NEW SERIES RELEASE MONETARY MALPRACTICE AVAILABLE NOW MONETARY MALPRACTICE: Deceptions, Distortions and Delusions MONETARY MALPRACTICE: Moral Malady MONETARY MALPRACTICE: Dysfunctional Markets
NOW SHOWING HELD OVER Currency Wars Euro Experiment Sultans of Swap Extend & Pretend Preserve & Protect Innovation Showings Below
FREE COPY... Current Thesis Advisory: CONTACT US
|
Weekend. August 10th , 2013
|
The Window of Opportunity: BLOWN! w/ CHARLES HUGH SMITH 32 Minutes with 34 Slides
What Are Tipping Poinits?
|
![]()
Reading the right books? >> Click to Browse << We have analyzed & included Book Review- Five Thumbs Up
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
"BEST OF THE WEEK " |
Posting Date |
Labels & Tags | TIPPING POINT or 2013 THESIS THEME |
HOTTEST TIPPING POINTS |
Theme Groupings |
||
We post throughout the day as we do our Investment Research for: LONGWave - UnderTheLens - Macro Analytics |
|||
Investors Never Listen NOR Learn |
|||
RISK - Investors Never Listen NOR Learn Stock Market Bubbles And Record Margin Debt: A (Repeating) History Of Ignoring All Warnings 08-09-13 Zero Hedge It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles. And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always. As DB says, "we prepared a collection of press articles which were published around the key events during the past financial crises. Our key finding is straight forward. Irrespective of the publishing date, the articles read alike throughout the two major crisis periods, i.e. the “new technologies market equity bubble” (1999-00) and the “Great/Global Financial Crisis” (2007-08). Most interestingly, literally the same content can be found in todays’ press. Universal phrases include:
|
08-10-13 | ANALYTICS RISK | 1 - Risk Reversal |
RISK - EU Worries Will Soon Emerge After the Election in Germany is Finalized Buckle Up, the EU Crisis Will Be Back Soon 08-09-13 Graham Summers, Gains, Pains & Capital The financial media continues to talk about how Europe is saved. It’s odd that somehow everything is starting to look so much better now than Angela Merkel is up for re-election in Germany. Could it be coincidence that the worst Crisis in years suddenly went away right as the women with her finger on the “bailout” button needed to convince German voters that she’s doing a great job? Remember, politics drive everything in Europe, including the markets (Spain’s political scandals had a bigger impact on the Spanish Ibex than a myriad of horrific economic data). Which is why everything is on hold until the German election ends next month. Meanwhile, underneath this veneer of calm, things worsen. Recently...
The European markets look equally ugly. Spain’s Ibex has traded sideways since late 2012. It’s now coming up against major resistance. We’ll see how that turns out. Germany’s Dax is forming a massive bearish rising wedge pattern. This market needs to explode to the upside or we’re going to see a correction that erases all of the gains since mid-2011. The same is true of France: Again, we need a parabolic rise now or this is a false breakout and France’s shares are heading lower. We’ve all seen how false hopes work out for the markets: BADLY. Given that Europe is beyond bankrupt at this point, I fully expect that that the EU Crisis will be back with a vengeance very shortly. When you consider that the entire EU banking system is leveraged at 26 to 1, it’s clear that there’s only one outcome possible here: implosion. Folks, there is no other way to put this... the markets are in a massive bubble. And when it bursts, things will get ugly very FAST. |
08-10-13 | ANALYTCS PATTERNS |
4- EU Banking Crisis |
PATTERNS - Even Retail Investors Don't Believe this Rally Did Retail Investors Just Fold? 08-09-13 TD Ameritradevia ZH After BTFATH in June, and being rotated into by the professionals in early July, it would appear that the apparent 'greater fools' are heading for the exits now. As we noted here, the 'retail' buyer of what the institutions were selling suggested things were getting a little too exuberant but as TD Ameritrade's Investor Movement Index shows that the retail investor is now a net seller of equities.Their proprietary index is now at its lowest level for 2013 and the last few days in stocks suggest the institutional sellers have run out of willing 'at any cost' great rotating equity buying 'greater-fools' (despite the mainstream media's call for moar BTFATH). Between Monday's record-breaking 'quote spam' and the JPY carry unwind occurring, we await the next call for Mr. Bernanke (or Kuroda) to get back to work. |
08-10-13 | PATTERNS | ANALYTICS |
US ECONOMY - A Lack of Demand Economic Recovery Suffering From Lack Of Demand 08-08-13 Comstock Partners At current levels the market is not only overvalued, but is ignoring the sputtering U.S. economic recovery, the slowing of earnings growth, and the prospect of tapering QE in the second half, perhaps as early as September. The additional prospect of a stalemate in Washington over the federal budget, the debt ceiling and the potential shutdown of the government is also being overlooked, not to mention the serious slowdown in global growth. Despite unprecedented monetary ease, the economy has slogged along at an average 2% growth rate over the last three years and seems to be slowing down even more in 2013. GDP grew at an annualized rate of only 1.1% in the 1st quarter and 1.7% in the 2nd with final demand even lower at 1.3% and 0.3% respectively. The reasons for the lagging growth are not hard to find. Simply put, there is not enough demand as consumers continue to deleverage the enormous amount of debt built up during the housing boom at the same time their incomes are barely rising. For the last 60 years household debt, which averaged about 77% of real disposable income, soared to 129% at the peak in 2007. While some progress has been made in reducing the ratio to 106%, it is still a far cry from the 60-year average. At the same time consumers’ ability to spend is severely limited. Real spending increased at a tepid 2% over the past year, and even this amount is unlikely to be maintained as real disposable income during the period rose only 0.6%. With the household savings rate at a recovery low of only 4.4%, consumers are unlikely to reduce the rate even more in order to support spending. The reported increase in payroll employment is not likely to change the bleak outlook for income and spending. Monthly job increases have averaged 186,000 over the last two years, far below the amount recorded in prior recoveries. In addition the rate of new jobs has not picked up recently as average employment rose by an average of only 175,000 over the last three months. Furthermore, an unusually high proportion of new jobs were part-time and in lower paying segments such as leisure and hospitality, where wages are only $13.48 per hour, compared to $24.37 per hour in manufacturing jobs, which have been going down. And since hours worked per week are much lower in leisure and hospitality than in manufacturing, the gap in weekly wages between the two segments is even greater. That is why consumer incomes are not keeping pace with the increase in jobs. In sum, we believe that the economy is losing steam rather than picking up. This is happening at the same time that the Fed seems intent on paring down QE, dysfunction is coming to a head in Washington, earnings increases are decelerating, and global economies are under pressure. Under these circumstances the potential for a severe market decline should not be overlooked.
|
08-10-13 |
US CATALYST DI
US RECESSION |
US ECONOMY |
EU RECESSION - Protraction Now Taking Global Demand with It 2008 Recession was 5 Quarters - 2011 Recssion is now in 7th Quarter |
08-10-13 | EU RECESSION | GLOBAL MACRO |
THESIS & THEMES | |||
STATISM - The Latest In Government Oppression Presenting The Latest In Government Oppression... 08-09-13 Simon Black via Sovereign Man blog, via ZH Here on the European continent, the bureaucrats who run the EU have recently proven to the world how much a ‘government guarantee’ is really worth. We’ve been discussing in this column lately how the modern banking system is a total fraud– that dictatorial control of 70% of the world’s money supply has been awarded to just four central bankers. And that the vast majority of banks, especially in the western world, are laughably illiquid… and very thinly capitalized. But most people never really worry too much about their banks. We’re told, pratically since birth, that
This belief is universally held as truth across society. And to cap it all off, we’re told that the government will step up to backstop any bank losses and ensure depositors don’t lose a single penny. The numbers obviously tell a very different story. In the US, for example, many banks hold less than 3% of their customer deposits in cash, and they have to use clever accounting tricks and off-balance sheet vehicles to mask the true health of their balance sheets. And the FDIC, which is supposed to bail out US depositors in the event of a crisis, has a mere 1.35% of total US deposits in cash. This isn’t safe. This isn’t conservative. It doesn’t even register as a drop in the bucket. STEALTH CAPITAL CONTROLS
SECURE E-MAIL /PRIVACY OUTLAWED
Just another week in the free world. Have you hit your breaking point yet? |
08-10-13 | THESIS | |
Credit Outbids Cash = Resource Wars 08-09-13 Charles Hugh-Smith of OfTwoMinds blog, via ZH There are real-world consequences to over-issuing credit and currency. Creating credit is the same as printing money when interest rates are zero. If I borrow $1 billion at 0% from the Federal Reserve (because I'm a Too Big to Fail bank, for example), it is functionally equivalent to printing $1 billion in cash currency because the credit costs nothing.
