cash - What We're Reading - StockBuz2024-03-29T14:05:54Zhttp://stockbuz.ning.com/articles/feed/tag/cashThe Winners And Losers Of A Cashless Societyhttp://stockbuz.ning.com/articles/the-winners-and-losers-of-a-cashless-society2017-01-19T01:48:52.000Z2017-01-19T01:48:52.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div style="clear: both;"><a href="http://money.visualcapitalist.com/global-war-on-cash/"><img src="http://i1.wp.com/money.visualcapitalist.com/wp-content/uploads/2017/01/war-on-cash-infographic.jpg?w=1360" data-recalc-dims="1" border="0" /></a></div>
<div>Courtesy of: <a href="http://money.visualcapitalist.com">The Money Project</a></div>
<div>
<p><em> </em></p>
<p>There is a global push by lawmakers to eliminate the use of physical cash around the world. This movement is often referred to as “The War on Cash”, and there are three major players involved:</p>
<p><strong>1. The Initiators</strong><br />
<em>Who?</em><br />
Governments, central banks.<br />
<em>Why?</em><br />
The elimination of cash will make it easier to track all types of transactions – including those made by criminals.</p>
<p><strong>2. The Enemy</strong><br />
<em>Who?</em><br />
Criminals, terrorists<br />
<em>Why?</em><br />
Large denominations of bank notes make illegal transactions easier to perform, and increase anonymity.</p>
<p><strong>3. The Crossfire</strong><br />
<em>Who?</em><br />
Citizens<br />
<em>Why?</em><br />
The coercive elimination of physical cash will have potential repercussions on the economy and social liberties.</p>
<h2>Is Cash Still King?</h2>
<p>Cash has always been king – but starting in the late 1990s, the convenience of new technologies have helped make non-cash transactions to become more viable:</p>
<ul>
<li>Online banking</li>
<li>Smartphones</li>
<li>Payment technologies</li>
<li>Encryption</li>
</ul>
<p>By 2015, there were 426 billion cashless transactions worldwide – a 50% increase from five years before.</p>
<table id="tablepress-4" class="tablepress tablepress-id-4">
<thead>
<tr class="row-1 odd">
<th class="column-1">Year</th>
<th class="column-2"># of cashless transactions</th>
</tr>
</thead>
<tbody class="row-hover">
<tr class="row-2 even">
<td class="column-1">2010</td>
<td class="column-2">285.2 billion</td>
</tr>
<tr class="row-3 odd">
<td class="column-1">2015</td>
<td class="column-2">426.3 billion</td>
</tr>
</tbody>
</table>
<p>And today, there are multiple ways to pay digitally, including:</p>
<ul>
<li>Online banking (Visa, Mastercard, Interac)</li>
<li>Smartphones (Apple Pay)</li>
<li>Intermediaries ( Paypal , Square)</li>
<li>Cryptocurrencies (Bitcoin)</li>
</ul>
<h2>The First Shots Fired</h2>
<p>The success of these new technologies have prompted lawmakers to posit that all transactions should now be digital.</p>
<p>Here is their case for a cashless society:</p>
<p><strong>Removing high denominations of bills from circulation makes it harder for terrorists, drug dealers, money launderers, and tax evaders.</strong></p>
<ul>
<li>$1 million in $100 bills weighs only one kilogram (2.2 lbs).</li>
<li>Criminals move $2 trillion per year around the world each year.</li>
<li>The U.S. $100 bill is the most popular note in the world, with 10 billion of them in circulation.</li>
</ul>
<p><strong>This also gives regulators more control over the economy.</strong></p>
<ul>
<li>More traceable money means higher tax revenues.</li>
<li>It means there is a third-party for all transactions.</li>
<li>Central banks can dictate interest rates that encourage (or discourage) spending to try to manage inflation. This includes ZIRP or NIRP policies.</li>
</ul>
<p><strong>Cashless transactions are faster and more efficient.</strong></p>
<ul>
<li>Banks would incur less costs by not having to handle cash.</li>
<li>It also makes compliance and reporting easier.</li>
<li>The “burden” of cash can be up to 1.5% of GDP, according to some experts.</li>
</ul>
<p>But for this to be possible, they say that cash – especially large denomination bills – must be eliminated. After all, cash is still used for about 85% of all transactions worldwide.</p>
<h2>A Declaration of War</h2>
<p>Governments and central banks have moved swiftly in dozens of countries to start eliminating cash.</p>
<p>Some key examples of this? Australia, Singapore, Venezuela, the U.S., and the European Central Bank have all eliminated (or have proposed to eliminate) high denomination notes. Other countries like France, Sweden and Greece have targeted adding restrictions on the size of cash transactions, reducing the amount of ATMs in the countryside, or limiting the amount of cash that can be held outside of the banking system. Finally, some countries have taken things a full step further – South Korea aims to eliminate paper currency in its entirety by 2020.</p>
<p>But right now, the “War on Cash” can’t be mentioned without invoking images of day-long lineups in India. In November 2016, Indian Prime Minister Narendra Modi demonetized 500 and 1000 rupee notes, eliminating 86% of the country’s notes overnight. While Indians could theoretically exchange 500 and 1,000 rupee notes for higher denominations, it was only up to a limit of 4,000 rupees per person. Sums above that had to be routed through a bank account in a country where only 50% of Indians have such access.</p>
