BONDS - Buy In June After the Swoon

Buy (Bonds) In June, After The Swoon? 06-12-13 Zero Hedge

In 2006, 2007, 2008 and 2009 we saw 10Y bond yields surge into June only to peak and turn lower aggressively; and in 2010, 2011 and 2012 we saw a 'mini rally' in yields into June that was not sustained, so, as Citi FX's Tom Fitzpatrick notes, while we regularly hear the mantra for the Equity market of "Sell in May and go away" maybe we should have one for the Bond market - "Buy in June after the swoon."

There can be no doubt that the predominant factor in rising yields, increased market volatility, turmoil in emerging markets, rising peripheral European yields etc. over recent weeks has been the Fed but Citi still believes that the mention in the past weeks of "tapering" has been a "Kite flying" exercise by the Fed with the premise being to sell 'the markets' on the idea that reducing bond purchases was a “slowing of easing”, a “tinkering” not a tightening.

It appears it is not going according to plan and we believe the Fed has got its answer as to what will happen if they announce tapering and it’s not pretty and unless they back away from this 'less easing' path, this policy mistake will have a negative feedback loop in financial markets and the economy leading to the market “easing” again and sending bond yields lower once more.

Via CitiFX,

...

So the argument from the Fed is that tapering is a slowing of the easing process rather than a tightening process. While mathematically that may be correct consumers do not borrow from mathematicians or for that matter at the “Fed funds rate”

The simple fact of the matter is that starting with the employment numbers in May combined with the tapering rhetoric from the Fed this rate has risen 71 basis (low to high) points since 01 May. If pushing mortgage rates lower is accepted to be a form of unconventional monetary easing (given we are looking to recover out of the greatest housing downturn of this generation) then rising mortgage rates have to be viewed as a tightening.

So to varying degrees we have seen a rising 10 year yield into June in the last 7 years. The most impulsive moves were seen in the four years 2006-2009. Those moves had characteristics more like what we have seen this year and in all cases we saw dramatic moves lower after a surge higher into June. Three of those four surges peaked between 11 and 13 June.

• 2006: 10 year yields surge and hit a peak of 5.25% on 28 June. That level is never again revisited that year and by December the yield had fallen to 4.40%
• 2007: 10 year yields surge and hit a peak of 5.32% on 13 June. That level is never again revisited that year and by November the yield had fallen to 4.05%
• 2008: 10 year yields surge and hit a peak of 4.27% on 13 June. That level is never again revisited that year and by December the yield had fallen to 2.03%
• 2009: 10 year yields surge and hit a peak of 4.00% on 11 June. That level is never again revisited that year and by October the yield had fallen to 3.10%
• 2010: 10 year yields were heading lower but have a short term bounce to peak at 3.42% on 03 June. That level is never again revisited that year and by October the yield had fallen to 2.33%
• 2011: 10 year yields were heading lower but have a short term bounce to peak at 3.22% on 30 June. That level is never again revisited that year and by October the yield had fallen to 1.67%
• 2012: 10 year yields were heading lower but have a short term bounce to peak at 1.73% on 11 June. A new trend low is posted at 1.38% on 25 July. The yield finishes the year at 1.75%

Bottom line the Fed is singing “Everything will be alright” while the market is singing “Hotel California” (You can check out anytime you like but you can never leave.)

Tapering will come, tightening will come but the “patient” is not yet healthy enough to take this shock just yet. To push this prescription at this point risks a relapse.

BONDS - A Flight to Safety from An EM Liquidity Crisis?

A Treasury bond buying opportunity triggered by an emerging market storm? 06-12-13 Currency Currents

As you likely know, there has been a lot of damage to emerging market stocks, bonds, and currencies on a relative basis compared t o the developed world markets. And you may remember that n ot too long ago emerging /developing market (EMs) finance minist ers were beating the drums of “ currency war. ” The b l ame placed squarely on the august shoulders of Mr. Ben Bernanke and company . The IMF was so concerned; they were openly endorsing the use of capital controls to help EMs to handle the pressure . We ll, maybe it ’ s just a cease fire, but EM finance ministers are now intervening to keep their currencies from “ depreciating. ” How quickly things can change?

