The biggest news of the day comes from the official Buba announcement that, in its official capacity as a prudent central bank, it - as first of many - is looking to repatriate some 300 tons of gold from the New York Fed. That, however, is not today's news - that was Monday's news.
What is news is that courtesy of the supplied calendar of events in the Buba statement, it will take the Fed some seven years to procure Germany's 300 tons of gold. This is the same Fed that, in its own words, holds some "216 million troy ounces of gold" or some 6720 tons, in its vault 80 feet below ground level.
Putting the above in perspective, the amount of gold that Germany will have to wait 7 years for is shown in red. The amount of gold the Fed supposedly holds, is shown in yellow with a shade of tungsten. Why it will take the Fed 7 years to part with an amount of gold that is less than 5% of its total holdings is anyone's guess...
unless of course, the bulk of the gold in the column on the right has been rehypothecated numerous times to serve as collateral for countless counterparties, and it is no longer clear just who own what to anyone.
* * *
We can only wonder how many centuries it will take the New York Fed to deliver all the gold held by third parties in its vault, once the demand notices start rushing in...
For all those curious how the Fed itself describes the gold vault and its contents, can read more in the pamphet below:
While moustachioed managers, contrary to the far better insight of their superiors, and mainstream spivs are trying to talk down Germany's somewhat stunning shift in thinking - i.e. to repatriate its gold - as nothing but political pandering (or cost-saving); it seems, just as we predicted, the rest of the world are seeing this crack-in-the-confidence-armor the same way we have suggested. As we noted here, the first party to defect from the prisoner's dilemma of all the bulk of global gold being held by the Fed, defects best (then the second, or even the third perhaps) and sure enough, via RTL, we see the Dutch CDA party has requested that Holland's gold supply be repatriated. Who next?
The Dutch government says it has 612 tonnes of gold - with a value of around E24 billion - and is thereby in the top 10 of countries with gold reserves. The bulk of the Dutch gold reserves is in America and, to a lesser extent, in Canada and the United Kingdom. The rest, about 10 percent, is in Amsterdam.
01-17-13
US MONETARY
1
1- EU Banking Crisis
GERMAN GOLD REPATRIATION - "To Combat Currency Crisis in the Future"
Germany’s Bundesbank is to repatriate gold reserves held abroad to tighten control and combat currency crises in the future, pulling a chunk of its holdings from New York and all its bullion from Paris.
The move marks an extraodinary breakdown in trust between leading central banks and has set off ferment among gold enthusiasts, with some comparing it with France’s withdrawal of gold from the US under President Charles de Gaulle as the Bretton Woods currency system crumbled in the late 1960s.
Handelsblatt said the Bundesbank will announce on Wednesday that it intends to relocate the gold to vaults in Frankfurt, said by insiders to include parts of the old archive library. Germany has 3,396 tons of gold worth roughly £115bn, the world’s second-largest holding after the US. Most of the reserves were stored abroad for safety during the Cold War.
The bank holds an estimated 45pc of its gold at the US Federal Reserve in New York, and 11pc at the Banque de France, lower than originally thought.
A report by Germany’s budget watchdog in October revealed that the bank halved its holding in London a decade ago, a period when the Bank of England was selling part of Britain’s gold at the bottom of the market to buy euros.
The gold was purportedly withdrawn because London was charging €500,000 a year in storage costs. The Bundesbank said part of 930 tonnes brought back was melted down for checks, and "not one gram was missing". It currently holds just 13pc of its total holdings at the Bank of England.
The Bundesbank says there is little reason to keep gold in Paris now that Germany is reunified and at peace. The bank will retain some reserves in London and New York for trading and liquidity purposes.
"Gold stored in your home safe is not immediately available as collateral in case you need foreign currency," said Bundesbank board member Carl-Ludwig Thiele late last year.
"Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity. Similar pound sterling liquidity could be obtained by pledging the gold that is held with the Bank of England."
The latest shift in strategy follows criticism by the German Court of Auditors, who said in a confidential report that the gold held abroad had "never been verified physically" and was not under proper control. A growing chorus of lawmakers in the Bundestag has demanded a return of all Germany’s gold in case the financial crisis escalates.
Veteran gold trader Jim Sinclair said the Bundesbank’s move is a pivotal event in the gold market and the latest warning for investors that they should keep metal bars under their physcial control, rather than relying on paper contracts.
"This sends a message about storing gold near you and taking delivery no matter who is holding it. When France did this years ago it sent panic amongst the US financial leadership. History will look back on this salvo as being the beginning of the end of the US dollar as the reserve currency of choice," he said.
Many analysts say the world is moving towards a de facto gold standard again as China, Russia and other reserve powers boost their holdings to diversify out of dollars and euros.
Unlike Britain, Spain, Switzerland, Holland and others, Germany did not sell any of its gold when bullion was out of fashion. Nor did Italy. The two countries are now sitting on very substantial reserves that are starting to take on political significance.
01-17-13
US MONETARY
1
1- EU Banking Crisis
GERMAN GOLD REPATRIATION - It Was Only A Matter of Time
In what could be a watershed moment for the price, provenance, and future of physical gold, not to mention the "stability" of the entire monetary regime based on rock solid, undisputed "faith and credit" in paper money, German Handelsblatt reports in an exclusive that the long suffering German gold, all official 3,396 tons of it, is about to be moved. Specifically, it is about to be partially moved out of the New York Fed, where the majority, or 45% of it is currently stored, as well as the entirety of the 11% of German gold held with the Banque de France, and repatriated back home to Buba in Frankfurt, where just 31% of it is held as of this moment. And while it is one thing for a "crazy, lunatic" dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most. In brief: this is a momentous development, one which may signify that the regime of mutual assured and very much telegraphed - because if the central banks don't have faith in one another, why should anyone else? - trust in central banks by other central banks is ending.
Much more importantly, it is being telegraphed as such, with Buba fully aware of just what the consequences of this (first partial, and then full; and certainly full vis-a-vis the nouveau socialist regime of Francois Hollande which will soon hold zero German gold) repatriation will be in a global monetary arena, which is already scraping by on the last traces of faith in a monetary system that is slowly but surely dying but first diluting itself to oblivion. And in simple game theory terms, the first party to defect from the prisoner's dilemma of all the bulk of global gold being held by the Fed, defects best. Then the second. Then the third. Until, in this particular case, the last central bank to pull its gold from the NY Fed and the other 2 primary depositories of developed world gold, London and Paris, just happens to discover their gold was never there to begin with, and instead served as collateral to paper gold subsequently rehypothecated several hundred times, and whose ultimate ownership deed is long gone.
It would be very ironic, if the Bundesbank, which many had assumed had bent over backwards to accommodate Mario Draghi's Goldmanesque demands to allow implicit monetization of peripheral nations' debts has just "returned the favor" by launching the greatest physical gold scramble of all time.
Die Bundesbank hat ein neues Konzept ausgearbeitet, wo sie künftig ihre Goldreserven lagern will. Nach Informationen des Handelsblatts (Dienstausgabe) sieht dieses Konzept, das am kommenden Mittwoch bekanntgegeben werden soll, vor, den heimischen Standort aufzuwerten, in New York dafür weniger Gold zu lagern und überhaupt kein Gold mehr in Paris zu horten.
Derzeit lagert das Gold der Bundesbank ihren Angaben zufolge in New York, London, Paris und Frankfurt. In der amerikanischen Notenbank Fed lagern 45 Prozent der insgesamt 3.396 Tonnen Gold, in der Bank of England in London 13 Prozent, in der Banque de France in Paris elf Prozent und im Hauptsitz in Frankfurt 31 Prozent. Diese Verteilung soll sich nun ändern.
We present it in the original for fear of losing something in translation, but in broad English terms the above reads as follows:
The German Bundesbank is developing a new approach as to where its gold will be stored. According to exclusive information, to be fully announced on Wednesday, the bank will in the future hold less gold in the New York Fed, and no more hold in Paris (Banque de France). As a result, the distribution of German gold, of which 45% is held in New York, 13% in London, 11% in Paris and 31% in Frankfurt, is about to change.
There is no need to explain why this is huge news (for those who have not followed our series on the concerns and issue plaguing German gold can catch up here, here, here, here, and certainly here) . At least no need for us to explain. Instead we will let the Bundesbank do the explanation. The following section is the answer provided by the Bundesbank itself in late October in response to the question why it does notmove the gold back to Germany:
The reasons for storing gold reserves with foreign partner central banks are historical since, at the time, gold at these trading centres was transferred to the Bundesbank. To be more specific: in October 1951 the Bank deutscher Länder, the Bundesbank’s predecessor, purchased its first gold for DM 2.5 million; that was 529 kilograms at the time. By 1956, the gold reserves had risen to DM 6.2 billion, or 1,328 tonnes; upon its foundation in 1957, the Bundesbank took over these reserves. No further gold was added until the 1970s. During that entire period, we had nothing but the best of experiences with our partners in New York, London and Paris. There was never any doubt about the security of Germany’s gold. In future, we wish to continue to keep gold at international gold trading centres so that, when push comes to shove, we can have it available as a reserve asset as soon as possible. Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity. Similar pound sterling liquidity could be obtained by pledging the gold that is held with the Bank of England.