<p>The Hindu has reported that there have now been 112 reported deaths associated with the Indian demonetization. Some people have committed suicide, but most deaths come from elderly people waiting in bank queues for hours or days to exchange money.</p>
<h2><strong><span class="font-size-4">Caught in the Crossfire</span></strong></h2>
<p>The shots fired by governments to fight its war on cash may have several unintended casualties:</p>
<p><strong>1. Privacy</strong></p>
<ul>
<li>Cashless transactions would always include some intermediary or third-party.</li>
<li>Increased government access to personal transactions and records.</li>
<li>Certain types of transactions (gambling, etc.) could be barred or frozen by governments.</li>
<li>Decentralized cryptocurrency could be an alternative for such transactions</li>
</ul>
<p><strong>2. Savings</strong></p>
<ul>
<li>Savers could no longer have the individual freedom to store wealth “outside” of the system.</li>
<li>Eliminating cash makes negative interest rates (NIRP) a feasible option for policymakers.</li>
<li>A cashless society also means all savers would be “on the hook” for bank bail-in scenarios.</li>
<li>Savers would have limited abilities to react to extreme monetary events like deflation or inflation.</li>
</ul>
<p><strong>3. Human Rights</strong></p>
<ul>
<li>Rapid demonetization has violated people’s rights to life and food.</li>
<li>In India, removing the 500 and 1,000 rupee notes has caused multiple human tragedies, including patients being denied treatment and people not being able to afford food.</li>
<li>Demonetization also hurts people and small businesses that make their livelihoods in the informal sectors of the economy.</li>
</ul>
<p><strong>4. Cybersecurity</strong></p>
<ul>
<li>With all wealth stored digitally, the potential risk and impact of cybercrime increases.</li>
<li>Hacking or identity theft could destroy people’s entire life savings.</li>
<li>The cost of online data breaches is already expected to reach $2.1 trillion by 2019, according to Juniper Research.</li>
</ul>
<p>As the War on Cash accelerates, many shots will be fired. The question is: who will take the majority of the damage?</p>
<p>Courtesy of <a href="http://money.visualcapitalist.com/global-war-on-cash/" target="_blank">Infographics</a></p>
</div>
</div>Credit Spreads And Earnings Estimates. Random Thoughtshttp://stockbuz.ning.com/articles/credit-spreads-and-earnings-estimates-random-thoughts2016-09-25T19:34:37.000Z2016-09-25T19:34:37.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>This week’s EVA brings the second edition of our new <em>Random Thoughts</em> format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion.</p>
<p>In this issue, we are looking at, once again, the powerful financial force known as credit spreads.   Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint:  both make a dart-board look good!).</p>
<p>As always, your feedback is welcomed and appreciated.<span id="more-4901"></span></p>
<h4>RANDOM THOUGHTS</h4>
<p><strong>When the spread isn’t the thing</strong>. One of the themes this newsletter has emphasized most heavily this year has been the importance of the spread—or difference—between government and corporate bond yields. As we have repeatedly cited, when that gap is widening in a pronounced way bad things tend to happen both to the economy and financial markets.</p>
<p>The most recent case in point was the summer of 2014 when spreads began to lift off from dangerously depressed levels. When the gap is quite tight, as it was then, it indicates investors are too cavalier about future risks, particularly when there are discernible threats looming. But it generally takes some kind of negative catalyst to precipitate the spread-widening cycle. In the fall of 2014, there were actually two triggers : the collapse in oil prices and the dollar doing a moon-shot. (By the way, Fed governor Lael Brainard recently articulated a thesis, relayed in past EVAs, that the dollar’s 2014/2015 spike was the equivalent to a 2%—200 basis points—monetary tightening.)</p>
<p>Yet, despite a little indigestion, the stock market—at least in the US—continued to rise until the summer of 2015. Then, in August of last year we had another flash crash with Dow tanking 1000 points in less than an hour. The market stabilized and rallied back to its high of around 2110 before succumbing to another blow-out in credit spreads in January of this year. This took the S&P down 12% in less than two months (admittedly, there were other factors at work such as plunging oil prices, China’s wobbling currency, and mounting US recession fears).</p>