Given the nature of emerging (or developing) world markets, and lack of any depth in their capital markets, i.e. bond markets, relative to the size of money flows from the center from i ndividuals and institutions escaping the zero interest rate regimes and looking for more, the ebb and flow of money can be seen by the track of EM stock market and currency markets. Keep in mind that o ne has to buy the currency to invest in l ocal stocks of an EM, and one has to sell the stocks and sel l the currency locally when one decides to leave. If there was a viable bond market locally, with assorted money market and derivative products available, we likely wouldn ’ t see the currencies so highl y correlated with local stocks . A good example of this can be seen in Brazil. N otice the correlation between the Brazilian real/USD cross and Brazil ’ s stock market in the daily chart below :

This price action in stocks and currencies has been playing out in many EMs lately. S o it poses a couple of questions:

1. As this money leaves EMs, where has it gone ?

2. Is this flow out of EMs a precursor to a nasty global growth accident ahead?

Wrestling with the first question and thinking abou t the actions in US Treasuries is a bit confusing.

Below is a chart comparing the Thomson R euters BRIC Stock Index (Brazil, Russia, India and China) versus US Treasury Bond Futures ... what I want you to notice here is th at usually when there is a sell - off in the BRIC index, US T reasuries ral ly and vice versa . But notice the action since the latest sell - off in the BRIC index, which began back in early May 2013 — instead or rallying on this price actio n, US Treasury bond prices fell, i.e. the price series moved in the same direction.

As JR and I think about this chart, it leads to an interesting set of scenarios. Some a bit more far - fetched than others; but here is what I am thinking:

This money flowing out of EM equities is flowing into US and other developed world equity markets. But, the danger here is two - fold: a) Given the deleveraging by European banks out of EM markets; there is a real poss ibility of a liquidity crunch, and b) a liquidity crunch in EMs would likely go hand and hand with a big sentiment shift regard ing global growth, i.e. it might Black Swan

Many market conflagrations have been ignited quietly in EMs before growing into a global &^#$ ( four lett er wo rd starting with “ s ” ) storm .

Could this be one of the m? Of course we don ’ t know. But, if a storm develops it means US Treasuries , as usual , will be the

GOLD - JPM's Gold Vault Needs Watching

JPM Vault Gold Drops By 28.4% Overnight, Slides To Fresh Record Low As Withdrawals Accelerate 06-11-13 Zero Hedge

With a massive 6,208 (or 80% of the total in the entire Comex system) Customer Delivery issues outstanding against JPM so far in June alone, many have been wondering - how and when will the firm reconcile what is seemingly more demand for JPM vaulted gold than the firm has in its possession?

While we still don't have the answer, what we do know is that as of an hour ago when the Comex released its daily vault depository statistics, JPM has said goodbye to another 28.4% of all of its vaulted gold - the largest one day withdrawal since April 25, the result of the departure of 61.5% of its Eligible gold, as hundreds of thousands of registered ounces in the bast few weeks have seen warrant detachment.

Which means that as of last night, total gold held by JPM has fallen to a new fresh all time low of just 550k ounces, down from 768K the day before, and total eligible gold of only 136,380 troy oz in inventory (just over 4 metric tonnes) - also a record low.

Whoever is "running the JPM vault" shows no sign of relenting. At this pace, the world's biggest gold vault located below 1 CMP, and just next to the Fed's own gold vault, will be empty in about 1.5-2 months.

STATISM - A Short History of Big Brother Sam

How America Became Orwellian: A Short History of Big Brother Sam 06-09-13 Juan Cole at Informed Comment

Cora Currier, Justin Elliott and Theodoric Meyer write at
ProPublica

On Wednesday, the Guardian published a secret court order requiring Verizon to hand over data for all the calls made on its network on an “ongoing, daily basis.” Other revelations about surveillance of phone and digital communications have followed.

That the National Security Agency has engaged in such activity isn’t entirely new: Since 9/11, we’ve learned about large-scale surveillance by the spy agency from a patchwork of official statements, classified documents, and anonymously sourced news stories.

1978

Surveillance court created

After a post-Watergate Senate investigation documented abuses of government surveillance, Congress passes the Foreign Intelligence Surveillance Act, or FISA, to regulate how the government can monitor suspected spies or terrorists in the U.S. The law establishes a secret court that issues warrants for electronic surveillance or physical searches of a “foreign power” or “agents of a foreign power” (broadly defined in the law). The government doesn’t have to demonstrate probable cause of a crime, just that the “purpose of the surveillance is to obtain foreign intelligence information.”

