The Week That Was: May 27th - May 31st 2013

For Those Who Work During the Week!

Positives

1. Conference Board’s consumer confidence survey surges in May, 10yr spikes
2. Case-Shiller home prices surge in March, ironically led by the same states that fueled the last bubble
3. Richmond Fed Mfg beats expectations, however new orders plunge
4. NYSE Margin Debt reaches all-time high, this should end well
5. Dow continues its streak, now 20-20 on Tuesdays
6. The next crisis is already contained! Sallie Mae splits, with the intent on containing looming student loan bubble
7. Q1 US GDP revised down again , and initial claims jump (all news is now good news, as we all know)
8. US shrugs off weak 2yr auction, sees stronger 7yr $29bn dollar auction
9. UMich Confidence reaches 6 year high but spending slumped?
10. Chicago PMI smashes expectations (didn’t work out so well last time)

Negatives

1. JGB’s define ‘volatile’, exhibit 3 sigma price drop
2. This is NOT how you help cash flow Larry: Pensions being hit by ZIRP policy
3. ~60% of the S&P’s earnings since Q3 2011 have been due to CapEx & positive growth projects buybacks
4. Weak US 2yr auction, as US sells $35bn with BTC hitting a two year low
5. Crude oil drops on heavy volume
6. Cyprus bank deposits fall, but don’t tell Krugman
7. Japanese equities down, bond prices spike
8. Asset allocation of Japanese Public Pension Fund has the fund 64% in JGB’s
9. Demand for physical delivery of copper on LME soar to new record
10. Income and Spending data considerably worse than expected
11. European unemployment hits record high (and youth unemployment is stunningly bad)
12. Mortgage rates rise to one-year highs
13. US equities plunge into month-end

Additional

•  Peak Collateral: Are there enough assets to sustain the demand for credit?
• Hugh Hendry’s latest outlook
• David Stockman again takes Central Planners to task
• Jeff Gundlach on Central Planner’s making economic analysis irrelevant

JAPAN - Unsustainable Dysfunctional Situation Is Likely Model of What Lies Ahead Globally

FACTOIDS:

• ABENOMICS
  • YEN: -20% move in less than six months,
  • JGB: 10-year government bond (JGB) yields spiking from 0.35% to 1% in around 7 weeks is a sign of a Unhealthy / Dysfunctional market. The bond market being halted on numerous occasions due to unprecedented volatility is a further proof.
• REACTION
  1. Investors bailing due to 10-year government bonds yielding just 0.85% when the central bank is now OFFICIALLY targeting 2% inflation,
  2. Snowballing into liquidity concerns as the central bank increasingly crowds out other players in the bond market, leading to increased yield volatility.
  3. Rising Global Rates as spillover occurrs (VaR impacts)
• WHAT IT MEANS: Iinitial signs of investors' losing of faith in Japan's bond market - A prelude to what will later happen in other developed markets - Anticpate a Wide Volatile Ride
• UNSUSTAINABLE POLICY
  • LOOMING TAX REVENUE CRISIS: The interest of Japanese government debt already takes up 25% of government revenues. If yields were to rise to just 2.8%, that figures becomes 100%. A bond market crash would happen well before it got to that point though.
  • LOOMING BANKING CRISIS - VaR: The more immediate concern is with Japanese banks which hold massive JGB portfolios. According to the BoJ, a 100 basis point increase across all bond maturities would lead to mark-to-market losses of 10% of tier 1 capital for the major banks. Reduced capital means banks wouldn't be able to lend as much. This in turn would blunt the impact of Japan's quantitative easing (QE) policies.

Japan Foreshadows Next Global Crisis 06-01-13 Asia Confidential

Japan is the only game in town right now and for good reason. First, it was the yen's +20% move in less than six months and now there's the extraordinary volatility in Japanese stock and bond markets. What's behind the recent action? Nobel laureate Paul Krugman points to false alarm over rising bond yields which is actually reflective of increased optimism in a Japanese economic recovery. One can only assume Krugman wrote this with a straight face, all the while ignoring the real reasons for Japan's dysfunctional bond market:

1) investors bailing due to 10-year government bonds yielding just 0.85% when the central bank is targeting 2% inflation

2) And that snowballing into liquidity concerns as the central bank increasingly crowds out other players in the bond market, leading to increased yield volatility.

These first signs of investors' losing of faith in Japan's bond market not only spell trouble for the world's third largest economy. They're also likely to prove a prelude to what will later happen in other developed markets, including Europe and America. Namely, the unprecedented economic measures of the developed world will reach their limits when investors no longer view government bond markets as safe havens and yields spike on supply concerns. The jig will then be up and it'll have huge spill-over effects for the world's currencies, including the reserve currency, as well as stock markets. Hang onto your seatbelts; it's going to make for a wild ride.

Paul Krugman can't be serious

I played tennis at a high level as a teenager and one of my then heroes was the irrepressible John McEnroe. During one of his famous temper tantrums, McEnroe was so furious with an umpire at the Wimbledon championships that he uttered the immortal line, "you cannot be serious", before treating the centre court crowd to a more colourful diatribe.

I couldn't help but think of the McEnroe line when reading Paul Krugman's latest take on Japan. In the column in The New York Times, Krugman lauds Japan's unprecedented stimulus efforts:

"A short term boost to growth won't cure all of Japan's ills but, if it can be achieved, it can be the first step to a much brighter future."

This isn't a surprise given that Krugman, like the majority of the economics profession, believes that during an economic downturn, government stimulus and reduced interest rates can help to boost GDP growth as reduce unemployment (the Keynesian school of thought in crude terms). I won't debate that here, but as noted in many prior newsletters, there's little historical evidence that it actually works.

Krugman then goes to suggest that the stimulus efforts in Japan are starting to bear fruit:

"The good news starts with the surprisingly rapid Japanese economic growth in the first quarter of this year - actually, substantially faster growth than that in the United States, while Europe's economy continues to shrink. You never want to make much of one quarter's numbers, but that's the kind of thing that we want to see."

Here Krugman is on shakier ground for he knows (or should) that GDP growth isn't reflective of economic health (didn't we learn that from the 2008 financial crisis?). And he conveniently ignores the latest inflation statistics which show Japan remains mired in deflation.

Then we get to the more interesting part of the column. Krugman notes other positives in Japan including a steep rise in the stock market (prior to when the column appeared on May 23) and a sharp fall in the yen, aiding the country's exporters. Of the bond market volatility, he writes:

"Some observers have raised the alarm over rising Japanese long-term interest rates, even though those rates are still less than 1 percent. But the combination of rising stock prices and rising interest rates suggest that both reflect an increase in optimism, not worries about Japan's solvency."

Let's put aside the skewed logic that rising stock markets are a sign that Japan's economy is getting back on track (supposedly paper wealth via stock markets will trickle down into economic spending).

Let's instead focus on Krugman's claim that rising bond yields in Japan are sign of increased optimism. By the way, this is a view shared by most of his Keynesian brethren too.

If this claim leaves you scratching your head, you're not alone. Apparently we're supposed to believe that after 23 years of economic stagnation, bond investors (94% of them domestic at last count) now see better times ahead. That 10-year government bond (JGB) yields spiking from 0.35% to 1% in around 7 weeks is a sign of a healthy market. And that the bond market being halted on numerous occasions due to unprecedented volatility is a further sign of a healthy market.

Better reasons for a dysfunctional market 

There are other, more plausible reasons why Japan's bond market has become dysfunctional - and I don't think that's too strong a word for its current state. The first reason is that there are some investors who are clearly unhappy with getting paltry returns of 0.85% from 10-year JGBs. Why own them when the government is intent on producing 2% inflation, implying a -1.15% real return? Particularly when the bonds are denominated in yen, whose further decline seems assured given the central bank's extraordinary actions.

The second reason is that these extraordinary actions, involving the Bank of Japan (BoJ) printing money to buy JGBs, mean the central bank is becoming the dominant player in the JGB market, crowding out other investors. This crowding out effect reduces liquidity and heightens volatility. An illiquid market means that banks can't quickly find counterparties with which to trade large volumes of bonds.

The situation is likely to worsen as the BoJ intervenes more heavily in the bond market going forward. And it may have little choice, just to prevent a more substantial crash in the market.

