Archives for April 2013

20 Signs That The Next Great Economic Depression Has Started In Europe

20 Signs That The Next Great Economic Depression Has Started In Europe

Courtesy of Michael Snyder of The Economic Collapse

The next Great Depression is already happening – it just hasn't reached the United States yet.  Things in Europe just continue to get worse and worse, and yet most people in the United States still don't get it.  All the time I have people ask me when the "economic collapse" is going to happen. 

For ages I have been warning that the next major wave of the ongoing economic collapse would begin in Europe, and that is exactly what is happening. Both Greece and Spain already have levels of unemployment that are greater than anything the U.S. experienced during the Great Depression of the 1930s.

Pay close attention to what is happening over there, because it is coming here too.  Europe is a lot like the United States.  Both countries are drowning in unprecedented levels of debt, and both have overleveraged banking systems that resemble a house of cards. 

The reason why the U.S. does not look like Europe yet is because we have thrown all caution to the wind.  The Federal Reserve is printing money as if there is no tomorrow and the U.S. government is savagely destroying the future that our children and our grandchildren were supposed to have by stealing more than 100 million dollars from them every single hour of every single day.  We have gone "all in" on kicking the can down the road even though it means destroying the future of America.  But the alternative scares the living daylights out of our politicians.  When nations such as Greece, Spain, Portugal and Italy tried to slow down the rate at which their debts were rising, the results were absolutely devastating.  A full-blown economic depression is raging across southern Europe and it is rapidly spreading into northern Europe.  Eventually it will spread to the rest of the globe as well.

The following are 20 signs that the next Great Depression has already started in Europe…

#1 The unemployment rate in France has surged to 10.6 percent, and the number of jobless claims in that country recently set a new all-time record.

#2 Unemployment in the eurozone as a whole is sitting at an all-time record of 12 percent.

#3 Two years ago, Portugal's unemployment rate was about 12 percent.  Today, it is about 17 percent.

#4 The unemployment rate in Spain has set a new all-time record of 27 percent.  Even during the Great Depression of the 1930s the United States never had unemployment that high.

#5 The unemployment rate among those under the age of 25 in Spain is an astounding 57.2 percent.

#6 The unemployment rate in Greece has set a new all-time record of 27.2 percent.  Even during the Great Depression of the 1930s the United States never had unemployment that high.

#7 The unemployment rate among those under the age of 25 in Greece is a whopping 59.3 percent.

#8 French car sales in March were 16 percent lower than they were one year earlier.

#9 German car sales in March were 17 percent lower than they were one year earlier.

#10 In the Netherlands, consumer debt is now up to about 250 percent of available income.

#11 Industrial production in Italy has fallen by an astounding 25 percent over the past five years.

#12 The number of Spanish firms filing for bankruptcy is 45 percent higher than it was a year ago.

#13 Since 2007, the value of non-performing loans in Europe has increased by 150 percent.

#14 Bank withdrawals in Cyprus during the month of March were double what they were in February even though the banks were closed for half the month.

#15 Due to an absolutely crippling housing crash, there are approximately 3 million vacant homes in Spain today.

#16 Things have gotten so bad in Spain that entire apartment buildings are being overwhelmed by squatters

A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters.

“This is happening all over the country,” said Jose Maria Fraile, the town’s mayor, who estimates only 100 apartments in the block built for the council have rental contracts, and not all of those tenants are paying either. “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.”

#17 As I wrote about the other day, child hunger has become so rampant in Greece that teachers are reporting that hungry children are begging their classmates for food.

#18 The debt to GDP ratio in Italy is now up to 136 percent.

#19 25 percent of all banking assets in the UK are in banks that are leveraged at least 40 to 1.

#20 German banking giant Deutsche Bank has more than 55 trillion euros (which is more than 72 trillion dollars) of exposure to derivatives.  But the GDP of Germany for an entire year is only about 2.7 trillion euros.

Yes, U.S. stocks have been doing great so far this year, but the truth is that the stock market has become completely and totally divorced from economic reality.  When it does catch up with the economic fundamentals, it will probably happen very rapidly like we saw back in 2008.

Our politicians can try to kick the can down the road for as long as they can, but at some point the consequences of our foolish decisions will hunt us down and overtake us.  The following is what Peter Schiff had to say about this coming crisis the other day…

"The crisis is imminent," Schiff said.  "I don't think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems."

"We're broke, Schiff added.  "We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out."

Schiff points out that the market gains experienced recently, with the Dow first topping 14,000 on its way to setting record highs, are giving investors a false sense of security.

"It's not that the stock market is gaining value… it's that our money is losing value. And so if you have a debased currency… a devalued currency, the price of everything goes up. Stocks are no exception," he said.

"The Fed knows that the U.S. economy is not recovering," he noted. "It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode."

So please don't think that we are any different from Europe.

If the United States government started only spending the money that it brings in, we would descend into an economic depression tomorrow.

The only way that we can continue to live out the economic fantasy that we see all around us is by financially abusing our children and our grandchildren.

The U.S. economy has become a miserable junkie that is completely and totally addicted to reckless money printing and gigantic mountains of debt.

If we stop printing money and going into unprecedented amounts of debt we are finished.

If we continue printing money and going into unprecedented amounts of debt we are finished.

Either way, this is all going to end very, very badly.

Here We Go Again – Builders Hold Lotteries for Right to Buy a House

Courtesy of Mish.

Here’s that “froth” thing again: Builders hold lotteries for eager new homebuyers.

O’Brien Homes started holding a monthly housing lottery for its 228-unit development called Fusion in Sunnyvale, Calf., after seeing throngs of prospective buyers camp out at the openings of other new condo complexes in the area.

Each month, as new sections of the development came under construction, roughly 50 buyers would show up at O’Brien Homes’ sales office hoping to be picked for one of the 10 or so sites available. The participants were already pre-qualified for a mortgage and had their down payment in place. After being assigned a number, they crossed their fingers and waited for each bingo ball to be plucked from the tumbler.

“Some people would come back month after month,” said Frimel. “It got very frustrating for them.”

Adding to that frustration was that home prices rose virtually every time a new group of homes went on sale. The two-, three- and four-bedroom homes started out between $420,000 and $620,000. The last grouping went for $555,000 to $815,000, a 32% increase.

Even with the price hikes, buyers kept returning. O’Brien started issuing returnees an extra bingo ball. If they lost for four straight months, they would get five chances the next time.

Here’s my Greenspan imitation: “Don’t worry, it’s only some sections of the country. Besides it’s well supported by the fundamentals. And as we all know, home prices never drop.”

Mike “Mish” Shedlock

Continue Here

33 Months of Falling Retail Sales in Spain; Austerity the Wrong Way

Courtesy of Mish.

Guru’s blog in Spanish highlights the dramatic retail spending situation in Spain.

Here is a Mish-modified translation.

Last month I discussed the retail drama in Spain.

March data is more of the same. Sales have fallen 33 consecutive months coupled with 56 months of job destruction.

This month overall sales fell by 10.9%. Accounting for seasonal effects, sales are down 8.9%. Single location business sales fell 14.1% (10.9% accounting for seasonal effects). Small business sales are down 12.7% (9.2% seasonally adjusted).

Spain is in a national emergency with no consumer spending, no credit, and no job creation, coupled with strongly rising unemployment.

Austerity the Wrong Way

This is what happens when you implement austerity the wrong way, by raising taxes instead of cutting needless bureaucrats.

Addendum: Couple of typos were corrected by reader Bran.

Here are the revised sentences: “Single location business sales fell 14.1% (10.9% accounting for seasonal effects). Small business sales are down 12.7% (9.2% seasonally adjusted).

The percentages did not change but I had the word “spending” instead of “sales”.

Mike “Mish” Shedlock 

Continue Here

US Homeownership Rate Drops to 1995 Levels

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

When it comes to the US housing market there appear to be three groups of people: those who who have either unlimited cash and/or access to credit, and like the most rabid of bubble-chasing speculators, are perfectly happy to engage in a game of Flip That House for a short-term profit pending the discovery of a greater fool (often times converting the house into rental properties as numerous hedge funds have been doing on cost-free basis courtesy of the government's REO-To-Rent program) – they are the vast minority of speculators; then there are those who currently rent and are opportunistically looking at home prices, willing to dip their toe at the right price – these too are few and far between and mostly represent a function of the natural growth of the US household offset by the availability of jobs; and then there is everyone else. Sadly, it is the "everyone else" that is the vast majority of the US population.

