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While most traders over the past month have been obsessing over developments in Washington, the real action - most of it under the radar - has played out in China, where as discussed over the past few weeks, domestic liquidity has tightened notably, culminating with an unexpected bailout by the PBOC of various smaller banks who defaulted on their interbank loans as interest rates, particularly on Certificates of Deposit (CD) - which have become a preferred funding conduit for many Chinese banks - but not only, spiked. Ironically, these mini PBOC bailouts took place only after the PBOC itself decided to tighten conditions sufficiently to choke off much of the shadow debt funding China's traditional banks.

As a result, the interbank CD rate rallied strongly, leaving a narrower or negative spread for some smaller banks, whose legacy carry trades (see below for details) suddenly became unprofitable. Also, as reported last Tuesday, several small banks failed to meet overnight repo obligations. This liquidity tightness has been mainly due to escalating financial deleveraging, as the PBOC has lifted market rates and rolled out stricter macroprudential policy rules.

But all those events in isolation seem as merely noise against what otherwise appears to be a relatively benign, even boring, backdrop: after all, neither China's stock, nor bond markets, has seen even remote volatility in recent months, and certainly nothing compared to what was experienced one year ago, when the Chinese turmoil nearly led to a bear market across developed markets. Then again, maybe the markets are simply once again behind the curve due to all the inherent complexity of China's unprecedented, financialized and extremely complex pre-Minsky moment ponzi scheme.

Last last week, Deutsche Bank analysts led by Hans Fan released what is the definitive research report summarizing all the latest troubling trends facing China, which judging by capital markets, nobody is paying any attention to. They should, because as Deutsche Bank puts it, if taken too far, they threaten an "uncontrollable liquidity event", i.e., the financial cataclysm that Kyle Bass and other perma-china-bears have been waiting for.

And, as usual, it all started with rising interest rates, which in turn is leading to increasing funding pressure, which if left unchecked, could lead to dire consequences for China's underfunded banking system.

Here is a fantastic explanation of everything that has happened in China in recent weeks, and more importantly, what may happen next, courtesy of Deutsche Bank. We urge readers to familiarize themselves with the content as we will refer back to this article in future posts.

* * *

Only in early stage of financial deleveraging

China’s monetary policy has been shifting gradually towards a tightening stance since 2H16. Targeting the liabilities side of the banking sector, the PBOC hiked rates of monetary tools, such as MLF, SLF and OMO (Figure 1), and withdrew liquidity on a net basis after the Chinese New Year (Figure 2). At the same time, it targeted the asset side of the banking sector when it rolled out stricter MPA rules by including off-BS WMP credit in broader credit assessment and imposing stricter-than-expected penalties on banks that fail to comply.

As a result, the key indicators in the money market, including repo and CD rates, all suggest stretched domestic liquidity. For example, the 7-day repo rate, which is the most representative liquidity indicator, has exceeded the interest rate corridor ceiling of 3.45% several times this year (Figure 3). Moreover, the interbank CD rate spiked to 4.6% on 20 Mar 2017, up c.180bps from last year’s low (Figure 4).

We summarize in the below diagram recent financial deleveraging efforts by regulators.

Why push forward financial deleveraging?

We believe the PBOC aims mainly to contain the fast-growing leverage in China’s financial sector. In our view, the country’s financial leverage basically relates to speculators borrowing excessive wholesale funding to grow assets and chase yield, rather than relying on vanilla deposits. To measure this, we believe one of the good indicators of financial leverage is the credit-to-deposit ratio, calculated as total banking credit as a percentage of total deposits. The higher the ratio, the more fragile the financial sector, and the more likely the banking system will run into difficulties to finance unexpected funding requirements. Traditionally the loan-to-deposit ratio was widely used to measure system liquidity risk, but has become increasingly irrelevant in China, as banks are growing their bond investments and shadow banking books to extend credit.

As shown in Figure 6, the credit-to-deposit ratio in China’s banking system has risen sharply by 27ppts since 2011 to reach 116% as of February 2017. We see the rising credit-to-deposit ratio basically is a function of increasing reliance on wholesale funding to support strong credit growth. As of end 2016, borrowing from banks and NBFIs accounted for 17% of total liabilities, against 8% 10 years ago (Figure 7).

Which banks are more leveraged? Joint-stock banks and city/rural banks

As we have long argued, the risks are not evenly distributed in China’s banking system; there are notable differences in the balance sheet structures of different types of banks. As shown in Figure 8, medium-sized banks, which mainly include joint-stock banks, recorded the highest credit-to-deposit ratios and hence are most reliant on wholesale funding. At the same time, small banks, which mainly include city/rural commercial banks, also delivered notable increases in credit-to-deposit ratios, despite a lower absolute level. The credit-to-deposit ratio for small banks has increased by 30ppts since 2010, vs. 14ppts for the big-four banks in the same period.