And in case the above was not clear enough, below is the speech Buba's Andreas Dobret delivered to none other than NY Fed's Bill Dudley in early November:
Please let me also comment on the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany – a discussion which is driven by irrational fears.
In this context, I wish to warn against voluntarily adding fuel to the general sense of uncertainty among the German public in times like these by conducting a “phantom debate” on the safety of our gold reserves.
The arguments raised are not really convincing. And I am glad that this is common sense for most Germans. Following the statement by the President of the Federal Court of Auditors in Germany, the discussion is now likely to come to an end – and it should do so before it causes harm to the excellent relationship between the Bundesbank and the US Fed.
Throughout these sixty years, we have never encountered the slightest problem, let alone had any doubts concerning the credibility of the Fed [ZH may, and likely will, soon provide a few historical facts which will cast some serious doubts on this claim. Very serious doubts]. And for this, Bill, I would like to thank you personally. I am also grateful for your uncomplicated cooperation in so many matters. The Bundesbank will remain the Fed’s trusted partner in future, and we will continue to take advantage of the Fed’s services by storing some of our currency reserves as gold in New York.
So we wonder: what changed in the three months between November and now, that has caused such a dramatic about face at the Bundesbank, and that in light of all of the above, will make is explicitly very unambigous that the act of gold repatriation, assuming of course that Handelsblatt did not mischaracterize what is happening and misreport the facts, means the "excellent relationship" between the Fed and Buba, not to mention Banque de France which will shortly hold precisely zero German gold, has just collapsed.
Also, if the Bundesbank is first, who is next?
Finally, once the scramble to satisfy physical gold deliverable claims manifests itself in the market, we can't help but wonder what will happen to the price of gold: both paper and physical?
Credit-ratings companies will face European Union curbs on how they update markets about the quality of government debt under plans approved by the bloc’s lawmakers today.
The measures, intended to make it less likely that ratings decisions roil markets, will also give investors the right to sue if they lose money because of poor quality or deliberately distorted credit assessments. European Parliament legislators, voting in Strasbourg, France, backed the plans in a compromise deal with the EU’s 27 governments, which must now rubber stamp the accord before it can take effect.
“The part of the new regulation that will affect us the most is the controls and constraints on sovereign ratings,” Ian Linnell, group analytical head at Fitch Ratings Ltd., said in a telephone interview on Jan. 11. Under the draft law,
“both unsolicited and solicited ratings must be constrained by a calendar put in place the previous year,” he said.
... governments in the EU, including France and Germany, have called for tougher rules on ratings companies, saying their decisions risk harming the bloc’s fight against its fiscal crisis.
Unsolicited Assessments
Under the EU plan, each credit ratings company would pick a maximum of three days a year when they would be allowed to publish so-called unsolicited assessments of governments’ creditworthiness. “If the ratings agencies hadn’t made glaring errors and covered up for rather doubtful market practices, we wouldn’t have needed this initiative,” said Leonardo Domenici, an Italian member who steered the law through the EU’s Parliament in Strasbourg, France, and who held out the prospect of yet more European legislation in the field. “This is just a stage,” Domenici said. “We do need to follow up and continue looking at other options.”
Unsolicited ratings are those that haven’t been requested and paid for by a client.
Ratings companies will be able to issue such ratings outside of their three dates if they can justify it to regulators.
Publishing ‘Freedom’
“The law does leave some freedom for us to publish ratings outside of the timetable, and, where appropriate, we will do just that,” Linnell said. “Quite rightly, investors expect our ratings to reflect all relevant information and we will not wait for our slot in the calendar when a significant credit event occurs.”
The draft law requires ratings companies to submit a 12- month calendar to regulators showing when they plan to publish solicited and unsolicited sovereign ratings. It also requires that such ratings are published on a Friday.
“Credit-rating agencies will have to be more transparent when rating sovereign states and will have to follow stricter rules, which will make them more accountable for mistakes in case of negligence or intent,” Michel Barnier, the EU’s financial services chief, said in a statement after the vote.
On legal liability, the draft law foresees that investors and credit issuers will be able to claim damages from a ratings company if they suffer losses because of malpractice or gross negligence in the drawing up of assessments.
Liability Rule
France already has a similar liability rule targeted specifically at ratings companies, while other nations address the issue through general civil liability regimes.
Ratings companies “must be accountable,” Wolf Klinz, a lawmaker from the parliament’s Liberal group, said in an e- mailed statement.
At present, they “are able to escape from their responsibility by claiming that they just express opinions -- this is too easy,” Klinz said.
Parliament lawmakers voted to largely scrap proposals from Barnier to force businesses to rotate the ratings company they use to assess their debt, on concerns that the measure could raise companies’ funding costs.
Barnier had said that the measure was needed to boost competition for the so-called big three ratings companies, Fitch Ratings, Moody’s Investors Service Inc. and Standard & Poor’s.
The new rules should take effect by March, following final approval by governments, Stefaan De Rynck, a spokesman for Barnier, said in an e-mail.
‘Untested’ Measures
“Moody’s will now focus on implementation of the regulation, however concerns remain about a number of untested policy measures that have been included” in the draft law, Daniel Piels, a spokesman for Moody’s in London, said in an interview.
The legislation is the EU’s third round of rule-making for ratings companies since the 2008 financial crisis.
“We intend to comply fully with the new rules,” Martin Winn, a spokesman for Standard & Poor’s in London, said in an e- mail. The company will “be working closely” with the European Securities and Markets Authority to implement the standards, Winn said.
Under the draft law, the EU plans to block any investor from owning stakes above 5 percent in more than one rating company.
The law would also stop companies from giving rankings for debt issued by their shareholders, if the investors hold a stake of 10 percent or more in the ratings firm. The parliament vote is in line with a political deal on the law reached in November by legislators and officials.
Credit ratings companies are “playing a prominent role in the current sovereign-debt crisis,” Sven Giegold, a lawmaker from the assembly’s Green group, said in an e-mailed statement.
Lawmakers would have liked the rules to be “more ambitious in terms of addressing the market power of the ‘big three’ agencies and potential conflicts of interest,” he said.
We make more than we’ve ever made, we owe more than we’ve ever owed, and we have less than we've had in decades which is distributed to those that did not earn the money. This is a working definition of Trouble. The stock market is at an all-time high while the financial condition of the country has seriously deteriorated. We are printing $90 billion a month of little green pieces of paper while the Democrats yell at the Republicans to up the debt ceiling as they want to spend even more money to promote social welfare programs. We cannot afford the bills that we have now and we are being asked to add more to them. This is a recipe for disaster and I am reminded of those months right before the financial crisis of 2008/2009 where no documentation loans for Real Estate flourished and easy money was the normal course of things.
Perhaps the landscape has shifted from “money for nothing” for property to “money for nothing” for our national debt. Fiscal responsibility has evaporated in a grand scheme to get voters and Obama has put the Chavez Plan in place which appeals to the poorest of citizens, hands them money and expects their support at the polls. Hard work and earning a living are the ethics of past generations that are slowly being ground to dust in the flurry to socialize America and re-distribute wealth and having succeeded and having money is now thought of as a crime not far behind rape and arson. The White Knight is walking backwards and the Red Queen has lost her head and the Mad Hatter is in charge of the tea party.
“The trouble with practical jokes is that they very often get elected.”
-Will Rogers
Europe is in Trouble
The sovereign debt accounting is a fraud. Liabilities are not counted, contingent liabilities are not recognized and the balance sheet of the ECB is worse than America’s. Collateral considerations are a joke and loans are disguised, hidden and placed in various locked drawers and central bank vaults. The economies of Spain, Italy, Portugal, Cyprus, Greece, Ireland continue to deteriorate as their sovereign yields fall due to the Draghi put and the creation of their little pieces of blue paper which must be used somewhere for something. There is, once again, easy money in the United States but easier money in Europe and so the game continues as anyone with any common sense begins to wonder how it all will blow up and when. Is it to be Inflation or Valuation and will Gold be the next currency or are there going to be other answers.
Asia is in Trouble
Japan, once thought to be an ascending power, has drifted into a nightmare of insolvency and no growth where Deflation rules and the debts of the country now exceed the ability of their citizens and institutions to own them. The push is on for Inflation as the only way out as they argue with China over some islands that might have some oil reserves. In China growth is slowing, their one party system will not allow outside investment past a certain point, their banks are a shadow of the demands of the country and in disarray as political/economic scapegoats and the numbers that China provides for growth make no sense and so are discounted as maybe-maybe statistics. The central banks of both nations follow the tendrils of the American and European ones and the entire globe is encased in a soap bubble of our own making as some may see the fire but no one knows how to get safely out of the theatre.
Find two elephants, two zebras and two giraffes and start building the boat.
The World is in Trouble
The scheme has worked because there is no place to go, no place to run; no place to hide. The collusion is past anything we have ever seen in history. The central banks of the world are supporting intervention and massive protection of the State and we are witnessing the results while all of the newly created paper must be put somewhere and so bonds rise in price, absolute yields on sovereign debt will fall more, compression will continue and the equity markets will rise. All of this is not the result of fundamentals or of economics but solely the result of little pieces of paper being printed, distributed and having to find a home.
