Archives for March 2013

Russia Launches Surprise Large-Scale, 36 Warship Military Exercise In The Black Sea

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Many were wondering what Russia's response to Germany's deposit confiscation drill in Cyprus would be. The confusion was moderated somewhat after it was uncovered that the very Russians who were supposed to be punished, have been able to withdraw some or most of their Cyprus-based cash either before the Cyprus D(eposit Confiscation)-Day or during the capital controlled blackout using various disclosed loopholes.

Yet that doesn't mean that Putin would avoid this opportunity to give the "developed world" and his closest neighbors a quick lesson in realpolitik. After all, who better than a former KGB agent understands that one should never let a crisis go to waste. Sure enough, today at 4 am, in a very surprising move, Puitin ordered the launch of large-scale Russian military exercises in the Black Sea region in a move which according to Reuters "may create tensions with Russia's post-Soviet neighbors Ukraine and Georgia." Of course, it may create tensions with our island nations reachable by the Russian naval fleet, such as Cyprus, which would naturally mean tensions with the same European (read German) forces who structured the entire Cypriot bail in.

From Reuters:

Putin issued the order to start the previously unannounced maneuvers at 4 a.m. Moscow time (12.00 a.m. EDT) as he flew back from an international summit in South Africa, his spokesman, Dmitry Peskov, told reporters by telephone.

"These are large-scale unannounced test exercises," Peskov said, adding that 36 warships and an unspecified number of warplanes would take part. "The main goal is to check the readiness and cohesion of the various units."

He did not say how long the exercises would last.

Putin has stressed the importance of a strong and agile military since he returned to the presidency last May after four years as prime minister. In 13 years in power, he has often cited external threats when talking of the need for unity in Russia.

Russia's Black Sea fleet, whose main base is in the Ukrainian port of Sevastopol, was instrumental in a war with Georgia in 2008 over the Russian-backed breakaway Georgian regions of South Ossetia and Abkhazia.

Disputes with Kiev over Moscow's continued lease of the Black Sea navy base have been a thorn in relations with its former Soviet neighbor.

Peskov said that Russia is under no obligation to warn neighbors ahead of time of plans to hold the air and sea military exercises as long as fewer than 7,000 servicemen participated in the maneuvers.

And while the proposed explanation may be valid, something tells us that in this specific case it was not the Ukraine or Georgia that were being contemplated, but the island nations in the Mediterranean, or rather nation, especially the one located in close proximity to Syria.

Keep a close eye on if and when news hits that some 36 Russian warships quietly passed through the Bosphorus in direction Nicosia. Perhaps if Cyprus was so quick to hand over its Russian economic interest, all that would be needed to make it flip on its dedication to the Eurozone would be a brief but insistent naval semi-blockade. After all, few things are quite as persuasive as 36 warships sitting idly by doing not much of anything.

Shorting Stocks On These April POMO Days May Be Hazardous To Your Health

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It's that time of the month again when, with little fanfare, the NY Fed discreetly discloses on which days of the upcoming month shorting is unadvisable, because on the other end of every sale or short will be none other than Kevin Henry & Co., and some $45 billion in buying power-cum-short stop loss triggers (not to mention every possible Citadel HFT algo operating at a less than arm's length from the Liberty 33 trading desk).

In short: we get the advance monthly schedule of POMO days. And as everyone knows, one should never fight the Fed (unless, of course, one is the European Central Bank, the People's Bank of China, the Bank of Japan, the Bank of England, the Swiss National Bank, and pretty much every other central bank now that the entire world has devolved to outright currency warfare, but let's ignore that particular weak link in the media's propaganda narrative for the time being). So how does April look? In short: for anyone seeking to short the market in order to take advantage of the inevitable end of the Fed's despotic central-Ponzi planning regime (for reference, please see Bernie Madoff): not good.

David Covers His AAPL Short

David of All About Trends mentioned that he was shorting AAPL in this weekend’s Market Shadows newsletter. Today, he covered his short position in AAPL. Following up on his short trade idea, he sent this to his subscribers and to us:

All About Trends 
SHORT SELL Locking In Gains
Trade Trigger Alert: AAPL
March 28, 2013
Given that AAPL is one of those popular names for painting the tape (i.e. market manipulation), we’ll lock down our gains from shorting last Friday (3/22) and call it a day.
AAPL is currently trading at $ 444.50, and that will be the price we buy to cover our short 20 shares position.
(AAPL closed lower, at $442.71.)
1. The moment you take a trade, you are at the mercy of the market and have no control except when to sell/cover. If you are not willing to take the risk of losing, do not take the trade. Only take risks knowing you may lose.  Have a plan to limit your losses.
2. To help limit your loses, manage your trade size according to the conservative principles. Keep positions at 5% or less of your portfolio.  See Market Shadow’s Virtual Value Portfolio for an example of how to apply rules to limit position sizes. Do not let a surprise disaster in one stock decimate your account.
3. A stock can only do one of three things: Rise, decline, or go nowhere. The moment you hit the enter button you are at the mercy of the market. You only decide when to sell/cover.  The market will do what IT wants to do.

To learn more about Allabouttrends, sign up for David’s free, no obligation 15-day trial.

Use “Shadows” as your promotion code.  No credit card is necessary. You’ll receive everything paying subscribers receive for free, for 15-days.  


THESE ARE NOT BUY RECOMMENDATIONS! Comments contained in the body of this report are technical opinions only. The material herein has been obtained from sources believed to be reliable and accurate, however, the accuracy and completeness cannot be guaranteed. is not an investment advisor, and does not endorse or recommend any securities or investments. Any trading ideas contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation with respect to the purchase or sale of any securities. All trademarks, service marks and trade names appearing in this report are the property of their respective owners. We are not responsible for your trading decisions. Market Shadows and shall not be liable to anyone for any loss, injury or damage resulting from the use of any information. This information is strictly for educational and informational purposes. Allabouttrend’s charts are courtesy of 

Youth Unemployment Rates: US, Germany, Italy, Spain, France, Greece; Where to From Here?

Courtesy of Mish.

Here are some unemployment charts I put together via Ycharts.

Youth Unemployment Rates US vs. Europe

Germany Youth Unemployment Rate Chart

Spain and Greece have youth unemployment over 50%. Germany, at 7.9%, has the only youth unemployment rate under 10%. US has second-best 16.8%, nothing to brag about except in relative terms.

Unemployment Rates US vs. Europe

Germany Unemployment Rate Chart

Once again, notice the tight clustering at the start of the recession vs. the huge spreads today. As with youth unemployment, Spain and Greece lead the pack with overall unemployment rates above 25%.

Youth Unemployment Rate Percentage Change US vs. Europe

Germany Youth Unemployment Rate Chart

In percentage terms, Germany is the only country with falling youth unemployment. US youth unemployment is up 58.56% in five years. 

Unemployment Rate Percentage Change US vs. Europe

Continue Here

Federal Spending Sequester Crushes Jobs- Biggest Jump in Unemployment For This Week Since 1996

Courtesy of Lee Adler of the Wall Street Examiner

First time unemployment claims put on their worst performance for this week of March in the past 17 years.

The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment rose by 16,000 to 357,000 from a revised 341,000 (was 336,000) in the advance report for the week ended March 23, 2013. The last time this week showed an increase larger than that was the week ended March 23, 1996. Normally initial claims decline in this week of March.

Because the advance report does not include all interstate claims, it is usually revised up by from 1,000 to 4,000 in the following week. The current revision of +5,000 was larger than usual because this week’s number included the annual revision to the SA factors, used for claims since 2008! As the DOL put it, “The seasonal adjustment factors used for the UI Weekly Claims data from 2008 forward, along with the resulting seasonally adjusted values for initial claims and continuing claims, have been revised.”  

Seasonally adjusted numbers are fictional and are not finalized until 5 years after the fact. The annual revisions are an attempt to accurately reflect what actually happened this week. The weekly numbers are worthless for comparative analytical purposes. I work with only the actual NSA data, which is final the week after the advance report. The revisions are minor and consistent, so it is easy to adjust for them. After the second week, they are never subsequently revised.

The consensus median economists’ estimate of 338,000 for the SA headline number was too low this week. Usually they are too pessimistic, but this week was an exception, possibly due to the seasonal adjustment chicanery.  Economists are fishing in the dark for a fictitious number that is all but impossible to guess. But when they are persistently wrong in one direction, it shows that their models simply don’t work or that they have a bias. For months it has appeared that a pessimism bias was built in to their estimates. This week went the other way. Was it because the number really was bad? I think so.

The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 315,657 in the week ending March 23, an increase of 14,706 from the previous week. There were 323,373 initial claims in the comparable week in 2012.”  [Added emphasis mine]

Note: To avoid the confusion inherent in the  fictitious SA data, I analyze the actual numbers of claims (NSA). It is a simple matter to extract the trend from the actual data  and compare the latest week’s actual performance to the trend, to last year, and to the average performance for the week over the prior 10 years.  It’s easy to see  graphically whether the trend is accelerating, decelerating, or about the same.

For purposes of this analysis, I adjusted this week’s reported number up by 2,000, based on last week’s DOL revision to the NSA data. The adjusted number that I used in the data calculations and charts  is 318,000, rounded. Next week the final number for this week will be released. It’s usually very close to my adjusted figure.

This year’s actual filings represented a decrease of  1.8% versus the referenced week last year. That’s slightly above the usual range of -3% to -20%, suggesting a slowing rate of improvement.  That comes as no surprise because the year to year comparisons are now much tougher as the number of job losses, which had been declining sharply since 2009, begins to stabilize at a low level.

The current week to week change was an increase of 16,700 in the NSA number.  That compares with an average decrease of 4,300 over the prior 10 years. The comparable week showed increases in only 3 of those 10 years, and two of those were the last two years.  In 2012 there was an increase of  3,900 while in 2011 there was an increase of 3,000. The current week’s performance was worse than any of the last 10 years. This may be the first time bears really have a data point to hang their hats on, in this series.

While the fiscal cliff tax increases at the beginning of the year had no noticeable negative impact on the trend, the current number suggests that the Federal spending sequester that went into effect on March 1 is beginning to have  an impact.

Since mid 2010 the annual rate of change in initial claims has ranged from -3% to -20% in virtually every week, with a couple of temporary minor exceptions, including the Superstorm Sandy surge. Since mid 2011 the annual rate of change was within a couple of percent of -10% in most weeks. The trend has been remarkably consistent. The data is now at the upper limit. Any move toward a year to year increase in claims would suggest a substantive slowing in the economy. We haven’t seen that yet in the real time withholding tax data, but we need to watch both that series and this one closely in the weeks ahead.

