Archives for June 2013

Another, more predictable BEN

Another, more predictable BEN

By Paul Price

Market Shadows’ Virtual Put Selling Portfolio sold another put today. We sold one put contract of the Franklin Resources (BEN) Jan. 2014 $150 strike put for $19.40 per share.                       

Franklin Templeton Investments -  logo

After pulling back more than $32 per share over the past month, BEN ($137.60) appears to be a gift. A return to even fifteen times forward estimates would support a 12-month goal of $174.

Over the latest decade, BEN’s earnings per share surged by about 474%. EPS rose from $1.98 in fiscal 2003 to an estimated $11.36 for the fiscal year (FY) ending September 30, 2013. Dividends expanded by 287% over that stretch.

At the current price, BEN is offered at 12.1x this year’s estimate, and 11.8x the Zacks FY 2014 estimate. That is cheap compared with its 10-year median multiple of 17x.

A secure 29-cent quarterly dividend provides a modicum of income at a 0.85% current yield.

 BEN   1-year (daily)

Maximum profit from selling the put would be $1,940 – the amount of the premium we collected. That would occur if BEN closes at $150 or above on January 17, 2014.

If Franklin Resources closes below $150 on the option expiration date, we will be obligated to purchase 100 shares at a net cost of $150 – $19.40 = $130.60 per share. (BEN is currently trading at $137.60, so $130.60 is a 5.1% discount.)

BEN  Jan. 2014 put price

That break-even price is exactly $7 below the stock's price of $137.60 at the time of our put sale. We were able to capture a price about mid-way between the bid – ask spread.

BEN could decline by up to 5.1% without causing a loss on this trade.

See our full Virtual Put Selling Portfolio here http://marketshadows.com/virtual-portfolios/put-selling-virtual-portfolio/.

Supreme Court Strikes Down DOMA

Visualizing The State-By-State Implications Of The DOMA Decision

Courtesy of Zero Hedge

The Supreme Court struck down the 1996 Defense of Marriage Act (as we noted here), leaving states to decide on the legality of same-sex marriage. As the infographic below from Bloomberg shows, laws ban same-sex-marriage in 35 states, with five of those allowing civil union or domestic partnerships.

 

Supreme Court Strikes Down DOMA

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

In what is likely to cause a storm of controversy, the Supreme Court ruled against the 17-year-old anti-gay Defense of Marriage Act:

  • *DEFENSE OF MARRIAGE ACT PROVISION STRUCK DOWN BY TOP U.S. COURT
  • *SUPREME COURT VOTES 5-4 ON U.S. DEFENSE OF MARRIAGE ACT
  • *COURT SAYS MARRIAGE LAW VIOLATES EQUAL PROTECTION GUARANTEE

Kennedy: DOMA "humiliates tens of thousands of children now being raised by same-sex couples"

Scalia: "By formally declaring anyone opposed to same-sex marriage an enemy of human decency, the majority arms well every challenger to a state law restricting marriage to its traditional definition,"

"DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment."

Full Timeline of Gay Marriage (via Global Post):

Following is a timeline of important events in the history of gay marriage in the United States.

1969

– The modern gay liberation movement unofficially kicks off with the Stonewall Riots, demonstrations by gays in response to a police raid in New York City.

1972

– The U.S. Supreme Court lets stand a Minnesota Supreme Court ruling that the law does not allow for same-sex marriage, and that the issue is different from interracial marriage.

1973

– Maryland becomes the first state to pass a statute banning gay marriage.

1977

– Harvey Milk becomes the first openly gay elected official in San Francisco, winning a seat on the Board of Supervisors. He later appeals to gays to come out and run for office, saying "for invisible, we remain in limbo." Milk was shot and killed in 1978.

1986

– The U.S. Supreme Court says "we are quite unwilling" to find a fundamental right to sodomy, even in the privacy of one's home, in Bowers v. Hardwick ruling.

1996

– U.S. Supreme Court Justice Anthony Kennedy writes an opinion striking down a Colorado ban on protections for gays, saying the ban "seems inexplicable by anything but animus."

– President Bill Clinton signs the Defense of Marriage Act, defining marriage as between a man and a woman for federal purposes.

1997

– Comedian Ellen DeGeneres reveals she is gay. Shortly afterward, her TV situation comedy character says "I'm gay" – inadvertently speaking into an airport public address system.

1998

– Debut of television show "Will and Grace" about a gay man and his best friend, a straight woman.

2000

– Vermont becomes the first U.S. state to allow civil unions for same-sex couples.

– Republican vice presidential candidate Dick Cheney, who has a lesbian daughter, indicates he supports gay marriage, saying "freedom means freedom for everybody" and "people should be free to enter into any kind of relationship they want to enter into." He said states should regulate the matter, not the federal government. Cheney serves as vice president for eight years.

2003

– The U.S. Supreme Court, in another decision written by Kennedy, strikes down Texas anti-sodomy law in Lawrence v. Texas case and reverses the 1986 Bowers ruling. Kennedy writes that this does not mean the government must recognize gay relationships. "Do not believe it," Justice Antonin Scalia dissents, saying the logic of the opinion points to allowing same-sex marriage.

– The Massachusetts Supreme Court rules in favor of same-sex marriage, and gay weddings begin in 2004.

2004

– San Francisco Mayor Gavin Newsom directs the county to allow same-sex marriages, arguing the state's voter-approved ban on gay marriage, Proposition 22, is unconstitutional. The state Supreme Court stops the weddings on grounds unrelated to the constitutionality of marriage.

2005

– U.S. northern neighbor Canada allows gay marriage.

2008

– California gay marriages become legal when the California Supreme Court strikes down the Proposition 22 ban. That November, voters add a ban to the state constitution – Proposition 8 – ending a summer of gay marriage.

2009

– Iowa state Supreme Court legalizes same-sex marriage.

– Federal court challenge to Proposition 8 filed, days before California Supreme Court lets Proposition 8 stand as a valid change to the state constitution. Eventually, federal district and appeals courts agree to strike down the ban, which heads to the U.S. Supreme Court.

2010

– The U.S. Congress passes legislation to end a policy put in place in 1993 called "don't ask don't tell" that had barred gays from serving openly in the U.S. military. President Barack Obama signs the measure. The policy officially ends in 2011.

2012

– Obama becomes the first U.S. president to endorse gay marriage, acknowledging that his views on the matter had evolved.

– North Carolina approves a constitutional amendment to ban gay marriage in May. In November, Maine, Maryland and Washington become the first states where voters approve same-sex marriage, and Minnesota rejects a new ban.

2013

– The U.S. Supreme Court in March hears oral arguments on the constitutionality of California's Proposition 8 and the federal Defense of Marriage Act.

– The Boy Scouts of America organization votes in May to lift a century-old ban on openly gay scouts in a victory for gay rights activists. A prohibition on openly gay adult leaders remains in place.

– Minnesota, Rhode Island and Delaware in May become the latest U.S. states to allow same-sex couples to marry, bringing to 12 the number of states permitting it. The other states allowing same sex marriage are: Connecticut, Iowa, Maine, Maryland, Massachusetts, New York, New Hampshire, Vermont and Washington state, as well as the District of Columbia.