“God didn't make the little green apples, and it don't rain in Indianapolis in the summer time. And there's no such thing as Dr. Seuss or Disneyland and Mother Goose, no nursery rhymes.”
-Roger Williams, Little Green Apples
Pricked
The world is in a gigantic bubble and it is going to get pricked. Now it takes certain magical incantations and special spells to determine all of this but we learned a few things from our last go round so the crystal ball is less cloudy and my wand is at hand. Our last fiasco whacked the banks on the backside as the valuation of their holdings, most noticeably their ownership of subprime mortgages and of mortgage securitizations raised the specter of default and of systemic carnage. This time it will be certain sovereign nations that will be the catalyst. It may be the mundane running out of cash that will cause the torrent to flow as Greece, Cyprus, Spain, Italy, Ireland or Portugal that lines up for more money and is refused by various governments on the Continent. It may be a refusal by a sovereign nation to accede to the demands of the IMF/EU/ECB for funding or it may be social unrest in the spring that unseats some government as nationalism overcomes the grand European experiment. The giant central bank slosh of money has lowered yields but it has not improved the financial condition of any nation on the Continent and so push will come to shove once again. It may be that Germany refuses to waste anymore of their citizen’s money or that Britain will have had enough of being run out of Berlin or it could even be a refusal to fund America’s debt which comes from China and other Asian countries as our creditworthiness deteriorates. There are many pressure points pressing against the Bubble and one of them will give just as the subprime mess was where the prick took place last time. It was all the cause of “money for nothing and chicks for free” and while I am unsure about the chicks I am quite sure that the incredible amount of easy money will take its toll once again. Money, you know, ceases to be money when all that anyone sees is paper and not the guarantee that is imprinted on it. It could be Inflation on a grand scale or worse, Valuation that determines the charade and calls it for what it is and neither result will be pleasant.
You cannot keep printing money without consequences and when absolute and intrinsic valuations replace relative valuations then the game is afoot. Lower and lower yields also eventually have a serious impact on the people of a nation, pension funds, insurance companies and backlashes are certainly possible as the lives of people and institutions are put at financial risk. When the survival of the State puts its people in dire straits then, eventually, the citizens will rebel as the nation has forgotten just who composes its constituents. The people and institutions that have the capital will only go along quietly for so long when nations try to take what they have earned and dispossess it for others. The rich will become poorer and the poor will become poorer and when those with the capital have been deprived of it so that everyone is worse off then the Lords of Chaos will be in control once again. Look for securities that float, States that have no debt in Municipals, the few countries in the world that are still fiscally responsible and get ready to hold on to your hat. The charade goes on a little longer but it will not go on indefinitely and the time for preparation is now. When one plus one no longer equals two then something will give. Make sure you are not the one crying “Uncle.”
The trouble with going with the flow is that you
01-19-13
CANARIES
3
3 - Risk Reversal
WEF GLOBAL RISKS - Chronic Fiscal Imbalances Ranks First
Climate and governance dominate the World Economic Forum's eighth-annual Global Risks report published this week. "Dynamism in our hyperconnected world requires increasing our resilience to the many global risks that loom before us," writes the WEF's Klaus Schwab.
A total of 1,234 top experts from around the world submitted responses. One of the questions asked the experts to rate the likelihood of 50 major events on a scale of 1 (least likely) to 5 (most likely).
We've ranked the 17 they said were most likely to occur.
The 50 global risks in this report are interdependent and correlated with each other. The permutations of two, three, four or more risks are too many for the human mind to comprehend. Therefore, an analysis of the network of connections has been undertaken to highlight some interesting constellations of global risks seen in Figure 3.
In Section 2, these constellations of global risks are presented as three important cases for leaders: “Testing Economic and Environmental Resilience” on the challenges of responding to climate change, “Digital Wildfires in a Hyperconnected World” on misinformation spreading via the Internet, and “The Dangers of Hubris on Human Health” on the existential threat posed by antibiotic-resistant bacteria.
Each case was inspired by the findings from an initial network analysis and further developed through extensive research into current trends, potential causal effects, levels of awareness and possible solutions. Unlike traditional scenario methodologies, the risk cases do not attempt to develop a full range of all possible outcomes. They are instead an exercise in sensemaking as well as a collective attempt to develop a compelling narrative around risks that warrant urgent attention and action by global leaders. Readers are encouraged to refine these cases further and to develop their own scenarios based on the data presented.iv
Resilience – Preparing for Future Shocks
This year’s Special Report examines the increasingly important issue of building national resilience to global risks. It introduces qualitative and quantitative indicators to assess overall national resilience to global risks by looking at five national-level subsystems (economic, environmental, governance, infrastructure and social) through the lens of five components: robustness, redundancy, resourcefulness, response and recovery. The aim is to develop a future diagnostic report to enable decision-makers to track progress in building national resilience and possibly identify where further investments are needed. The interim study will be published this summer, and we invite readers to review the proposed framework and to share ideas and suggestions with the Risk Response Network.
Basically, because the country has done so little. While its true that the Bank of Japan has done QE a number of times, the truth is that it's been a real wuss.
As this chart shows, the actual growth of the balance sheet has been super-small compared with other central banks since the crisis (granted, Japan started sooner).
It's in part for this reason that since the crisis, the Nikkei has been a huge loser, compared to the S&P.
Bloomberg reports Federal Reserve officials from Chairman Ben Bernanke to Kansas City Fed President Esther George have been voicing concern in speeches over the last few weeks “that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.”
“I’m of the opinion we entered the ‘greater depression’ back in 2007,” Casey explains. “Look at it as being a hurricane. We passed the leading edge of the hurricane of 2007 - 2009. We’re now in the eye of the storm, which was created by these governments creating trillions of currency units. I think 2013 we’re going to come out through the trailing edge of the storm, and it’s going to be much worse and much longer than what we saw in 2008.”
... “There are going to be other bubbles created by all the money central banks are printing," he says. "And, they’re likely to be in the stock market."
"People will panic into stocks", as they panic out of dollars,
People are presently panicing into Bonds,
Gold is the only asset that is not another parites liability which today is terribly important
2000 Stock Bubble, 2007 Rela Estate Bubble, 2013 Bond Bubble,
Yields can't gom lower (much) and prices higher (much). The downside is lower prices. The government will do everything to keep this on hold. The variable is what the bonds will be denomiated in ie FOREX exchange.
A stronger dollar would allow bonds to go higher in price and even lower in yield.
One of the biggest "givens" of the New Normal was that no matter what happens, US corporations would build their cash hoard come hell or high water. Whether this was a function of saving for a rainy day in a world in which external liquidity could evaporate overnight, whether it was to have dry powder for dividends and other shareholder friendly transactions, or to be able to engage in M&A and other business transformations (but not CapEx, anything but CapEx), corporate cash swelled to over $2 trillion (the bulk of it held in deposit accounts, or directly invested in "cash equivalents" i.e. risk assets, in banks in the US and abroad). Whatever the use of funds, the source was quite clear: ever declining interests rate which allowed corporate refinancings into ever lower cash rates, a "buyer's market" when it comes to employees, the bulk of which have been transformed into low paid geriatric (55 years and older), part-time workers: the only two categories that have seen a steady improvement in employment since the start of the second great depression, and low, low corporate taxes (for cash tax purposes; for GAAP purposes it is different story altogether). So some may be surprised that the great corporate cash hoard build appears to have finally tapered off. As the chart below from Goldman shows, after hitting an all time high of 11.2%, the ratio of S&P500 cash to total assets has once again started to decline.
The implications of this chart may be innocuous, or, more likely, they may be very profound.
Recall that it was about 2 quarters ago that corporate profit margins peaked and have since declined steadily. Add to that the decline in revenues and EPS, and one can see that the natural cash generation capacity of US companies is also declining in parallel. Of course, as this is a ratio, the question is what other assets are rising to compensate for it.
We know what assets are not rising: Net P,P&E for one has been flat at best if not declining, as the rate of Depreciation and Amortization has been far greater than CapEx investments in recent years. While this has been a benefit for cash flow creation (lower taxes), it has also meant that future revenues will continue contracting as absent reinvestment in a business, absent renewing the capital base of businesses, there can be no organic growth.
Which means the offset may be rising goodwill, which is possible with the recent increase in M&A, although as the H&P - Autonomy transaction showed, goodwill on balance sheets is one fraudulent reports away from being fully written down.
It could also be Net Working Capital, which however means that more and more corporate liquidity is locked up in Net-30/60/ or 90 terms, which while indicative of some easing in counterparty confidence, means that should companies need full access to their cash, they won't have it.
Finally, it may well be a pure and simply outflow of cash as more and more is dividended to shareholders, or as retained earnings are built up following stock repurchases, following urgent shareholder demands to boost returns.
We hope to have a far more detailed answer to the question what is offsetting the drop in Corporate cash after the earning season is over, when we can analyze the full S&P500 balance sheet on a sequential basis.
But what is certain is that the days of the inexorable corporate cash growth are now over, and cash is now declining. What is also declining is the future growth of corporations, as well as their general profitability, even as their capex spending remains at near all time low depressed levels, while the asset base is aging faster and faster, generating lower and lower ROAs. One thing that will certainly be rising for US corporations, are cash tax rates, meaning even more cash outflows.