We had been expecting some moderation in the rate of improvement because further reductions in the number of new claims should be much more difficult to achieve as the year to year comparisons become tougher. I noted last week that that pattern may be starting. This week’s data supports that.

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge

While there are wide intermediate term swings in stock prices, the correlation of the  broad trends of claims with the trend of stock prices over the longer term is strong. This can be seen clearly when the claims trend is plotted on an inverse scale with stock prices on  a normal scale, as shown below.

Initial Unemployment Claims and Stock Prices - Click to enlarge

Initial Unemployment Claims and Stock Prices- Click to enlarge

Stock prices have broken out of the top of their range channel, while initial claims have not. As a monetary/technical analyst, the only conclusion I would draw is that the Fed’s QE3-4 money printing campaign is having far more success in creating a stock market bubble, which was one of Bernanke’s stated goals (in more slightly different words), than in driving economic growth.

Stocks appear to be trending on a beeline for 1600 plus, while the initial claims claims trend, which had been improving at the same modest rate of the past two years, may now be slowing.  As long as the trend of new claims doesn’t turn negative and the Fed keeps jamming cash into the accounts of Primary Dealers via its asset purchase programs (QE3-4), the broad uptrend in stock prices should remain intact. But if the deterioration in claims persists, the rally’s days may be numbered. The issue may be whether the sequester is a one time hit to the trend, or something that shifts the longer term momentum. We should get some idea of which it is over the next few weeks.

[I cover the technical side of the market in the Professional Edition Daily Market Updates.]

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Fallout From Cyprus: Increasing Unease

Courtesy of Larry Doyle.

The island nation of Cyprus today implemented a set of capital controls within its banking system so as to forestall a “run on its banks.”

Having had a number of conversations with individuals since the onset of this meltdown in Cyprus, the consistent theme among people with whom I have spoken is one of increasing unease.

Cyprus may be a small island nation with a level of economic activity that barely registers on the scale of international trade and overall output. That said, when funds can be expropriated in the manner in which these large depositors in Cyprus are experiencing, there is a ripple effect as people think, “how would I feel if that happened to me?”

Responses to that daunting question have left people somewhat dumbfounded thinking that a Cyprus-like scenario could play out in their own financial backyards. People have shared the following reactions with me:

“I do not know exactly what I would do but I would certainly go out of my mind.”

“If those bastards ever tried to come after my money or my accounts, I would be beside myself.”

“Could this actually happen here in America? I do not know how I would handle something like that.”

Well, as the media downplays the actual reality of the expropriation of depositors funds in Cyprus, what do I think will be the fallout from the increasing unease that is clearly rippling throughout the world?

I foresee the following:

1. A shifting of funds to those institutions deemed “too big to fail” while simultaneously seeing that funds do not rise above the maximum level protected by deposit insurance.

2. The storage of currency and other hard assets (gold, silver) within private households and safeguards.

3. A movement of currency out of banks and into other stores of value (hard assets) and other markets (including black markets).

How do you feel? Does the situation in Cyprus unnerve you?

Would love to hear from people as to what they think and how they feel. I thank you.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

When It Comes To Wall Street, All the Devils Are Still There

Courtesy of Pam Martens.

(This column, with updates, runs periodically at Wall Street on Parade. Please consider emailing it to friends and family members.)

Yesterday, while at the grocery store, I noticed a large, attractive display of unused hardcover books with a big sign reading: “3 for $10.” As I drew closer, my eye fell on All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera. I swooped up a copy even though I knew I already had one sitting in my bookcase at home.

When I arrived home, I went to the bookcase and looked at the price I had paid when the book first case out in 2011. The price was $32.95.

In my early years on Wall Street, when it actually functioned as an allocator of capital to worthy enterprises, we were trained to look for opportunity by zeroing in on pricing anomalies.  Yesterday, in a grocery store, I found such an anomaly. All the Wall Street devils from the crash of 2008, and quite a few new ones, are still with us and yet the public perception is that this book is ancient history worthy of a drastic haircut. The value of the stock market has inflated this year while the value of the knowledge of its inherent, non remedied corruption has deflated by 90 percent.

What does this all mean? It means there is still more serious pain ahead.

Writing in his book, “The Worldly Philosophers,” Robert Heilbroner explained the situation leading up to the depression of the 1930s:

Continue Here

Rational Reason to Panic; Hot Money Blues; Right for the Wrong Reasons

Courtesy of Mish.

The first rule of panic is simple: “Panic before everyone else does.” With that rule in mind, the pertinent question at hand is also simple: “Should I panic now?

For those in Europe, I offer an emphatic “Yes!” One is foolish at best to keep more than 100,000 euros in any European bank, especially any Southern European banks.

There is a clear and obvious “Rational Reason to Panic“.

By “panic” I mean get your money out now, while you can, before everyone else does. I am not the only one who thinks that way. Wolfgang Münchau makes a well-stated case in his Der Spiegel column Euro rescue plan: Thank Dijsselbloem!

Dutch Finance Minister and Euro Group Chief, Jeroen Dijsselbloem earned much criticism because he deviated from the official line that Cyprus was an “isolated incident”.

I welcome this unusual burst of openness. Dijsselbloem expressed the brutal truth. I’m not criticizing that he states the policy. Rather, I criticize the policy itself.

This policy will destroy the euro, with the two now foreseeable interlocking mechanisms.

The first way is capital flight from the euro crisis countries. Expect permanent restrictions on the free movement of capital.

The second way is a never ending recession in the eurozone.

The first of these mechanisms is the logical consequence of Dijsselbloem’s settlement blueprint. Spanish or Portuguese citizens would be pretty stupid to keep over 100,000 euros in a savings account.

Rational savers will distribute their assets to different banks, each with a limit of €100,000. German savers will do so as well.

Germany rejects a European deposit guarantee, so no credible reinsurance exists across southern Europe. Most of the Southern states are insolvent. A Cyprus-like rescue works only in context of a union of banks, and Germany emphatically rejects that mechanism. …

Continue Here

A Little Strategy, a Little Action

Here’s the latest newsletter: A Little Strategy, a Little Action, 3/24/13

Strategy: Averaging down in a quality company has been a successful market technique according to recent evidence. However, a prerequisite is that you don’t overweight your portfolio with an outsized initial position.

“During the year, 100% of the DJIA companies traded below their annual peaks. The intra-year declines ranged from as little as 5.8% (JNJ) to as great as 62.2% (HPQ). 30 out of 30 closed last week above their 2012 nadirs. 

“The biggest recovery came in last year’s biggest dog (HPQ). Other large percentage rebounds occurred in lower quality BAC, old-tech companies (CSCO & IBM) and the controversial bank JPM. While those stocks were ‘falling knives,’ the old adages about never averaging down were certainly quoted numerous times. Adhering to that advice was a hedge against prosperity.” (Of course buying at the absolute bottom is better than averaging down, but catching that bottom requires luck and we can’t count on that…)



Strategy:  Selling puts, for those comfortable with selling options, is a way to either profit by keeping the premium, or enter a stock at a lower price than it’s currently trading at. We have our Virtual Put Selling Portfolio up and running


Paul sees less bargains than he did several months ago. However, he still likes Express Scripts (ESRX), Quest Diagnostics (DGX), Lab Corp. (LH), Coach Inc. (COH) and Calamos Asset Management Inc. (CLMS) at current prices.

Patient investors may find better bargains if this toppy market sells off – which wouldn’t surprise us. We’ve built our cash position in the Virtual Value Portfolio up a little bit for this reason; sold our position in ICE

In the meantime, however, Paul has sold a put in SLBCMI and ORCL. 


Trends for next week courtesy of Lee Adler: 

Liquidity Sufficient to Keep Bid In Treasuries AND Prevent Stock Selloff 

  • Treasury supply will be heavy this week, while support from the Fed is reduced at the end of the month. This would normally unsettle the market a bit. But much of the $100 billion in Fed pumping from mid month may still be available for deployment. That could keep bids under both Treasuries and stocks. 
  • Foreign central bank (FCB) buying (US Treasuries) is in the weak side of its short term buying cycle but renewed fears over the European financial crisis are likely sending more private foreign capital flooding into the US Treasury market, and more Fed cash will be on the way, so weak FCB buying should not be enough to slow the markets. 
  • Recent strength in withholding taxes are resulting in a windfall for the government. Withholding tax collections for the 2 week period ended March 21 were up 11.5% over the corresponding period of 2012. That compares with a gain of 9.2% a week ago. This suggests that some sectors of the economy are much stronger than anybody realizes and may be overheating. Tax collections remain well above what can be attributed to the tax increase alone. 
  • The sequester could reduce Treasury supply by a small amount, which would be a bullish factor for both Treasuries and stocks. With less Treasury supply, more Fed QE cash would be available for stock and commodity speculation. 


Read Market Shadow’s A Little Strategy, a Little Action here. 

Cyprus Bailout Needs Rise By €2 Billion As Conditions Deteriorate Rapidly

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

A week of closed banks, depositor angst, and economic malaise is creating an increasingly vicious circle for Cyprus (and implicitly the European Union). As Die Welt notes, because the economic data of the tiny 'irrelevant' island could be considerably worse than previously thought (or forecast by Troika) thanks to the distortions created this week by bank closings, several people around the Troika said the exact amount of the bailout remains uncertain and could amount to EUR2bn more than expected.

With the Troika capping their handout at EUR10bn of the current EUR17bn needed (and the deposit levy reportedly filling EUR6bn of that EUR7bn hole), the need for a bigger bailout – which seems increasingly likely – will fall on Cyprus banks' depositors (or taxpayers) leading to a hard-to-beat downward spiral. Simply put, the more deposits are pulled, the more deposits need to be confiscated; and with retailer stocks running low ("will last another 2-3 days") and cash-on-delivery demanded, the real economy will "have a problem if this is not resolved by next week."

Via The Guardian,

Retailers, facing cash-on-delivery demands from suppliers, warned stocks were running low. "At the moment, supplies will last another two or three days," said Adamos Hadijadamou, head of Cyprus's Association of Supermarkets. "We'll have a problem if this is not resolved by next week."

Via Die Welt (and Google Translate),

Cyprus needs a lot more money than expected

A few hours before the emergency meeting of the situation seems to capture from bankruptcy Cyprus to deteriorate: From Troika says that money could not exceed the estimated range.

Cyprus needs for information of the "world" more money to bail out its banks and the stabilization of its national budget. Not initially agreed 17 billion euros were enough states in the field of negotiations. The exact amount is not certain. Several people around the troika said the "world" that the increased demand would amount to around two billion euros.

Because the economic data of the island nation could be worse than previously thought, additional billions are needed. One reason for the expansion of the bailout, the distortions caused by the closing of the banks, which has been going on for a week. The financial institutions will not open until next week again.