Let's say there is a .25% interest rate cost and printing cash also costs .25%. The carrying costs of both are trivial.
As a result, those with access to cheap credit have the equivalent of a printing press. I illustrated this recently with an example of three traders entering a trading fair: Trader 1 only has cash that has been earned and saved; Trader 2 has access to leveraged credit (i.e. borrowing $100 based on $10 of cash collateral) and Trader 3 has a printing press that creates cash currency. The Financial System Doesn't Just Enable Theft, It Is Theft (July 31, 2021)
As a result, Traders 2 and 3 could buy a lot more real-world goods at the fair than Trader 1, enabling the two traders with essentially unlimited credit/cash to reap enormous profits on carry-trades and other speculative trading.
Longtime contributor Harun I. recently pointed out an even more destructive consequence: resource wars.
This is a profound insight. Let's take two states, both of which issue credit and currency. The first is the U.S., and the second is a beleaguered state (State 2) with too much public and private debt and little collateral (for example, gold reserves) to back its currency.
The second state can issue as much currency and credit as it chooses, but the value of that capital falls in direct proportion to the quantity issued. Those sellers who accept this credit or cash as payment for real-world goods have little trust that the money issued by State 2 will retain its current purchasing power in the future. As a result, there is a huge risk premium priced into the trade, and relatively few traders will accept the risk of trading a potentially worthless currency for their scarce resources.
For whatever reason (and there are more than one), the trader trusts that the U.S. dollar will retain its purchasing power long enough for the trader to trade it for some other asset or form of capital, or even hold it as collateral for future loans.
Harun's point is the U.S. can outbid State 2 for oil or any other resource because it's essentially free for the U.S. to issue credit and cash. The price for the resources in U.S. dollars will soar in a bidding war, and while the U.S. can simply issue more credit/cash, State 2 is rapidly impoverished as the cost of essential resources rises.
Eventually this leads to a bidding war for trust: Whose credit/cash will be trusted to retain its purchasing power? There is a grand irony here, of course; as issuers of credit/cash attempt to debase their currency to boost their exports, their debased currency buys fewer real-world resources.
In a global credit crisis created by the over-issuance of credit/debt, which currencies will lose trust and which will gain trust? Those which retain or gain trust will enrich the issuer and those who lose trust will impoverish the issuer.
Nations that lose this bidding war for trust may reckon it's "cheaper" to wrest control of the needed resources by force rather than go through the arduous steps necessary to rebuild lost trust in their credit and currency.
In sum: there are real-world consequences to over-issuing credit and currency.
|
08-10-13 | THEMES
US MONETARY
GROUP US RISK FREE |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - August 4th - August 10th |
RISK REVERSAL | 1 | ||
COLLATERAL TRANSFORMATION - Quality Collateral Supply Is Determining "TAPER" Schedule From Less Repo, To Less Collateral Transformation, To Less Quantiative Easing In One Shadowy Step 08-05-13 Zero Hedge First it was the TBAC's May presentation "Availability of High Quality Collateral" piggybacking on reasoning presented previously by Credit Suisse. Then JPM's resident "flow and liquidity" expert Nikolaos Panigirtzoglou rang the bell on regulatory changes to shadow banking and how they would impact the repo market and collateral availability (and transformation) in an adverse fashion. Now, it is the turn of Barclays' own repo chief Joseph Abate to highlight a topic we have discussed since 2009: the ongoing contraction in quality collateral as a result of transformations in shadow banking and the Fed's extraction of quality collateral from traditional liquidity conduits (i.e., QE's monetization of bonds). To wit: "Several recent regulatory proposals will increase the pressure on banks to reduce assets that carry low risk weights. Repurchase agreements are a large source of banks’ low-risk assets, and we expect banks to reduce their matched book operations in response to these proposals." Abate's highlights:
What this means explicitly for repo volumes is nothing new and has been covered here extensively in the past, and can be seen quite vividly in the periodic slide of OTR repo into "special" status, usually just ahead of Treasury auctions:
The danger from the imposition of a "higher supplementary leverage ratio" is that while on the surface banks may demonstrate stronger balance sheets and less counterparty exposure, it will simply force them to seek "near-substitutes" that behave not exactly according to plan. See Lehman.
Digging into the implications of "thinner dealer inventories" which is already a direct result of changes in the repo market:
Finally, and getting straight to the heart of the TBAC's May warning, we focus on the biggest issue of all: collateral transformation, or literally getting something from nothing (or absolute junk) courtesy of the murky, off-balance sheet transformations that take place in the shadow banking system:
Note the highlighted, underlined text above, because it gets to the bottom of the tapering discussion: in a world in which "deficits persist", the Fed has all the liberty to do as much QE as needed, and absorb quality collateral as much as new gross collateral is injected via the Treasury (i.e., deficit funding). However, as deficits decline, as they have been in the US for the past few quarter (at least until the housing picture inevitably deteriorates again and the GSEs go from source of government funding back to use, and the demographic crunch hits in 2015 and deficits explode higher once again), ongoing monetization means collapsing the high quality collateral pool of assets far more than the TBAC advises. In fact, it is the TBAC that is pulling the strings on the Fed and making it clear, as it did in May, that the Fed has no choice but to taper as long as deficits don't return on their normal, upward trajectory (whether this means a war is inevitable to boost contracting defense spending remains to be decided). However, it is this aspect of the Fed "cornering itself" that is the underlying driver of all behind the scenes tapering discussions, which have nothing to do with the economy. Because while all the rhetoric and regulatory discussion focuses on the economy, the open markets, and deficits - this is all for general popular consumption. What the Fed and the BIS are truly concerned about, and have been for the past four years, is ongoing instability in the repo world, and other aspects of shadow banking. The last thing the Fed, and Treasury, will want to do is override the TBAC on its advice to moderate collateral extraction and plough on with even more quality asset imbalances in shadow banking. And this is why, at least until the Treasury proceeds to spend itself back into "drunken sailor" mode, that all hopes that the Fed will monetize everything that is not nailed down, will have to be deferred indefinitely. And with Credit Suisse, the TBAC, JPM and Barclays all having now covered this issue, we look forward to that final "liquidity" guru, Citi's Matt King to chime in on precisely this topic, and make it clear just what the real considerations driving the Fed's tapering "logic" are at this moment. |
08-06-13 | RISK MATA STUDY
US MONETARY |
1 - Risk Reversal |
JAPAN - DEBT DEFLATION | 2 | ||
JAPAN - Japanese Bonds Have Lost Their Ability To Price Risk BNP Warns Japanese Bonds Have Lost Their Ability To Price Risk 08-08-13 BNP Paribas via ZH The JGB market was completely unfazed by the news that the prime minister’s office was reconsidering the planned consumption tax hike. While the tax hike is unlikely to be changed; in BNP's view, the market’s lack of response to tail risk looks like proof that its function has been impaired by the BoJ’s massive buying. Even if the Abe regime is opting for financial repression to reduce the public debt, however, BNP warns that some degree of fiscal reform is needed to control the long-term interest rate. If the unfazed market is deemed to mean that fiscal reforms can be shelved without fear of a bond-yield spike as long as massive BoJ buying continues, serious problems could ensue. Via BNP, The JGB market was entirely unfazed by the news that the prime minister’s office was mulling a change in the timing and/or scale of the consumption tax hike (5% to 8%) slated for next April. To some, this lack of response reflects a dispassionate assessment of market participants that, despite all the talk about possible changes, the sales tax hike cannot be easily undone, having been enshrined in law. As the legislative process would have to start over to change it, we concur that it would be very difficult to devise a new plan. Still, just because the base-line scenario of most market players holds that the consumption tax hike will be implemented as planned, it does not follow that the probability distribution of the hike should be the same as it was. If rising tail risk is priced in, the long-term interest rate should pick up to some degree. In our opinion, the JGB market has become unable to price in risk, because the Kuroda-led BoJ’s aggressive purchasing has greatly impaired the market’s function. Normally, the yield curve prices in factors such as inflation expectations, economic growth forecasts, the likely future path of overnight rates, fiscal risk premiums, etc. By discounting future changes in these economic fundamentals, financial markets perform the proper role of price discovery. However, owing to the BoJ’s overwhelming bond purchases, transactions among other market participants have essentially dried up. With the BoJ being party to most transactions, bond prices no longer reflect news on Japan’s economic fundamentals. Questions, however, remain as to whether it is even possible for Japan to generate inflationary expectations. The traditional mechanism for transmitting monetary policy – rate cuts that stimulate demand, thereby causing improvements in the output gap, which stoke inflation – is currently not an option in Japan, as both the short-term and long-term interest rates are essentially at the zero bound. While the reflationists surrounding Prime Minister Shinzo Abe argue that inflationary expectations can be fostered by expanding the money supply, the theoretical rationale for this quantitative easing is the quantity theory of money, which does not hold when the nominal interest rate is zero. ... Incidentally, theories on how the price level is determined fall into two broad categories, the quantity theory of money and the fiscal theory of the price level (FTPL). While the former holds that monetary policy determines the price level, the latter makes fiscal policy the main determinant. When the central bank succumbs to fiscal dominance, wherein monetary policy is dictated by fiscal affairs and not the economy and prices, the applicable model is the FTPL. Under the FTPL model, fiscal policy can fall into two regimes:
What happens if we apply this model to Japan? For starters, the absence of positive price growth is not because of insufficient monetary easing, but the widely held view that the government will ultimately come through on fiscal restructuring, including tax hikes. In other words, past Japanese governments were deemed to have Ricardian fiscal regimes, hence the lack of inflation. But policy seems to have taken a non-Ricardian turn since the Abe administration took office.
