Archives for May 2012

ZH Evening Wrap Up 5/31/12

Courtesy of ZeroHedge. View original post here.

Submitted by CrownThomas.

 

Some Headlines From Today

– Morgan Stanley's Gorman defends handling of Facebook IPO

– Spain says it has at least until October to raise enough funds to rescue Bankia

– Newly issued Mortgage Backed Securities see record low yields

– Weekly Jobless claims come in at 383,000

– New York City Will now tell you what to drink

– Goldman Sachs says it can't cut salaries any further…

 

On a long enough timeline 

– China's Manufacturing PMI Plunges

– Your daily Biderman rant

– What does high yield credit know that stocks don't?

– Student Debt Bubble Delinquencies Surge

– I want to work at the Goldman Sachs

Myths and Realities of Returning to a Gold Standard

Myths and Realities of Returning to a Gold Standard

By Terry Coxon, Casey Research

The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public’s consciousness.

I’m happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.

Despite my enjoyment of the revival, I’ve noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let’s take a closer look at what it really means. It’s not that complicated.

What Isn’t at Stake

The abolition of the gold standard has been the source of considerable mischief, but it hasn’t been the source of all mischief.

I’ve heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn’t.

The legal-tender laws are usually part of the story, but the story doesn’t hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don’t like it, you can avoid it by declining to accept anyone’s IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.

The legal-tender laws amount to no more than the government’s claim that it owns “dollar” as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark “Chevy” and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.

Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn’t alter that situation or expand the range of your choices.

I’ve also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It’s quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn’t redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).

What It Wouldn’t Fix

A return to the gold standard wouldn’t make you any freer than you are now. You’d still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn’t reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.

A new gold standard wouldn’t be an elixir of stability for the economy. A severe depression in 1919-1920 demonstrated the Federal Reserve’s ability to engineer financial train wrecks even when the dollar is redeemable for gold by anyone and everyone. And before the advent of the Federal Reserve, the US Treasury demonstrated the same ability through its borrowing operations, as did Congress on a few occasions simply by creating uncertainty about possible changes in the monetary system.

And a return to a gold standard wouldn’t ensure long-term preservation of purchasing power for the dollar and dollar-denominated obligations – because, as we’ve seen, a gold standard adopted one day can be abandoned the next.

What It Would Fix

Now that we’ve dampened expectations, here’s what a gold standard would do: threaten the individuals who run monetary institutions (such as the Federal Reserve) with embarrassment for bad behavior. It narrows their opportunities for dodging responsibility.

Every issuer of money promises to protect its value. The promise is the same whether it is made on behalf of a fiat currency or for a currency backed by gold, silver, copper, other currencies or seashells or pelts. A gold standard doesn’t prevent an issuer from breaking the promise. It merely makes it difficult for the issuer to pretend that it is keeping the promise when year after year it isn’t.

With a fiat money system, you don’t need any special talent in order to deceive the public with insincere talk about avoiding inflation and protecting the money’s purchasing power. The years-long lag between printing and the effect on prices makes deception easy.

If you print more money this year, well, it’s only a temporary measure and only because of the recession you’re trying to avoid. Next year, you’ll slow down the printing or maybe not print at all – you’ll have to wait and see what conditions are next year. And don’t forget to mention the odd years of rapid monetary growth that coincided with almost no price inflation at all. And when price inflation does pick up, there’s always someone or something to blame – OPEC or terrible growing conditions for the soybean crop in Brazil or a war. You’ll think of something.

Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk.

With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial.

The formal adoption of a gold standard holds no magic. It’s just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That’s why a gold standard protects the value of a currency, and that is why the politicians don’t want it.

Terry Coxon is one of several big-picture analysts at Casey Research who sift through today’s cultural, political and economic trends looking for clues as to when and how they might shift… because those shifts hold strong profit potential for bold investors. To enjoy more articles like this, as well as to receive specific, actionable investment advice including when to buy or sell specific stocks and shorting stocks, among other things, sign up today for The Casey Report. A ninety-day trial is completely risk-free.

U.S. Labels ALL Young Men In Battle Zones As “Militants” … And American Soil Is Now Considered a Battle Zone

Courtesy of ZeroHedge. View original post here.

Submitted by George Washington.

Preface: If this is too intense for you, look at this instead.

Glenn Greenwald has two must-read posts on the reason that virtually everyone the U.S. kills is called a “militant” or “suspected militant”.

He wrote Monday:

glenn headlines 460x307 U.S. Labels ALL Young Men In Battle Zones As Militants ... And American Soil Is Now Considered a Battle Zone

 

Virtually every time the U.S. fires a missile from a drone and ends the lives of Muslims, American media outlets dutifully trumpet in headlines that the dead were ”militants” – even though those media outlets literally do not have the slightest idea of who was actually killed. They simply cite always-unnamed “officials” claiming that the dead were “militants.” It’s the most obvious and inexcusable form of rank propaganda: media outlets continuously propagating a vital claim without having the slightest idea if it’s true.

 

This practice continues even though key Obama officials have been caught lying, a term used advisedly, about how many civilians they’re killing. I’ve written and said many times before that in American media discourse, the definition of “militant” is any human being whose life is extinguished when an American missile or bomb detonates (that term was even used when Anwar Awlaki’s 16-year-old American son, Abdulrahman, was killed by a U.S. drone in Yemen two weeks after a drone killed his father, even though nobody claims the teenager was anything but completely innocent: “Another U.S. Drone Strike Kills Militants in Yemen”).

 

This morning, the New York Times has a very lengthy and detailed article about President Obama’s counter-Terrorism policies based on interviews with “three dozen of his current and former advisers.” I’m writing separately about the numerous revelations contained in that article, but want specifically to highlight this one vital passage about how the Obama administration determines who is a “militant.” The article explains that Obama’s rhetorical emphasis on avoiding civilian deaths “did not significantly change” the drone program, because Obama himself simply expanded the definition of a “militant” to ensure that it includes virtually everyone killed by his drone strikes. Just read this remarkable passage:

 

Mr. Obama embraced a disputed method for counting civilian casualties that did little to box him in. It in effect counts all military-age males in a strike zone as combatants, according to several administration officials, unless there is explicit intelligence posthumously proving them innocent.

 

Counterterrorism officials insist this approach is one of simple logic: people in an area of known terrorist activity, or found with a top Qaeda operative, are probably up to no good. “Al Qaeda is an insular, paranoid organization — innocent neighbors don’t hitchhike rides in the back of trucks headed for the border with guns and bombs,” said one official, who requested anonymity to speak about what is still a classified program.

 

This counting method may partly explain the official claims of extraordinarily low collateral deaths. In a speech last year Mr. Brennan, Mr. Obama’s trusted adviser, said that not a single noncombatant had been killed in a year of strikes. And in a recent interview, a senior administration official said that the number of civilians killed in drone strikes in Pakistan under Mr. Obama was in the “single digits” — and that independent counts of scores or hundreds of civilian deaths unwittingly draw on false propaganda claims by militants.

 

But in interviews, three former senior intelligence officials expressed disbelief that the number could be so low. The C.I.A. accounting has so troubled some administration officials outside the agency that they have brought their concerns to the White House. One called it “guilt by association” that has led to “deceptive” estimates of civilian casualties.