It is this "everyone else" that is once again being forced out of housing due to both the ramping bubble in housing prices making housing affordable primarily to those who buy with the intention of flipping, and due to the lack of available credit to those who actually need it (see sad state of commercial bank loans in the US).

Finally, it is this "everyone else" who comprises the bulk of those who have been kicked out of the American Dream, whose core pillar has always been owning your own home (with or without a massive mortgage attached), not renting.

As the US Census Bureau reported earlier today, the US homeownership rates in the first quarter of 2013 dropped by another 0.4% to a fresh 18 years low, or 65% – the lowest since 1995!

That this progressive, ongoing decline in ownership is taking place despite allegedly record home affordability is without doubt the most troubling feature of the economic "recovery" which has forced ever more Americans to shift away from owning and into renting, as can be seen by the next two charts showing the median asking rent and sale prices for vacant rent units and for sale units. While home prices have a long way to go still countrywide (excluding the occasional regional bubble market such as LA and NY), rents are already at record highs, which explains why it is every hedge fund's dream to become a landlord.

However, it is only a matter of time before zero-cost subsidized rental pass thru units owned by hedge funds who can therefore keep the rental asking price as high as they wish, forces out more and more Americans out of the Adjusted American Dream, where renting is the new buying, and leads to ever more people living in the streets.

Although, we are confident, it will be merely a matter of time before this, or some other administration, simply unleashes a "street living tax" – after all, "it is only fair" to apply austerity to hobos next. Because it has worked so well with the billionaires and trillionaires…

Central Banks and Their Unerring Sense of Timing

Central Banks and Their Unerring Sense of Timing

Courtesy of  of Acting-Man blog

Central Banks Wade Into Stocks

Readers may recall that we have frequently remarked that the fact that central banks have reportedly become fairly large net buyers of gold over the past two years was at best irrelevant and at worst a contrary indicator. What it never was and never will be, is bullish. There is some hope that it may not be a big negative signal, due to the fact that the central banks doing the buying are not the same ones that sold between $250 and $600 and because they only buy fairly small amounts. However, it sure hasn't been a positive signal so far. Central banks as a rule are the worst traders in the world.

It is therefore interesting that the latest central bank fad is apparently to buy stocks. They didn't buy stocks in early 2009, mind. They probably had to wait for the markets to 'look safe' or something like that.

Bloomberg reports:

“Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.


The survey of 60 central bankers, overseeing a combined $6.7 trillion, found that low bond returns had prompted almost half to take on more risk. Fourteen said they had already invested in equities or would do so within five years. Those conducting the annual poll had never before asked that question.

“I definitely see other central banks doing or considering equities,” said Jan Schmidt, the executive director of risk management at the Czech National Bank in Prague, which has built up stocks to 10 percent of its $44.4 billion in reserves since 2008.


Central banks’ purchases of shares show how the “hunger for yield” is changing the behavior of even the most conservative investors, according to Matthew Beesley, head of equities at Henderson Global Investors Holding Ltd. In London, which oversees about $100 billion.

“Equities are the last asset class standing,” Beesley said in a phone interview on April 18. “When you have dividend yields in excess of bond yields, it’s a very logical move.”  (emphasis added)

Good grief. Yes, it's only 'logical' to invest in the 'last asset class standing' – which means in translation: the one asset class that's recently been in an uptrend. We weren't actually aware that central banks had a 'hunger for yield'. Aren't they supposed to be out there 'fighting inflation'? Just kidding.

However, they are supposed to be the stewards of the currencies they issue, and it is not entirely clear why that suddenly requires them to pile into equities. One thing is certain though: it is an example of very interesting timing.

NYSE Margin Debt Back at Nominal Record High

Just as central bankers eagerly eye stocks as a means to 'diversify' their reserves, margin debt at the NYSE is finally back at its 2007 record high. It may well grow even larger this time around though, as the annual rate of change has not yet achieved a spike similar to those seen in 1999/2000 and 2007.

Still, in spite of rising stock prices, investor net worth has now been negative for more than three years (with a few brief interruptions). That's not as long as during the 1990s mania, but longer than the period preceding the 2007 peak. Naturally, investors have nothing to worry about, since it is well known that the DJIA is going to 36,000 next. Even if it is 'impossible to predict how long it will take'.


margin debt


NYSE margin debt is back at its 2007 peak. It may make an even higher peak this time around, but it would probably be a mistake to completely ignore this datum – click to enlarge.

But then again, mutual funds have seen large inflows lately, so surely they have lots of cash to deploy? Unfortunately their cash amounts to only 3.7% of their assets, 40 basis points above an all time low. The small wiggles that can be seen on the chart in recent months are likely the result of said inflows.


mufu cash
Mutual fund cash-to-assets ratio – it has never been as low as over the past three years – click to enlarge.


Surely that doesn't mean much though, since it hasn't meant anything for three years running. And besides, investors are bearish, so stocks can only go higher.


Consensus Inc
Consensus Inc. bullish consensus on stocks – click to enlarge.


OK, so some investors are bearish. But it isn't as if speculators were heavily long futures on speculative stocks, something like small caps, say.


A new record high in speculative net long positions on Russell 2000 futures – click to enlarge.


Enough already…who cares about these technicalities? Fundamentals are sound! Companies are throwing off oodles of cash!


corporate cash flow
Corporate net cash flows turn negative – click to enlarge.


That seems to leave only one thing: central banks are buying stocks and they know best!

We must admit that the above amounts to some extent to an exercise in cherry-picking of data. Not every stock market-related sentiment and positioning datum looks as stretched as the ones shown above. There are surveys like Consensus Inc. and Market Vane that are pretty much at the top of their historical range, but others like the Investors Intelligence survey look  less extreme. Speculators don't hold record net long positions in all stock index futures, but their long positions are nevertheless historically large in all of them (they are not far from records in most of them – and the records were all set within the past year).

Economic conditions are meanwhile at best middling in the US, and downright atrocious in Europe and Japan. China is growing, but less than it used to and it has a debt problem to boot (of course, everybody has a debt problem).


Either the stock market 'knows' something we don't – and we frankly don't think so, because it usually knows very little – or it is indeed rising on fumes. No doubt the fact that central banks continue to be 'accommodating', i.e., are printing gobs of money, currently lends support to stocks. One must however be careful with such simplistic cause-effect schemata. One could for instance ask, why is this additional money no longer lifting commodity prices? And how does the persistent bid enjoyed by 'safe haven' type government bonds jibe with rising stock prices? To be sure, warning signs like the ones discussed above have been noticeable for many months and this hasn't kept the rally from continuing. It was easy to underestimate its persistence, and may still persist for even longer. However, once even central banks are beginning to buy stocks, a few extra alarm bells should start ringing.

Oh well, at least stocks are cheap.


S&P 500 Average 12-Year PE
SPX, average 6 year and 12-year p/e ratio 1877- today (chart via our friend BC) – click to enlarge.


Oops! Sorry! : )

Charts by: Sentimentrader, St. Louis Fed, BC

How To Make Austerity Work

How To Make Austerity Work

Pater Tenebrarum of Acting-Man blog

A Question of Spending Discipline and Reform

The Baltic States are unique in Europe in that they went through an austerity crash program a while ago already (beginning right after the 2008 crisis) and have in the meantime recovered strongly. Der Spiegel has an interesting interview with Lithuanian president Dalia Grybauskaite, in which she explains her views on the topic. It can obviously be done successfully.

Just to get this out of the way up front: we are aware that every case is unique. The problems are not the same in every country, and due to cultural norms and traditions, it may be easier to enact reform in certain countries than others. Nevertheless, no matter how many times Paul Krugman insists that no Baltic nation can possibly be held up as an example, the fact remains that they have imposed fiscal austerity and implemented wide-ranging reform measures and have succeeded.

Here are a few notable excerpts from the interview:

SPIEGEL ONLINE: In spite of the ongoing crisis, Lithuania wants to join the euro zone in January 2015. Why?

Grybauskaite:This is not a crisis of the euro zone, but a debt crisis. Some states, inside and outside the euro zone, have difficulties because of their irresponsible economic and fiscal policies.


SPIEGEL ONLINE: A new poll in six big EU countries shows that trust in the EU is declining rapidly. Are EU leaders taking this growing unease seriously enough?

Grybauskaite:This is the consequence of the crisis in Europe and people's reaction to the inability of the politicians to tackle the challenges.