The thing that worries us most is how those surrounding the prime minister will react to a JGB market that does not price risk. Matters could get very serious if they believe
Even if the authorities are deliberately opting for financial repression to steadily inflate away the public debt by fostering negative real interest rates, some degree of fiscal restructuring is still needed to ensure stable control over the long-term interest rate. Relying on seigniorage alone to repay the public debt could ultimately lead to double-digit inflation that would be socially unacceptable. Then again, surging term interest rates could make it impossible to rely on seigniorage. There is a good chance that financial repression will not succeed unless it is part of a package that includes credible fiscal restructuring comprising spending cuts and tax increases. |
08-09-13 | JAPAN MONETARY |
2 - Japan Debt Deflation Spiral |
BOND BUBBLE | 3 | ||
EU BANKING CRISIS |
4 |
||
SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] | 5 | ||
CHINA BUBBLE | 6 | ||
CHINA - Credit Bubble: 240% Of GDP And Soaring The True Chinese Credit Bubble: 240% Of GDP And Soaring 04-11-13 Zero Hedge Several months ago we pointed out something not fully grasped by the broader public: the Chinese corporate debt bubble is the largest of any developed and developing country, and at 151% of GDP (and rising rapidly) is the biggest in the world. What is better known is that corporate debt is just one part of the total debt picture, which also includes consumer loans, government debt and other "shadow debt" credit in the case of China. So how does China's true debt picture as a percentage of debt look? As the chart below from Goldman shows, in 2013 the total credit outstanding in China is expected to rise to a whopping 240% of GDP, and continue rising from there at an ever faster pace. What is even more concerning is that in order to maintain its breakneck economic "growth" of ~8% per year, China has to continue injecting massive amounts of debt, the so called "credit impulse" or "flow" which according to assorted views, is what is the true driver of an economy, and where GDP growth is merely a reflection of how much credit is entering (or leaving) the system. The chart below shows that total Chinese social financing flow just hit a record for the month of March. Completing the picture is the estimated economic response to a surge in credit. As the last chart shows, in China the biggest benefit to a surge in flow is felt in the quarter immediately following the credit injection, as one would expect, with the effect tapering off and even going negative in future quarters, thus requiring even more debt creation to offset the adverse impacts of prior such injections. What should become obvious is that in order to maintain its unprecedented (if declining) growth rate, China has to inject ever greater amounts of credit into its economy, amounts which will push its total credit pile ever higher into the stratosphere, until one day it pulls a Europe and finds itself in a situation where there are no further encumberable assets (for secured loans), and where ever-deteriorating cash flows are no longer sufficient to satisfy the interest payments on unsecured debt, leading to what the Chinese government has been desperate to avoid: mass corporate defaults. At that point it will be up to the PBOC to do what the Fed, the ECB, the BOE and the BOJ have been doing: remove any pretense of money creation via the commercial bank complex (even if these are merely glorified government-controlled entities), and proceed to outright monetization of de novo created assets, thus flooding the system with as much money as is needed to preserve the illusion of growth. Naturally, with the Chinese stock market having proven itself to be a horrible inflation trap (and as a result the bulk of new levered money creation goes into real estate), the inflation explosion that would result would be epic. At that point the chart of the price of gold (in any currency) due to on the ground demand for capital preservation will make the Bitcoin chart pre-bubble pop, seem outright flat. |
08-08-13 | CHINA | 6 - China Hard Landing |
CHINA - Sustainability Requires A Slowdown in Investment China’s Sustainability Requires Slowdown in Investment 08-05-13 Mark Williams, Chief Asia economist at Capital Economics in London. There has been a sea change recently in how investors view China’s economic prospects, with a growing belief that the slowdown reflects structural constraints rather than cyclical weakness. These constraints are often linked to demographic changes such as the fact that the working-age population last year declined for the first time in the modern era. However, population growth was never a big part of China’s growth story. Demographic changes this decade will account for only about 1 percentage point of the slowdown in economic growth. The roots of the continuing slowdown lie elsewhere, mostly in investment spending. Investment has increased to 46 percent of total spending from 36 percent in the last 10 years, well above the emergingworld average of 30 percent of GDP. There are three reasons why such a high rate is a problem.
Evidence on how bad the problem of misallocation is in China is mixed. One way to think about this is to ask what the current return is on capital. If a lot of investment is going into areas where it is not used productively, then profits will be hurt.
PESSIMISM OF OVERCAPACITY: Against the backdrop of increasing pessimism, such evidence of overcapacity is fueling talk of an imminent crisis. Even so, the troubles of individual sectors do not tell the story of the whole economy. Stepping back to look at industry overall, profit margins continue to hold up relatively well. There has been no repeat of the margin compression of 2009, let alone a return to the despair of the late 1990s, when overcapacity and investment misallocation in state-owned industry forced a wholesale restructuring. Similarly, there has been only a small decline recently in the returns firms generate on capital. And, unlike in previous downturns, there has been no industry-wide spike in inventories. Indeed, there are a couple of reasons to believe growth may stabilize or even pick up a little in the short term. Credit is still expanding at a 20 percent annual rate and there are tentative signs this is finally feeding into stronger activity. Meanwhile, the government has signaled it intends to keep growth above 7 percent and has announced some targeted measures to boost spending. We expect policy makers to do more over coming months and years to steer the economy onto a new path. While this will be a healthy development, it almost certainly means that the pace of growth will slow further. One important feature of the slowdown so far is that, although it has been led by weakening investment, this has still not been enough to pull down investment’s share of GDP. As long as investment remains the main driver of growth, the risks will loom large. |
08-06-13 | CHINA | 6 - China Hard Landing |
SOUTH KOREA - Korean Peninsula a Black Swan Possibility A Korean Black Swan? 08-04-13 John Mauldin Last week I was in Newport, Rhode Island, at the Naval War College, where I participated in a summer study group focused on possible futures and how they might affect the strategy of the US Defense Department. The discussions were wide-ranging and mind-expanding, at least for me. As readers know, I believe that Japan has begun a long-term process of continually devaluing its currency. For reasons I have written about at length in previous letters, I think the yen could go to 200 to the dollar in the next five years. I don’t see a precipitous move, simply a steady erosion as Japan tries to bring back inflation and export its deflation. While the yen at its current valuation is not a particular problem for the rest of the world, when it One of the countries that I think is put into a most difficult situation is South Korea. Their options Protectionism will have little real effect vis-à-vis Japan. Remember that the Japanese yen was 357 Honing their competitive edge may also be the only real option for South Korea. But it is not an Now let’s shift our focus to North Korea. Everyone (including your humble analyst) is worried A side conversation at the study group began with an observation by a senior officer about the How capable is the North Korean military of actually mounting an offensive when their soldiers are While there is little ability for the North Korean population to actually stage a revolution, as they There were not many people forecasting the collapse of the USSR in 1987. Yet as we look back, the confluence of causes that resulted in its collapse seems rather obvious. Probably, the current If that were to happen it would be a humanitarian disaster. In the long run it might be better for the No matter how positively you would want to view Korean unification, the process would be And this could happen while the attention of South Korea is focused on dealing with the I’m not saying this will happen, but it is a possibility we need to keep an eye on. |
08-05-13 | RISK GEO- POLITICAL SIGNALS |
8 - Geo-Political Event |
US BUDGET - Everyone Hates Sequestration, But Few Can Agree On What to Cut The GOP's Entire Budget Strategy Collapsed Yesterday, And Almost No One Noticed 08-01-13 BI House Republicans' latest fiasco confirms the suspicion: The GOP loves the Paul Ryan budget in theory, but even Republicans can't get it to work in practice. That was the result of a seemingly nonchalant debate over a bill to fund the Departments of Transportation, and Housing and Urban Development, which blew up in House Republicans' faces on Wednesday. The THUD bill was, well, a thud, and it was pulled from the House floor amid the realization that it did not have close to the 218 votes of GOP support it needed. Republicans couldn't garner the votes while abiding by their standards — billions in cuts on top of the levels of spending under sequestration. House Majority Leader Eric Cantor said that the House will return to appropriating the bill after Congress' August recess. But a furious House Appropriations Committee Chairman Hal Rogers said that was "bleak at best," and other GOP sources said there's little chance of that, as well. What happened here? This bill to fund the THUD served as Republicans' starting point in negotiations with Democrats. The GOP used the Ryan budget — which it passed more than four months ago — as a blueprint for the cuts they would need to make. But the problem with Ryan's budget is that it works in abstractions, and is never binding. And Republicans learned that, for the sake of saving face while going back to their districts, the heavy cuts projected in the Ryan budget just weren't workable. In a scathing statement, the normally measured Rogers blasted his colleagues.