 

“It bothers me when they say there were seven guys, so they must all be militants,” the official said. “They count the corpses and they’re not really sure who they are.”

The next day, Greenwald noted:

In 2006, the pro-Israel activist Alan Dershowitz created a serious scandal when he argued – mostly in order to justify Israeli aggression — that “civilian causalties” are a “gray area” because many people in close proximity to Terrorists — even if not Terrorists themselves — are less than innocent (“A new phrase should be introduced into the reporting and analysis of current events in the Middle East: ‘the continuum of civilianality’ . . . . Every civilian death is a tragedy, but some are more tragic than others”).

 

Even more repellent was John Podhoretz’s argument in 2006 that “the tactical mistake” which “we made in Iraq was that we didn’t kill enough Sunnis in the early going to intimidate them and make them so afraid of us they would go along with anything,” specifically that the real error was that the U.S. permitted “the survival of Sunni men between the ages of 15 and 35.” In other words, “all military-age males” in Sunni areas should have been deemed “combatants” and thus killed. Podhoretz’s argument created all sorts of outrage in progressive circles: John Podhoretz is advocating genocide!

 

But this is precisely the premise that President Obama himself has now adopted in order to justify civilian deaths and re-classify them as “militants.” Here is the rationale of Obama officials as described by the NYT: “people in an area of known terrorist activity, or found with a top Qaeda operative, are probably up to no good.” Probably up to no good. That’s a direct replica of Dershowitz’s argument, and is closely related to Podhoretz’s. They count someone as a “militant” — worthy of death — based purely on the happenstance of where they are and the proximity they’re in to someone else they suspect is a Bad Person. If such a person is killed by a U.S. missile, then, by definition, they are “militants,” not “civilians” — even if we don’t know the first thing about them, including their name.

Will This Policy Apply to Americans On U.S. Soil?

This may sound like something far away which won’t directly affect Americans.

But the military now considers the U.S. homeland to be a battlefield.  As we noted in March:

Fox News reports:

FBI Director Robert Mueller on Wednesday said he would have to go back and check with the Department of Justice whether Attorney General Eric Holder’s “[criteria] for the targeted killing of Americans also applied to Americans inside the U.S.

 

***

 

“I have to go back. Uh, I’m not certain whether that was addressed or not,” Mueller said when asked by Rep. Tom Graves, R-Ga., about a distinction between domestic and foreign targeting

 

Graves followed up asking whether “from a historical perspective,” the federal government has “the ability to kill a U.S. citizen on United States soil or just overseas.”

 

“I’m going to defer that to others in the Department of Justice,” Mueller replied.

Indeed, Holder’s Monday speech at Northwestern University seemed to leave the door open.

Constitutional expert Jonathan Turley writes:

One would hope that the FBI Director would have a handle on a few details guiding his responsibilities, including whether he can kill citizens without a charge or court order.

 

***

 

He appeared unclear whether he had the power under the Obama Kill Doctrine or, in the very least, was unwilling to discuss that power. For civil libertarians, the answer should be easy: “Of course, I do not have that power under the Constitution.”

 

***

 

The claim that they are following self-imposed “limits” which are meaningless — particularly in a system that is premised on the availability of judicial review. The Administration has never said that the [Law Of Armed Conflicts] does not allow the same powers to be used in the United States. It would be an easy thing to state. Holder can affirmatively state that the President’s inherent power to kill citizens exists only outside of the country. He can then explain where those limits are found in the Constitution and why they do not apply equally to a citizen in London or Berlin. Holder was not describing a constitutional process of review. They have dressed up a self-imposed review of a unilateral power as due process. Any authoritarian measure can be dressed up as carefully executed according to balancing tests, but that does not constitute any real constitutional analysis. It is at best a loose analogy to constitutional analysis.

 

When reporters asked the Justice Department about Mueller’s apparent uncertainty, they responded that the answer is “pretty straightforward.” They then offered an evasive response. They simply said (as we all know) that “[t]he legal framework (Holder) laid out applies to U.S. citizens outside of U.S.” We got that from the use of the word “abroad.” However, the question is how this inherent authority is limited as it has been articulated by Holder and others. What is the limiting principle? If the President cannot order the killing of a citizen in the United States, Holder can simply say so (and inform the FBI Director who would likely be involved in such a killing). In doing so, he can then explain the source of that limitation and why it does not apply with citizens in places like London. What we have is a purely internal review that balances the practicality of arrest and the urgency of the matter in the view of the President. Since the panel is the extension of his authority, he can presumably disregard their recommendations or order a killing without their approval. Since the Administration has emphasized that the “battlefield” in this “war on terror” is not limited to a particular country, the assumption is that the President’s authority is commensurate with that threat or limitless theater of operation. Indeed, the Justice Department has repeatedly stated that the war is being fought in the United States as well as other nations.

 

Thus, Mueller’s uncertainty is understandable . . . and dangerous. The Framers created a system of objective due process in a system of checks and balances. Obama has introduced an undefined and self-imposed system of review ….

Before you assume that Mueller’s comments are being blown out of proportion, remember that it has been clear for some time that Obama has claimed the power to assassinate U.S. citizens within the U.S. As we pointed out in December:

 

I’ve previously noted that Obama says that he can assassinate American citizens living on U.S. soil.

 

This admittedly sounds over-the-top. But one of the nation’s top constitutional and military law experts – Jonathan Turley – agrees.

 

***

 

Turley said [on C-Span]:

President Obama has just stated a policy that he can have any American citizen killed without any charge, without any review, except his own. If he’s satisfied that you are a terrorist, he says that he can kill you anywhere in the world including in the United States.

 

Two of his aides just … reaffirmed they believe that American citizens can be killed on the order of the President anywhere including the United States.

 

You’ve now got a president who says that he can kill you on his own discretion. He can jail you indefinitely on his own discretion

Remember, government officials have said that Americans can be targets in the war on terror.

And Northwestern University’s law school professor Joseph Margulies said:

Obama and Bush … both say we are in a war not confined to particular battlefield. … Both say we can target citizens without judicial oversight and that can happen anywhere in the world.

Indeed, the Army is already being deployed on U.S. soil, and the military is conducting numerous training exercises on American streets. And see this.

And the numerous drones flying over American soil – projected by the FAA to reach 30,000 drones by 2020 – are starting to carry arms.

So if a military-age man is killed in a U.S. city because he happens – even unknowingly – to be near a suspected bad guy, will the report simply read “another militant killed”?

China PMI Plunges Most In 28 Months, Reverts To HSBC's Reality

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Color us not stunned at all. China’s Manufacturing PMI finally reverted to the reality that HSBC’s Manufacturing PMI has been arguing for and fell for the first time in six months. The drop is the largest since February 2010. While still above 50 (though the lowest level of expansion in five months), or 50.4 technically, down from 53.4, and missing expectations of 52.0, it seems another engine of global growth just sputtered finally – as the real impact of a European depression and fiscally challenged US hit home.