The court’s sessions and opinions are classified. The only information we have is a yearly report to the Senate documenting the number of “applications” made by the government. Since 1978, the court has approved thousands of applications – and rejected just 11.

Oct. 2001

Patriot Act passed

In the wake of 9/11, Congress passes the sweeping USA Patriot Act. One provision, section 215, allows the FBI to ask the FISA court to compel the sharing of books, business documents, tax records, library check-out lists – actually, “any tangible thing” – as part of a foreign intelligence or international terrorism investigation. The required material can include purely domestic records.

Oct. 2003

‘Vacuum-cleaner surveillance’ of the Internet

AT&T technician Mark Klein discovers what he believes to be newly installed NSA data-mining equipment in a “secret room” at a company facility in San Francisco. Klein, who several years later goes public with his story to support a lawsuit against the company, believes the equipment enables “vacuum-cleaner surveillance of all the data crossing the Internet – whether that be peoples’ e-mail, web surfing or any other data.”

March 2004

Ashcroft hospital showdown

In what would become one of the most famous moments of the Bush Administration, presidential aides Andrew Card and Alberto Gonzales show up at the hospital bed of John Ashcroft. Their purpose? To convince the seriously ill attorney general to sign off on the extension of a secret domestic spying program. Ashcroft refuses, believing the warrantless program to be illegal.

The hospital showdown was first reported by the New York Times, but two years later Newsweek provided more detail, describing a program that sounds similar to the one the Guardian revealed this week. The NSA, Newsweek reported citing anonymous sources, collected without court approval vast quantities of phone and email metadata “with cooperation from some of the country’s largest telecommunications companies” from “tens of millions of average Americans.” The magazine says the program itself began in September 2001 and was shut down in March 2004 after the hospital incident. But Newsweek also raises the possibility that Bush may have found new justification to continue some of the activity.

Dec. 2005

Warrantless wiretapping revealed

The Times, over the objections of the Bush Administration, reveals that since 2002 the government “monitored the international telephone calls and international e-mail messages of hundreds, perhaps thousands, of people inside the United States without warrants.” The program involves actually listening in on phone calls and reading emails without seeking permission from the FISA Court.

Jan. 2006

Bush defends wiretapping

President Bush defends what he calls the “terrorist surveillance program” in a speech in Kansas. He says the program only looks at calls in which one end of the communication is overseas.

March 2006

Patriot Act renewed

The Senate and House pass legislation to renew the USA Patriot Act with broad bipartisan support and President Bush signs it into law. It includes a few new protections for records required to be produced under the controversial section 215.

May 2006

Mass collection of call data revealed

USA Today reports that the NSA has been collecting data since 2001 on phone records of “tens of millions of Americans” through three major phone companies, Verizon, AT&T, and BellSouth (though the companies level of involvement is later disputed.) The data collected does not include content of calls but rather data like phone numbers for analyzing communication patterns.

As with the wiretapping program revealed by the Times, the NSA data collection occurs without warrants, according to USA Today. Unlike the wiretapping program, the NSA data collection was not limited to international communications.

2006

Court authorizes collection of call data

Jan. 2007

Bush admin says surveillance now operating with court approval

Attorney General Alberto Gonzales announces that the FISA court has allowed the government to target international communications that start or end in the U.S., as long as one person is “a member or agent of al Qaeda or an associated terrorist organization.” Gonzalez says the government is ending the “terrorist surveillance program,” and bringing such cases under FISA approval.

Aug. 2007

Congress expands surveillance powers

Sept. 2007

Prism begins

The FBI and the NSA get access to user data from Microsoft under a top-secret program known as Prism, according to an NSA PowerPoint briefing published by the Washington Post and the Guardian this week. In subsequent years, the government reportedly gets data from eight other companies including Apple and Google. “The extent and nature of the data collected from each company varies,” according to the Guardian.

July 2008

Congress renews broader surveillance powers

April 2009

NSA ‘overcollects’

Feb. 2010

Controversial Patriot Act provision extended

President Obama signs a temporary one-year extension of elements of the Patriot Act that were set to expire — including Section 215, which grants the government broad powers to seize records.

May 2011

Patriot Act renewed, again

March 2012

Senators warn cryptically of overreach

In a letter to the attorney general, Sens. Ron Wyden, D-Ore., and Mark Udall, D-Colo., write, “We believe most Americans would be stunned to learn the details” of how the government has interpreted Section 215 of the Patriot Act. Because the program is classified, the senators offer no further details.