Which leads us to square one: now that corporate cash is once again declining, as it did in the period from the early 2000s until 2007 when the Great Depression 2.0 hit, only to soar afterward, does this mean that any hope of aggressive corporate EPS growth is now limited at best, and any future growth in the S&P is solely due to multiple expansion driven by the Fed's dilution of money in circulation. And since the answer is yes, the problem with the latter is that multiple expansion works, until it doesn't - i.e., until such time as the pace of input cost increase overwhelms the rise in revenues, and the only way for corporate profitability, and shareholders returns, is down.
That will be the time to get out of corporate Dodge.
In a February 2009 speech at the Marcus Evans conference on “stress testing,” Andrew Haldane — then executive director for financial stability at the Bank of England — noted his first run-in with market realism. He recounted a discussion he had been a part of, in which bankers were asked about the need for more severe stress-test scenarios than were currently in use by banks. Haldane says the bankers responded that “in that event, the authorities would have to step in to save a bank and others suffering a similar plight.” Based on the results of this week’s CFA Institute Financial NewsBrief reader survey, investors’ expectations have not been changed by what legislators, parliamentarians, central bankers, or regulators have done in the nearly five years since the failure of Bear, Stearns & Co.
Asked about the most important investment lesson they’ve learned over the past five years, 59.5% of 999 survey respondents said it is that central banks and governments will continue to bail out troubled creditors. Even worse, slightly more than 9% of respondents believe that institutional creditors will be more prudent in their lending in the future. In the parlance of economics books, this situation sounds like a recipe for moral hazard. Just 3.6% of respondents agreed that financial regulations adopted since 2008 will prevent systemic failures in the future — a similar percentage to that of a broader CFA Institute poll taken in July 2010, immediately after the passage of the Dodd-Frank Act. In the July 2010 survey, only one response apart from the statement on bailouts was seen as credible — namely, that equity market structures are negatively affecting market trust (24%).
01-19-13
ANALYTICS
INVESTORS
CONFIDENCE
33
33 - Public Sentiment & Confidence
TO TOP
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
GLOBAL IMBALANCES - Continue to Increase Along With Fragility
In the same fashion that I proposed an analytic framework for 2012, I want to lay out today what I think will be the big themes of 2013. Their drivers were established in September 2012, and I sought to give a thorough description of them here, here and here.
An Analytic Framework for 2013
In one sentence, during 2013, I expect imbalances to grow. These imbalances are the US fiscal and trade deficits, the fiscal deficits of the members of the European Monetary Union (EMU) and the unemployment rate of the EMU thanks to a stronger Euro. A stronger Euro is the consequence of capital inflows driven by the elimination of jump-to-default risk in EMU sovereign debt. Below is a drawing I made to help visualize these concepts:
The drawing shows a circular dynamic playing out: The threat of the European Central Bank to purchase the debt of sovereigns (that submit to a fiscal adjustment program) eliminates the jump-to-default risk of this asset class. As explained and forecasted in September, this threat also forces a convergence in sovereign yields within the EMU, to lower levels. As long as the market perceives that the solvency of Germany is not affected, the Bund yields will not rise to that convergence level. So far, the market seems not to see that (Possunt quia posse uidentur). But the resulting appreciation of the Euro will eventually address that illusion.
This convergence, in my view, is behind the recent weakness in Treasuries. I proposed this thesis last September. However, the ongoing weakness in Treasuries does not mean I was right. In fact, I fear I may have been right for the wrong reasons. The negotiations on the US fiscal deficit and the latest announcement of the Fed with regards to debt monetization quantitative easing to infinity may also be behind this move. But until proven wrong, I will cautiously hold to my thesis.
The above factors drove capital inflows back to the European Monetary Union and strengthened the Euro. I believe this strength will last longer than many can endure. The circularity of this all resides in that the strength of the Euro will make unemployment and fiscal deficits a structural feature of the EMU, forcing the ECB to keep the threat of and eventually implementing the Open Monetary Transactions. The alternative is a social uprising and that will not be tolerated by the Euro kleptocracy.
All this -and particularly the strength of the Euro- is not sustainable. Ad infinitum, it would create a Euro so strong that the periphery would drag coreEuropein its bankruptcy. But while it lasts, the compression in sovereign yield will mask the increasing default risks in Euro corporate debt, specially the one denominated in US dollars. Both have been fuelling the rise in the value of equities globally.
The unsustainable framework rests upon the shoulders of the Federal Reserve, which thanks to the established USD swaps and unlimited Quantitative Easing, has completely coupled its balance sheet to that of the European Central Bank. In the end, as this new set of relative prices between asset classes sets in, it will be more difficult for the European Central Bank to sterilize the Open Monetary Transactions.
History provides an example of the current growth in imbalances
By now, it should be clear that the rally in equities is not the reflection of upcoming economic growth. Paraphrasing Shakespeare, economic growth “should be made of sterner stuff”.
Under the current framework, the European Central Bank can afford to engage in the purchase of sovereign debt because the Fed is indirectly financing the European private sector. The Fed does so with the backstop of USD swaps and tangible quantitative easing, which provides cheap USD funding to European banks and thus avoids a credit contraction of the sorts we began to see at the end of 2011.
This same structure was in place between the Federal Reserve and the central banks of France and England in 1927, 1928 and 1929 and, as a witness declared, “(it)transformed the depression of 1929 into the Great Depression of 1931”. Something tells me that this time however it will be different. It will be worse. That little something is the determination of the new Japanese government to devalue its currency via purchases of European sovereign debt (ESM debt).
How fragile is this Entente?
Most analysts I have read/heard, focus on the political fragility of the framework. And they are right. The uncertainty over the US debt ceiling negotiations and the fact that prices today do not reflect anything else but the probability of a bid or lack thereof by a central bank makes politics relevant. Should the European Central Bank finally engage in Open Monetary Transactions, the importance of politics would be fully visible.
However, unemployment is “the” fundamental underlying factor in this story and I do not think it will fall. In the long term, financial repression, including zero-interest rate policies, simply hurt investment demand and productivity. I do not see unemployment dictating the rhythm in 2013, indirectly through defaults. Furthermore, in the meantime, the picture may look different, because “…we should not be surprised if, under zero-interest-rate policies in the developed world, we witness a growing trend in corporate leverage, with vertical integration, share buybacks and private equity funds taking public companies private…”. This is obviously supportive of risk.
No Systemic Meltdown in 2013?
From earlier letters, you know that I believe quasi-fiscal deficits (i.e. deficits from a central bank) are a necessary condition for a meltdown to occur, and that these usually appear when deposits begin to seriously evaporate. So far, capital is leaving main street (via leveraged share buybacks and dividends), but at the same time, it is being parked at banks in the form of deposits. The case of Wells Fargo and the temporary pause in the flight of deposits from the periphery of the European Union suggest that the process towards a meltdown, if any (and I believe there will be one) will be a long agony. Furthermore, in the short term, at the end of January, European banks, have the option to repay the money lent by the European Central Bank in the Long-Term Refinancing Operations from a year ago, on a weekly basis. I expect them to repay enough to cause more pain to those still long of gold (including me, of course).
01-16-13
THEMES
GLOBAL IMBALANCES
GLOBAL MACRO
GLOBAL TRENDS - National Intelligence Council
Global Trends 2030: Alternative Worlds Natiional Intelligence Council
A report by the National Intelligence Council predicts that the United States will lose its superpower status by 2030, but that no country — including China — will be a hegemonic power.
Instead, the report says, power will shift to “networks and coalitions in a multipolar world.”
The council, which wrote Global Trends 2030, was established in 1979. It supports the U.S. director of National Intelligence and is the intelligence community’s center for long-term strategic analysis.
The council’s intelligence officers are drawn from government, academia and the private sector.
FULL REPORT: Global Trends 2030
“The world of 2030 will be radically transformed from our world today,” the report concludes. “By 2030, no country — whether the U.S., China, or any other large country — will be a hegemonic power.”
The Office of the Director of National Intelligence is out with its annual forecast of what the world will look like in 2050. The report focuses on six "gamechanging" trends and events that will shape the world in the coming years.
Some we were mostly aware of — like threats to global economies from developed countries' deficits. But many others — like the prospect of new technology and the potential for increased conflict — surprised us.
Gamechanger 1: The Crisis-Prone Global Economy
CRISIS ECONOMY: “Drastic measures” will be necessary to curb growing fiscal liabilities in developed countries.
CRISIS ECONOMY: The global share of financial assets becomes much more evenly distributed.
CRISIS ECONOMY: Commodity instability will hit China and India, who remain import dependent.
CRISIS ECONOMY: Durations of business cycles will become significantly shorter and less smooth.
Megatrend 2: The Governance Gap
GOVERNANCE GAP: Growing middle classes in developing countries will increase demand for rule of law and government accountability.
GOVERNANCE GAP: About 50 countries qualify as falling somewhere between "free" and "not free."
GOVERNANCE GAP: And growth in the number of free countries has stalled in the past decade.
GOVERNANCE GAP: Climate stress, which will exacerbate water scarcity, could actually cause some governments to collapse.
Gamechanger 3: Potential For Increased Conflict
CONFLICT: Tensions have increased as the international system has become more fragmented and existing norms of cooperation fall out of favor.