And as a reminder, here is why unless “Europe is fixed” and quite soon, the situation will first get worse before it gets much worse:

China PMI Plunges Most In 28 Months, Reverts To HSBC’s Reality

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Color us not stunned at all. China’s Manufacturing PMI finally reverted to the reality that HSBC’s Manufacturing PMI has been arguing for and fell for the first time in six months. The drop is the largest since February 2010. While still above 50 (though the lowest level of expansion in five months), or 50.4 technically, down from 53.4, and missing expectations of 52.0, it seems another engine of global growth just sputtered finally – as the real impact of a European depression and fiscally challenged US hit home.

And as a reminder, here is why unless “Europe is fixed” and quite soon, the situation will first get worse before it gets much worse:

Belligerent Bears Batter BNI's 'Buffett-Black-Swan' Bet

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Was it just a week ago that we suggested buying Burlington Northern CDS (credit protection) as the cheapest Black-Swan bet against Buffett and Bernanke’s ebullience? The answer is yes. And from the start of May the cost of protection has doubled from around 15bps to just over 30bps – quite a surge as it seems more than a few funds thought this a worthwhile trade to tuck in the back pocket at a minimal carry cost. At 32bps mid (31/34), it remains cheap still from a carry perspective and while we are approaching the initial profit target, the reason for buying this low cost, long vol trade is the huge convexity upside should things go a little more pear-shaped for the Octogenarian-of-Omaha – or more specifically for the US equities in general. We do note that if this keeps pushing past our other profit-targets then some should be covered since counterparty risk will rapidly become an issue (unless the Fed officially becomes a CCP).

 

Chart: Bloomberg

Belligerent Bears Batter BNI’s ‘Buffett-Black-Swan’ Bet

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Was it just a week ago that we suggested buying Burlington Northern CDS (credit protection) as the cheapest Black-Swan bet against Buffett and Bernanke’s ebullience? The answer is yes. And from the start of May the cost of protection has doubled from around 15bps to just over 30bps – quite a surge as it seems more than a few funds thought this a worthwhile trade to tuck in the back pocket at a minimal carry cost. At 32bps mid (31/34), it remains cheap still from a carry perspective and while we are approaching the initial profit target, the reason for buying this low cost, long vol trade is the huge convexity upside should things go a little more pear-shaped for the Octogenarian-of-Omaha – or more specifically for the US equities in general. We do note that if this keeps pushing past our other profit-targets then some should be covered since counterparty risk will rapidly become an issue (unless the Fed officially becomes a CCP).

 

Chart: Bloomberg

“The End Game: 2012 And 2013 Will Usher In The End” – The Scariest Presentation Ever?

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If Raoul Pal was some doomsday spouting windbag, writing in all caps, arbitrarily pasting together disparate charts to create 200 page slideshows, it would be easy to ignore him. He isn’t. The founder of Global Macro Investor “previously co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul came to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe… Raoul Pal retired from managing client money in 2004 at the age of 36 and now lives on the Valencian coast of Spain, from where he writes.” It is his writing we are concerned about, and specifically his latest presentation, which is, for lack of a better word, the most disturbing and scary forecast of the future of the world we have ever seen….

And we see a lot of those.

Consider this:

  • We are here…

  • We don’t know exactly what is to come, but we can all join the very few dots from where we are now, to the collapse of the first major bank…
  • With very limited room for government bailouts, we can very easily join the next dots from the first bank closure to the collapse of the whole European banking system, and then to the bankruptcy of the governments themselves.
  • There are almost no brakes in the system to stop this, and almost no one realises the seriousness of the situation.
  • The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…
  • Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations
  • From an EU crisis, we only have to join one dot for a UK crisis of equal magnitude.
  • And then do you think Japan and China would not be next?
  • And then do you think the US would survive unscathed?
  • That is the end of the fractional reserve banking system and of fiat money.
  • It is the big RESET.

It continues:

  • Bonds will be stuck at 1% in the US, Germany, UK and Japan (for this phase).
  • The whole bond market will be dead.
  • Short selling on bonds – banned
  • Short selling stocks – banned
  • CDS – banned
  • Short futures – banned
  • Put options – banned
  • All that is left is the Dollar and Gold

It only gets better. We use the term loosely:

  • We have around 6 months left of trading in Western markets to protect ourselves or make enough money to offset future losses.
  • Spend your time looking at the risks of custody, safekeeping, counterparty etc. Assume that no one and nothing is safe.
  • After that…we put on our tin helmets and hide until the new system emerges

And the punchline

From a timing perspective, I think 2012 and 2013 will usher in the end.

Enjoy:

 

Lauren Lyster Interviews CBO Whistleblower Lan Pham

Courtesy of Jesse's Cafe Americain

Lauren Lyster Interviews CBO Whistleblower Lan Pham

From the February 2, 2012 Wall Street Journal story on Lan Pham's firing:

"I was repeatedly pressured by the CBO Assistant Director, Deborah Lucas, in charge of the Financial Analysis Division to not write nor discuss issues in the banking sector and mortgage markets that might suggest weakness in these sectors and their consequences on the economy and households."

The CBO's 2010 termination letter to Ms. Pham cites her lack of qualifications, "poorly organized" research, and resistance to taking orders from her superiors as the reasons for her firing.

Lan Pham's March interview with ZeroHedge.

It is a little known fact, but probably no surprise to most, that in addition to not prosecuting any key participants in the financial fraud and crisis, the Obama Administration has instead been particularly tough on whistleblowers who expose government corruption.

M Stanley derivatives switch hits hold-up

Morgan Stanley’s plan to shift a large chunk of its $52tn derivatives portfolio into the part of the group backed by customer deposits is facing regulatory obstacles, according to people familiar with the situation.

Under the plan – partly an attempt to reassure trading partners of its financial strength ahead of a looming credit downgrade by Moody’s – Morgan Stanley would move derivatives into its bank subsidiary, which has a higher credit rating than the group as a whole.

But the US Federal Reserve has yet to approve the request after considering it for an extended period.

The derivatives move should also make it less likely that counterparties take their business from Morgan Stanley to higher-rated competitors such as JPMorgan Chase even if Moody’s follows through on a threat to downgrade its credit rating by up to three notches to Baa2 from A2.

Keep reaading: M Stanley derivatives switch hits hold-up – FT.com.

Simon Johnson: Jamie Dimon and the Failure of the Nation

Courtesy of Jesse's Cafe Americain 

No matter how you wish to frame it, the Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

Baseline Scenario
Jamie Dimon And The Fall Of Nations

By Simon Johnson
May 31, 2012

“Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” by Daron Acemoglu and James Robinson, is a brilliant and sometimes breathtaking survey of country-level governance over history and around the world. Professors Acemoglu and Robinson discern a simple pattern – when elites are held in check, typically by effective legal mechanisms, everyone else in society does much better and sustained economic growth becomes possible. But powerful people – kings, barons, industrialists, bankers – work long and hard to relax the constraints on their actions. And when they succeed, the effects are not just redistribution toward themselves but also an undermining of economic growth and often a tearing at the fabric of society. (I’ve worked with the authors on related issues, but I was not involved in writing the book.)

The historical evidence is overwhelming. Many societies have done well for a while – until powerful people get out of hand. This is an easy pattern to see at a distance and in other cultures. It is typically much harder to recognize when your own society now has an elite less subject to effective constraints and more able to exert power in an abusive fashion. And given the long history of strong institutions in the United States, it appears particularly difficult for some people to acknowledge that we have serious governance issues that need to be addressed…

Read the rest here.

