckenmiller on Squawk Box, which has a large audience, and the video spread across the internet, and most financial publications covered it, multiplying the reach of the message. And by airing the concerns of a famous investor, like Druckenmiller, on the show, CNBC spread the word far and wide. Druckenmmiller didn’t get into wealth inequality, but he got into asset bubbles and the “massive, massive raging mania in financial assets,” as he said, that the Fed has caused, the “de facto MMT,” and how this was “dangerous.” Here is my transcript of portions of his take: “I think the merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got their independence. And it’s obviously creating a massive, massive raging mania in financial assets, and as you just pointed out, Joe, it has not spilled over to Main Street.” “I would just say that I hear a lot of people on the air lauding Jay Powell, saying he saved the world. And I do think that he did a great job in March. But I think the follow up has been excessive.” “And I just want all you guys cheering him on to remember the Maestro in 2005, and how that worked out. Look, everybody loves a party,” he said, “but inevitably, after a big party, there’s a hangover, and right now we are in an absolutely raging mania.” He then goes on to explain just how crazy markets have gotten. “And what the Fed has done, in my opinion, if you listen to the Jackson Hole speech on the framework, it’s quite amazing. It sounded like an apology because inflation has been 1.6% instead of 2% the last 10 years. Well, their mandate is price stability, where I think 1.6% is. They hit a home run. But they actually sound like they’ve been too tight the last 10 years.” “And look what they’re risking in terms of financial stability to hit that 2% mark. My own sort of central case is that for the first time in a long time, I am actually worried about inflation.” “De facto MMT, which is what we are doing right now, because we actually have the Chairman of the Federal Reserve – with a three-and-half-trillion-dollar deficit – out lobbying Congress to do more spending, and guaranteeing to those of us on Wall Street that he’ll underwrite it.” “I think it’s dangerous. I think we could easily see 5% to 10% inflation in the next four or five years. Ironically, I think he has also raised the risk of deflation…. Every [deflation event] was proceeded by an asset bubble, and he has created this massive asset bubble.” “So ironically, he has raised the two tails: The risk of inflation is much higher, I’d say, than it was 12 or 24 months ago; and the risk of deflation, I’m talking like minus 3 or 4%, because if things don’t work out, and we get a bust here, that is a…” He didn’t complete the sentence, and maybe that was a good thing. “I think the odds here of us hitting the sweet spot – which I would say is around the 2% area, which is where we’ve been – have actually gone way down with the Fed activity.” Whether it is due to these forms of high-profile push-back, or whether it’s because the Fed actually has come to see on its own what it is fabricating with its policies, the Fed has effectively backed off already with its asset purchases. Its total assets peaked in June and have declined since then. And yesterday it disclosed that it had stopped buying corporate bond ETFs entirely back in July, and that it has almost wound down its corporate bond purchases. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.