CONFLICT: Resource competition will intensify.
CONFLICT: Cyber attacks have increased.
Gamechanger 4: Wider Spread Of Regional Instability
REGIONAL INSTABILITY: The Middle East's youth population is getting younger, and unemployment is rising.
REGIONAL INSTABILITY: Defense spending in Asia is increasing.
REGIONAL INSTABILITY: Latin America's growing middle class will clash with countries' inherent populism.
REGIONAL INSTABILITY: Using a new global power index, China will still surpass the US, but by 2040 instead of earlier.
Gamechanger 5: The Impact Of New Technologies
TECH: Three key technology areas will see wide inovation: information, the ability to store which is getting increasingly cheaper
TECH: Robotics and manufacturing, which is already affecting unit labor costs worldwide...
TECH: And resource technology, which will have to increase to compensate for declining crop yields.
Gamechanger 6: The Role Of The United States
AMERICA: For now, the U.S. continues to dominate the world in a number of areas.
AMERICA: And the U.S.'s share of the oil market is only going to increase. Read more:
AMERICA: But by 2050, China will enjoy greater purchasing power parity than the U.S.
AMERICA: Our demographic prosperity window is closing fast, while others' have just opened.
Our entire economic and political system is a farce. The American people are being played by the powerful interests that provide them with an illusion of choice. Both parties serve the interests of their masters and the fiscal cliff show and debt ceiling show are a form of reality TV to keep the masses alarmed, fearful, and believing there is actually a difference between the policies of the ruling class. The charade has played out in its full glory in the last few weeks with Obama convincing the masses he had stuck it to the rich, while in reality the working middle class got it good and hard when they got their January paychecks. This chart details the tax changes that went into effect on January 1.
The funniest part this fiscal fiasco farce is watching the reaction of the sheep who believed Obama and the mainstream media storyline. Obama was able to raise the published top rate on people making over $400,000. The newly defined “rich” laughed heartily as they know only fools pay anywhere near the top rate. The rich just call their tax advisor and instruct them to use one of the thousands of tax loopholes in the 75,000 page IRS tax code to “legally” avoid the new Obama rates. Meanwhile, both parties and their mainstream media mouthpieces downplayed the 2% payroll tax increase on every working American. This tax increase has been a complete surprise to the reality TV zombies and Facebook aficionados. Even college educated professionals in my office had no idea their next monthly paycheck was going to be $150 to $200 lighter. This will wipe out most, or all, of the annual raise they received. The tax will fall heavily on the 75% of households that make less than the $113,700 Social Security cutoff. For a struggling family of four earning the median income of $50,000, the $1,000 less in their paychecks will mean less food, putting off trips to the doctor, driving on bald tires, or not taking the family on a vacation to the Jersey shore. The $2,274 increase in taxes (.57%) for the Wall Street banker making $400,000 probably won’t put too much of a crimp in his Hamptons lifestyle.
The joke is on the American people as the rich will ante up maybe $50 billion of taxes in 2013, while the working middle class will be skewered for $125 billion. How’s that “Tax the Rich” slogan working out for you?
Only in the Orwellian capital of Washington DC would a bill that was supposed to provide tax relief to the middle class and spending cuts to reduce the deficit, actually increase the tax burden of a median household by $1,000 and perpetuate the pork spending payoffs to campaign contributors and friends of the slimy politicians that slither through the halls of Congress. The list of pork and bribes should be nauseating to hard working Americans across the country:
$30 billion extension of the 99 weeks of unemployment benefits, even though we are supposedly in the 3rd year of economic recovery. Continuing to pay people to not work for two years will surely boost employment.
$14.3 billion for a two-year extension of the corporate research credit benefiting large technology companies like IBM and Hewlett Packard.
$12.2 billion one-year extension of the production tax credit for wind power.
$11.2 billion two- year extension of the active financing exception, which lets GE, Caterpillar Inc. (CAT) and Citigroup Inc. (C), among others, defer taxes on financing income they earn outside the U.S.
$1.9 billion extension of the Work Opportunity Tax Credit for hiring workers from disadvantaged groups, benefitting mega-restaurant chains like McDonalds.
$1.8 billion extension of the New Markets Tax Credit for investments in low- income areas, benefitting JP Morgan and other Wall Street shyster banks.
$650 million tax credit for manufacturing energy-efficient appliances, benefitting mega-corps like Whirlpool.
$430 million for Hollywood through “special expensing rules” to encourage TV and film production in the United States. Producers can expense up to $15 million of costs for their projects. NBC thanks you.
$331 million for railroads by allowing short-line and regional operators to claim a tax credit up to 50% of the cost to maintain tracks that they own or lease.
$248 million in special expensing rules for films and television programs.
$222 million for Puerto Rico and the Virgin Islands through returned excise taxes collected by the federal government on rum produced in the islands and imported to the mainland.
$78 million for NASCAR by extending a “7-year cost recovery period for certain motorsports racing track facilities.”
$59 million for algae growers through tax credits to encourage production of “cellulosic biofuel” at up to $1.01 per gallon.
$4 million for electric motorcycle makers by expanding an existing green-energy tax credit for buyers of plug-in vehicles to include electric motorbikes.
So when you see the cut in your take home pay, just comfort yourself knowing that JP Morgan, Citigroup, GE and hundreds of mega-corporations were able to retain their tax breaks. As they have done for decades, Congress and the President agreed to address spending cuts at a future date. Of course, a government spending cut isn’t actually a cut. It’s a lower increase than their previous projection. Nothing is ever cut in Washington DC. The austerity storyline is a lie. Not a dime has been cut from the Federal budget. Intellectually dishonest ideologues try to peddle the wind down of the Obama $800 billion porkulus program as a cut in Federal spending. They sold this Keynesian “shovel ready” crap to a gullible public as stimulus to jumpstart the economy. Federal spending was $3.0 trillion before the Obama stimulus. After the two year stimulus was pissed away without helping the economy one iota, the baseline should have been back in the $3.2 trillion range. Instead, FY13 Federal spending will be $3.8 trillion. This hasn’t kept liberal ideologues like Krugman and his minions in the mainstream media from blaming crazy Tea Party Republicans for inflicting horrendous austerity measures on the poor and disadvantaged.
01-19-13
US FISCAL
US ECONOMICS
DEMOGRAPHICS - Immigration, Regionalization, Dependency and Obesity
When economists forecast the future, they have to consider one key variable: people.
Using charts and info from Pew, the Census, and a Ph.D presentation put together by Elise Barrella & Sara Beck of Georgia Tech, we've found some interesting facts about what America will look like in a few decades.
The general trends: More Latino, older, and unfortunately, fatter. These evolving demographic dynamics will have consequences on the economy, which we also address in this feature.
The Census says our population will jump another 100 million in just a few decades
Put aging and immigrants together, and you get a working-age population that will be "majority minority" in 2050
11 emerging "megaregions," economies become so interdependent that they form larger distinct entities
Dependency ratio — the proportion of nonworking to working people — is gonna surge. It's not clear whether we'll be able to support them
There's another thing that's gonna happen...we're gonna get fatter. this, not aging, is what's going to cause medical costs to skyrocket
01-14-13
INDICATORS
DEMO- GRAPHICS
US ECONOMICS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
Market Analytics
TECHNICALS & MARKET ANALYTICS
ANALYTICS - Long Term Regression-to-the-Mean Tells the Story
With stocks sitting at their 5-year highs, many investors are wondering what's next.
Peter Lee, Chief Technical Analyst at UBS, recently spoke with Eric King of King World News, and he offered a dire outlook.
According to Lee's reading of the charts, long-term "mean-reversion" could send stocks plummeting.
Currently, the mean based on Lee's "1942 trendline" values the S&P 500 at 740.
The S&P closed yesterday at 1,472.
Lee doesn't think that stocks will return to the trendline right away. But if it does by 2014, the S&P 500 would be at around 850.
From KingWorldNews.com:
Peter Lee: We are about to enter this convergence period, and we suspect in the second half of this year and into 2014 we will see a great deal of major movements in these financial markets. The charts below go back to the Great Depression when we had an 85% drop in the S&P.
...
The most recent test was the March 2009 low at 666 on the S&P. At that time the trendline was up into the low 600s, at 620, 630. So we were within striking distance during that panic. This 1942 trendline should be somewhere in the 850 area or above by 2014 (this would represent a horrendous drop of roughly 42% on the S&P).
... Eric King: “Either way we are in for one hell of a rough ride for equities.”
Lee: “We’re not done yet. Everyone thinks that we’re nearing the end of the bear market, or structural sideways trading market. We suspect we probably have another 5 to 8 years of this. No one wants to hear this call because investors have already been frustrated by the last 13 years.
We have run a number of internal studies dating back to 1800, and the track record has been 100% accurate. Every single time we have overextended market to the upside, we see a ‘mean reversion’ back to normal levels. Again, this is 100% accurate going back to the 1800s.”
"12 years into this sideways market, valuations are still 30% above the historical average, while in 1982 they were about 30% percent below average!" he writes. "Also, historically, stocks spent a good amount of time at below-average valuations before sideways market turned into a secular bull market."
