The Hidroítuango Dam in Colombia: Things Are Getting Worse

By Otto Rock

Authorities call for emergency evacuation

Maybe ten days ago, this humble corner of cyberspace brought you news of a potential disaster in Colombia. The Hidroítuango hydroelectric dam near Medellín in Antioquia is a new civil works project, was supposed to go online late last year but because of serious miscalculations in its design along with abnormally heavy rains is now under serious threat of collapse. If that happens, the houses and around 130,000 people living downstream could quite literally be wiped out (the boffins talk about a 26m high wall of water rushing down the river valley…not funny in the slightest).

Well people, news from Hidroítuango this morning tells us this story hasn’t gone away. The latest is that the the danger level has been risen to Red Alert (highest level), the reservoir is full to overflowing, mountain peak overlooking the dam is now unstable and engineers expect landslides in the next few hours into the dam and reservoir area, roads 13km below the dam have been closed and local authorities are now calling for the evacuation of everybody downstream. Yup, 130,000 people.

Apart from that, they’re having a great day.

PS: I’ve been asked so here’s the answer. The dam was built by a Brazil/Colombia consortium known as CCC, a JV between Brazil’s private capitals company Camargo Correa (which has been closely linked in several of the Odebrecht bribery scandals), Colombia’s Conisa Ramón HSA and Colombia’s Constructore Concreto SA. They won the tender for the contract back in 2012.

UPDATE: An evacuation order has just been signed by the mayor of the local area, affecting 30 regions.

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The Return of the PIGS: 10Y Italy, Greece Yields Spike Over 40 BPS

By Anthony B. Sanders

2Y Italian Yield Spikes 153 BPS

A general rule of thumb is that whenever sovereign yields spike by over 10 basis points, it is a big deal.

So Italy and Greece 10-year sovereign yields spiking over 40 basis points this morning is a big deal! The third PIG (Portugal) is up 11.3 BPS.

sov10

For the 2-year sovereign debt, Italy is up over 153 BPS.

Continue reading The Return of the PIGS: 10Y Italy, Greece Yields Spike Over 40 BPS

Overwriting Madness

By Kevin Muir

Closed-end funds are an interesting sentiment indicator. Although there are individual factors that determine whether a specific closed-end fund trades at a premium or discount, there can be no arguing with the cold hard reality of what investors are willing to pay above (or below) NAV to gain exposure to a particular asset.

Therefore it was with great interest that I dug into the following tweet by my pal Adam Collins at Movement Capital (a must follow on twitter):

CEF stands for Closed-End Fund and the product in question is the Nuveen Nasdaq 100 Dynamic Overwrite Fund – symbol QQQX.

Continue reading Overwriting Madness

ECB’s Turn for a Disappointing Account

By Jeffrey Snider

Earlier this week the FOMC published the minutes of its April policy meeting, disappointing “dovish” in them which more properly suggests skepticism about the state of economic affairs. Yesterday, it was the ECB’s turn. Releasing the “Account” of also its April gathering, Europe’s central bank began it by noting Germany’s federal securities. Specifically, it mentions yields falling back on them.

With regard to recent bond market developments, a gradual decline in the ten-year German government bond yield, which started in mid-February, had pushed yields back to levels not far from those observed for most of 2017.

So much for growing evidence of Europe’s boom hysteria. In fact, most of the Account is written to convey growing uncertainties about it all. Germany’s bund market is therefore a very good place to start.

We can do so, however, in a manner in which authorities never do. They quite intentionally frame any discussion about bonds, bunds, or whatever in as short of a perspective as possible. As the quote above demonstrates, that way they can make it seem like progress if yields rise more in 2018 than in 2017 (until even that stops) without having to explain why those same yields remain still nowhere close to 2014, 2011, or normal.

Not being so narrow of focus, instead we can better appreciate just how little German yields have changed in comparison to where they were or would be if there was anything like an economic boom afoot. Sustained economic weakness is therefore consistent not surprising or unexpected.

Continue reading ECB’s Turn for a Disappointing Account

But “We Owe it to Ourselves” Report, 28 May 2018

By Keith Weiner

[biiwii comment: Gold and silver supply/demand report 2nd segment]

Have you ever heard someone say this? It falls into the category of, it’s so perverse, so wrong, and so wrong-headed that there has got to be a constituency out there somewhere, to assert this!