On the liabilities side, medium-sized and small banks mainly rely on wholesale funding, i.e. borrowing from banks and NBFIs. As of 1H16, wholesale funding made up 31% and 23% for medium-sized and small banks, respectively, against only 13% for big-four banks, as shown in Figure 9.

A closer look into interbank CDs – funding pressure ahead

Wholesale funding for smaller banks has been obtained mainly by issuing CDs in the interbank market. Interbank CDs have supported 20% of smaller banks’ assets expansion over the past 12 months. Since the introduction of interbank CDs in 2014, CD issuance recorded strong growth and the balance jumped 89% yoy to Rmb7.3tr in Feb 2017 (Figure 10), or 3.4% of total banking liabilities.

Joint-stock and city/rural banks account for 99% of issuance (Figure 12). In the coming months these banks have ambitious CD pipelines. More than 400 banks announced plans to issue CDs worth Rmb14.6tr in 2017. This represents 60% yoy growth from the issuance plan in 2016. Investor-wise, WMPs, various asset management plans and commercial banks themselves are the major buyers, which combined make up 79% of the total balance (Figure 13).

However, we view banks that are more reliant on CDs as more vulnerable to rising rates and tighter regulations.

Reflecting tighter liquidity, the interbank CD rate has rallied strongly, with the 6-month CD pricing at 4.6% on average. Some CDs issued by smaller rural commercial banks have been priced close to 5% recently. This would have pushed up the funding cost and notably for smaller banks. If banks invest in low-risk assets such as mortgages, discounted bills and treasury bonds, this would lead to a negative spread. Alternatively, banks can lengthen asset duration, increase the risk appetite, add leverage or slow down asset growth. Among these alternatives, we believe a slowdown in asset growth is the most likely.

Caixin previously reported CDs are likely to be reclassified as interbank liabilities, capped at 33% of total liabilities. This potential regulation could add funding pressure for banks with a heavy reliance on interbank liabilities. With Rmb4tr interbank CDs to mature during Mar- Jun 2017 (Figure 16) and interbank liabilities exposure approaching the limit (Figure 17), joint-stock and city/rural banks are subject to notable funding pressure.

We show the listed banks’ issuances in the chart below. INDB, SPDB and PAB are among the most exposed to interbank CDs.

* * *

What are the implications?

Are we close to a “tipping point”?

For now, probably not, especially in a year of leadership transition. In our view, the risk of an uncontrollable liquidity event is low, as the PBOC will do whatever it takes to inject liquidity if needed. In the domestic liquidity market, the PBOC exerts strong influence in both the volume and pricing of liquidity. With 90%+ of financial institutions directly or indirectly controlled by the government, PBOC will likely continue to give liquidity support. In 2H15, the central bank established an interest rate corridor to contain interbank rates within a narrow range and pledged to inject unlimited liquidity to support banks with funding needs.

However, continuing liquidity injections do not come without a cost. A bigger asset bubble, persistent capital outflow pressure and a lower yield curve over the longer term are side effects that China will have to bear. At the same time, the execution risk of PBOC itself is rising.

Implications on system credit growth

We expect system credit growth to moderate from 16.4% yoy in 2016 (16.1% in Feb’17) to approximately 14-15% yoy in 2017 (Figure 23). As a result, the credit impulse is likely to trend lower from the current high level (Figure 24). The slower credit growth is mainly attributable to several factors: 1) a tighter liquidity stance to push up the funding cost of smaller banks and to force them to slow down asset growth; 2) further curbs on shadow banking; 3) a higher  bond yield to defer bond issuance; and 4) slower mortgage loan growth.

Appendix A – Liquidity flows in China’s interbank market

New deposits supported 55% of asset growth in China’s banking system in 2016. The remaining 45% of new assets were mainly funded by borrowing from PBOC (19%) and borrowing from each other (19%, including bond issuance). While borrowing from NBFIs remained flat for the entire system, it was the main funding source for medium-sized and small banks. We summarize the liquidity flows in China’s interbank market in Appendix A.

Liquidity injection from PBOC. Over the past 12 months, to offset the liquidity drain from falling FX reserves, the PBOC has injected a huge amount of liquidity worth Rmb5.8tr into the banking system, which is equivalent to 400bps of RRR cuts (Figure 29). Of this injection, 30% and 24% have been made to support joint-stock banks and policy banks, respectively (Figure 30). For details, please see our report, PBOC liquidity facilities: Doing whatever it takes, 23 January 2017.

Borrowing from interbank market. Policy banks and big-four banks are net interbank lenders, while joint-stock and city/rural commercial banks are net borrowers. Joint-stock and city/rural banks not only borrow from policy/big banks, but also from each other. This could potentially lead to stronger contagion effects if some of them run into liquidity stress.