There's also the possibility that the volatility in the JGB market will lead to rising yields in other developed world bond markets as investors look for better returns for the risks that they're taking on. This in turn could put further upward pressure on JGB yields.

The significance of the tumultuous action in Japan's bond market can't be understated. As I've said on many occasions, the interest of Japanese government debt already takes up 25% of government revenues. If yields were to rise to just 2.8%, that figures becomes 100%. A bond market crash would happen well before it got to that point though.

The more immediate concern is with Japanese banks which hold massive JGB portfolios. According to the BoJ, a 100 basis point increase across all bond maturities would lead to mark-to-market losses of 10% of tier 1 capital for the major banks. Reduced capital means banks wouldn't be able to lend as much. This in turn would blunt the impact of Japan's quantitative easing (QE) policies.

A template for what's to come

Few investors realise it yet, but the action in Japanese markets is likely a prelude to what will happen in other developed countries, including the U.S.

To understand why let's briefly take a step back. The 2008 financial crisis resulted in governments in many developed markets taking over the enormous debts accumulated in the private sector. Whether this was right or wrong has been endlessly debated and we won't do that here - it's done.

Cutting these enormous debts would probably have sent the world into depression. Instead, governments chose to try to inflate these debts away. That's where QE came into play. QE involved printing money to buy bonds off financial institutions. Theoretically, these institutions would use this money to lend more, thereby stimulating the economy. This would also produce inflation, thereby reducing government debts in local currency terms. Cutting interest rates at the same time would amplify the stimulus.

The problem is that banks haven't lent the money out to the extent that central banks would like. That's because consumers have been busy paying off debt and they've been frightened to take on more again. They've learned their lesson, in other words.

Because stimulus has failed to kick-start economies, government debt in developed markets has continued to skyrocket, and total debt remains on an uptrend too. In fact, total debt to developed market GDP is 270%, 21 basis points higher than it was in 2008!

Not to be deterred, governments in these developed markets don't view QE as a failed experiment. They believe that it's prevented a sharper economic downturn. And that more QE will help their economies recover faster. That means governments and their central banks everywhere are ramping up stimulus. It's a coordinated effort that's not been seen in modern history, not even during the Great Depression.

Therefore, it's highly likely that QE will be incrementally increased so long as economies don't recover to the satisfaction of central bankers. That's why you shouldn't expect any imminent cut to stimulus in the U.S. either.

In many respects, Japan is the template for what's to come in other developed markets. After an enormous credit bubble which burst in 1990, Japan has refused to restructure its economy in order for it to grow in a sustainable manner. Instead, it's chosen the less painful route of printing money to try to revive the economy and reduce debts in yen terms.

It's been unsuccessful at previous attempts at QE, including in the early 1990s and 2001-2006. Now it's got to the point where the debt load is so large at 245% of GDP, and the interest burden so excessive, that there are no good choices left. So Japan has chosen to print even more money, at the not-so-subtle urging of developed countries, particularly the U.S.

The trouble with this is that there comes a point where bond investors lose confidence in the ability of the government to repay the money. These investors then refuse to rollover government debt at low rates. When bond markets dry up, they normally do so quickly. The current wobbles in the Japanese bond market can be seen as a prelude to this endgame.

Though Japan has escaped its day of reckoning for a long time, other developed markets are unlikely to be as lucky, given the extent of their indebtedness and continued commitment to flawed policies.

FEDERAL RESERVE - Biggest EVER Monthly loss of 3.5% OR Double Its Total Capital

Ben Bernanke Capital May P&L: ($115) Billion 05-31-13 Zero Hedge

For all the attention paid to the 1.9% drop in PIMCO's $293 billion Total Return Fund in the month of May following one of the worst months for bonds in a long while, perhaps a far more important question is what happens when one mixes the world's largest actively managed, fixed income portfolio, that of the $3.4 trillion hedge fund located at 33 Liberty Street, and its DV01 of over $2.5 billion, with the 46 bps move in the 10 year in the month of May, and gets a P&L of ($115) billion, or double the said hedge fund's total capital.

The hedge fund in question is of course the Federal Reserve Bank.

While no LPs, aka taxpayers will be concerned at the biggest ever monthly "loss" of 3.5% just yet, because it is simply on "paper", at what point will that most precious of central bank commodities - fiath that the bald man behind the curtain knows what he is doing - start running in short supply? And, even worse, how long before the Fed has to start paying ever more and more reserve interest to the same banks (the majority of which are foreign) so reviled for being bailed out in the first place, until one day, it goes cash flow negative and has to request a bailout from the US Treasury and thus, the US people?

• EU eases hard line on austerity
• Hollande raises alarm on Europe’s jobless youth
• EU ‘sacrificial lamb’ faces budget fines
• In depth Austerity Europe
• FT series Europe – Make or Break
• Wolfgang Munchau Europe’s future looks more Japanese than German

EU - Unemployment Going the Wrong Way

The Only Difference Between The US And Europe That Matters 05-24-13 BI

"The labour market is an example of the divergent performance between the two regions," wrote Deutsche Bank's economists in their new House View report. "Unemployment stood at roughly the same level in mid-2009. Since then, US unemployment has edged down to 7.5% while Eurozone unemployment has risen to record highs of 12.1%"

EU YOUTH EMPLOYMENT - Crisis Level

The Unemployment Chart That Could Still Destroy Europe 05-28-13 BI

Bank of France chief Christian Noyer says that youth unemployment is a fundamental threat to the European Project.

This is intuitive. A huge generation of unemployed youth will create volatile politics, the potential for social unrest, and blight of lost skills and time that could harm Europe for years.

Meanwhile, the EU has released a memo on tackling the youth employment crisis (via Peter Spiegel). It urges the establishment of national Youth Guarantee programs, which ensure job offers and vocational training to those under 25.

What is the EU doing to tackle youth unemployment?

The July 2012 country-specific recommendations sought to ensure that youth employment remains high on the policy agenda of all Member States where youth unemployment rates are particularly dramatic.

The European Commission proposed in December 2012 a Youth Employment Package to help Member States specifically tackle youth unemployment and social exclusion by giving young people offers of jobs, education and training (see IP/12/1311 and MEMO/12/938,). This package includes:

• A proposal for a Council Recommendation to introduce a Youth Guarantee
• A Quality Framework for Traineeships
• A European Alliance for Apprenticeships

The Youth Guarantee Recommendation was adopted by the EU's Council of Ministers on 22 April 2021 (see MEMO/13/152). The European Commission urges Member States to now put in place the structures to make the Youth Guarantee a reality as soon as possible. The Commission will soon present further initiatives to support Member States in their efforts to put in place their youth guarantee scheme.

What is the Youth Guarantee?

The Youth Guarantee, based on experience in Austria and Finland, seeks to ensure that all young people up to age 25 receive a quality offer of a job, continued education, an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed. The Youth Guarantee is one of the most crucial and urgent reforms required to address youth unemployment and to improve school work transitions. This chart in the report shows the extent of the crisis across the EU.

AUSTERITY - Now Officially Dead Public Policy

EU Extends Deficit Deadlines For Most European Countries, Admits Structural Adjustment Failure, Kills Austerity 05-29-13 Zero Hedge

Moments ago, the following European Commission website hit the interwebs, which can be summarized as follows:

• EU EXTENDS DEFICIT DEADLINE FOR POLAND TO 2014
• EU EXTENDS DEFICIT DEADLINE FOR SLOVENIA TO 2015
• EU EXTENDS DEFICIT DEADLINE FOR PORTUGAL TO 2015
• EU EXTENDS DEFICIT DEADLINE FOR NETHERLANDS TO 2014
• EU EXTENDS DEFICIT DEADLINE FOR SPAIN UNTIL 2016
• EU RECOMMENDS LIFTING DEFICIT REGIME FOR ROMANIA, LITHUANIA
• EU RECOMMENDS LIFTING EXCESSIVE-DEFICIT REGIME FOR ITALY
• EU SAYS 20 STATES CURRENTLY UNDER EXCESSIVE-DEFICIT PROCEDURES

Translation: the theatrical spectacle of Europe's austerity, which never really took place, is finally over. Going forward political incompetence will henceforth be known as just that: incompetence, and elected rulers will not be able to pass the buck to evil, evil, "austerity." More importantly, Europe has also proven without a doubt, that any "structural adjustments" on the continent are impossible, and that governments are locked in a spend till you drop mode.