– Supreme Court Strikes down DOMA…

 

Full opinion below:

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Boston Fed Research Paper: The Key Variable for Monetary Policy Is . . .

Courtesy of Larry Doyle.

Are we supposed to really think that Ben Bernanke believes our economy — and especially our employment situation — is markedly improving?

If we were to gather our news from USA Today or similar outlets, I guess we could just think just that.

Let’s dig a little deeper.

What are many in and around the Federal Reserve likely reviewing in an attempt to gauge the real health of our employment situation?

I thank one of the single best individuals with whom I ever worked on Wall Street for sharing a paper released recently by the Federal Reserve Bank of Boston addressing the fact that the 35-year low in the labor force participation rateand not the unemployment rate — is truly the key variable in setting Fed policy. Is that right? Indeed it is.

We have not heard this take from Big Ben himself or other officials as they clearly subscribe to the “you can’t handle the truth” approach in dealing with the American public.

The authors provide:

. . . compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical (i.e moves independent of the economy) during “normal times” (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock.

Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.

The paper gets very technical in its delivery, but from what I have been told it has attracted the attention of many within the Federal Reserve system. What do the authors conclude?

Overall, we view our paper as pointing out how labor market slack arising in the wake of deep recessions may not be well summarized by the unemployment rate (given the substantial lag in the response of participation), and consequentially, that monetary rules developed for the Great Moderation period may have to be adapted to account for broader measures of slack.

That is, they maintain that proper Fed policy is to stay exceptionally accommodative for a protracted period and run the risk of greater inflation to counteract the current underlying disinflationary trends within our economy.

So what are we to make of Bernanke’s comments last week and last month? I personally believe Ben is stretching the truth when he comments about an improving economy. I think he was — and still is – concerned with inflated asset valuations and wanted to let some air out of many of the market segments that had clearly bubbled.

For those who care to read and review this paper, I thank my friend for sharing Labor Force Participation and Monetary Policy in the Wake of the Great Recession

Navigate accordingly.

Larry Doyle

For those reading this via a syndicated outlet please visit my blog and comment on this piece of ‘sense on cents.

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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.

House Financial Services Convenes Today on Too Big to Fail

Courtesy of Pam Martens.

The U.S. House of Representatives’ Financial Services Committee will convene at 10 a.m. this morning to hear new warnings about the growing dangers posed by the too big to fail Wall Street banks. 

On deck to testify are: Thomas Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation (FDIC); Richard W. Fisher, President of the Federal Reserve Bank of Dallas; Jeffrey Lacker, President of the Federal Reserve Bank of Richmond; and Sheila Bair, former Chair of the FDIC, now with the Pew Charitable Trust. (Bair wrote the quintessential insider’s account of the 2008 crash, Bull by the Horns.)  

Tragically, these individuals spent hours writing their testimony with the full knowledge that it will far on the deaf ears of a Congress that is incapable of seeing a train wreck coming down the tracks until the mangled cars lie scattered over the landscape. 

Here’s a look at some interesting milestones leading up to this hearing:

May 2011: Restructuring the Banking System to Improve Safety and Soundness, By Thomas M. Hoenig, President and CEO, Federal Reserve Bank of Kansas City, and Charles S. Morris, Vice President and Economist, Federal Reserve Bank of Kansas City

“This proposal to reduce costs and risks to the safety net and financial system has two parts.  The first part proposes to restrict bank activities to the core activities of making loans and taking deposits and to other activities that do not significantly impede the market, bank management, and regulators in assessing, monitoring, and/or controlling bank risk taking.  However, prohibiting banks from engaging in activities that do not meet these criteria and that threaten financial stability would provide limited benefits if those activities migrate to shadow banks.  The second part proposes changes to the shadow banking system by making recommendations to reform money market funds and the repo market.”

Continue Here

Italy Faces Huge Losses on Derivatives Restructured in Eurozone Crisis

Courtesy of Mish.

The Financial Times notes that Italy faces billions in losses on Derivatives Restructured in Eurozone Crisis.

Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.

A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn.

Experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.

Three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.

An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.

The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.

The facts seem difficult to piece together, but the amounts are significant. Some of the derivatives date back to 1994-1996 when Italy dressed up its finances to meet Maastricht treaty criteria, including a budget deficit less than 3 per cent.

“Italy had a budget deficit of 7.7 per cent in 1995” but the deficit magically shrunk to 2.7% in 1998, the approval year for Italy joining the eurozone. The odds of that being legitimate are approximately zero percent.

ECB president Mario Draghi was head of the Italian central bank at the time much of this took place, so it’s no wonder details are scant.

Recall that Bloomberg lost a freedom of information lawsuit against the ECB regarding derivatives used to hide Greek debt on the basis “disclosure of the files would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece”….

Continue Here

Housing Inflation Ain’t Recovery

Courtesy of Lee Adler of the Wall Street Examiner

Let’s call a spade a spade, please. What we have here is housing “inflation,” hardly housing “recovery.” Housing prices are rising 10-15% per year, but nobody in the media is calling it what it is. There’s a wall of silence.

We have narrowed the definition of inflation to such a degree that nothing is “inflation” unless the Fed or the BLS says so. Massive asset bubbles, particularly housing bubbles, go unrecognized by mainstream economists because they simply pretend that asset bubbles are not manifestations of inflation.

Meanwhile they throw the term “recovery” around as if it actually means what it says. You want “recovery?”  This  ain’t it. The so called housing recovery is a Fed concocted dead cat bounce that will disappear along with the Fed and foreign central bank subsidized mortgage rates (which are tied primarily to the 10 year Treasury yield).

Housing Inflation Is Not Recovery - Click to enlarge

Housing Inflation Is Not Recovery – Click to enlarge

Prices have risen 10% in the past 12 months and 18% in the past two years while new home demand and construction has barely moved off historic lows. As for employment in the home construction, it remains dead. ZIRP and subsidized mortgages have caused gross distortions in the housing market that fool people into thinking that there’s some kind of fundamental recovery under way.

Those subsidized super low mortgage rates have driven phony demand.  As mortgage rates normalize, the phony demand will dry up.  Likewise, as fixed income investment yields return to historically normal levels, empty nesters and retirees who have wanted to downsize or cash out will soon be able to actually earn a decent return on their money. They have sat on their hands and stayed put in their old homes because the proceeds of a sale would earn zero interest.  They’ll soon have an incentive to sell. For sale existing home supply will increase just when the phony demand is vaporized.

As for the Case Shiller Index, it’s ancient history.  It tells us nothing about today’s market.  There are far more timely indicators that I’ll cover in the days ahead as we look for cracks in this trend of housing inflation without recovery.

_______________________________________________

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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.

Yields Creep Up in Spain, Italy, France (Actual and Also Relative to Germany)

Courtesy of Mish.

Curve Watchers Anonymous has its eye on global interest rates that are heading North practically everywhere.

Spain 10-Year Bond Yields

After hitting a low of just above 4% earlier this year, the yield is now back above 5%.

Italy 10-Year Bond Yields

After falling as low as 4.68% today, the yield close up slightly at 4.86%. The April low was 3.76%.

Germany 10-Year Bond Yields

The yield on the Germany 10-Year government bond is 1.80, up from a year-low of 1.17%.