First, let’s head off at the pass the objection that the majority of US government debt is held by foreigners. As of March this year, the US Treasury estimates that $6.3 trillion worth of Treasury bills and bonds are owned by foreign holders. This is not even close to the majority of it.

It’s also not the point. The nature of debt is what it is, whether the creditor is the People’s Bank of China or Uncle Ernie who puts 10% of his salary into US Savings Bonds.

The constituency of wrongness is headed by Paul Krugman. He is willing to go beyond the debate of domestic vs. foreign creditors, and defend global collectivism as such. He wrote an article with a headline that is sheer irony. In Nobody Understands Debt he says, “…the world economy as a whole owes money to itself.”

Producing and Consuming

We don’t have much to say to Professor Krugman, other than collectivism is the resort of scoundrels. It is a cynical ploy to distract attention from individual action. When you drill down, you see that some people are productive and others are not. Some people produce more than they consume, saving the difference. Others consume more than they produce.

As an aside, the collectivism is not typically so naked. More often, we are just offered an aggregate statistic without explanation of why it is measured in aggregate. For example, GDP is taken as a given. The idea of “economy as a whole” is implicit in the concept of GDP. But suppose a fat man is eating two steak dinners in a restaurant. A starving man looks through the window longingly. Would you say it’s two men and two steaks, therefore one steak per capita, and therefore all is well?

Continue reading But “We Owe it to Ourselves” Report, 28 May 2018

Chart Of The Week: US PE10 Valuation Ex-GFC

By Callum Thomas

This week it’s the PE10 and the impact of the financial crisis.  Specifically what we’re looking at is how the PE10 or CAPE (Cyclically Adjusted Price to Earnings) ratio would look like if you excluded the impact of the crash in earnings during the financial crisis.  The bottom line is that the PE10 would be about 4 points lower.  That would make for a PE10 reading that would look more around average instead of expensive.

The chart comes from a recent report on the PE10, and the eventual roll-out of this distortion (as well as some work on expected future returns).  On that note, it’s also worth considering the roll-out of this effect, which by my numbers will be almost fully complete by late next year.

The report I mentioned also shows that if you substitute in consensus earnings over the next few years into the calculations as well, you could end up with a significantly cheaper looking PE10 valuation.  Of course that makes a number of simplifying assumptions (e.g. price stays the same), but it goes to show some of the key forces set to impact this valuation ratio in the coming months and years.

Finally, it’s worth mentioning in passing, that if you run the same analysis globally for Emerging Markets and DM Ex-US valuations you do see a similar effect, but it’s not nearly as dramatic as the chart above.

So it’s an interesting effect overall and it serves as a reminder that it’s worth understanding the mechanics and what goes in to a particular valuation metric, and the value of exploring the underlying data.  In my view it’s also a nod to the value of using multiple indicators to build up a more holistic picture.

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European End Game

By Kevin Muir

We all know the famous Getty line about “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Today the numbers Getty used seem a little quaint, but we understand the sentiment.

I doubt that when Getty uttered this line more than half a century ago he ever imagined it would apply to countries, yet here we are.

Too many pundits believe Germany holds all the aces in the European power dynamic. After all, they are the creditor nation with all the wealth. They should be able to dictate the terms of the European Union and instill their fiscal and monetary dominance on the rest of the EU nations.

Yet we have long passed the point where Germany can walk away from this union. Let’s forget the political implications of an EU collapse (which are considerable and provide a great degree of inertia for the EU remaining together), and instead focus on the fiscal implications.

Continue reading European End Game

Memorialize That

By James Howard Kunstler

War for the USA these days is a weird, inconclusive enterprise. Our objectives are poorly discerned, hardly even articulated anymore, just a pattern of going through the motions as destructively as possible with no end in sight. How many Americans can state what our mission in Afghanistan is after seventeen years of blundering around its bare mountains and valleys? What exactly has been the point of our exercises in Syria? To get rid of Bashar al-Assad, the wonks might say. Really? And replace him with what? With the ragtag ISIS maniacs we’ve been shoveling arms and money to?