The troika of EU, European Central Bank (ECB) and International Monetary Fund (IMF) had agreed originally with Cyprus on a rescue package amounting to 17 billion euros. Ten billion would provide the troika, the remaining seven will apply even Cyprus.

Almost six billion would achieve the Cypriot government by the proposed compulsory levy on savings. More money to flush tax increases, such as the increase of the corporate tax in the state coffers.

Europe Has A Crisis — And It’s Much Bigger Than Cyprus

Europe Has A Crisis — And It's Much Bigger Than Cyprus


eiffel tower france paris

REUTERS/Christian Hartmann


In a way, Europe should be thrilled by the week that was because financial markets barely batted an eye at the crisis in Cyprus.

But Europe has a problem on its hands that's bigger than Cyprus: The economy stinks.

This week we got fresh proof that things are bad or getting worse.

In France, the Flash PMI report (which is a mid-month look at the combined services and manufacturing sectors of the economy) came in dismal, with the output index falling to a four year low.

french flash PMI



Meanwhile, Germany's economy is the envy of Europe, but even they are not immune to trouble.

You can see its Flash PMI jutted lower this week as well.



Meanwhile, the horror show in Italy and Spain continues unabated.

This week, Danske Bank economist Frank Øland Hansen warned that France was beginning to look more like a peripheral country than a core one.

Not only is the economy sinking, but from a labor cost/competitiveness standpoint, it's looking PIIGSish.


france competitiveness

Danske Bank


Not only is the European economy a mess, and the second biggest country looking more and more peripheral, there isn't much action being taken to address any of it.

Cyprus hasn't made a dent in markets, and it might not. On the other hand, all of the above is a crisis.

A Safe and a Shotgun or Publicly-owned Banks? The Battle of Cyprus

A Safe and a Shotgun or Publicly-owned Banks? The Battle of Cyprus

If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.

– Martin Hutchinson on the attempted EU raid on deposits in Cyprus banks

The deposit confiscation scheme has long been in the making.  US depositors could be next . . . .

On Tuesday, March 19, the national legislature of Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout.  Reuters called it “a stunning setback for the 17-nation currency bloc,” but it was a stunning victory for democracy. As Reuters quoted one 65-year-old pensioner, “The voice of the people was heard.”

The EU had warned that it would withhold €10 billion in bailout loans, and the European Central Bank (ECB) had threatened to end emergency lending assistance for distressed Cypriot banks, unless depositors – including small savers – shared the cost of the rescue. In the deal rejected by the legislature, a one-time levy on depositors would be required in return for a bailout of the banking system. Deposits below €100,000 would be subject to a 6.75% levy or “haircut”, while those over €100,000 would have been subject to a 9.99% “fine.”

The move was bold, but the battle isn’t over yet. The EU has now given Cyprus until Monday to raise the billions of euros it needs to clinch an international bailout or face the threatened collapse of its financial system and likely exit from the euro currency zone.

The Long-planned Confiscation Scheme

The deal pushed by the “troika” – the EU, ECB and IMF – has been characterized as a one-off event devised as an emergency measure in this one extreme case. But the confiscation plan has long been in the making, and it isn’t limited to Cyprus.

In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank Resolution,” Kevin Hoskin and Ian Woolford discussed a very similar haircut plan that had been in the works, they said, since the 1997 Asian financial crisis.  The article referenced recommendations made in 2010 and 2011 by the Basel Committee of the Bank for International Settlements, the “central bankers’ central bank” in Switzerland.

The purpose of the plan, called the Open Bank Resolution (OBR), is to deal with bank failures when they have become so expensive that governments are no longer willing to bail out the lenders. The authors wrote that the primary objectives of OBR are to:

  • ensure that, as far as possible, any losses are ultimately borne by the bank’s shareholders and creditors . . . .

The spectrum of “creditors” is defined to include depositors:

At one end of the spectrum, there are large international financial institutions that invest in debt issued by the bank (commonly referred to as wholesale funding). At the other end of the spectrum, are customers with cheque and savings accounts and term deposits.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the caseAccording to Wikipedia:

In most legal systems, . . . the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. When too many creditors come for their money at once, the result can be a run on the banks and bank failure.

The New Zealand OBR said the creditors had all enjoyed a return on their investments and had freely accepted the risk, but most people would be surprised to learn that too. What return do you get from a bank on a deposit account these days? And isn’t your deposit protected against risk by FDIC deposit insurance?

Not anymore, apparently. As Martin Hutchinson observed in Money Morning, “if governments can just seize deposits by means of a ‘tax’ then deposit insurance is worth absolutely zippo.”

The Real Profiteers Get Off Scot-Free

Felix Salmon wrote in Reuters of the Cyprus confiscation:

Meanwhile, people who deserve to lose money here, won’t. If you lent money to Cyprus’s banks by buying their debt rather than by depositing money, you will suffer no losses at all. And if you lent money to the insolvent Cypriot government, then you too will be paid off at 100 cents on the euro. . . .

The big winner here is the ECB, which has extended a lot of credit to dubiously-solvent Cypriot banks and which is taking no losses at all.

It is the ECB that can most afford to take the hit, because it has the power to print euros. It could simply create the money to bail out the Cyprus banks and take no loss at all. But imposing austerity on the people is apparently part of the plan.  Salmon writes:

From a drily technocratic perspective, this move can be seen as simply being part of a standard Euro-austerity program: the EU wants tax hikes and spending cuts, and this is a kind of tax . . . .

The big losers are working-class Cypriots, whose elected government has proved powerless . . . . The Eurozone has always had a democratic deficit: monetary union was imposed by the elite on unthankful and unwilling citizens. Now the citizens are revolting: just look at Beppe Grillo.

But that was before the Cyprus government stood up for the depositors and refused to go along with the plan, in what will be a stunning victory for democracy if they can hold their ground.

It CAN Happen Here

Cyprus is a small island, of little apparent significance. But one day, the bold move of its legislators may be compared to the Battle of Marathon, the pivotal moment in European history when their Greek forebears fended off the Persians, allowing classical Greek civilization to flourish.  The current battle on this tiny island has taken on global significance.  If the technocrat bankers can push through their confiscation scheme there, precedent will be established for doing it elsewhere when bank bailouts become prohibitive for governments.

That situation could be looming even now in the United States.  As Gretchen Morgenson warned in a recent article on the 307-page Senate report detailing last year’s $6.2 billion trading fiasco at JPMorganChase: “Be afraid.”  The report resoundingly disproves the premise that the Dodd-Frank legislation has made our system safe from the reckless banking activities that brought the economy to its knees in 2008. Writes Morgenson:

JPMorgan . . . Is the largest derivatives dealer in the world. Trillions of dollars in such instruments sit on its and other big banks’ balance sheets. The ease with which the bank hid losses and fiddled with valuations should be a major concern to investors.

Pam Martens observed in a March 18th article that JPMorgan was gambling in the stock market with depositor funds. She writes, “trading stocks with customers’ savings deposits – that truly has the ring of the excesses of 1929 . . . .”

The large institutional banks not only could fail; they are likely to fail.  When the derivative scheme collapses and the US government refuses a bailout, JPMorgan could be giving its depositors’ accounts sizeable “haircuts” along guidelines established by the BIS and Reserve Bank of New Zealand.

Time for Some Public Sector Banks?

The bold moves of the Cypriots and such firebrand political activists as Italy’s Grillo are not the only bulwarks against bankster confiscation. While the credit crisis is strangling the Western banking system, the BRIC countries – Brazil, Russia, India and China – have sailed through largely unscathed. According to a May 2010 article in The Economist, what has allowed them to escape are their strong and stable publicly-owned banks.

Professor Kurt von Mettenheim of the Sao Paulo Business School of Brazil writes, “The credit policies of BRIC government banks help explain why these countries experienced shorter and milder economic downturns during 2007-2008.” Government banks countered the effects of the financial crisis by providing counter-cyclical credit and greater client confidence.

Russia is an Eastern European country that weathered the credit crisis although being very close to the Eurozone. According to a March 2010 article in Forbes:

As in other countries, the [2008] crisis prompted the state to take on a greater role in the banking system.  State-owned systemic banks . . . have been used to carry out anticrisis measures, such as driving growth in lending (however limited) and supporting private institutions.

In the 1998 Asian crisis, many Russians who had put all their savings in private banks lost everything; and the credit crisis of 2008 has reinforced their distrust of private banks.  Russian businesses as well as individuals have turned to their government-owned banks as the more trustworthy alternative. As a result, state-owned banks are expected to continue dominating the Russian banking industry for the foreseeable future.

The entire Eurozone conundrum is unnecessary. It is the result of too little money in a system in which the money supply is fixed, and the Eurozone governments and their central banks cannot issue their own currencies. There are insufficient euros to pay principal plus interest in a pyramid scheme in which only the principal is injected by the banks that create money as “bank credit” on their books. A central bank with the power to issue money could remedy that systemic flaw, by injecting the liquidity needed to jumpstart the economy and turn back the tide of austerity choking the people.

The push to confiscate the savings of hard-working Cypriot citizens is a shot across the bow for every working person in the world, a wake-up call to the perils of a system in which tiny cadres of elites call the shots and the rest of us pay the price. When we finally pull back the veils of power to expose the men pulling the levers in an age-old game they devised, we will see that prosperity is indeed possible for all.

For more on the public bank solution and for details of the June 2013 Public Banking Institute conference in San Rafael, California, see here.


Ellen Brown is an attorney, chairman of the Public Banking Institute, and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are and

The Retirement Crisis Is Here For Millions-Income Inequality Now Set To Wreak Its Ugly Revenge

The Employee Benefits Research Institute (EBRI) has today released its report highlighting the intense state of insecurity American workers are experiencing as they look forward—with ever increasing trepidation—to a retirement without sufficient money to see them through.

According to the data, American workers have very good reason to be afraid.

Per the survey conducted by EBRI, 57 percent of American workers currently have less than $25,000 in total savings and investments (excluding the value of their homes) put aside for retirement. In 2008, that number was 49 percent.  As a result, almost 50 percent of the nation’s workers are either “not too confident” or “not at all confident” that they will have sufficient resources to cover the bills in their retirement—while many who are feeling a bit better about  the future may just be kidding themselves.

What’s more, it’s getting worse every year.

Keep Reading: The Retirement Crisis Is Here For Millions-Income Inequality Now Set To Wreak Its Ugly Revenge – Forbes.

When Do We Call It A Solvency Crisis?

When do we call it a solvency crisis?

Courtesy of Michael Pettis

This post is extracted from my newsletter sent out four weeks ago, at a time when the mood in Europe was much better than now and when there was even a sense that the crisis was in the process of being resolved. I mention this to remind readers of how quickly sentiment can change.