Thus sovereign rates are up 63 basis points in Germany, but over 100 basis points (a full percentage point) in Spain and Italy.

Continue Here

The Daily Show Does the US Ratings Agencies

The Daily Show Does the US Ratings Agencies

Courtesy of Jesse's Cafe Americain

The Daily Show does the ratings agencies, CNBC, and the opera buffo of the financial markets.

The credibility trap doesn't explain everything, but it does cover quite a bit.

"It is difficult to get a man to understand something when his salary depends upon his not understanding it."

Upton Sinclair

h/t Matt Taibbi

China Acts to Calm Markets; Stock Market Rebounds From 6% Plunge After Central Bank Pledges More Liquidity; Wet Nurse Action

Courtesy of Mish.

In the past few week, China intraday lending rates as measured by SHIBOR got as high as 25% (See China Cash Crunch: 1-Day Interest Rate Spikes to Record High 25%).

With rates spiking, global stock markets plunged.

On Monday China insisted banks had significant liquidity sending a message that banks need to manage their own risks.

A translated message by the People’s Bank of China on liquidity states “Commercial banks should concentrate storage for taxes and statutory reserve deposit and other factors impact on liquidity in advance to arrange sufficient positions to maintain adequate levels of reserve ratio, to ensure the normal settlement” while warning “expansion of credit and other assets too fast may lead to liquidity risk“.

That message sent the Shanghai stock market index down about 6% as shown in the following chart.

Shanghai Composite Intraday Chart

The horizontal line represents a split shift when the stock market is open.

$SSEC Shanghai Daily Chart

Since the beginning of June, the Shanghai stock index is down about 15%. Since the February high of 2443, the market is down nearly 20%. Intraday, the market was down over 25% from the year’s high.

Continue Here

Bill Gross On The Fog That’s Yet To Lift… Or Doctor Populist And Mister P&L

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Bill Gross, of PIMCO and serious bond duration pain, finally comes clean: the man who has been criticizing the Fed for years for one after another misguided policy (all of which ultimately culminate with the New York Fed's markets desk going "wave it in" this or that) to the point where he began sounding like a Zero Hedge broken record, opines on the taper. And it is here that Bill's colors truly shine through: "We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty." In other words, please let me have my Fed and central-planning criticizing cake (but don't actually enact my free market suggestions) and let me eat my management fees too (and no monthly redemptions please). And there you have it: populist critic by day, pandering P&L defender by night.

This article originally appeared in the online edition of Barron’s on 25 June 2013.

The Fog That’s Yet to Lift

June Gloom, the fog and clouds that often linger here over the Southern California coast this time of year, appears to have spread to the Federal Reserve. At his press conference last week, Fed Chairman Ben Bernanke said the central bank may begin to let up on the gas pedal of monetary stimulus by tapering its asset purchases later this year and ending them in 2014.

We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty.

Fog may be obscuring the Fed’s view of the economy – in particular, the structural impediments that will inhibit its ability to achieve higher growth and inflation. Mr. Bernanke said the Fed expects the unemployment rate to fall to about 7% by the middle of next year. However, we think this is a long shot.

Mr. Bernanke’s remarks indicated that the Fed is taking a cyclical view of the economy. He blamed lower growth on fiscal austerity, for example, suggesting that should it be removed from the equation the economy would suddenly be growing at 3%. He similarly attributed rising housing prices to homeowners who simply like or anticipate higher home prices, as opposed to emphasizing the mortgage rate, which is really what provided the lift in the first place.

Our view of the economy places greater emphasis on structural factors. Wages continue to be dampened by globalization. Demographic trends, notably the aging of our society and the retirement of the Baby Boomers, will lead to a lower level of consumer demand. And then there’s the race against the machine; technology continues to eliminate jobs as opposed to provide them.

Mr. Bernanke made no mention of these factors, which we think are significant forces that will prevent unemployment from reaching the 7% threshold during the next year. Falling below “NAIRU” (the non-accelerating inflation rate of unemployment – usually estimated between 5% and 6%) is an even more distant goal.

Indeed, the Fed’s views on inflation may be the foggiest of all. Mr. Bernanke said the Fed sees inflation progressing toward its 2% objective “over time.” At the moment, we’re nowhere near that.

The Fed’s plan strikes us as a bit ironic, in fact, because Mr. Bernanke has long-standing and deep concerns about deflation. We’ve witnessed this in speeches going back five or 10 years – the “helicopter speech,” the references not only to the Depression but to the lost decades in Japan. He badly wants to avoid the mistake of premature tightening, as occurred disastrously in the 1930s. Indeed, on several occasions during his press conference, Mr. Bernanke conditioned his expectations of tapering on inflation moving back toward the Fed’s 2% objective.

The Chairman, of course, may be equally concerned about the market effects of tapering and determined to signal its moves early. However, as the spike in interest rates shows, this path is fraught with danger, too.

We’re in a highly levered economy where households can’t afford to pay much more in interest expense. Monthly payments for a 30-year mortgage have jumped 20% to 25% since January. Mortgage originations have plummeted by 39% since early May.

High levels of leverage, both here and abroad, have made the global economy far more sensitive to interest rates. Whereas a decade or two ago the Fed could raise the fed funds rate by 500 basis points and expect the economy to slow, today if the Fed were to hike rates or taper suddenly, the economy couldn’t handle it.

All this suggests that investors who are selling Treasuries in anticipation that the Fed will ease out of the market might be disappointed. If inflation meanders back and forth around the 1% level, Mr. Bernanke may guide the Committee towards achieving not only an unemployment rate but also a higher inflation target.

It’s reasonable, of course, for Mr. Bernanke to try to prepare markets for the inevitable and necessary wind down of QE. But if he has to wave a white flag three months from now and say, “Sorry, we miscalculated,” the trust of markets and dampened volatility that has driven markets over the past two or three years could probably never be fully regained. It would take even longer for the fog over the economy to lift.

Perfecting The Surveillance Society – One Payment At A Time

Perfecting The Surveillance Society – One Payment At A Time

Courtesy of Wolf Richter  

www.testosteronepit.com   www.amazon.com/author/wolfrichter

Governments and corporations, even that genius app developer in Russia, have one thing in common: they want to know everything. Data is power. And money. As the Snowden debacle has shown, they’re getting there. Technologies for gathering information, then hording it, mining it, and using it are becoming phenomenally effective and cheap.

But it’s not perfect. Video surveillance with facial-recognition isn’t everywhere just yet. Not everyone is using a smartphone. Not everyone posts the details of life on Facebook. Some recalcitrant people still pay with cash. To the greatest consternation of governments and corporations, stuff still happens that isn’t captured and stored in digital format.

But there is one place in the world where their wildest dreams are coming true, one place that is getting closer to the ideal where every purchase is tracked … by a single device. That place isn’t a well-organized dictatorship or an overly paternalistic state where everyone is required to possess a national ID. In fact, it’s barely a state at all, dysfunctional in many aspects, catastrophic in others, decades behind in many ways, with people who are often desperately poor and illiterate: Somaliland.

There are barely any classic telephones – those devices with cords hanging out incongruously. Or banking services. Fiber-optic cables? Hardly. Copper cables? They’d just get stolen and sold for scrap. Credit cards? Useless. It declared its independence from Somalia in 1991 but hasn’t been recognized. Yet, payment by cellphone is becoming standard.