SPIEGEL ONLINE: The president of the EU commission, José Manuel Barroso, said this week that austerity in Europe had reached its limit. The political and social acceptance is not there any longer. Is it time to relax the efforts?

Grybauskaite: There is not one rule you can apply to every state. In the Baltic states, after 2009 we had to implement very radical austerity measures. In Lithuania, we consolidated 12 percent of GDP in two years. We cut public salaries by 20 percent and pensions by 10 percent. Our adjustment was a lot deeper than what we see now in Southern Europe. And we saw growth return after 2 years.

SPIEGEL ONLINE: So Barroso is wrong?

Grybauskaite: Some countries need extra stimulus in specific areas. Something has to be done against high youth unemployment in Greece and Spain, for example. But in the end, there is no way around it: The debt levels have to come down.

SPIEGEL ONLINE: You say that reducing public debt is mainly about political will. Where do you see this will lacking in Europe?

Grybauskaite: I won't name countries, but reforms could be quicker in many parts. There are different mentalities and different ideas about political responsibility in the North and the South.

SPIEGEL ONLINE: Austerity is often seen as a diktat from Germany. From the perspective of a small country, is Berlin too powerful?

Grybauskaite: We need to understand the situation of the German people. They are largely responsible for paying for these bailouts. I cannot imagine a head of government whose country is paying for something not asking for certain conditions. It is legitimate that Berlin leads the way.” (emphasis added)


She is right – as we have often pointed out in these pages, it is not a currency crisis, but a debt crisis. The euro as such seems to be doing fine, as well as can be expected from a modern fiat currency. It is the private and public sector debt mountains that have been built up over time that are the problem, not the fact that several nations use a common currency.

One might of course counter 'the common currency has caused debts to increase so much', but that is only partially true. We cannot recall that Italy or Greece had any problems growing their debt into the blue yonder in the past,  i.e., prior to the adoption of the euro. The main difference is that they used to be able to devalue their way out of problems,  thereby robbing their citizens surreptitiously. At least nowadays the cost is quite obvious to all.

Take note of the example she gives for austerity a la Lithuania (similar courses were followed in the other Baltic nations): “We cut public salaries by 20 percent and pensions by 10 percent. Our adjustment was a lot deeper than what we see now in Southern Europe. And we saw growth return after 2 years.”

The magic words here are: “cut spending”. As opposed to “raise taxes, and then raise them some more, while leaving spending almost exactly as it was before” – the preferred method in places like Italy, Spain and Greece. Yes, the debt levels have to come down – but it is not immaterial how they are coming down. No doubt it was not exactly great fun to be in the Baltics during the harsh period of adjustment. However, we are sure Greece's citizens would have been more or less perfectly fine with just two years of hardship. It is vastly different when the hardship is going into its fifth year with still no light at the end of the tunnel. In this context, Mr. Barroso's recent proclamations strike us as rather dubious. He seems to think there is a 'choice', but there very likely isn't one, as markets will sooner or later penalize countries veering from their fiscal consolidation efforts.

Cutting spending is not everything of course – economic reform is just as, if not more important. This is another area where many European governments are lacking the necessary political will and imagination. The Baltic nations still have memories of Soviet Russia's embrace – that does wonders for one's political will and the ability to endure hard times for a little while.

And finally, yes,  the paymasters must be expected to insist on conditions for keeping others afloat. Imagine if things were the other way around: if Italy, Spain, Greece, etc., were asked to bail out Germany and Finland, would they be doing so without demanding conditions? Not very likely, is it?



Lithuania: a bubble, followed by a severe bust coupled with austerity, and the return of growth- click to enlarge.


lithuania-industrial-production (1)

The ups and downs of industrial production in Lithuania. Note that production began to improve well before the contraction in GDP ended- click to enlarge.


The budget deficit as a percentage of GDP. Lithuania is already getting close to the Maastricht ratio again – click to enlarge.


There are ways and means to deal with a major bust and fiscal troubles. None of them are painless, but some make more sense than others.

Hey guess what – Abenomics is starting to work

Hey guess what – Abenomics is starting to work

Courtesy of 

The latest data from Japan indicates a society that is beginning to buy in to the New Nippon and Abenomics.

Check this out, from Wall Street Breakfast:

Abenomics got a vote of confidence from Japanese consumers in March as household spending jumped the most in nine years, while the jobless rate in Japan fell to a four year low. Spending rose 5.2% Y/Y, obliterating estimates of a 1.8% increase, as the wealth effect created by soaring stock prices fueled demand for cars and home repairs. The unemployment rate came in at 4.1% for March, better than the 4.3% rate forecast by economists.

I've been in this trade since January, it's been tempting to take the gain but the price action trends seems to support a continuation. And now the economic data is starting to participate, which is nice.


Wall Street Breakfast (Seeking Alpha)

Read Also:

Dan Loeb's Investment Process (TRB)

The Japanese Buy In (TRB)

hat tip Ken S

The Message Is The Message

Courtesy of Lee Adler of the Wall Street Examiner

So I’ve gotten a few things right lately.

The stock market keeps rallying. I’ve been pretty steadfastly bullish since last November and published as early as January 23 that the market was headed for 1600. Got that right. Not hard if you face the fact that the market is rigged and the rigging works until it doesn’t.

And the Federal budget deficit is shrinking. I’ve been forecasting that since last October, arguing that the fecal cliff and secastration were bullish because they would reduce Treasury supply and because the Fed’s massive, historic level of money printing under non crisis conditions would cause a meltup in stocks.

I recognized the turn in housing prices early in 2012. Got all that right. I went from being bearish on Treasuries to intermediate term bullish a few months ago. Right again.

Meanwhile most of the pundits have been continually surprised by these things.

A couple of my subscribers and others who follow my free reports have given me pats on the back, which I very much appreciated. But that makes me nervous. Usually no one pays any attention to the guy standing on the hill shaking his fist at the moon. Most everyone thinks he’s a nut and they ignore him. I feel like that guy, and I know how much I have been able to see that the leading lights in the media and on Wall Street haven’t seen, or pretended not to see.

So how have I managed to see what others have not? I’m no genius. I’m just an average guy following the teachings of the great economic philosopher Yogi.  The great Yogi said a couple of things that have stuck in my mind.

“It’s hard to make predictions, especially about the future.”

“You can observe a lot by watching.”

I don’t necessarily agree with the first, but definitely agree with the second. I’ve found that by watching the flow of facts closely over long periods, the trends become clearer, earlier. By “facts” I mean raw data, not the media’s interpretation of the data. It’s actually easy to make predictions, and not that hard to get them right if we pay attention to the facts. If we recognize the trend, it’s usually a good bet that it will continue if none of the factors contributing to it are changing. And if they are changing and you’re paying attention to the facts, then it’s not hard to recognize that they are changing early enough in the game to be ahead of the crowd, especially since the crowd usually never gets to the point of recognition until it’s too late.

mediapropagandaIn the process of “watching,” I’ve also recognized that there’s a pile of misinformation out there, but because it’s broadcast loud and long, it’s all most people ever see or hear. I don’t know why that is, other than that I suspect that the vested interests–the plutocrats, the politicians they own, and their media mouthpieces– who control the message, know only the message. They have no regard for the facts, because if they control the message, the facts are irrelevant. This is the essence of Goebbelsian propaganda.

Now don’t get me wrong, these people aren’t Nazis. Goebbels, the father of modern propaganda, was a Nazi. His evil was unspeakable.  Today’s plutocrats and their media handmaidens are not on the same order of magnitude of evil, but they use propaganda tools championed by Goebbels nevertheless, particularly the idea of promoting the Big Lie over and over until it becomes truth. Perhaps it would be less inflammatory to call it Orwellian propaganda, but Orwell merely fictionalized the reality of Goebbels, as well as the Soviets.  Goebbels perfected propaganda. All national plutocratic political machines use the tools he developed.

Eventually, for brief but cataclysmic periods, reality catches up with and overpowers the illusions which the Establishment has promulgated . Then most people are in shock for a while. We are repeatedly told that nobody saw “it” coming. That’s part and parcel of the ongoing message. But  it is not true. Many people who are not in the limelight see “it” coming. But the Establishment elites continue to promote only their message, and that’s what people see and hear.  The truth is constantly suppressed. Constantly.

