RISK - Better Understanding the VIX

A Different Assessment of Risk 12-03-13 Phoenix Capital Research via ZH

Perhaps the single most misunderstood item in the financial world is the Chicago Board Of Options Volatility Index, or VIX.

The VIX is a measure of how much investors are willing to pay for portfolio “insurance.” If they’re willing to pay a lot (the VIX is high), then it’s assumed investors are nervous. If they don’t want to pay much (the VIX is low), then it’s assumed investors are calm and expecting blue skies ahead

Because of this, most investors, including the majority of professional investors, believe the VIX provides a reliable barometer of market risk. 

This is not true. The reason is because investors are usually greedy when they should be fearful and vice versa. If the VIX is up, it’s not because the market is “risky” or at risk of falling… it’s because the market already FELL!

As anyone knows, the time to buy stocks is when they’re “low” as in “buy low, sell high.” But as I just explained, stocks are usually “low” when they’ve already fallen  (which would mean the VIX is already spiking). Put another way, the VIX doesn’t really measure risk per se… instead it shows you when investors are panicked… and that’s when you should consider buying.

Take a look at the above chart. Everytime the VIX spiked (the blue line below), the market had already dropped and was in the process of bottoming.

Now let’s look at a longer-term chart. Once again, the VIX spiked after the market had already plunged. In fact, buying stocks around the time the VIX spiked was a GREAT way to trade the market going back for years. If you had done this, you would have profited handsomely.

If you want to make a killing in the markets, you need to be willing to see the world the way it really is, NOT how you THINK it is. Most investors think the VIX measures the market’s risk, but really, it’s almost the opposite: a spike in the VIX almost always picks market bottoms!

RISK - Even Goldman Can't Explain Away The Market Exuberance

Even Goldman Can't Explain Away The Market Exuberance 12-02-13 Goldman via ZH

From the start of 2012, the S&P 500 up over 40% with the bulk of that surge coming since QE3 (and 4EVA) was unleashed. Until that point, Goldman's global risk and macro models had stayed relatively well synced with stock market 'reality' but once that torrent of liquidity was released, all bets were off. As the following chart shows, more than half the equity market performance is due to factors unrelated to risk, macro fundamentals, or country-specific factors. So, BFTATH of course?

Chart: Goldman Sachs

RISK IS A funny old thing at the best of times, and even funnier when it is supposed to be correctly priced.

Most of us grew up with the understanding that the correct price for credit – my main area of expertise – was a function of the default probability, adjusted for the expected recovery rate.

Perhaps the simplest and cleanest example of risk pricing is to be found in the credit card industry, where your “bucketing” is of paramount importance. The lower your perceived risk is, the better a risk bucket you get lumped into and the lower your interest rate is. That’s banking 101, but it still isn’t clear to everyone that the net earnings from each bucket are expected to be similar, based on higher spreads being matched to higher defaults. Excess returns are generated when the expected defaults do not occur at the forecast rate.

So far, so good. But then how does one extrapolate that basic rule of lending to the way credit markets have been performing of late?

My old chum Suki Mann, living legend and credit strategist at Societe Generale here in London, highlighted the point – albeit probably not intentionally – in a piece he wrote this week. He asked, rhetorically, whether it would be possible for the credit markets to repeat this year’s performance in 2014 – wondering, in other words, whether a further 8.4% of returns on 220bp of spread tightening in high-yield or 2.4% returns with 22bp of spread tightening in investment-grade were possible.

“We’d concur with the former,” he wrote, “but up to 7% is not impossible off 100bp of spread tightening; while in IG, we think 2%-plus is possible with tightening in [iBoxx] index spreads of around 30bp.”

Although I don’t entirely disagree with Suki, I can’t detect too much science going into his pricing model, if that is what it is. The sole point of reference seems to be the all-time low spread of the iTraxx Main index, which was registered at 20bp in June 2007. As recently as early October it was trading at 100bp but is now marking around 75bp. Hence, his rather confident assertion that a further 20bp of tightening should not be a problem.

Are risk assets now riskless assets or are they risk assets disguised as riskless?

PERHAPS, BUT ONLY because the first rule of investing now appears to have become: if the worst is about to occur, then the monetary authorities will make sure that it doesn’t.

Let’s face it, Saint Mario Draghi did not only say that he will do “whatever it takes”, the bit of his assertion everyone remembers, but also, and perhaps more importantly, “…and believe me, it will be enough”.

In doing so, he removed huge swathes of what we once called risk – a concept that used to be known as a four-letter word. This raises the question: are risk assets now riskless assets or are they risk assets disguised as riskless?

What goes for bonds appears to go for equities too, even though we did experience something of a wobble in the summer when the US Fed seemed set to taper its bond buying programme. Since then, though, the Fed, in its own inimitable way, appears to have let equity markets believe that it will do nothing that might hurt share prices and hence shareholders. If anything, the velocity of the rally now appears to be increasing rather than decreasing.

Either the Fed is deceiving markets into believing that there is nothing to fear, or it is not making itself clear enough. To be frank, I doubt it is the latter.

SO WHAT HAS become of risk pricing? Well, one might try to argue that if there is no risk, then there can be no price for it. But that would be perhaps taking it a little bit too far – even for me.

Nevertheless, pricing risk has become so alien that even non-monetary policy-related risks are being disregarded. The little tiff between China and Japan (and by proxy the Americans) over a group of uninhabited islands never even caused a ripple in financial markets. And although it was written that oil prices had fallen in the aftermath of the interim agreement between Iran and the West, if one looks at the charts, WTI was trading well below its 300-day moving average long before the news broke – and the Geneva breakthrough doesn’t appear to have even registered.

Is there no risk or has the way in which authorities prevented the fallout from the credit bubble and the events that led to its formation led a generation of traders and investors to believe that it is a thing of the past?

One hedge fund manager once proudly stated that life is a bull market intersected by corrections. In the midst of the credit crisis I laughed at him.

Looking at the state of the world now, he might be laughing back, having concluded that the 2007 financial crisis and the 2008 fall of the House of Lehman were nothing more than bigger corrections and hence thumping buying opportunities that could only have been missed by idiots.

I guess that puts me in my place. Either that or there is something lurking out there that we have forgotten how to identify – and hence how to value.

PATTERNS - A Negative, Low-Probability Outcome May Quickly Become Exaggerated

Negative, Low-Probability Outcomes Are Consistently Exaggerated 11-30-13 LPL Financial Research's Outlook 2014

The well-known bias of weather forecasters to exaggerate fears of negative, low-probability outcomes, such as the likelihood and amount of snowfall, also often appears in the forecasts of non-weather-related issues. We saw this bias in the media over the antics in Washington, D.C., fixating on the threat of a default on U.S. Treasury debt during the debt ceiling discussions, or a return to recession due to the impact of the sequester spending cuts. This bias could also be seen in events beyond the United States’ borders in the exaggerated attention devoted to the threat of another financial crisis stemming from the Cyprus bank bailout, the risk of the outcome of the Italian elections plunging the Eurozone debt markets into chaos, and the risks of a strike on Syria turning into a major geopolitical military engagement.

Of course, the probabilities of those outcomes were very low, and the markets did not dwell on those potential outcomes. Market participants tuned them out, and the S&P 500 moved steadily higher throughout the year without experiencing more than a 6% pullback at any point [Figure 11]. We believe it will be safe in 2014 to again tune out much of the antics in Washington, D.C. as the mid-term elections turn up the volume but not the impact.

The LPL Financial Research forecast: In the nearterm, Washington may be washed up when it comes to driving the markets.