In a presentation he recently gave to the CFA Society of Atlanta, Katsenelson closely reviews the history of secular bull and secular sideways markets.
In addition to pointing to above-average valuations, he argues that this current sideways market can persist because of higher taxes, lower government spending, heavy global debt, historically high profit margins, and overcapacity in China among other things.
Thanks to Vitaliy Katsenelson for giving us permission to feature his presentation.
A week ago, when Wells Fargo unleashed the so far quite disappointing earnings season for commercial banks (connected hedge funds like Goldman Sachs excluded) we reported that the bank's deposits had risen to a record $176 billion over loans on its books. Today we conduct the same analysis for the other big two commercial banks: Wells Fargo and JPMorgan (we ignore Citi as it is still a partially nationalized disaster). The results are presented below, together with a rather stunning observation.
First, Wells again - deposits over loans: record $176 billion.
Next: Bank of America: unlike Wells, BofA is not even trying as its deposits are soaring while the loans have been declining for 6 quarters in a row. Deposits over Loans: record $221 billion.
Finally: JP Morgan, or the bank that started it all when the CIO blew up and made it all too clear what happens with the "Excess deposit over loans" cash. December 31 Deposits over Loans: record $460 billion.
And this is how the consolidated deposit and loan data for the Big Three banks looks: some $858 billion, or nearly half of the $2 trillion in total excess deposits over loans in the entire US commercial banking system (speaking of Too Big To Fail).
Why is all of the above important? Because as we have explained repeatedly in the past several weeks, the "excess deposit cash over loans" is nothing more or less than additional prop trading capital, that banks can use as they see fit. The traditional regulatory explanation is that the cash is to be used for safe, responsible investment. Alas, as the JPM CIO debacle taught us, said cash is used for anything but, and is in fact used to fund prop trading operations deep inside these commercial banks.
But don't take our word for it. Take the word of the Task Force charged with explaining away the 2012 CIO Losses, released yesterday.
JPMorgan’s businesses take in more in deposits than they make in loans and, as a result, the Firm has excess cash that must be invested to meet future liquidity needs and provide a reasonable return. The primary responsibility of CIO, working with JPMorgan’s Treasury, is to manage this excess cash. CIO is part of the Corporate sector at JPMorgan and, as of December 31, 2011, it had 428 employees, consisting of 140 traders and 288 middle and back office employees. Ms. Drew ran CIO from 2005 until May 2012 and had significant experience in CIO’s core functions.19 Until the end of her tenure, she was viewed by senior Firm management as a highly skilled manager and executive with a strong and detailed command of her business, and someone in whom they had a great deal of confidence.
CIO invests the bulk of JPMorgan’s excess cash in high credit quality, fixed-income securities, such as municipal bonds, whole loans, and asset-backed securities, mortgage-backed securities, corporate securities, sovereign securities, and collateralized loan obligations. The bulk of these assets are accounted for on an available-for-sale basis (“AFS”), although CIO also holds certain other assets that are accounted for on a mark-to-market basis.
Beginning in 2007, CIO launched the Synthetic Credit Portfolio, which was generally intended to protect the Firm against adverse credit scenarios. The Firm, like other lenders, is structurally “long” credit, including in its AFS portfolio, which means that the Firm tends to perform well when credit markets perform well and to suffer a decline in performance during a credit downturn. Through the Synthetic Credit Portfolio, CIO generally sought to establish positions that would generate revenue during adverse credit scenarios (e.g., widening of credit spreads and corporate defaults) – in short, to provide protection against structural risks inherent in the Firm’s and CIO’s long credit profile.
The positions in the Synthetic Credit Portfolio consisted of standardized indices (and related tranches) based on baskets of credit default swaps (“CDS”) tied to corporate debt issuers. CIO bought, among other things, credit protection on these instruments, which means that it would be entitled to payment from its counterparties whenever any company in the basket defaulted on certain payment obligations, filed for bankruptcy, or in some instances restructured its debt. In exchange for the right to receive these payments, CIO would make regular payments to its counterparties, similar to premiums on insurance policies. As described in greater detail below, the actual trading strategies employed by CIO did not involve exclusively buying protection or always maintaining a net credit short position (under CSW 10%); rather, CIO traded in an array of these products, with long and short positions in different instruments.
In other words, JPM's own task force admitted the CIO was using excess cash for prop trading purposes (there is much more in the full 132 page document). This is when JPM had roughly $400 billion in excess cash over loans. JPM now has a record $460 billion and it most likely continues to invest this cash in any way it sees fit. Sadly, when asked to provide details about what the CIO is doing these days, Jamie Dimon provided no additional information.
Because if JPM was/is doing it, everyone else was/is doing it.
And you, dear savers, are the ones who money is being used by the banks to fund precisely this prop trading, which, among other factors (Fed) is what is causing the relentless stock market melt up.
01-18-13
ANALYTICS
STUDY
ANALYTICS
WEDGE - Ending Diagonals Are signs of Tops
Chart of the Day 01-16-13
For some further perspective on the current state of the stock market, today's chart presents the long-term trend of the S&P 400 (mid-cap stocks). As the chart illustrates, the S&P 400 rallied from late 2002 into the mid-2007 and then gave most of that back during the financial crisis. However, the S&P 400 rebounded well by recouping all losses incurred during the financial crisis and making new record highs in a mere two years. Since mid-2011, the S&P 400 has traded in a rather choppy fashion which has helped define its current wedge-shaped trading range (see the red and green trendlines). More recently, the S&P 400 has embarked on a sharp rally which has allowed it to break above resistance (see red line) and make new all-time record highs.
01-16-13
PATTERNS
ANALYTICS
COMMODITY CORNER - HARD ASSETS
THESIS Themes
2013 - STATISM
STATISM IS SLAVERY
01-18-13
THESIS
STATISM
GUN CONTROL - More Going On Here than Gun Control
Obama proposed 23 "gun controling" executive actions, which do little to actually control guns - that part falls to Congress, where the proposal will be promptly killed - but which will add some $4.5 billion to US spending, and which will "push for further action on his health care law, including insisting on the kind of mental health coverage states must provide under their Medicaid programs."
The breakdown of the spending is as follows, per Weekly Standard:
$4 billion for the president’s proposal “to help keep 15,000 cops on the streets in cities and towns across the country.” (That is roughly $266,000 per police officer.)
$20 million to “give states stronger incentives to make [relevant] data available [for background checks] … “$50 million for this purpose in FY2014”
“$14 million to help train 14,000 more police officers and other public and private personnel to respond to active shooter situations.”
“$10 million for the Centers for Disease Control to conduct further research, including investigating the relationship between video games, media images, and violence.”
$20 million to expand the National Violent Death Reporting System.
$150 million to “put up to 1,000 new school resource officers and school counselors on the job.”
What can one say: politics, fully, theatrically and embarrassingly "endorsed" by the children sitting behind the president.
Homeland won best TV series, best TV actor and actress. It IS a highly entertaining show which actually portrays some of the flaws of the MIIC system
Argo won best movie and best director. It glorifies the CIA and Ben Affleck spoke with the highest praise for the CIA.
And best actress went to Jessica Chastain of Zero Dark Thirty, a movie that has been vilified for propagandizing the use of torture.
***
The Military Industrial Intelligence Complex is playing a more and more pervasive role in our lives. In the next few years we’ll be seeing movies that focus on the use of drone technology in police and spy work in the USA. We’ve already been seeing movies that show how spies can violate every aspect of our privacy– of the most intimate parts of our lives. By making movies and TV series that celebrate these cancerous extensions of the police state Hollywood and the big studios are normalizing the ideas they present us with– lying to the public, routinely creating fraudulent stories as covers for what’s really going on.
***
I was hoping that Zero Dark Thirty would come up without any awards. I was hoping that at least such blatant propaganda promoting the lie that torture works would be repudiated by the Golden Globes. That didn’t happen.
***
The truth is we do live in a time when the police have been massively militarized. We don’t need movies or TV shows that celebrate that militarization. We don’t need entertainment that normalizes the obscene violations of our privacy that the intelligence state is inflicting upon us. We need stories that celebrate people who stand up to this seemingly irrepressible tide that is washing away our freedoms, sucking up all our resources and erasing the last bastions of privacy.
Zero Dark Thirty, Kathryn Bigelow’s quasi-fascistic glorification of the role played by the CIA in the so-called “war on terror” … was tapped for five awards.
Of course,there is plenty of other war-o-tainment. being peddled by Hollywood.
The military has long had a direct influence on Hollywood. For example, a book published by the University of Texas points out:
The Central Intelligence Agency has been actively engaged in shaping the content of film and television, especially since it established an entertainment industry liaison program in the mid-1990s.
The book laments:
The significant influence that the CIA now wields in Hollywood
Gizmodo reports:
The CIA has a pile of script ideas lying around.
***
The Department of Defense and just about every branch of the military has an entertainment industry liaison similar to the CIA’s.
If you want to make a war film and need a fleet of F-22s, a crowd of Marines, or a Navy aircraft carrier, just call up the Department of Defense’s entertainment media office and they’ll tell you if the Army can spare that M1A1 Abrams tank you’ve always wanted for a day or two of filming.