For Europe's sake, it better find a sake of endogenous credit creation once the BOJ's carry trade fueled mask of all that is wrong with Europe fades away. Alas, following yet another painful M3 report, and an intractable ECB which refuses to monetize de novo and unsterilized (and simply can't "lack of fiscal union" reasons previously explained), where such credit creation will come from is unknown.

WELFARE MYTH - The Beginnings of the Unwind

Schaeuble Warns Of "Revolution" If Welfare Model Threatened 05-28-13 Zero Hedge

Over the weekend, when discussing the latest casualty of Bernanke's disastrous monetary policy, the US corporate pension plan, we touched on a topic that has been a recurring theme on these pages:

"the start of the unwind of the welfare myth, if only in the private sector for now"

made worse by Ben Bernanke's endless tinkering in what was formerly a free market, should be making the guardians of the status quo very, very nervous... and certainly has the disciples of the Bismarckian welfare state delusion on their toes, because they can see very well what is coming down the road." Moments ago none other than Germany's finance minister, Schrodinger Schaeuble, explained just why this observation is at the core of all modern problem, going so far as using the R-word in the context of Europe (first, and then everywhere else).

From Reuters:

German Finance Minister Wolfgang Schaeuble warned on Tuesday that failure to win the battle against youth unemployment could tear Europe apart, while abandoning the continent's welfare model in favour of tougher U.S. standards would cause "revolution".

Germany, along with France and Italy, backed urgent action to rescue a generation of young Europeans who fear they will not find jobs, with youth unemployment in the EU standing at nearly one in four, more than twice the adult rate.

"We need to be more successful in our fight against youth unemployment, otherwise we will lose the battle for Europe's unity," Schaeuble said.

While Germany insists on the importance of budget consolidation, Schaeuble spoke of the need to preserve Europe's welfare model.

If U.S. welfare standards were introduced in Europe, "we would have revolution, not tomorrow, but on the very same day," Schaeuble told a conference in Paris.

"We have to rescue an entire generation of young people who are scared. We have the best-educated generation and we are putting them on hold. This is not acceptable,"

Italian Labour minister Enrico Giovannini said.

"Let's be honest, there is no quick fix, there is no grand plan," said Werner Hoyer, head the European Investment Bank.

This explains why our long-running series of charts of youth unemployment has been labeled "Europe's scariest chart."

What is amusing, however, is that for Schauble it is not just abandoning the welfare state model that would promptly incite glimpses of the new coming of the French revolution: all that is needed is the adoption of "tougher US standards." Tougher?

Then perhaps a better question is how US society has been so remarkably reslient in the fact of a "recovery" that has led to job gains exclusively for the older set, those 55 and older, while the number of young workers (54 and under) employed is still down some 3 million since the arrival of Obama?

Jobs: young vs old:

And more granular, broken down by age group.

Oh well, just add more QE (because 4 years of the same one and only remaining flawed prescription to a gangrenous underlying problem are obviously not enough) and let it simmer. Eventually, it will be different.

WELFARE MYTH -Unsustainable

Why Social Unrest In Europe Has Been Subdued (For Now) 05-29-13 Stratfor via ZH

When even the political elite are voicing concerns about the possible social implications of youth unemployment rates in Europe being so egregiously high, you know that there are problems. The question many have is that until now riots have been few and far between (most notably Sweden and Switzerland recently); so why are the main areas of massive unemployment not seeing the widespread chaos? The answer, perhaps unsurprisingly, is in government handouts but as Stratfor notes, time is running out for the benefit-beholden generation and perhaps the governments will finally see what so many have been fearful of.

Via Stratfor,

Greece, Spain and Portugal have the highest rates of unemployment in the eurozone, and all have relied heavily on unemployment benefits as a safety net for people who have lost their jobs. Of the three countries, Spain's unemployment system is the most generous. On average, Spain currently spends roughly 800 euros ($1,030) per inhabitant on these benefits (from 483 euros in 2007), while Greece spends some 330 euros (from 216 euros in 2007) and Portugal around 230 euros (from 182 euros in 2007).

The unemployment benefits system -- along with other social benefits such as pensions and increased remittance inflows from family members abroad, as well as aid from family members at home and, to some extent, informal economic activities -- is somewhat mitigating the social aspect of the European economic crisis.

However, these safety nets are limited.

CREDIT CONTRACTION - Insufficient Collateral

European Credit Contraction Accelerates, Spanish Loan Creation Craters 05-29-13 Zero Hedge

There is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.

ECB unable and unwilling to engage in outright unsterilized credit creation (i.e., pumping low powered money into banks which can then invest in businesses buy stocks),

The only hope for European growth is that its commercial banks will be net lenders and thus net contributors of credit money to the economy. However, as we first discussed over a year ago,

Europe simply no longer has the debt capacity against which banks can lend:

• SECURED through unencumbered assets
• UNSECURED through future cash flow

Today's M3 data simply confirmed that for Europe a long, hard painful slog is best it can hope for. That is, assuming of course, the

1. soaring unemployment,
2. deteriorating demographics and
3. collapsing welfare state

do not lead to a revolution first as Wolfi Schaeuble warned yesterday.

From SocGen:

The broad monetary aggregate M3 expanded by €15 bn in April. We see this expansion as a technical correction from last month’s report. In fact, last month’s deceleration of M3 was largely attributed to the Cyprus events. However, the broad aggregate is still growing at a slow pace, well below its reference value of 4.5%. On the credit side, there is no sign of improvement. In fact, credit to the euro area private sector is contracting further to -0.9% yoy from -0.7% yoy.

Looking at the country level, we still see signs of credit crunch in the peripheral economies. In Spain, outstanding loan to non financial corporation is contracting at -19.1%. Yet, there is little incentive to borrow given the lack of confidence in future growth.

The key charts that matter: Eurozone M3 and net lending. The blue line is what should be happening. The brown line is what is happening.

And a nation by nation breakdown. Oops, Spain.

All of the above is the bad news.

The good news is that for now at least Europe still is the proud recipient of exogenous credit creation, mostly from

1. Japan
2. Assorted US hedge funds,
3. Various European banks rehypothecating sovereign bonds with the ECB.

This has prevented the economic reality from spilling over into the bond sector as it did in 2010, 2011 and 2012. Soon the carry arb will disappear and slowly but surely European peripheral bonds will resume their traditional trading pattern, which will return the crisis squarely where it belongs.

In the meantime, Europe is delighted that it has bought itself some time in which to enact the structural reforms so desperately needed to make it a viable going concern.

Oh wait, as the ECB reported today Europe never did any of that because politicians were hoping and praying the bankers would fix it all. Oops. 

INTERMEDIATE TERM - In the Process of Putting In an Intermediate Term Top

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CITI: The Stock Market Is Getting Dangerously Close To 'Euphoria' Territory 05-28-13 Citi via BI

Citi's proprietary Panic/Euphoria model has a remarkable track record for predicting the direction of the stock market based on a variety of market sentiment measures. When investor sentiment is euphoric, expected returns are low. And when investors are panicking, expected returns are high.

In his latest note to clients, Citi's Tobias Levkovich warns that sentiment is once again approaching euphoria.

"The Panic/Euphoria model was signaling last summer that there was a 96% chance of impressive gains by mid-2013 but it is now showing a meaningful spike towards the euphoria level which does not augur nearly as well for investors," wrote Levkovich.

That's not the only thing that's making Levkovich cautious these days. "Moreover, lower intra-stock correlation also implies a more upbeat investment community focused on stock selection and less concerned about macro dynamics, thereby adding to the risk profile as economic, political or geopolitical events are no longer being considered by fund managers by virtue of their actions," he wrote.

Complacency and euphoria are the types of things that will exacerbate market volatility should a sell-off come.

FRANCE - Rapidly Deteriorating Confidence

French Consumer Confidence Is One Of The Ugliest Charts We've Seen In A Long Time 05-28-13 BI

Hoo boy. It's hard to recall the last time we came across a chart as abjectly ugly as this chart of French Consumer Confidence.