<p>Fortuitously for all of our portfolios, spreads began to contract starting in early February which, as previously relayed in these pages, coincided with the rousing rally we’ve seen since then. This episode reflects the typical pattern: rising spreads give a hugely valuable heads-up of future trouble; then, when they start narrowing, stocks explode to the upside (assuming it has been a severe widening event). As we’ve noted before, credit spreads have been a far more accurate stock market influence than what our central bank is doing, calling into question the old Wall Street axiom, Don’t Fight the Fed (see <a href="http://www.evergreengavekal.com/evergreen-virtual-advisor-38/">Don’t Fight the Spread</a>).</p>
<p>The reason I’m going back over what is familiar terrain to consistent EVA readers is to point out that spreads don’t always warn of turmoil ahead. This is notwithstanding the fact that they did accurately forewarn of the bear markets looming in 2000 and again in 2008. Moreover, we’ve looked back at 50 years of stock market history and found that nearly all significant spread widening phases lead to corrections, if not actual bear markets. Encouragingly, they presently reside at a non-threatening level.</p>
<p style="text-align: center;"><strong>CORPORATE BOND SPREADS OVER US TREASURIES</strong><img class="alignnone size-full wp-image-4905" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Spreads-since-1.1.14.png" alt="spreads-since-1-1-14" width="796" height="378" /><em>Source: Evergreen Gavekal, Bloomberg</em></p>
<p>Yet, there are numerous times when spreads are unhelpful. 1987 was a classic example and, if you want to go way back, so was 1962. Sometimes markets are slammed by what academics call an exogenous shock (the rest of us might refer to these as a bolt from the blue). In this case, spreads are no better than a fortune cookie at forecasting when stocks are poised to fall out of bed. (A note on 1987: Spreads did begin widening materially in 1986 and into 1987, providing an early warning of the crash in October of that year. However, they began to recede immediately prior to that spectacular decline, primarily because government bond yields erupted from 7% in the summer of ’87 to over 10% on the eve of the crash. Those were the days to be a buyer of long-term bonds!)</p>
<p>The other reason I’m bringing this up is that we may have a set of circumstances today that could lead to one of those out-of-nowhere moments. Now, since these are by definition unforeseeable, it would be foolish of me (even more than usual) to try to identify the external shock. But what is identifiable is that, until very recently, there has been pervasive complacency among the investment community (low volatility equates to a lack of fear).</p>
<p style="text-align: center;"><img class="alignnone size-full wp-image-4906 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/NDR_annualized_standard_deviation_of_daily_returns_.png" alt="ndr_annualized_standard_deviation_of_daily_returns_" width="1055" height="392" /><em>Source: Ned Davis Research </em></p>
<p>This carefree attitude, combined with very elevated S&P 500 valuations and a surprising (at least to the consensus) erosion in recent US economic reports, are the types of backdrops that can cause a severe and sudden drop-back in stock prices.</p>
<p>We’ve also got two big votes coming up over the next 45 days or so: The US presidential election and a de facto vote by Italy on staying in the European Union. Either one going “the wrong way” from the market’s perspective could precipitate another air pocket in stocks.</p>
<p>But, as they say, bull markets climb walls of worry. Over the last seven and a half years, this seemingly eternal bull has hopped over more of those walls than I can possibly recount. Maybe, just maybe, it’s got one more leap left in it.</p>
<p><strong>The Gets No Respect market?</strong> One of the sound-bites you regularly hear on CNBC is that this is “the most hated bull market ever”. As usual, there is an element of truth in this mantra. Certainly, there are many high profile billionaires and hedge-fund managers (often one and the same) who have been skeptical in the extreme about further appreciation. Actually, many of them continue to warn of a future day of reckoning when years of stock market gains will evaporate nearly overnight.</p>
<p><img class="wp-image-4907 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/NYSE_Composite_BWD_7.18.16.png" alt="nyse_composite_bwd_7-18-16" width="533" height="370" /></p>
<p>As one who has shared many of their concerns, I can empathize with their conclusions. Yet the worry-warts among us must admit that they have been highly premature, even if, as you can see below, the broad market has gone nowhere for years. (The NYSE Composite is considered a more comprehensive measure of the stock market.)</p>
<p>But sentiment is just that—a feeling. What really counts is how investors are actually positioned. Per the charts below, you can see that overall US household asset allocations are hardly reflecting fear and loathing toward equities. In reality, it’s cash that is near its lowest weightings of the past 30 years, while bonds are in the middle of their historic allocation range.</p>