July 2012

Court finds unconstitutional surveillance

Dec. 2012

Broad powers again extended

Congress extends the FISA Amendments Act another five years, and Obama signs it into law. Sens. Wyden and Jeff Merkley, both Oregon Democrats, offer amendments requiring more disclosure about the law’s impact. The proposals fail.

April 2013

Verizon order issued

June 2013

Congress and White House respond

Following the publication of the Guardian’s story about the Verizon order, Sens. Feinstein and Saxby Chambliss, R-Ga., the chair and vice of the Senate intelligence committee, hold a news conference to dismiss criticism of the order. “This is nothing particularly new,” Chambliss says. “This has been going on for seven years under the auspices of the FISA authority, and every member of the United States Senate has been advised of this.”

Director of National Intelligence James Clapper acknowledges the collection of phone metadata but says the information acquired is “subject to strict restrictions on handling” and that “only a very small fraction of the records are ever reviewed.” Clapper alsoissues a statement saying that the collection under the Prism program was justified under the FISA Amendments of 2008, and that it is not “intentionally targeting” any American or person in the U.S.

Statements from the tech companies reportedly taking part in the Prism program variously disavow knowledge of the program and merely state in broad terms they follow the law.

STATISM - Why The Surveillance State Must Be Erased

Why The Surveillance State Must Be Erased 06-11-13 Brandon Smith of Alt-Market blog via ZH

In America today there is a great rushing storm, a swirling hurricane of clashing opinions and ideologies that defy coherent organization and classification.  This social tempest has been triggered by certain revelations among the general public on issues which we in the Liberty Movement have long been aware.  The fact that our government is bought and paid for by international corporate interests, the fact that our government has positioned itself to spy on ALL Americans without warrant and without probable cause, the fact that our government is instituting policy initiatives that target common citizens as enemy combatants, the fact that every one of our Constitutional rights is being deliberately torn away; these things are not news to us, but to many once ignorant people, they are a shock to the system.

Open corruption on the part of a criminal establishment has a funny way of politicizing everyone, even those people who go out of their way to avoid the bigger picture.  In the end, no man or woman gets a pass.  Whether you like it or not, one day soon, you will have to choose a side; freedom or tyranny.  There is no middle ground.  There is no Switzerland. 

With all the rationalizations and counter-rationalizations flying around concerning the current avalanche of admissions and data leaks, it is easy to lose track of the root of the overall conflict.  It’s as if we have been dropped into the heart of an Amazonian swamp, our feet encased in a thick sludge of social inaction as a dark cloud of mindless mosquito-people buzz about us, pecking hungrily at our veins with their warped and uneducated world views.  The deafening chorus distracts us from what is truly important.

Here is the reality of our situation:

1) Both the Bush Administration and the Obama Administration supported FISA domestic surveillance legislation.  FISA is the legal tool which the federal government now uses to justify the monitoring of journalists and recently exposed mass surveillance programs such as PRISM.  Politicians from both the Republican and the Democratic parties have defended the use of FISA and PRISM.  Both parties support the destruction of your 4th Amendment rights. 

2) The Obama Administration openly admits to the monitoring of journalists phone and email records in an attempt to thwart whistleblowers that might actually bring the truth of what the government is doing into the light of day.  Obama of course defends this position by claiming that “national security” is at stake.

3) Part of the motivation for surveillance measures against journalists has clearly been the Benghazi conspiracy, which is a thorn in the side of the establishment that refuses to go away.  Like Watergate, or Iran-Contra, the White House has been caught with its pants down and instead of admitting its guilt, has decided to attack the messengers instead. 

4) Another motivation was certainly the exposure of the ATF’s “Fast And Furious” program, which funneled U.S. firearms into the hands of Mexican drug cartels so that American firearms dealers and owners could be blamed for the escalation of deadly violence south of the border.  Again, Obama and his handlers seek to use a suffocating surveillance grid in order to thwart whistleblowers and prevent federal crimes from being aired in public.

5) The use of the IRS as a weapon against the political enemies of the establishment (namely Tea Party groups) verifies that government surveillance without oversight can indeed lead to political profiling and unjustified punishment.

6) The PRISM scandal, leaked by former CIA operative and NSA contractor Edward Snowden, has given the general public a raw naked look at the reality of the FISA spy initiative.  In the past, Liberty Movement champions have been derided as “paranoid” for pointing out that there were no limitations to FISA, and that the entire nation might one day be monitored and catalogued like animals in a great technological cage.  Today, the public now knows that this concern is concrete and undeniable.  EVERYONE is being watched.  Reports now estimate that NSA hackers harvest over 2.1 million gigabytes of data on American citizens per hour.