This phenomenon – widespread use of cellphones for a broad array of services, including mobile payments – is new, rapidly expanding, and for Africa, revolutionary. It has allowed people to leapfrog decades of painstaking technological development. And it has been widely reported with a mix of admiration and head-shaking; the latest in The Globe and Mail, which recounted how easy and common it is to use a basic cellphone for nearly all purchases, at stores or street vendors, to pay for a bus ticket or a shoeshine or some khat for a torpid afternoon high.

“We never handle a single dollar in cash,” explained Moustapha Osman Guelleh, COO of Coca-Cola’s local bottler. About 80% of its sales to distributors are handled via Zaad, the mobile payment service of the largest cellphone operator, Telesom. The rest are handled via bank transfers. “We don’t have any issues of having to keep cash in a safe,” he said. The company even pays its employees via Zaad. A cashless company, in an increasingly cashless society.

“What amazes me is that even illiterate people have learned how to use it,” said Khader Aden Hussein, general manager of the Ambassador Hotel in Hargeisa, the capital of Somaliland. The hotel pays all of its 300 employees and nearly half of his suppliers via Zaad.

They have their reasons. Text messages immediately confirm the transaction to both parties. Zaad transactions are in US dollars, eliminating the need to count and deal with wads of soggy crinkled shillings. It’s secure – well, at least it’s encrypted. Crime that targets cash is becoming unprofitable. Security improves. Subscribers prepay, so credit risk for the company is zero. Credit risk for subscribers is another matter, but hey. And Telesom’s servers capture every bit of data and retain it forever.

Mobile payments are becoming common in other parts of Africa: 17 million Kenyans use them, out of a working-age population (15 or older) of 25 million. What’s happening in Africa – getting rid of cash – is every government’s dream: no more anonymous transactions. It would end the underground economy, black markets, or smuggling. Small-time tax evaders would lose an important tool. Eliminating cash would be useful in the war on drugs or terror, or in any other such “war” on products or strategies. Even “anonymous” virtual currencies have to pass through internet service providers and leave a digital trail, unlike cash. If only cash could be eliminated!

But the killer technology isn’t the elimination of cash. It’s the combination of payment data and the information stream that cellphones, particularly smartphones, deliver. Now everything is tracked neatly by a single device that transmits that data on a constant basis to a number of companies, including that genius app developer in Russia – rather than having that information spread over various banks, credit card companies, etc. who don’t always eagerly surrender that data. Eventually, it might even eliminate the need for data brokers. At that point, a single device knows practically everything. And from there, it’s one simple step to transfer part or all of this data to any government’s data base.

Opinions are divided over whom to distrust more: governments or corporations. But one thing we know: mobile payments and the elimination of cash, a quantum leap for Somalis in their quest for modern life, will also make life a lot easier for governments and corporations in their quest for the perfect surveillance society.

Both cooperate in their quest. For example, Keyhole Inc., a venture-capital funded startup, was acquired by Google in 2004. Its product became Google Earth. Its technology filtered into Google Maps and Google Mobile. One of the investors? The CIA. And Snowden’s disclosures shed new light on these arrangements. Read…. Tech Companies And Their Love Affair With The NSA and CIA.

Canadian National Railway Co: Fundamental Stock Research Analysis

Courtesy of www.fastgraphs.com.

Before analyzing a company for investment, it’s important to have a perspective on how well the business has performed.  Because at the end of the day, if you are an investor, you are buying the business.  The FAST Graphs™ presented with this article will focus first on the business behind the stock.  The orange line on the graph plots earnings per share since 1999.  A quick glance vividly reveals the historical operating record of the company.

This article will reveal the business prospects of Canadian National Railway Co (CNI) through the lens of FAST Graphs – fundamentals analyzer software tool.   Therefore, it is offered as the first step before a more comprehensive research effort.  Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.

 A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business.  Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized.  The FAST Graphs’ unique advantage is the graphical articulation of the price value proposition. 

Earnings Determine Market Price:  The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings.  The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line.  On graph after graph the lines will move in tandem.  If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.  

Earnings & Price Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on Canadian National Railway Co shows a picture of undervaluation based upon the historical earnings growth rate of 18.5% and a current P/E of 14.4.  Analysts are forecasting the earnings growth to continue at about 11.5%, and when you look at the forecasting graph below, the stock appears in-value (it’s inside of the value corridor of the five orange lines – based on future growth).

Canadian National Railway Co:  Historical Earnings, Price, Dividends and Normal P/E Since 1999

Performance Table Canadian National Railway Co

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return:  capital appreciation and dividend income.  Dividends are included in the total return calculation and are assumed paid, but not reinvested. 

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident.  In addition to the 17.9% Annualized ROR (w/o Div) (green circle), long-term shareholders of Canadian National Railway Co, assuming an initial investment of $10,000, would have received an additional $10,429.41 in total dividends paid (blue highlighting) that increased their Annualized ROR (w/o Div) from 17.9% to a Total Annualized ROR plus Dividends Paid of 18.6% versus 2.9% in the S&P 500.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest.  Notice that the current price earnings ratio on this quality company is as normal as it has been since 1999.

A further indication of valuation can be seen by examining a company’s current P/S ratio relative to its historical P/S ratio.  The current P/S ratio for Canadian National Railway Co is 3.98 which is historically high.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1.            The rate of change (growth rate) of the company’s earnings

2.            The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 17 leading analysts reporting to Capital IQ forecast Canadian National Railway Co’s long-term earnings growth at 11.5%.  Canadian National Railway Co has low long-term debt at 35% of capital.  Canadian National Railway Co is currently trading at a P/E of 14.4, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18.  If the earnings materialize as forecast, based upon forecasted earnings growth of 11.5%, Canadian National Railway Co’s share price would $178.13 at the end of 2018 (brown circle on EYE Chart), which would represent a 13.8% annual rate of total return which includes dividends paid (yellow highlighting).

Earnings Yield Estimates

Discounted Future Cash Flows:  All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Canadian National Railway Co to an equal investment in 10-year Treasury bonds illustrates that Canadian National Railway Co’s expected earnings would be 4.9 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported.  Future forecasts for earnings growth are based on the consensus of leading analysts.  Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure:  No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

Please click here to read more articles at FastGraphs.com.

Aaron’s Inc: Fundamental Stock Research Analysis

Courtesy of www.fastgraphs.com.

Before analyzing a company for investment, it’s important to have a perspective on how well the business has performed.  Because at the end of the day, if you are an investor, you are buying the business.  The FAST Graphs™ presented with this article will focus first on the business behind the stock.  The orange line on the graph plots earnings per share since 1999.  A quick glance vividly reveals the historical operating record of the company.

Aaron’s Inc (AAN), is a leader in the sales and lease ownership and specialty retailing of residential furniture, consumer electronics, home appliances and accessories with more than 2,000 Company-operated and franchised stores in 48 states and Canada. Founded in 1955 by entrepreneur R. Charles Loudermilk and publicly traded since 1982, Aaron’s was a pioneer in the furniture rental industry.