Time Bomb? Banks Pressured to Buy Government Debt

US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.

Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.

While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.

"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently."

"Specifically," Lorenzen adds, "having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the sovereign ultimately reneges on its obligations."

Keep reading: Time Bomb? Banks Pressured to Buy Government Debt – US Business News – CNBC.

Eric Sprott: The Real Banking Crisis, Part II

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

From Eric Sprott and David Baker of Sprott Asset Management

The Real Banking Crisis, Part II

Here we go again. Back in July 2011 we wrote an article entitled “The Real Banking Crisis” where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.

EURO STOXX BANKS INDEX

EURO-STOXX-BANKS-chart.gif

Source: Bloomberg

On Wednesday, May 16th, it was reported that Greek depositors withdrew as much as €1.2 billion from their local Greek banks on the preceding Monday and Tuesday alone, representing 0.75% of total deposits.1 Reports suggest that as much as €700 million was withdrawn the week before. Greek depositors have now withdrawn €3 billion from their banking system since the country’s elections on May 6th, seemingly emptying what was left of the liquidity remaining within the Greek banking system.2 According to Reuters, the Greek banks had already collectively borrowed €73.4 billion from the ECB and €54 billion from the Bank of Greece as of the end of January 2012 – which is equivalent to approximately 77% of the Greek banking system’s €165 billion in household and business deposits held at the end of March.3 The recent escalation in withdrawals has forced the Greek banks to draw on an €18 billion emergency fund (released on May 28th), which if depleted, will leave the country with a cushion of a mere €3 billion.4 It’s now down to the wire. Greece is essentially €21 billion away from a complete banking collapse, or alternatively, another large-scale bailout from the European Central Bank (ECB).

The way this is unfolding probably doesn’t surprise anyone, but the time it has taken for the remaining Greek depositors to withdraw their money is certainly perplexing to us. Official records suggest that the Greek banks only lost a third of their deposits between January 2010 and March 2012, which begs the question of why the Greek banks have had to borrow so much capital from the ECB in the meantime.5 Nonetheless, we are finally past the tipping point where Greek depositors have had enough, and the past two weeks have perfectly illustrated how quickly a determined bank run can propel a country back into crisis mode. The numbers above suggest there really isn’t much of a banking system left in Greece at all, and at this point no sane person or corporation would willingly continue to hold deposits within a Greek bank unless they had no other choice.

The fact remains that here we are, in May 2012, and Greece is right back in the exact same predicament it was in before its March 2012 bailout. Before the bailout, Greece had approximately €368 billion of debt outstanding, and its government bond yields were trading above 35%.6 On March 9th, the authorities arranged for private investors to forgive more than €100 billion of that debt, and launched a €130 billion rescue package that prompted Nicolas Sarkozy to exclaim that the Greek debt crisis had finally been solved.7 Today, a mere two months later, Greece is back up to almost €400 billion in total debt outstanding (more than it had pre-bailout), and its sovereign bond yields are back above 29%. It’s as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history. It is now safe to assume that that record will be surpassed in short order. It’s either that, or Greece is out of the Eurozone and back on the drachma – hence the renewed bank run among Greek depositors.

Meanwhile, in Spain, bank depositors have been pulling money out of the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.8 The Bankia run coincided with Moody’s issuance of a sweeping downgrade of 16 Spanish banks, a move that was prompted over concerns related to the Spanish banks’ €300+ billion exposure to domestic real estate loans, half of which are believed to be delinquent.9 The Spanish authorities were quick to deny the Bankia run, with Fernando Jiménez Latorre, secretary of state for the economy stating, “It is not true that there has been an exit of deposits at this time from Bankia… there is no concern about a possible flight of deposits, as there is no reason for it.”10 Funny then that the Spanish government had to promptly launch a €9 billion bailout for Bankia the following Wednesday, May 24th, an amount which has since increased to a total of €19 billion to fund the ailing bank.11 Deny, deny some more… panic, inject capital – this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.

The recent bank runs in Greece and Spain are part of a broader trend that has been building for months now. Foreign depositors in the peripheral EU countries are understandably nervous and have been steadily lowering their exposure to Eurozone sovereign debt. According to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past nine months, representing more than 10% of each market.12 The same can be said for foreign deposits in those countries. Citi’s credit strategist Matt King recently reported that, “in Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks.”13 Spain and Italy are not immune either, with Spain having suffered €100 billion in outflows since the middle of last year (certainly more now), and Italy having lost €230 billion, representing roughly 15% of its GDP.14

As we’ve stated before, no matter what happens in the Eurozone, the absolute worst case scenario for the authorities is a bank run. It terrifies all involved, because they can spiral out of control faster than governments can react to stop them, save for the most Draconian measures. They also prompt banks to liquidate whatever assets they can, revealing the truth about what their “assets” are actually worth. In this environment, no one wants to find out what the market will really pay for them. We’re seeing this now in Spain, where according to Bloomberg, “Many Spanish banks are avoiding property sales so they don’t have to “mark to market” valuations. Instead, they’re giving developers new loans to pay debt coming due to prevent defaults.”15 Sound familiar? We’re now at the point where a bank run in one Eurozone country could quickly seize up the entire system – not just in Greece or Spain, but throughout the entire Eurozone and beyond. Greek and Spanish banks are just like all the others; they operate with leverage ratios averaging 25x their equity capital. They are all so overleveraged that it takes very little in deposit withdrawals to cause instantaneous liquidity issues. This is why we’ll likely see another ECB-induced printing program announced (with a new abbreviation, hopefully) before a broader bank run can take root. The Eurozone authorities simply cannot risk the consequences of bank runs in countries like Spain, Portugal or Italy, which are far too big to bailout for the over-stretched ECB. It’s not about Greece staying or leaving the European Union anymore, it’s about the bailout ability of European banking system to survive the impact of massive money transfers.

Nothing is really being solved here, and everyone knows it. We’re essentially in the same place we were when the crisis erupted back in 2010, only now there’s more total debt outstanding. Bank of Canada Governor Mark Carney remarked in a December 2011 speech that “the global Minsky moment has arrived”, and it’s now plain for all to see.16 The “Minsky moment” refers to the work of Hyman Minsky, a deceased American economist who developed theories on how debt accumulation eventually leads to financial crises. You don’t have to be an economist to understand the crux of Minsky’s theories. As an economy grows it takes on increasing amounts of debt. The point eventually comes when the cost of servicing that debt can no longer be met by that economy’s productive capacity – that’s the Minsky Moment, and we’re watching it play out all over the world today. When Greek bond yields spiked back in February 2012, bond investors looking at the country’s €368 billion of debt outstanding, its population of 11 million people, and its nominal GDP of $312 billion realized that it couldn’t possibly work. There was no way Greece could pay the interest on its debt load. There was no way the bond market could keep pretending everything was ok, like it currently does with the UK, US and Japan… for now.