Originally posted at China Financial Markets,

I got back last week from a two-day trip to London, where I spoke at an interesting event organized by the Carnegie Endowment. The attendees were for the most part senior bankers and investors, and I got the impression that several, though maybe not all, shared with me a certain amount of surprise that European bond markets were up this year. We were even a little shocked that the buoyant markets were being interpreted as suggesting that the worst of the European crisis was behind us. The euro, the market seems to be telling us, has been saved, and peripheral Europe is widely seen as being out of the woods.

I cannot name any of the attendees at the Carnegie event because it was off the record, but one of them who seemed most strongly to share my skepticism is a very senior and experienced banker whose name is likely to be recognized by anyone in the industry. After I finished explaining why I thought the euro crisis was far from over, and that I still expected that absent a serious effort from Germany to boost domestic spending – an effort likely to leave the country with rapidly rising debt – at least one or more countries would eventually be forced off the currency, he told the group that he hadn’t made as gloomy a presentation only because he considered it impolitic to sound as pessimistic as I did.

Neither of us, in other words, (and few in the meeting) felt that the recent market enthusiasm was justified. Never mind that the Spanish economy, to return to the country I know best, contracted again in the fourth quarter of last year, that it is expected to contract again this year, that unemployment is still rising, and that the ruling party is involved in yet another scandal that has driven its popularity down to 20%. Never mind that young Spaniards are emigrating (20,000 a month net), that the real estate market continues to drop, that businesses are still disinvesting and popular anger is extraordinarily high. The ECB, it seems, is willing to pump as much liquidity into the markets as it needs, so rising debt levels, greater political fragmentation, and a worsening economy somehow don’t really matter. This crisis continues to be just a liquidity crisis as far as policymakers are concerned – and not caused by problems in the “real” economy – and the solution of course to a liquidity crisis is more liquidity.

But is peripheral Europe really suffering primarily from a liquidity crisis? It would help me feel a lot better if I could find even one case in history of a sovereign solvency crisis in which the authorities didn’t assure us for years that we were facing not a solvency crisis, but merely a short-term problem with liquidity. A sovereign solvency crisis always begins with many years of assurances from policymakers in both the creditor and the debtor nations that the problem can be resolved with time, confidence, and a just few more debt rollovers.

To take one possibly illuminating example, I started my trading career during the Latin American debt crisis, which officially began in August 1982. I joined the market in 1987, when bankers and policymakers were still assuring everyone that the problem Latin America was facing was a liquidity problem. As long as we could keep rolling loans over, they earnestly explained, the problem would eventually resolve itself at little to no relative cost (well, Latin America was struggling with unemployment, capital flight, hyperinflation and political turmoil, but I guess that doesn’t really count).

It wasn’t until 1990 that the first formal debt forgiveness took place – known as the Mexican Brady Bond restructuring – and before the end of the decade nearly every country except Chile and Colombia had their own Brady bonds. Even those two countries, and all the others, had managed to obtain for themselves a significant amount of informal debt forgiveness through debt-equity swaps and debt repurchases at huge discounts from face value (some legal and some not quite legal).

Why did it take so long for bankers and policymakers to recognize the truth – that this was not just a liquidity problem? Actually it didn’t. Most bankers knew by 1985-86 that the region was actually suffering from a generalized solvency problem, and among the big banks JP Morgan had been taking substantial provisions all along. No one could formally acknowledge the possibility of insolvency, however, because to have done so would have required that all of banks take much greater provisions than they already had. This would have created a problem. Of the top ten banks in America, only JP Morgan would not have been technically insolvent had the banks been forced to mark their LDC loan portfolios to market.

In May 1987 Citibank, after many years of replenishing its capital, was able to announce suddenly and to the great surprise of the entire market that it had decided to take a huge amount of provisions against dodgy sovereign loans. By 1989-90 the rest of the big American banks were also able to accept the write-offs without becoming technically insolvent. That is when everybody formally “discovered” that in fact the LDC debt crisis was a lot more than just a liquidity crisis.

This is the key point. The American bankers weren’t stupid. They just could not formally acknowledge reality until they had built up sufficient capital through many years of high earnings – thanks in no small part to the help provided by the Fed in the form of distorted yield curves – to recognize the losses without becoming insolvent.

And this matters to Europe. There is simply no way European banks, especially in Germany, can acknowledge the possibility of sovereign insolvency until they, too, have built up enough capital to absorb the losses. They have, unfortunately, been painfully slow to do so, even with yield-curve help from the ECB, and so I suspect that this is going to remain a “liquidity” problem for many more years. While it does, the debt-burdened countries of peripheral Europe are going to suffer a decade of weak growth, high unemployment, and contentious politics, all the while the debt growing faster than the economy.

The new gold bloc

Or the peripheral countries can regain competitiveness quickly by leaving the euro, in which case after a year or so of confusion growth would return almost immediately, especially in countries like Spain that have managed to put into place a number of very important labor market reforms. The historical precedent is clear. Crisis-stricken countries that have forced through robust reforms to address their comparative lack of competitiveness will continue to struggle under the burden of high debt and an overvalued currency, but once they directly address both, growth usually returns quite quickly.

And there have been real reforms in Spain for all the grumbling. Several euro-optimists have pointed out that unit labor costs in Spain have dropped substantially relative to Germany, by as much as 6 or 7 percentage points. So this whole reform process is working, they claim, and if we can just wait it out another year or two Spain will be fully competitive again.

I am not so sure. Although I agree that there have been real economic reforms, I am a lot less sanguine about the ability of these reforms to stave off the crisis. First, the reforms have come at a huge social cost, and it isn’t obvious that people can suffer much longer as they already have. After all we know how to force down unit labor costs. It is really quite easy. High unemployment usually does the trick.

The problem is that Spain, after four years of punishingly high unemployment, has only clawed back in labor competitiveness about one-third of what it needs to claw back in total, and Madrid has already picked most of the low hanging fruit. As brutally difficult as this has been, this was the easy part. For Spain to claw back other 10-15 percentage points in unit labor costs, and it may need more, may well be beyond the capacity of the population to endure.

Second, labor is only one factor in international competitiveness. Capital is the other, and everyone is in a hurry to forget this. It is hard to calculate the appropriate trade-off, but while relative labor costs in Spain have certainly declined, the relative cost of capital has just as certainly risen, and probably by a lot more (to the extent that businesses can even get capital). On Monday the Financial Times had this article:

Businesses in the core of the eurozone are cashing in on easy monetary policy to borrow at record low rates, while those based in the periphery are still struggling to find market funding, according to new data. Barclays analysis of European Central Bank data suggests that companies based in the “core” of the bloc have been the main beneficiaries of the central bank’s promise last June to do “whatever it takes” to save the eurozone.

Companies based in France, Germany, Belgium and Holland were able to borrow a net €37bn of ultra-cheap debt from the markets in the second half of last year, following the announcement. But companies based in Italy, Spain, Portugal and Greece added only about €12bn of market borrowing, with only the biggest companies such as Telecom Italia and Telefonica able to access the capital markets.

At the same time these peripheral eurozone countries faced a €65bn reduction in net bank lending, as the region’s crisis-hit banks reduced lending in a bid to strengthen balance sheets.

At best we can say of the combination of lower labor costs and higher capital costs that there has been a transfer of resources from the capital-intensive parts of the economy to the labor-intensive parts. Aside from the fact that this probably doesn’t bode well for future productivity growth, it suggests that for all the pain of reform Spanish businesses still cannot compete.

Some people might argue – and do – that the sharp contraction in Spain’s current account deficit, from 5% of GDP in 2008 to around 1% today, shows that Spain has indeed become more competitive, but this of course isn’t at all obvious. Much of the “improvement” seems to have occurred because of a drop in imports, which suggests greater export competitiveness hasn’t played much of a role here – which it shouldn’t have done if I am right about the impact of higher costs of capital in eroding the benefits of lower labor costs.

Unemployment levels well above 15-20% (and I assume official unemployment of 26% is probably overstated by the failure to account for the “black” economy) are an incredibly effective way of forcing a trade deficit to contract, because when people can’t buy anything, they also can’t buy tradable goods. As they stop purchasing those tradable goods however these goods would necessarily have been diverted to exports, even without any improvement in the country’s overall competitiveness.

This might imply that whatever increase in exports we have seen may be no more than the export of goods that Spaniards used to buy but no longer can. This kind of export performance is not a consequence of improved competitiveness. It is simply a consequence of rising unemployment.

What’s more, if Spain is ever going to repay its very rapidly rising debt, it needs a lot more than a lower trade deficit. It needs a very high trade surplus to fund net capital outflows (unless we are expecting an unlikely surge in net private capital inflows). Actually to be technically correct I should say that in order to repay its debt Spain needs a very high current account surplus, and given Spain’s huge interest burden, this actually means it needs a whopping trade surplus since the trade surplus has to exceed the interest outflows before it can be used to pay down debt. If unemployment is the best tool to get us there, I am not sure the Spanish population can bear the burden needed to get us the necessary high trade surplus.

So in spite of the good news in the Spanish bond markets, I still don’t think we can pop the champagne corks. Except for the debt refinancing costs, the underlying fundamentals have not gotten better in the last six months. At best they are unchanged, and probably they are worse.

How long must Spain hold on to prove how serious it is about staying the course? A lot longer, I think. After all it wasn’t until around 1931-32 that France began suffering from its membership in the gold bloc, but they doggedly held on until 1936 when they finally threw in the towel and devalued. The Spaniards are proving tougher than the French were, possibly because among the older generation (although not so much the younger) there is a tremendous residual worry (and shame) that Spain might not truly be European, and this is creating much of the loyalty to Europe, of which the euro is the great symbol.

But the Spanish still have a lot of pain to absorb. By the way if we were to see an intensification of the debate in France about the euro, I suspect that this will give a green light to Spanish public intellectuals, for whom France is the North Star, to discuss the prospect themselves. Until then, in Spain you are not really supposed to talk about abandoning the euro if you want to be taken seriously. It is a little like England in the 1920s, when for much of the policymaking elite abandoning the country’s free trade principles and leaving gold were unmentionable – until many years of unemployment suddenly made both policies very “mentionable” in the first years of the 1930s.

In my opinion the happy bond markets are, as they have so often been under similar circumstances in history, a little premature. I think the phrase “there is light at the end of the tunnel” was popularized by Herbert Hoover around 1931, when the US stock markets staged a strong rally, convincing him and others that the crisis was over. Of course it wasn’t, and the buoyant markets gave back everything and more over the next three years.

On the Circus in Europe

The Circus


Courtesy of ZeroHedge. View original post here.