“The scripts we get are only the writer’s idea of how the Department of Defense operates,” Vince Ogilvie, deputy director of the Defense Department’s entertainment liaison office, told Danger Room. “We make sure the Department and facilities and people are portrayed in the most accurate and positive light possible.”
Hollywood has been working with government organizations to make more credible films for years (for instance, Jerry Bruckheimer and Paramount Pictures worked closely with the Pentagon when filming the 1986 blockbuster “Top Gun”). But the phenomenon is under newfound scrutiny. There was a bit of a kerfuffle recently when some in the press and in Congress speculated about whether the government will give Sony Pictures any pointers while they make a film about the killing of Osama bin Laden.
In a letter to the Defense Department and CIA last month, Rep. Peter King expressed outrage at the Pentagon’s relationship with the film’s director, Kathyrn Bigelow. King claimed that she had already been made privy to sensitive information that could put American lives at risk.
***
Standard procedure is to review the script, make notes on what the Defense Department would like changed, and kick it back to the producer. If the changes are made, the military will provide whatever help they can – declassified information, equipment, personnel, etc. – for a price.
***
Why has the Defense Department recently partnered with 20th Century Fox to make an X-Men/U.S. Army ad or with explosion-enthusiast Michael Bay to make all three Transformers movies? In The Washington Post, David Sirota suggests entertainment like this is “government-subsidized propaganda.”
The Guardian noted in 2001 that this has been happening for a long time:
For the first time in its history, the [CIA] has appointed an official PR liaison with Hollywood: veteran CIA operative Chase Brandon, whose 25-year career was spent defending democracy, it says here, in benighted South American theatres of the cold war.
These days, his brief is to preach a revised CIA gospel to Tinseltown, to overcome the lamentable image the agency acquired during the 1977 Church Congressional Commission on Assassinations, which it has struggled to shake off.
***
Other government agencies like the FBI, the Secret Service and the armed services discovered long ago the benefits of lending their cooperation to movies like Silence of the Lambs, In the Line of Fire and Top Gun.
Coming late to the game, the beleaguered CIA now has to overcome 25 years of suspicion – not to mention a grim history of covert assassinations, secret wars, illegal coups d’état, and the damaging revelations of former agents such as Philip Agee or John Stockwell – if it wants to clean up its image. This may be an uphill struggle, as the agency faces criticism for its failure to predict the events of September 11 – but suddenly, perhaps fortuitously, a slew of movies and TV shows about the CIA will be launched this autumn.
Brandon and the agency have approved eye-opening stuff. The Agency is a new CBS drama, full of best-and- brightest types rolling up their sleeves and attacking problems of national security, West Wing-style. Its first episode depicted a CIA attempt to foil an assassination attempt on Fidel Castro. This might surprise anyone remembering the agency’s attempts in the early 1960s to knock off Fidel with exploding cigars, sub-contracted mobsters and chemicals designed to make his beard fall out – to say nothing of the abortive Bay of Pigs invasion.
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The company also lent their support to Alias, an action series featuring Jennifer Garner as a grad student-superspy a few degrees away from La Femme Nikita. The Chris Rock-Anthony Hopkins comedy Bad Company traffics in similar comic-strip depictions of the CIA that Brandon was happy to help.
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Receipt of the CIA’s corporate imprimatur is conditional upon only one thing: a totally sympathetic portrayal of company business.
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It used to be the case that if a movie explicitly condemned CIA actions – such as Under Fire – the studios could be counted on to bury it.
In fact, the CIA first started working with Hollywood in the 1950s:
The CIA has been working with Hollywood since the 1950s.
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The CIA first started working with Hollywood to influence foreign audiences. “Their purpose was essentially to shape foreign policy or to win hearts and minds overseas during the cold war,” she says.
The CIA developed a think tank to fight communist ideology, which negotiated the rights to George Orwell’s “Animal Farm” — getting a talking pig on the screen 20 years before “Charlotte’s Web.” Jenkins says the CIA also wanted to promote a certain view of American life, for instance pressing for line changes in 1950s scripts to make black characters more dignified, and white characters more tolerant. This “politically correct” image was intended to promote an attractive image of America to a world picking sides in the Cold War.
Of course, pro-torture productions such as Zero Dark Thirty and the CIA-sponsored tv show 24 are 100% false: the top conservative and liberal interrogation experts say that torture hurts rather than helps national security.
The government also spreads propaganda through video games.
By way of example, former CIA director William Colby went to work for a video game company after he retired, and a former United States marine allegedly confessed to working at a video game company which was really a CIA front to create a game to drum up support for war against Iran.
“For decades the military has been using video-game technology,” says Nina Huntemann, associate professor of communication and journalism at Suffolk University in Boston and a computer games specialist. “Every branch of the US armed forces and many, many police departments are using retooled video games to train their personnel.”
Like much of early computing, nascent digital gaming benefited from military spending. The prototype for the first home video games console, the 1972 Magnavox Odyssey, was developed by Sanders Associates, a US defence contractor. Meanwhile, pre-digital electronic flight simulators, for use in both military and civilian training, date back to at least the second world war.
Later, the games industry began to repay its debts. Many insiders note how instruments in British Challenger 2 tanks, introduced in 1994, look uncannily like the PlayStation’s controllers, one of the most popular consoles of that year. Indeed, warfare’s use of digital war games soared towards the end of the 20th century.
“By the late 1990s,” says Nick Turse, an American journalist, historian and author of The Complex: How the Military Invades Our Everyday Lives, “the [US] army was pouring tens of millions of dollars into a centre at the University of Southern California – the Institute of Creative Technologies – specifically to build partnerships with the gaming industry and Hollywood.” [The Washington Times reports on the link as well.]
It’s a toxic relationship in Turse’s opinion, since gaming leads to a reliance on remote-controlled warfare, and this in turn makes combat more palatable.
“Last year,” says Turse, “the US conducted combat missions in Afghanistan, Iraq, Libya, Pakistan, Somalia and Yemen. There are a great many factors that led to this astonishing number of simultaneous wars, but the increasing use of drones, and thus a lower number of US military casualties that result, no doubt contributed to it.”
In 1999, the military had its worst recruiting year in 30, and Congress called for “aggressive, innovative” new approaches. Private-sector specialists were brought in, including the top advertising agencyLeo Burnett, and the Army Marketing Brand Group was formed. A key aim of the new recruitment strategy was to ensure long-term success by cultivating the allegiance of teenage Americans.
Part of the new campaign, helping the post-9/11 recruiting bump, was the free video game America’s Army. Since its release, different versions of the war game have been downloaded more than 40 million times, enough to put it in the Guinness book of world records. According to a 2008 study by researchers at the Massachusetts Institute of Technology, “the game had more impact on recruits than all other forms of Army advertising combined.”
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That these efforts are unfaithful to war’s reality has not gone unnoticed. Protesting the Army Experience Center in Philadelphia, Sgt. Jesse Hamilton, who served two tours in Iraq and nine total in the military, expressed disgust that the Army has “resorted to such a deceiving recruitment strategy.”
It’s an approach that could have detrimental long-term effects. “The video game generation is worse at distorting the reality” of war, according to one Air Force colonel. Although they may be more talented at operating predator drones, the colonel told the Brookings Institution, “They don’t have that sense of what [is] really going on.”
Video games are increasingly viewed by top brass as a way to get teenagers interested in enlisting.
Games such as “America’s Army,” developed and published by the Army, and “Guard Force,” which the Army National Guard developed with Alexandria, Va.-based Rival Interactive, can be downloaded or picked up at recruitment offices.
“America’s Army” has been a hit online since its July 2002 release, attaining 1.5 million registered users who endure a basic training regiment complete with barbed-wire obstacle courses and target practice.
“Guard Force” has been less successful. Released last year, it features bland synth-rock music that blares in the background. Between video commercials touting the thrills of enlisting in the Army National Guard, gamers pluck flood victims from rooftops or defend a snowy base. In the training mission, gamers deploy helicopters, even tanks, to rescue skiers trapped in an avalanche.
Video games would seem to be ideal propaganda tools. Where comic books and newsreels once enthralled the Greatest Generation, today’s millennials are in love with video games. American consumers, for example, spent $25 billion on games in 2010, while gamers worldwide play 3 billion hours a week. Games also offer advantages over traditional propaganda mediums like television or newspapers: They are interactive and immersive, they and deliver challenge, competition, and the hands-on triumph of personally gunning down enemies.
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Who could blame a CIA spymaster for pondering whether games could be used to demonize Iran or vilify Venezuela?
Governments are increasingly trying to twist the [video game] business into a brainwashing machine to promote their agendas, just as has been done with the movie industry.
Why are video games such a perfect tool for governments and why are governments stepping up their usage of them? Because the Internet generation now have easy access to all information and points of view. Governments don’t want kids using the Internet to learn about these things. So governments need to keep kids distracted and under constant brainwashing. A typical American kid might go to school all morning learning about how great America is and how dangerous the rest of the world is, then come home and play some video games like Strategy 2012.
This game was free during the Presidential campaign and tells you who you should vote for and how political campaigns are run (or at least how the government would like you to think it’s done). This is the official game description: “Help Mitt Romney win the Nomination by beating his conservative rivals. Then choose Romney or Obama and fight for the presidency in Ohio.”