As I see it, my job is to stick religiously to watching the facts found in the raw data as it unfolds, and to stand on that hill shouting and shaking my fist at the moon about what I see. There are a few of us out there, including many greater lights and louder voices than mine. I keep hoping, apparently in vain, that sooner or later enough people might hear us, and do something about it, that change will come.


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.

Now That You Know Wall Street Can Eat Up Two-Thirds of Your 401(k) With Fees, You Should Also Know It Formed a Coalition to Block Full Disclosure of That Fact

Courtesy of Pam Martens.

Last week we reported on a PBS Frontline program showing that a 2 percent mutual fund management fee can gobble up two-thirds of your nest egg for retirement over a span of 50 years of saving. Now comes an equally ugly truth. 

Since at least 1998 the U.S. Department of Labor, which oversees the nation’s 401(k) plans, has known that fee gouging was eroding the ability of workers to adequately build wealth for retirement in 401(k) plans. It took more than a decade for the Federal agency to pass a regulation mandating that 401(k) recipients receive fee disclosure in an annual mailing. Leading the charge against full disclosure was a coalition of trade associations dominated by Wall Street. 

On April 13, 1998, the U.S. Department of Labor published a “Study of 401(k) Plan Fees and Expenses,” noting the following: 

“Expenses of operating and maintaining an investment portfolio that are debited against the participant’s account constitute an opportunity cost in the form of foregone investments in every contribution period. The laws of compound interest dictate that these small reductions in investment are magnified greatly over the decades in which many employees will be 401(k) plan participants. Observers have concluded that some plan providers are charging as much as 100 basis points in fees and expenses over the prevailing average rates (Benna; Butler, November 12, 1997). The effect of such higher levels of expenses would be to reduce the value of potential future account balances for these participants… 

“A second issue of concern to many observers is that sponsors (and participants) lack adequate information on the structure and extent of fees and expenses to make informed choices about service providers and investment options. Thus, the inadequate disclosure of information may be a factor in the existence of the large variance in fees and expenses of 401(k) plans…”

Today, the U.S. Department of Labor web site carries a candid statement of what is happening to the unsophisticated in their efforts to save for retirement in 401(k)s: “Do you or your loved ones know how much you are paying for your retirement accounts? You could be losing tens or even hundreds of thousands of dollars because of excessive and hidden fees.”

Continue Here

Book Reviews: Bailout, Confidence Men

Courtesy of Larry Doyle.

If the American public is concerned about the dysfunction within Washington D.C., after reading two inside editions on the games being played within our nation’s capital, the public should be even more concerned than ever.

I recently completed two enlightening books, Confidence Men by Ron Suskind and Bailout by Neil Barofsky. I recommend both to those who want to gain a real understanding of how our nation’s capital does NOT work, that is, does NOT work for us.    

I was glad that I read Confidence Men prior to reading Bailout, as I found it helpful in terms of further understanding the trials and tribulations detailed by Neil Barofsky in his role as Special Inspector General for the TARP (aka, SIGTARP).

What is the consistent message delivered by both of these books?

In large measure, three men with very few checks and balances have run our nation over the last four plus years. Who are they? Ben Bernanke, Larry Summers, and Tim Geithner.

Suskind lays out how other members of the Obama economic team during his first administration were seemingly utilized as props, and once having recognized that reality expressed their frustration. In fact, the author leaves the very strong impression that President Obama himself played second fiddle to Summers and Geithner especially in terms of economic and fiscal policy.

Barofsky tars and feathers Treasury Secretary Tim Geithner for his lack of meaningful accountability and transparency in dispensing TARP funds not only to the banks but also AIG, the auto companies, and especially the homeowner foreclosure program known as HAMP.  I very much got the impression that Geithner was simply throwing money from a truck to plug the gaping hole in our banks’ capital positions with little regard for those who would or could game the system, especially the large banks receiving the lucre.

Barofsky writes out of frustration knowing that little has changed in Washington that might avert another crisis. Suskind undresses President Obama as being more concerned with the politics and appearances of the place than actually advancing real public policy for the nation’s benefit.

I would not necessarily think either Barofsky or Suskind remain on the invitation list for the Washington cocktail circuit, but their books are well worth reading. If Washington is truly this dysfunctional —  replete with waste, fraud, abuse, and corruption — little wonder why our economy is growing at such a sluggish rate.

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.

Is the US Spending Enough on Education?

Courtesy of Mish.

Given the constant chatter from the Obama administration and from teachers’ unions on the need to spend more for public education, let’s address the question “Is the US spending enough on education?”

I propose we look at the stats in graphical form starting with charts of population and total spending, culminating with education spending per child.

click on any chart for sharper image

1. Population vs Civilian Employees

2. Budget Per Civilian Employee

Data is from White House OMB Historical Tables

3. US Population and Children Population

Data is from Childstats.Gov and the US Census Bureau Population Clock

Continue Here

Bond Bubble Goes Full Retard

The minute you send Rwanda or Ghana your money, it’s gone. But you won’t know it for awhile. 

Rwanda is borrowing foreign currency – US dollars – offering a tempting 7% interest. But the likelihood of getting principal back is zero, though the country will probably pay some interest while the game is alive. Most likely, the gov’t will use part of the principle to pay interest to the bond purchasers, and the rest to buy imports and fund itself. When the money runs out, Rwanda will default. It cannot print new US dollars like the Federal Reserve can. Besides borrowing, the country has no access to dollars. Same deal with Ghana. 

Bond Bubble Goes Full Retard

Courtesy of ZeroHedge. View original post here.

Last week it was Rwanda issuing USD-denominated debt at 7% (lower than Spain yields less than a year ago) just as bond yields of 90% of global sovereign bonds are at or near all time lows.

And now, moments ago, we just learned that Ghana (nominal 2013 GDP: $42.8 billion) has just upsized its dollar-denominated $750MM bond issue to $1 billion.

We can only assume that this is due to unprecedented demand for yield. Any yield.

From Bloomberg:

Ghana is inviting bids for advisers on transaction, according to information from two people with knowledge of the plans, who asked not to be identified because details aren’t yet public.

Govt plans to sell debt by end of yr: Albert Kofi Asamoa-Baah, an adviser at finance ministry, says by phone, declining to comment on size of offering.


Well, it finally happened

Egypt’s economic woes becoming acute

Egypt's economic woes becoming acute

Courtesy of Sober Look

The Washington Post recently published a story on Egypt's growing black market, which is rapidly replacing the "official" economy.

WP: – Egypt’s rapidly expanding black market for fuel — and for foodstuffs, other commodities and U.S. dollars — may be the most tangible illustration of just how badly the economy of this vast Arab nation is failing, two years after the fall of Hosni Mubarak. 

The prices of most basic goods, like fuel and flour, have been fixed for decades, with Egypt pouring roughly a quarter of its GDP into a bloated and deeply inefficient national subsidy system each year.

As foreign reserves run dangerously low, access to fuel is becoming particularly critical. To prevent a complete economic collapse in Egypt, Libya has stepped in to give support until the long-awaited IMF loan is put in place. Libya is in effect providing an interest-free oil loan for a year as a stop-gap measure.

Reuters: – Libya will soon start shipping oil to neighboring Egypt on soft credit terms, two senior Libyan officials said, as Cairo struggles to pay for energy imports and avoid fuel shortages. 

The officials told Reuters that Tripoli would supply Cairo with $1.2 billion worth of crude at world prices but on interest free credit for a year, with the first cargo expected to arrive next month.

Egypt's officials continue to emphasize that the IMF loan deal is just around the corner.

Egypt's Official Press: – The Governor of the Central Bank of Egypt (CBE) said that measures required by the International Monetary Fund (IMF) for Egypt to obtain a loan are normal and followed all over the world. 

During an interview with CBC satellite channel on Saturday 27/4/2013, Hisham Ramez said that an agreement with the IMF to get the loan is about to be concluded. 

The IMF loan has other dimensions because it opens the door for borrowing from other bodies, Ramez said.

But that could be wishful thinking. Egypt just suffered a major setback, as its key negotiator quit today.

Reuters: – A key Egyptian negotiator with the International Monetary Fund said on Sunday he has resigned as first deputy finance minister, in a potential blow to Cairo's prospects of an early IMF deal. 

Hany Kadry Dimian has been the crucial point man in Egypt's protracted and so far fruitless negotiations to obtain a $4.8 billion loan needed to help combat a severe economic crisis.

Kadry gave no explanation for his decision to quit, first reported on the Egyptian dissident Rebel Economy blog, saying he would say more on Tuesday. 