This article will reveal the business prospects of Aaron’s Inc through the lens of FAST Graphs – fundamentals analyzer software tool.   Therefore, it is offered as the first step before a more comprehensive research effort.  Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.

 A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business.  Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized.  The FAST Graphs’ unique advantage is the graphical articulation of the price value proposition. 

Earnings Determine Market Price:  The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings.  The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line.  On graph after graph the lines will move in tandem.  If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.  

Earnings & Price Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on Aaron’s Inc shows a picture of undervaluation based upon the historical earnings growth rate of 13.9% and a current P/E of 13.  Analysts are forecasting the earnings growth to continue at about 12.2%, and when you look at the forecasting graph below, the stock appears  undervalued (it’s inside of the value corridor of the five orange lines – based on future growth).

Aaron’s Inc:  Historical Earnings, Price, Dividends and Normal P/E Since 1999

Performance Table Aaron’s Inc

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return:  capital appreciation and dividend income.  Dividends are included in the total return calculation and are assumed paid, but not reinvested. 

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident.  In addition to the 13.4% Annualized ROR (w/o Div) (green circle), long-term shareholders of Aaron’s Inc, assuming an initial investment of $10,000, would have received an additional $1,036.71 in total dividends paid (blue highlighting) that increased their Annualized ROR (w/o Div) from 13.4% to a Total Annualized ROR plus Dividends Paid of 13.5% versus 2.9% in the S&P 500.

 

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest.  Notice that the current price earnings ratio on this quality company is as low as it has been since 1999.

A further indication of valuation can be seen by examining a company’s current P/S ratio relative to its historical P/S ratio.  The current P/S ratio for Aaron’s Inc is .94 which is historically normal.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1.            The rate of change (growth rate) of the company’s earnings

2.            The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 10 leading analysts reporting to Capital IQ forecast Aaron’s Inc’s long-term earnings growth at 12.2%.  Aaron’s Inc has low long-term debt at 11% of capital.  Aaron’s Inc is currently trading at a P/E of 13, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18.  If the earnings materialize as forecast, based upon forecasted earnings growth of 12.2%, Aaron’s Inc’s share price would $59.42 at the end of 2018 (brown circle on EYE Chart), which would represent a 15% annual rate of total return which includes dividends paid (yellow highlighting).

Earnings Yield Estimates

Discounted Future Cash Flows:  All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Aaron’s Inc to an equal investment in 10-year Treasury bonds illustrates that Aaron’s Inc’s expected earnings would be 5.6 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported.  Future forecasts for earnings growth are based on the consensus of leading analysts.  Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure:  Long AAN at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

Please click here to read more articles at FastGraphs.com.

Yields Creep Up in Spain, Italy, France (Actual and Relative to Germany)

Courtesy of Mish.

Curve Watchers Anonymous has its eye on global interest rates that are heading North practically everywhere.

Spain 10-Year Bond Yields

After hitting a low of just above 4% earlier this year, the yield is now back above 5%.

Italy 10-Year Bond Yields

After falling as low as 4.68% today, the yield close up slightly at 4.86%. The April low was 3.76%.

Germany 10-Year Bond Yields

The yield on the Germany 10-Year government bond is 1.80, up from a year-low of 1.17%.

Thus sovereign rates are up 63 basis points in Germany, but over 100 basis points (a full percentage point) in Spain and Italy.

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Ben Bernanke Starts a Bond Panic; Fed Pals Step In to Soothe Nerves

Courtesy of Pam Martens.

James Bullard, President of the St. Louis Fed

The frightening “L” word is now making the rounds on Wall Street, resurrecting fears of the early days of the 2008 financial crisis. According to Wall Street veterans, liquidity has dried up in finding buyers for what hedge funds are desperate to sell: large blocks of lower rated bonds. 

Since Federal Reserve Chairman Ben Bernanke held his press conference on Wednesday, June 19, of last week, hedge funds have been stampeding to unwind trades, driving down the value of not just bonds, but stocks, exchange-traded funds (ETFs) and gold as well. Even U.S. Treasury notes, the typical safe haven amidst panic selling, have lost significant value. The Treasury selloff is likely a result of the liquidity of the instrument; when hedge funds must raise cash quickly to meet margin calls and there are no bids for some of their other asset holdings, they have no choice but to sell the most liquid investments. 

It also didn’t help that Bernanke made his remarks the week before the U.S. Treasury was set to auction $179 billion of Treasury bills and notes. The increase in interest rates resulting from the panic selling has forced the U.S. government to offer higher interest rates on its debt auctions this week. 

Bernanke, a man of measured words, clearly did not mean to set off a panic. So what was it that the bond vigilantes found so repugnant in Bernanke’s press conference of June 19: 

First, Bernanke said the Fed might actually sell some of its holdings of mortgage backed securities at some point: “One difference is worth mentioning. While participants continue to think that, in the long run, the Federal Reserve’s portfolio should consist predominantly of Treasury securities, a strong majority now expects that the Committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run, limited sales could be used to reduce or eliminate residual MBS holdings.” 

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Parking in Chicago: Two Minutes for Two Bits

Courtesy of Larry Doyle.

Do you ever get to the point when you think your life is one large windshield and every bird in the world has taken a liking to you?

Let’s take a break from trying to decipher the nuances and obfuscations in all too many statements emanating from the Federal Reserve system and focus on simple matters of everyday life.

To do just that, let’s navigate to the Windy City and the state of Illinois and revisit a chilling comment left here the other day by a regular reader:

I live in Illinois, and our unfunded pension debt is $100B, and grows by $17.1M per day. The school pensions are paid by the state, so there is no accountability by the local school boards to limit large wage increases to teachers that are retiring by the next contract, or within four or five years. Four, five, six and even seven percent increases have been given to teachers retiring in the next few years, padding their pensions that the citizens of the state of Illinois are on the hook for.

The Civic Club of Chicago actually estimates Illinois’ unfunded pension obligation is $240B to $248B if the accounting included accrual, not cash value. As soon as I can sell my home, I am moving six miles north to Wisconsin, where pension reform actually lowered property taxes by an average of $400.00 per homeowner in Wisconsin, while my tax rate increase in Illinois went up 22.7% after going up 20.1% the year before.

With both the city of Chicago and state of Illinois under enormous fiscal pressures, what is one vehicle — pun intended — the city specifically has taken to address its escalating fiscal nightmare? It sold its parking meters.

Who bought the meters and what does this mean for the life of everyday citizens? The Financial Times highlights that Chicago Car Owners Are Driven to Distraction:

Meg Babs and four friends are pumping quarters into an automated parking meter on Clark Street, two blocks from Chicago City Hall.

Thirty-four quarters later, they look at the time they’ve accrued: one hour and nineteen minutes. For $8.50.

“It’s crazy – you put in a quarter you get two minutes, you put in $5 you get 49 minutes,” Ms Babs, 21, says. “It makes you want to take public transportation to get into the city.”

Ms Babs and her friends are not alone in their frustration with the city’s parking rates. Fees have been rising since a 2008 deal saw Chicago lease its 36,000 parking meters to a consortium led by Morgan Stanley for $1.15bn for 75 years. The consortium is also backed by Allianz and Abu Dhabi’s sovereign wealth fund.

