After the event, I had an opportunity to spend a couple hours having Breakfast with Dave.  We view the world in very similar lenses and I think Dave is one of the few economists on the street who “gets it” – in this case, “it” is the extended impact of deleveraging on the global economy.  Very much enjoyed breakfast and getting to know the Gluskin Team, as well as hearing about Dave’s experience at the Munk Debates.  Thanks for breakfast guys.

P.S.  William – the raffle was a terrific success!!

• There is a gene for value investing.  For Klarman, it’s natural, but for a lot of people it is against human nature – while everybody appreciates a bargain, everyone also overreacts and gets scared when the market is going down.
• Investing is the intersection of economics and psychology.  The economics is not that hard.  Controling the emotion is harder and it comes with experience.
• Value investors have to be patient and disciplined.
• Leverage can magnify returns but it also magnifies losses. If you are leveraged and greedy you blow up.
• You need to balance arrogance and humility.  When you buy anything, it is an arrogant act.  You need the humility to know that you might be wrong.
• Buffett evolved through three states: from buying cigar butts and getting something for free; to buying great businesses at cheap prices; to buying great businesses at fair prices and holding on forever.  Klarman is still in phase one.  Buffett has a better eye for great businesses.
• Klarman does not have a Bloomberg on his desk, but he sits on a trading desk thinking big thoughts – “we are not traders.”
• Baupost is making medium-to-long term investments – three to five years or longer.
• The only reason to care about market gyrations is to buy something cheaper – benefit from volatility.
• Baupost’ s rhythm is opposite most of the market’s rythym.
• When the market goes straight up, the little guy finds it irresistable and get’s sucked in. The return for all mutual funds in the 90s was 600 bps higher than the average investor’s return because they get in at the wrong time and out at the wrong time.
• Buying is easier.  Selling is hard.  There is no timing element.  You can never know how good a bargain someone will offer you tomorrow.  If you see a dollar laying around for sixty cents, you have to buy it, and buy a little more if it falls further.  The risk is that the dollar isn’t really worth a dollar.
• A lot of stocks are cheap for a reason.  Many stocks are perennial undervalued because they are mismanaged.  Good management adds value.  Bad managements think of themselves first.
• Klarman had no interest in the firm when he started Baupost. He looks for people that will put clients first.  If you do this, you will do great.
• When people give money to instituional managers, there is a giant separation between the interest of the money and the interest of the stewards of the money.
• The Earnings of financials hit 40% of the broad market several years ago. It seems ridiculous that we are an economy that only makes money from making money. The financial industry as a whole does not add any value.  Finance, in terms of complex secruties, etc. is disturbing.
• The sovereign crisis is a large serious problem.  But the real problem is the banks that own government debt.  If one bank goes, they will go like dominoes.  The problem is the system is so interconnected.
• Subordinated debt holders should take a haircut when businesses fail.  If Citi had done that, they would not have needed a bailout.  These things can be accomplished differently.
• In this particular case, the problem in Europe is so large, they will likely need assistance.  Governments have created the problem by encouraging moral hazard.  We need to demand that our politicians man up and do the right thing.

http://www.valueinvestingworld.com/2011/11/charlie-rose-interviews-seth-klarman.html

“Because increased collateral values inspire more credit, reflexive dynamics can often be identified by the concomitant growth of credit and collateral values. If credit is rising rapidly along with asset prices, there is a high probability that reflexive dynamics are under way.”

With this in mind, I revisited the chart below from Steve Keen, illustrating Australian home prices and the change in credit growth in the economy.

Looks like the growth rate in Australian Housing credit is plumbing the lowest levels ever.  I’m not a quant guy, but I’m pretty sure that “ever” is a long time.

Given that Australia’s Private Sector Debt has rapidly exceeded that of even  the most prolific American spenders, I wonder what happens when the private sector begins deleveraging from the extremes shown below.

I also think it is interesting that most folks have the impression that Australia has very little debt.  If we learned anything from the recent crisis, it’s that private sector liabilities can quickly become the public sector’s responsibility.  So it’s important to look at the total debt in the system.  In this light, Aussies are actually in line with the US due to heaps of household and financial sector debt obligations.