JAPAN - Japan May Matter More Than Tapering

Why Japan May Matter More Than Tapering 12-07-13 Asia Confidential

The traditionally quiet period for markets in December is turning out to be not-so-quiet, thanks to a key meeting of the U.S. Federal Reserve starting December 17. The meeting will decide on whether a reduction in quantitative easing (QE) is necessary. Consequently, every economic data point up to the meeting is being analysed and over-analysed. But it does appear that the Fed seems committed to so-called tapering at some point soon and the odds are 50:50 that it'll pull the trigger in December. A few weeks ago, I was asked for my 2014 global outlook by a large precious metals website and I told the editor that while tapering will be a key theme, Japan is likely to prove equally important if not more so. The editor was taken aback by this and I can understand why. But let me explain... The Fed has been flagging tapering for some time and markets appear to have gotten used to the fact that it'll happen soon. In May, when Bernanke first hinted of tapering, markets freaked out as they assumed a rise in interest rates would come simultaneously. Since then, the Fed has been at pains to say that interest rates will stay low for several years to come while a wind down in QE occurs. Markets appear to have bought this line. They may continue to buy the line through 2014 and even 2015. While the U.S. cuts back on stimulus, Japan is likely to move in the opposite direction, increasing its own stimulus very soon. That'll be on top of Japan's existing QE which is the equivalent of 3x that of the U.S. when compared to GDP. The reason for even more QE is that the grand experiment known as Abenomics, almost one year old, has been a failure. It hasn't lifted key components such as core inflation, wages or business spending. Increased Japanese QE will mean a lower yen, potentially much lower. If right, that'll have significant consequences. Among other things, it'll increase the risks of exporting rivals fighting back by depreciating their own currencies and embracing a currency/trade war. Second, it's likely to raise the ire of exporting competitor, China, and raise already high tensions in the South China Sea. If more stimulus fails to lift the Japanese economy, Abe will be desperate to maintain his credibility and a fight with China could just suit his ends. Hence why Japan matters. Perhaps more than tapering. To taper or not to taper? It may be the time when the Fed stops with all the flirting and finally starts to cut bond purchases. Bond whiz, Bill Gross of Pimco, suggests there's a 50:50 chance, or even greater, of tapering this month. And he's probably right given the many hints from the Fed that it's ready to go down that path. If tapering does occur, markets will be assessing the potential time frame for a full wind-down of QE and the economic targets set by the Fed for that to happen.  To understand the potential consequences of tapering, let's do a quick recap of what QE is and what it's been trying to achieve. The Fed has put in place two key policies since the financial crisis:  Lower short-term interest rates towards zero. Implement QE, involving the purchase of longer term bonds. The Fed and other central banks have done this to achieve several ends: Suppress bond yields and thereby interest rates (check). Buying the bonds from banks and other institutions who can use that money to lend out and therefore stimulate the economy (hasn't happened). The printed money also helping banks to repair their balance sheets, devastated by 2008 (check, at least in the U.S.) Keeping short-term rates near zero means pitiful bank deposit rates and tempting depositors into higher yielding but higher risk investments (check). Rising asset prices inducing the wealth effect, where people feel wealthier and start to spend again (minimal success, but let's wait and see). Keeping interest rates below GDP rates, thereby reducing the developed world's large debt to GDP ratios (slow progress given sluggish GDP). The Fed is now contemplating tapering as it sees a recovering economy and is worried about QE's stimulatory effects on asset prices. Tapering involves cutting back on the purchase of long-term bonds while keeping short-term interest rates near zero.  In essence, the Fed is saying: "Look everyone, we're going to keep short-term interest rates near zero for a very long time. We're resolute with this and hoping that cutting back on the buying of long-term bonds won't lead to a spike in long-term bond yields. Please, market, cooperate with us in achieving this aim." The Fed knows markets largely control the long-term bond. It can't afford to lose control of the bond market as higher long-term bond yields would result in increased mortgage rates and rising government interest expenses. That outcome would be a disaster as consumers and governments simply wouldn't be able to cope with even a small spike in rates. And any hoped-for economic recovery would be over. Key risks to the tapering strategy include a stronger-than-expected economic recovery or higher future inflation expectations, and the Fed moving too late to raise short-term rates. Alternatively, an economic recovery doesn't take place and more QE is needed to maintain current growth. Here, the Fed would lose immense credibility and may eventually lose control of the bond market as investors start to demand higher yields on government debt. But these risks may not be short-term story if investors believe that tapering and rising rates don't go hand-in-hand. Increased Japanese QE coming soon On December 16 last year, Shinzo Abe came to power and promised the most audacious economic reforms in Japan since the 1930s in order to arrest a 23-year deflationary slump. Almost a year on, the reforms now known as Abenomics can be judged a failure. This failure may soon result in policies which could have a greater impact on markets in 2014 than the much talked about taper. Initially Abenomics involved a strategy with the so-called three arrows. The first arrow was a dramatic expansion in the central bank's balance sheet to lift inflation to a 2% target rate. The second arrow involved a temporary fiscal support program. While the third was structural reform to the economy.  The first arrow came with much fanfare and resulted in a large depreciation of the yen. Yen devaluation wasn't a stated aim but was certainly a target given a lower currency is needed to lift inflation. The big problem is that inflation has risen for the wrong reasons via higher import costs. Core inflation is flat as wages have barely moved. The second arrow was implemented while the third arrow largely hasn't been fired. The market has been disappointed with the latter as it knows economic reform is needed for stronger and sustainable growth. Abe has resisted change on this front given the entrenched interests against reform. A fourth arrow has been fired, though, in the form of an increased consumption tax. The tax will increase from 5% to 8% in April next year. This is necessary to raise government revenues given Japan's unsustainable budgetary position where government debt is 20x government revenues. The problem is that the tax will depress spending and cut GDP growth by an estimated 2% next year. To partially compensate for this, Abe has promised corporate tax relief and infrastructure spending of 5 trillion yen, equivalent to 1% of GDP. In other words, more stimulus to partially offset the impact from rising taxes. Given the failure of Abenomics to lift core inflation or wages, you can soon expect even more stimulus on top of the 290 trillion yen already planned between now and end-2014. And this is likely to result in a much weaker yen, for the following reasons: To reach a targeted 2% annual inflation rate requires the yen to depreciate by around 15% per year. That translates into a +115 yen/dollar rate by the end of next year. If U.S. tapering occurs, that will widen the yield differentials between U.S. and Japanese bonds even further. Those yield differentials currently point to fair value of 115-120 yen/dollar rate.

More QE should result in more money heading offshore and a subsequent weakening of the yen. Impact on the rest of the world If a much lower yen is on the cards, it'll have the following consequences: Japan will export even more deflation to the world when it least needs it. By this I mean that a lower yen allows Japanese exporters to price their products more competitively vis-vis other exporters. This would raise already heightened global deflationary risks.  It'll put other exporting powerhouses, such as Germany, China and South Korea, in a less competitive position, increasing the odds of a backlash via currency war. The yen at 115 or 120/dollar would change the ballgame and increase the risks of this occurring. Any currency war risks a trade war. Historically, trade wars reduce global trade, sometimes significantly. Putting China in a weakened exporting position will possibly increase tensions in the South China Sea. Tensions are already high and a lower yen won't help the cause. You don't have to have a wild imagination to see that if Japan's experiment doesn't help lift inflation and the economy, a desperate, nationalist Prime Minister may just be more inclined to take the fight up to China. The above analysis could well turn out to be incorrect. Perhaps Japan holds off on stimulus. Or it increases QE but combines it with meaningful structural reform.  Maybe. Whichever way Asia Confidential looks at it though, a substantially lower yen would seem to be something you can almost take to the bank. And the implications of that being the case are worth thinking about as we head into 2014.

JAPAN - Japan Finances Worse Than at War’s End

Japan Finances Worse Than at War’s End 11-29-13 WSJ

To illustrate just how woeful Japan’s fiscal conditions are now, one merely has to look at how they were in March 1945. About half a year before Japan’s military-controlled government surrendered, Tokyo was borrowing at a feverish pitch to pay for its losing war effort and the Bank of Japan was furiously printing money to cover the soaring deficit.

• 1945: 204% - The central government’s debt-to-gross domestic product ratio stood at 204% at the end of March 1945. More than half a century later, this ratio–a key measure of a government’s ability to pay down debt–is already above that milestone.
• 2013: 227% - The Ministry of Finance estimates it will reach 227% by the end of March next year.

“Looking at our country’s outstanding liabilities from a historical perspective, they are above the levels seen near the end of the Pacific War, when all resources available were being spent for the war effort,” said the finance ministry’s fiscal system council in documents released Friday. “This situation is extremely grave.”

Although the BOJ and the government aren’t currently in a snake-eating-its-own-tail type of situation where the central bank is monetizing sovereign debt, bond dealers suspect they’re pretty close. Under its aggressive program launched in April to stamp out over 15 years of deflation, the BOJ is buying government bonds from the market that account for a whopping 70% of newly issued debt, which has helped hold down borrowing costs for the government. But there are concerns among some lawmakers, government officials, and BOJ policymakers that trouble lies ahead if the government doesn’t do more to rein in its massive outstanding debt and the BOJ’s buying continues unabated.