Chicago’s parking woes highlight the growing tension between America’s cities and the Wall Street banks, which have stepped in to offer to plug desperate municipalities’ widening deficits.

The bank invested in the city’s parking system through Morgan Stanley Infrastructure Partners (MSIP), its $4bn infrastructure fund. MSIP has been snapping up assets in recent years including Southern Star Central, a company that transports natural gas to municipalities including Kansas City and Oklahoma City.

The Chicago deal has been pilloried in the media, by residents and by Mayor Rahm Emanuel, whose predecessor rushed it through and used nearly all of the proceeds to plug budget holes.

A spokesman for the consortium, Chicago Parking Meters LLC, says that only the city has the authority to raise rates. He points out that the company has invested in infrastructure, including 4,700 modern pay boxes.

The city says the schedule of increases over the past five years – which took rates from as low as 25 cents an hour in some places to $2, $4 or $6.50 an hour – were written into the original contract, which many argue the city council and then-mayor’s office had not fully considered.

This parking nightmare, aka ‘windshield treatment’, is further evidence of the longstanding and massive municipal malfeasance in Chicago but now also the rent-seeking solutions pursued by political operatives.

Navigate accordingly.

Larry Doyle

For those reading this via a syndicated outlet please visit my blog and comment on this piece of ‘sense on cents.

Please 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.

Deflation By Any Other Name Would Smell As Foul

Courtesy of The Automatic Earth

Russell Lee Family Car February 1939
"White migrant and wife repairing clutch in their car near Harlingen, Texas"

Over the past two weeks or so, we've been seeing a very clear portrait of how sick our economies are. Not that you would know it from reading the press. The term deflation pops up only very cautiously. Could that be because people don't understand what's going on? Or are they simply afraid of the word? This is the real thing, guys. And it's going to hurt.

Money (actually: credit) has shifted out of emerging markets by the trillions. So where did it go? Not into bonds, stocks or precious metals. Money shifted out of there too, and also by the trillions. Money isn't going anywhere, it's going "poof". It's vanishing and will never be seen again.

Markets may still rise at times to some extent, but only if and when more stimulus is flooded into the system, or people think it will be. Markets have simply been undead for the past 5 years – or so -, as long as central banks have issued stimulus. Take that away and all you're left with is zombies. And even if markets rise, or "normalize", a little in the future, this genie's out of the bottle and won't get back in: bond yields and interest rates will not go back to the extremely low levels of the past few years. Central banks' longer term control of either has always been no more than an illusion. And as for another illusion: you can't call something a "recovery" if you pay for it with more debt, that doesn't make nearly enough sense.

People think they can find the reason behind the vanishing trillions in money/credit in things Ben Bernanke may or may not have said, and perhaps in a hard stance by the Chinese central bank. But they are merely small parts of a bigger story. The problem is not that the Fed hints at tapering, it's that the US economy is too sick to stand up straight without constant and/or increasing credit infusions. A zombie economy propped up with zombie money. And that can't last. It never could.

Nothing Ben does, whether it's issuing stimulus or hinting at less stimulus, represents real value. And that, to many people focused on the illusion of value, may have become clear only when Abenomics appeared on stage, seemed a success at first and then showed its true colors in a substantial Nikkei crash. Abenomics is the Fed's QE on steroids; both follow the same trajectory, but it's a matter of the harder they come, the harder they fall. Japan wanted too much too fast, and ended up shattering the stimulus illusion worldwide. As I put it three weeks ago:

What If Stimulus Is Self-Defeating?

… in today's world stimulus is self-defeating because it's stimulus itself that reveals the weak spots in an economy, and more stimulus reveals more weak spots.

Note: this is not the same as saying all stimulus is bad, or must necessarily defeat itself. But it is, and it does, in today's world, where stimulus doesn't serve to jolt the real economy into recovery, but to hide existing debt and create only the illusion of recovery. What makes it worse is that even just about everybody who should have known this instead elects to cling to the illusion. Well, your wake up call has come, and if you still don't listen it'll come back louder next time.

Today's stimulus is self-defeating simply because it is unleashed in a toxic financial environment, ridden with hidden debt. [..] … it can only function when debts are properly restructured, defaulted upon, their holders bankrupted where applicable.

And there's no chance of that: the most prolific debt holders are Wall Street banks, and their debts have been made more secret than the latest whereabouts of Jimmy Hoffa. As long as that stays the way it is, QE is nothing but a very expensive – and very temporary – stop gap. Short term profits for the financial world, long term losses for you and me.

How much money/credit has evaporated into thin air in the last few weeks? It's impossible to even estimate, and nobody's trying, maybe because of a fear of some kind, but it's certainly multiple trillions. A Reuters article over the weekend stated that "global equity markets lost $1 trillion on Thursday alone" . And Thursday was by no means the worst of the lot. The biggest losses have come not in stock markets, but in the bond markets, and these losses will continue. Not only did central banks never have control here, what's crucial is that nobody believes anymore that they have. More from the article:

The CBOE Volatility Index, a gauge of anxiety on Wall Street, jumped 23% on Thursday to 20.49, the first time this year it has exceeded 20, an often-used dividing line between calm and stressed markets. It closed at 18.90 on Friday.

Signs of concern about high-flying assets like emerging markets can be seen in the options market, where more than 1.35 million contracts in the iShares MSCI Emerging Markets exchange-traded fund traded on Thursday – 82% of which were put options, generally used to protect against losses.

The Merrill Lynch MOVE Index, a measure of expected volatility in the U.S. Treasury market, rose to 103.7 on Friday; that index sat at 50 in early May, a multi-year low.

Volatility, nerves, uncertainty. Deadly for an economy based on make-believe. The problem is not what Bernanke says or does not say, the problem is the debt still hiding underneath the layers of stimulus. Peel those layers away and guess what you see? And nerves or no nerves, bonds are losing value fast, the losses for institutional investors, governments, central banks and other parties will be enormous. And that is deflation.

Over the weekend, the BIS came with a curious number on the losses, as quoted by Reuters:

The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors – excluding the Federal Reserve – of more than $1 trillion, or 8% of U.S. gross domestic product.

The potential loss of value in government debt as a share of GDP is at a record high for most advanced economies, ranging from about 15% to 35% in France, Italy, Japan and Britain.

"As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said.

Curious, because a 3 percentage point rise is a large number (so large it may well have been picked to throw people off) and losses will already be very substantial at a much lower percentage too. Moreover, in the $82 trillion or so global bond markets, a $1 trillion loss looks very low in comparison, certainly when you see the BIS claim that France, Italy, Japan and Britain can see their bonds lose a third of their value. But still, again, this is deflation.

Perhaps the clearest, most down to earth and black and white illustration of deflation comes from two graphs that Ambrose Evans-Pritchard posted overnight . Remember, deflation does not equal falling prices, they're just a consequence. Deflation is the combination of the money and credit supply with the velocity of money. We know what that means for Japan, where velocity is extremely low, and PM Abe finds out that he can try to increase the money supply, but he has no control over the velocity. Here are M1 and velocity for the US:



Not a picture that leaves many questions open, it would seem. Still, it would be good to note that these developments didn't start with the latest market turmoil. If anything, they're the best illustration we can hope for of the failure of QE and other stimulus to induce an economic recovery. It's still impossible for all intents and purposes to find even one single politician or "expert" who does not talk about a return to growth and recovery, and that, in view of what we see out there, is taking on a bizarre character.