Greece clearly needs another large-scale bailout, and we think they’ll get one. Greece’s exit from the Eurozone represents a Lehman-like scenario to the global banking system – why wait to see what carnage it will unleash? It’s always easier to print money, and printing another couple €100 billion is nothing compared to the trillions that have been printed since last November. Where this will get tense, however, is when the market acknowledges the Minsky moment in a larger EU economy, like Spain or Italy. As we go to print, Spanish bond yields are now trading back above 6.5%, signaling the market’s non-confidence in the country’s ability to back-stop its own banking system. Spain has a population of 47 million, a GDP of roughly $1.3 trillion, national debt of roughly $1.1 trillion, debt owed to the ECB and various bailout funds totaling €643 billion, and now, a banking system that also appears close to collapsing.17 Their Minsky Moment has already arrived, and it’s simply a matter now of how the market will react to it, and how long it takes the ECB to come to Spain’s rescue.

Without a doubt, the most counterintuitive aspect of the Greece/Eurozone debacle has been its impact on the price of gold. Gold is now back below $1600 for the third time since August 2011; each time has coincided with severe banking stress within Greece and the broader Eurozone. Some pundits have suggested that various European banks are selling gold to raise liquidity, and this would make sense if the Eurozone banks had gold to sell, but we cannot find any evidence of large physical sellers out of Europe. Also, ever since the unlimited US-dollar SWAP agreement was launched in November 2011, USD liquidity has not been the key issue in Europe – rising sovereign bond yields and deposit withdrawals have. On the contrary, the selling pressure in gold once again appears to be expressed primarily through the futures markets, which are highly levered and rarely involve any physical transactions involving actual bullion. The futures market sell-off also appears to be waning now, since the European banking crisis has provided central banks with a politically-palatable excuse to take action if it deteriorates any further.

The recent gold price has been particularly frustrating given the continuation of bullish demand trends out of China. China posted another record Hong Kong gold import number in March of 62.9 tonnes. Gold imports into China have now totaled 135.5 metric tonnes between January and March 2012, representing a 600% increase over the same period last year.18 We don’t have to connect the dots here – China is stockpiling the precious metal while investors in the West scratch their heads wondering why the spot price is so low.

CHINA HONG KONG GOLD IMPORTS AND GOLD SPOT PRICECHINA-HK-GOLD-chart.gif
Source: UBS, Bloomberg

Non-G6 central banks have also continued to accumulate physical gold, with the latest reports revealing another 70 tonnes of gold purchases completed in March and April by the central banks of Philippines, Turkey, Mexico, Kazakhstan, Ukraine and Sri Lanka.19 We won’t bore you with the exercise of annualizing those numbers and comparing them to the annual global mine supply, but suffice it to say that the fundamentals still remain firmly intact. It’s now simply a matter of improving sentiment towards gold in the West, and if the current banking crisis in Europe gets any worse, or if we see another large-scale policy response, it will likely happen on its own accord.

Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what’s left of European citizens’ confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people’s growing distrust of the banking system – and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe.

1 Hope, Kerin and Wigglesworth, Robin (May 16, 2012) “Greek banks see steady deposits outflow”. Financial Times. Retrieved May 22, 2012 from:
http://www.ft.com/intl/cms/s/0/3d588c2e-9f3c-11e1-a455-00144feabdc0.html#axzz1v3uDr3Vw
2 Smith, Helena and Treanor, Jill (May 16, 2012) “Greeks withdraw €3bn in 10 days since election”. The Guardian. Retrieved May 22, 2012 from:
http://www.guardian.co.uk/world/2012/may/16/greeks-withdraw-3bn-10-days
3 Rueters (May 28, 2012) “Greece Pours $22.6 Billion Into Four Biggest Banks”. Reuters. Retrived May 29, 2012 from:
http://www.cnbc.com/id/47591006
4 Paris, Costas and Paris, Jenny (May 22, 2012) “Former Greek PM Papademos: Risk of Greece Leaving Euro is Real”. Dow Jones. Retirved on May 23, 2012 from:
http://www.dowjones.com/products/djfxtrader/articles/FormerGreekPMPapademosRiskOfGreeceLeavingEuroIsReal.asp
5 Smith, Helena and Treanor, Jill (May 16, 2012) “Greeks withdraw €3bn in 10 days since election”. The Guardian. Retrieved May 22, 2012 from:
http://www.guardian.co.uk/world/2012/may/16/greeks-withdraw-3bn-10-days
6 Becatoros, Elena and Steinhauser, Gabriele (March 9, 2012) “Greece secures biggest debt deal in history” Associated Press. Retrieved May 20, 2012 from:
http://news.yahoo.com/greece-secures-biggest-debt-deal-history-193537156.html
7 Reuters (March 9, 2012) “Sarkozy says Greek problem solved”. Reuters. Retrieved May 20, 2012
http://www.reuters.com/article/2012/03/09/us-eurozone-greece-sarkozy-idUSBRE8280QV20120309
8 Vigna, Paul (May 17, 2012) “Whatever You Do, Don’t Say ‘Bank Run'”. Wall Street Journal. Retrieved May 22, 2012 from:
http://blogs.wsj.com/marketbeat/2012/05/17/whatever-you-do-dont-say-bank-run/
9 Reuters (May 17, 2012) “Moody’s cuts Spanish banks ratings”. Reuters. Retrieved May 22, 2012 from: http://www.reuters.com/article/2012/05/17/idUSL1E8GHGOZ20120517
10 Johnson, Miles (May 17, 2012) “Spain denies bank run reports”. Financial Times. Retrived May 20, 2012 from:
http://www.ft.com/intl/cms/s/0/b6705296-a01c-11e1-94ba-00144feabdc0.html#axzz1vn7yKh26
11 Giles, Ciaran and Woolls, Daniel (May 28, 2012) “Spanish PM adamant bank sector won’t need European Union as Bankia shares plunge”. The Associated Press. Retrieved on May 28, 2012 from: http://www.canadianbusiness.com/article/85633–bankia-bailout-plan-sends-shares-plunging-10-year-spanish-bond-yield-soaring
12 Milne, Richard (May 23, 2012) “Bond exodus on a par with eurozone bank run”. Financial Times. Retrieved on May 24, 2012 from:
http://www.ft.com/intl/cms/s/0/8b954e82-a4db-11e1-9a94-00144feabdc0.html#axzz1vn7yKh26
13 Field, Richard (May 21, 2012) “Citi’s Matt King on deposit flight likely to pick up speed in the EU”. Trust Your Instincts Blog. Retrieved on May 24, 2012 from:
http://tyillc.blogspot.ca/2012/05/citis-matt-king-on-deposit-flight.html
14 Milne, Richard (May 23, 2012) “Bond exodus on a par with eurozone bank run”. Financial Times. Retrieved on May 24, 2012 from:
http://www.ft.com/intl/cms/s/0/8b954e82-a4db-11e1-9a94-00144feabdc0.html#axzz1vn7yKh26
15 Smyth, Sharon and Callanan, Neil (May 29, 2012) “Spain Delays And Prays That Zombies Repay Debt: Mortgages”. Bloomberg. Retrieved on May 29, 2012 from:
http://www.bloomberg.com/news/2012-05-28/spain-delays-and-prays-that-zombies-repay-debt-mortgages.html?ftcamp=crm/email/2012529/nbe/AlphavilleLondon/product
16 Carney, Mark (December 12, 2011) “Growth in the Age of Deleveraging”. Bank of Canada. Retrieved on May 20, 2012 from:
http://www.bankofcanada.ca/2011/12/speeches/growth-in-the-age-of-deleveraging/
17 Taylor, Anthony (April 19, 2012) “Spanish Debt as at April 19th 2012 vs GDP”. British American Marketing. Retirved on May 20, 2012 from:
http://www.britishamericanmarketing.com/consultancy/globaleconomicnews/spainish-debt-as-at-april-19th-2012-vs-gdp-florida-investors-macro-financ-view/
18 Bloomberg News (May 8, 2012) “China’s Gold Imports Jump As Country May Become Biggest User”. Bloomberg. Retrieved on May 20, 2012 from:
http://www.bloomberg.com/news/2012-05-08/china-s-gold-imports-advance-as-country-may-become-biggest-user.html
19 Williams, Lawrence (May 25, 2012) “Central Banks boost gold holdings yet again”. Mineweb. Retrieved on May 26, 2012 from:
http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=152096&sn=Detail&pid=102055