“We must not become complacent about the current situation, where long-term interest rates are staying at low levels amid the BOJ’s massive purchases of government bonds,” the council said. “Now is the time to act decisively on fiscal overhaul.”

If there’s one asterisk to put after the shocking comparative figures, it’s that the debt-to-GDP ratios don’t take into account Japan’s huge asset holdings. At the end of March 2012, Japan’s central government had assets totaling some Y600 trillion, roughly half of its total liabilities projected for next March, separate MOF data show. And those assets include Y250 trillion in cash, securities and loans.

Critics often say Japan’s fiscal health could quickly improve if the government sells some of those assets, a step the MOF is reluctant to take partly on worries that doing so could deprive lawmakers of incentives to improve government finances.

JAPAN - BOJ: "The days of ‘constructive ambiguity’ is over!”

Fed Is Cautionary Tale For Kuroda 12-07-13 WSJ

For Bank of Japan Gov. Haruhiko Kuroda, sending out a clear message is important. The bank has set a target of achieving 2% inflation in two years through doubling of asset purchases to double the money it pumps into the economy.

“The days of ‘constructive ambiguity’ is over,” he told students at his alma mater on Saturday, eight months after he led the BOJ to introduce the drastic easing policy which the bank has dubbed as “quantitative and qualitative easing (QQE).”

“The ‘QQE’ has been producing the anticipated results and Japan’s economy has been following the path toward achieving the 2% price stability target, as expected,” Mr. Kuroda proudly told the audience gathered at the University of Tokyo, where he graduated from in 1967. But when it comes to the issue of exiting ultra-loose monetary policy—a challenge facing the U.S. Federal Reserve that has shaken global markets–Mr. Kuroda appears to have no intention of shedding vagueness.

“Experiences of, for instance, the Federal Reserve, the Bank of England or the European Central Bank show that if forward guidance is extremely complicated, that may have unintended results,” Mr. Kuroda said. “Transparency is important,” the governor said, but added: “too complicated forward guidance or too complicated communication could–I don’t say ‘backfire’—be less efficient and sometimes even disruptive.”

To be sure, with Japan’s consumer prices rising at a rate far below the BOJ’s 2% target, Mr. Kuroda is under little pressure to worry about communicating exit policies. Since implementing its aggressive easing policy in April, the BOJ has taken pains in emphasizing the potential effects of its measures while avoiding debate on how it planned to withdraw from the policy in the future. BOJ officials appear to believe that they need to keep saying positive things about the economy if they are to change the deflationary mindset that has set in over the last 15 years of deflation.

If people begin to believe that prices will rise, that will become a self-fulfilling prophecy, they hope.

The recent rise in Japan’s consumer prices is a sign such sentiment is finally changing, and the worst thing to do now, they say, is to talk publicly about exit policies. That would raise speculation that the BOJ may end its easing sooner rather than later, possibly letting Japan’s economy sink back into deflation.

“The bank will continue with the QQE, aiming to achieve that target, as long as it is necessary for maintaining it in a stable manner,” Mr. Kuroda reiterated on Saturday. Yet, with the BOJ now buying a whopping 70% of newly issued government bonds—far more aggressive than the bank’s first quantitative easing in the 2000s—some Japanese lawmakers are worried that it may produce unintended side effects, such as asset-price bubbles. Mr. Kuroda has recently been grilled in parliament on how he intends to pull out of the policy without causing such trouble.

Mr. Kuroda on Saturday acknowledged that the task was challenging, given that major central banks have had little experience in terminating easing policies of the current size. “We central bankers, as well as market participants, may be less certain about what kind of impact exiting from QEs could have on the markets and economies.”

JAPAN - Abenomics ‘Third Arrow’ Growth Strategy Underwhelms

Abenomics ‘Third Arrow’ Growth Strategy Underwhelms 11-14-13 Bloomberg

Japanese Prime minister Shinzo Abe has marketed his economic policies to revitalize the Japanese economy, popularly known as “ Abenomics,” as comprising “three arrows:”

• Bold Monetary policy to end deflation and secure stable 2 percent inflation;
• Flexible Fiscal policy for two to three years to support a strong recovery and mitigate external risks; and
• A Growth Strategy based on supply-side reforms, deregulation, and government support to boost corporate competitiveness, promote innovation, and develop new growth industries.

Rather than three “arrows,” I would describe Abenomics as comprising two policy pillars:

• One using macroeconomic or demand-side policies (monetary and fiscal policy) to end deflation and secure (operational) price stability, and
• The second using microeconomic or supply-side policies to raise real potential growth.

FIRST ARROW

Even so, most observers would likely agree that, relative to the policy rhetoric, Abe has exceeded expectations when it comes to the first arrow: New Bank of Japan (BOJ) governor Haruhiko Kuroda has engineered a 180-degree shift in both communication – ”yes, we can (end defltion); yes, we will (end it)” and action.

On April 4, the BOJ launched an open-ended expansion of the monetary base (essentially, the central bank’s balance sheet) by between 60 and 70 trillion yen a year, committing to continue the policy until deflation is ended and 2 percent stable inflation is secured.

SECOND ARROW

Abe would probably also get relatively high marks for the second arrow, although this arrow gets less attention and what “flexible fiscal policy” means is sufficiently vague to be somewhat in the eye of the beholder.

THIRD ARROW

When it comes to the third arrow – the growth strategy – so far most observers seem underwhelmed. Why the disappointment? Probably for three related reasons, all of which reinforce the sense that, when it comes to the growth strategy, it is more a case of “business as usual” than that something truly game-changing is afoot.

First, the growth strategy plan is in the grand tradition of such plans in Japan, dating back at least three decades and probably more. While some elicit more excitement and hope than others, virtually every new administration in Japan launches a new set of reform and deregulation initiatives, backed up by weighty reports produced by standing advisory panels, special commissions, and/or key parts of the bureaucracy.

Second, the growth strategy plans, as detailed as they are, lack coherence and credibility, judged against the huge demographic headwinds that Japan faces and appears to be doing little directly to counter. There is a huge gap between the stated aims of the growth strategy and the reality of Japan’s starting point and associated growth trend, and the growth plans don’t seem to address this. The target of Abenomics is to have the economy grow at an annual average rate of 2 percent in real terms and percent in nominal terms during the decade from fiscal year 2011 to fiscal year 2020, in overall, not per capita, terms (see chart).

In the prior 10 years, quarterly real growth had averaged 0.8 percent year-on-year and nominal growth negative 0.4 percent. The implied stated goal therefore, notwithstanding stiffening demographic headwinds, is to lift the year-on-year rate of real growth by an average of 1.2 percentage points. This is a huge ask and something that has never been done in recent Japanese history.

Third, and perhaps most ominously, whereas Prime Minister Abe “owned” the “end deflation” or “reflation” issue, sending a clear and strong message and backing it up with decisive action, he has come across as a much more traditional political leader when it comes to the growth strategy, spouting vague and well-trodden policy rhetoric and giving the impression of subcontracting out the whole exercise to the ever-willing and, when it comes to devising detailed reform plans, capable bureaucrats of Kasumigaseki. In short, the growth strategy part of a benomics, as currently articulated, does not appear credible, relative to what it is ostensibly trying to achieve.

Eonomists use a “growth accounting” framework to think about real potential (or maximum sustainable) economic growth. Growth of real output can come from three sources:

• More labor inputs;
• More capital inputs; and
• Smarter use of those inputs, or innovation (economists, not altogether helpfully, call this “total factor productivity”).

To raise its potential real growth rate, Japan needs to address one or more--preferably all – of these three.

• It will need to expand the amount of labor going into the production of goods and services (GDP),
• It will have to accumulate and use more capital in that process, and
• It will have to raise the productivity of the labor and capital it uses, squeezing more output from a given level of inputs.

That’s it: there is nowhere else that growth can come from.

(Paul Sheard is the Chief Global Economist and Head of Global Economics and Research for Standard & Poor’s Ratings Services)

JAPAN - 2nd ABE-nomics $200B Stimulus Package Approved

Japan approves $182 billion economic package, doubts remain 12-05-13 Reuters

The measures approved on Thursday will add 1 percentage point to gross domestic product and create around 250,000 jobs, according to the Cabinet Office.

There is a consensus that the sales tax hike will subtract about 2 trillion yen from gross domestic product, so 5.5 trillion yen in spending should more than compensate, Yasutoshi Nishimura, a senior vice minister at the Cabinet Office, told reporters.