<p style="text-align: center;"><img class="size-full wp-image-4908 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/NDR_allocation_survey.png" alt="ndr_allocation_survey" width="905" height="561" /><em>Source: Ned Davis Research</em></p>
<p>The cash chart also doesn’t take into account the extremely lofty level of margin debt (essentially, negative cash).  Though this has come down a bit, it remains among the highest readings of all-time.  This is why the following chart factoring in both cash and margin debit balances is close to where it was when the biggest US stock market bubble on record was in full swing back in 2000.</p>
<p style="text-align: center;"><strong>INVESTOR CREDIT BALANCE/MARGIN DEBT (%)</strong><img class="alignnone size-full wp-image-4934" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Investor_credit_balance.png" alt="investor_credit_balance" width="940" height="336" /><br />
<em>Source: Ned Davis Research</em></p>
<p style="text-align: left;">Further, as recently as last month, this is how the net speculative positioning looked on the Dow. Maybe it’s just me, but I don’t see a lot of hate in this chart.</p>
<p style="text-align: left;"><img class="wp-image-4911 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/BWD_8.11.16.png" alt="bwd_8-11-16" width="620" height="432" /></p>
<p>Ergo, perhaps what we’ve got on our hands is a market that is quite late stage and very tired, propped up by trillions of central bank joy-juice.  Not to mention, one also supported by a lot of fully-invested bears.  If so, these folks might not be the stickiest holders of equities should events take a turn for the worse this autumn.<br />
<strong>Downward Dog.</strong> First, let me admit right up front that my yoga involvement these days is limited to wearing a few Lululemon jackets and work-out pants. But I did enough of it a few years ago to know about one of its most famous poses.</p>
<p><img class="wp-image-4912 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Downwarddog.jpg" alt="downwarddog" width="497" height="336" /></p>
<p>Also, over the years we’ve had a couple of pooches in our home with a bit of bull dog in their blood. For some reason this breed loves to do what my wife and I have called the “bow-stretch”, more popularly known as the Downward-Facing Dog.<br />
No, I’m not going Westminster Kennel Club on you. There is a relevance to things financial, as improbable as that may seem. What I’m referring to is the uncanny similarity of a wide-range of economic charts to the downward slope of that pose.</p>
<p><em>Random Thoughts</em> EVAs are meant to be more visual and lighter on text, so in that spirit let me just show you what I mean.</p>
<p style="text-align: center;"><strong>PRODUCTIVITY DOING A MAJOR “BOW-STRETCH”</strong><img class="alignnone wp-image-4923" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Moodys_labor_productivity-1.png" alt="moodys_labor_productivity" width="593" height="395" /><br />
<em>Source: Moody’s</em></p>
<p style="text-align: center;"><strong>DITTO WITH CAPACITY UTILIZATION*</strong><img class="wp-image-4924 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Chart_of_the_day_8.18.16.png" alt="chart_of_the_day_8-18-16" width="492" height="370" />*How much of the country’s productive resources are being utilized.</p>
<p style="text-align: center;"><strong>INDUSTRIAL PRODUCTION, IN A RELATED DOWNWARD DOG</strong><img class="alignnone size-full wp-image-4925" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Industrial-Production.png" alt="industrial-production" width="828" height="416" /><em>Source: Evergreen Gavekal, Bloomberg</em></p>
<p style="text-align: center;"><strong>…AS IS THE VERY IMPORTANT LEADING INDICATOR OF DURABLE GOODS</strong><img class="alignnone size-full wp-image-4926" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/NDR_durable_goods_orders.png" alt="ndr_durable_goods_orders" width="954" height="214" /><em>Source: Ned Davis Research</em></p>
<p style="text-align: center;"><strong>RETAIL SALES ALSO BOWING DOWN…</strong><img class="alignnone size-full wp-image-4927" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Hedgopia-8.15.jpg" alt="hedgopia-8-15" width="474" height="301" /><br />
<em>Source: Hedgopia</em></p>
<p style="text-align: center;"><strong>…AS IS NOMINAL/GDP (REPRESENTING OVERALL ECONOMIC ACTIVITY)</strong><img class="alignnone wp-image-4928" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/NDR_nominal_GDP.png" alt="ndr_nominal_gdp" width="574" height="449" /><br />
<em>Source: Ned Davis Research</em></p>
<p style="text-align: center;"><strong>THEN THERE ARE PROFIT MARGINS (PERHAPS BOTTOMING OUT)…</strong><img class="alignnone size-full wp-image-4929" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Profit-Margins-Since-2014.png" alt="profit-margins-since-2014" width="797" height="380" /><em>Source: Evergreen Gavekal, Bloomberg</em></p>
<p style="text-align: center;"><strong>…AND FINALLY, PRIVATE NON-RESIDENTIAL INVESTMENT (CRUCIAL FOR FUTURE GROWTH AND PRODUCTIVITY IMPROVEMENT)</strong><img class="wp-image-4930 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Barrons_non-red-private-fixed-investment.jpg" alt="2016_09_12_cmyk_NL_" width="345" height="298" /><em>Source: Wall Street Journal</em></p>