That last sentence is what Democrats have been saying since sequestration took effect in March. Predictably, House Democrats seized on the news, with Budget Committee ranking member Chris Van Hollen using Rogers' statement as proof of validation for Democrats. Talking Points Memo's Brian Beutler explains how this latest failure could affect the coming battle over the fight to fund the government with a complete continuing-resolution bill:
Republicans passed the unspecific outlines of the Ryan budget earlier this year, because they look good in abstraction. But when it comes to specifics, the knife cuts too deep. Meanwhile, the Senate will move Thursday to the next step in its version of the THUD bill. |
08-06-13 | US FISCAL | 9 - Global Governance Failure |
OBAMACARE - A Flawed Public Policy Implmentation America: Where Hard Working, Productive Members Of Society Pay For The Health Care Of Everyone Else 08-04-13 Michael Snyder of The Economic Collapse blog via ZH Everybody in America wants health care - but most Americans seem to want someone else to pay for it. In the United States today, the way that our system works is that the hard working, productive members of society pay for the health care of everyone else. At least under socialism everyone gets the same benefits. Our system of health care is a very twisted version of socialism where millions upon millions of very hard working people are forced to pay for the health care of others, but often can't afford to purchase decent health insurance for themselves. Personally, I don't have a big employer paying for my health care so I have to buy it myself, and I just got a letter from my health insurance company telling me that I have another massive rate increase coming up. Have you gotten a similar letter? Health insurance premiums are going up all over America, and this is just the beginning. In fact, the CEO of Aetna says that health insurance rates for many Americans will double when the major provisions of Obamacare kick in next year. It would be bad enough if hard working Americans just had to pay for their own health insurance. But no, they are also expected to pay for the health care of members of Congress, employees of the IRS and other federal agencies, state and local government employees, their adult kids (because they can't afford health insurance), the elderly, the poor, and now under Obamacare they will also be expected to subsidize the health plans of tens of millions of other Americans that are not poor enough to qualify for Medicaid. When you add it all up, the hard working, productive members of society are at least partially subsidizing the health care of well over half of all Americans while having to pay for their own health care at the same time. Needless to say, it isn't too hard to see who is getting the raw end of the deal. Members of Congress certainly don't want to pay for their own health care. There was panic in the halls of Congress recently when they started realizing that due to certain provisions in Obamacare they may soon be forced to pay for their own health insurance plans. There was widespread moaning and complaining about how they would be facing "thousands of dollars in additional premium payments" every year. Things got so bad that Barack Obama got personally involved in the effort to find a solution. Thankfully, members of Congress can relax because a ruling is being issued that will allow the federal government to continue to subsidize 75 percent of the cost of their health plans...
And the IRS, which has been put in charge of imposing the rules of Obamacare on all the rest of us, is freaking out about the fact that some members of Congress would like to force them to personally participate in Obamacare...
The following are some excerpts from a letter that the union that represents IRS employees sent to members of Congress...
This is just shameful. If the IRS is going to impose Obamacare on the rest of America, then it should be good enough for them too. Just check out acting IRS chief Danny Werfel begging for employees of his agency not to have to go on Obamacare... But we have always had to at least partially subsidize the health plans of federal, state and local government workers. The big change under Obamacare is that we will soon be subsidizing the health plans of tens of millions of our fellow Americans. CNN says that 26 million Americans will be eligible for health insurance subsidies, but others believe that the true number is far, far higher than that. For example, according to CNBC, a family of three in New York that earns $78,120 a year would be eligible for a subsidy of more than five thousand dollars...
So who pays for that? You and I do through our tax dollars. And if you can believe it, Obamacare actually provides an incentive to not work too hard, because if you make too much money you could lose your health insurance subsidy...
What a perverse system. And of course Obamacare will allow young adults to stay on the health insurance policies of their parents until they reach 26 years of age. As I mentioned the other day, 36 percent of all young adults in the 18 to 31 age bracket are currently living with their folks. In most of those cases, the parents have to end up footing the bill for health care because the kids simply cannot afford it. Medicaid continues to expand as well. Certainly helping the poor is a very good thing, but unfortunately the number of poor just continues to explode. 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. Right now, there are more than 56 million Americans on Medicaid, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls. It is going to take a whole lot of money to support 72 million Medicaid patients. And then of course there is Medicare. When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around. Instead, it actually cost the federal government $110 billion in 1990, and it will cost the federal government close to $600 billion this year. But if you think this is bad, just wait until all of the Baby Boomers retire. It is being projected that the number of Americans on Medicare will grow from a little bit more than 50 million today to 73.2 million in 2025. By then, we would be spending well over a trillion dollars a year on Medicare. As you can see, under Obamacare the vast majority of all Americans will have their health care at least partially subsidized. And it expected that our tax dollars will somehow be enough to pay for all of this. The truth is that we have a deeply broken system. Costs are spiraling out of control and nobody is quite sure how to fix things. The following statistics come from one of my previous articles entitled "50 Signs That The U.S. Health Care System Is A Gigantic Money Making Scam"... -This year the American people will spend approximately 2.8 trillion dollars on health care, and it is being projected that Americans will spend 4.5 trillion dollars on health care in 2019. -The United States spends more on health care than Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain and Australia combined. -If the U.S. health care system was a country, it would be the 6th largest economy on the entire planet. -Back in 1960, an average of $147 was spent per person on health care in the United States. By 2009, that number had skyrocketed to $8,086. The sad thing is that many hard working Americans in the private sector are being forced to subsidize the health care of others, but they can't even afford decent health care for themselves. For example, I know of one hard working couple that has a health plan that has a $1,000 deductible. Even with that deductible, their health insurance premiums are absolutely ridiculous. Their health care strategy is simply to avoid going to the hospital or visiting a doctor as much as possible. And of course health insurance companies make money by providing as little health care as possible. Many Americans have discovered that when you need them the most, some health insurance companies will try to get out of covering you any way that they possibly can. The reality is that just because you have health insurance that does not mean that you are "covered". According to a study that was published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of all personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved people that actually did have health insurance. So what is the bottom line? The bottom line is the system stinks, and Obamacare is going to make things a whole lot worse. |
08-06-13 | US PUBLIC POLICY | 9 - Global Governance Failure |
HOUSING - Household Formation Drives Residential Real Estate Record 21 Million 'Young Adults' Now Live With Their Parents 08-02-13 PEW Research via ZH Just about a year ago we questioned the "demographic demand" thesis for why the US housing 'recovery' would become self-sustaining and lead to yet another fiscal and monetary 'nirvana'. However, while the 'household formation' meme remains front-and-center among bloviating Fed apologists; the sad facts are that not only is household formation actually still falling but, as a recent Pew Research study finds, a record 21 million young adults are now living at home with their parents. Since 2007, young adults have grown increasingly likely to live at home. This is a new trend with a stunning 45-year high 36% (21 million) of 18-31 year-olds back with mom-and-pop. By way of corollary, with one-third of all Italian adults living at home (and 61% of young-adults), it would seem arguing that a housing renaissance in the US is around the corner on the basis of demographics is risible at best. Household formation is falling among the young adults (a new trend)... as 18-31 year olds continue to be forced to move back in with their parents... But as we warned 10 months ago, there is massively more room for this to increase... as we see in Italy, it can get considerably worse...