 A good friend of mine, and one of the most successful investors I know, has been lecturing me on the importance of catalysts when sizing positions.  I am beginning to come around to the idea, particularly as we have been writing about the Australian Property Bubble for over a year now, and I am looking forward to moving on to something new.  Some may say we’ve been early, but I’d remind them that we’ve been warning of European defaults for over two years!  Call it what you want but our thesis continues to develop and we continue to see increasing evidence of falling prices and deteriorating economic conditions down under.  What follows is a collage of evidence I’ve accumulated over the past several weeks (maybe longer), that when put together, paints a very clear story in our opinion.  So Kyle, GET FIRED UP!!  Here is your evidence:

Properties are languishing on the market in a number of suburbs.  This article in Perth Now explains that, “Almost 311,286 properties are for sale across Australia, the highest in more than five years and almost 30 per cent more than the same time last year. In Melbourne, there are 50 per cent more properties for sale, 30 per cent in Sydney, 14 per cent in Brisbane and almost 40 per cent in Adelaide. Meanwhile, auction clearance rates have remained below 50 per cent for 20 consecutive weeks in Australia’s largest housing markets.”

CourierMail explains, that “Sellers who manage to snare a buyer in Brisbane’s soft property market are seeing their deals fall over as a new trend emerges of valuations coming in below contract prices, making it difficult to obtain finance. Owner’s estimates of their property’s actual value are often wildly optimistic.”

Prosper Australia has ignited a small but growing push calling for a “buyers’ strike” to protest against the high cost of housing.  “There are 1.3 million Australians with negatively geared rental properties. They are diverting all rents and some personal income to meeting interest payment in the hope of capital gains. When only capital losses are expected, investors will flood the market and overwhelm demand. Buyers will step back, making it virtually impossible to sell at any price.”

It seems that the Australian Bankers Association is waking up to reality, taking the unprecedented step of launching a website – www.doingittough.info – for financially stressed homeowners to negotiate hardship packages, according to the Daily Telegraph.  “The Big Four banks are on high alert for a rocky 2012 with a sharp rise in defaults.”  This is the first time the banks had set up a site to deal with customer hardship on mortgages and other financial products like credit cards and personal loans.  Recent reports have pointed to a higher ratio of “non-performing loans” and people falling behind on mortgage repayments in recent months.

One in ten Australian households are in housing stress, according to Australian’s for Affordable Housing.  A startling 460,000 households spend more than half of their income on housing costs.  It’s no wonder Australian’s are shouting out for help.  The cost of housing is the single biggest cost of living issue in Australia today.  Spend a few minutes perusing this site to get a feel for their frustrations.  We have seen how this story ends.

In a recent report, Moody’s warned that there are “meaningful uncertainties” for Australian housing and mortgage delinquency rates are likely to increase over the next decade. We doubt it will take that long.  “Capital city house prices have more than quadrupled and household debt has tripled since 1990. Simple metrics indicate that the current price levels are not sustainable.”

According to Australian Real Estate and Property, “If a second global financial crisis (GFC) occurs credit markets will tighten up.  Australian banks already have up to 40% exposure to European debt and the big four Australian banks ratings were downgraded by Moody’s Investor service due to this wholesale funding exposure. Unfortunately in 2011 Australian borrower home loan arrears hit a 15 years high with Australian banks and borrowers in a binge-buying hangover.  The time period 2008 and 2009 combined make up 40 per cent of the mortgage loan books of the major Australian lenders. The Australian borrowers who purchased property during the height of the Australian Government economic stimulus in 2009 and hence the peak property prices, are now most at risk to falling property prices.” 

It’s no wonder that, “The Australian Prudential Regulation Authority has told banks to model what would happen if the European meltdown spread to Australia through a series of stress tests designed to ensure the strength of the local banking system,” according to The Australian Financial Review.  “The stress test has been prompted by an escalation of the European sovereign debt crisis that could lead to a global recession and a hard landing in China. It comes in the same week that the Reserve Bank of Australia’s deputy governor, Ric Battellino, warned that Australia’s indirect exposure to Europe through the effect on some of our important trading partners, could be significant.  The short notice and time frame allowed by APRA, particularly in light of negative comments from the RBA, indicates the regulator is preparing for a difficult 2012.”

The banks problems are likely to be compounded as most of the Australian economy is already in recession.  So it shouldn’t come as a surprise that, “The number of companies entering some form of insolvency administration in calendar year 2011 continues to set new records, per Dissolve.  A recent report stated that, “The months of March, April, June and now July 2011 have been the highest ever for each of those months. The calendar year to July 2011 is also the highest ever.”