It was put together by Vincent Flasseur of Reuters Datastream, and it shows Consumer Confidence vs. GDP. Confidence is at an all-time low.

There's a widespread sense that the French economy is deteriorating and becoming more peripheral-like. The new President Francois Hollande is wildly unpopular, which is not surprising at all when you look at a chart like this.

MACRO LANDSCAPE - Situational Analysis

Macro View in 10 Bullet Points Marc To Marketvia ZH

1.  The market is getting ahead of itself with the idea the Fed will soon taper its asset purchases.  

2.  A serious tapering discussion cannot take place until September and even then, depending on the data for early Q3,  the discussion need not lead to immediate action.  

Talk of tapering serves Fed's purposes and has seen the markets re-price risk.  

3. It is not just about the real economy;  price pressures are low and, when adjusted for the borrowing associated with corporate share buy-backs, the credit growth is on par with Europe. 

4.  The ECB is very unlikely to cut the deposit rate below zero.  It is like the OMT, where the effectiveness may lie more in the lack of use.   It is part of the forward guidance to remind the market that there are other measures the ECB is prepared to take if necessary.  

5. A refi rate cut is largely irrelevant when key overnight rates are hovering just above zero.  

6. The shift away from austerity in Europe suits most, even Merkel who is maneuvering to outflank her domestic critics ahead of the September election.  However, the subtext may prove more vital in the next phase, and that is the emphasis on structural reforms, which may prove as onerous as recent austerity measures.

 Emphasis on structural reforms, which may prove as onerous as austerity.

7. Despite widespread official endorsements, Abenomics has a critical contradiction at its core between ensuring lower rates while trying to boost inflation, and without resolving this, it cannot, by definition, succeed.

 Critical contradiction at its core between ensuring lower rates while trying to boost inflation

8. The domestic push for a weaker yen has lessened.  A Thomson Reuters survey found many Japanese businesses are content with current levels.  Some Japanese officials see the stabilization of  the yen as helpful to stabilize the bond market.  At the same time, the comments from the IMF's Lipton suggest the yen has under-shot its longer-term value, seemingly suggesting the deviation is acceptable for the moment, provide structural reforms are implemented.  

The domestic push for a weaker yen has lessened

9.  To the extent that QE was good for emerging markets, the tapering talk and rise in US interest rates has triggered a dramatic wave of position squaring.  This is clearly evident in the emerging market sovereign bonds.  The dollar has benefited as well as part of a large carry trade is unwound.  

10.  The historic pattern in which EM bonds, as an asset class, trade like high beta-Treasuries:  both in the same direction but more so.  This is also why spreads often show a directional bias. 

GERMANY - Falling CAPEX Is a Bad Sign for Future Growth

The Economic Engine Of Europe Is Beginning To Sputter 05-24-13 an Corrigan of Diapason Commoditiesvia ZH

Despite ultra-low interest rates, practically unlimited liquidity, and a capital market seemingly willing to lend to anyone for anything on any terms, the very heart of Europe's economy - German CapEx on machinery - is falling at a rate faster than during the Tech bust... the tough news for anyone looking for a silver lining is that this just goes to confirm what we saw in US durable goods orders - there is simply no 'decoupling', it is a lead-lag inter-linked global economy.

(h/t Sean Corrigan of Diapason Commodities)

US - Decay Hidden by Denial & Dillusion

40 'Frightening' Facts On The Fall Of The US Economy 05-27-13 Michael Snyder of The Economic Collapse blog, via ZH

40 Statistics About The Fall Of The U.S. Economy That Are Almost Too Crazy To Believe

If you know someone that actually believes that the U.S. economy is in good shape, just show them the statistics in this article.  When you step back and look at the long-term trends, it is undeniable what is happening to us.  We are in the midst of a horrifying economic decline that is the result of decades of very bad decisions.  30 years ago, the U.S. national debt was about one trillion dollars.  Today, it is almost 17 trillion dollars.  40 years ago, the total amount of debt in the United States was about 2 trillion dollars.  Today, it is more than 56 trillion dollars.  At the same time that we have been running up all of this debt, our economic infrastructure and our ability to produce wealth has been absolutely gutted.  Since 2001, the United States has lost more than 56,000 manufacturing facilities and millions of good jobs have been shipped overseas.  Our share of global GDP declined from 31.8 percent in 2001 to 21.6 percent in 2011.  The percentage of Americans that are self-employed is at a record low, and the percentage of Americans that are dependent on the government is at a record high.  The U.S. economy is a complete and total mess, and it is time that we faced the truth.

The following are 40 statistics about the fall of the U.S. economy that are almost too crazy to believe...

#1 Back in 1980, the U.S. national debt was less than one trillion dollars.  Today, it is rapidly approaching 17 trillion dollars...

#2 During Obama's first term, the federal government accumulated more debt than it did under the first 42 U.S presidents combined.

#3 The U.S. national debt is now more than 23 times larger than it was when Jimmy Carter became president.

#4 If you started paying off just the new debt that the U.S. has accumulated during the Obama administration at the rate of one dollar per second, it would take more than 184,000 years to pay it off.

#5 The federal government is stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day.

#6 Back in 1970, the total amount of debt in the United States (government debt + business debt + consumer debt, etc.) was less than 2 trillion dollars.  Today it is over 56 trillion dollars...

#7 According to the World Bank, U.S. GDP accounted for 31.8 percent of all global economic activity in 2001.  That number dropped to 21.6 percent in 2011.

#8 The United States has fallen in the global economic competitiveness rankings compiled by the World Economic Forum for four years in a row.

#9 According to The Economist, the United States was the best place in the world to be born into back in 1988.  Today, the United States is only tied for 16th place.

#10 Incredibly, more than 56,000 manufacturing facilities in the United States have been permanently shut down since 2001.

#11 There are less Americans working in manufacturing today than there was in 1950 even though the population of the country has more than doubled since then.

#12 According to the New York Times, there are now approximately 70,000 abandoned buildings in Detroit.

#13 When NAFTA was pushed through Congress in 1993, the United States had a trade surplus with Mexico of 1.6 billion dollars.  By 2010, we had a trade deficit with Mexico of 61.6 billion dollars.

#14 Back in 1985, our trade deficit with China was approximately 6 million dollars (million with a little "m") for the entire year.  In 2012, our trade deficit with China was 315 billion dollars.  That was the largest trade deficit that one nation has had with another nation in the history of the world.

#15 Overall, the United States has run a trade deficit of more than 8 trillion dollars with the rest of the world since 1975.

#16 According to the Economic Policy Institute, the United States is losing half a million jobs to China every single year.

#17 Back in 1950, more than 80 percent of all men in the United States had jobs.  Today, less than 65 percent of all men in the United States have jobs.

#18 At this point, an astounding 53 percent of all American workers make less than $30,000 a year.

#19 Small business is rapidly dying in America.  At this point, only about 7 percent of all non-farm workers in the United States are self-employed.  That is an all-time record low.

#20 Back in 1983, the bottom 95 percent of all income earners in the United States had 62 cents of debt for every dollar that they earned.  By 2007, that figure had soared to $1.48.

#21 In the United States today, the wealthiest one percent of all Americans have a greater net worth than the bottom 90 percent combined.

#22 According to Forbes, the 400 wealthiest Americans have more wealth than the bottom 150 million Americans combined.

#23 The six heirs of Wal-Mart founder Sam Walton have as much wealth as the bottom one-third of all Americans combined.

#24 According to the U.S. Census Bureau, more than 146 million Americans are either "poor" or "low income".

#25 According to the U.S. Census Bureau, 49 percent of all Americans live in a home that receives direct monetary benefits from the federal government.  Back in 1983, less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

#26 Overall, the federal government runs nearly 80 different "means-tested welfare programs", and at this point more than 100 million Americans are enrolled in at least one of them.

#27 Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, one out of every 6 Americans is on Medicaid, and things are about to get a whole lot worse.  It is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

#28 As I wrote recently, it is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025.

#29 At this point, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for every single household in the United States.

#30 Right now, there are approximately 56 million Americans collecting Social Security benefits.  By 2035, that number is projected to soar to an astounding 91 million.

#31 Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.