A senior European diplomat said his departure was not a good omen for Egypt's hopes of wrapping up a deal on the long delayed IMF loan next month, as the government has said it aims to do.

There has been speculation that Qatar will step in to help Egypt with a $3bn loan, but so far that support hasn't materialized. Furthermore, many Egyptians are uneasy with Qatar and view it as meddling in the nation's internal affairs.

According to official sources in Egypt, foreign reserves now stand at $13.4 billion, while foreign debt is at $38.8 billion (up 13% from previous year).

As summer approaches, the risks of violent civil unrest rise sharply. This year Ramadan will be in July, the hottest month of the year. Power outages are expected to be quite frequent and shortages of bread and fuel could become an issue. With Syria becoming the recent focus of mass media, Egypt's issues have not been widely covered. Yet in the near future, Egypt's woes present a major source of uncertainty in the Middle East.

“Read 500 pages like this every day…”

“Read 500 pages like this every day…”

Courtesy of 

“Read 500 pages like this every day…That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”
– Warren Buffett

My favorite article from this weekend was from the Omaha World-Herald and it's about how Warren and Charlie's deputy stock pickers got hired at Berkshire Hathaway and their ongoing education under the tutelage of Warren Buffett.

Both Ted and Todd already knew how to make money and pick stocks – but what Buffett is teaching them now is how to become legendary.

It begins with getting off the phone, shutting down the monitor, turning off the TV and reading. A lot. Charlie Munger once famously remarked "In my whole life, I have known no wise people who didn't read all the time — none, zero. You'd be amazed at how much Warren(Buffett) reads — at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.” It's nice to see that they really live this ethos at Berkshire.

Check out Todd Combs in the photo below. Take it all in. The monitors are dark, there's nothing on the desk save for a pile of what look to be annual reports or research notes and his feet are up. He's gonna be there for awhile. Reading.


That looks like a dream come true to me. I find time to read but there's never enough. I'm trying to change that.

Please click over to Steve Jordon's whole article, it's fantastic and a rare glimpse into the inner sanctum of the Oracle's home base.


Investors earn handsome paychecks by handling Buffett's business (Omaha World-Herald)

Wishes, Fantasies, Delusions, And Dumbasses

We Wish

By James Howard Kunstler

Wishful thinking now runs so thick and deep across the USA that our hopes for a credible future are being drowned in a tidal wave of yellow smiley-face stories recklessly issued by institutions that ought to know better. A case in point is the Charles C. Mann’s tragically dumb cover story in the current Atlantic magazine – “We Will Never Run Out of Oil” – setting out in great detail the entire panoply of techno-narcissistic “solutions” to our energy predicament. Another case in point was senior financial writer Joe Nocera’s moronic op-ed in last week’s New York Times beating the drum for American “energy independence.”
You could call these two examples mendacious if it weren’t so predictable that a desperate society would do everything possible to defend its sunk costs, including the making up of fairy tales to justify its wishes. Instead, they’re merely tragic because the zeitgeist now requires once-honorable forums of a free press to indulge in self-esteem building rather than truth-telling. It also represents a culmination of the political correctness disease that has terminally disabled the professional thinking class for the last three decades, since this feel-good propaganda comes from the supposedly progressive organs of the media — and, of course, the cornucopian view has been a staple of the idiot right wing media forever. We have become a nation incapable of thinking, or at least of constructing a consensus that jibes with reality. In not a very few years, the American public will be so disappointed and demoralized by broken promises like these that they will turn the nation upside down and inside out, probably with violence and bloodshed.
Charles Mann’s Atlantic article begins by cheerleading for the mining of methane hydrates from the ocean floor. These are natural gas molecules trapped in ice formations in the muck around the continental shelves. Mann spotlights the efforts of a Japanese research ship conducting tests. Guess what: the Japanese are engaging in this because they have absolutely no fossil fuels of their own, and a failing consensus about nuclear power, and they are on a course to become the first advanced industrial nation to be forced to return to a medieval economy. That is, they are the most desperate among the desperate. You could say they’ve got nothing to lose (but a few billion of their rapidly depreciating Yen).
Methane hydrates are stable only at extreme pressures or very low temperatures. They also exist in the arctic permafrost, for instance, Siberia, where conventional natural gas drilling operations have been carried out for decades, with no contributions from methane hydrates. Undersea methane hydrate exploration projects have gone on for decades in the US, Canada, India, Russia, China, and Japan. The hope is that this so-called “hot ice” would turn out to be the gas equivalent of tar sands, which would mean at best a very expensive way to get more fossil fuels as the conventional sources dry up. That hope has dimmed in nations other than extremely desperate Japan. Like a lot of techno-wonders, the recovery of methane hydrates can be demonstrated on the “science project” scale. For now, no viable technique exists for getting commercially-scaled streams of natural gas out of methane hydrates. The Japanese themselves state that it would take at least ten years, if ever, to commercially mine methane hydrates. Japan doesn’t have ten years. It’s banking system is imploding, and without capital even the science projects will come to an end.
Charles Mann is equally rapturous about shale oil and gas. He writes:

“Today, though, fracking is unleashing torrents of oil in North Dakota and Texas–it may create a second boom in the San Joaquin Valley–and floods of natural gas in Pennsylvania, West Virginia, and Ohio. So bright are the fracking prospects that the U.S. may become, if only briefly, the world’s top petroleum producer. (“Saudi America,” crowed The Wall Street Journal. But the parallel is inexact, because the U.S. is likely to consume most of its bonanza at home, rather than exporting it.)”

This is very misleading. The US consumes roughly 19 million barrels a day. The Bakken and Eagle Ford shale formations produce about a million barrels a day combined now, and guaranteed to get a whole lot lower within the next five years. Today’s near-peak production is based on furious drilling and fracking of extremely expensive wells — known as “the Red Queen syndrome” because they are running as fast as they can to keep production up. Meanwhile, the depletion curve on shale oil is a reverse “hockey stick.”


The situation is similar for shale gas, the difference being that the temporary glut of 2005 – 2012 happened because we didn’t have the means to export surplus gas from the initial burst of development and it briefly flooded the domestic market. The price of shale gas is still below the level that makes it economic to produce and when it eventually rises to that level, and beyond, it will be too expensive for its customers to buy. Shale gas is also subject to the Red Queen Syndrome.
These arguments have been well-rehearsed many times in this blog and elsewhere. But the key to understanding our energy predicament is ignored in cornucopian cases like Charles Mann’s Atlantic piece, which is the role of capital. Non-cheap oil has already worked its hoodoo on advanced industrial economies: it has already destroyed the process of capital formation. These economies were not designed to run on non-cheap oil and they can’t, and the capital is no longer there for even the research-and-development to change out the infrastructure, let alone carry out any as-yet-undesigned changes. Furthermore, there is no prospect that we can rescue the process of capital formation at the scale required to continue financing things like shale oil. The absence of real growth in the USA, Europe, and Japan has already destroyed the operations of interest and repayment of debt, and any new debt issued will never be repaid, meaning it is functionally worthless (we just don’t know it yet). These impairments of capital formation have left the major commercial banks insolvent and central banks have worked tirelessly to rescue them by issuing more “money” in the form of credit that can never be paid back.
What all this means is that the capital does not exist to run non-cheap oil economies, or to continue indefinitely the production of non-cheap oil and gas, not to mention methane hydrates and other fantasy fuels.
Joe Nocera’s op-ed in last week’s New York Times was shorter and even dumber (and lazier) than Charles Mann’s foolish Atlantic article. It was based on remarks made by Canada’s Energy Minister, Joe Oliver, who said (among other patently false and idiotic things) that Canada “has the resources to meet all of America’s future needs for oil.” Oliver was pimping for the Keystone pipeline project to transport tar sands byproducts from Alberta down to the US. Nocera swallowed everything Oliver said whole, such as “oil mined from the sands is simply not as environmentally disastrous as opponents like to claim.”  Is that so, Joe? And what’s your source for that assertion? Canada’s Energy Minister? The slug at the bottom of Nocera’s column said he was invited onto the op-ed page because regular columnists Gail Collins and Nicholas Kristoff were off (or on book leave). Nocera’s column was disgracefully ignorant. The editors should send him back to the Times business section where unreality is the order-of-the-day.
Now, many people may draw the conclusion that some conspiracy is underway when the major mainstream media report the news so disingenuously, but that is just not so. The reason we, in effect, lie to ourselves incessantly is because of the master wish behind all the subsidiary wishes: we want to keep driving to WalMart forever and we can’t imagine any other way of life, let alone the way of life that the contraction of industrial economies is tending toward — which is to say a way, way downscaled and re-localized economic life centered on farming and artisanal manufacture. Yes, we are going medieval too, eventually, just like the Japanese, who will get there a little sooner than we will. It’s hard to swallow, I’m sure. That’s why we prefer the more digestible propaganda gummi bear treats like Charles Mann’s Atlantic article and Joe Nocera’s stupid op ed.