Run for ‘Cover’ when the ‘Cover Story’ highlights an investment class

Dr. Paul Price argues convincingly against annuities, explaining why they are not the best investment choices. ~ Ilene 

Run for ‘Cover’ when the ‘Cover Story’ highlights an investment class

Courtesy of Dr. Paul Price

Barron’s May 28, 2012 issue ran this as their front page over the holiday weekend…

 

 

Annuities are popular right now due to near-zero fixed interest rates accompanied by stock market action that has scared away many investors that typically would have preferred equity or balanced portfolios. If you read and understand the story’s details you’d likely be much less enthusiastic about buying any of the featured annuities.

Why are annuities in style? They offer income for either a specified minimum number of years or for ‘the rest of your life’ depending on the plan you select. They can start paying monthly income immediately or at a preplanned age in the future. On the surface they appear to offer superior income to currently available fixed-income rates.

So where’s the catch? Unlike bonds, T-bills or CDs, annuities generally provide nothing to your heirs upon your demise. They never mature and return your principal. You are typically buying an income stream with no residual value. 

Annuity sales professionals like to tout the high percentage of the monthly distributions which are considered ‘tax free’ to the recipients. One seminar I attended correctly claimed 82% would not be subject to federal income tax. How can that be? Simply put…. that percentage is the part of the payment which is considered a return of your own money. It’s equivalent to simply withdrawing money from your own bank account. You don’t owe taxes when you do that either.

A key number to keep in mind is the projected life expectancy for an American male. For men 55 or 60 presently it is 83.27. A 65 year old male is projected to live until 84.89 – slightly higher due to already having made it that far. [Data source: SSA.gov actuarial life tables] http://www.ssa.gov/oact/STATS/table4c6.html

Here are the top-rated examples (issuers rated A+ or higher) listed in the Barron’s article for the most common types of immediate annuities. The second example includes payments with 3% annual inflation adjustments at each year’s conclusion.

Immediate Lifetime Annuities: Turn a lump sum into guaranteed payments for life.

 

A) $200,000 initial purchase for a 60 year old male; payments to begin immediately

Pacific Life Yearly Income: $12,445.32 No COLA [cost of living adjustments]

Years/Age until initial deposit is fully returned: 16.1 yr.  / 76.1 years old

 

B) $200,000 initial purchase for a 60 year old male; payout begins immediately. 3% annual inflation adjustment

Nationwide Financial 1st yr. Income: $8,622.72   25th yr. income: $18,612  

Years/Age until initial deposit is fully returned: 16.8 yr. /   76.8 years old

 

In either case buyers of these annuity products would not see anything more than the return of their original principal for longer than the first 16 years. Assuming anything more than a 2% annualized investment result on the $200,000 lump sum deposit (if invested in a non-annuity) could easily make the ‘break-even’ period well above the buyer’s actual life expectancy. Ironically, choosing the inflation adjusted product produced a slightly longer time to get to break-even due to the lower annual income in its early years.

Distinct risks of owning annuities include:

Solvency of the issuer. The promise to pay is backed solely by the issuer’s ability to pay. Today’s AAA ratings cannot ensure future fiscal health. 

Annuity distributions are taxed as ordinary tax rates (as opposed to more favorable capital gains rates) to the extent the IRS considers them ‘income’.

Unless you buy a minimum payout period, or a return of principal annuity there will be no residual asset to leave for your heirs. 

Inflation risk. The first example provides no increases in monthly income over your entire lifetime. The second policy offers just a 3% annual adjustment along with significantly less current income than non-adjusted annuities for some years to come. In a world with QE programs maximum 3% inflation protection may end up seeming like a cruel joke. 

Unless you feel both extremely pessimistic about all investments and you have the genes to expect to live a very, very long life immediate annuities look like a poor choice. Simply putting the same money into insured deposits or a diversified portfolio while gradually withdrawing money to live on is likely to outperform most annuity products with less risk, greater inflation protection and more flexibility.

Dr. Paul Price

www.BeatingBuffett.com

Disclosure: The author was previously licensed to sell life and health insurance products

THE ‘S WORD’: JON STEWART COMES OUT OF THE CLOSET AS A SOCIALIST

Courtesy of Richard Metzger of Dangerous Minds


 

“Socialism. The new “S word”—it’s the worst thing you can call someone. It’s like the “C word” and the “N word” had a baby.”

Comrade Jon Stewart

The Wrong Way To Use An Index Tracker

Courtesy of Tim of The Psy-Fi Blog

Sedate and Inept

Index tracking is supposed to be a sedate affair, a quiet contemplation of the tempestuous dynamics of market forces from an appropriate distance.  A passive approach to investing, if you will.
 
Instead it seems that people who use index trackers either don’t understand that they’re simple commodities or simply trade them like any other instrument available to private investors: frequently, ineptly and in a manner calculated to abrogate their inbuilt advantages.  Nothing new there, then.
 
Dumb Money
 
As we saw in Intelligence Can Seriously Damage Your Wealth, many bright people seem unable to understand that index trackers are essentially commodities, where the main consideration ought to be the total expense ratios of the various funds.  After all, one S&P500 tracker ought to be much like another, but all too often smart people end up paying higher fees than necessary, seemingly because they're confused by the opaqueness of the charging structures.
 
This is what Michael Boldin and Gjergji Cici call The Index Fund Rationality Paradox.  On investigating this puzzle they come up with a couple of interesting findings.  Firstly they suggest that this isn’t the widespread problem it has previously appeared to be, because the anomaly seems to be explained:

“As being largely driven by an identifiable group of unsophisticated investors that buy funds through brokers. This finding is noteworthy because it contrasts with industry claims that the structural features of funds that charge loads and/or 12b-1 fees are beneficial to investors.”

Essentially investors who use brokers tend to end up with expensive index trackers which, the industry claims, add value through extra services.  However, the researchers suggest, these extra fees are often actually used to incentivize intermediaries to push naive investors into these funds.
 