Miyazaki was less optimistic, saying the measures may only contribute around 2 trillion yen or 0.4 percentage point as a lot of the direct government payouts to the elderly and families will go straight to savings.

The steps approved on Thursday include measures to boost competitiveness; assist women, youth and the elderly; accelerate reconstruction from the March 2011 earthquake and tsunami; and build infrastructure for the 2020 Tokyo Olympics.

"This includes steps to boost capital expenditure for the future and ensure the economy stays in a positive cycle," Abe said in a speech about the stimulus to businessmen and economists.

"If companies invest more and wages rise more, then the positive (economic) cycle materializes."

The overall size of the package is on a par with Abe's 20 trillion yen burst of spending early this year as part of his campaign to end 15 years of falling prices and tepid growth.

The headline figure usually announced by the Japanese government on economic measures often includes spending that has already been committed, and tends to far exceed the amount of actual new government spending.

New debt issuance is not required as new spending will be covered by tax revenues that have exceeded initial budget projections due to the economic recovery, as well as using unspent funds from other accounts. ($1 = 102.6550 Japanese yen)

Japan readies $182 billion economic package, no new debt needed: sources 12-03-13 Reuters

Japanese Prime Minister Shinzo Abe is readying a $182 billion economic package this week in his latest bid to pull the economy out of deflation, but the new measures will not require the government to sell more debt.

The package, to be approved by Abe's government on Thursday, will have a headline value of 18.6 trillion yen ($181.6 billion), people familiar with the process said on Wednesday.

That puts the overall package on a par with Abe's 20 trillion yen burst of spending early this year as part of his campaign to end 15 years of falling prices and tepid growth.

But the bulk of the package includes loans from government-backed lenders, spending by local governments and corporations, the sources said. The headline figure usually announced by the Japanese government on economic measures often includes spending that has already been committed, and tends to far exceed the amount of actual new government spending.

The long-expected core of the package will be spending measures Abe ordered in October to bolster the economy ahead of a national sales-tax hike in April, the sources told Reuters on condition of anonymity.

Government officials at the time said the main stimulus steps, to be approved on Thursday, would be worth about 5 trillion yen. Sources said on Tuesday the stimulus will be between 5.4 trillion yen and 5.6 trillion yen.

This amount will not require new debt issuance as it will be covered by tax revenues that have exceeded initial budget projections due to the economic recovery, as well as using unspent funds from other accounts, the sources said.

Measures include steps intended to boost competitiveness; assist women, youth and the elderly; accelerate reconstruction from the March 2011 earthquake and tsunami; and build infrastructure for the 2020 Tokyo Olympics, they said.

($1 = 102.4450 Japanese yen)

JAPAN - World’s Biggest Pension Fund Sees Japan Fail on ABE-nomics' 2% Inflation Goal

World’s Biggest Pension Fund Sees Japan Fail on 2% Inflation 12-04-13 Bloomberg

The Bank of Japan’s unprecedented monetary easing will fail in its goal of spurring 2 percent inflation, according to Takahiro Mitani, president of the fund that manages the world’s largest pool of pension savings.

While Japan is making progress toward ending deflation, consumer-price gains will probably stay between 0.1 percent and 1 percent, said Mitani, the head of the 124 trillion yen ($1.21 trillion) Government Pension Investment Fund. The fund may revise asset allocations in as little as a year after a government-appointed panel recommended a review of domestic bond holdings, he said.

“A 1 percent inflation rate may be possible, but that’s different to the Bank of Japan target,” Mitani said in an interview at GPIF’s Tokyo headquarters today. “We haven’t seen real demand to pull prices up yet. Whether inflation will be stable is questionable.”

Related: Japan Wages Must Rise for Abenomics Success

Mitani’s comments on inflation pit him against Takatoshi Ito, an academic handpicked by Prime Minister Shinzo Abe to head a panel advising lawmakers on pension allocations. Ito last month expressed faith in the BOJ reaching its 2 percent target for price increases and said GPIF needs to hold investments that can provide higher returns as retirement payouts for the world’s oldest population rise.

Japan’s Topix index of stocks surged 62 percent in the 12 months through Sept. 30 for the biggest gain among global developed markets and the measure’s steepest rally in four decades. Domestic sovereign bonds handed investors a 1.8 percent return, an index compiled by Bloomberg shows. GPIF’s assets swelled by 15 percent in the same period, according to its financial statements.

GPIF’s website states its portfolio allocations are scheduled to remain unchanged until March 31, 2015. While Ito’s advisory group overstated the risks from owning local bonds, the fund will need to reduce its holdings at some point, said Mitani, a former executive director at the BOJ, who has headed GPIF since 2010. The nation’s stock market isn’t in a bubble, he said.

“Some changes can be done in about a year,” Mitani said. “We were already considering new investments,” such as alternative assets, he said.

GPIF owned 71.9 trillion yen of domestic bonds as of Sept. 30, with the investment making up 58 percent of its assets, according to its quarterly report.

Yields of 0.63 percent on benchmark Japanese sovereign 10-year debt, the lowest in the world, mean investors may face losses if the BOJ succeeds in its goal of spurring 2 percent inflation in about two years.

Japanese stocks pared losses on Mitani’s remarks, which imply the central bank may have to ease policy further and that GPIF may switch money from bonds into equities, according to Gavin Parry, managing director of Hong Kong-based brokerage Parry International Trading Ltd. The Topix pared declines to as little as 1.1 percent from 1.9 percent before the comments. The gauge closed 1.7 percent lower at 1,240.99.

The BOJ, led by Haruhiko Kuroda, is buying more than 7 trillion yen of bonds a month and has signaled a willingness to add more cash to the economy to reach the inflation target. Monetary easing, fiscal stimulus and reforms to boost corporate earnings make up Abe’s three-pronged growth strategy known as Abenomics.

The nation’s consumer prices excluding fresh food, the BOJ’s gauge for its target, increased 0.9 percent in October from a year earlier, government figures showed Nov. 29. A gauge of prices that also excludes energy rose 0.3 percent.

It’s been 22 years since annual inflation in Japan exceeded 2 percent, according to data compiled by Bloomberg. In the last five years of the 1980s, when Japan’s gross domestic product climbed from $1.3 trillion to $3 trillion and the Nikkei 225 Stock Average peaked at almost 39,000, the monthly readings for consumer price gains averaged 1.2 percent, the data show. The Nikkei 225 closed today at 15,407.94.

“It’s difficult to say whether we are really exiting deflation,” Mitani said. “Consumer prices are starting to rise, but a large reason for that is based on the weakening yen and rising energy prices. We can’t say that looking at recent results, we have really exited deflation.”

GPIF is under pressure to cover payouts as more Japanese baby boomers born in the wake of World War II turn 65 years old and become eligible for pensions. The government spent 52.2 trillion yen on pensions in the fiscal year ended March 31, 2012, a 1.1 trillion yen increase on the previous year, according to figures published by the health ministry.

Pension funds should assess investment risk assuming a 2 percent inflation rate, Ito told reporters after the release of the government advisory panel’s report last month.

“The environment is changing now,” said Ito, who is the dean of the Graduate School of Public Policy at the University of Tokyo. “All the panel’s experts share an awareness that it’s dangerous to keep on shaping the fund’s portfolio based on the risk and return assumptions that have been used to date.”

GPIF and other public pension funds should consider investing more in:

• Overseas assets,
• Private equity,
• Commodities,
• Infrastructure and
• Real-estate investment trusts,

the panel said. GPIF needs more independence from the Ministry of Health, Labor and Welfare, which currently oversees its investments, according to the report.

Japanese Economy Minister Akira Amari said on Nov. 20 he will work toward realizing the group’s proposals, while adding Nov. 22 that any changes in the management of GPIF will depend on whether Japan has deflation or inflation.

GPIF is discussing whether to use the JPX-Nikkei Index 400 as a benchmark for Japanese equity investments, as recommended by the report, Mitani said. The fund is also considering investing in inflation-linked bonds to protect against rising prices, while monitoring whether the market is large enough to avoid being distorted by GPIF’s potential buying, he said.

As GPIF invests more abroad, the Japanese currency may drop to 108 per dollar in the coming year, Eisuke Sakakibara, a former Ministry of Finance official known as “Mr. Yen” for his efforts to influence exchange rates in the late 1990s, said on Dec. 2. The fund should boost foreign holdings to as much as 35 percent from 23 percent, according to Sakakibara.