Lending/borrowing between banks and NBFIs. There has been a sharp rise in net claims to NBFIs from banks (Figure 33). We believe this is due to rising shadow banking transactions and also arbitrage activities with funds self-circulating within the financial sector. Clearly as shown in Figure 34, small banks are key lenders to NBFIs

Appendix B - What is driving the financial leverage?

From the accounting perspective, we believe the rising credit-to-deposit ratio is mainly due to bank credit circulating back into the banking system as non-deposit liabilities. In normal cases, when a bank makes a $100 corporate loan or purchases a $100 corporate bond, the bank books the credit to a corporate on the asset side while it also books a deposit on the liability side. We show a normal case in Figure 35. However, if a bank’s money circulates back into the banking system, just like in the two cases we illustrate in the diagram below, the $100 deposit is removed but interbank borrowing or borrowing from NBFIs would increase by $100. While there are likely to be many variants of bank credit circulation, we elaborate on two cases in detail.

Case #1: Bank credit circling via NBFIs

It is well known that NBFIs have been serving as SPVs to channel shadow banking credit from banks to corporates in past years. What is  insufficiently addressed though is that NBFIs also have been acting as channels for bank credit circling. Let us show a simple example below:

• First, Bank A invests in an asset management plan packaged by an NBFI. This is booked as a receivable investment on Bank A’s balance sheet.
• Second, the NBFI invests further in a CD issued by Bank B. Bank B books the CD under interbank borrowing. The money circulates back into the banking system and no deposit is generated.
• In some cases, if the yield of the CD does not cover the cost of issuing the asset management plan, the NBFI will leverage up in the bond market by pledging the CD through repo transactions. The leverage could be built up by two transactions: 1) entrusted bond investment (“Daichi” in Chinese); or 2) entrusted investment (“Weiwai” in Chinese), which we discuss in detail in our 2017 outlook report.
• In this case we use the investment in a bank’s CD as an example. In reality it applies to investment in interbank CDs, interbank negotiated deposits and financial bonds issued by banks, which are all circulating money back into the banking system.

The bank credit circling through NBFIs is growing rapidly. This is evidenced by strong growth in banks’ receivable investments, which reached Rmb21tr as of end-2016 to account for 10% of commercial banking assets, as shown in Figure 36. This represents 80% CAGR in balance since 2013. The majority of these investments was made by medium-sized and small banks. Note that not all receivable investments are credit circling, but we believe it should make up a notable portion. We summarize the structure of banks’ receivable investments in Figure 38.

The NBFI here could be any trust company, broker, fund subsidiary or insurance company. We believe brokers and fund subsidiaries should be the key players, as their bond trading leverage in the interbank bond market is much higher than other participants (Figure 37).

Case #2: Bank credit circling via corporates

Corporate loans may circle back into the banking system as well. This is because many corporates use borrowed but idle cash to buy bank WMPs. Below is a simple example:

• Firstly, Bank A makes a loan to a corporate.
• Secondly, the corporate uses the loan proceeds to buy a wealth management product issued by Bank A.
• Thirdly, Bank A invests the WMP fund in a financial bond issued by Bank B. This corporate deposit would circle back to the banking system as a non-core liability.
• To make this process economic, in many cases it would require leverage. The corporate borrowing cost may be at 4%, but the financial bond issued by Bank B may only yield 3.5%. To compensate the yield shortage, Bank A has to entrust the WMP fund to a third party and to leverage up by pledging the bonds through repo transactions. This process is called entrusted investment (“Weiwai” in Chinese, or entrusting to an external party).

This type of transaction is not an individual case. As shown in Figure 39, corporates purchased Rmb7.7tr WMPs in 1H16. This accounted for 7% of total corporate debt in China, or 29% of total WMP AUM in the system. SOEs, large private corporate and listed companies enjoy ample bank lending resources with low interest cost. However, the lack of attractive investment projects in their own business prompts them to invest in the financial market (i.e. bank WMPs).

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NOTIFY jpgagent_kill_job, 'job_id_here';

@JOB_TIMEOUT=30 s;
@EMAIL_ON=FAIL[;{JOB_STATUS}];
@EMAIL_TO=test@test.com;test2@example.com;
@EMAIL_SUBJECT=Important Subject;
@EMAIL_BODY=Job failure:<br>Job name - ~job_name~<br><br>You can even use HTML formatting.

@JOB_TIMEOUT If the job takes longer than specified to complete, the job will abort, and abort all 
steps that have not completed yet. The steps that did complete are not affected.

@EMAIL_ON Only send an email on this list of JOB_STATUS.

@EMAIL_TO Email address('s) to send the message to.

@EMAIL_SUBJECT The subject of the email to be sent. Can contain html formatting.
Tokens available: ~status~, ~job_name~.