<p>Not a pretty set of poses, is it?  But then let’s look at this chart since it’s all most investors seem to care about (at least when it is in the upward-dog pose).</p>
<p style="text-align: center;"><strong>THE S&P 500—STILL STANDING TALL</strong><img class="size-full wp-image-4914 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/SP-500-Since-2009.png" alt="sp-500-since-2009" width="797" height="378" /><em>Source: Evergreen Gavekal, Bloomberg</em></p>
<p style="text-align: left;">The reason for this disconnect can be visually captured in the next graphic showing what has been happening to price/earnings (P/E) ratios in recent years.</p>
<p style="text-align: center;"><strong>TRAILING 12-MONTHS P/E RATIO FOR THE S&P 500</strong><img class="size-full wp-image-4915 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/SP-500-Price-to-Earnings-Ratio-Since-2011.png" alt="sp-500-price-to-earnings-ratio-since-2011" width="796" height="380" /><em>Source: Evergreen Gavekal, Bloomberg</em></p>
<p>As you can see, P/Es have been rising consistently, meaning that investors are paying higher and higher multiples for what have turned out to be declining, not rising, earnings.</p>
<p>Never fear, there’s always next year.</p>
<p><strong>Price/Yearnings ratio?</strong> The Fed has deservedly taken considerable heat for its inexcusably misguided GDP forecasts over the last decade, if not longer.</p>
<p style="text-align: center;"><img class="wp-image-4916 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/WSJ-hilsenrath.jpg" alt="wsj-hilsenrath" width="506" height="414" /><em>Source: Wall Street Journal</em></p>
<p>As you can see, it hasn’t been a situation of win some/lose some. The Fed has not only been embarrassingly wrong, it has consistently—with one exception—been wrong on the high side. In other words, the economy has almost always turned out weaker than it projected during this not very expansive expanison. And, as observed in prior EVAs, the Fed has predicted precisely zero of the recessions America has endured over the years. But it has some company in this regard.</p>
<p>Perhaps it’s because both the Fed and Wall Street have a vested interest in spreading happy-talk, but, whatever the reason, “The Street” has also been serially guilty of overly bullish profits forecasts. Again relying on the crack team at Ned Davis Research, analysts have overestimated annual earnings by an average of 11.4% per year since 1984 based on their forward four-quarter projections. (This is despite their well-known tendency to low-ball the upcoming quarter, creating the “beat” that can often pop stocks.) For the last 17 quarters, as you can see below, they have been too bullish on their next twelve months’ estimates in every instance, with the last three having been overly cheery in the extreme.</p>
<p style="text-align: center;"><img class=" wp-image-4920 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/NDR_estimated_actual_earnings_5.20.png" alt="ndr_estimated_actual_earnings_5-20" width="547" height="422" /><em>Source: Ned Davis Research </em></p>
<p>About the only time that the analyst community is too negative on a next 12-month basis is during a recession. Therefore, what they are really good at is extrapolating current conditions into the future.  When profits are growing at a steady pace, they project more of the same. Conversely, when earnings have collapsed they become quite cautious, even though history shows profits tend to come roaring back after recessions.</p>
<p>Presently, there are some high-profile money managers, not just “sell-side” strategists, who are publicly endorsing an earnings number of around $127 for the S&P 500 next year. So far, with 2016 half in the bag, actual profits are approximately $50, meaning, on an annualized basis it would be near $100, about flat with last year (which, by the way, was estimated by Wall Street to be $137 as recently as April, 2014; talk about a whiff!). Thus, if $100 does turn out to be close to 2016’s full year S&P net income number, a $127 target for next year looks heroic indeed.</p>
<p>Yet “The Street” is actually even higher for 2017 at $132. Part of this is predicated on an anticipated stellar second half of this year, supposedly bringing earnings up to roughly $110 per S&P share when 2016 is in the history books versus annualizing the first half as I did above. But as you can see from my friend Paban Pandey, who runs the nifty website Hedgopia (you can <a href="http://www.hedgopia.com" target="_blank">subscribe to this free service by clicking here</a>), the trend of downward S&P revisions in recent years has been relentless.*</p>
<p style="text-align: center;"><img class="size-full wp-image-4921 aligncenter" src="http://www.evergreengavekal.com/wp-content/uploads/2016/09/Hedgopia-8.2-operating-earnings.jpg" alt="hedgopia-8-2-operating-earnings" width="470" height="299" /><em>Source: Hedgopia </em></p>