“Thirty-six companies in the residential construction sector have entered voluntary administration in the past two weeks,” often the precursor to liquidation, according to The Age.  ”There has been a marked increase in the insolvency of builders and building-related businesses over the last few weeks and this is likely to increase after Christmas when contractors have to fund the long slow-down or shut-down period, with little cash flow coming in. With banks being reluctant to increase facilities for building companies, this will only exacerbate the situation.”  The author concludes with a very important point:

“A big part of the problem is the delay of payments to these businesses, which puts their cash flows under undue pressure. According to the country’s biggest receivables management and credit report company, Dun & Bradstreet, the trade payment terms for the construction sector are at the highest level since the fourth quarter of 2009, which was at the height of the global financial crisis. Over the past 12 months, payment terms in the construction sector deteriorated by nearly two days from 52.8 to 54.4 days, which is almost double the conventional standard of 30 days. In 2003 the average was 45 days.

“Payment trends are known to be an accurate leading indicator of an economic correction. Indeed, the last economic decline was preceded by a blowout in trade payments. The concern is that as the global credit market crunches, and credit availability starts to tighten again, the impact of late payments on cash flow will be devastating in a sector that is already hurting.

“Residential housing and construction are a key component of the economy and when things go south they have a huge knock-on effect. Things are likely to get worse before they get better.”

A year ago, some of my Australian friends claimed that housing prices would not fall because the economy was so strong and without a rise in unemployment, prices would maintain their elevated levels.  I disagreed with the comment then but it is still worth noting that Australia’s job market is weakening today as businesses look to cut costs to cope with a deteriorating economy.  Per News.com.au, “The economy outside mining has been quite weak so companies have had to start laying people off to get their costs under control . . . That suggest for 2012 there will be weaker consumer spending, greater downside risk for businesses and this is of course even before the full impact of the European debt crisis.”  Perhaps this explains why consumer sentiment collapsed in Australia by the most since the start of the financial crisis three years ago.  At least for most consumers.  Apparently, some of them, like this 25-year-old high school dropout from Western Australia making $200,000 a year running drills in underground mines, is the exception, according the WSJ.  We’d suggest it is more likely just another indication of the unsustainable credit boom and forthcoming bust in China, as our friend Vikram eloquently outlined in his book.  Don’t worry, we’ll have more on this shortly as well.

• Three big themes: deleveraging; monetary and fiscal policy out of ammunition; political will has deteriorated to address structural issues.
• We have reached our debt limits.  Europe has reached their debt limits.  Now the process is in reverse.
• You can break the world into two parts. The developed debtor world, which is deleveraging.  And the emerging creditor countries.
• The key is to spread it out as long as long as we can so it is not disorderly.
• If we just cut spending by 3% and raised taxes by 3% we would cut the deficit in half over ten years.  Instead we have a political division so there is no compromise, which is extremely dangerous during a deleveraging process.
• Resolving the public sector debt does not resolve the problem.  Overindebted individuals face the same problem.
• The social impact of extended unemployment is a cancer to society.  The unemployed must be made productive.
• Reality works in a certain way.  You have to understand reality.  Europe has a debt problem.  There are three options.  Transfer the money. Print the money. Or write-down the debt.
• We all should recognize that we can be wrong.  Success comes from knowing what you don’t know.
• The number one principle at Bridgewater is if something doesn’t make sense, you have the obligation to explore it.
• One of his favorite books is Einstein’s Mistakes.
• The great fallacy of all of mankind is people know more than they do.
• Every place has to have a culture.  Culture is values.
• Bridgewater is an unusual place with an unusual culture. The number one principle is don’t believe anything.  Think for yourself.
• An independent thinker has to have a different point of view than the next person.
• The cost of being wrong is a terrible thing.  So worry about being wrong.
• Everybody is looking at what to do, and each approached it with a bias, but no one has thought about or discussed how the economic machine works.
• There is not enough discussion on how to get people to be self-sustaining.
• The most important thing you can give anyone is opportunity.
• The number one problem today is our leaders are not having a quality dialogue.
• There are two worlds.  Debtor developed countries and emerging creditors.  Classically, the US and China.
• Those worlds can be divided into those that can and cannot print.
• Europe cannot print.  There is a limit to wealth transfers. They will likely print (ultimately) and take haircuts.
• China cannot control credit growth.  This is an emerging credit bubble.  This is a dangerous thing that the Chinese must gain control of.
• The US is in a deleveraging.  We don’t have the ability to ease via monetary policy.  It is not as effective.  On top of that, we have social tension.
• We should be able to grow at a rate comparable to income growth – 1.5% to 2% – but unemployment creates social tension analogous to that existing in Greece, Spain, etc.
• That is the best case scenario.  If we have a disruption, we can not recapitalize the banks.  It is not feasible.
• You have to have agreement to have a plan.  You can not have people at odds.
• Our job is to stay one step ahead.
• I suppose I’m concerned.  It is a test of us.  It is a test of our society.