@EMAIL_BODY The body of the email to be sent. Can contain html formatting.
Tokens available: ~status~, ~job_name~.

@JOB_STEP_TIMEOUT=5 s;
@RUN_IN_PARALLEL=true;
@DATABASE_HOST=192.168.1.105;
@DATABASE_NAME=data_warehouse;
@DATABASE_LOGIN=username;
@DATABASE_PASSWORD=securepass;
@DATABASE_AUTH_QUERY=SELECT user, pass FROM auth_table WHERE active;
@EMAIL_ON=FAIL;ABORTED;IGNORE;
@EMAIL_TO=test@test.com;test2@example.com;
@EMAIL_SUBJECT=Step: ~job_step_name~ ;
@EMAIL_BODY=Step status: ~status~ <br>Job name - ~job_name~

@RUN_IN_PARALLEL This annotation allows the step it's defined on to run in parallel with the 
previous step (regardless of the annotations on the previous step).  You can set up some somewhat 
intricate job flows with this.

@JOB_STEP_TIMEOUT If the step takes longer than specified to complete, the step will abort leaving
the rest of the job to finish normally.

@DATABASE_HOST If specified, use this database host name to connect instead of the connection info
specified for jpgAdmin.

@DATABASE_NAME If specified, use this database name to connect instead of the database selected 
in the job step.  This can be used when the host you are trying to run the job step on has
a database that is not the server that the PGAgent database is on (the UI only allows you to
pick from a predefined list).

@DATABASE_LOGIN If specified, use this database login to connect instead of the connection info
specified for jpgAdmin.

@DATABASE_PASSWORD If specified, use this database password to connect instead of the connection
info specified for jpgAdmin.

@DATABASE_AUTH_QUERY If specified, use this query to run the job step for each set of credentials returned.  
This will start a new transaction for each credential returned.  The query must return two columns, the 
first being user, the second being password.

@EMAIL_ON Only send an email on this list of JOB_STEP_STATUS.

@EMAIL_TO Email address('s) to send the message to.

@EMAIL_SUBJECT The subject of the email to be sent. Can contain html formatting.
Tokens available for use: ~status~, ~job_name~, ~job_step_name~.

@EMAIL_BODY The body of the email to be sent. Can contain html formatting.
Tokens available for use: ~status~, ~job_name~, ~job_step_name~.

  --help                 : Help (default: true)
  --port Integer         : Database host port. (default: 5432)
  --smtp-email String    : Email address used for smtp.
  --smtp-host String     : Server address used for smtp.
  --smtp-password String : Password used for smtp.
  --smtp-port String     : Server Port used for smtp.
  --smtp-ssl Boolean     : Is SSL enabled for the smtp connection. (default: true)
  --smtp-user String     : User used for smtp.
  --version              : Version (default: false)
  -d String              : jpgAgent database.
  -h String              : Database host address.
  -p String              : Database password.
  -r Integer             : Connection retry interval (ms). (default: 30000)
  -t Integer             : Job poll interval (ms). (default: 10000)
  -u String              : Database user.
  -w Integer             : Size of the thread pool to execute tasks.  Each job and job step can take up to a thread in the pool at once. (default: 40)

    -d=postgres
    -h=127.0.0.1
    -u=test
    -p=password

    java -server -jar /path/to/jar/jpgAgent.jar -d postgres -h 127.0.0.1 -u test -p password 

    java -server -jar /path/to/jar/jpgAgent.jar @/usr/jpgagent/args

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In several major economies it's crunch time for the future of cash. Goldman Sachs notes that this is largely policy-driven: tangible steps are being taken to wean economies off cash (e.g. India, Europe); but adds that, at the same time consumer expectations around convenience are rising and enabling technologies have proliferated in the shape of contactless cards, mobile wallets, cryptocurrencies and more.

So, they ask, does the decline in cash payments imply the demise of cash?

Not necessarily.

Technology has been an important catalyst for shrinking cash usage, but it is by no means a new phenomenon. As we wrote in 2012 (see Issue 42, Fortnightly Thoughts: Money, money, money in a mobile world, October 2012), the first technological step-change in the payments arena was the shift from cash to plastic money, i.e. credit and debit cards, which happened in the 1960s. There are many parallels to be drawn between that period and the ongoing shift to digital money: an initial period of an increasing number of providers was followed by a consolidation stage that established a few players (Visa and MasterCard primarily) as the industry standards, eventually accelerating the adoption of plastic money. However, the availability of technology alone has not ensured the demise of cash. As the following chart shows, there are several advanced economies in which it is still the dominant mode of payment in volume terms (surprisingly quite a few European countries are in the bottom left quadrant).

Japan is a striking example of this; lots of tech and lots of cash.