So with mortgage rates up, household formation down, and the rotation from full-time to part-time jobs, we suspect the exuberance priced into a 'housing recovery'-based growth renaissance is as unlikely as Ron Paul becoming the next Fed Head. |
08-06-13 | INDICATORS CATALYSTS RESIDENTIAL REAL ESTATE |
15 - Residential Real Estate - Phase II |
CREDIT - A Loan Distribution Bubble Another Looming Credit Crunch? 08-05-13 Morgan Stanley via ZH Thanks to an over-flowing cup of Fed liquidity, corporate debt maturities have not only been pushed out in time but have risen in their nominal outstandings as cheap financing was too good to ignore (especially for those firms on the bubble of failure). The problem these firms face now is, with the Fed set to Taper (and indeed tighten on rates in the next few years); the outlook of much higher bond yields will have a major impact on firms that levered up and used this period to 'survive'. As is clear from the chart above, debt maturities will once again surge in 2-3 years; and given credit markets now focused on fundamentals (future cashflows) as opposed to merely technicals (fed liquidity flows), the wall of maturities just as rates are rising (and liquidity being withdrawn) will make high-yield investors increasingly nervous (and feedback into lower valuations for stocks, no matter how exuberant a rotation retail investors expect). The message once again appears to be - there's no free lunch as the Fed has merely dragged forward exuberance at the expense of dystopia in the not so distant future. The bottom-line is that the credit-cycle cannot be hidden forever - unless we can rest assured that even if the Fed does 'Taper' it will rapidly 'un-Taper' soon after as the gross misallocations of capital (rise in liabilities - which will not drop - against an artificial rise in assets - which will fall)... Chart: Morgan Stanley
|
08-07-13 | US MONETARY |
17 - Credit Contraction II |
TO TOP | |||
MACRO News Items of Importance - This Week | |||
GLOBAL MACRO REPORTS & ANALYSIS |
|||
US ECONOMIC REPORTS & ANALYSIS |
|||
RECESSION - More and More Signals Flashing Real Personal Income Points To Recession Charles Hugh-Smith of OfTwoMinds blog,via ZH Every time real personal income goes negative, a recession occurs. Now that personal income is falling, a recession is baked in. Frequent contributor B.C. recently submitted a long-term chart of real personal income that highlights a strong correlation between falling real income and recession. This makes sense: if real (that is, adjusted for loss of purchasing power a.k.a. inflation) income is declining, households have less income to spend and less income to leverage more debt. Note that real personal income is per capita (per person) and that government transfer payments (checks from social programs such as welfare, Social Security, etc.) are excluded. There are two noteworthy points in this chart.
Here are B.C.'s explanatory comments:
Thank you, B.C. The Big Lie of the "recovery" is that it is self-sustaining. Minus government transfers, the reality that the Fed and Federal government are simply enriching the top 1/10th of 1% with access to unlimited credit at zero interest is revealed. "The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." Ernest Hemingway, The Next War
|
08-08-13 | GROWTH GMTP STUDY RECESSION
MATA A08 |
US ECONOMY |
EMPLOYMENT - Low-Wage Jobs Bias Continues to Hamper U.S. Recovery Low-Wage Jobs Bias Continues to Hamper U.S. Recovery 08-05-13 Bloomberg Brief Economic data last week revealed the economy is plodding along at sub-par pace, incapable of engendering a solid pace of living-wage job creation. The Bureau of Economic Analysis estimates the U.S. economy advanced an annualized 1.7 percent in the second quarter, or a lowly 1.4 percent over the last year. This has traditionally raised recession alarms; since 1948, anytime the year-over-year pace has fallen this low, the economy has entered recession within three quarters. Low wages and incomes will probably continue to stymie household spending and business investment, and impede the recovery efforts. The economy’s weak path is consistent with findings in the Bloomberg Orange Book and its associated Orange Book Sentiment Index, which was at 49.26 during the week ended August 2 — the twenty-fifth consecutive sub-50 reading for this indicator. The economy added 162,000 jobs in July while the unemployment rate slipped a tenth of a percentage point to 7.1 percent. While these numbers were considered favorable by some pundits,
Even with the seemingly improved headline figures, the underlying jobs trends remain disheartening:
The risks to economic expansion are definitively to the downside since the slightest blow to the consumer or business sector would push growth rates of real GDP, incomes, and spending even lower, thus ensuring recession. |
08-06-13 | MATA AO8 RECESSION |
US ECONOMY |
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES | |||
TAPER - Political "Push BacK" by the Fed The Case For Fed Tapering Sooner Rather Than Later 08-06-13 Charles Hugh-Smith of OfTwoMinds blog, via ZH Better to engineer a mini-crisis while you're still in control than let a crisis you can't control run away from you. One of the most widespread misconceptions about the Federal Reserve is that its policies are based solely on economic data and models. This misconception is not accidental but the result of carefully managed public relations: The Fed fosters a public image of dispassionate experts working econometric magic that mere mortals (i.e. non-PhDs in Economics) cannot possibly understand.
(Insert joke about one-armed economists being unable to say "on the other hand" here.)
The reality is the Fed is as much a political and PR machine as it is a financial institution. Behind the carefully nurtured facade of experts poring over data and complex financial models is a leadership that spends an inordinate amount of time on PR and perception management (care to count the number of Fed-staged speaking engagements and press conferences this year?).
The Fed is an intrinsically political entity, and its leadership is by necessity thoroughly political. In public, the Fed leadership plays the part of dutiful technocrats to perfection, but behind this mask they are keenly aware that the elected leadership of the nation has relied on the Fed's easy money to enable stupendous deficit spending.
The Fed's mass money-creation and bond buying programs have allowed the elected leadership (the Executive branch and Congress) to avoid any tough decisions; being able to borrow trillions of dollars at near-zero real rates of interest means never having to face difficult spending choices: need another trillion to fund politically powerful cartels? No problem, just borrow it. The Fed has our back.
The Fed has a dual mandate, and no, it's not stable prices and employment. The Fed's real dual mandate is:
1) Preserve and protect the banking sector's power and share of the national income
2) Preserve and protect the Fed's political and institutional power.
The second mandate requires a complex dance with the elected leadership of the nation. The Fed needs to be needed, and so funding the political Elites' borrowing gives the Fed abundant political power. The political class cannot afford to alienate the Fed leadership when they depend on cheap money and trillion-dollar bond buying to sustain their own power.
But the political class's abject failure to deal with the fiscal morass is pushing the Fed into a corner it cannot afford to be trapped in. The longer the Fed prints $1 trillion a year to make things easy for the elected toadies and apparatchiks, the greater the risk that the financial system destabilizes again and the Fed will shoulder the blame.
The political class plans to be on the sidelines during the next financial crisis, innocently tsk-tsking while the Fed absorbs the blame for the fiasco. The Fed is desperate to pass the ticking time-bomb back to the elected leadership before it blows, and there is only one way to do this: taper off the money-printing and bond buying, and accept a mini-meltdown in stocks as the cost of forcing responsibility back on on the elected leadership.
Fed Chairman Bernanke has telegraphed the Fed leadership's concern about the free pass the elected leadership has been given on the fiscal side, and now that his term is ending, Bernanke is aware that the clock is ticking not just on his legacy but on the critical task of handing the responsibility for fiscal management back to the elected leadership.
While doing nothing will let him leave the stage in December with the appearance that everything is in good order, he knows that he's handing the next Fed chair--and more importantly, the Fed itself--a no-win situation: if the global financial system destabilizes, the Fed will have few (if any) options available to save it that don't trigger risky unintended consequences.
Should the financial system slip into crisis again, the Fed's opportunity to force responsibility back on the elected leadership will have passed.
Politically, it's now or never for the Fed, and Bernanke is keenly aware of this. From the point of view of the Fed, it has patiently given the elected leadership four long years to get its house in order, and the political class has chosen the easy way out: do nothing of any substance and borrow $7 trillion to fund every politically powerful cartel and constituency.
Bernanke is also aware that he needs to give the Fed (and the next chairperson) some policy leeway: if the quantitative easing machine's throttle is already maxed on 10, the Fed leadership will have precious little maneuvering room left in the next crisis.
To preserve its political power and avoid taking the fall during the next crisis, the Fed has to taper off its money-creation and bond buying well in advance of December. The majority of commentators in the financial media see the stock and bond markets as not just the most important metrics but the only metrics. This reflects their self-absorption and political naivete; the markets are ultimately theater and PR leverage for the real power plays.
The best way to (ahem) get the attention of the political class is to taper now, trigger a stock market decline and speak directly to the elected leadership's need to put the fiscal house in order.