A slowdown in US lending or a ramp up in shadow banking

A slowdown in US lending or a ramp up in shadow banking

Courtesy of Sober Looking

We've received a number of emails pointing to what looks like a slowdown in lending by US-chartered banks. The amount of loans and leases on balance sheets of US banks has stopped growing.

As in 2009 and 2011, some people are upset to see record levels of bank excess reserves that are not being turned into loans. These are deposits at the Fed earning 25bp and people are asking why banks are not lending more of this capital out.

But what exactly caused the loan growth on banks' balance sheets to stall? More precisely, what types of loan balances are no longer growing? It turns out that while commercial and industrial loans continue to grow – in fact accelerating – the growth in retail mortgage balances has stalled. And that's the explanation for the flat-lining of the overall loan balances (the first chart above).

Fixed maturity mortgages on US banks' balance sheets (source: FRB; not seasonally adjusted)

"Aha", some economists would say. Banks are not extending as much credit in the mortgage space as they should, which is slowing down the economy. Those evil zombie banks…

The real answer however has to do with the wonderful world of "shadow banking". Why would banks want to keep all these mortgages on their books when they can blow them out to Freddie and Fannie, who in turn sell them to the market in the form of agency MBS (mortgage backed securities). And who are the buyers? The usual suspects of course – insurance firms, mutual funds, etc., and of course the biggest buyer of them all – the Fed. In fact the holdings of MBS on Fed's balance sheet just hit a record. Mortgages are simply making their way from banks' balance sheets onto the Fed's balance sheet in the form of MBS.

Source: FRB

The data from Freddie and Fannie confirms this trend, with the first quarter of this year showing the largest MBS issuance volume in two years. After all, Freddie and Fannie are the largest "shadow banks" around.

The last time we had a spike in MBS issuance in early 2011, mortgage balances at banks actually declined – as they did some "spring cleaning" of their balance sheets. But what about loans that are not Freddie and Fannie eligible? Those should still be sitting on banks' balance sheets, right? Not exactly. The private side of shadow banking is now kicking into gear, particularly in the so-called jumbo loans (mortgages too large to qualify for the GSEs).

Inside Mortgage Finance: – The private-label market is "showing new signs of life," according to Standard & Poor’s, which predicted that banks are likely to increase their securitization of jumbo mortgages. In a report released late last week, S&P projected $14 billion in non-agency jumbo MBS in 2013. Redwood alone set a goal of issuing $7 billion in non-agency MBS this year and is on pace to exceed that volume, helped by a pending $425 million deal, its sixth of the year. PennyMac Mortgage Investment Trust is also aiming to issue a non-agency jumbo MBS in the Redwood mold in the third quarter of 2013.

The demand for fixed income product has manifested itself in the so-called "private-label" MBS, allowing banks to securitize mortgages that don't qualify for Freddie and Fannie. Once again, it's not about lending less – which is how some economists are reading the first chart above. It's about originating product, collecting fees, and then selling into the hot securitization market – public or private. And taking those loans off the balance sheet creates room to do it all over again. As one banker put it, "I want to be in the origination and fee business, not in long-term warehousing …"

Weaponized America: Sturm, Ruger Backlog Doubles; Gun Production, Shipments Surge

Weaponized America: Sturm, Ruger Backlog Doubles; Gun Production, Shipments Surge

Courtesy of ZeroHedge

Whether it is due to the recent governmental attempt to enforce assorted gun controlling measures in the aftermath of the Newtown, CT shooting, or, merely driven by the same catalyst that saw a surge in gun sales four years ago, namely the presidential election, one thing is certain: America is weaponizing itself at an unheard of pace, with both Sturm, Ruger shipments and units produced surpassing 500,000 each in one quarter for the first time in history.


Units Produced:

Shipped and Produced – over 1 million in one quarter for the first time ever:

* * *

But the biggest shock is the backlog of guns on order (orders which RGR could not satisfy in the current quarter).

At over 2 million for the first time in history, a 40% increase from the prior quarter, and nearly a 100% from a year ago, when it comes to getting guns, American just like Cypriots in need of cash, have just one option: get in line.

If we didn't know better, we would say that either RGR has somehow become a $0.99 app for the latest and greatest cool, faddy cell phone, whatever that may be, or, alternatively, America is preparing for war.

Source: 10-Q.

See also: 

DEAR AMERICA: Here’s Why Everyone Thinks You Have A Problem With Guns

“Freely Traded Markets Are An Anachronism; Fundamental Rules No Longer Apply”

"Freely Traded Markets Are An Anachronism; Fundamental Rules No Longer Apply"

Courtesy of Lance Roberts of Street Talk Live

March Spending Driven By Surge In Services

Bond-Choking Central Banks Expand Investment Menu

Bond-Choking Central Banks Expand Investment Menu

Courtesy of Wade of Investing Caffeine


Central banks around the globe are choking on low-yielding bonds, and as result are now expanding their investment menu beyond Treasuries into equities. Expansionary monetary policies purchasing short-term, low-rate bonds means that central banks have been gobbling up securities on their balance sheets that are earning next to nothing. To counteract the bond-induced indigestion of the central banks, many of them are considering increasing their equity purchasing strategies. How can you blame them? With the 10-year U.S. Treasury notes yielding 1.66%; 10-year German bonds eking out 1.21%; and 10-year Japanese Government Bonds (JGBs) paying a paltry 0.59%, it’s no wonder central banks are looking for better alternatives.

More specifically, the Bank of Japan (BOJ) is planning to pump $1.4 trillion into its economy over the next two years to encourage some inflation through open-ended asset purchases. Earlier this month, the BOJ said it has a goal of more than doubling equity related exchange traded funds (ETFs) by the end of 2014. According to Business Insider, the BOJ is currently holding $14.1 billion in equity ETFs with an objective to reach $35.3 billion in 2014.

I can only imagine how stock market bears feel about this developing trend when they have already blamed central banks’ quantitative easing initiatives as the artificial support mechanism for stock prices (see also The Central Bank Dog Ate my Homework).

While expanded equity purchases could break the backs of bond bulls and stock naysayers, some smart people agree that this strategy makes sense. Take Jim O’Neill, the chairman of Goldman Sachs Asset Management, who is retiring next week. Here’s what he has to say about expanded central bank stock purchases:

“Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they’re not going to ever need it? To help their future returns for their citizens, why would they not invest in equity?” 

How big is this shift towards equities? The Royal Bank of Scotland conducted a survey of 60 central banks that have about $6.7 trillion in reserves. There were 13% of the central banks already invested in equities, and almost 25% of them said they are or will be invested in equities within the next five years.

While I may agree that stocks generally are a more attractive asset class than bubblicious bonds right now, I may draw the line once the Fed starts buying houses, gasoline, and groceries for all Americans. Until then, dividend yields remain higher than Treasury yields, and the earnings yields (earnings/price) on stocks will remain more attractive than bond yields. Once stocks gain more in price and/or bonds sell off significantly, it will be a more appropriate time to reassess the investment opportunity set. A further stock rise or bond selloff are both possible scenarios, but until then, central banks will continue to look to place its money where it is treated best.

The central bank menu has been largely limited to low-yielding, overpriced government bonds, but the appetite for new menu items has heightened.  Stocks may be an enticing new option for central banks, but let’s hope they delay buying houses, gasoline, and groceries.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Revolving Door Goes Both Ways

Revolving Door Goes Both Ways: Morgan Stanley Hires Former Treasury Staffer To Head Corporate Affairs

Courtesy of ZeroHedge

Think the revolving door for Morgan Stanley's diaspora of clutch interests goes only from the private sector outward, with the recent appointment of MS' darling Mary Jo White (who will promptly recuse herself in virtually all major cases involved her former clients at Debevoise for years to come) to head the SEC? Think again. Moments ago, Reuters reported that according to a memo sent internally today, Morgan Stanley has hired Michele Davis, "a public relations official and policy director who helped shape the Treasury Department's strategy during the financial crisis, to become global head of corporate affairs, according to a bank memo sent on Monday."