The yen touched a six-month low of 103.38 per dollar this week. It has plunged 19 percent over the past year, the worst performance among 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

Returns for Japan’s biggest pension funds were the lowest among 11 countries between 2007 and 2012 in local currency terms, according to a Towers Watson & Co. report that tracks the world’s 20 largest pools of retirement cash. Japanese funds shrank 1.2 percent during the period, compared with a 0.9 percent increase in the U.S. and 16.5 percent growth in China, according to the report.

GPIF announced in June a cut to its target holdings for domestic bonds to 60 percent from 67 percent as part of the first changes to its core portfolio since its inception in its current form in 2006. The proportion of foreign and local shares was changed to 12 percent each, from 9 percent and 11 percent respectively. The fund also raised its target for foreign bonds to 11 percent from 8 percent.

The California Public Employees’ Retirement System has a 50 percent target allocation for public equity holdings, compared with 17 percent for income investments, according to its website. Calpers is the largest public pension fund in the U.S. with $260.9 billion in assets as of Aug. 31.

GPIF’s returns trailed its three global peers in five of the past nine fiscal years, according to the fund’s website. The Japanese fund compared its returns against Calpers, Canada Pension Plan Investment Board and Norway’s Government Pension Fund Global. The only year GPIF’s performance beat all three peers was in 2008 amid the global financial crisis, when shares around the world tumbled.

“Our investment was based in a deflationary environment domestically, so you can’t simply compare it to those abroad,” Mitani said. “Considering the price declines and wage declines we had, we don’t see our investments results as being especially lower than the ones abroad.”

GPIF earned a 2.7 percent return in the three months through September, boosting assets to a record, the fund said Nov. 29. Domestic stock holdings returned 6.1 percent, while local bonds yielded 1.2 percent. Foreign debt gained 1.6 percent and overseas stocks added 7.1 percent.

“They need to take on more risk to increase their returns,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which oversees the equivalent of $110 billion. “Like their global peers, such as Calpers in the U.S. and pension funds in the U.K., they should increase their equity allocations. They need to ride the global economic growth wave.”

JAPAN - The Abe-nomics Failure

This Inflation Is Supposed To Be GOOD For Japanese Workers? 11-30-13 Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter via ZH

Japan’s new economic religion, lovingly dubbed Abenomics, relies mostly on a money-printing binge that monetizes the entire government deficit plus a chunk of its public debt, month after month. Printing yourself out of trouble and to wealth works every time. For the elite. This is a lesson learned from the Fed. But how are workers and consumers faring? And by implication the real economy?

We keep getting juicy morsels of data on this phenomenon. Abenomics is accomplishing its two major goals – watering down the yen and stirring up inflation – pretty well. Over the last 12 months, the yen has been devalued by 20% against the dollar that the Fed is trying to devalue as well. So this is quite a feat! It's been devalued by 28% against the euro. And inflation is heating up.

The consumer price index, released today, rose 0.1% in October and is now up 1.1% for the 12-month period. Less “imputed rent,” inflation rose 1.4% year over year. Service prices were up 0.4%, but goods prices jumped 1.9%. At this rate, Abenomics will have no problems meeting or exceeding by March, 2015, its “2% price stability” target, as the Bank of Japan has come to call it with bitter cynicism.

WAGE INCREASES

What isn’t happening: wage increases!

The Japanese Statistics Bureau just reported incomes and expenditures of households with two or more persons. This is by far the largest category of households in Japan. Due to the cost of housing in large urban areas – and due to remnants of tradition – a large number of singles live with their parents. This category is further divided into “workers’ households,” “no occupation” households, and “other” households.  

Incomes of the all-important “workers’ households” rose a measly 0.1% from a year ago to ¥482,684. In nominal terms. But adjusted for inflation – yes, here is where the benefits of Abenomics are kicking in – incomes fell 1.3%. Disposable incomes fell 1.4%. The details were ugly: “Current income” (salaries and wages) dropped 1.2% and “temporary bonuses” plunged 19.5%. Income from self-employment and piecework plummeted 20.8%.

So these strung-out workers’ households whose belts are being tightened by Abenomics and whose real incomes are being whittled away by inflation, how can they spend more to perk up the economy? Turns out, they don’t. Spending rose a scant 0.4% in nominal terms from a year ago – but adjusted for inflation, spending fell 1.0%.

And this despite rampant frontloading of big-ticket purchases. The consumption-tax hike from 5% to 8%, to take effect on April 1, is motivating households to buy big-ticket items now and save 3%. It has turned into a frenzy. Durable goods purchases, the primary target of frontloading, jumped 40.4% in October from a year ago. While it’s goosing the economy now, it will create a hole starting next spring. Japan has been through this before.

When the consumption tax hike from 3% to 5% was passed in 1996, Japanese consumers went out on a buying binge of big-ticket items to avoid paying the extra 2% in taxes, and the economy boomed. The hangover came around April 1, 1997, when the tax hike became effective. The economy skittered into a recession that lasted a year and a half. Now Japanese households are frontloading to avoid an additional 3% in consumption tax. The hangover next year is going to be painful.

But frontloading of a few big-ticket items is hitting day-to-day expenditures. These households spent 1.8% less on non-durable goods and 2.0% less on services, compared to prior year. Hence, the drop of 1% in overall spending by these households, despite their splurging on a few big items.

This is the benefit of inflation without compensation! A process that ever so slowly hollows out the middle class and pushes the lower classes deeper in the quagmire. It’s hurting workers and consumers. It’s constraining the real economy. Yet, holders of assets that the central bank inflates into the stratosphere benefit. Japan isn’t the only country that is practicing this large-scale redistribution of wealth from workers to holders of inflated assets. Abenomics is following the playbook of the Fed. But it’s pushing it further to the extreme.

The dogfight over Japan’s biggest problem, its gargantuan government deficit, entered its annual ritual of leaks and pressure tactics that usually lead to a pre-Christmas draft budget with an even bigger deficit. But this time, it’s different. Very different. Read..... Japan Is Used To Natural Disasters, But This One Is Man-Made

EMERGING MARKETS - The "Original Sin" in International Finance Has Been Consumated

History Ignored, Again Yet 12-03-13 Gen Re, CIO John Gilbert

They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.

We may be seeing the leading edge of a wave of credit problems among corporate borrowers in emerging market economies. Lest one think it does not affect the U.S. and other developed market countries, recall the Asian crisis chronology. Thailand devalued its currency in the summer of 1997 and few outside of Thailand cared. But contracting Asian demand reduced demand for oil, and Russia (whose exports are 80% oil) defaulted in August of 1998. Risk spreads widened, and five weeks later, Long Term Capital Management was insolvent. That was a systemic event and caused disruption in markets in general, and a stock market decline. So for those who believe that they are protected from loss by central bank behavior, a little history is in order. As usual.

It would seem fair if Twitter were to share. The company’s initial public offering was a staggering success, of course. Priced at $26, the stock closed its first day of trading at $45 per share. The company was thus endowed with a market capitalization of $25 billion. The company has no earnings, but who cares. Adding back non-cash charges to produce earnings before interest, taxes, depreciation and amortization, then adding back the financial value of non-cash employee compensation, the company can be regarded as profitable. Such a number for 2013 may approximate $50 million or so. The company is valued at 500 times such results, which exclude expenses that do have economic value. Correctly accounted, the company makes not a dime. But who cares when circumspection is the investment equivalent of tuberculosis.

It should be obvious to everybody by now that such stock market largesse is made in Washington. The specific address is the Eccles Building on Constitution Avenue, home of the Federal Reserve. In fact as citizens and U.S. taxpayers, we think it would be an expression of gratitude if Twitter were to take a little pressure off of the Fed and buy some Treasury bonds themselves. But that is not our remit, the company would reply. We are here to, well, Twitter.

Happily, not all members of the U.S. government are as pleased as the central bank to induce investors to behave foolishly. On the eve of Twitter’s IPO, Mary Jo White, chair of the Securities and Exchange Commission, offered cautionary remarks on investing in complex or inchoate technology businesses. The stock market ignored her, but her comments were well chosen.

We have seen this all before and it ends badly. Ms. White’s remarks were presumably pollinated by the lessons of history. By coincidence, in the same week that Twitter completed its offering, another tech firm reported disappointing earnings. That firm was Cisco, which was one of the belles of the stock market boom of the late 1990s. By the peak in early 2000, Cisco was valued at about $500 billion, which was 200 times the company’s then earnings. An impressive valuation, also. But back then, Cisco and brethren were going to change the world. Sort of like Twitter today. Chart 1 is Cisco, tracing out the dreaded where-the-Rocky-Mountains-meet-the-Great-Plains stock price pattern.