The US also stands out, and this could at least partly be attributed to the fact that regulators in the US have explicitly stated that the market should manage the shift to digital payments by itself.

On the other hand, Scandinavian countries are on the cusp of becoming some of the first cashless societies, as a result of industry-co-ordinated steps and government initiatives. Swish, a payment app developed jointly by the major Swedish banks, has been adopted by nearly half the Swedish population, and is now used to make over nine million payments a month. About 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits and many, especially in rural areas, no longer have ATMs. In conjunction with that, cash transactions were just c.2% of the value and 20% of the volume of all payments made last year (down from 40% five years ago).

Denmark’s move to a cashless society is a deliberate result of policy, with the government removing the obligation for some retailers to accept payment in cash.

Without this legislative push, we believe cash is very difficult to disrupt and substitute. After all, it is a free and convenient mode of transacting. So far, the selling point of the most broadly used alternatives to cash (cheques and cards) is greater convenience. But that hasn’t been sufficient to meaningfully reduce the market share of cash in countries outside Scandinavia and Canada.

But why do governments want less cash?

The three key stakeholders in this argument, governments, businesses and consumers, all have varied benefits from shifting away from cash.

For businesses, it should result in lower cash handling costs, streamlined operational costs (e.g. accounting, taxes) and increasingly, a better understanding of their customers and their operations, via data analytics. Our US financial services analysts argue that customer data, when combined with loyalty programmes, could deliver a sales lift of 2%-5% for merchants. Leveraging detailed data on individuals, to precisely target advertising and offers and thereby driving incremental sales and repeat purchases, is increasingly key to defend against competition. Starbucks and Ulta Salon are good examples of two companies that have leveraged loyalty programs to support top-line growth recently.

The flipside for consumers is loss of anonymity and privacy. But as Aakash Moondhra of PayU argues, these concerns are often compensated for by greater convenience and, in EMs, greater access to formal financial services channels. For example, in many African economies, it is the lack of widespread banking infrastructure and high remittance costs that have driven the rapid adoption of mobile transactions. The often cited example, M-Pesa, accounts for more than 95% of the mobile-money market, with the value of transactions flowing through its system equivalent to c.40% of Kenya’s GDP. Put simply, in several of its markets in Africa, consumption growth is being driven not just by growing disposable income, but more importantly, also by freeing up frustrated demand via mobile money. One of the underrated advantages of cash is that it ensures anonymity; but it is difficult to say how much loss of privacy has hindered the growth in digital payments. The emergence of cryptocurrencies may be evidence that there is demand for a digital medium that ensures privacy, but their adoption remains very limited.

The advantages of moving away from cash are perhaps the most pronounced for governments. Electronic transactions allow for greater transparency, which in turn leads to greater formalisation of the economy and higher tax revenues. This lies at the centre of India’s demonetisation efforts, when the government pulled approximately 85% of currency in circulation in order to reduce unaccounted and counterfeit money in circulation. Demonetisation in India was also carried out parallel to broader measures being taken to encourage households and businesses to electronic and digital transactions, in order to reduce friction costs and improve ease of doing business.

The following chart shows the share of cash transactions vs. the Corruption Perception Index, which makes a similar case for moving away from cash.

...

For policy makers, another advantage of limiting the use or circulation of cash is becoming increasingly relevant; less cash in the economy increases the effectiveness of monetary policy. Currency and monetary policy are intrinsically linked, as without the ability to set negative rates on currency, rates are limited by the zero lower bound (Ball 2014). Cash provides the opportunity to lock in a 0% nominal rate of return, and as such interest rates cannot become more negative than the cost of storing cash, as there is the incentive to switch to paper currency to earn a greater return.

However, the costs of storing cash are potentially very large, requiring rates to turn significantly negative before the zero lower bound takes hold. As the following chart shows, despite the rate of deposits held at the ECB turning negative in mid June 2014, usage of the deposit facility has actually increased.

...

Stack up the advantages for the different stakeholders and it is evident that governments benefit most from lowering cash usage. This is why we believe that they will be the biggest catalyst to the shift away from cash. Regulatory intervention will be needed more if the current low nominal interest environment persists. This is because cash in circulation as a percentage of GDP is negatively correlated with inflation. High inflation erodes the value of currency and increases the opportunity cost of holding cash.

...

To conclude, we would argue that as a ‘medium of exchange’, cash has peaked. Why is this? We see three key reasons: (1) increasing ubiquity of technology; (2) the willingness of consumers to use less cash and most importantly (3) policy action. We believe recent government action (for example in India and Europe) demonstrates the rising importance of supportive policy in accelerating the shift away from cash. The benefits for policy makers are clear – electronic transactions allow for greater transparency and better control over monetary policy transmission mechanisms. But the paradox of banknotes means that the decline in cash payments does not imply the death of cash.