<p>Who knows? Maybe we will see a second half earnings eruption. And maybe next year will bring a 20% surge on top of that, as Wall Street is forecasting. But given the preceding Downward Dog section, and a global economy that appears to be losing altitude, it is looking less and less probable.</p>
<p>Call me cynical, but given this history I’d prefer to value the stock market based on recent actual earnings rather than the yearnings of “Street” economists and strategists whose paychecks are based not on accuracy but on how supportive their views are of perpetuating this bull market. Such a behavior pattern directly relates to one of Charlie Munger’s favorite sayings: “Show me the incentives and I’ll show you the results.” (Mr. Munger is Warren Buffett’s sidekick and fellow billionaire.)</p>
<p>Looping back to the Fed, I’d like to end this issue of the Evergreen Virtual Adviser with this extremely random thought (at least it’s one I haven’t come across elsewhere): Perhaps the reason our central bank—despite its enormous computer capabilities and PhD-stuffed personnel roster—has such a sorry record of economic forecasting is because of its incentive structure. The Fed has a dual mandate based on inflation and unemployment. Yet, as every economist knows, inflation and unemployment are two of the most backward-looking (i.e., lagging) economic factors.</p>
<p>It’s true that incentives aren’t the same as objectives but they are closely aligned. And while it’s nice to have both low inflation and unemployment, typically those two are at odds with each other (rising joblessness generally pushes inflation down, though it’s been different in this latest cycle, as has been the case in so many ways). But, more to the point, with the Fed highly focused on those two lagging indicators, it means it is constantly looking in the rear-view mirror. That’s a terrible way to drive a car and it’s proving to be a less than optimal way to steer an economy as complex and dynamic as America’s.</p>
<p>It might be better for the overall economy if the Fed’s incentive structure was modified to encourage it to look at what’s up ahead—like how it can ever extricate itself, without causing a market riot, from the zero-interest rate prison it has been locked inside for the last eight years. Perhaps that is when it might realize it takes a proper cost of capital to make capitalism function properly. Who knew? Actually, the Fed should have.</p>
<p>*If you are wondering about the discrepancy between the Ned Davis analysis and that of Hedgopia, it is because the former uses earnings estimates from IBES while the latter is using S&P’s database. However, both reveal extreme overestimation of profits in recent years.</p>
<p>Courtesy of <a href="http://www.evergreengavekal.com/evergreen-virtual-advisor-random-thoughts/" target="_blank">Evergreen Gavekal</a></p>
</div>We're Shifting Fast To A Cashless Societyhttp://stockbuz.ning.com/articles/were-shifting-fast-to-a-cashless-society2016-05-18T02:53:56.000Z2016-05-18T02:53:56.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div style="clear: both;"><a href="http://www.visualcapitalist.com/shift-cashless-society-snowballing/"><img src="http://2oqz471sa19h3vbwa53m33yj.wpengine.netdna-cdn.com/wp-content/uploads/2016/05/war-on-cash.jpg" border="0" /></a></div>
<div><em>We talk about this subject at great length in my neck of the woods and oh boy, is it coming..........fast.  Now let's be honest here and let me ask a few questions.  How much cash are you carrying right now in your wallet? The last time you saw eight year olds selling Girl Scout cookies, did you have to pass them by with no bills in your pocket?  No thin mints for you!  How many purchases do you make per day in cash and how many times do you simply swiping your debit or credit card?  Do your bills come in the mail and get paid via the same method, or are they paid on the internet? </em></div>
<p>Love it or hate it, cash is playing an increasingly less important role in society.</p>
<p>In some ways this is great news for consumers. The rise of <a href="http://www.visualcapitalist.com/tap-into-the-mobile-payments-revolution/">mobile and electronic payments</a> means faster, convenient, and more efficient purchases in most instances. New technologies are being built and improved to facilitate these transactions, and improving security is also a priority for many payment providers.</p>
<p>However, there is also a darker side in the shift to a cashless society. Governments and central banks have a different rationale behind the elimination of cash transactions, and as a result, the so-called “war on cash” is on.</p>
<h2 style="margin-top: 0;">On the Path to a Cashless Society</h2>
<p>The Federal Reserve estimates that there will be <a href="https://www.credit-suisse.com/us/en/articles/articles/news-and-expertise/2015/07/en/will-we-soon-live-in-a-cashless-society.html">$616.9 billion in cashless transactions</a> in 2016. That’s up from around $60 billion in 2010.</p>
<p>Despite the magnitude of this overall shift, what is happening from country to country varies quite considerably. Consider the contradicting evidence between Sweden and Germany.</p>