Cisco’s valuation has been decimated, and it trades today at only about 11 times earnings, a rather modest valuation, and a reminder that following such a crowd is an excellent hedge against ever being financially independent. Gravity wins in time.

Cisco’s discouraging recent earnings disclosure was particularly ironic, coming as it did in the week that Twitter led the Fed-driven market upward. That is because the company made pointed comments about a sudden deceleration in their businesses in many emerging market economies in the last few months. This is not only a cautionary tale about the uncertainty implicit in technology businesses. We fear that it may precede more such news from a number of firms and emerging countries that have benefitted from the same central bank policies of which Twitter is the lottery winner of the moment.

We applauded Fed Governor Jeremy Stein when, in his paper of February of this year, he broached the subject of unintended consequences of the Fed’s  unconventional policies. We have long held that view. Governor Stein explored a number of evident candidates, including mortgage REITs and high yield bond issuance. One asset class that he did not discuss was emerging market debt issuance, which to us seemed then, and since, as even more important because of its systemic nature. Emerging market borrowers can borrow at very low rates in dollars, and have accepted the opportunity with alacrity.

When Chairman Bernanke broached the subject of reducing bond purchases back in February, long-term rates began a sharp rise that took the yield on the 10-year Treasury from 1.6% to 2.5% to 3.0%, where they remain. While such yields are low by historic standards, the change at the margin is significant. It has already retarded activity in the U.S. mortgage market, for example.

The most important emerging market borrowers have historically been sovereign governments, who could reduce their borrowing costs so long as the currency mismatch did not move against them. From time to time, it did, resulting in such borrowing being referred to pejoratively as original sin in international finance. But at least those were sovereign governments.

An alarming feature as the current credit cycle has developed has been the rapid growth in borrowing by emerging market businesses. Many emerging countries have had boom conditions over most of the period since the Asian Financial Crisis. China’s accession to the WTO in 2001 was followed by a massive investment program that provided a massive and rapidly growing market for the exports of many other emerging nations—and the businesses that produced the coal, steel, copper and cement China required. The Lehman bankruptcy was an abrupt interruption of the boom, but China’s response was a redoubling of investment to overcome the financial crisis. So China’s demand for imports surged again, much of which was satisfied by emerging market vendors from Brazil to Indonesia to Africa.

Those boom conditions coincided with the Fed’s everyday low price interest rate policy. The temptation to borrow in dollars at low rates, and take the chance on  exchange rates, was evidently too powerful for many corporate borrowers. In fact, at the time, the currencies were moving in their favor. Booming exports made for  resilience, or even strength, in their currencies against the dollar. Borrowing in dollars seemed to make all the sense in the world.

The result was a boom in borrowing to match the boom in business. Chart 2 shows the increase in dollar—denominated borrowing by corporations since the Asian Financial Crisis in 1997–1998. It has exploded since the Federal Reserve has suppressed borrowing costs in the last five years.

The result of this roaring issuance is that debt ratios have risen to a level not seen since the Asian Financial Crisis of 1997—1998, as shown in Chart 3

This might be disquieting, but not necessarily troublesome, if the currency mismatch were not an issue. But shortly after Bernanke’s suggestion in May that the punchbowl might be removed, capital began flowing out of the hot emerging markets. The result was downward pressure on their currencies, which in some cases is severe. Chart 4 shows the change in exchange values versus the dollar for a number of affected emerging countries.

The systemic nature of the problem—booming debt issuance in dollars, followed by contemporaneous currency shocks in response to Bernanke’s comments in May—coincides with the sudden slowing in demand for Cisco’s equipment and, perhaps, others as well.

This is a major component of the downside to the Fed’s program. They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.

We may be seeing the leading edge of a wave of credit problems among corporate borrowers in emerging market economies. Lest one think it does not affect the U.S. and other developed market countries, recall the Asian crisis chronology. Thailand devalued its currency in the summer of 1997 and few outside of Thailand cared. But contracting Asian demand reduced demand for oil, and Russia (whose exports are 80% oil) defaulted in August of 1998. Risk spreads widened, and five weeks later, Long Term Capital Management was insolvent. That was a systemic event and caused disruption in markets in general, and a stock market decline. So for those who believe that they are protected from loss by central bank behavior, a little history is in order. As usual. Particularly for Twitter aficionados.

US EMPLOYMENT - Trend Remains Chronic

CONTINUED DROP IN PARTICPATION RATE IN 2014

Going forward, unless current fiscal policy is changed, about 1.3 million people who receive emergency unemployment benefits will not see them renewed at the end of the year. That will create a noticeable decline in the unemployment rate next year as these individuals exit the work force, thus causing the labor force participation rate to fall even further.

OUTSIZED RETAIL HIRING

Job gains during the November reporting period will probably be skewed toward the service sector, with retail hiring accounting for an outsized portion of the gains. i f there is a risk to the Bloomberg con - sensus forecast of 185,000 new jobs, it will most likely be due to the fact that the u .S . Thanksgiving holiday occurred late this year, on Nov. 28, thus causing a shift in some hiring to the December reporting period. i n addition to seasonal factors, softer P mi hiring estimates and the deceleration in service sector hiring as indicated in the November i S m non- manufacturing survey may weigh on the report.

TAPER TO REMAIN ON HOLD

Gains in private sector employment around the 190,000 level, which is also the average monthly increase during the past three years, are unlikely to be impressive enough to move the Fed to begin paring back the pace of asset purchases at its December meeting. Policy makers will probably need to see a sustained improvement in the level of employment, one that accompanies gains over a period of time of well above 200,000 per month before beginning to taper asset purchases. i ncoming Fed Chair Janet y ellen indicat ed as much in her testimony before the Senate Banking Committee last month.

RETAIL SALES - Thanksgiving Results

Holiday Sales Sag Despite Blitz of Deals- Discounts, Earlier Opening Hours Fail to Pry More Dollars Out of Budget-Conscious Shoppers 12-01-13 WSJ

Retail spending over Thanksgiving weekend dropped for the first time in at least seven years, the industry's main trade group said, as the blitz of deals and earlier opening hours apparently failed to pry more dollars out of the hands of budget-conscious shoppers.

The estimates underscore how retailing has become largely a zero-sum game amid slow overall growth in consumer spending. Some retailers have warned that their margins will suffer as they use promotions to get reluctant consumers to spend more.

On Thanksgiving Day, 45 million people went shopping, up 27% from last year, but traffic on Friday increased only 3.5% to 92 million. "Consumers are stressed. They're still under a lot of pressure from things like high unemployment," said GameStop Corp. Chief Executive Paul Raines. "We see that in our business."

Holiday Sales Expected To Be Less Than Half Fed's "Wealth Effect" Hope 11-27-13 Zero Hedge

Based on the Fed's wealth effect creating surge in stock prices, Guggenheim's Scott Minerd believes retail sales should be up 5.8% in Q4 2013. However, as we noted before, expectations are for a dismal 1-2% holiday spending growth at best; as 2013 is set to be the worst holiday spending season since 2009. Stores from Tilly's to Abercrombie and Wal-Mart are warning, the NRF projects the first drop YoY since 2009, and gas prices are set to rise (further pressuring consumers' disposable incomes). The bottom line - as we already know - is that QE's effects on the real economy (if there were ever any?) are set to end in the 2013 holidays.

A 1-2% spending rise expectation is less than half the S&P's surge would imply...

Chart: Guggenheim

Black "Weekend" Shopper Traffic Down 4% Led By Plunge In Electronics 12-03-13 Zero Hedge

Over the Thursday-Sunday Black "Weekend", Shoppertrak reports that traffic fell a notable 4% from last year with sales up a measly 1% - very much in line with our expectations of a weak holiday spending season. Total in-store shopper traffic increased by 9.4% in the apparel sector, while traffic in the electronics sector decreased by 6.5% for that same time period. Regionally, traffic fell the most in the Northeast (-9.8%) and the Midwest saw the largest drop in sales (-2.9%) with only the West increasing notably (+5.5%).