This is the only way the Fed can escape taking the bullet during the next financial crisis. "We told you so" is much better than "we did everything we could and it still fell apart." Better to engineer a mini-crisis while you're still in control than let a crisis you can't control run away from you, and better to pass the ticking time-bomb to the elected leadership while you still can. |
08-07-13 | US MONETARY | CENTRAL BANKS |
TAPER - Ending QE Will Pressure Fiscal Policy Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot" 08-25-13 Dallas Fed via ZH From "Horseshift! (With Reference to Gordian Knots)" - the prepared remarks by the Dallas Fed's Dick Fisher released moments ago, in which the Fed president with GLD holdings, gets folksy with the Fed's balance sheet. Years of Extraordinary MeasuresFor six of my eight years at the Fed, we have been working to bring the nation’s economy out of recession. The fiscal authorities have for the most part been AWOL during this time, having left the parking brake on during their absence. This has placed the onus on the Bernanke-led Federal Reserve. We have undertaken extraordinary measures, first to get the economy out of the emergency room after the financial system seizure of 2008-09, and more recently, to goose up the private sector to expand payrolls. Toward this end, the Fed cut interest rates to their lowest levels in the nation’s 237-year history by initially cutting the base rate for overnight interbank lending—the “fed funds rate”—to near zero, and then by purchasing massive amounts of U.S. Treasuries and bonds issued or backed by U.S. government agencies (obligations of Fannie Mae, Freddie Mac and Sally Mae, and mortgage-backed securities). This later program is referred to as quantitative easing, or QE, by the public and as large-scale asset purchases, or LSAPs, internally at the Fed. As a result of LSAPs conducted over three stages of QE, the Fed’s System Open Market Account now holds $2 trillion of Treasury securities and $1.3 trillion of agency and mortgage-backed securities (MBS). Since last fall, when we initiated the third stage of QE, we have regularly been purchasing $45 billion a month of Treasuries and $40 billion a month in MBS, meanwhile reinvesting the proceeds from the paydowns of our mortgage-based investments. The result is that our balance sheet has ballooned to more than $3.5 trillion. That’s $3.5 trillion, or $11,300 for every man, woman and child residing in the United States. The theoretical mechanics behind QE are straightforward: When the Fed buys Treasuries and MBS, it pays for them, putting money into the economy. A key intent of this unprecedented program was to drive down interest rates to such a degree that businesses would achieve a financial comfort level that would induce them to put back to work the millions of Americans that were laid off in the Great Recession. Thus far, only 76 percent of the jobs lost during 2008-09 have been clawed back in the more than three and a half years of modest to moderate payroll gains. This 76 percent figure does not include the 3 million or so jobs that would normally be created to absorb growth in the working-age population. The Challenge of Untying the Monetary Gordian Knot The challenge now facing the FOMC is that of deciding when to begin dialing back (or as the financial press is fond of reporting: “tapering”) the amount of additional security purchases. In his press conference following our June FOMC meeting, speaking on behalf of the Committee, Chairman Bernanke made clear the parameters for dialing back and eventually ending the QE program. Should the economy continue to improve along the lines then envisioned by Committee, the market could anticipate our slowing the rate of purchases later this year, with an eye toward curtailing new purchases as the unemployment rate broaches 7 percent and prospects for solid job gains remain promising. Kindly note that this does not mean that the Committee would envision raising the shorter term fed funds rate simultaneously; indeed, the Committee has said it expects this pivotal rate to remain between 0 and ¼ percent at least as long as the unemployment rate remains above 6.5 percent, intermediate prospects for inflation are reasonable, and longer-term inflationary expectations remain well anchored. Having stated this quite clearly, and with the unemployment rate having come down to 7.4 percent, I would say that the Committee is now closer to execution mode, pondering the right time to begin reducing its purchases, assuming there is no intervening reversal in economic momentum in coming months. This is a delicate moment. The Fed has created a monetary Gordian Knot. You can see the developing complexity of that knot in this sequence of slides tracing the change in our portfolio structure with each phase of QE. Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot. Those of you familiar with the Gordian legend know there were two versions to it: One holds that Alexander the Great simply dispatched with the problem by slicing the intractable knot in half with his sword; the other posits that Alexander pulled the knot out of its pole pin, exposed the two ends of the cord and proceeded to untie it. According to the myth, the oracles then divined that he would go on to conquer the world. There is no Alexander to simply slice the complex knot that we have created with our rounds of QE. Instead, when the right time comes, we must carefully remove the program's pole pin and gingerly unwind it so as not to prompt market havoc. For starters though, we need to stop building upon the knot. For this reason, I have advocated that we socialize the idea of the inevitability of our dialing back and eventually ending our LSAPs. In June, I argued for the Chairman to signal this possibility at his last press conference and at last week’s meeting suggested that we should gird our loins to make our first move this fall. We shall see if that recommendation obtains with the majority of the Committee. Horseshift!We needn’t be condemned to the glue factory. As I said, American companies publicly held and private—large, medium and small—have taken advantage of the cheap and abundant money made available by the Fed’s hyper-accommodative monetary policy to create lean and muscular balance sheets. In response to the deep recession and the challenges of fiscal and regulatory uncertainty, they have rationalized their cost structures and ramped up productivity, leveraging IT, just-in-time inventory management and new production structures to the max. I believe American businesses today are, far and away, the most efficient operators in the world. We have countless businesses in every sector of goods and service production that are the equivalents of the Secretariats, Man o’ Wars, Citations, Seabiscuits or any great thoroughbred that has ever graced the track. They just need to be let out of the starting gate. That gate is controlled by Congress, working with the president. If they would just let 'em rip, we would have an economy that would soar. We would experience what, tongue firmly but confidently in cheek, I would call “horseshift”: from being the stuff of an economic glue factory to becoming the wonder-horse that would outpace the rest of the world, putting the American people back to work and renewing the wonder of American prosperity. If you and your fellow citizens from whatever state you hail from insist upon it, it will be done. But why "let them rip" when Congress and the president can continue the charade, and pretend they are doing their political roles of sticking to their ideologies (i.e., no consensus on anything) when at the end of the day it is the Fed whose all enabling monetary policy provides the necessary impetus to keep the economy if not growing, then at least keep it from imploding (for now) even if it means record daily S&P highs and unseen splintering between America's uber rich and everyone else. In other words good luck with all that.... folksy or not. |
08-07-13 | US MONETARY | CENTRAL BANKS |
Market Analytics | |||
TECHNICALS & MARKET ANALYTICS |
|
||
VALUATIONS- PE Multiple Expansion Is Not Sustainable Multiple Expansion Is Not Sustainable; Guggenheim Warns "Take Profits" 08-08-13 Guggenheim Partnersvia ZH While remaining unapologetically bullish US equities long-term, Guggenheim's Scott Minerd warns that
– all of which will put downward pressure on stock prices. The near-term outlook for equities makes now a good time to consider the old Wall Street adage, "Nobody ever lost money by taking a profit." Multiple Expansion Driving the Rally in U.S. Equities The P/E multiple, defined as the ratio of price to trailing 12-month earnings, has been the main driver of the rally in U.S. equities over the past two years. The S&P 500 index has increased by over 34 percent since the beginning of 2011, of which 28 percent has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4 percent in 2012 and another 2.5 percent for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable. |
08-09-13 | STUDY VALUATIONS |
ANALYTICS |
GLOBAL GROWTH - Fighting Triffin's Paradox Why the Shrinking Trade Deficit Will Choke U.S. Corporate Profits 08-09-13 Charles Hugh-Smith of OfTwoMinds blog, via ZH All those counting on a weaker dollar and rising U.S. corporate profits will be doubly surprised. That the U.S. trade deficit shrank to $34 billion in June is being presented as good news all around (no surprise there, as all news is presented as good news). The petroleum boom in the U.S. has pushed oil imports down by over $2 billion a month to $10 billion/month, and non-petroleum trade generated a deficit of $37 billion/month, down $5 billion.
Slowing imports and modestly higher exports are being presented as reasons for stronger GDP growth going forward. Oil Boom Helps to Shrink U.S. Trade Deficit by 22%.
Nice, except nobody is talking about the negative consequences of a shrinking trade deficit on U.S. corporate profits. The financial media doesn't talk about this because it doesn't understand the connection, which is based on Triffin's Paradox, a dynamic I have discussed in depth a number of times:
What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2021)
Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2021)
The basic idea here is that the world's reserve currency must expand to meet the needs of global trade. Most commentators view the U.S. dollar through the prism of the domestic economy: Federal Reserve money-printing increases the supply of dollars, depreciating its value, and this policy is intended to competitively devalue the dollar to increase U.S. exports.
Here's the heart of Triffin's Paradox: Triffin's Paradox: when one nation's fiat currency is used as the world's reserve currency, the needs of the global trading community are different from the needs of domestic policy makers.
Understood in this light, rising U.S. trade deficits in the 1990s and 2000s were required to provide enough dollars to lubricate rising global trade:
Trading nations need dollars to lubricate trading and as foreign exchange reserves that bolster the value of their own currency and provide the asset base for the expansion of credit within their own nation.
What does a declining trade deficit mean? It means fewer dollars are being exported. The global economy is about $60 trillion, of which about 25% is the U.S. economy. Into this vast sea of trade, the U.S. "exports" about $400-500 billion in U.S. dollars via the trade deficit. Put in perspective, it isn't that big compared to the machine it is lubricating. (That is $250 billion less than was "exported" in 2006.)
So what happens when there are fewer dollars being exported? Demand for existing dollars goes up, pushing the "price" of dollars up--basic supply and demand.