7) Privacy rights have been so debased that the invasion of our electronic communications is the least of our worries.  The Supreme Court has ruled in Maryland v. King that police now have the authority to extract DNA samples from any person placed under arrest, without a warrant, and without due process.  This means that the second a law enforcement officer places you in cuffs, your genetic materials are no longer your property, even if the charges against you are erroneous, if charges are ever filed at all.  The government admits to having at least 10 million people catalogued in their genetic database already.

8) Since 9/11, U.S. cities have added approximately 30 million new CCTV cameras on top of those already in operation.  After the Boston Bombing, even more are expected to be installed.  There are few places in most major cities where you are not being watched, and even smaller municipalities with miniscule crime rates are beginning to follow suit.

It would seem that our government has somehow overlooked the 4th Amendment of our Constitution, and statist rationalists would do well to study it before defending their actions.  Let’s read it, shall we?

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Now let’s examine the arguments of the establishment in favor of the Surveillance State:

Argument #1:  Mass Surveillance Has Been Going On For A Long Time And Is Nothing New

Dianne Feinstein and Lindsey Graham, perhaps the most evil political duo since McCain and Lieberman, have both used the above talking point in order to rationalize the mass surveillance of FISA and PRISM.  But let’s put this in perspective…

Feinstein and Graham are essentially saying that because the government has criminally trespassed on our privacy for years, we should not complain when we discover that the invasion was a bit more elaborate than we had originally suspected.  They are saying that because we allowed them to get away with taking an inch, we might as well allow them to get away with taking a mile.  This is the logical fallacy of incrementalism, and tyrants use it in their arguments all the time.

Despotism rarely establishes itself overnight.  Rather, it slithers slowly into the midst of a society like a parasite, and carefully entrenches itself under our skin bit-by-bit so that we do not notice until it is buried so deep we fear removing it at all.  A line must be drawn in the sand eventually.  Past mistakes are not a license for future failures and future regrets, and anyone who claims otherwise is trying to take something away from you.

Argument #2:  If You’re Not Talking To Terrorists, Then You Have Nothing To Worry About

Another debate point from the bottom feeding Lindsey Graham.  First off, our Constitutional rights are not predicated on whether or not we are guilty of “terrorism”.  Even a so-called terrorist is supposed to be protected under the Bill of Rights.  The law is very clear, and this is not a negotiable position.  Every American, regardless of government suspicion, has a right to privacy, and is protected from unreasonable search and seizure without probable cause.  Period.  Graham’s argument perpetuates the fallacy that the word “terrorism” is somehow a magical password that allows the federal government to bypass Constitutional barriers.  I’m sorry to tell Lindsey that he is greatly mistaken.

Secondly, the very foundation of a free society requires that every person be treated as INNOCENT until proven guilty.  Mass surveillance twists this principle, so that all people are treated by the state as guilty until proven innocent.  Such a system will inevitably generate a vast rift between the populace and the government because it designates the political elite as the “watchers” and the public as the “watched”.  As history has shown us, the "watchers" always become the enslavers, and the "watched" always become the enslaved.   

I’m not sure why so many people, including U.S. senators, do not seem to grasp this concept.    

Argument #3:  We Must Trust That The Government Is Using The Surveillance Apparatus For Good

Barack Obama in defense of the leaked PRISM initiative and all encompassing NSA surveillance stated that Americans must simply “trust” that the federal system is using the data they have criminally harvested for the good of the country.  That is to say, we should have “faith” in the White House. 

I’m sorry, but the Constitution was written exactly because governments are run by men, NOT benevolent gods, and men are notorious for abusing power.  The Constitution exists because NO government can be trusted to act in a principled manner.  We do not have to “trust” them because tight constitutional restrictions are in place to ensure that they aren’t given enough slack to become dangerous.  When those restrictions are diminished, we get programs like PRISM…

The checks and balances of due process and warrants are supposed to be absolutely public and transparent so that we can see, with our own eyes, that all is being handled justly and honorably.  Mass surveillance in particular is an affront to the 4th Amendment because there is no conceivable way that warrants could ever be issued for the incredible volume of materials gathered, and therefore, there is no conceivable way that any legitimate judicial oversight is being enforced.  Secret courts, secret charges, secret programs targeting entire subsections of the population, were expressly forbidden by the Founding Fathers as totalitarian in nature.