What goes on in the Baghdad Green Zone these days with Operation Inherent Resolve still underway? How come four US Special Forces soldiers were killed in Niger in 2017? Do you know what they were doing there? How many Americans can even say where Niger is on a map? How much better is life in Somalia these days with American soldiers on-the-scene? What was the net effect of our effort to liberate Libya in 2011 (Operation Freedom Falcon)? What factions are US military advisors training in Ukraine? And what for? Defense Secretary James Mattis says, “We’re working with them on reform of their military.” Hmmm…. So they can be more like us?

Continue reading Memorialize That

Why It’s Different This Time

By Steve Saville

One of the financial world’s most dangerous expressions is “this time is different”, because the expression is often used during investment bubbles as part of a rationalisation for extremely high market valuations. Such rationalisations involve citing a special set of present-day conditions that supposedly transforms a very high valuation by historical standards into a reasonable one. However, sometimes it actually is different in the sense that all long-term trends eventually end. Sometimes, what initially looks like another in a long line of price moves that run counter to an old secular trend turns out to be the start of a new secular trend in the opposite direction. We continue to believe that the current upward move in interest rates is different, in that it is part of a new secular advance as opposed to a reaction within an on-going secular decline. Here are two of the reasons:

The first and lesser important of the reasons is the price action, one aspect of which is the performance of the US 10-year T-Note yield. With reference to the following chart, note that:

a) The 2016 low for the 10-year yield was almost the same as the 2012 low, creating what appears to be a long-term double bottom or base.

b) The 10-year yield has broken above the top of a well-defined 30-year channel.

c) By moving decisively above 3.0% last week the 10-year yield did something it had not done since the start of its secular decline in the early-1980s: make a higher-high on a long-term basis.

Continue reading Why It’s Different This Time

How Seasonality The Week Of Memorial Day Has Changed Over The Years

By Rob Hanna

Happy Memorial Day! The week of Memorial Day has shown some interesting seasonal tendencies over the years. But it has faltered greatly the last few. The chart below is one I have shown in the past, and have now updated. It examines SPX performance from the Friday before Memorial Day to the Friday after it.

2018-05-28

There was no substantial edge apparent throughout the 70s, but starting in 1983 through 2009 there was a bullish tendency. The last 8 years this week has mostly struggled.  That said, Thursday continues to look seasonally strong, and I will update that study later this week.

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What to Expect at a Critical Market Point: End of a Wave 2 Rally

By Elliott Wave International

“Most investors are convinced that the bull market never went away.”

The great game of Wall Street — where huge amounts of money are at stake every trading day.

Many speculators play this game by watching for events outside of the stock market that they believe will “trigger” the next big move in prices.

However, the real driver of all those green up arrows and red down arrows is nothing more or less than investor psychology. This famous Kal’s cartoon sums it up perfectly:

sellcartoonwithcopyright

First investor: “I’ve got a stock here that could really excel.”

Second investor: “Really excel?”

Fourth investor: “Sell?” — and the crowd goes, “Sell, sell, sell!”

First investor again: “This is madness! I can’t take it any more, good bye!”

Second investor: “Good bye?”

Third investor: “Buy?” — and the crowd goes: “Buy, buy buy!”

As random and unpredictable as this cartoon makes it look, EWI’s research reveals that investor psychology actually goes through similar phases during every market cycle. So, if you know the current psychological phase of the market, you can make a high-confidence prediction about the next phase.

Continue reading What to Expect at a Critical Market Point: End of a Wave 2 Rally

Fishy Business

By James Howard Kunstler

Picking up a trope conceived months back, the melodrama of US governance is looking more and more like Herman Melville’s Moby Dick, with the FBI as the doomed ship Pequod, with R. Mueller as Captain Ahab and D.J. Trump as the white whale. In the classic book, of course, the wounded whale finally sends the ship to the bottom, crew and all (but one), and swims away to the freedom of the deep blue sea.

Forgive the barrage of movie metaphor, but there’s quite a bit of the 1944 classic Gaslight in here too — and sure, I’m not the first to notice. In that film, the wicked Charles Boyer manipulates his wife, played by Ingrid Bergman, into thinking she’s lost her marbles, in order to cover up his own crimes. That’s how I feel when I turn to The New York Times every morning — for instance, today’s edition, with the front-page story Trump Proxies Drop by Briefings on Use of F.B.I. Informant (which headline was actually changed on the landing page to Trump’s Lawyer and Chief of Staff Appear at Briefings on F.B.I.’s Russia Informant).

Continue reading Fishy Business