Michele Davis will report to Vice Chairman Tom Nides, according to the memo from Nides and CEO James Gorman. She has worked "at the nexus of political and financial media throughout her career," said the memo, which was sent to employees and obtained by Reuters.

Davis is taking a position that was held by Jeanmarie McFadden who retired in February.

Davis worked under former Treasury Secretary Hank Paulson during the financial crisis in 2008. She had previously held posts at Fannie Mae and at the White House, where she was a deputy assistant to the president and deputy national security advisor for communications.

One could wonder just what benefits MS and other Wall Street firms incurred courtesy of Ms. White's benevolence in the days following Lehman's failure, and/or what the promised benefits to the said former Treasury staffer were from Morgan Stanley as a result of the preceding, but that would be trivial.

After all who cares: we are at a point in time in US history when the chief advisor to the US Treasury on its borrowing needs is none other than the COO of JPMorgan. Everything else should really be a logical continuation of this mindboggling state.

And yes, the revolving door goes both ways. Hence the name.

For those curious to learn some more about Ms Davis, here she is presenting, hilariously, on the topic of "Too Big To Fail"

Fed Mortgage Subsidy Drives Buying Panic In Existing Homes To Bubble Levels

Courtesy of Lee Adler of the Wall Street Examiner

The NAR Pending Home Sales data for March is a measure of current sales as of the date of the contract. It’s the closest thing we have to a real time measure of sales activity in the existing home market. The NAR’s “Existing Home Sales” represents the closing, that is the cash settlement of the sale reflected in Pending Home Sales, usually two months later on average. Existing sales represent historical data that’s two months old, plus the lag of the release, which is another month, so the NAR’s existing home sales data is 3 months stale. The release of that data simply confirms what we already knew from the pending home sales data.

People who pretend to predict existing home sales are pulling your chain. The data is already out there. In fact, the local multiple listing services publish sales information, including contract prices, for local Realtor board members virtually in real time. Many organizations have access to real time price and volume data. They just don’t make it generally available to the public. Pundits who have access to that data and pretend to be able to predict volume and price changes are lying cheats. They have the data in front of their faces.

To the credit of Corelogic, they do publish pending sales price data within a reasonable time after they receive it, and way ahead of everyone else playing the housing data game. In a couple of days Corelogic will post the pending home sales price index from March. The February Index showed an annual gain of 10.2%. This should show up in April closed sale prices when they are first reported in early June.  No doubt we’ll see similar numbers for March pending sales/May closed sales.

The widely followed Cash Shiller data to be released tomorrow adds another month to the release time, then lags the data even more by using a 3 month average. The price and volume data in that index is therefore the theoretical average as of 1.5 months prior to the named date, which for tomorrow’s release will be February. That is already two months late because it’s closed sale data, and further delayed in release by two 2 months. It’s 5 1/2 month old data when it’s released. Tomorrow’s data will represent the theoretical average contract price as of mid November 2012.  It’s absolute garbage.  Corelogic just bought the Case Shiller Index. Hopefully, because it’s worthless crap, they’ll just shut it down.

The pending home sales data reflects only volume, not price. It’s a good gauge of market activity. It’s an index, not an actual number, but I’ve compared it with the existing home sales data over the past 8 years in order to derive a formula to convert it to an equivalent sales number. Then I plot this on a chart on a not seasonally adjusted (NSA) basis. The NSA data is actual, not seasonally manipulated to obscure the market’s actual behavior. I compare the current level and rate of change with past levels and rates of change at the same point of the year to see just how the market is doing. The fallout rate between contracts and sales is usually around 10% but sometimes larger when the market is under more severe stress. For about the past year, the fallout rate has been near zero.

This market is getting more active, as you can see. The sales volume trend is continuing on pace and is back to 2006 levels, just off peak bubble levels.

Pending and Existing Home Sales - Click to enlarge

Pending and Existing Home Sales – Click to enlarge

Dividing the sales number into current inventory shows the inventory to sales ratio. It shows just how tight the market for existing homes has become. This is driving the buying panic.

Existing Homes Inventory To Sales Ratio - Click to enlarge

Existing Homes Inventory To Sales Ratio – Click to enlarge

Finally, here’s an overview of both sales volume and price trends by different measures. Current prices are shown in the listings price data reported by which compiles listing prices of the 55 largest US metros.  While they are higher than the subsequently reported sales prices their trends have proven accurate as an indicator of market direction in real time. Listing prices as of the end of April were 6.9% above the same date last year.

Home Prices - Click to enlarge

Home Prices – Click to enlarge

Listing prices across all markets are not rising as fast as selling prices because more sales are taking place in the more desirable, active markets, whereas the listings data reflects a broader cross section of good and bad markets.  The NAR’s closed sales data showed a gain of 11.6% in February, while Corelogic reported a gain of 10.2% in February pending home sales that will show up in April existing sales data. Housing inflation, like the inflation of stock and bond prices, is raging in the US thanks to the Fed’s subsidy of mortgage rates. Buyers are scrambling to outbid one another for limited inventory in good locations.

However, do not confuse the frenetic buying panic in existing housing with a housing industry recovery. Read It’s A Housing “Recovery” In Orwellian Terms – Here’s The Reality.

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.

Increasing Likelihood of Unstable German Coalition Following Next Elections

Courtesy of Mish.

Following my April 23 political prediction Merkel Loses Chancellorship in September as Support for AfD Soars, I received many emails from readers suggesting I was engaged in wishful thinking, that German polls are unreliable, that I was following the wrong polls, etc.

I am sticking with what I said. I simply do not see how any sort of stable coalition can form either with or without Merkel.

The Green party has now ruled out a coalition with Merkel, SPD wants Merkel gone, and the math for a Merkel-led coalition is simply not there.

The Financial Times reports Greens and SPD close ranks in battle against Angela Merkel.

Germany’s main centre-left opposition parties closed ranks over the weekend in their uphill battle against Angela Merkel, with the Greens signalling a decisive shift to the left.

During a three-day party congress in Berlin five months before national elections, the Greens positioned themselves to the left of the Social Democrats (SPD) with calls for higher income tax and a property levy on the rich.

The party pledged to raise the top rate of income tax from 45 to 49 per cent, and to levy a 1.5 per cent tax on property worth more than €1m, aiming to raise €100bn over 10 years.

Making the first appearance by a Social Democrat leader at a Green congress, Sigmar Gabriel, the party’s national chairman, delivered a passionate plea to the Greens to stop flirting with Ms Merkel’s conservatives. He said only an SPD-Green coalition could take on the financial markets, which he blamed for the recent economic turmoil in Europe.

“There are only two parties in Germany that can tame the financial markets, and that’s you and us,” he told delegates, to loud cheers.

Jürgen Trittin, the Green’s parliamentary leader, declared: “The SPD is the only coalition partner that will help us make Germany greener.”

Coalitions Mathematically Going Nowhere

So where is the SPD-Green Coalition Going? Better yet, where is any coalition going?

Please consider the latest Wahl-O-Meter polls….

Continue Here

Wall Street Is A Rentier Rip-Off

Wall Street Is A Rentier Rip-Off: Index Funds Beat 99.6% Of Managers Over Ten Years

Courtesy of Charles Hugh-Smith of Of Two Minds

The entire financial management industry is a profit-skimming rentier arrangement.

It may seem uncharitable to note that only .4%–that's 4/10th of 1%–of mutual fund managers outperform a plain-vanilla S&P 500 index fund over 10 years, but that is being generous: by other measures, it's an infinitesimal 1/10th of 1%.

According to the folks at the Motley Fool, only ten of the ten thousand actively managed mutual funds available managed to beat the S&P 500 consistently over the course of the past ten years. Consider the following: a quick glance at Yahoo Finance reveals the average expense ratio for growth and income style mutual funds is 1.29%. As a result, approximately $1,883 of every $10,000 invested over the course of ten years will go to the fund company in the form of expenses. Compare that to the Vanguard 500 fund, designed to mirror the S&P 500 index, which boasts an annual expense ratio of only 0.12%, resulting in ten-year compounded expense of $154 for every $10,000 invested.