How does a rising dollar impact U.S. corporate profits? Most large U.S. global corporations already earn 60+% of their revenues overseas, in other currencies. As the dollar weakened, global corporate profits skyrocketed as earnings in euros, yen, etc. rose when stated in dollars.
As the U.S. dollar strengthens, overseas profits will decline when stated in dollars. Shrinking trade deficits means fewer dollars exported into the global economy, which means demand for dollars for trade, reserves and to pay debts denominated in dollars will face shrinking supply. That will drive the "price" of dollars higher.
As the price of dollars rise, U.S. corporate profits will decline as all the goods and services sold overseas in other currencies are converted (at least for accounting purposes) into U.S. dollars.
Be careful what you wish for. Shrinking trade deficits may appear to be positive for the domestic economy, but they won't be positive for a stock market dependent on profits generated by global corporations who earn 50%-60% of their revenues overseas: a rising dollar driven by declining trade deficits will re-set the stock market downward along with corporate profits.
All those counting on a weaker dollar and rising U.S. corporate profits will be doubly surprised. |
08-09-13 | MATA STUDY CORPORATE PROFITS
MATA A08 RECESSION |
ANALYTICS |
RISK - Money Going to Cash But Equity Inflows Still Suggest Corrective Correlation July Records Biggest Inflows... Into Cash? 08-06-13 Lance Roberts of Street Talk Live, via ZH With the Federal Reserve's:
... program currently in full swing; one would assume that the daily pushes to new market highs are driven by massive inflows of cash into the equity markets. Well, that assumption would be partially correct. According to Trim Tabs:
Of course, this is clear evidence that the "Great Rotation" by investors, from bonds into equities, is upon us which will cause yields to rise as investors bet on a recovering U.S. economy. Right? Maybe not. First of all there is scant evidence that the economy is entering into a growth mode. Even after the recent data manipulations by the Bureau of Economic Analysis (BEA) to artificially inflate the economic data by $500 billion through
... the annual growth rate of the economy remained below 2% for the third straight quarter. Historically, such events have only been witnessed prior to the onset of economic recessions - not expansions. Yet, the markets have continued to rise setting daily records with each minor uptick. This incredible advance has come despite weak economic, and corporate, fundamentals. The rush to plow money into equities since the end of 2012 has been quite astonishing as investors continue to show a complete lack of "fear" as evidenced by extremely low levels in volatility measures and record levels of leverage. Historically, such combinations of complacency, exuberance and leverage have ended very poorly. However, currently, there is no denying that the old Wall Street axiom of "Don't Fight The Fed" has been taken to heart. The belief, by investors, is that as long as the Federal Reserve is intervening the "stocks" are the only game in town. I recently showed the correlation between the stock market and the Fed's balance sheet expansions. But, is it really the "Great Rotation?" Have investors finally come to an agreement that the worst is behind us and a new secular economic and market cycle is just ahead? While this idea is what we have been led to believe by countless pieces of hope filled commentary - the real question is what are investors are really doing?
Trim Tabs goes on to state that:
As I discussed recently in "Is It 'The Great Rotation' or 'Bad Behavior'":
While investors are indeed most likely chasing performance of the market - they are also appear to being more "afraid" of the rally, that what we have seen historically, by storing more money in cash. As article after article has been written chastising investors for not "jumping into the market" - the reality is that investor "trust" has been broken. They still remember being told that "this time was different" at the peak of the markets in 2000 and 2008. It wasn't. They also remember being told to "buy" and "hold on" all the way down during both market corrections that cost them 50%, or more, of their portfolios. Now that individuals have finally gotten back to even, for the second time in the past decade - they are indeed taking rotating money in the markets - it just happens to be to cash. But then again, after being lied to, abused, manipulated and defrauded by Wall Street - who can really blame them. |
08-08-13 | RISK
GROUP US RECESSION |
ANALYTICS |
RISK - "Blue-Sky" Index Is Flashing Red "Blue-Sky" Index Is Flashing Red 08-05-13 Sean Corrigan (Diapason Commodities) via ZH Nobody may wish to believe it, but, Diapason Commodities' Sean Corrigan warns, it just might be that the US economy has seen its best for this phase of the cycle. Where does that leave assets? Arguably overpriced and overbought, he believes. The VIX has swooped to a low only once briefly undercut since before the last New Era started to lose its luster in early 2007. As a result, Corrigan's "Blue Sky" index - the OEX divided by the VIX, being an inverse representation of what people perceive to be the worth of buying price protection - has jumped to the upper third of the ninety?ninth percentile of the past quarter-century's distribution; an anoxia?inducing plane only briefly exceeded just as the first rumblings of the forthcoming doom started to afflict the Boom in the March of 2007. |
08-07-13 | SENTIMENT RISK |
ANALYTICS |
PATTERNS - Equity Fund Flows Three Years Of Domestic Equity Fund Flows In One Chart 08-06-13 Zero Hedge There has been much discussion about fund flows into domestic mutual funds in the past few weeks for one simple reason: there have been inflows into domestic mutual funds (as tracked by ICI). For some reason, pundits correlate this inflow with the move higher in stocks. What remains unsaid is why there was little to no discussion of fund flows into domestic stock funds for about 90% of the time in the past three years. The reason is just as simple: there were no inflows, as can be seen on the chart below. There were, however, other "exogenous" events during this time: such as QE2, LTRO 1 + 2, Draghi's whatever it takes language and Operation Twist of course, and then QE3 which will likely continue indefinitely and be replace by QE4 the second it is fully "tapered." So what is relevant: inflows (or, gasp, outflows) or whatever central banks do? You decide. |
08-07-13 | PATTERNS | ANALYTICS |
VALUATIONS - Shiller PE of 24X Historically Signals An Approaching Top Can It Get Any Better Than This? 08-04-13 John Mauldin To many investors:
This kind of news would normally point to prosperity across the real economy and call for a celebration – but prices do not always reflect reality. Moreover, the combination of high and rising valuations, low volatility, and a weakening trend in real earnings growth is a proven recipe for poor long-term returns and market instability. Let’s take the S&P 500 as an example. It returned roughly 42% from September 1, 2011, through August 1, 2013, as the VIX Index fell to its lowest levels since the global financial crisis. Over that time frame, real earnings declined slightly (down about 2% through Q1 2013 earnings season), while the trailing 12-month price-to-earnings (P/E) ratio jumped 44%, from 13.5x to 19.5x. That means the majority of the recent gains in US equity markets were driven by multiple expansion in spite of negative real earnings growth. This is a clear sign that sentiment, rather than fundamentals, is driving the markets higher. Of course, the simple trailing 12-month P/E ratio can be misleading at critical turning points if you are trying to handicap the potential for long-term returns. For example, the collapse in real earnings during the global financial crisis sent the S&P 500’s trailing P/E multiple through the roof by March 2009. So, while trailing P/E is a useful tool for understanding what has already happened in the market, the “Shiller P/E” is far more useful for calculating a reasonable range of expected returns going forward. This approach won’t help you much with short-term market timing, but current valuations have historically proven extremely useful in forecasting long-term returns. In his book Irrational Exuberance (2005), Robert Shiller of Yale University shows how this approach “confirms that long-term investors – investors who commit their money to an investment for ten full years – did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well-advised, individually, to lower their exposure to the stock market when it is high … and to get into the market when it is low.” As you can see in Figure 6, compared to the more common trailing 12-month P/E ratio in Figure 5, the Shiller P/E metric essentially smooths out the series and helps us avoid false signals by dividing the market’s current price by the average inflation-adjusted earnings of the past ten years. \ Historically, this range has peaked and given way to major market declines at around 29x on average (or 26x excluding the dot-com bubble), and it has bottomed in the mid-single digits. Not only does today’s Shiller P/E of 24x suggest a seriously overvalued market, but the rapid multiple expansion of the last two years in the absence of earnings growth suggests that this market is also seriously overbought. John Hussman helps us keep current valuations in historical perspective:
While it may be impossible to accurately predict when this policy-driven market will break, history suggests it would be very reasonable for the secular bear to eventually bottom at a P/E multiple between 5x and 10x, opening up one of the rare wealth-creation opportunities to deploy capital at truly cheap prices. Some of these technical details are rather dry, but I hope you'll focus on the main idea: We are not talking about the potential for a modest 20% to 30% drawdown in the S&P 500. If history is any indication, we are talking about the potential for a 50%+ peak-to-trough drawdown and ten-year average annual returns as bad as -4.4%, according to the chart above from Cliff Asness at AQR. Such a result would fall in line with somewhat similar deleveraging periods such as the United States experienced in the 1930s and Japan has experienced since 1989. There is no way to sugarcoat it: too much equity risk can be unproductive and even destructive in this kind of economic environment. |