#32 Today, the number of Americans on Social Security Disability now exceeds the entire population of Greece, and the number of Americans on food stamps now exceeds the entire population of Spain.

#33 According to a report recently issued by the Pew Research Center, on average Americans over the age of 65 have 47 times as much wealth as Americans under the age of 35.

#34 U.S. families that have a head of household that is under the age of 30 have a poverty rate of 37 percent.

#35 As I mentioned recently, the homeownership rate in America is now at its lowest level in nearly 18 years.

#36 There are now 20.2 million Americans that spend more than half of their incomes on housing.  That represents a 46 percent increase from 2001.

#37 45 percent of all children are living in poverty in Miami, more than 50 percent of all children are living in poverty in Cleveland, and about 60 percent of all children are living in poverty in Detroit.

#38 Today, more than a million public school students in the United States are homeless.  This is the first time that has ever happened in our history.

#39 When Barack Obama first entered the White House, about 32 million Americans were on food stamps.  Now, more than 47 million Americans are on food stamps.

#40 According to one calculation, the number of Americans on food stamps now exceeds the combined populations of "Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Utah, Vermont, West Virginia, and Wyoming."

US FISCAL - Budgeting Casualties - Federal, State and Local

The Collapse Of Public Infrastructure Spending In One Chart 05-24-13 BI

The big news today is that a bridge in Washington collapsed, throwing cars into the water. Amazingly, nobody died. This may revive debate about the need to spend more on infrastructure, which would have multiple positive effects. Nothing is likely to happen, however. That being said, here's a chart of public construction spending (TLPBLCONS) as percentage of GDP. You can see, public construction spending is lower than its been in over 20 years.

US PENSIONS - A Ticking Time Bomb in a 70% Consumption Economy

Ben Bernanke's Latest Casualty: The Pension Plan 05-27-13 WaPo Report via ZH

With every passing day, the destructive consequences of Ben Bernanke's ruinous monetary policy on the broader economy become more and more apparent.

Nowhere is this more evident than the observation of a record high stock market - benefiting just a tiny portion of the population - correlating directly with the record number of Americans on food stamps - the wealth effect "trickle down", or lack thereof, for everyone else (not to mention an economic growth rate four years after the "end of the recession" that is the worst recovery in recorded history).

Less hyperbolically, this can be seen empirically in the anti-correlation between the US economy and corporate profits. Through his "central" scheming, Bernanke has turned the discounting paradigm on its face, leading to a world in which the market no longer "discounts" or anticipates any information or fundamentals, but merely cares about how big the next latest and greatest liquidity hit will be, and in which there is an inverse correlation between profitability and general economic well-being.

And so on, and so on: which is to be expected from a world gone upside down as a result of the biggest doomed economic experiment ever conducted on a global scale to preserve a system which can only survive following debt liquidation, and yet one which we are told day in and day out needs just a little bit more debt... to fix a problem resulting from record debt.

For the the latest "unintended casualty" of Bernanke and his ZIRP policy, we look at corporate pension funds, which as WaPo reports, are finally starting to crack under the weight of pervasive central planning, brought to the brink by none other than the Chairman's "good intentions."

On the surface this makes no sense: after all pension funds invest in assets - the same assets that Bernanke's policy of serial cheap credit funded bubble creation are supposed to inflate. And they do. The only problem is that pension funds also have offsetting matching liabilities: or the amount of money a company has to inject in order to cover future retiree obligations. And in a period of low discount rates brought by a record low interest rate environment, these liabilities painfully and relentlessly increase when discounting future cash needs.

Quote WaPo:

Assets held by pension plans of the firms that make up the Standard & Poor’s 500-stock index increased by $113.4 billion in 2012, according to a report by Wilshire Associates, a consulting firm. But largely because of low rates, company liabilities increased even more: by $173.6 billion. That left the median corporation’s pension plan 76.9 percent funded, with just over $3 of assets for every $4 of liabilities.

Low interest rates hurt firms that provide pensions in two ways: They are required to set aside more money to pay for future pensions even as the liabilities appearing on their balance sheets grow larger.

And therein lies the rub: because while the NPV of future benefits in a bubbly environment results in higher asset values, it is the plunging rate used in the DCF that is dooming companies to a slow, painful cash bleeding death as they scramble to prefunded already underfunded (and ever more so) liabilities.

Visually, this is as follows:

In brief: the longer ZIRP drags on, the uglier the monetary reality that private (for now) workers will have to face when they finally choose to retire.

“Low interest rates are certainly a significant issue for employers,” said Judy A. Miller, director of retirement policy for the American Society of Pension Professionals and Actuaries. “The lower the interest rates, the higher the value of the benefits you have to provide and the higher the required contributions.”

Fear not though: in a world in which the recovery is so strong, Mark-to-Market accounting for banks still has to come back four years after it was killed at the altar of central planning, corporations are the next to realize that out of sight means out of mind, and what better way to ignore the pension issue than to just move it "off the books."

[F]irms are moving pension liabilities off their books. Last year, Verizon Communications transferred $7.5 billion in pension obligations — about a quarter of its total — to Prudential Insurance, to limit its liabilities and bolster its financial profile. The move came after General Motors paid Prudential to assume $25 billion of its pension risks.

Congress is in on it too now:

Congress moved last year to provide relief from the pension damage being caused by low rates by allowing firms to temporarily use a 25-year interest rate average when calculating how much money they had to funnel into funds.

“It phases out over the next five or six years,” said Joshua D. Rauh, a Stanford University professor who studies pension plans.

But the relief does not change how pension liabilities appear on a firm’s balance sheet. In addition, firms could find that under the new law, their pension-related liabilities could quickly rise after 2013 unless interest rates return to more normal levels. This has dampened the appeal of the change for many companies.

Nothing like legislating 'magic' accounting into law, allowing companies to reap the benefit of low interest rates and soaring asset values, while pricing in the future benefits of inflation that will magically come (but not impair the asset values of course) and sweep all their underfunded liability concerns away.

Of course, since everyone is in on the scheme - most certainly the workers who stands to receive less and less the longer the lies are perpetuated - it has no chance of working. Instead, what companies are doing is simply cutting off the "welfare" illusion tentacle at the core, and finally starting to freeze pension funds.

That has left many firms to conclude that it is best to freeze their pension plans, cutting off contributions for current workers and making new employees ineligible for the benefit.

At ILM, which sells commercial insurance to building-supply manufacturers and retailers, the pension plan had been a source of pride in a benevolent company culture developed over 117 years.

“Personally, I think a pension is a tremendous benefit,” said Don W. Blackwell, ILM’s chief financial officer and treasurer. “This is a very valuable benefit to our employees. We did not want to take it away.”

But with the pension plan causing the firm to report a $8 million liability at the end of last year and with no end in sight for low interest rates, “we waved the white flag,” Blackwell said. “It was a waiting game and we blinked. We had no idea that interest rates would remain this low.”

There is still the hope and the illusion that as companies switch from traditional pensions to that most direct bubble beneficiary, the 401(k), that everyone will live happily ever after? Well no: here is the side by side comparison:

Once it froze its pension plan, ILM started to contribute 3 percent of each worker’s salary to a 401(k) plan. It’s something, but nowhere near enough to provide the same level of retirement security that the company’s pension did.

Blackwell said an employee with a $40,000 annual salary who received a 3 percent raise each year, set aside 7 percent of his pay for retirement and received a 3 percent company contribution would wind up with roughly a third less money in his retirement fund after 25 years than he would have with the pension plan.

In the private sector, surprisingly, some still prefer realism over lies:

Still, ILM employees are taking the pension fund’s demise in stride. “To be honest, I am surprised that the plan was not frozen a while back,” said Traci Barber, 42, a service center manager who has been with ILM nearly 13 years. “I was surprised when I took this job that it even offered a pension plan.”

Knotts, the firm’s vice president for human resources, said that many employees do not seem to understand the security that a pension’s guaranteed monthly payments offer in retirement. “When people get hired here,” she said, “they are not thinking about that. All of the questions are about salary and paid time off.”

She was among the executives who fretted over cutting the pension plan, deciding to back the decision even though she knew it is bad for employees. Keeping it, she said, would be even worse for the company.