SENTIMENT - Crisis of Trust

Two-Thirds Of Americans Can't Be Trusted 12-01-13 AP via ZH

Only one-third of Americans say their fellow countrymen can be trusted according to a recent AP-GfK poll, down from over half 40 years ago. Americans are suspicious of each other in everyday encounters and who can blame them with the government appearing to bless any and all surveillance and intervention in the interests of the status quo. "I'm leery of everybody," warns one respondent, and as AP reports, this is a potential problem for economic growth as "social trust" brings good things. A society where it's easier to compromise or make a deal; where people are willing to work with those who are different from them for the common good, appears to promote economic growth. Distrust, on the other hand, seems to encourage corruption and there's no easy fix.

Via AP,

You can take our word for it. Americans don't trust each other anymore.

We're not talking about the loss of faith in big institutions such as the government, the church or Wall Street, which fluctuates with events. For four decades, a gut-level ingredient of democracy - trust in the other fellow - has been quietly draining away.

These days, only one-third of Americans say most people can be trusted. Half felt that way in 1972, when the General Social Survey first asked the question.

Forty years later, a record high of nearly two-thirds say "you can't be too careful" in dealing with people.

...

Does it matter that Americans are suspicious of one another? Yes, say worried political and social scientists.

What's known as "social trust" brings good things.

A society where it's easier to compromise or make a deal. Where people are willing to work with those who are different from them for the common good. Where trust appears to promote economic growth.

Distrust, on the other hand, seems to encourage corruption.

Even the rancor and gridlock in politics might stem from the effects of an increasingly distrustful citizenry

...

"It's like the rules of the game," Clark said. "When trust is low, the way we react and behave with each other becomes less civil."

There's no easy fix.

...

Trust has declined as the gap between the nation's rich and poor gapes ever wider, Uslaner says, and more and more Americans feel shut out. They've lost their sense of a shared fate. Tellingly, trust rises with wealth.

"People who believe the world is a good place and it's going to get better and you can help make it better, they will be trusting," Uslaner said. "If you believe it's dark and driven by outside forces you can't control, you will be a mistruster."

African-Americans consistently have expressed far less faith in "most people" than the white majority does. Racism, discrimination and a high rate of poverty destroy trust.

Nearly 8 in 10 African-Americans, in the 2012 survey conducted by NORC at the University of Chicago with principal funding from the National Science Foundation, felt that "you can't be too careful."

...

Can anything bring trust back?

Uslaner and Clark don't see much hope anytime soon.

GLOBAL GROWTH - Falling GDP Estimates

NO ONE WHATS TO TALK ABOUT THIS

The Reality of Global Growth Forecasts

... and they are ALWAYS too optimistic!

With the ex- ception of Western Europe, analysts have been lowering predictions for global GDP and across regions all year, suggesting a tough environment for 2014.

VENEZUELA - President Maduro Lays Out Socialist Vision On National TV

New vision for the country was being presented on national TV just before A NATIONAL blackout struk. Via Bloomberg:

Venezuela President Nicolas Maduro, speaking in national address on television and radio, says decree will be ready “within 24 hours.”

* Individuals will be able to open FX accounts in euros or dollars in state banks to import cars: Maduro
* Law decree will lower prices for used, new cars: Maduro
* Govt will set prices for new cars: Maduro
* Manufacturers must inform of weekly car production: Maduro
* Prices for used cars can’t exceed prices for new cars: Maduro
* Venezuelans must save more, consume less: Maduro
* Venezuela economy needs fair prices, reasonable profit margins: Maduro

JAPAN - Yen as a Safe Haven Currency

The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis November 2013 BIS Working Paper

THE RISK-OFF HAVEN FOR CURRENCIES

THE RISK-ON SOURCE FOR CARRY

wp13228.pdf

VALUATIONS - PE's At Historical Regression Boundary Condition

Stealth Bubble 11-29-13 Decison Point Carl Swenlin

This chart shows the S&P 500 Index (black line) in relation to its normal P/E range. A P/E of 10 is undervalue, a P/E of 20 is overvalue, and a P/E of 15 is considered to be fair value.

GOLD - Below Cash Cost, Approaches Marginal Production Costs

Gold Drops Below Cash Cost, Approaches Marginal Production Costs 12-02-13 Zero Hedge

The marginal cost of production of gold (90% percentile) in 2013 was estimated at between $1250 and $1300 including capex. Which means that gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1125.

JAPAN - Secures Final Passage Of Secrecy Bill

Japan Secures Final Passage Of Secrecy Bill 12-06-13 Zero Hedge

Shinzo Abe secured final passage of a bill granting Japan’s govt sweeping powers to declare state secrets. The Bill won final approval of the measures at about 11:20 p.m. Tokyo time after opposition parties first forced a no-confidence vote in Abe’s govt in the lower house. The first rule of the pending Japan’s Special Secrets Bill is that what will be a secret is secret. The right to know has now been officially superseded by the right of the government to make sure you don’t know what they don’t want you to know. It might all seems like a bad joke, except for the Orwellian nature of the bill and a key Cabinet member expressing his admiration for the Nazis, "just as Germany needed a strong man like Hitler to revive defeated Germany, Japan needs people like Abe to dynamically induce change."

Submitted by Subcultureist of Japan's Subculture Research Center blog,

The first rule of the pending Japan’s Special Secrets Bill is that what will be a secret is secret. The second rule is that anyone who leaks a secret and a reporter who writes it up can face up to ten years in jail. The third rule is that there are no rules at to what government agency can declare state secrets and no checks on them to determine they don’t misuse the privilege; even of no longer existent agencies may have the power to declare their information secret. The fourth rule  is that anything pertaining to nuclear energy is of course a state secret so there will not longer be any problem with nuclear power in this country because we won’t know anything about it. And what we don’t know can’t hurt us.

The right to know has now been officially superseded by the right of the government to make sure you don’t know what they don’t want you to know.

Legal experts note that even asking pointed questions about a state secret, whether you know or don’t know it’s a secret, could be treated as “instigating leaks” and the result in an arrest and a possible jail term up to five years. Of course, the trial would be complicated since the judge would not be allowed to know what secret the accused was suspected of trying to obtain.

Ask the wrong question, five years in jail. 

And of course, trials about state secrets, would by the nature of the law, also be secret trials and closed to the public.

At this point in time, no one has really claimed authorship of the secrecy bill. The author is a secret. Kafka would seem the most likely scrivener for this perplexing legislation, if he was still alive, but ruling coalition members acknowledge that another famous white man from the past may have provided the real inspiration for the bill and its implementation.

An Upper House member of the Diet said on background to JSRC, “Deputy Prime Minister Aso Taro sort of telegraphed the punches of the administration by expressing his admiration for how the Nazi Party forcefully changed the German constitution this summer.

Obviously, we’re not Nazis in Japan–because we hardly have any Jews, but we are like the defeated post World War I Germany in that we do not have the right to wage war to defend ourselves from our enemies. Just as Germany needed a strong man like Hitler to revive defeated Germany, Japan needs people like Abe to dynamically induce change.”

In August this year, Aso Taro, who is also the Finance Minister stated at a seminar, “Germany’s Weimar Constitution was changed into the Nazi Constitution before anyone knew. It was changed before anyone else noticed. Why don’t we learn from that method?”

It’s obvious that the Abe administration which pushed this bill into the Diet without public hearings and even the standard deliberations with Japan’s legal establishment has been an apt pupil of their German predecessors. They even attempted to pass the bill in the middle of the night yesterday while most of Japan was sleeping. The administration hasn’t been able to set a fire to the Diet building to justify a harsher crackdown but the LDP Secretary General was kind enough to say that those noisily protesting the bill were committing “terrorist acts.”

The hawkish Prime Minister Abe has publicly stated his ambition to revise Japan’s constitution to rid it of Article 9, which forbids Japan from waging war. Upper house Diet member, Taro Yamamoto and others have publicly stated they believe the current bill is a stepping-stone to recreate a fascist Japan, as it existed prior to the Second World War.

It might all seems like a bad joke, except for the Orwellian nature of the bill being proposed and a key Cabinet member expressing his admiration for the Nazis.

STATISM - Spain And Japan Move To Criminalize Protests

War On Democracy: Spain And Japan Move To Criminalize Protests 12-02-13 Michael Krieger of Liberty Blitzkrieg blog,via ZH

As might be expected as political and economic policy failures pile up and citizens become increasingly mad, the status quo is becoming increasingly authoritarian (recall blogger “Mish” was just fined 8,000 euros for a blog post).