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Authored by Johnny Hopkins via The Aquirer's Multiple blog,

One of our favorite investors at The Acquirer’s Multiple – Stock Screener is Howard Marks.

Howard Marks is Chairman and Co-Founder of Oaktree Capital Management, the world’s biggest distressed-debt investor. He’s known in the investment community for his “Oaktree memos” to clients which detail investment strategies and insight into the economy, and in 2011 he published the book The Most Important Thing: Uncommon Sense for the Thoughtful Investor.

One of our favorite memos is his May 2005 piece where Marks discusses why investors develop amnesia when it comes to share-market history. It’s a must read for all investors.

Here’s an excerpt from that memo:

Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory.

 

. . . There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

 

John Kenneth Galbraith - A Short History of Financial Euphoria, Viking, 1990

The above observation has appeared in lots of my memos, second only to Warren Buffett’s reminder that our need for prudence in a given situation is inversely proportional to the amount of prudence being displayed by other investors. Neither of these favorite quotations says much for the average investor: Buffett urges us to adopt behavior that is the opposite of John Q. Investor’s, and Galbraith points out how prone John Q. is to repeating the mistakes of the past.

It may sound cynical, but most outstanding investors – especially members of the “us school” (see “Us and Them,” May 7, 2004) – understand that the path to superior results lies in taking advantage of other people’s mistakes. (The alternative is to think everyone can succeed simultaneously.) It’s when most investors take a trend to excess, or the price of an asset to an extreme, that the few people smart and resolute enough to abstain from herd behavior can make truly exceptional profits.

I think both Buffett’s and Galbraith’s dim views of the average investor are well founded. Although there exist a few rules and reminders that can make it easier to avoid the costliest investing mistakes, most investors rarely heed them.

Investors truly do make the same mistakes over and over. It may be different people doing it each time, and usually they do it in new fields and in connection with new assets, but it is the same behavior. As Mark Twain said, “History doesn’t repeat itself, but it rhymes.”

Rarely is the same error repeated in back-to-back years. Usually enough time passes for the repetitive pattern to go unnoticed and for the lessons to be forgotten. Often it’s a new generation repeating the errors of their forefathers. But the patterns are there, if you observe with the benefit of objectivity and a long-term view of history.

Why do the mistakes repeat? That’s a good question, but not much of a mystery. First, few investors have been around long enough to recognize reoccurrence of the errors of twenty or forty years ago. And second, the greed that argues for ignoring “the old rules” easily trumps caution; hope truly does spring eternal. That’s especially true when the good times are rolling. The tendency to ignore the rules invariably reaches its apex in periods when following them has cost people money. It is thus, as Galbraith points out, that those who harp on the lessons of the past are dismissed as old fogies. What are some of the recurring mistakes investors make?

 

It’s Different This Time – Trends in investing are carried to their greatest (and most punishing) extremes by the belief that something has changed – that rules that applied in the past have been rendered obsolete by new circumstances. (E.g., the traditional standards for reasonable valuations weren’t applicable to shares in tech companies whose products were likely to change the world.)

 

It Can’t Miss – The fact is, anything can miss. There’s no asset so good or trend so strong that you can’t lose money betting on it. No investment technique is guaranteed to deliver high returns or keep risk low. Smoothly functioning markets don’t permit the combination of high return and low risk to persist – good results bring in buyers who raise prices, lowering future returns and elevating risk. It’ll never be otherwise.

 

The Explanation Couldn’t Be Simpler – By this I mean to poke some fun at investors’ tendency to fall for stories that seem true on the surface but ignore the workings of markets. The stage was set for some of the greatest debacles by platitudes that were easy to swallow – but too simplistic and, in the end, just plain wrong. These include “For a company with good enough growth prospects, there’s no such thing as too high a price” (1969 and 1999) and “Emerging markets are a sure thing because of the terrific potential for growth in per capita consumption” (1994).

 

This Tree Will Grow to the Sky – The fact is, no trend will go on unabated forever. Most trends are limited by cycles, which are caused by people’s reaction to developments. Buyers, sellers and competitors respond to trends, altering the current landscape and the future.

 

The Positives of Today Will Still Be Positives Tomorrow – From time to time, some combination of optimism and greed convinces people that the favorable elements in the current environment – responsible for today’s high asset prices – will stay that way. But (a) things usually turn less rosy, and (b) even before they do, investors take prices to levels that are too high even for today’s positives.

 

Past Returns Are a Good Guide to Future Returns – The greatest bubbles stem from the belief that high returns in the past foretell high returns in the future. The most successful investors – the longest-term survivors – believe in just the opposite: regression to the mean. The things that have appreciated the most will slow down (or decline), and those that lagged will catch up or move ahead. Instead of being encouraged by months or years of price appreciation, investors should be forewarned.