Secondly, though, and on a more positive note they also find that the paradox is decreasing in general as most investors are learning to select their funds based on total expense ratio – a finding that indicates that they’re behaving more rationally over time. This is, at least, vaguely encouraging, because it suggests some of the messaging about the advantages of passive investing are getting through. However, we should never underestimate our innate ability to screw up even the most foolproof of plans.
 
Cold and Tasty Turkey
 
Of course index tracking is supposedly about passivity – a fixed and formulaic approach to stock selection which removes all of the nasty behavioral problems we’re inclined to suffer from.  It’s the active investor’s equivalent of going cold turkey.  Unfortunately the way that many active investors actually use index trackers is the equivalent of discovering the cold turkey is addictive and developing a whole new method of substance abuse. 
 
Fundamentally the logical beauty of an index tracker is that it largely removes the psychological problems associated with choosing and timing the buying and selling of shares.  Typically we lose 6% a year through overtrading, often because we keep changing our mind about whether we should be in a particular stock or not (see: Your 6% Self-Inflicted Trading Tax).  So deliberately setting out to avoid this problem should remove a whole class of behavioral issues.
 
It turns out, though, that instead of attempting to finesse trades in individual stocks the users of index trackers are trying to finesse trades in the style of stocks.  The research suggests investors are flipping between momentum stocks, value stocks and small and large market capitalisation stocks.
 
Young, Dumb and Indexing
 
Of course it’s unlikely that they’re actually switching between the specific factors identified, but it’s quite possible that their sensitivity to risk is changing based on the macroeconomic environment and that they’re switching style of investment depending on whether they’re feeling confident or not about the future progress of markets.  And, as is usual in these situations, they manage to trade away their profits.
 

“Investors who use these index-linked securities are younger than the investors who do not use these index-linked securities. They also differ in their level of active investing and portfolio performance. They trade more often. They do more stock picking, as measured by the level of idiosyncratic risk they bear. Their portfolio performance is better. We conclude from the above evidence that the users are better traders than the non-users of index-linked securities.”

To unpick this, the evidence seems to be that it’s younger investors who are tending to use index trackers and they seem to be better at trading using them.  So, you’d imagine, they get better results.  And, of course, you’d imagine wrongly because, as usual, people manage to pluck defeat from the jaws of certain victory: our active users of passive investment vehicles don’t perform any better than anyone else – which is to say; they don’t do very well.
 
Chase the Trend
 
Although these investors are not able to embrace the time-honored tradition of poor stock selection they are able to demonstrate an all-too-typical ability to chase market trends. The researchers looked at three common market factors or trends – the momentum, the high minus low (HML) and the small minus large (SML) factors.  (Momentum is presumably self-explanatory, the HML measures book to market and SML measures the size effect).
 
When the portfolio returns of the passive investors were adjusted for these effects they did at least as well, if not better, than their actively trading counterparts.  So the researchers hypothesised:

“This implies that the deterioration in portfolio performance for users compared to non-users could be attributed to bad factor timing on the part of users after use. This is surprising. The reason has to be that the users are employing these easy-to-trade index-linked securities to time factors, and they are timing them wrong.”

Basically they’re trend following.  Rather than using passive investment funds for the purpose for which they were intended – passive investing – our young index tracker trading friends are chasing the latest hot factor.  As usual these tend to mean revert as soon as they become popular, just as active funds do, so all of the benefits of a passive approach are getting traded away.  The ability of investors to introduce psychological malfeasance into the most unlikely of areas never ceases to amaze.
 
Education Limits
 
Of course, aggressively trading vanilla index trackers to chase particular market trends was never the intention, but it really isn’t surprising that many people do so.  The fact that it tends to be younger investors who act in this way is possibly indicative of some measure of education about the pitfalls of active stockpicking creeping into the group consciousness (see: The Tyranny of Numeracy).  Just as investors are learning to select funds based on total expense ratios, so they’re being slowly educated to avoid individual stocks.
 
Unfortunately this baseline education can only take you so far.  Behavioral bias is implicit in the human condition, so unless investors take on the simple point that market prediction at all levels is extremely difficult, and is something that should be left to people who get paid for doing so, then they’ll still find ways of losing money. The tendency to throw away any advantages that this might bring is certainly indicative that while you can lead an investor to the Promised Land you can’t actually prevent them razing it to the ground when they get there in order to build a better future.  Or so they think.
 
Related articles:

 

PIMCOs Gross warns of economic "breaking point"

By Sam Forgione

NEW YORK (Reuters) – The debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a "potential breaking point" in the global economy, PIMCO's Bill Gross, manager of the world's largest bond fund, said in his monthly letter to investors.

In his June outlook entitled "Wall Street Food Chain," Gross said stimulus policies by the Federal Reserve and the European Central Bank have led to riskier government bonds with lower value and paved the way for higher inflation.

"Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core," Gross said.

"Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year old global monetary system," he added.

Keep reading: PIMCOs Gross warns of economic "breaking point" – Yahoo! Finance.

PIMCOs Gross warns of economic “breaking point”

By Sam Forgione

NEW YORK (Reuters) – The debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a "potential breaking point" in the global economy, PIMCO's Bill Gross, manager of the world's largest bond fund, said in his monthly letter to investors.

In his June outlook entitled "Wall Street Food Chain," Gross said stimulus policies by the Federal Reserve and the European Central Bank have led to riskier government bonds with lower value and paved the way for higher inflation.

"Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core," Gross said.

"Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year old global monetary system," he added.

Keep reading: PIMCOs Gross warns of economic "breaking point" – Yahoo! Finance.

Be Afraid Europe, Be Very Afraid – Tim Geithner Is Now "Helping" You

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.

  • SPAIN DEPUTY PM: US TREASURY’S GEITHNER AGREES TO WORK WITH SPAIN TO RESOLVE BANK CRISIS – DJ
  • SAENZ DE SANTAMARIA SAYS GEITHNER URGES SPAIN BANK SOLUTION
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
  • GEITHNER DISCUSSED SPAIN’S PLANS TO STRENGTHEN FINANCE SECTOR
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS

 

More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed.

Then again, Geithner’s involvement may have a silver lining. Recall that the last time Geithner appeared on the European scene in September 2011, everyone’s utmost hatred of the American was channeled into a reconciliation of differences, and led Europe to set off on a path that led to the LTRO and at least fooling some of the C-grade commentariat that Europe was fixed.

From September 15:

Europe Tells Geithner To Take His Advice And Shove It

 

Just because it is not enough for Tim Geithner to be mocked, ridiculed and generally despised on one continent, the former New York Fed “Hudsucker Proxy-style” plant has just managed to become the most despised individual on at least one more continent. Bloomberg reports that European Central Bank Executive Board member Juergen Stark said countries offering advice on how Europe should solve its debt crisis should put their own fiscal situation in order first. “Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans,” Stark said at an event in Vienna. This probably means it is safe to assume that the ECB, after listening to the human caricature of Beavis twice in a row on implementing totally failed stress tests, will not take up Timmy on his latest proposal of how Europe should fix itself. It is also safe to say that Europe just have a perfect example of how one should shut up a corrupt, incompetent, cheating, printer of virtually infinite one-ply US debt.

Be Afaird Europe, Be Very Afraid – Tim Geithner Is Now "Helping" You

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.