By Bruce Krasting

I'm flabbergasted that Cyprus is the cause of the circus in Europe. Cyprus was an avoidable problem in my opinion. That view is supported by the fact that all of the words, actions (and threats) by the deciders in Northern Europe have been decidedly negative. There was no "Can Do" talk. All I heard was, "We won't do" or "Here is a deadline" – "Here's a gun to your head".

Two possibilities – Either this was a completely bungled effort in Brussels. Or this was a deliberate effort to weed out the weak members of the EU. If the intent was the latter, this will not stop with little Cyprus.

Next week there will be some broad confusion following the resolution in Cyprus. Either Cyprus is out of the Euro zone by Wednesday, or the +E100k depositors are going to get whacked. There is no soft landing potential any longer. If the folks in Brussels and Berlin who are pulling the strings are really serious about stabilizing the Euro zone they will respond with a series of "positive" measures next week. Things that might be considered to ring-fence Cyprus include:

– Doubling the deposit guaranty to E200.

– Creating a Transaction Account Guarantee. This would insure all accounts that were related to the settlement of goods and trade. (protect the economy)

– Financial measures – From some minor stimulus stuff, to monetary measures like LTRO or a cut in % rates.

These would be "calming" steps. They would be proactive in that the intent would be to get ahead of any contagion. We could also see "nothing" from Brussels. That silence would be a "tell" that "they" don't want to resist gravity any longer. The most significant sign would be if capital controls were established more broadly in Europe over the next few weeks. These will scare the crap out of folks, especially those in Spain and Italy.

– Restrictions on the amount of withdrawals at an ATM.

– Restrictions on money transfers.

– Restrictions on the ability to acquire foreign exchange (Dollars Swiss Francs, etc)

Three possibilities. "They" either (1) act in a coordinated way to head off any problems, (2) do nothing, or (3) they turn up the heat with more scary stuff, and the SHTF.

I'm not sure what comes next, Door #1 might buy some time. Doors #2 &3 are trouble. Bad odds.


Europe looks like a three ringed circus to me. Think of it, the tent is packed with awestruck patrons. In the center stage is a clown show. Slapstick comedy. Clowns running clumsily with their big shoes carrying rubber mallets, chasing after other clowns who have buckets filled with confetti, ready for a water fight. A riotous scene that many in the audience cheer and applaud. But there are also those in the audience who fear clowns – the reasons vary – the results are the same. They are revolted by the antics of the clowns. The clowns are the politicians and technocrats in Berlin and Brussels.





On one side is a smaller ring. This one has a large metal cage, in it are a bear, a lion and a dozen "little people". The wee ones are dressed in funny, colorful outfits. They carry miniature whips and are desperately trying to get the beasts to perform the hoop jump and barrel rolling tricks. The lion swats with a paw, knocking the bear off its perch and onto one of the little ones. A rescue squad of more little people comes up with a stretcher and carries off the "injured". Some children watching are crying, they think the little one has been crushed. Mothers try to soothe sobbing children with, "Don't worry, it's only make believe".


Screen Shot 2013-03-23 at 2.48.28 PM


In the final ring is the high wire act. The famous Estes family from Milan is the main attraction. Three generations are balanced on a small wire. The family forms a pyramid three levels high. A young boy, the youngest Estes, climbs to the top and does a handstand. Most in the audience stand and cheer at this amazing feat, others turn their heads in fear. There is no safety net below the Estes family. How could they take such risks with their youth?




Off to the side of the final ring are a troop of actors. Some are dressed in brown shirts, others white. The stage has a back drop of the famous fortress in Toledo, The Alcazar.

Toledo-Alcazar antes del incendio


The circus show is a re-enactment of the 1936 Siege of Alcazar. This battle was the start of the Spanish Civil war. The Brown shirts, led by Franco and armed by Germany defeated the defenders. The battle was fought over the control of a munitions plant. There were many heroes of this battle.


alcazar -bk


Few in the circus audience understand (or care) about this portion of the show. But some of the older ones do remember, others know that this siege was an important step to a much larger war.


Reader Asks “Where’s the Money?”

Courtesy of Mish.

Reader Robert at Americans for Limited Government asks an interesting question.

Robert writes …

Hello Mish

We are led to believe that taxing Cypriot deposits in the amount of 5.8 billion euros will make the banks solvent. I have a question: Why the need for capital controls after “recapitalization”? How can deposits be used for taxation but not withdrawals?


I believe that’s a rhetorical question. Robert knows the answer. Even with the EU kicking in 10 billion euros (a loan not a gift), the money is not there.

If the banks were sufficiently capitalized, there would not be a need for capital controls.

End of the Single Currency in All but Name

Jeremy Warner at the Financial Times has an interesting article on this very subject. Warner says If capital controls are introduced in Cyprus, it is the end of the single currency in all but name.

With the European Central Bank threatening to pull the plug on Monday by denying further liquidity support, and showing absolutely no sign of blinking, Cypriots have little choice in the matter. The present plan is only slightly more palatable than the last. The two most problematic banks are to be restructured, with uninsured creditors taking a 40 per cent hair cut. That gets the Cypriot authorities some of the way towards the €5.8bn they need, or is that €6.7bn? Reports suggest the beastly Troika has upped the ante. In any case, the balance, whatever it might be, is going to come from “taxing” uninsured deposits above €100,000 in other banks in the way originally proposed.

However, the perhaps more widely significant part of the proposal is the planned application of capital controls. This is of course entirely necessary to prevent a further run on the banks the moment they open their doors on Monday. Many Russian depositors are threatening to remove their spoils if they are subjected to any kind of a haircut. This would quickly render these organisations essentially insolvent regardless of the recapitalisations. Almost no amount of capital is sufficient for a bank which has lost the confidence of its depositors.

Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can’t spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.

This is precisely what happens in a fractional reserve lending system when faith is lost. And faith certainly has been lost. Why shouldn’t it be lost? The entire global financial system would be recognized as insolvent if even 25% of the people tried to get their deposits.

Mike “Mish” Shedlock

Continue Here

Sheila Bair with Bill Moyers: Big Banks’ Greed and Impunity

Sheila Bair with Bill Moyers: Big Banks' Greed and Impunity

Courtesy of Jesse's Cafe Americain 


Liquidity Sufficient to Keep Bid In Treasuries AND Prevent Stock Selloff

Liquidity Sufficient to Keep Bid In Treasuries AND Prevent Stock Selloff 

Courtesy of Lee Adler of the Wall Street Examiner

Trends for next week:

  • The haircut to be administered to bank depositors in Cyprus, not yet finalized as of this writing, has again tilted the playing field to drive foreign capital into the US Treasury market, which should prevent an upside breakout and send yields lower in the short run. The 1.85 to 2.10 range should remain intact for a while. 
  • Treasury supply will be heavy this week, while support from the Fed is reduced at the end of the month. This would normally unsettle the market a bit. But much of the $100 billion in Fed pumping from mid month may still be available for deployment. That could keep bids under both Treasuries and stocks. 
  • Foreign central bank (FCB) buying (US Treasuries) is in the weak side of its short term buying cycle but renewed fears over the European financial crisis are likely sending more private foreign capital flooding into the US Treasury market, and more Fed cash will be on the way, so weak FCB buying should not be enough to slow the markets. 
  • Public buying remained a bullish factor for bonds. Panic in Europe would add to that. 
  • Recent strength in withholding taxes are resulting in a windfall for the government. Withholding tax collections for the 2 week period ended March 21 were up 11.5% over the corresponding period of 2012. That compares with a gain of 9.2% a week ago. This suggests that some sectors of the economy are much stronger than anybody realizes and may be overheating. Tax collections remain well above what can be attributed to the tax increase alone. 
  • The sequester could reduce Treasury supply by a small amount, which would be a bullish factor for both Treasuries and stocks. With less Treasury supply, more Fed QE cash would be available for stock and commodity speculation. 

Screen Shot 2013-03-24 at 12.22.17 PM


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Russian Billionaire in Exile Boris Berezovsky Commits Suicide – The First Cyprus Casualty?

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Just your ordinary run of the mill Russian billionaire oligarch in exile who had so much money he was terminally depressed… or just the opposite, and the first tragic casualty of the Cyprus capital controls which are about to eviscerate a whole lot of Russian wealth (and ultraluxury Manhattan real estate prices)?

From RT:

Exiled Russian tycoon Boris Berezovsky has died at the age 67, according to a Facebook post from his son-in-law Egor Schuppe. Details regarding the nature of his death are yet to be released.

His death has not been officially confirmed, and details have not been disclosed.

According to Schuppe, Berezovsky was recently depressed. He failed to keep in touch with friends and acquaintances, and often chose to stay at home rather than go out.

Damian Kudriavtsev, the former CEO of Kommersant Publishing House also commented on the businessman’s death saying he passed away at 11:00 GMT in London.

On his twitter account, Kudriavtsev said there were no signs of a violent death.

Aleksandr Dobrovinksy, a famous lawyer and head of Moscow-based The Alexander Dobrovinsky & Partners law firm has said that Berezovsky committed suicide.   

“Just got a call from London. Boris [Abramovich] Berezovsky committed suicide. He was a difficult man. A move of disparity? Impossible to live poor? A strike of blows? I am afraid no one will get to know now,” the lawyer said on his social network page.

BBC confirms the death:

Berezovsky has been found dead at his home in Surrey.

The circumstances of the death of Mr Berezovsky – a wanted man in Russia, and an opponent of President Vladimir Putin – are not yet known.

A former Kremlin power-broker whose fortunes declined under Mr Putin, Mr Berezovsky emigrated to the UK in 2000.

Last year, he lost a £3bn ($4.7bn) damages claim against Chelsea Football Club owner Roman Abramovich.

Mr Berezovsky claimed he had been intimidated by Mr Abramovich into selling shares in Russian oil giant Sibneft for a "fraction of their true worth".

The allegations were completely rejected by the London Commercial Court judge, who called Mr Berozovsky an "inherently unreliable" witness

His name was Boris Berezovsky.

Former Cyprus Central Bank Head And Senior Fed Economist: “The European Project Is Crashing To Earth”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Back in August 2011, one of the most prescient European (ex) central bankers, Cyprus' very own Athanasios Orphanides was optimistic, but with a caveat: "I am optimistic that with the right actions and effort by all we will pull through this," Orphanides told reporters after a meeting with Finance Minister Kikis Kazamias. They were Orphanides' first public comments since warning authorities in a July 18, 2011 letter that Cyprus ran the risk of requiring an EU bailout unless urgent action was taken to shore up its finances." 