 

It’ll Always Beat the Cost of Borrowing – Speculative behavior usually features the belief that assets will always appreciate faster than the rate of interest paid on money borrowed to buy them with. We saw a lot of this in the inflationary 1970s. But for the most part, statements including the words “always” and “never” are usually a sign of trouble ahead.

 

The Supply/Demand Picture Doesn’t Matter – The relationship between supply and demand determines the price of everything. The higher the demand relative to the supply, the higher the price for a given asset or strategy. And, the higher the price, the lower the prospective return (all else being equal). Why can’t investors remember these two absolute rules?

 

Higher Risk Means Higher Return – There are times, especially when the prospective returns on low-risk investments appear inadequate, when people reach for more return by going out further on the risk curve. They forget that riskier investments don’t necessarily bring higher returns, just higher projected returns. Forgetting the difference can be fatal.

 

Anything’s Better Than Cash – Because it entails the least risk, the prospective return on cash invariably is lower than all other investments. But that doesn’t mean it’s the least desirable. There are times when the valuations on other investments are so high that they entail too much risk.

 

It May Be Too Good to Be True, But I Don’t Want to Miss Out – There’ve been lots of times in my career when people knew something was unlikely to keep working but jumped on the bandwagon anyway. Usually they did so because they thought there was a little bit more left in the trend, or because not being aboard – and watching from the sidelines while others got rich – had become too painful.

 

If It Stops Working, I’ll Get Out – When people invest despite obvious danger signs, they usually do so under the belief that they’ll be able to get out when the market turns down. They rarely ask how it is that they’ll know to sell before others do, or to whom they’ll sell if everyone else figures it out simultaneously.

As I sit here in 2005, the picture seems “as plain as the nose on your face.” Investors have found new darlings – real estate, private equity, hedge funds and crude oil – to replace the favorites of ancient history (that is 1999) – technology-media-telecom, biotech and venture capital funds. As I read articles about the new favorites, I find myself saying one thing over and over: “There they go again.”

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The noose is tightening Obamafags. While you occupy yourselves by injecting heroin into your scrawny arms at one of your Antifa meetups, AG Sessions is preparing the groundwork to end the legacy of King Obama -- sending him barreling towards a scandal far greater than anything Nixon ever did -- crushing and poleaxing any hopes of rejuvenating the broken status of the democratic party.

Here's Tony Shaffer, former senior intelligence officer at the CIA, saying that the wiretapping scandal against Trump is 'orders of magnitude' worse than Watergate -- alluding to Bob Woodward's comments made earlier this week describing the offenses as being 'felony level' crimes that might wreak havoc throughout the former Obama administration.

"This incidental, it's accidental on purpose.'

The unmasking of Trump and his cohorts means they specifically targeted him and his team. The political appointees at the CIA, aka black hats, aren't laughing anymore.

Meanwhile, continue to bask in your Obamacare victory. I'm certain the people will appreciate it going forward -- as it cascades and cracks asunder amidst financial failure in the near term.

Content originally generated at iBankCoin.com

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Authored by Mac Slavo via SHTFplan.com,

Ultimately, no one can stop what is coming.

The haves and have nots of the next, gritty era of aftermath will be those who have the means to survive when the system has failed, and those who do not.

For the wealthy, and prepper minded elite, hidden fortified layers purchased for insurance will preserve most of the luxuries of life above ground, and in the cities, even as society crumbles and burns to the ground.

Others, without the means to purchase these luxuries, may have still set aside the necessary materials to live and thrive after a great collapse, where anything and everything from the electric grid, to the fuel supply to the food supply will fail.

There will be tens of millions of starving, angry and bewildered people who face endangerment and extinction, and there will be a few who succeed not only in planning ahead, but in laying low enough to avoid being noticed and picked off by looters, marauders and misguided authorities.

Finding the perfect location for your redoubt, and making your preps to get away if need be, amount to something of an art and a science. Nothing is guaranteed, everything has its advantages and disadvantaged, but just by doing anything at all, you’ll be way ahead of the masses.

If the plans of the elite are anything to consider, they have decked out their bunkers with mementos and reminders of normal life, and not only enough to supplies not to feel the pain of a crumbling infrastructure, but to be distracted by the illusion of normalcy even in times of ultimate crisis.

But ultimately, all successful redoubts invest in the means to provide for long-term survival and maximum self-sufficiency.

As Health Nut News reports:

Most “shelters” include enough food for a year or more, and many have hydroponic gardens to supplement. The developers also work hard to create “well-rounded communities with a range of skills necessary for long-term survival, from doctors to teachers.” (During the 2016 elections, Vivos received a flurry of interest in its shelters from both liberals and conservatives and completely sold out of spaces in its community shelters.)