David J. Riese, who retired as vice president of claims in 1997 after 16 years at ILM, said he values the security provided by his company pension. Current employees, he added, will not have it as good.

At least someone dares to admit defeat in the face of ubiquitous central planning. And as always, the private sector is the first to realize that in the New Normal, all workers will be worse off.

The question we have is how long until the same logic and methodology, which is absolutely universal, is transferred from the private to the public sector, and how long until the tens of millions of state and federal servants, most of whom do their tedious and menial tasks with a matched enthusiasm, only so they can reap the benefits of a luxurious lifetime pension upon early retirement, still based on a discounting math from the Old Normal?

Because the start of the unwind of the welfare myth, if only in the private sector for now, should be making those enforcing a collapsing statist regime, made worse by Ben Bernanke's endless tinkering in what was formerly a free market, should be making the guardians of the status quo very, very nervous... and certainly has the disciples of the Bismarckian welfare state delusion on their toes, because they can see very well what is coming down the road.

QE- Is a Monetary Policy EXPERIMENT which is a contrived substitute for failed Public Policy (address secular/structural problems) & Fiscal Policy (excess governemnt debt) which politiicans were unwilling and incapable of addressing!

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REHYPOTHECATION - Serious Shortage of Quality Collateral - A $10T US Problem Over 10 Years

Central Banks' Central Bank Warns About Rehypothecation Threats 05-29-13 Zero Hedge

Just a few years ago, central bankers dared not breathe the word rehypotehcation - after all it was the secret fabric that held the shadow banking system together, which was a critical hub to perpetuating the central bankers' plan of reflating assets and creating a wealth effect if only for the 1%, while keeping the rest content with free Obamaphones and endless promises of "trickling down" which four years into Bernanke's grand monetary experiment has yet to materialize. Then, little by little, more and more started to realize that the shadow banking system, whose fiath-based (sic) liabilities amount to somewhere between $60 and $100 trillion (of credit money) globally, is precisely the inflation buffer that has allowed central banks to engage in round after round of QE, which has sent global stocks to all time highs, while keeping the world mired in the longest economic depression since the 1930s (explained here).

Of course, the one inadvertent side effect of all this constant meddling which be definition requires the monetization of quality collateral in order to generate new fungible money, was the gradual disappearance of all such quality assets which private investors could buy, then pledge back via repo and other conduits and use proceeds for risky investments. Such as Treasurys. Which is why recently none other than the TBAC warned that the US is suddenly facing a $10+ trillion high quality collateral shortage in the next decade. As we have also explained, this is a major problem for the Fed which at current rates of QEeing, will monetize all Treasury duration exposure in roughly 5 years - at that point there will be virtually no collateral left and the Fed will be finally out of both tools and ammo. Which in turn is why the Fed is desperate to restore the "moneyness" of assorted private sector assets in the time it still has with QE, and convert them to "high quality collateral" status, or eligible for repo and money creation via conventional bank conduits.

Indeed, the TBAC admitted as much in the confidential appendix to its Q2 slide presentation to the US Treasury when it said:

Private sector generation of moneylike collateral helps policymakers over long periods by:

• Slowly reducing the demand for money
• Increasing financial deepening
• Supporting financial globalization

The more restricted the private sector’s ability to create safe, liquid, and moneylike collateral, the harder the public sector must work to supply it through deficits and easy monetary policy.

We will have more to say on this in a future post when we discuss just what the real catalysts for the Fed's unwind are (hint: nothing to do with the market, and nothing to do with inflation or unemployment) and what Ben Bernanke is seeking to accomplish. It is a fascinating topic, and one which we are confident means Bernanke's replacement will be none other than... Bernanke.

But before we go there, a key thing to ponder is that in all activities involving shadow banking, and now that quality collateral, in its definition of being "accepted by all", is scarcer than ever, involve the rehypothecation of certain assets using collateral chains of assorted lengths, which in turn dilute the links of title and ownership between owner and owned, in some cases (like MF Global and Lehman) to infinity, in effect confiscating an asset and plunging it into the bottomless abyss of the shadow banking system.

Furthermore, as we reported recently, none other than Europe has started a crack down on rehypothecation. We are confident that once Deutsche Bank et al realize that this may in fact be serious - a development which would, if completed, collapse their ability to operate on shadow margin and extend their asset base, they will promptly put an end to the silliness.

However, the good news is that with every incremental public instance of the rehypothecation discussion, more are focusing their attention on just how it is that true credit money creation works in the modern world (hint: nothing at all like how the textbook monetarists, Magic Money Tree growers, and all those others who still rely on economic concepts developed in the 1980s and before think).

The most recent, and perhaps most notable, observation on the topics of asset encumbrance, collateral and rehypothecation was none other than the BIS with its just released report titled appropriately enough, "Asset encumbrance, financial reform and the demand for collateral assets." In this report, variants of the word "rehypothecate" appear no less than 24 times. More importantly, the whole point of the paper is to serve as a warning, which means that slowly but surely the world's bankers are finally willing to expose in broad daylight (ironically), the true risks permeating the real financial system located deep in the shadows, where maturity, risk and collateral transformation all take place, however without the nuisance of deposits. Whether this is so they can abuse it all over again (most likely) or out of actual altruistic (unlikely) motivates, is unclear.

However, for those still confused by what remains a very nebulous topic for most, here is what the BIS has to say on the key topic of rehypothecation and its assorted instances in modern finance.

Rehypothecation and reuse of collateral assets

Rehypothecation refers to the right of financial intermediaries to sell, pledge, invest or perform transactions with client assets they hold; and it allows prime brokers and other financial intermediaries to obtain funding using their client collateral. Collateral reuse, in turn, usually covers a broader context where securities delivered in one transaction are used to collateralise another transaction, including the ability to reuse collateral through change in (temporary) ownership. Yet the terms rehypothecation and reuse of securities are often used interchangeably; they do not have distinct legal interpretations.

Certain types of collateral rehypothecation (and reuse) can play an important role in financial market functioning, increasing collateral velocity and potentially reducing transaction and liquidity costs. Rehypothecation decreases the (net) demand for collateral and the funding liquidity requirements of traders, since a given pool of collateral assets can be reused to support more than one transaction. This lowers the cost of trading, which is beneficial for market liquidity.

Securities lending-type transactions (including collateral swaps), which have been structured as collateralised loans, would not exist without rehypothecation. In the repo market, participants would not be able to cover short positions without the ability to reuse collateral. However, repos do not directly rehypothecate collateral because they are structured as a sale and repurchase transaction.

While certain types of rehypothecation can be beneficial to market functioning, if collateral collected to protect against the risk of counterparty default has been rehypothecated, then it may not be readily available in the event of a default. This, in turn, may increase system interconnectedness and procyclicality, and could amplify market stresses. Therefore, when collateral is rehypothecated, it is important to understand under what circumstances and the extent to which the rehypothecation has occurred; or in other words, how long the collateral chain is.

And some of the more vocal warnings:

A particular aspect that has received considerable scrutiny in the policy debate on securities financing markets is the extent to which rehypothecation activities should be permitted. The recent crisis experience suggests that greater reliance on rehypothecation in financial intermediaries’ balance sheets will increase interconnectedness and make them more vulnerable to financial shocks. Rehypothecation of client assets can also delay the recovery of assets or even impose losses on beneficial owners. In addition, it can prompt intermediaries to build up leverage in good times, contributing to increased procyclicality of the financial system.

But most importantly:

Financial intermediaries should provide sufficient disclosure to clients when collateral assets posted by them are rehypothecated; rehypothecation should be allowed only for the purpose of financing the long position of clients and not for financing the own-account activities of the intermediary; and only entities subject to adequate regulation of liquidity risk should be allowed to engage in the rehypothecation of client assets.

Ironically, using rehypothecation for the purposes of financing the own-account activities of the intermediary, is precisely what happens every single day in every single, and certainly TBTF large (see JPM) bank.

Could it be that some of the forces behind the bank of central banks are starting to realize just how close to the precipice the world truly is and are now actively cautioning their private sector peers to step back from the ledge or everyone gets it?

If so, and here is a chance this is true, we expect to see one of the most epic public-private sector conflicts in financial history, because in a world rapidly devoid of collateral and quality assets against which to margin and build leveraged operations, without rehypothecation the ability to generate mindnumbing bonuses for the banker superclass becomes null and void.