08-05-13 | ANALYTICS FUNDA-MENTALS VALUATIONS
|
ANALYTICS |
PROFIT MARGINS - Revenue Recession and Eroding Operating Profits S&P 500 Profit Margins Plunge To Three Year Lows 08-03-13 Zero Hedge That S&P500 revenues are contracting for the second quarter in a row (i.e. a revenue recession) is by now well-known even to CNBC. This is just as we predicted in June of last year, because in a world devoid of growth capital expenditures (and judging by the amount of train, plane and other crashes lately, maintenance capex as well), there can be no organic growth. What, however, may come as a surprise to the market cheerleaders (who unknowingly, or knowingly, are merely cheering Ben Bernanke's magic bubble blowing machine, see final chart) is that that other key component of bottom line improvement, profit margins, are not only not at record highs contrary to what conventional wisdom may incorrectly believe, but have been consistently sliding for three years now, and while earnings margins are 'only' back to June 2011 levels at 8.7%, it is the far more critical Operating Margin which has tumbled in the past two years after peaking in Q3 2011 and is now back down to 8.4%, a level not seen since mid-2010. In other words, absent aggressive levered stock buybacks (which are virtually over with rates rising once again), the S&P500 EPS would now be in free fall. Don't worry though, just like in 2010, 2011, and 2012, there is a hockeystick for that. As the Goldman chart below shows, one just needs to believe in unicorns and that maybe, finally, this time things will simply surge higher just because the Fed wishes them to. What is even more disturbing is that a few more quarters of contraction and margins will slide right back to the levels last seen during the past peak of 2006-2007, when companies still had millions of full-time workers they could fire or simply replace with part-time equivalents. This time around, they don't have that gross profit-boosting luxury. And with interest rates once again rising, the benefits from refinancing corporate capital structures at ever lower rates are now forever gone. Of course, the charts above are completely irrelevant, as is all fundamental information in a centrally-planned world, as long as the one all important chart remains. The one shown below. |
08-05-13 | ANALYTICS FUNDA-MENTALS VALUATIONS STUDY REVENUE / OPERATING MARGINS
|
ANALYTICS |
COMMODITY CORNER - HARD ASSETS | PORTFOLIO | ||
PRIVATE EQUITY - REAL ASSETS | PORTFOLIO | ||
AGRI-COMPLEX | PORTFOLIO | ||
SECURITY-SURVEILANCE COMPLEX | PORTFOLIO | ||
THESIS Themes | |||
2013 - STATISM |
|||
2012 - FINANCIAL REPRESSION |
|||
FINANCIAL REPRESSION - Manipulated Illusions
Manipulating Bad Financial DataBad government policy has created a years-long unemployment problem. But instead of fixing the problem, the government is trying to paper over it. We’ve known for a long time that the Bureau of Labor Statistics fudges the numbers to make unemployment look lower than it is really is. BLS itself has admitted that its “adjustments” skew unemployment data during recessions. Indeed, the former head of the BLS recently said BLS statistics are B.S. … and that unemployment is much higher than the government is letting on. The Bureau of Economic Analysis is revising 84 years of economic history … which will make the economy magically look better. The U.S. and British governments encouraged interest rate manipulation. And central banks have been directly manipulating interest rates for hundreds of years. Government agencies have helped banks manipulate commodities prices for decades. The government twisted statistics and intentionally lied when it pretended that the banks it was bailing out were solvent The government has long ignored energy and food prices when reporting on inflation. Fraud is Wall Street’s business model, which is – unfortunately – being supported by the government. The government helped cover up the crimes of the big banks, used claims of national security to keep everything in the dark, and changed basic rules and definitions to allow the game to continue. See this, this, this and this. It is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud.Here are just a few of many potential examples:
Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:
Manipulating Bad Nuclear FactsWhen the Fukushima nuclear plant melted down, the government didn’t announce that these antiquated nuclear designs which were common throughout the United States were dangerous and needed to be scrapped. Instead, American (and Canadian) authorities virtually stopped monitoring airborn radiation, and are not testing fish for radiation. The U.S. government increased allowable radiation levels so that we could be exposed to radiation. The U.S. government pressured the Japanese government to re-start its nuclear program, and is allowing Fukushima seafood to be sold in the U.S. And U.S. nuclear regulators actually weakened safety standards for U.S. nuclear reactors after the Fukushima disaster. And the U.S. government has been covering up nuclear meltdowns for 50 years. Manipulating Oil Spill InfoWhen BP – through criminal negligence – blew out the Deepwater Horizon oil well, the government helped cover it up (and here). As just one example, the government approved the massive use of a highly-toxic dispersant to temporarily hide the oil. The government also changed the testing standards for seafood to pretend that higher levels of toxic PAHs in our food was business-as-usual. Manipulating Data on Other Environmental IssuesThe Bush administration covered up the health risks to New Orleans residents associated with polluted water from hurricane Katrina, and FEMA covered up the cancer risk from the toxic trailers which it provided to refugees of the hurricane. The Centers for Disease Control – the lead agency tasked with addressing disease in America – covered up lead poisoning in children in the Washington, D.C. area. The government also underplayed the huge Tennessee coal ash spill. As the New York Times noted in 2008:
(The former head of the National Mine Health and Safety Academy says that the government whitewashed the whole coal ash investigation.) And the government allegedly ordered Manhattan Project scientists to whitewash the toxicity of flouride (flouride is a byproduct in the production of weapons-grade plutonium and uranium). As Project Censored noted in 1999:
Manipulating Food Safety DataThe government’s response to the outbreak of mad cow disease was simple: it stopped testing for mad cow, and prevented cattle ranchers and meat processors from voluntarily testing their own cows (and see this and this) The EPA just raised the allowable amount of a dangerous pesticide by 3,000% … pretending that it won’t have adverse health effects. In response to new studies showing the substantial dangers of genetically modified foods, the government passed legislation more or less pushing it onto our plates. Manipulating Health Safety DataWhen one of the most respected radiologists in America – the former head of the radiology department at Yale University – attempted to blow the whistle on the fact that the FDA had approved a medical device manufactured by General Electric because it put out massive amounts of radiation, the FDA installed spyware to record his private emails and surfing activities (including installing cameras to snap pictures of his screen), and then used the information to smear him and other whistleblowers. After drug companies were busted for using fraudulent data for drug approval, the FDA allowed the potentially dangerous drugs to stay on the market. Manipulating Metrics for WarThe U.S. has drastically underestimated the amount of innocent civilians killed by drone, and repeatedly announces that it has just killed some terrorist that it had previously reported killing. When USA Today reporters busted the Pentagon for illegally targeting Americans with propaganda, the Pentagon launched a smear campaign against the reporters. When the American government got caught assassinating innocent civilians, it changed its definition of “enemy combatants” to include all young men – between the ages of say 15 and 35 - who happen to be in battle zones. When it got busted killing kids with drones, it changed the definition again to include kids as “enemy combatants”. After the U.S. congratulated the government of Yemen for killing Al Qaeda terrorists within its country – but a Yemeni journalist photographed the scene, discovering that the U.S. had fired a cruise missile to make the kill, and that children and other shepards will killed, instead of Al Qaeda – president Obama insisted that the journalist be indefinitely detained to shut him up (he was also tortured). Al Qaeda was labeled as the main enemy in the War on Terror. But now Al Qaeda and other terrorist groups have somehow become our close allies. They have somehow become the “good terrorists” which we are using to fight our enemies. Indeed, groups are listed as official “terrorist” organizations and then de-listed to suit the convenience and ambitions of particular U.S. political leaders. Indeed, the U.S. literally labels others as terrorists when they do exactly what we do (although no one does it to the extent we do). The Core ProblemCorruption at the top leads to lawlessness by the people. But – while conservatives blame the government for our problems, and liberals blame big corporations – the core problem is the malignant, synergistic intertwining between the two.
|
08-05-13 | THESIS | |
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
|||
2010 - EXTEN D & PRETEND |
|||
THEMES | |||
CORPORATOCRACY - CRONY CAPITALSIM | |||
GLOBAL FINANCIAL IMBALANCE | |||
SOCIAL UNREST |
|||
CENTRAL PLANNING |
|||
STANDARD OF LIVING |
|||
CORRUPTION & MALFEASANCE | |||
NATURE OF WORK | |||
CATALYSTS - FEAR & GREED | |||
GENERAL INTEREST |
|
||
TO TOP | |||
|
Tipping Points Life Cycle - Explained
Click on image to enlarge
TO TOP
![]() |
YOUR SOURCE FOR THE LATEST THINKING & RESEARCH
|
TO TOP
FAIR USE NOTICE This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. DISCLOSURE Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments. COPYRIGHT © Copyright 2010-2011 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him
|