In the latest disturbing news from a desperate power structure, the conservative government in Spain has passed an Orwellian bill titled the Citizens’ Security Law, which allows for fines of up to 600,000 euros ($816,000) for “unauthorized” street protests, and a 30,000 fine for merely having signs with “offensive” slogans against Spain or for wearing a mask.

This law is a perfect example of the increasing neo-feudalism being implemented across the globe by a corrupt, decadent and depraved status quo. Such laws must be immediately resisted or they will only get worse, much worse. It is quite obvious what the power structure in Spain in trying to do. It is putting into place an egregious punishment framework that could bankrupt a person by merely protesting. Such a threat is intended to make people not even consider their rights as human beings to express grievances to a crony government.

Instead of eye for an eye, it is like 25 eyes and a limb for an eye. If this does’t tell the Spanish people all they need to know about their government I don’t know what will. Below are some excerpts from a Reuters story covering the law:

(Reuters) – Spain’s conservative government agreed on Friday to toughen penalties for unauthorized street protests up to a possible 600,000 euro ($816,000) fine, a crackdown that belies the peaceful record of the anti-austerity protests of recent years.

Street protests and strikes have became increasingly frequent in recent years following huge cuts to education and health spending aimed at shrinking Spain’s public deficit to adhere to European Union demands.

But in contrast to Greece and elsewhere, where many similar protests have turned violent, Spain’s have remained largely peaceful, despite unemployment of 26 percent, rising poverty, and changes in labor laws that make firing easier.

Among other measures, protesters who cover their faces at demonstrations could be fined up to 30,000 euros while “offensive” slogans against Spain or its regions could reap a similar sanction.

The government also plans a new law restricting labor protests.

“This law … attempts to criminalize the act of protest,” said United Left lawmaker Gaspar Llamazares, questioning whether it complied with Spain’s constitution. “The government is trying to turn its political opponents into delinquents.”

”Compare events in Spain with those of other countries around us,” wrote conservative columnist Jose Antonio Zarzalejos on the website El Confidencial. “This security law … will add the stigma of authoritarianism to the political failure of the PP.”

It’s not just Spain though. This sort of panic attack from desperate members of the status quo is popping up elsewhere. Japan is another example, and over the weekend I read that Liberal Democratic Party Secretary-General Shigeru Ishiba compared demonstrations to “acts of terrorism.” From the Japan Times:

Citizens demonstrating against the controversial state secrets bill are committing “an act terrorism,” according to Liberal Democratic Party Secretary-General Shigeru Ishiba.

In a blog post Friday, he wrote: “If you want to realize your ideas and principles, you should follow the democratic principles, by gaining as much support as you can. I think the strategy of merely shouting one’s opinions at the top of one’s lungs is not so fundamentally different from an act of terrorism.”

My take is that people worldwide will not stand for such nonsense. Increasingly citizens have very little to lose and if they all say no together, there is not much the state can do. Just look at how Ukrainians responded to a ban on protests. Hundreds of thousands of them filled the streets in defiance. Below is a video of just one of the many incredible street scenes from over the weekend. In this case we see demonstrators using a tractor to break police barricades.

Interesting times indeed.

INEQUALITY - Rising Steadily

U .S . sociological trends for income inequality, gun and ammunition purchases, and personal healthcare ex-penditure, which are rising steadily.

STANDARD OF LIVING - Signs of the Times

Record Numbers Of Homeless Flood Massachusetts Even As State Shelters Overflowing 12-02-13

In Bernanke's centrally-planned, inverse Robin Hood world, record stock prices for the few unfortunately mean record homelessness for the many: this is what the state of Massachusettes found out the hard way after it was flooded with a record number of homeless families who are overwhelming the state's emergency shelter system.

As the Boston Globe reports, citing a recent report from the Department of Housing and Urban Development, the number of homeless people in shelters and living on the streets in Massachusetts has risen 14 percent since 2010 to a record 20,000 in January 2013, even as homelessness has declined nationally.

Aaron Gornstein, the undersecretary for housing, said the surge has followed cuts in state and federal housing subsidies, soaring rents in Greater Boston, and still-high rates of unemployment and underemployment, particularly among lower-income workers.

“The state as a whole has recovered from the Great Recession faster than most other states, but in many ways we’re still struggling,” Gornstein said. “Federal budget cuts have made the situation worse.”

However, in what may be the most curious twist, and yet another example of how perverted the incentive and capital allocation system in the US is, the nearly 2,100 families who could not find place in shelters, were housed in motel rooms at a greater cost to all US taxpayers amounting to tens of millions.

An average of nearly 2,100 families a night — an all-time high — were temporarily housed in motel rooms in October, just about equaling the number of families in emergency shelters across the state, according to be the state Executive Office of Housing and Economic Development.

The demand for shelter is so great that the state has been temporarily sending homeless families from Boston to motels in Western Massachusetts, although state officials said many have been relocated back again, closer to home.

The rest of the story is largely well-known. "This jump in homelessness is another example of an uneven recovery. Even as stocks soar to new heights and real estate values rebound, many of the state’s poorest residents remain without jobs and homes four years after the last recession. The problems have been compounded by the dramatic federal spending cuts, known as sequestration, which have cut housing and food subsidies."

“There’s no question, this is a continuing legacy of the Great Recession,” said Michael Goodman, a professor of public policy at the University of Massachusetts Dartmouth. “There’s more we can do to help, but it’s not likely, given where federal policy is. That suggests it’s going to be a very long winter for many.”

Whatever the reason for the record class disparity (and the reason is quite clear - Ben Bernanke - whose existence has made America's legislative branch obsolete, and with it taken away the only thing that may help America's poor: fiscal reform), one thing is certain: as tales of the hotel-housed homeless spread, everyone and their grandmother (quite literally) will scramble to join the ranks of people without a roof and be housed, on the taxpayers' dime, in your friendly, local and quite comfortable hotel.

In the Western Massachusetts community of Greenfield, taxicabs pull up to the Quality Inn, but instead of tourists or business travelers with wheeled luggage, homeless families toting belongings in trash bags emerge.

Gretchen Vazquez is one of them. She moved into a room in the Quality Inn in October with her two daughters, 1- and 9-years-old, when the state subsidy for her Roxbury apartment ran out after the Legislature stopped funding a program called HomeBASE. The program was created to provide an alternative to emergency shelters.

The cramped motel, Vazquez lamented, is far from her evangelical church and her daughter’s school in West Roxbury. After missing about two weeks of school, her daughter enrolled in the public school system here.

“I’m stuck,” said Vazquez. “I don’t know what’s going to happen next.”

Massachusetts has one of the most extensive shelter systems in the country. Unlike most states, it offers emergency housing to anyone who qualifies. Many end up in shelters or living in homes that board families in rooms, known as congregate housing.

In the meantime, Massachusettes (and the homeless of course) are grateful for the generosity of America's taxpayers.

Motels are one of the state’s most expensive options at $82 a night, almost as much as congregate housing’s $100 a night cost. In the past five years, state spending on motels has exploded to more than $46 million from about $1 million in 2008, according to state records

The average motel stay, state housing officials said, is about seven months, although some families live in motels for a year waiting for affordable housing.

Libby Hayes, executive director of Homes for Families, a Boston advocacy group, said it is not surprising that low-income workers with fewer skills cannot make ends meet since even college graduates are struggling to find work.

Naturally, the people are angry:

“The economy is not working,” Hayes said. “How do we expect people from the lowest income tier to make it if people who have had opportunities can’t?”

The recent jump in homeless people signals that people have run out of alternatives, said Randy Albelda, an economics professor at the University of Massachusetts Boston. Many families were able to stay off the streets by living off savings, doubling up with family members, or sleeping on friends’ couches, Albelda said. But eventually their money or relatives’ good will “just runs out.”

“Families close to the edge have not been able to pull back from the edge in this recovery,” Albelda said. “That’s in part because the recovery has not affected the bottom 30 to 40 percent of people.”

However, something tells us that one of the proposed solutions...

Rather than warehousing families in motel rooms, said Jim Greene, director of the Emergency Shelter Commission of Boston, the state needs more long-term rental assistance programs that target families who are homeless or at risk of homelessness.

“That’s how you bring the numbers down, with the right social services,” he said. “Short-term programs don’t get people out of homelessness.”

... namely converting short-term help into long-term (read perpetual) state and government help, is hardly the solution either.

Then again, who really cares about the plight of a few thousand homeless families as long as America's billionaires can tweet about a stock, and immediately become billionairish-er, in the process buying off however many politicians and regulators is required to keep behavior such as that legal.