Someone should start talking about what we're going to do if and when growth does not return, when recovery is not just around the corner. We've lost precious years in which we could have cleaned up our economies but didn't. We instead borrowed from the future to put lipstick on the zombie. And now, behold: we've run headfirst into deflation, the very dreaded enemy we all wish to avoid. Are the Bernanke's and Krugmans et al of this world simply not smart enough to understand what is happening, and why? Perhaps, but I'm not so sure of that. It's too obvious. Even if Krugman seems to genuinely think a federal government can never suffer from debt deflation.

You can call it something else, and everybody has until now. But that doesn't change a thing. Trying to solve a debt problem with more debt creates bigger bubbles. In the end, there's one rule that always applies: credit bubbles lead to debt deflation, and the bigger the bubble, the more deflation there will be. It's inevitable. And it's not all bad: it cleanses the system, albeit in a painful way. But the longer you try to postpone it, the more painful it becomes.

Just because our economies can no longer function without stimulus doesn't mean they can with it.

 

Immigration Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants; Immigration and Obamacare’s Employer Mandate

Courtesy of Mish.

Obamacare is bad enough in and of itself. An immigration bill in the Senate is about to compound the problem.

Brietbart reports Senate Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants.

Under the Gang of 8’s backroom immigration deal with Senators Schumer, Corker and Hoeven, formerly illegal immigrants who are amnestied will be eligible to work, but will not be eligible for ObamaCare. Employers who would be required to pay as much as a $3,000 penalty for most employees who receive an ObamaCare healthcare “exchange” subsidy, would not have to pay the penalty if they hire amnestied immigrants.

Consequently, employers would have a significant incentive to hire or retain amnestied immigrants, rather than current citizens, including those who have recently achieved citizenship via the current naturalization process.

Following a link from the above article, Phil Klein at the Washington Examiner explains further in Immigration and Obamacare’s employer mandate

As the implementation of Obamacare approaches, there have been many news reports about companies considering cutting back full-time workers to part-time, or taking other actions to get around the mandate penalties. The immigration bill would offer employers another way out –hiring fewer American citizens and more immigrants with provisional legal status.

It’s not surprising that this unintended consequence hasn’t yet been resolved, because there’s no easy fix. One way of eliminating the problem would be to get rid of the employer mandate in Obamacare altogether – which would be a non-starter for Democrats. The other way would be to give noncitizen immigrants with provisional status access to Obamacare’s benefits – which would destroy any hopes of garnering Republican votes.

The issue was never addressed in any of the more than 200 amendments proposed when the immigration legislation made its way through the Senate Judiciary Committee.

And so here we are. Obamacare encourages hiring part-time workers over full-time workers and an immigration bill, if passed as it currently sits, would encourage hiring of amnestied immigrants over US citizens.

For more Obamacare absurdities, please see

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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The Nightmare Scenario

Courtesy of John Rubino.

It’s safe to say that as this is written at noon EST on Monday the 24th, every economic policymaker in this hemisphere (and a lot of sleepless folks elsewhere) are staring at screens and wondering if this is it. They’ve been playing with fire for such a long time, trying to balance incompatible goals of low interest rates, stable currencies and accelerating growth, that for a while they almost believed that they would get away with it, that the laws of economics could be bent to their will forever.

Now they see that this was hubris, that their sense of control was just an illusion bought with credit on a scale so large that the numbers had become meaningless.

During the night, emerging market stocks tanked again, led, ominously, by China. This morning the carnage has shifted to the US, where stocks are down hard but, more important, interest rates are still rising. 10-year Treasuries, the key to mortgage rates and pretty much everything else, now yield nearly twice what they did a year ago. That means massive losses for a whole world of risk-averse investors who thought they were parking their money in the safest-possible asset. Presumably the rest of their capital is in riskier places like stocks and junk bonds, which means they’re losing big across the board.

10 year treasury june 24 13

This is a global story, since Treasuries have been everyone’s safe haven of choice for decades. But painful as a 40% haircut for the world’s pension funds might be, it pales next to the impact on growth. US interest rates are, with a few notable exceptions like Japan, the base of the global yield curve. Everything else, being riskier, has to have a higher yield. So a doubling of US rates means a commensurate ratcheting up of everyone else’s rates.

Since equities are valued in part in relation to the yield on available bonds, rising interest rates mean lower stock prices – everywhere. And real estate, which is generally leveraged, has just gotten a lot more expensive (which means the other group obsessively staring at screens these days is the new generation of flippers who recently joined the Southern California and Florida bubbles).

This is the nightmare scenario that keeps central bankers and institutional investors up at night because, based on Japan’s experience with hyper-aggressive monetary ease, there might not be a fix. If even easier money is met with dramatically higher bond yields, as in Japan, then there’s nothing left to do but to let the system unravel.

Not that they won’t try one more role of the dice. It’s just that this time their odds of getting snake eyes have gone way up, and they know it.

 

Visit John’s Dollar Collapse blog here >

10-Year Treasury Yield Up 100 Basis Points Since May; What’s That Mean for Mortgage Rates and Housing Affordability?

Courtesy of Mish.

Curve Watchers Anonymous note the yield on the 10-year treasury note hit as high as 2.657% today, up a whopping 104 basis points since the early May low in yield of 1.614%.

$TNX: 10-Year Treasury Yield

The 10-year yield has been falling since the open today, but the overall rise since May has clobbered mortgage affordability.

Treasury Rise vs. Mortgage Rate Rise

My friend Michael Becker, a mortgage broker at WCS Funding Group writes …

Hello Mish

As bad as Treasuries are selling off, the sell off in MBS is much worse. I looked at some charts this morning and the prices of Fannie Mae and Ginnie Mae coupons continue to drop.

The FNMA 3.5 coupon was trading at 106 22/32 on May 2nd, and this morning it was trading at 99 9/32. Ginnie Mae is worse. The GNMA 3.5 coupon was trading at 109 1/32 on May 2nd, and this morning it was trading at 99 24/32.

In terms of interest rates, I locked an FHA purchase on May 2nd and the rate was 3.25%, and that rate carried a 2 point lender credit to help pay for closing costs. In order to get the same deal today, (a 2 point lender credit) the rate would have to be 5% today.

This as an apples to apples comparison illustrates that FHA rates have increased 1.75% in 7 weeks.  You could get 4.625% on an FHA purchase, but you wouldn’t get any closing cost help.

I was locking well qualified borrowers at 3.50% on conventional loans (Fannie Mae) at the beginning of May, and now they are looking at 4.875%….

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The Banker Who Was God

The Banker Who Was God

From this week’s Market Shadows Newsletter, The Banker Who Was God (6-23-13).

American writer and cartoonist James Thurber wrote, “The Owl Who Was God” in 1940, long before the Chairman of the Federal Reserve would become the de facto ruler of the world’s financial system. It begins as a typical fable about relationships among animal characters. “Once upon a starless midnight there was an owl who sat on the branch of an oak tree. Two ground moles tried to slip quietly by, unnoticed. ‘You!’ said the owl. ‘Who?’ they quavered, in fear and astonishment, for they could not believe it was possible for anyone to see them in that thick darkness.” 