And after all, preserving the cash flow associated with levering every possible asset as many times as inhumanly possible and wagering it, preferably with zero risk, in a coopted and manipulated market, is what it is all about...

SENTIMENT - Further Granularity

How Emotions Can Lead Investors Astray 05-28-13 BlackRock

"Each person has a different perspective on the markets. But many admit that buying low may never feel 'right.' Oftentimes, emotional instincts drive investors to do the exact opposite. Being aware of your emotional state is important to making clearly reasoned investment decisions," according to BlackRock. Using hypothetical emotions and a hypothetical $100,000 investment they show how emotions can misguide investors.

GOVERNMENT - A Seedy Circus which is Perpetually in Debt

George Washington had no delusions about government:

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.

Government is exhausted. It is  out of resources, ideas and solutions. Government has painted itself into a fiscal and financial corner from which there is no escape.

As a result of its profligacy, government is no longer able to sustain itself. That is the real reason for the Fed’s quantitative easing progra(s). Taxes and traditional government bond sales no longer provide enough money to run the monster. QE, more properly described as counterfeiting, is a euphemism to disguise the insolvency of the government. Without the Federal Reserve, government would have to pare down dramatically. There is not enough money to meet the levels of military spending, social spending, entitlements, debt service and other commitments.

QE was sold as a basis for stimulating the economy. While that may have been a consideration, it wasn’t as important as pretending the government was not bankrupt. Of course no economic recovery has occurred, which most anyone not infected with Statist economics (feel free to substitute Keynesian) predicted.

Government is now hopelessly indebted. It cannot honor its current debt obligations and social promises. Additional debt is issued to cover the debt service on existing debt. This practice is the equivalent of borrowing against your Visa card in order to make an American Express payment. It works for a short period, but it reflects the debt death spiral that has overtaken government. As Herbert Stein intelligently observed: “something that cannot continue will not.”

An economic Armageddon is coming. It is up to government whether this shows up in the form of fire (massive inflation) or ice (a collapse of the economy). Regardless of what the entry phase looks like, the ending is a massive Depression. The problem is beyond governance or economics. Mathematics has assumed control and mathematics is cold, unemotional and relentless.

Government is insolvent. It will ultimately dishonor many of its obligations. The longer it postpones this reckoning, the bigger the defaults will be and the greater the pain.

Larsen E. Whipsnade, aka W. C. Fields

As a card-carrying curmudgeon, I have always been a fan of W. C. Fields. His pessimistic view of the human race and its foibles rivalled that of H. L. Mencken, another favorite. In 1939 W. C. Fields wrote and starred in “You Can’t Cheat An Honest Man.” Wikipedia describes the plot:

Fields plays “Larsen E. Whipsnade”, the owner of a shady carnival that is constantly on the run from the law. The whimsical title comes from a line spoken by Fields about ten minutes into the film. Whipsnade says that his grandfather Litvak’s last words, spoken “just before they sprung the trap”, were: “You can’t cheat an honest man; never give a sucker an even break, or smarten up a chump.” … The character name is obviously a play on “larceny“, a point which Fields reinforces at one point when someone calls him “Larceny Whipsnake”.

Another website, IMBd, described the storyline in this fashion: ”Larson E. Whipsnade runs a seedy circus which is perpetually in debt.” [Note, it is unclear whether the first name coined by Fields was spelled Larsen or Larson. Both appear in various places.]

A Seedy Circus Which Is Perpetually In Debt

I was struck by the latter description. Is there a better phrase to describe modern government than “a seedy circus which is perpetually in debt?” It is perfect.

Larson E. Whipsnade, aka Government

Larson E. Whipsnade is now running the failing circus we call government. He is doing his best to con the people in whatever way fits his advantage. Unfortunately, this is not a comedy and our current Whipsnade is hardly a hapless, likeable con man.

Government has been reduced to a smoke-and-mirrors machine. There is little substance left (other than raw tyrannical power) and tools are limited. Those which might be beneficial are politically unpalatable and will not be used.

What we get from government is little different than the routine of the carnival barker. A major difference is the carney only grabs a portion of our wallet. Government is playing with our entire wallet and the future of our children.

Government is now a facade, with guns. It has failed miserably at governance and shifted its focus to survival. It is doing and will do whatever it perceives can enhance its survival chances. Citizens are considered mere marks to be exploited, fodder for the power class to use as they see fit.

Charles Ponzi and Bernie Madoff, two famous hucksters, were mere gnats compared to the schemes that the American public are facing. A desperate and dying dinosaur is trying to avoid its fate and it does not care what it has to do to accomplish this end. The damage it inflicts will make Ponzi and Madoff appear compassionate with respect to how they treated their victims.

George Washington had no delusions about government:

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.

Since the time of our first president government has broken virtually every restraint the Founders imposed. The Constitution is little more than a curious artifact. The Rule of Law is routinely violated and headed for the same historical graveyard. Washington could not imagine the “fearful master” we all face today.

A century-long rampage has seen government break virtually everything it touched. Every program enacted has failed in terms of original and revised goals and objectives. None have stayed within budget. Many have produced results 180 degrees from intended. Many are bankrupt in the sense that they cannot be sustained much longer. Many will be defaulted upon. Finally government has driven itself to the precarious position of so many of the programs it manages. It too is broke and unsustainable.

Government itself is broke and unsustainable. Fittingly, it has reached the same state as most of its programs.

Examples of Con Artistry

Larson E. Whipsnade is now running this failing circus and doing whatever he can to con the people. The issue is no longer whether you can cheat an honest man. The government believes, probably correctly, that they can deceive tens of millions of honest men.

To do so, government is engaged in an unusually blatant propaganda campaign. Economic recovery, so we were told, began in June of 2009. That was a lie. We still haven’t recovered and only the Great Depression took longer than this to recover from (and we are not out of this yet).  There are still 5,000,000 fewer people working today than would be considered normal yet the media echoes the government line as faithfully as Pravda once did.

Incredible statistics are routinely reported with a straight face by bureaucrats. Websites like Shadowstats.com provide information as to how this is accomplished and the gap between the reported numbers and what they consider the true numbers. Lying with numbers deliberately misleads and is a reflection of the ruthlessness of those in power. But these prevarications, while shameful, likely cause little economic harm. They are intended to keep the masses happy with whomever happens to hold office.

There is other deception in terms of price manipulation which is very harmful. I am not talking about gold price manipulation or other market fixes designed to enrich Wall Street. These are illegal and should be punished to the full extent of the law. Rather I am referring to something more subtle and devastating in its effects on the people of this country.

CRONY CAPITALISM - Getting Insider Information & Establishing "Relationships"

PUBLIC SERVICE TO PRIVATE EQUITY - A Well-Tread Path

• The former general will be chairman of a new internal "institute" focused on macroeconomic forecasts, communications, public policy and advice on investments in emerging markets,
• Mr. Petraeus has traveled the world and knows military, economic and political leaders. Those connections could help KKR land deals in some foreign countries where the firm has less experience and better evaluate the risks and rewards of offbeat investments,
• He is expected to advise on economic trends, issues with foreign governments and other matters that could affect transactions,
• The KKR Global Institute, as the private-equity firm has dubbed it, will bring together Mr. Petraeus and others at the firm to formalize discussions over macroeconomic and geopolitical forces that could influence KKR's investment decisions. These issues include the heightened role of central banks following the financial crisis, and what KKR views as "revolutions" in energy, manufacturing and technology, among other areas. Mr. Mehlman and Henry McVey, KKR's global head of macro and asset allocation at KKR, will take on leading roles with the institute, they said.
• Ken Mehlman, a former Republican National Committee chairman who now serves as KKR's global head of public affairs, said Mr. Petraeus is "someone who has served in an incredibly effective and in some ways heroic way."
• Mr. Kravis, who Mr. Petraeus said he got to know over the past few years at dinner parties, conferences and as a member of the Council on Foreign Relations, called the former general the day after he left the CIA

As the Journal reports, David Petraeus, the former U.S. Army general and CIA chief, is joining KKR. He’s just the latest a long line of Washingtonians who left for private equity.