Frequent contributor B.C. recently screened 24,711 funds on Yahoo Finance's fund screener and 17,785 funds on the Wall Street Journal's online screening tool. The results were sobering, to say the least: using a basic set of criteria, the first screen turned up a mere 5 managers who beat the S&P 500 index over five years. Using a slightly different set of criteria, the second screen found 71 funds out of 17,785 outperformed the index over ten years.
That's .4% of managed funds, i.e. an index fund beat 99.6% of all fund managers.
So what do we get for investing our capital in mutual funds and hedge funds? The warm and fuzzy feeling that we've contributed the liquidity needed to grease a monumental skimming operation. Ten out of 10,000 is simply signal noise; in effect, nobody beats an index fund.
The entire financial management industry is a rentier arrangement: they skim immense profits and return no productive yield. This is of course a key characteristic of the neofeudal debtocracy that is the U.S. economy: various cartels and state fiefdoms operate rentier arrangements that skim a percentage of the national income, protected by the state and endless PR from any market forces or transparency.

B.C.'s analysis and commentary:

Here are the most recent results for the quarter ending Q1 '13 for mutual fund managers' performance vs. the total return to the S&P 500using the Mutual Fund Screener from Yahoo Finance (data from Morningstar):

First Screen Criteria:
All funds.
Manager tenure 5 years or more.
No load.
Management fee of less than 1%.

YTD: >5%
1-yr.: >10%
3-yr.: >5%
5-yr.: >0%

Number of managers who beat the S&P 500 over the past five years: 0

Second Screen Criteria:
All funds.
Manager tenure 5 years or more.
Load less than 2%.
Management fee less than 2%.

YTD: >5%
1-yr.: >10%
3-yr.: >5%
5-yr.: >0%

Number of managers who beat the S&P 500 over the past five years: 5

The screener includes a universe of 24,711 funds, which means that those who "beat the market" were in the fifth-order Pareto distribution of 2-3 out of 10,000.

Using similar criteria for the Mutual Fund Screener without the option of choosing manager tenure but including Lipper relative performance to peers, load-adjusted performance, and with an A-AAA rating, only 71 funds (fewer managers because of multiple fund management by a manager) of 17,785 matched or beat the S&P 500 over 10 years.

Once again, evidence of a third- or fourth-order Pareto distribution of 2-4 out of 1,000 being "winners."

The results of the past 10-12 years during the ongoing secular bear market clearly demonstrate that the "money management" industry exists primarily, if not now exclusively, for the benefit of those who "manage" other people's money, not the investors/shareholders of the funds.

By definition "hedge" funds are no better, i.e., they hedge investors' returns to no better than cash:

Hedge Funds: Going nowhere fast (The Economist)

"The past year has been another mediocre one for hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. Although it might be possible to shrug off one year’s underperformance, the hedgies’ problems run much deeper.

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation."

B.C.'s commentary resumes:

That there are so many "managers" in the game with AUMM (assets under mis-management), all manner of ETFs, and now pension funds "discovering" index funds and index ETFs, all trying to match or "beat the market", is a primary reason why the overwhelming majority of " managers" will underperform and thus add no value to an investors' portfolio. 

Eventually, a growing plurality of so-called "investors" will discover that the stock market is not for wealth accumulation for the majority of "investors" but a wealth-transfer mechanism from the second 9-19% with any financial surplus to the top 0.1-1% who hold a disproportionately large share of financial wealth, and to the so-called money "managers" who benefit from fee income generated by the wealth-transfer process.

However, the resources of the financial services industry generated by fee income will continue to fund mass-media advertising/propaganda in the ongoing attempt to convince the top next 19% that they can "beat the market" if only they turn over their savings to the industry to "manage". Little do most "investors" know that they are funding the perpetuation of the industry's fraud, their own underperformance, and failing to match risk-adjusted returns of cash and fixed income after fees, taxes, and inflation over a cycle.

Now, imagine what would happen to the financial services and banking industries and financial print, broadcast, and online media were these unsanitized facts about dismal money "manager" performance to be widely reported and internalized by a significant minority or small plurality of investors or the public at large.

Thank you, B.C. In my analysis, the financial services industry is simply one of many state-enabled cartels and rentier arrangements that are immune to market forces, price discovery and the bright light of truth.

Mary Jo White About to Get Off to a Bad Start

Mary Jo White About to Get Off to a Bad Start

Courtesy of Yves Smith, Naked Capitalism

Your humble blogger was surprised when Obama nominated Mary Jo White to head the SEC, since her reputation as a tough prosecutor is at odds with Obama’s well established pattern of catering to banks (the fact that he gives them only 97% of what they want is nevertheless offensive enough to their tender sensibilities). I surmised that there had to be an angle here, and I figured he was up to one of his old 11 dimensional chess tricks. The Wall Street Journal pointed out that the timing of her nomination was off, and that alone could be fatal:

Some observers predicted the White House would have difficulty getting any SEC nominee through the Senate until Republican Commissioner Troy Paredes’s term expires in June, possibly creating an opening for a Republican. Nominees can stand a better chance at confirmation if they are paired with a member of the opposing party. The SEC currently has one empty seat.

But she was approved, and this was even with tough-on-banks types who had worked with her personally, like Neil Barofsky and Dennis Kelleher, being enthusiastic about her nomination. So what gives?

Now I’m not as put off as many are by her picking people who’ve been effective on behalf of corporations to be on her team. Sadly, just as Willie Sutton robbed banks because that’s where the money was, you pretty much have to go to Corporate America to find people who could wrestle them to a standstill (Barofsky himself being a possible exception). Now that does not mean that they will, by a long shot. But it’s not uncommon in deal land for attorneys to land new clients because they outmaneuvered the other side and the client figured it out and decided he better have that sonofabitch on his side of the table next time. And White at her confirmation hearing committed to “to further strengthen the enforcement function of the SEC” in a “bold and unrelenting” manner. The most encouraging sign is that DC law firm Arnold and Porter seems to take what White says at face value in an advisory to clients (hat tip Harvard Law School Forum on Corporate Governance and Financial Regulation):

These recent statements by White and other SEC officials, along with White’s reputation, suggest that there may be a strong enforcement effort in the coming years – and the Obama administration’s budget proposal for FY 2014, which was released on April 10, 2013, indicates that the SEC likely will have the resources it needs to support this effort.

So why would the Senate Republicans not have balked? Well, it looks like she’s willing to carry their water, at least on some issues.

White’s first move looks to be to approves something so rancid that outgoing SEC chairman Mary Shapiro refused to touch it, concerned that it would taint her legacy. From Bloomberg (hat tip Ann S):

U.S. Securities and Exchange Commission chairman Mary Jo White is pushing to adopt a rule allowing hedge funds to advertise in a move consumer advocates say could fail to protect unsophisticated investors, according to two people familiar with the matter.

White, who became SEC chairman on April 10, has suggested the commission pass the existing plan without major changes and add additional protections later, said the people, who declined to be identified because the deliberations are private. The approach would placate congressional Republicans who have complained the SEC has slow-walked the rule, which was required to be completed by July 2012…

The rule would lift the ban on “general solicitation,” or using advertising to market investments in hedge funds, startups and other firms. The ban dates to the passage of the first federal securities laws in 1933, said Brian J. Lane, a partner at Gibson, Dunn & Crutcher and former director of the SEC’s corporation finance division.

Shapiro had been initially in favor of allowing for general solicitation until an advisory committee recommended unanimously against it. The four commissioners have since been divided along party lines, with the Democrats wanting to introduce more consumer-protection measures.

The most charitable interpretation one can make is that Shapiro decided she needed to give Republicans this bone in order to get approved (and remember, the SEC is subject to Congressional appropriations, so getting into a pissing match this early could lead to budget cuts which would further weaken the SEC). Bloomberg again:

Approving the regulation would allow White to make good on a promise she made in her Senate confirmation hearing to prioritize rules mandated by the Jumpstart Our Business Startups Act, which was designed to boost capital-raising and job creation.

The sneaky bit here is that by arguing for speed, the Republicans were arguing for implementing the no restriction provision as is. A rewrite would be contentious and therefore take time.

As one Mary Jo White fan said by e-mail:

Ugh. Can’t imagine why she’d want to come out of the gate w/a 3-2 vote, where she’s siding w/the Republican commissioners.

Now enough hue and cry over the rule could give White the pressure or air cover, depending on how cynical you are about her, to be a bit more, um, judicious.

In and of itself, White’s move to appease Republicans isn’t fatal. But it also is clearly not a good sign either. Stay tuned.