In February of this year, Obama boasted during a Google Plus “Fireside Chat” that his was “the most transparent administration in history”.  The ability of politicians to lie with sociopathic expertise is well documented, hence, my lack of faith.

The government and the Obama White House in particular do not deserve our trust.  Trust has to be earned…

Argument #4:  Surveillance Programs Are Essential To The Safety Of The Public

At this point I find that anyone who still uses the “safety” position to justify the trampling of our freedoms is a lost cause.  Years ago, when the surveillance grid was being put into place through legal chicanery, the common skeptic would insist that such subversive laws had not yet hurt anyone, and that the concerns of the Liberty Movement were “overblown”.  Today, it’s no longer about theory.  Our cultural pain is real, people are being targeted, people are suffering, and it’s only going to get worse from here on.  And, as we warned a long time ago, the concept of “collective safety” would be the primary persuasion technique used to lead America further into oblivion.    

In a race to spin the leak of PRISM, lawmakers and establishment shills have come out in droves to suggest that the secret surveillance state has “stopped terrorist attacks” and “saved lives”.  Of course, because all the details of the program are classified, we’ll never see any proof that such claims are true.  What a conundrum.  Frankly, I know enough about government sponsored terrorism to understand that even if PRISM thwarted an attack, our clandestine alphabet bureaucracy has created far more death and destruction than they have ever prevented. 

In the end, I couldn’t care less if PRISM stopped a terrorist act.  The point is irrelevant.  Our civil liberties are not subject to the supposed success of an unconstitutional government action.  The promise of safety does not nullify our rights, nor does it give government capital to do whatever it pleases. 

Comfort Means Death

I believe the establishment has moved away from the denial of so many abuses because it hopes to convince us that this is the “new normal” of our society.  They want us to embrace the surveillance state and become comfortable in its cradling arms.  I do not plan to get “comfortable”.  When political villains no longer fear the exposure of their villainy, it is time to start worrying. 

There has been a lot of unrestrained conjecture on the motivations of the suddenly world-famous Edward Snowden.  The fact is we still know very little about him, and for now I will reserve judgment; partially because I know that one day people like myself could be accused of “fomenting controlled opposition” or “working for the enemy”.  Our culture has become so cynical that we refuse to believe that anyone does anything anymore out of a sense of principle. 

Whatever Snowden’s original intentions, I find his admitted reasons inspiring.  When asked why he forced the truth of PRISM into the mainstream, Snowden replied:

"I don't want to live in a society that does these sort of things ... I do not want to live in a world where everything I do and say is recorded. That is not something I am willing to support or live under…"

"I'm willing to sacrifice all of that [career and former life] because I can't in good conscience allow the U.S. government to destroy privacy, Internet freedom and basic liberties for people around the world with this massive surveillance machine they're secretly building."

"My sole motive is to inform the public as to that which was done in their name and that which is done against them…I understand that I will be made to suffer for my actions. I will be satisfied if the federation of secret law, unequal pardon and irresistible executive powers that rule the world that I love are revealed even for an instant."

The surveillance machine is the key to control.  When each person feels the eyes of the state constantly upon them, dissent and rebellion becomes unthinkable.  At the very least, those of us who are aware of the great Orwellian shift before us must take an immovable stand. 

The right to privacy is an inherent right of natural law. No individual or government system should be allowed legal precedence to invade my privacy, and all people have the right to be treated as innocent until proven guilty rather than guilty until proven innocent. As an individual, I do not owe the collective, or the government, a constant update on whether or not I am a "threat". In fact, I don't owe anyone anything.

If someone continues to treat me as an enemy and constantly tramples my natural right to privacy, I am going to fight them, and I am going to hurt them, perhaps mortally. This is what people who support surveillance society need to understand; there will be consequences for their trespasses against the natural rights of others.

There can be no negotiation.  There can be no compromise.  The surveillance state must be erased.

BOND MARKET - Tremors Getting Louder

Bond Market Tremors Get Louder 06-11-13 Zero Hedge

It appears the cracks in the armor of the central bankers created by an over-enthusiastic BoJ's impact on the quadrillion JPY JGB markets are now rippling through the global market place. While every talking head that dares to speak has proclaimed the weakness in bonds as nirvana for equity bulls, it seems they were wrong, very wrong. As bond market tremors ignite everywhere, so equity markets come a little unglued at the prospect that the Fed, ECB, BoJ, and PBOC may not be so omnipotent after all...