 

Many of the interiors are left as a blank slate so that each owner can create what they are looking for in terms of comfort and luxury- and it all comes at a cost. Base models can start at $25,000 and go up to almost $5 million dollars. Their footprints also vary from quaint to 5000 square feet.

It isn’t just happening in the United States, but all over the world. And while the fastest growing part of this sector clearly caters to the rich and well adjusted, many shelters are also being constructed to house millions of masses during emergencies – at least in places like China, Switzerland and Russia.

[…] The Oppidum, billed as “the largest billionaire bunker in the world.” This top-secret facility, once a joint project between the former Soviet Union and Czechoslovakia (now the Czech Republic and Slovakia), was built over 10 years beginning in 1984. The premiere apocalypse dwelling is a place that billionaires can live out the horrors of the apocalypse- be it zombie or other- in luxury with every amenity you could ever hope for.

 

[…] Retail firm Survival Condos offers refuge at a re-purposed missile silo in Kansas, United States. The luxury apartments here are stacked underground and protected by blast doors designed to withstand explosions. Retail firm Survival Condos offers refuge at a re-purposed missile silo in Kansas, United States. The luxury apartments here are stacked underground and protected by blast doors designed to withstand explosions.”

 

[…] Vivos Europa One, in Rothenstein, is one of Germany’s largest repurposing projects. The 76-acre former Soviet bunker is capable of withstanding a nuclear blast, a direct plane crash or biological attack. It is being transformed into 34 five-star apartments, starting at 2,500 sq ft, which aim to protect the super-rich from any forthcoming apocalypse.

Self-sustaining communities or networks of individuals can also plan around their budgets to make these concepts a reality. Many companies will customize and scale down projects to costs as low as $25,000… while basic home fortification and DIY applications can be done for much less money.

In the end, those who prepared when nothing happened are only out what they invested on the principle of having a viable back-up insurance plan.

But those who didn’t prepare for the worst when it did happen could very quickly lose everything they have, and many will perish during the next major crisis – which could be triggered at this point by almost anything.

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In the latest setback for the world's most valuable private company which in recent weeks has been reeling from multiple crises, on Friday a self-driving Uber vehicle was involved in a crash in Tempe Arizona, which left the Volvo SUV stranded on its side.  According to ABC15, a car failed to yield to the autonomous SUV and hit it, authorities said. The self-driving vehicle then rolled onto its side.

A photo posted on Twitter showed one of Uber’s Volvo self-driving SUVs pictured on its side next to another car with dents and smashed windows. As Bloomberg notes, the photo suggests a relatively high-impact crash. That would be a contrast to the incidents involving self-driving cars tested by Waymo.

BREAKING: Self-driving Uber vehicle on it’s side after a collision in Tempe, AZ.

Photos by @fresconews user Mark Beach http://pic.twitter.com/5NCF2KG0rW

— Fresco News (@fresconews) March 25, 2017

According to the ABC reports, no injuries were reported however, police said there was a passenger in the self-driving car. The person was behind the wheel but it's unclear whether they were controlling the SUV or not. Uber’s self-driving cars began picking up customers in Arizona last month. Uber told ABC15 that they're aware of the incident and will provide an update when they have more details.

As Bloomberg adds, Uber, and Chief Executive Officer Travis Kalanick, have been under scrutiny following a series of scandals. The ride-hailing company has been accused of operating a sexist workplace. This month, the New York Times reported that Uber used a tool called Greyball to help drivers evade government regulators and enforcement officials. And Kalanick said he needed "leadership help" after Bloomberg published a video showing him arguing with an Uber driver.

In the latest hit piece overnight, the Information reported that a woman who dated Uber CEO Travis Kalanick for three years, Gabi Holzwarth, said she was with Mr. Kalanick when he and a team of five Uber employees visited an escort-karaoke bar in Seoul in mid-2014.

At the bar, women sat in a circle, identified by numbered tags. Four male Uber managers picked women out of the group, calling out their numbers, and sat with them, she says. About an hour later, she and Mr. Kalanick left.

Uber’s self-driving car program has also been mired in controversy. Waymo, Alphabet Inc.’s autonomous driving business, sued an Uber unit called Otto earlier this year for allegedly stealing designs for an important component of driverless cars known as lidar. Uber called the suit "baseless."  In more than two million miles of testing on public roads, Waymo’s vehicles were mostly minor incidents, often when other cars drove into the back of their vehicles in busy areas.

Last night's Uber crash will likely rekindle the controversy over the safety of self-driven vehicles, and could potentially delay full implementation for a material period of time. Additionally while it is unclear which driver caused the crash, the accident will raise questions if it is found that the software was controlling the car at the time and why it was unable to avoid the collision. According to Axios, Uber has been working to avoid regulation for its self-driving cars and in Arizona especially it had a heavy hand in shaping the state's legislation on self-driving car testing.