Two years later, following endless dithering and pretense that just because the ECB has stabilized the markets, all is well, and "action was being taken" when none was (because in the New Normal the lack of market collapse is somehow supposed to represent structural changes are taking place, which never actually happen), Cyprus is beyond the bailout stage – it is now quite literally on the verge of total collapse. This is also why Orphanides, who recently (and perhaps prudently) quit as Central Banker of Cyprus following a clash with the new communist government (and was replaced by a guy named Panicos), no longer is optimistic. "The European project is crashing to earth,” Athanasios Orphanides told the Financial Times in an interview. "This is a fundamental change in the dynamics of Europe towards disintegration and I don’t see how this can be reversed.

It can't. Which is what we have been saying all along. But it apparently takes a former Federal Reserve senior economist to say the perfectly obvious, and for reality to finally hit front and center.

More from the FT's interview with Orphanides:

This week’s events had made “a mockery” of EU treaties, he added. “It suggests that in Europe not all people are equal under the law.”

“We have seen other eurozone countries, the Netherlands, for instance, put national interests ahead of the European interest by trying to bring down the economic model of countries such as Cyprus or Luxembourg.”

He also called into question the credibility of the ECB’s threat to pull the plug on the Cypriot banking system. On Thursday, the ECB warned that if an EU-IMF rescue programme was not agreed by Monday, it would ban the use of “emergency liquidity assistance” to prop up the Cypriot banking system.

According to Mr Orphanides, about €10bn of ELA is being provided via Europe’s Target2 payments system used by its central banks. “If you say it is no longer authorised, it would force the Central Bank of Cyprus to default on its Target2 obligations. Cyprus would then have to leave the euro area.”

“The ECB will have forced Cyprus out. This is the one thing Mario Draghi doesn’t want to happen – he does not want to be the ECB president who triggers the break-up of the euro. It is painful to watch.”

So far, global financial market reaction to the Cyprus crisis has been subdued. But Mr Orphanides warned that would change. “I don’t think that the full extent of the shattering of the trust that we have seen in this case . . . has been seen fully yet.

“Banks’ funding costs in the [southern eurozone] periphery will rise further – there is no way we will avoid that. This, in turn, will make the recession in the periphery deeper, adding to the misery that the mishandling of the crisis has caused so far.”

“Financial markets are over-influenced by what happens in London or New York – there, the intricacies and processes of European politics are not very well understood.

We couldn't agree more.

As a reminder, Mr Orphanides was governor of Cyprus’s central bank from 2008 until last year, when he was replaced after clashing with the island’s then communist government. As member of the ECB’s governing council, Mr Ophanides’ views were respected because of his background as a senior economist at the US Federal Reserve. He has since returned to academic economics in the US. We can't wait until the world of very serious economist, some of them even with Nobel prizes, turn on one they proudly praised as their own, as recently as months ago.

In the meantime, Orphanides is absolutely correct.

Cyprus Deposit Levy Vote Delayed, Will Go “Down To The Wire” As Up To 70% Deposit Tax Contemplated For Some

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While GETCO's algos were poised to set off a buying tsunami yesterday the millisecond a flashing red headline hit Bloomberg with even the hint or suggestion that Cyprus is fixed, we said to sit back and relax because Cyprus "will get no resolution today, or tomorrow, and may at best be resolved on Sunday night following yet another coordinated global bailout, (although our money is on a last, last minute resolution some time on Monday when Cyprus is closed but the European markets are widely open)."

As it turns out, we were right, following reports by major newswires that the vote on the deposit levy will only take place (if at all) on Sunday night, after the Eurozone finance ministers' meeting on Sunday.

As it also turns out, and as noted previously, the votes taken yesterday were the easy ones – obviously Cyprus will now need capital controls in perpetuity to slow down the terminal unwind of its banking system which is now, for all intents and purposes, over and will only exist, if at all, entirely though ECB liquidity injections, but the difficult decision – to complete U-Turn on the Tuesday vote just saying no to deposit tax levy – has been delayed.

The reason for the delay? Deciding how to best bring the news to Russian, and other wealthy depositors, that not only will they not have access to their funds for a long, long time, the ultimate haircut on what they thought was safe, easily accessible cash as recently as a week ago, may be a stunning 70%!

From Xinhua:

The Cypriot parliament has postponed a debate on legislation imposing a levy on bank deposits until after a Eurogroup meeting in Brussels on Sunday, parliament sources said on Saturday.

The vote on the bill had been scheduled for Saturday, ahead of a finance ministers meeting to consider a revised bailout for Cyprus, following endorsement of nine bailout related bills at a day-long session of parliament on Friday.

The sources could not say if and when a deposits levy bill will be debated.

Troika technocrats representing the European Commission, the European Central Bank and the International Monetary Fund were at the ministry of finance early on Saturday discussing final details of the bailout.

Cyprus president Nicos Anastasiades was scheduled to fly to Brussels later on Saturday accompanied by leaders of parliamentary parties to plead his position on the bailout but plans may change depending on the outcome of discussions at the ministry of finance.

However his travel to Brussels has been throwing into uncertainty following the postponement of Saturday’s session of parliament.

Reuters has more:

Cyprus's bid to avert financial collapse will go down to the wire after the island said it would hold a crucial sitting of parliament only after finance ministers of the 17-nation euro zone meet on Sunday.

Cyprus faces a Monday deadline to clinch a 10 billion euro ($13 billion) bailout from the European Union or the European Central Bank says it will cut off emergency funding to the country's stricken banks, spelling certain collapse and potentially pushing the island out of Europe's single currency.

The way the deal is currently structured, all deposits that have EUR 100,000 and less in deposits, which in Cyprus amounts to 361,000 of a total 371,000, will not see a deposit tax, after last week's attempt to impose a 6.75% on all "insured" accounts. However, the same can not be said for the remaining 10,000 belonging supposedly to uber-wealthy Russians, but certainly to people from all over the world, and even Cyprus.

As a result, according to the rapidly shifting plan, depositors with the biggest local bank, Bank of Cyprus, may see losses up to 25%. Per Reuters:

Cyprus is considering a levy of about 25 percent on bank deposits over 100,000 euros ($130,000) in the island's largest local lender, Bank of Cyprus, Finance Minister Michael Sarris said on Saturday

Sarris told reporters that "significant progress" had been made in talks with officials from the European Union, European Central Bank and International Monetary Fund – the so-called 'troika' – and that the discussions may conclude on Saturday evening.

Cyprus' second largest bank, Cyprus Popular Bank, aka Laiki bank, where it appears the bulk of Russian cash is stored, will fare far, far worse with deposit haircuts up to a stunning 70% on the table, and that is after capital controls ease enough to allow for the deposit withdrawals!

Cyprus Popular Bank depositors with more than 100,000 euros will face losses, said Averof Neofytou, deputy president of Anastasiades’s ruling Disy party.

They will wait for many years before they see what percentage they will get back from their savings — 30 percent, 40 percent, 50 percent, 60 percent, it will be seen,” Neofytou said during the debate in parliament.

He didn’t say what could happen to larger depositors of other banks.

Nothing good, that's for sure.

But at least the bulk of the population will be spared. The problem is what Russia will do, when the ball is in its court following a vote to impair its citizens which may or may not come, as all political leaders in Russia have made it very clear this is an outright political provocation by Europe targeting purely Russian wealth.

What is also sure, is that any bulk investments in Europe, be they held by Russian, Chinese, or any other oligarchs, will now scramble to get out, knowing quite well their cash is not only no longer welcome in the Eurozone, but most likely will be used to fund bailouts of assorted insolvent European nations. Such as all of them.  This could be a very big problem because according to JPMorgan, the share of large or uninsured deposits is about half of total deposits in Euroarea banking system including the peripheral countries.

Should a stealthy "uninsured" depositor run in Europe take place following this weekend, and up to half the funding of European banks go poof – that which until recently was generously provided by the same uberwealthy who are now the target of persecution seemingly everywhere – not all the ELA, LTRO, SMP, OMT, and any other acronym free ECB money in the world will be able to hold the Eurozone together.

In the meantime, those hoping for a Saturday resolution to the Cypriot expropriation of Russian wealth are urged to step back from the computer and go for a walk – it will take a while, and will likely be after the imminent onslaught of fire and brimstone from Russia which now does everything it can – including outright threats at this point – to make it clear that should Europe indeed go ahead and impair its wealthiest depositors by up to 70%, that the European winter 2013/2014 season, will be very long, and very cold.

Is The Government Lying To Us About Inflation? Yes!

Is The Government Lying To Us About Inflation? Yes!

Courtesy of JOHN MAULDIN

In today’s Outside the Box, Gary D. Halbert (my old and very dear friend and former business partner of many years) reminds us about a few significant facts concerning the Consumer Price Index (CPI) that mainstream economists and the media tend to ignore. The central question is whether the CPI is really indicative of the actual inflation rate. Not likely, says Gary, since the US Bureau of Labor Statistics (BLS), which compiles the CPI, has engaged in methodological shenanigans over the past couple decades (as has been well documented by John Williams of ShadowStats, among others). The upshot of all their monkeying with the numbers is that the official rate of inflation may be two to four times lower than the actual rate (which is rather convenient if you’re a government bureaucrat trying to hold down interest costs and Social Security payments).

These changes are hotly debated in academic circles. There are many economists who agree with the changes and can show with their models that inflation is low. That is the currently accepted wisdom, or what passes for it. The problem is that inflation only shows up, as one person put it, in the things we actually buy. If your main costs are food, energy, education, and healthcare (ring any bells?), then inflation is a great deal higher than 2%. Other items are actually falling in price. It comes down to the mix of items in the calculations and whether you buy into the concepts of substitution (if beef gets too expensive we buy hamburger rather than steak) and “hedonics,” which says that prices of products drop over time as quality and manufacturing efficiency improve, so the calculation of inflation should take this into account.

Which means you can have official inflation at a low level (or even falling for certain items), while the amount you actually spend out of your very real pocket is rising! And thus the debate.

Having refreshed us on the basic techniques of CPI massage, Gary turns to food and energy, which the BLS includes in “headline CPI” but omits from “core CPI.” He points out that while headline CPI jumped an unexpected 0.7% in February, core CPI rose only 0.2%. That is, food and energy price increases accounted for more than 70% of the rise. “Not good for the economy,” he notes.

And of course, this is all bad news for unwary investors, since

Those who believe that inflation is only 2%, when it may be 5-8%, may be making investment decisions that are almost guaranteed to erode the purchasing power of their money over time. This is especially true with low-yielding investments such as CDs, Treasuries, etc.

Gary wraps up by taking a look at “chained CPI,” which he explains as follows:

[C]hained CPI assumes that when prices rise, consumers will resort to entirely different products, rather than just seeking a cheaper brand. For example, if beef prices rise, chained CPI would assume that consumers might opt for chicken to save money.