Bond markets...

BOND SCARE - Mainstream Saying Bond Market HAS or IS Reversing Its Long Trend

SOCGEN: 'Are We Facing A Bond Crash? Not Yet, But...' 06-10-13 Socgen via BI

Recent moves in the US and Japanese bond markets have some people worried if interest rates are doomed to surge. The consensus certainly seems to think so.

Goldman Sachs' Francesco Garzarelli has warned clients that the bond sell is "for real" with 10-year Treasury yields likely to head to 2.5% later this year.

In a note to clients this morning, Societe Generale's Patrick Legland reminds clients that their analysts expect the 10-year Treasury surging to 2.75% by the end of the year.

Legland communicated this in a note titled "Are We Facing A Bond Crash? Not Yet, But..." In the note, he discuss the risk of a disorderly bond market sell-off. Here's the "but" explained:

More volatility: a worrying sign

The recent rise in bond volatility is clearly a worrying sign, but we are still far from the volatility peaks which occurred in the past five years following the Lehman debacle and the euro sovereign debt crisis. However, the sharp rise in Japanese yields reminds us that there is still an anomaly that should be corrected in the next few years. The key question remains whether the BoJ will succeed in its policy and be able to maintain rates at low levels medium term. If not, then the bond bubble could burst rapidly, with dire consequences for financial markets. The evolution of bond volatility in Japan and the US should therefore be watched closely for any signs of panic. For the moment, we do not see indications of an imminent bond crash, but volatility will remain high until we understand better how the Fed exit will be implemented.

So, the risk of a bond crash is not imminent, but certainly on the table.

EMERGING MARKETS - Feeling the US "Exportation" of Inflation

This Is Increasingly Looking Like An Emerging Market Bond Meltdown 06-10-13 BI

The massive sell-off across emerging markets continues in force.

One of the big themes in global markets over the past month has been the rise in U.S. Treasury yields and the attendant strength in the U.S. dollar. This has caused a big unwind in emerging markets, as EM currencies depreciate against the dollar and higher-yielding EM government bonds look less attractive relative to Treasuries.

The 10-year Turkish government bond yield rose 22 basis points to 4.22%. In South Africa, 10-year yields rose 28 basis points to 7.84%. And in Mexico, 10-year government bond yields widened 5 basis points to 3.33%.

And if you're looking for a really ugly chart, inflation linkers in Brazil are getting absolutely massacred. (Inflation linkers are just bonds linked to inflation, like TIPS in the U.S.)

VALUATIONS - Macro Trends in Wages and Profits

The Real Underpinning for Equities 06-11-13 Gavyn Davies, Financial Times

Global equities have, so far, survived the bout of global deleveraging which followed Ben Bernanke’s remarks about slowing the pace of QE last month, though there have been nasty signs of volatility in Japanese and some emerging markets. Investors have, unsurprisingly, become temporarily obsessed by whether the Fed will taper its asset purchases in September or December. However, in the great scheme of asset valuation, this is nothing more than a passing detail. In the longer term, what matters is real factors, like

1. The forward path for corporate earnings, and
2. The interest rate at which they should be discounted.

• The appropriate discount rate is the risk-free (real) bond yield plus the equity risk premium (ERP).
• The Fed acts on the former, while the market determines the latter.

In recent years, the Fed has reduced the bond yield but the market has, simultaneously, required a higher ERP, so

the overall discount rate on equities has remained broadly unchanged

• As I have argued before, any rise in the bond yield as QE ends may be offset by a fall in the ERP, leaving the valuation of equities protected as bond returns become negative.
• We have seen a minuscule version of this playing out in recent weeks, for what it is worth.

This, however, does not necessarily mean that equities are fairly valued.

A common concern among investors is that the profit share in the US economy is currently abnormally high, which is one reason why US equities have performed so well since 2009. It is frequently argued that the profit share must eventually “mean revert”, and when that happens the market will have to revise downwards its estimates of the sustainable path for corporate earnings. Equities will tumble, not because of a hostile Fed, but because the fundamental earning capacity of corporate America will be found wanting.

This, however, seems to underplay the persistence and global breadth of the rise in the profit share, and the accompanying decline in the wage share, in the last three decades. It is far from clear why this trend should “mean revert” in the foreseeable future.