<p>In Sweden, about 59% of all consumer transactions are cashless, and hard currency makes up just <a href="http://www.nytimes.com/2015/12/27/business/international/in-sweden-a-cash-free-future-nears.html?_r=0">2% of the economy</a>. Yet, across the Baltic Sea, Germans are far bigger proponents of modern cash. This should not be too surprising, considering that the German words for “debt” and “guilt” are the <a href="http://www.bbc.com/news/business-31369185">exact same</a>.</p>
<p>Within Germany, only 33% of consumer transactions are cashless, and there are only 0.06 credit cards in existence per person.</p>
<h2 style="margin-top: 0;">The Dark Side of Cashless</h2>
<p>The shift to a cashless society is even gaining momentum in Germany, but it is not because of the willing adoption from the general public. According to <a href="https://global.handelsblatt.com/edition/354/ressort/finance/article/the-death-of-cash">Handelsblatt</a>, a leading German business newspaper, a proposal to eliminate the €500 note while capping all cash transactions at €5,000 was made in February by the junior partner of the coalition government.</p>
<p>Governments have been increasingly pushing for a cashless society. Ostensibly, by having a paper trail for all transactions, such a move would decrease crime, money laundering, and tax evasion. France’s finance minister <a href="http://wolfstreet.com/2015/04/25/don-quijones-war-on-cash-quotes-to-cashless-society/">recently stated</a> that he would “fight against the use of cash and anonymity in the French economy” in order to prevent terrorism and other threats. Meanwhile, former Secretary of the Treasury and economist Larry Summers has called for <a href="http://www.cnbc.com/2016/02/17/larry-summers-time-to-scrap-100-bill.html">scrapping the U.S. $100 bill</a> – the most widely used currency note in the world.</p>
<h2 style="margin-top: 0;">“Smoother” Aggregate Demand?</h2>
<p>It’s not simply an argument of the above government rationale versus that of privacy and anonymity. Perhaps the least talked-about implication of a cashless society is the way that it could potentially empower central banking to have more ammunition in “smoothing” out the way people save and spend money.</p>
<p>By eliminating the prospect of cash savings, monetary policy options like negative interest rates would be much more effective if implemented. All money would presumably be stored under the same banking system umbrella, and even the most prudent savers could be taxed with negative rates to encourage consumer spending.</p>
<p>While there are certainly benefits to using digital payments, our view is that going digital should be an individual consumer choice that can be based on personal benefits and drawbacks. People should have the voluntary choice of going plastic or using apps for payment, but they shouldn’t be pushed into either option unwillingly.</p>
<p>Forced banishment of cash is a completely different thing, and we should be increasingly wary and suspicious of the real rationale behind such a scheme.</p>
<p>Courtesy of <a href="http://www.visualcapitalist.com/shift-cashless-society-snowballing/" target="_blank">VisualCapitalist</a></p>
</div>How Else Could Bankcards Be Utilizedhttp://stockbuz.ning.com/articles/how-else-could-bankcards-be-utilized2016-02-05T13:16:50.000Z2016-02-05T13:16:50.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p class="annotatable"><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291389?profile=original"><img class="align-left" style="padding: 20px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1291389?profile=RESIZE_320x320" width="250"></a>The way we pay for things has changed dramatically over the past few years. Uber calculates your fare in real-time and charges you as you exit the car. The newest phones have chips that let you pay with a tap.</p>
<p class="annotatable">But that’s only scratching the surface. Visa, for one, envisions a future where pretty much any device could handle a payment, and we won’t even need a phone or credit card to make it work.</p>
<p class="annotatable">To get there and beyond, the payment-processing company is looking for some outside help. On Thursday (Feb. 4) it announced that it’s opening up its VisaNet platform <a href="http://developer.visa.com" target="_blank">to developers</a>. Considering <span class="s1">Visa processes 100 billion transactions per year, it’s a potentially powerful tool for that community.</span> By letting developers focus on the experience and Visa managing the payments—from processing to security and risk—change could happen quickly.</p>
<p class="annotatable">So how will we pay in the not-too-distant future? Visa CTO Rajat Tenaja, head of innovation Jim McCarthy, and head of product Jack Forestell gave Quartz a peek into where Visa thinks the payments industry is headed:</p>
<ul>
<li><strong>Paying with your hand</strong>—Morpho and Visa partnered to develop a system that lets you pay by just waving your hand. Morpho’s technology scans your hands, ties that information to your Visa card, and then lets you pay at merchants by just swiping your hand over a device. Visa will show off the technology at the Visa Innovation Lab in San Francisco this weekend.</li>