Here are some top examples:

1. Dan Quayle, former U.S. vice president Chairs unit Chairs unit focused on international deals at Cerberus Capital Management
2. James Baker III, former Treasury secretary and secretary of state Former senior counselor at Carlyle Group CG
3. Colin Powell, former secretary of state Strategic adviser at Kleiner Perkins Caufield & Byers
4. John W. Snow, former Treasury secretary Chairman of Cerberus Capital Management
5. Ken Mehlman, former chairman of the Republican National Committee and manager of George W. Bush’s re-election campaign - Global head of public affairs at KKR
6. Newt Gingrich, former speaker of the House Former advisory board member at Forstmann Little
7. Henry Kissinger, former secretary of state Former advisory board member at Forstmann Little
8. Bill Clinton, former U.S. president Adviser and partner at Yucaipa Cos. from 2002 to 2009

DEMOCRACY - Failing us Due to Inadequate Supervision of the Political Process from an Uninformed Public

• We have proven * consistent ineptness of political actions,
  • one thing government officials are good at, it’s going forth with failed plans while convincing themselves, and voters, that this time will be different.
• Politicians never let a good crisis go to political waste by not using it for political and financial advantage,
• Little praise is given for an expected service. We too simply expect our toilets to remove waste and electricity to come with the flick of a switch.
• Except in the absence of OPERATIONAL FOCUS, attention is diverted elsewhere.
• The core tenet of democracy that` makes it a workable political philosophy is wrong – voters are not considerate or far-thinking.
• They demand instant gratification.
• That helps explain why politicians, in their capacity as CROWD CHARMERS, dedicate little time and even fewer resources to keeping government infrastructure in pristine shape. As former New York City mayor Ed Koch liked to say, “It’s hard to hold a ribbon-cutting ceremony for a new sewer line.”

What we have are SPOILED CHILDREN (the public) supervised by CROWD CHARMERS (politicians) irresponsibly spending OTHER PEOPLES MONEY ineffectively.

Government And Collapsed Bridges 05-27-13 Ludwig von Mises - James E. Miller of the Ludwig von Mises Institute of Canada

AN EXAMPLE

Expect more Bridges to FALL!

The recent collapse of a small commuter bridge in Washington has brought back memories of Minnesota. Back in August of 2007, the I-35W Mississippi bridge connecting the Downtown East and Marcy-Holmes neighborhoods plummeted to the river below like a Chinese-made sofa. Thirteen individuals lost their lives while 145 escaped with injury. The suddenness of the debacle was met with the blunt response system of the state. That is, politicians in Minnesota and elsewhere went before the public to decry the deteriorating condition of government infrastructure across the country. A flurry of taxpayer money dedicated to overhauling the nation’s bridges followed. Five years after millions in tax dollars were fleeced, allocated, and distributed to this new urgency, less than two dozen of the state’s 172 “structurally deficient” bridges have been made whole.

The total failure to provide safe infrastructure, especially in the aftermath of a tragedy, would be comical if it were not so representative of the ineptness of state action. If there is one thing government officials are good at, it’s going forth with failed plans while convincing themselves, and voters, that this time will be different. Following the Interstate 5 bridge collapse in Washington, the same calls to action are being issued in spite of a non-failure in the bridge design itself. Former yes-man and advisor to the President David Axelrod attempted to blame Republicans in Congress for a reluctance to spend on infrastructure investment – as if the second half of the statist party coin ever harbored a desire to tame the District’s portly appetite for wasting tax revenue. Axelrod, being a professional opportunist, was not going to let a good crisis go to political waste; a tactic he undoubtedly learned from his White House comrade in debauchery Rahm Emanuel.

Proponents of sprawling public work projects such as bridges have been apt to cite to latest scorecard from the American Society of Civilian Engineers – a report which always happens to portray the country’s infrastructure as nearing a communist-like collapse. The latest inspection in 2012 revealed the U.S. is home to least 150,000 structurally deficient bridges. In the few years I have followed the ASCE’s annual checkup, I have yet to see bright and optimistic grading. The diagnosis consistently falls somewhere between neglectful euthanasia and deliberate homicide. The string of bridge collapses plays right into the hand of the century old association. It’s never a point of suspicion for liberals that the professional body’s membership, who are predominantly employed constructing or fixing government infrastructure, would have a vested interest in wringing more money from susceptible politicians. The ASCE’s siren call is filled with everything repugnant to the Progressive mindset: profit motive, corruption, undermining of public trust. That’s all dismissed with contemplation of tangible benefits provided by government funding.

Talk of public infrastructure projects ignites the thoughts of state apologists who dedicate their career to advancing a creeping despotism. The effect on the rest of the public is much lesser. Bridges, roads, sewer systems, and the like are accepted functions of the state. But therein lies the rub: little praise is given for an expected service. The foundational elements of civilized and commercial society remain hidden, in a sense, to greater recognizability. In other words, we expect our toilets to remove waste and electricity to come with the flick of a switch. Except in the absence of function, attention is diverted elsewhere. The core component of democracy that` makes it workable political philosophy is wrong – voters are not considerate or far-thinking. They demand instant gratification. That helps explain why politicians, in their capacity as crowd charmers, dedicate little time and even fewer resources to keeping government infrastructure in pristine shape. As former New York City mayor Ed Koch liked to say, “It’s hard to hold a ribbon-cutting ceremony for a new sewer line.”

Even with the less-than-glorifying esteem that comes with respooling electrical wire, the state maintains an iron-tight grip on commercial infrastructure for a reason. Monopoly control equates to societal power – nothing more or less. The free, voluntary transactions of individuals is without a doubt the best means to ensure an efficient use of resources. Ports, roadways, drainage systems, and bridges have all been provided for by the private economy. In government form, they provide a benefit; one which comes at the expense of an undetermined number of wrongs. As essayist Frank Chodorov wrote, “If we get any­thing for the taxes we pay it is not because we want it; it is forced on us.”

It can’t be said for sure if the I-35W Mississippi bridge was left in private hands, maintenance and upkeep would have been performed more regularly. I would wager my money on the profit spell, acting as a driving force to preserve quality. The theory of collectivism relies on the unsteady moral conscience of leadership. Capitalism rests only on the material desire for more. The former requiring more virtue than the latter, it would be wiser to put one’s faith in that which does not demand the all-knowing hubris of central planners.

In any service, the government has achieved the perfect deal. When a private entity fails at meeting consumer desire (or its negligence results in death), a drop in income and market share follows. When the faultiness of a state product is revealed, more money is requested to atone for the deficiency. Success for failure is a perverse incentive – all the more fitting for the government’s wheelhouse of inconsistencies such as “destroy to save” or “fascism to save the free market.”

Being the state iconoclast that I am, I find myself split between admiration for industrial feats and loathing for the dank, unscrupulous actions which cemented the wonder on fertile ground. It can be captivating to gaze upon a bridge spanning the length of a tumultuous river – a demonstration of man’s capacity to overcome the Earth’s obstacles and create his own future. Witnessing mammoths of concrete, steel, and calculated texture is humbling. The intricacies of meticulously crafted metal enveloped among stalactitic, concrete protrusions make for a web of human engineering that cannot begin to be understood by the layman. The knowledge necessary to erect such a structure has been kept and passed down for centuries. Its dissemination is a human achievement ranking among the great architectural undertakings.

The bridge is really a connector of civilization. Without it, the flourishing of the division of labor would be heavily constrained. The wilderness in remote parts of the Earth would remain untamed. It is certainly true that industrial structures that cultivate mobility have been used for campaigns of aggression and invasion, namely by militaries. But I have never been a fan of laying blame on technological innovation for enrapturing the destructive tendencies of man. Responsibility flows from human free will. The objects created by the employment of mind and labor are incapable of volition, and thus outside the bounds of being moral agents.

Indispensability is all the more reason to remove the state’s unprofitable hand from infrastructure investment such as bridge building. Enough economists have brought attention to the inability of government bureaucrats to utilize pricing signals in an effective manner. Public works projects often serve to enrich well-connected interest groups, with actual serviceability being a secondary concern.  Here’s hoping to the quick rehabilitating of the Interstate 5 bridge in Washington, and to the broadspread realization of the perversion government has on such endeavors.