The recent behaviour of the wage and profits share in the US is familiar territory for most investors.

After a century or more in which the profit share in GDP had fluctuated around a constant mean, the rise in the last few years has taken it above previous peaks, and the wage share has plumbed unprecedented depths. This has occurred because real wages in the US have grown much more slowly than output per head, which means that all of the gains from productivity growth have dropped into the hands of shareholders rather than workers.

I am certainly not making the case that this has been socially desirable, especially since the rise in real wages which has occurred has been concentrated at the very top of the income scale. The resulting change in the distribution of income and wealth is a major political issue (see David Blake’s penetrating analysis here), but from an investor’s point of view, it has provided a critical underpinning for rising share prices.

In the past, market economies have tended to erode unusually high profit margins through price competition which has restored real wages to their previous trends. That has always been seen as the natural order of things in a capitalist system. But there is no sign of it happening this time.

It is important to recognise that similar patterns have been seen not just in the US, but throughout the developed world, starting in the late 1970s [1].

In fact, the gross profit share in the advanced economies has risen by about 10 percentage points of GDP over three decades, and the wage share has fallen by the same amount (see this analysis just published by the International Labour Organisation, well summarised by Timothy Taylor here).

This is an enormous upheaval in the distribution of income in the global economy, and it has happened in an almost continuous straight line over the entire period. It seems to have been impervious to every kind of shock, including

• the decline in inflation,
• the technology bubble,
• the arrival of the BRICs,
• the collapse in the global financial system and
• two successive Ashes victories for England against Australia.

Not only has this pattern been repeated in almost every developed economy (though the UK and some of the less successful eurozone economies are partial exceptions over recent years), it has also been seen in the emerging economies as well.

This is even more surprising, since conventional trade theory (ie the Stolper-Samuelson theorem) predicts that the returns to the abundant factor of production, which is clearly labour in the emerging economies, should rise as more trade takes place.

The Stolper-Samuelson theorem (explained here) assumes that neither capital nor labour is mobile across borders. With capital increasingly mobile since the 1980s, the predicted rise in the wage share in emerging economies has not happened. What has happened instead is that the returns to capital have increased throughout the world, while the returns to labour have been severely squeezed. Workers have not had sufficient market or political power to prevent this.

The cumulative effect on corporate earnings, and therefore on equity markets, has been enormous. Consider the following. If the 10 percentage points decline in the wage share had not occurred, and everything else had (implausibly) stayed the same, then gross profits in the developed economies would have been about one-third lower than they are today and net profits (after depreciation) would have been about two-thirds lower. In addition, since the ILO reports that much of the income transferred from labour to capital has been used to pay increased dividends, the consequent rise in the dividend yield has probably been very large as well.

The conclusion is two-fold.

First, equity markets would indeed by very vulnerable if the decline in the wage share started to reverse on a permanent basis.

Second, that decline has been so widespread and persistent that it must have been caused by some very powerful and continuous economic forces, including

• a technology revolution,
• globalisation,
• financialisation and
• the erosion of labour’s bargaining power

—————————————————————————————–

Footnote [1]

The data for international economies relate to the “adjusted” wage and profit share, after excluding the self employed. The advanced economies are a GDP-weighted aggregate of the US, eurozone, Japan and the UK. The emerging economies are a simple average of Korea, Turkey, Mexico, Hungary and Poland. Source: EC Ameco database.

EARNINGS - Estimates Becoming Very Suspect

For Anyone Who Still Thinks Earnings Matter 06-10-13 Zero Hedge

As Mike Tyson once ominously noted, "everyone has a plan until they get punched in the face," and it seems the rampage of equity bulls have some plan that many more prosaic fundamental analysis-based investors are unaware of (as we showed here). The 'punch' in the face will come; but in the meantime the following chart may be just the 'jab' that softens them up. As ThomsonReuters notes, of the 116 second-quarter earnings preannouncements given by S&P 500 companies, 93 of them have been negative, while only 14 have been positive. The resulting 6.6 negative to positive guidance ratio is the most negative since the first quarter of 2001. Nothing to see here, move along.

Of course - that doesn't matter - as we already know... fundamentals are irrelevant in a market of expanding hope-driven multiples...

because margin 'faith' is keeping the dream alive...

Charts: Barclays and ThomsonReuters

(h/t Brad Wishak At NewEdge)