<li><strong>Preorder cash</strong>—Visa’s technology lets you use a mobile app to enter how much money you want to take out from your account. When you arrive at an ATM, it scans your iris and disperses the money. This tech will also be on display in San Francisco this weekend.</li>
<li><strong>Cars</strong>—Visa’s quite bullish on the future of connected cars. <a href="https://www.youtube.com/watch?v=8HDy1ZIGg78" target="_blank">This YouTube video</a> from Mobile World Congress in March 2015 shows how we’ll pay for gas, parking, and lunch all from our cars. This was only a proof-of-concept.</li>
<li><strong>Fridges</strong>—The fridge of the future will monitor grocery purchases you make with your Visa card, and buy them for you automatically. They could even be delivered to your door by Uber.</li>
<li><strong>AI assistants and bots</strong>—Making payments through AI assistants like Amazon Echo, Siri, and Google Now might not be far off either. Saying “Siri, get me Shake Shack from DoorDash,” and having it delivered to you is very possible with Visa’s technology. With <a href="http://qz.com/588972/facebook-messenger-has-800-million-users-and-itll-need-bots-to-keep-them-happy/" target="_blank">Facebook and Slack reportedly interested</a> in AI-powered bots, too, the potential of being able to buy anything, anywhere, is clear.</li>
</ul>
<p>Courtesy of <a href="http://qz.com/609642" target="_blank">QZ</a></p>
<p></p></div>Stock Buybacks; Sustainable Smoke And Mirrorshttp://stockbuz.ning.com/articles/stock-buybacks-sustainable-smoke-and-mirrors2014-07-14T17:42:29.000Z2014-07-14T17:42:29.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290774?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290774?profile=RESIZE_480x480" height="412" width="320"></a>My simplistic view of the stock market, the one my muddled brain is able to wrap around, is to imagine that of the waterfalls at the Continental Divide at Glacier National Park in Montana. Numerous rivers, all converging into to one. Hedge funds, pension funds, investment firms, your own 401k, option flows, you name it.........and share buybacks.</p>
<p>Throughout the recovery, the amount of cash being held on corporate balance sheets was in some instances, astounding, leaving many investors wondering if/when the cash would be deployed. </p>
<p>Well if you haven't noticed, they have been deploying more and more. Just imagine the many <em>streams</em> you see in this image to the right. One is M&A which can be the acquisition of a company to compliment ones existing structure OR a direct competitor which is a plus for a stock by making your space that much smaller. Another stream, a small one, is (hopefully) R&D, another stream represents cash being returned to shareholders via higher dividends and lastly we're seeing a <span style="text-decoration: underline;">great deal</span> (large, wide stream) in the way of share repurchase programs.</p>
<p>You may ask "why repurchase shares when the markets at an all time high?"</p>
<p>Smoke and mirrors my friend. Smoke and mirrors - especially when they're uncertain about near term sales and EPS growth. Allow me to explain:</p>
<blockquote>
<p>If a company has 10 million shares outstanding and earns $10 million per year, its earnings per share (EPS) is $1 ($10M/10M shares). If the stock has a price-to-earnings ratio (P/E) of 15, the stock will trade at $15 ($1 in EPS x 15 P/E).</p>
<p>When the company buys back 1 million of its shares, it still earns $10 million per year in profit, but now that $10 million is divided by 9 million shares instead of 10 million.</p>
<p>So although the company didn't earn any more money, earnings <em>per share</em> rises to $1.11 ($10M/9M shares). If the stock continues to trade at a P/E of 15, the stock climbs to $16.65.</p>
<p>Look at what just occurred. There was no change in the company's business, but through a reduced share count, earnings per share and the stock price jumped 11%.</p>
</blockquote>
<p>Now this gives companies the ability to beat EPS because of the smaller float. Nice trick, aye?</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290809?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290809?profile=RESIZE_320x320" width="300"></a>Now one alarm goes off in my head as I ponder this. <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290828?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290828?profile=RESIZE_320x320" width="307"></a></p>
<p>Namely <em>how long can buybacks be sustained?</em> What happens when the river begins to dry up? </p>
<p>Well the hope would be that the economy, and overall demand, has recovered sufficiently to take over but what if it doesn't? </p>
<p>What if global economies continue to be slow to heal. Certainly rates are low, allowing companies to borrow on the cheap however is this trend sustainable?</p>
<p>Just food for thought my friends.......</p>
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<p>(Click image to enlarge)</p></div>