http://www.charlierose.com/view/interview/11957

“Brinkmanship (or brinksmanship) is the practice of pushing dangerous events to the verge of disaster in order to achieve the most advantageous outcome. It occurs in international politics, foreign policy, labour relations, and (in contemporary settings) military strategy involving the threatened use of nuclear weapons. This manoeuvre of pushing a situation with the opponent to the brink succeeds by forcing the opponent to back down and make concessions. This might be achieved through diplomatic maneuvers by creating the impression that one is willing to use extreme methods rather than concede. During the Cold War, the threat of nuclear force was often used as such an escalating measure. Adolf Hitler also used brinkmanship conspicuously during his rise to power.

The dangers of brinkmanship as a political or diplomatic tool can be understood as a slippery slope: In order for brinkmanship to be effective, the threats used are continuously escalated. However, a  threat is not worth anything unless it is credible; at some point, the aggressive party may have to back up its claim to prove its commitment to action. The chance of things sliding out of control is often used in itself as a tool of brinkmanship, because it can provide credibility to an otherwise incredible threat.

The Cuban Missile Crisis presents an example in which opposing leaders, namely John F. Kennedy and Nikita Khrushchev, continually issued warnings, with increasing force, about impending nuclear exchanges, without necessarily validating their statements. Pioneering game theorist Thomas Schelling called this “the threat that leaves something to chance.” The British intellectual Bertrand Russell compared nuclear brinkmanship to the game of chicken. The principle between the two is the same, to create immense pressure in a situation until one person or party backs down, or both are annihilated.”

So what does this mean for investors?  In a nutshell, it is a step in the right direction.  But is it enough?

First, we would note that Chinese policy needs to be relaxed.  But odds are the initial move out of the gate will be tentative given the extent of the credit excesses lingering in the system, and as such, are unlikely to reverse slowing economic growth. Historically, policymakers response will be proportionate to the deterioration in the economy which means risk assets will likely be down substantially before policymakers respond in force. If and when, the party undertakes substantial fiscal and credit stimulus, we would turn more bullish on China-related assets.  We are not there yet.

It is important to remember that massive reflation and market intervention does not occur in healthy bull markets. Such policies can mark a bottom in price, but these “bottoms” are usually preceded by major crisis.  For example, the Fed began easing policy in January 2001 after the tech bubble burst but equities sold off through March 2003.  More recently, the Fed began liquidity injections and easing in August 2007 but market only hit bottom in March 2009.  The point is that an initial shift in policy is more likely confirmation of a bear market in risk assets and in this case, may indicate an economic acceleration to the downside before policymakers get ahead of the curve. 

Regarding the “coordinated action” announced today, investors might be reminded of similar central bank policies that saved us from Financial Armageddon a few years ago, and sparked a massive rally in risk assets which launched in March 2009.  Unfortunately, the first coordinated policy response was announced as early as 2007 so investors had a long ride ahead of them before the bottom!  For perspective, we compiled a timeline of central bank policy below using excerpts from a St Louis Fed report titled Lessons Learned?  Caution – this is somewhat exhausting!