  • SPAIN DEPUTY PM: US TREASURY’S GEITHNER AGREES TO WORK WITH SPAIN TO RESOLVE BANK CRISIS – DJ
  • SAENZ DE SANTAMARIA SAYS GEITHNER URGES SPAIN BANK SOLUTION
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
  • GEITHNER DISCUSSED SPAIN’S PLANS TO STRENGTHEN FINANCE SECTOR
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS

 

More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed.

Then again, Geithner’s involvement may have a silver lining. Recall that the last time Geithner appeared on the European scene in September 2011, everyone’s utmost hatred of the American was channeled into a reconciliation of differences, and led Europe to set off on a path that led to the LTRO and at least fooling some of the C-grade commentariat that Europe was fixed.

From September 15:

Europe Tells Geithner To Take His Advice And Shove It

 

Just because it is not enough for Tim Geithner to be mocked, ridiculed and generally despised on one continent, the former New York Fed “Hudsucker Proxy-style” plant has just managed to become the most despised individual on at least one more continent. Bloomberg reports that European Central Bank Executive Board member Juergen Stark said countries offering advice on how Europe should solve its debt crisis should put their own fiscal situation in order first. “Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans,” Stark said at an event in Vienna. This probably means it is safe to assume that the ECB, after listening to the human caricature of Beavis twice in a row on implementing totally failed stress tests, will not take up Timmy on his latest proposal of how Europe should fix itself. It is also safe to say that Europe just have a perfect example of how one should shut up a corrupt, incompetent, cheating, printer of virtually infinite one-ply US debt.

Be Afraid Europe, Be Very Afraid – Tim Geithner Is Now “Helping” You

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.

  • SPAIN DEPUTY PM: US TREASURY’S GEITHNER AGREES TO WORK WITH SPAIN TO RESOLVE BANK CRISIS – DJ
  • SAENZ DE SANTAMARIA SAYS GEITHNER URGES SPAIN BANK SOLUTION
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
  • GEITHNER DISCUSSED SPAIN’S PLANS TO STRENGTHEN FINANCE SECTOR
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS

 

More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed.

Then again, Geithner’s involvement may have a silver lining. Recall that the last time Geithner appeared on the European scene in September 2011, everyone’s utmost hatred of the American was channeled into a reconciliation of differences, and led Europe to set off on a path that led to the LTRO and at least fooling some of the C-grade commentariat that Europe was fixed.

From September 15:

Europe Tells Geithner To Take His Advice And Shove It

 

Just because it is not enough for Tim Geithner to be mocked, ridiculed and generally despised on one continent, the former New York Fed “Hudsucker Proxy-style” plant has just managed to become the most despised individual on at least one more continent. Bloomberg reports that European Central Bank Executive Board member Juergen Stark said countries offering advice on how Europe should solve its debt crisis should put their own fiscal situation in order first. “Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans,” Stark said at an event in Vienna. This probably means it is safe to assume that the ECB, after listening to the human caricature of Beavis twice in a row on implementing totally failed stress tests, will not take up Timmy on his latest proposal of how Europe should fix itself. It is also safe to say that Europe just have a perfect example of how one should shut up a corrupt, incompetent, cheating, printer of virtually infinite one-ply US debt.

Be Afaird Europe, Be Very Afraid – Tim Geithner Is Now “Helping” You

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.

  • SPAIN DEPUTY PM: US TREASURY’S GEITHNER AGREES TO WORK WITH SPAIN TO RESOLVE BANK CRISIS – DJ
  • SAENZ DE SANTAMARIA SAYS GEITHNER URGES SPAIN BANK SOLUTION
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
  • GEITHNER DISCUSSED SPAIN’S PLANS TO STRENGTHEN FINANCE SECTOR
  • SPAIN’S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS

 

More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed.

Then again, Geithner’s involvement may have a silver lining. Recall that the last time Geithner appeared on the European scene in September 2011, everyone’s utmost hatred of the American was channeled into a reconciliation of differences, and led Europe to set off on a path that led to the LTRO and at least fooling some of the C-grade commentariat that Europe was fixed.

From September 15:

Europe Tells Geithner To Take His Advice And Shove It

 

Just because it is not enough for Tim Geithner to be mocked, ridiculed and generally despised on one continent, the former New York Fed “Hudsucker Proxy-style” plant has just managed to become the most despised individual on at least one more continent. Bloomberg reports that European Central Bank Executive Board member Juergen Stark said countries offering advice on how Europe should solve its debt crisis should put their own fiscal situation in order first. “Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans,” Stark said at an event in Vienna. This probably means it is safe to assume that the ECB, after listening to the human caricature of Beavis twice in a row on implementing totally failed stress tests, will not take up Timmy on his latest proposal of how Europe should fix itself. It is also safe to say that Europe just have a perfect example of how one should shut up a corrupt, incompetent, cheating, printer of virtually infinite one-ply US debt.

Biderman: "Everyone Is Now A Seller Of US Stocks"

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Focusing on his supply-demand perspective of what drives stock prices and the heavy volume of corporate selling combined with mutual fund outflows that we have been so vociferous about, Charles Biderman of TrimTabs provides color on why, just like in 2010 and 2011, markets sold off in May. Whether you believe it is explicitly the angst-inspiring European malaise, Facebook’s flop, or US macro deterioration and a pending fiscal cliff – the real driver is more shares chasing less cash as he puts it and reflexively the news exaggerates it or stalls it. Stock prices are likely to keep dropping, no matter what, until the Fed announces the next stimulus/easing (as we all know) but unfortunately this will have no impact on the real economy (though stocks will pop). Biderman berates the Fed for its constant insistence that this time is different and as far as the election ‘our policies will bring about sustainable recovery and jobs’ promises we will hear from both candidates, he succinctly summarizes thus: “What Bullshit! Where we are now as a world is: it’s ok for governments to lie for their own benefit”.

One of his better rants that escalates more and more as the brief 4 minutes or so goes on…

and ends with a great question:

“Why are bankers, union bosses, and government officials not going to prison for committing fraud against all of us?”

Biderman: “Everyone Is Now A Seller Of US Stocks”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Focusing on his supply-demand perspective of what drives stock prices and the heavy volume of corporate selling combined with mutual fund outflows that we have been so vociferous about, Charles Biderman of TrimTabs provides color on why, just like in 2010 and 2011, markets sold off in May. Whether you believe it is explicitly the angst-inspiring European malaise, Facebook’s flop, or US macro deterioration and a pending fiscal cliff – the real driver is more shares chasing less cash as he puts it and reflexively the news exaggerates it or stalls it. Stock prices are likely to keep dropping, no matter what, until the Fed announces the next stimulus/easing (as we all know) but unfortunately this will have no impact on the real economy (though stocks will pop). Biderman berates the Fed for its constant insistence that this time is different and as far as the election ‘our policies will bring about sustainable recovery and jobs’ promises we will hear from both candidates, he succinctly summarizes thus: “What Bullshit! Where we are now as a world is: it’s ok for governments to lie for their own benefit”.

One of his better rants that escalates more and more as the brief 4 minutes or so goes on…

and ends with a great question:

“Why are bankers, union bosses, and government officials not going to prison for committing fraud against all of us?”