The chained CPI debate is raging as we speak: I got an email from the AARP this morning, urging me to tell my Senators to say no to chained CPI being used to calculate Social Security cost-of-living adjustments (COLA) – sounds like they may vote today (Friday) on a bill to do just that. But as Gary points out, we either calculate benefits using chained CPI – which, yes, is tough on those living on a fixed income – or we eliminate the cap on salary subject to Social Security taxation (that is, we raise taxes). As Gary says, “Either way, somebody’s got to pay, and it might end up being a little [of] both.”

Finally, a quick note: I am doing a webinar on Tuesday for Mauldin Circle members. The current state of the equity markets brings back memories of 2007. As the market continues to reach new highs, stock selection on both the long and short sides requires considerable expertise. That is why I decided that now is a good time to introduce you to one of the leading long-and-short investment managers, Jacob Gottlieb, CIO of Visium Asset Management. During our conversation on Tuesday, March 26 at 12:00 p.m. EDT (9:00 a.m. PDT), we will find out what’s on Jacob’s mind – his investment themes and where’s he seeing equity opportunities on both the long and short sides.

 If you are not aware of Visium, they are a premier long/short multi-strategy manager with over $3.7 billion in assets. It’s a firm I have been watching for some time. Bloomberg cited Visium as one of “The 100 Top Performing Large Hedge Funds.” Take a look at this recent write-up on Visium: “The Quiet Ambition of Jacob Gottlieb.”

 You will need to register for this exclusive webinar through The Mauldin Circle. If you are a Mauldin Circle member and a qualified purchaser or an investment advisor, a webinar invitation has been sent directly to you by email. A replay will also be available to qualified registrants. If you are unable to listen in to the live discussion, be sure to register so you can receive the replay information. If you are not a member of The Mauldin Circle and are a qualified purchaser, please join today. Upon qualification by my partners at Altegris, you will receive an email invitation . I apologize for limiting this discussion to qualified purchasers and investment advisors, but we must follow the rules and regulations. I look forward to having you at this exclusive Mauldin Circle event. (In this regard, I am president and a registered representative of Millenium Wave Securities, LLC, member FINRA.)

Have a great week. I know mine will be eventful – daughter Amanda is due to give birth to granddaughter Addison on Monday!

Your thinking about the world Addison will discover analyst,

John Mauldin, Editor
Outside the Box


Is The Government Lying To Us About Inflation? Yes!

By Gary D. Halbert
March 19, 2013

Consumer Price Index Jumped in February

On Friday, the Labor Department reported that the Consumer Price Index (CPI) jumped an unexpected 0.7% in February. This was above pre-report estimates and was the highest monthly reading since 2009. We should be very concerned, right? Let’s take a closer look.

Upon further examination, we find that if we subtract food and energy from the CPI, the cost index rose only 0.2% last month. It turns out that most of the big increase in the CPI last month was due to the sharp rise in gasoline prices. The experts tell us that due to the volatile nature of oil and gasoline prices, we shouldn’t include energy in the CPI. Ditto for food prices which can also be quite volatile.

I have always argued to the contrary, that food and energy prices do indeed need to be considered in the CPI. Think pocketbook: if gas prices rise $1.00 per gallon, and you have to fill up once a week, and it takes 20 gallons to fill up your car, then you have $20 less to spend on something else that week, or $80 less per month. Not good for the economy.

Some others disagree with me, arguing that you spend the same amount each month, and that if you spend more on gas, then you spend less on other things, but the overall economy gets the same amount of money from you one way or the other. Both points are valid.

But if you are trying to measure the true inflation rate, I maintain that food and energy should be included. Apparently the government agrees with me since they continue to report the headline Index including food and energy, and secondarily report what the Index was without food and energy.

The real question is whether or not the Consumer Price Index is really indicative of the actual inflation rate. I will argue that it is not a very good indicator with, or without, food and energy. At the very least, the CPI is controversial.

Why the CPI is So Controversial

The Consumer Price Index (CPI) is produced by the US Department of Labor’s Bureau of Labor Statistics (BLS). It is the most widely watched and used measure of the US inflation rate. For years, there has been controversy about whether the CPI overstates or understates inflation, how it is measured and whether it is an appropriate proxy for inflation.

Originally, the CPI was determined by comparing price changes in a fixed basket of goods and services. Determined as such, the CPI was a cost of goods index (COGI). Over time, however, the US Congress embraced the view that the CPI should reflect changes in the cost to maintain a constant standard of living. Consequently, the CPI has been moving toward a cost of living index (COLI).

Over the years, the methodology used to calculate the CPI has also undergone numerous revisions. According to the BLS, the changes removed “biases” that caused the CPI to overstate the inflation rate. The new methodology takes into account changes in the quality of goods and “substitution.” Substitution is the change in purchases by consumers in response to price changes, and this alters the relative weighting of the goods in the basket. The overall result tends to be a lower CPI.

Critics view the methodological changes and the switch from a COGI to a COLI focus as apurposeful manipulation that allows the government to report a lower CPI. Most critics prefer that the CPI be calculated using the original methodology based on a basket of goods with fixed quantities and qualities. Doing so can result in a significantly higher inflation reading.

On Friday, the BLS reported that the CPI rose only 2.0% over the last 12 months. Economists using different methodologies (including the original methodologies) estimate that the real US inflation rate over that same period was anywhere between 5% and 8%.That’s a huge difference!

If Inflation is 2%, Why Are Prices Up So Much?

I read a good article last week from TIME Business & Money columnist Michael Sivy. He pointed out that his printer ran out of ink recently, and he was “shocked” to find that the same printer cartridge had gone up in price by 25% in less than a year.

While the government’s CPI has averaged only 2% since the end of the Great Recession in early 2009, many basic commodities have soared since then. Gold was $930 an ounce when the recession ended, and today it’s just over $1,600. That’s an increase of 70% in four years, or an annualized rate of over 14%.

Of course, that’s just one commodity. How about a broader measure? The Reuters CRB Commodity Index, which tracks the prices of energy, coffee, cocoa, copper, cotton, etc. is up 38% over four years, or 8.6% at a compound annual rate.

The price of gasoline has gone up from $2.60 a gallon when the recession ended to around $3.70 today nationally. That’s a 41% increase in four years, or an annualized rate of 9%. Taxes have gone up almost as much. Federal, state and local income taxes have risen 35% over four years, an annualized rate of 7.8%.

Then there’s the so-called “Big Mac Index” that was popularized by The Economistsome years ago. McDonald’s hamburgers are available in many countries and their prices reflect the cost of food, fuel and basic labor. The price of a Big Mac, therefore, can be yet another indicator of inflation in a particular country. Since the recession ended, the cost of a Big Mac in the US has risen from an average of $3.57 to $4.37, or 5.2% a year.

As the main grocery shopper (and cook) in our family, I am reminded several times a week how food prices continue to go higher. Take a look at this chart from the St Louis Fed.

And while we’re on the subject of food, have you noticed how many manufacturers reduce the size of the containers and/or packages so as to reduce the enclosed amount – but still charge the same price as before? I know I’m not the only one!

Severe Drought Led to Higher Food Prices

Forecasters lay much of the blame for higher food prices on the drought that swept through much of the US last year, and is continuing this year. Last year’s severe weather put nearly 80% of the continental United States in drought conditions – the worst in 50 years. Particularly hard hit areas include the Midwest states of Illinois, Iowa, Minnesota, Nebraska, Kansas, as well as Oklahoma, Texas, Arkansas and many parts of Colorado and California.

The drought damaged key crops like corn, wheat and soybeans while driving up commodity prices and forcing farmers to scramble to find feed for livestock. Farmers and ranchers have had to cut back on the number of livestock and poultry in order to limit their own costs, which created a shortage of beef, chicken and pork.

Although conditions have improved in some areas, roughly 61% of the country still suffers from drought, which is remains at its worst levels in more than a decade, according to the US Drought Monitor.

On a personal note, we are fortunate to live on beautiful Lake Travis, just outside Austin. Lake Travis is a Corps of Engineers man-made lake, and it supplies water for hundreds of thousands of area residents and countless businesses in Central Texas. As such, the lake level varies significantly, depending on the amount of rainfall we receive each year.

The drought in Central Texas is in its third year. Lake Travis, which is 65 miles long and over 200 feet deep in places, is now only 40% full (or 60% empty). As the water level falls, we have to push our dock out further and further to keep it in the water. A trip down to the dock is over 125 steps (one way)!

So How Is the CPI at Only 2%? It’s Not.

As we’ve seen above, the prices of many things that consumers buy on a regular basis have risen much faster than the CPI. So how can the CPI be at only 2%? And how could it have averaged just 2% since the end of the Great Recession four years ago?

Some argue that it’s because wages are down, and with the economy so weak, workers can’t demand higher pay to make up for their increased cost of living. Indeed, that’s one of the factors causing the decline in real after-tax household income.

Real median annual household income in January of this year was $51,584 – or 92.7% of the level in January 2000. Incomes inched up early in 2012 but have been treading water since May, according to the Household Income Index. While household income ticked up slightly in the past year, it remains well below the $54,008 level seen at the start of the recovery roughly four years ago.

These are all factors influencing the economic recovery (or lack thereof) and thus the inflation rate. But they don’t explain why the headline Consumer Price Index has hovered around 2% for the last four years, or why other inflation measurements are in the 5%-8% range. How can this be?

Quite simply because it’s a government report that’s been frequently manipulated over the last 35 years. Whether by design (my bet) or coincidence, these revisions have served to reduce the official inflation rate.

Also, keep in mind that our government has a record $16.7 trillion in debt it is paying interest on. If interest rates rise, it costs Uncle Sam more money. If inflation rises, interest rates follow. Obviously, the government has incentives to manipulate the official inflation rate lower than it really is.

The bottom line is that there is no absolute and objective gauge of inflation. Any particular measure is simply one way of making the calculation, based on a host of assumptions. We do know with certainty that a number of the costs that American households face are going up considerably faster than the CPI.

Finally, the fact that real world inflation is higher than the CPI poses challenges for investors. Investors should calculate their total required return net of the effect of inflation. As the inflation rate increases, higher returns must be earned in order to obtain a desired real rate of return.

Those who believe that inflation is only 2%, when it may be 5-8%, may be making investment decisions that are almost guaranteed to erode the purchasing power of their money over time. This is especially true with low-yielding investments such as CDs, Treasuries, etc.

Obama’s Olive Branch – “Chained CPI”?

Before we leave the subject of CPI, I think it’s important to discuss something going on right now in the budget negotiations in Washington. Over the shrill opposition of liberal Democrats, Obama has verbally offered to change the way cost of living increases are calculated for Social Security and other entitlements. Instead of the CPI now used, he said he might consider using something called the “chained CPI.”