• The crisis first appeared in interbank lending markets in early August 2007, when the London Interbank Offered Rate (LIBOR) and other funding rates spiked after the French bank BNP Paribas announced that it was halting redemptions for three of its investment funds.
• The Federal Reserve sought to calm markets by announcing on August 10 that “the Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets” and noting that, “as always, the discount window is available as a source of funding.”
• Subsequently, on August 17, the Board of Governors voted to reduce the primary credit rate by 50 basis points and to extend the maximum term of discount window loans to 30 days.
• Then, in September, the Federal Open Market Committee (FOMC) lowered its target for the federal funds rate in the first of many cuts that took the rate essentially to zero by December 2008.
• Financial strains eased somewhat in September and October 2007 but reappeared in November. On December 12 2007, the Federal Reserve announced the establishment of reciprocal currency agreements (“swap lines”) with the European Central Bank and Swiss National Bank to provide a source of dollar funding in European financial markets. Over the next 10 months, the Fed established swap lines with a total of 14 central banks.
• On December 12, the Fed also announced the creation of the Term Auction Facility (TAF) to lend funds directly to banks for a fixed term.
• Financial markets remained unusually strained in early 2008. In March, the Federal Reserve established the Term Securities Lending Facility (TSLF) to provide secured loans of Treasury securities to primary dealers for 28-day terms.
• Later in March, the Fed established the Primary Dealer Credit Facility (PDCF) to provide fully secured overnight loans to primary dealers.
• Shortly after the creation of the PDCF, the Federal Reserve Board authorized the Federal Reserve Bank of New York to lend $29 billion to a newly created limited liability corporation (Maiden Lane, LLC) to facilitate the acquisition of the distressed investment bank Bear Stearns by JPMorgan Chase. The PDCF—and especially the Maiden Lane loan—marked significant departures from the Fed’s usual practice of lending only to financially sound depository institutions against good collateral.
• In July 2008, the Federal Reserve Board once again authorized loans to non-bank financial firms when it granted the Federal Reserve Bank of New York authority to lend to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) if necessary to supplement attempts by the U.S. Department of the Treasury to stabilize those firms. The Fed was not called on to lend to either firm, however, and the Treasury Department placed both Fannie Mae and Freddie Mac under conservatorship in September 2008.
• The financial crisis intensified during the final four months of 2008. Lehman Brothers, a major investment bank, filed for bankruptcy on September 15 after the failure of efforts coordinated by the Fed and Treasury Department to find a buyer for the firm. 
• Within hours of the Lehman bankruptcy, the Fed was forced to confront the possible failure of American International Group (AIG). Hence, on September 16 the Fed again invoked Section 13(3) of the Federal Reserve Act and made an $85 billion loan to AIG, secured by the assets of AIG and its subsidiaries. 
• The Lehman bankruptcy produced immediate fallout. On September 16, the Reserve Primary Money Fund announced that the net asset value of its shares had fallen below $1 because of losses incurred on the fund’s holdings of Lehman commercial paper and medium-term notes. The Federal Reserve responded to the runs on money funds by establishing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to extend non-recourse loans to U.S. depository institutions and bank holding companies to finance purchases of asset-backed commercial paper from money market mutual funds.
• To help stabilize the financial system, on September 21, the Fed approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies and authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of both firms, as well as to Merrill Lynch. A few days later, the Fed increased its existing swap lines with the European Central Bank and several other central banks to supply additional dollar liquidity in international money markets.
• Financial markets remained in turmoil over the ensuing weeks. To help alleviate financial strains in the commercial paper market, the Fed established the Commercial Paper Funding Facility (CPFF) on October 7.
• The Fed’s next rescue operation came in November, when it participated with the Treasury Department and Federal Deposit Insurance Corporation in a financial assistance package for Citigroup. The Federal Reserve agreed, if necessary, to provide a non-recourse loan to support a federal government guarantee of some $300 billion of real estate loans and securities held by Citigroup.
• Two days later, on November 25, the Federal Reserve announced the creation of the Term Asset-Backed Securities Lending Facility (TALF). Under this facility, the Federal Reserve Bank of New York provides loans on a nonrecourse basis to holders of AAA-rated asset-backed securities and recently originated consumer and small business loans. The TALF was launched on March 3, 2009, and the types of eligible collateral for TALF loans were subsequently expanded on March 19 and May 19, 2009.

“Throughout the fall of 2008, the Federal Reserve Board approved the applications of several large financial firms to become bank holding companies; these firms included Goldman Sachs, Morgan Stanley, American Express, CIT, and GMAC. The Board cited “unusual and exigent circumstances affecting the financial markets” for expeditious action on several of these applications. 

“In addition to the Fed’s rescue operations and programs to stabilize specific financial markets, the FOMC reduced its target for the federal funds rate in a series of moves that lowered the target rate from 5.25 percent in August 2007 to a range of 0 to 0.25 percent in December 2008. On November 25, 2008, the FOMC announced its intention to purchase large amounts of U.S. Treasury securities and mortgage-backed securities issued by Fannie Mae, Freddie Mac, and the Government National Mortgage Association (Ginnie Mae). The FOMC increased the amount of its purchases in 2009. The stated purpose of the purchases of mortgage-backed securities was to reduce the cost and increase the availability of credit for the purchase of houses. The move to support a particular market through open market purchases is highly unusual for the Federal Reserve and unprecedented on this scale since before World War II.”