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Not only are government-developed games spreading propaganda. Game developers are now accepting the norms set by the government like in Scribblenaughts where the game set’s a puzzle for you to solve by conjuring items. In one puzzle you get a mission called “Peacefully break up the Rioters!” What would a sane person try first? Well, I tried “Diplomat” and “Peacekeeper”. Neither had any effect. So I tried “Tear Gas” and had the crowd crying and disbursing in seconds, immediately earning a gold star just as you would in school when you have done something right! You can watch the video … of me playing the mission.
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Now that the gaming industry have been infected by government propaganda they are now constantly sending the information they want to your kids.
As such, it should not be entirely surprising that the enemy target in the most popular video game series, Call of Duty – which is more popular than virtually any movie or musical album – is a Julian Assange like character who is the “leader of the 99%”.
A surprising number of people in China have been writing and talking about “revolution”. First came word, in November, that China’s new leaders have been advising their colleagues to read Alexis de Tocqueville’s classic book on the French Revolution, L’Ancien Régime et la Révolution (The Old Regime and the Revolution), which subsequently has shot to the top of China’s best seller lists. Just this past week, Chinese scholar Zhao Dinxing, a sociology professor at the University of Chicago, felt the need to publish an article (in Chinese) laying out the reasons China won’t have a revolution (you can read an English summary here). Minxin Pei, on the other hand, thinks it will.
In the midst of this debate, I happened across an interesting set of passages in retired Harvard professor Richard Pipes’ slender volume Three “Whys” of the Russian Revolution. The first “why” he asks is “Why did Tsarism fall?”, an event that few saw coming:
If you read the Russian and foreign press before 1917, or memoirs of the time, you find that hardly anyone expected the downfall of tsarism either. On the contrary, people believed that tsarism would survive for a long time to come … For had not tsarism weathered all onslaughts and all crises [including the 1905 uprising], and emerged from them intact?
The answer, he argues, lies in the fact that Russian society changed dramatically, but its political system did not, leading to an explosive disconnect between the two:
So, around 1900, we have a mechanically rather than organically structured state that denies the population any voice in government, and yet, at the same time, aspires to the status of a global power. This aspiration compels it to promote industrial development and higher education, which has the inevitable effect of shifting much opinion and the power to make decisions to private citizens. Pre-1905 tsarism thus suffered from an irreconcilable contradiction. A not-insignificant segment of the population received secondary and higher education, acquiring, in the process, Western attitudes, and yet it was treated as being on the same level with the illiterate peasantry, that is, unfit to participate in the affairs of state. Capitalist industrialists and bankers made major decisions affecting the country’s economy and employment, yet had no say in that country’s politics because politics was the monopoly of the bureaucracy …
The result was a situation which Marx had rightly predicted had to arise when the political form — in this case, heavily centralized and static — no longer corresponded to the socio-economic context — increasingly dispersed and dynamic. Such a situation is by its very nature fraught with explosive potential. In 1982 [Pipes writes], when I worked in the National Security Council, I was asked to contribute ideas to a major speech that President Reagan was scheduled to deliver in London. My contribution consisted of a reference to Marx’s dictum that, when there develops a significant disparity between the political form and the socio-economic context, the prospect is revolution. This disparity, however, had now developed in the Soviet Union, not in the capitalist West. President Reagan inserted this thought into his speech, and the reaction in Moscow was one of uncontrolled fury: this, of course, was a language they well understood and interpreted to mean a declaration of political war against the Communist Bloc. Their anger was enhanced by the awareness that the statement was correct, that they were ruling in a manner that did not correspond to either the economic or the cultural level of their population.
Read that again carefully, line by line, with present-day China in mind, and I think you’ll find some fascinating food for thought. I have often observed that I know of no country that has changed as much in the past 30 years as China has, in terms of the kind of practical freedom people experience in their day-to-day lives. The greatest challenge facing China’s leaders is how — or whether — a fundamentally closed political system (rule by an elite) can cope with the dramatically more open economy and society that present-day China has become. That’s why they’re reading Tocqueville.
01-14-13
THEMES
SOCIAL UNREST
CENTRAL PLANNING
CENTRAL PLANNING - Complexity Determines the Outcome
The Expansionist State is on the path to insolvency and systemic political crisis.
The S-Curve usefully charts the gradual development, explosive rise and eventual stagnation and collapse of complex systems. Remarkably, natural phenomena such as the spread of bacteriological diseases and financial dynamics both follow S-Curves as they mature, stagnate and collapse. I have described the dominant dynamic of our era (1981-present), financialization, with the S-Curve: Financialization's Self-Destruct Sequence (August 16, 2021)
The S-Curve also helps us understand why the Expansionist Central State is doomed to inevitable implosion/collapse. This chart displays the key dynamics:
In its initial "boost phase," State investment in the low-hanging fruit of public infrastructure offers a high yield. Examples include rural electrification, the rapid expansion of the railroad system, the construction of the Interstate Highway system, and the publicly funded research and development of science and technology that enabled the basic protocols and software infrastructure of the world wide web.
These investments of public tax revenues acted as multipliers of private investment and leaps in productivity.
We can see in the chart that modest fiscal deficits when public monies are leveraging fast growth in the overall economy have little consequence, for tax revenues are climbing more or less alongside State expenditures as the economy rapidly expands.
The key dynamic in State spending is this: the allocation of public capital is intrinsically a political process, not a market or communal process. Thus politically powerful cartels and guilds will secure State funding for their vested interests, and potentially higher-value investments will go begging.
This is the opportunity cost of any financial decision: the opportunities left behind in the decision-making must be weighed along with the purported benefits of the chosen avenue of spending.
As the State expands its share and control of the economy, this political allocation of capital and national income also expands. As the State grabs an ever-larger share of the economy and extends its Central Planning to every layer of the economy, the "best game in town" inevitably becomes lobbying the State for funds and perquisites.
Private investment decisions start being made on the basis of State subsidies and tax loopholes rather than market-based metrics. This dynamic is especially pernicious: not only does the State increasing choose to fund projects with diminishing returns as a result of political allocation, the State's expansion of command and control distorts private investment as well.
The Expansionist State thus distorts the investment decisions of the entire economy, public and private. Households don't buy a home because it is a fruitful investment, they buy it to obtain the mortgage interest deduction. Corporations buy medical-supply companies because they see Medicare as low-risk cash-cow, and so on.
State expenditures cease to yield productive returns as spending increasingly goes to politically favored cartels. Did the billions of dollars spent on the B-1 Bomber in the 1980s yield a weapons system that provided leverage amd dominance? No, it was a horrendously costly and inefficient jobs project, with the defense cartel skimming millions of dollars off a program that had been terminated by those who realized the money would be better spent on other defense needs.
Has higher education improved dramatically as a result of the vast increase in spending on higher education? Has the health of American improved dramatically as a result of the vast increase in spending on healthcare? The answer in both cases is obviously no. Increasing spending simply increases systemic friction and unproductive skimming.
Central State spending has reached the point of negative returns: money is dumped into cartels but the yield on the investment is near-zero. This is the point of stagnation, where spending keeps rising but tax revenues are no longer keeping pace because the State has become an enormous drag on the economy.
Political allocation of the national income knows no bounds. Politically, there are never any limits. If tax revenues aren't keeping pace, then the State must borrow increasing sums of money to fund its spending. Politicians and their State fiefdoms/private-sector masters, the cartels of finance, defense, healthcare, education, construction, etc. are screaming for more funding; where it comes from is secondary to easing the political pain.
So the political class raises taxes on all but the parasitic class (finance) and wealthy cartels and corporations buy loopholes and exclusions to the new taxes. The burden falls on higher income households, who then have less to invest in the private sector.
We are at the inflection point indicated on the chart where the lines cross, just before the crisis: tax revenues are lagging spending in an enormous structural deficit; the State dominates the economy and its spending cannot possibly be contained, due to the political promises made to entitlement constituencies, fiefdoms and cartels, and the drag of unproductive State spending has sent the economy into systemic decline.
Each constituency, cartel and fiefdom is convinced that they are acting in their own best interests in demanding more State funding and subsidies. As a result, they are blind to the consequence of everyone becoming dependent on the Expansionist State: the collapse of a system that is now yielding a highly negative return on State spending.
When State spending is expanding faster than tax revenues (which are a function not just of tax rates but of economic expansion) and the underlying productive (non-State, non-finance) economy, then the gap can only be filled by borrowing money. This works until the interest on the fast-rising debt begins to crowd out spending on entitlements and other politically protected programs.
Progressives assume all State spending is productive; this is clearly a false assumption. Some State spending may be productive, but when it is allocated by a corrupting political process, the inevitable outcome is most State spending devolves to unproductive transfers from the politically weak to the politically powerful.
Tweaking tax policy or raising the debt ceiling will not change any of these dynamics.The Expansionist State is on the path to implosion (insolvency) and collapse, i.e. a political crisis. If we understand the core dynamics of the Expansionist Central State--the political allocation of scarce national income to favored constituencies and cartels--we understand why this process is inevitable.
France offers an illuminating example of this path to implosion and collapse, but every Expansionist Central State from China to the U.S. is also on the same path. France, the Hidden Zombie in Europe (Mish).
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