In a nutshell, chained CPI is a measure of inflation that seeks to account for substitution by consumers when prices rise. While the current CPI measure uses substitution to a small extent, chained CPI assumes that when prices rise, consumers will resort to entirely different products, rather than just seeking a cheaper brand. For example, if beef prices rise, chained CPI would assume that consumers might opt for chicken to save money.

The end result is that chained CPI is generally lower than the current CPI used for measuring inflation. As I noted above, the

CPI for the past 12 months was measured at 2.0%. The chained CPI for the same period was 1.8%.

If we switch to chained CPI for entitlement cost of living increases, which remains to be seen, it would mean that benefits would rise at a slower rate. Alan Greenspan recommended moving to chained CPI for Social Security back in his day at the Fed, but it went nowhere.

Liberal Democrats oppose the switch to chained CPI and demagogue it as a “war on seniors,” while Republicans feel it’s a way to save Social Security as we know it. Democrats prefer eliminating the cap on salary subject to Social Security taxation (read: increase taxes) to using chained CPI, which they view as a cut in benefits. It seems that only in a politician’s mind can a slower rate of increasing benefits be called a “cut.”

It’s still too early to tell how the current chained CPI debate will play out. This is one of those issues that hits both old and young. If chained CPI is used, then entitlement benefit increases will be lower. If it is not, then future Social Security taxes may well have to be higher. Either way, somebody’s got to pay, and it might end up being a little from both.

Hoping you stay ahead of inflation,

Gary D. Halbert


© 2013 Mauldin Economics. All Rights Reserved.

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Regrets Pour In; Cyprus Parliament Passes Bailout Plan; Will Her Highness Approve?

Courtesy of Mish.

The Cypriot parliament passed bailout measures today, but they are not quite the measures that Her Highness, Angela Merkel approves. They are not measures Cypriot citizens will approve of either.

Let’s take a look at the present state of blackmail, as passed by Cyprus and reported by the BBC.

MPs in Cyprus have voted to restructure the island’s banks – one of several measures to ease the crisis, which has hit confidence in the eurozone. They have also approved a “national solidarity fund” and capital controls to prevent a bank run. MPs did not vote on a key measure – a levy on large bank deposits. They rejected similar moves on Tuesday.

The “solidarity fund” would allow the pooling of state assets for an emergency bond issue, reports the Reuters news agency. These include future gas revenues and some pension funds – an idea that German Chancellor Angela Merkel has strongly condemned.

Ms Merkel had warned Cyprus not to “exhaust the patience of its eurozone partners”, reports say.

Businesses in Cyprus have been insisting on payment in cash, rejecting card and cheque transactions. “We have pressure from our suppliers who want only cash,” Demos Strouthos, manager of a restaurant in central Nicosia, told AFP news agency.

Our correspondent says he has never seen this much pressure being applied to a member state by the rest of the eurozone community in recent years.

Regrets Pour In

The Financial Times reports Cyprus laments end of way of life

When he was finance minister a decade ago, Takis Klerides helped steer Cyprus into the EU and the single currency, a defining achievement for a once-impoverished island nation that is far closer to Beirut than Brussels.

But on Friday, with Cypriots contemplating the steep price of an EU bailout, Mr Klerides sounded like a man with regrets.

“We found out the hard way that it’s not a family,” he said of the EU, arguing that the bloc’s biggest members “dictate the terms and everyone else falls in line. It’s becoming a dictatorship.”

“The European project is crashing to earth,” Athanasios Orphanides, who until recently served as central bank governor, said in a separate interview in which he dubbed Cyprus’ treatment by European leaders “the bullying of a people”.

Continue Here

Chris Martenson Warns “Market Risks Today are Higher than Ever”

Courtesy of Chris Martenson of Peak Prosperity

After the shot across the bow in 2008, you might have expected that regulators and market participants would use the experience to change for the better, to become more prudent, and to reduce the sorts of risky behaviors that almost crashed the entire system.

Unfortunately, you'd be wrong.

LTCM and Moral Hazard

In 1998, there was a firm called Long-Term Capital Management (LTCM, as it is commonly referred to today), staffed by the best of the best, including one of the very top bond traders that Wall Street ever produced as well as two future Nobel laureates.

LTCM boasted of its use of complex models that were supposed to generate outsized returns while operating with a risk-minimizing profile that, mathematically, was only supposed to experience severe losses so infrequently that the periods between them would be measured in the thousands of years.

Unfortunately for LTCM, their models badly underestimated real risks, and their leverage was such that their original $1 billion in capital turned into total losses of $4.6 billion in a little over four years, nearly dragging down the entire financial system in the process.

While this experience has much to teach us in the way of market risk, hubris, and the dangers of leverage, it really needs to be understood in terms of the rise of moral hazard on Wall Street.  The main lesson that Wall Street seems to have learned from the LTCM disaster is that if the wipe-out was big enough, the Federal Reserve would swoop in and rescue things. 

Message received: Go big or go home.  Take on as much risk as possible, secure in the knowledge that if things got bad enough, the Fed would simply print up what was necessary to make all the players whole again, with perhaps one core player or institution thrown under the bus for the sake of appearances. 

Fast forward to 2008, and that exact experience was replicated perfectly, thereby reinforcing Wall Street's perception that it is best rewarded by chasing big risks and big returns. And if things didn't go as hoped, the good ol' Fed would always be there to push the Reset button.

Since nobody of consequence went to prison after the overt fraud and excesses of the housing bubble were revealed, and no bank had to give back a single penny of their ill-gotten and outlandish profits related to such behaviors, one does not have to be a genius to guess what happened next.

Banks took the taxpayer funds, paid themselves gigantic bonuses, and immediately began taking on huge new risks. I mean, why not?  If you had a rich uncle that promised to let you keep any gains from your trading portfolio but would absorb any losses you might incur, you'd soon be swinging for the fences like a pro.

Back to the Future

This is why today, instead of having been reduced, financial risks loom larger than ever. It's why the next downturn will be just as bad if not worse than the last one. Nothing has been learned, and nothing has been changed. The most basic of human behaviors, the tendency towards moral hazard (so well understood by the insurance industry) has been completely overlooked by the Fed.  Once again, that institution, entrusted with so much, has been exposed as being rather intellectually shallow, or at least devoid of common sense.

I'll leave you with this:  The very same Fed that could not and did not see that a housing bubble was forming is now equally complacent about corporate bond yields touching all-time record lows across the entire spectrum, right down to CCC junk that sits one skinny notch above default.  Stocks are for show, but bonds are for dough and with bonds now priced for perfection if not for something even better, there's no room for error. 

Even the slightest hiccup say, one brought about by a renewed global slump as is already underway in Europe and Japan will cause massive losses to bond portfolios, and we will, yet one more time, be reminded that indeed there is nothing new under the sun.  Central banks cannot print us all back to prosperity, and insolvency cannot be cured with liquidity. 

All that remains is to assign the losses to someone. And right now there are plenty of very well-connected and powerful individuals working feverishly to assure that those losses do not fall upon them.

That leaves you and me, otherwise known as 'taxpayers'. And 'bank account holders'. Oh, yeah and 'Muppets.'

Big Trouble Brewing

What the Fed, in cahoots with other central banks, has managed to engineer is a spectacular rise in the price of financial assets.  Stocks, bonds, and all of their associated brethren such as options, futures, and derivatives have all been magically elevated.

To put this into context, not only are stocks at nominal all-time highs, but bonds are too.  Bonds, however, are very different from stocks, and the fact that they are also at all-time highs should really be viewed with much more concern.

The bond market is enormous and dwarfs the equity markets by over 2 to 1, or 3 to 1 if you include non-securitized loans in the mix:


But just looking at traditional bonds, what we have here is a situation where over $100 trillion in bonds are now historically badly overpriced.  That's what “record territory” means to me, at any rate.  For every 1% loss on that portfolio, more than a trillion dollars will be lost.

While the value of stocks has to be carefully adjusted for inflation to determine if all-time highs have been reached (not yet, by the way), bonds are priced according to the yield they offer.  The higher the price, the lower the yield.  The yield of a bond is supposed to compensate you for the risks involved, which include inflation, default, and time.  

The worse the prospect, the higher inflation, and the longer the time to maturity the higher the yield will be.  So how important is it that bonds are now yielding record lows?  This is perhaps the single most important factor in the financial landscape right now, because it means either one of two things:  (1) the risks of default and inflation are at all time lows, or (2) bond buyers are not being adequately compensated for risk.

Here's the data for corporate bonds, but sovereign bonds are just as lofty, and the lack of yield in those securities explains the grasping for yield in corporate bonds:

Yield-to-worst in junk bond market hits record low

Mar 13, 2013

March 13 (IFR) – The yield-to-worst in the US high-yield bond market has fallen to a record low average of 5.56% this week, as investors flock to higher-yielding but riskier products.

With interest rates hovering around record lows, investors have found themselves rushing down the credit ladder in search of bonds offering more return – and more risk.

CCC rated bonds – the riskiest investments at the very bottom of the credit spectrum, just one notch above default level – have rallied the most.

"It's definitely risk-on behavior, where you are trying to get exposure to the most yield possible," said Drew Mogavero, head of US high-yield trading at Barclays.

"The safer segments of the market, BBs, have rallied to pretty low-yielding levels," he said. "So people are looking out to CCCs and other higher-yielding names."

Bond yields and prices move in opposite directions. As investor demand has driven up prices, yields have tumbled. Yield-to-worst indicates the lowest potential yield on a bond without the issuer defaulting.

Lower All Over

Broken down by ratings, the yield-to-worst on the Barclays Double B index is also at its lowest ever (4.24%), as is the level on the Triple C index (7.43%).

The only segment of the market that didn't close at a record low on Tuesday was the Single B index, which is 5.46% versus the record low of 5.39% set on January 24

Again, these are record lows as in never-before-in-all-of-time records.  To think that the Fed has all of this under control, that it can steer the consequences of an entire world of investment and speculation decisions to a normal and graceful ending, requires far more faith than I can muster.

The very idea that the worst-of-the-worst credit risks in the corporate world are now yielding less than 6% is even more absurd than anything that I observed during the height of the housing bubbles.  Even the tiniest hiccup will wipe out the holders of those bonds, leaving them with, at best, pennies on the dollar.

Let me be very clear here: What I see now in the bond market is at least an order of magnitude riskier than anything I saw in the housing bubble, and if/when it pops, the effects will be far, far worse.

In Part II: How to Survive the Mother of All Bubble Burstings: A Collapse of the Bond Market, we'll identify the most significant warning signals of market instability, including the growth in derivatives, the reemergence of synthetic CDOs, and the widespread overpricing of debt ranging from sovereign to junk securities. With these risks come huge implications for those with money in the financial markets.  What should we be doing to protect ourselves?  How do we avoid the next downturn?  What strategies make sense given what we know and where we are in this story?