A friend sent me this updated look at the S&P yesterday, which provides some perspective on where we are in this cycle using “the last time around” as a guideline.  The chart aligns the bail out of Bear Stearns in March 2008 with the bail out of Dexia this year.  The conclusion appears obvious if you are able to step away from the day-to-day noise, rumors, plans, and announcements.  This will take some time to fully play out.  Until it does, we’d recommend reducing exposure to risk assets on policy-induced rallies.  We have not yet learned the most obvious lesson of this ongoing financial crisis.  You cannot solve a solvency problem with liquidity.

]]> http://www.viewfromtheblueridge.com/2011/11/30/is-it-enough/feed/ 0 http://www.viewfromtheblueridge.com/2011/11/30/is-it-enough/ http://feedproxy.google.com/~r/viewfromtheblueridge/JkgK/~3/8QwyeEHOAvc/ http://www.viewfromtheblueridge.com/2011/11/29/mountains-of-cash/#comments Tue, 29 Nov 2011 16:11:08 +0000 Christopher Pavese http://www.viewfromtheblueridge.com/?p=1615 In a recent post, The Buyback Paradox, we suggested that cash on corporate balance sheets was one of many Bullish Mirages.  We stated, “Companies do hold piles of cash that could potentially be used to buy back shares.  But why do they have this cash?  I would submit that there are a few reasons, none of which have bullish implications. One, low interest rates encourage managements to issue debt – in some cases a lot of debt. Note that these new claims on the business are higher in the capital structure than equity, so stockholders should not be particularly excited about high cash balances which result from selling debt. Two, the regulatory and political environment is not exactly pro-business in case you haven’t noticed today. Companies are holding cash because it is very difficult to make long term investments when the rules of the game and their tax consequences are impossible to predict even one week forward.  Cash on the sidelines is a sign of uncertainty, and frankly, I don’t see anything on the horizon that will change this.”

It is nice to know that every investment manager out there is wearing their “bubble-vision goggles” today.  In his latest weekly, John Hussman provides some hard facts to illustrate our point.  The full commentary is worth a read, but at a minimum, read the section titled, Are Corporate Balance Sheets Really the Strongest in History?  A few excerpts are below, for those not tempted by links within blogs:

 “As the following chart shows (based on Federal Reserve Flow of Funds data), the debt burden of U.S. corporations is near all-time highs, having retreated only modestly since 2009. Debt burdens are elevated regardless of whether they are measured against total assets or net worth. Certainly, corporations are presently benefiting from very low interest rates on corporate debt, which substantially reduces the servicing burden of these obligations. But the combination of high debt levels and low servicing burdens does create a potential risk to corporate health in the event that yields rise in future years. Overall, the picture is fairly stable at present thanks to low yields and high levels of cash-equivalents, but it is important for investors to keep in mind that cash can burn fairly quickly during economic downturns, and debt is not spread evenly across corporations.

 “The bottom line is that at an aggregate level, corporate balance sheets look reasonable, but are certainly not “stronger than they have ever been in history.” Cash levels are elevated, but this is at best a second-order factor (with excess cash representing only a few percent of total assets), while debt remains near record levels relative to total assets and net worth. In any event, balance sheet risks should be evaluated on a business-by-business level, rather than accepting the blanket notion that cash levels are so high that nobody needs to worry about corporate credit risk.”

“In going through the Flow of Funds data this week, I thought a few other features of the data were interesting. First, was the profound decline in tangible assets as a percentage of total corporate assets since 1980. This decline goes hand-in-hand with an increase in financial assets held by non-financial companies. At present, more than half of the total assets held by non-financial companies in the U.S. represent financial assets such as debt securities and equities. This is striking, in that we presently have a menu of prospective returns on financial assets that is among the most dismal in history. While the move toward zero interest rates has certainly been excellent for bonds when we look in the rear-view mirror, the fact that prospective rates of return are now so low suggests that a large portion of corporate assets are unlikely to achieve very much in the way of future returns, barring a decline in those asset prices. Something to think about.”

http://www.telegraph.co.uk/news/worldnews/europe/eu/8897662/EU-bans-claim-that-water-can-prevent-dehydration.html

They may not have figured out the debt crisis just yet, but at least they have scrapped the bans on bent bananas and curved cucumbers.