The owl soon demonstrated accidental highness and gained a reputation as the greatest and wisest creature of the region. He could see in the dark and answer all questions. Except for a particularly observant fox, the neighborhood animals became intoxicated with the owl’s splendor and selected him as their leader. 

The animal fan-club blindly trusted the owl and followed him everywhere. “He walked very slowly, which gave him an appearance of great dignity, and he peered about him with large, staring eyes, which gave him an air of tremendous importance… So they followed him wherever he went and when he bumped into things they began to bump into things, too. 

“Finally he came to a concrete highway and he started up the middle of it and all the other creatures followed him. Presently a hawk, who was acting as outrider, observed a truck coming toward them at fifty miles an hour, and he reported to the secretary bird and the secretary bird reported to the owl. ‘There’s danger ahead,’ said the secretary bird. ‘To wit?’ said the owl. The secretary bird told him. ‘Aren’t you afraid?’ he asked. ‘Who?’ said the owl calmly, for he could not see the truck. ‘He’s God!’ cried all the creatures again, and they were still crying ‘He’s God’ when the truck hit them and ran them down. Some of the animals were merely injured, but most of them, including the owl, were killed. 

“Moral: You can fool too many of the people too much of the time.”

[Source: James Thurber, Fables for Our Time and Famous Poems Illustrated (New York, 1940), pp. 35-36.] 

Last week, Bernanke spoke about the possibility of ending quantitative easing (QE) earlier than originally anticipated if warranted by a growing economy. The stock market reacted negatively, bonds sold off and yields spiked up. In Don’t Fear the Taper, we surmised Bernanke may talk the taper, but ultimately cannot risk soaring interest rates and a falling stock market. 

Lee Adler of the Wall Street Examiner pointed out that the Fed is lousy at predicting how the economy will do, anyway. “Bernanke said today that the taper will depend on the economy sticking around the Fed’s forecasts. The problem is that the Fed has never been able to forecast the economy correctly. It hasn’t even been able to forecast present conditions correctly. 

“This is true not just of the aggregate FOMC forecast, but of each individual member surveyed. The Washington Post covered this issue today. I wrote a report on this in 2010 covering the period of 2007 to 2010.  I think the market woke up today to just how clueless, delusional, manipulative, and incompetent Ben Bernanke really is.” (Fed Will Taper If Economy Goes As Forecast–Uh Oh! Fed Sucks At Forecasting.)

James Howard Kunstler commented on the Fed’s dilemma, “If the Fed were to reduce its purchases of this debt paper, nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage bundlers could only sell the stuff if they paid higher interest rates. But the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium.” (James Howard Kunstler’s Mid Year Digest)

Market Shadows Newsletter, The Banker Who Was God (6-23-13)

bz-panel-01-17-13

Cartoon courtesy of Dan Piraro Bizarro Comics.

Bank Transfers and Services Suspended in China: ATMs, POS Machines, Online Banking Paralyzed 50 Minutes

Courtesy of Mish.

Several readers sent a link to an article regarding online bank outages and suspended services in China. The translation show below is very choppy. If a reader has a better translation or a different source I will post it.

Please consider Bank of China, Bank of suspension of transfers morning counters were unable to apply for online banking

WASHINGTON (correspondent with Xuan) Following the ICBC, the Bank of China also go awry again. This morning, the Bank of China Bank moratorium on transfers, online banking, counters are inoperable.

10:00 many, many people began to receive messages sent to the Bank of China, “the end result of the Bank of China Bank failures, bank customers can not carry on through the Bank transfers, please Bank online banking, bank counter or use of other bank transfer system, Bank system will be restored promptly notify you. “large number of transfer business banking needs of the people turned to online banking, counter, but according to the instructions of the public still found text messages can not handle.

Reporters call the BOC, customer service said, now silver has been fully suspended phase transfer services, online banking, the counter can not be handled, and now has the background system response, recovery time is not yet known.

As of 12:00, the Bank customer service said handle part of the user’s online banking has been restored.

Just yesterday, 10:35, Shanghai and other places ICBC system failures, ATM machines, POS machines, online banking appeared paralyzed more than 50 minutes, all kinds of businesses can not properly handle.

The ICBC bank system failure comes trouble “money shortage”, inevitably lead to speculation that many people guess the bank is not money.

To solve this problem, ICBC relevant person in charge told reporters that morning, business process slow, the analysis on the host software upgrade, emergency treatment, 11:27 various businesses all returned to normal.

As for speculation that the crash might be the last two days the inter-bank “money shortage” relevant, ICBC has denied.

The above is an unedited Google translation. Is this a massive software glitch or is something else in the works?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Mid Year Digest

James Howard Kunstler's Mid Year Digest 

Wondering why the money world got its knickers in a twist last week? The answer is simple: the global economy is breaking apart and its constituent major players are doing face-plants on the downhill slope of a no-longer-cheap-oil way of life.  Let’s look at them case by case.

     The USA slogs deeper into paralysis and decay in a collective mental fog of disbelief that its own exceptionalism can’t overcome the laws of thermodynamics. This general malaise precipitates into a range of specific quandaries. The so-called economy depends on financialization, since it is no longer based on manufacturing things of value. The financialization depends on housing, that is, a particular kind of housing: suburban sprawl housing (and its commercial accessories, the strip malls, the box stores, the burger shacks, etc.). Gasoline is now too expensive to run the suburban living arrangement. It will remain marginally unaffordable. Even if the price of oil goes down, it will be because citizens of the USA will not have enough money to buy it. Lesson: the suburban project is over, along with the economy it drove in on.

     But so is the mega-city project, the giant metroplex of skyscrapers. So, don’t suppose that we can transform the production house-building industry into an apartment-building industry. The end of cheap oil also means we can’t run cities at the 20th century scale. That includes the scale of the buildings as well as the aggregate scale of the whole urban organism. Nobody gets this. For one thing, there will be far fewer jobs in anything connected to financialization because that “industry” is imploding. The recent action around the Federal Reserve illustrates this. When chairman Bernanke’s lips quivered last week, the financial markets had a grand mal seizure. He floated the notion that his organization might “taper” their purchases of US government issued debt and mortgage-backed securities — the latter being mostly bundled debt originated by government-sponsored entities and agencies. That’s the “money” that supports the suburban sprawl industry.

     If the Fed were to reduce its purchases of this debt paper, nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage bundlers could only sell the stuff if they paid higher interest rates. But the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium.

     Apart from that unhappy equation, entropy never sleeps. Everything in America except the Apple stores and a handful of big banks is falling apart — especially the human habitat and households. Suburbia will only lose value and utility. Big cities will have to get smaller (ouch!). Tar sands, shale oil and shale gas will not ride to the rescue (they cost too much to get out of the ground). The entire declension of government from federal to state to local will be too broke to fix the roads and make “transfer payments” to idle, indigent citizens. This populace will lose faith in their institutions… and disorder will eventually resolve in a new and very different disposition of things on-the-ground. If we’re lucky, this will not include cruel despotic leadership and war.

     If the “taper” talk is empty rhetoric, and the Fed continues sopping up issued debt, it will eventually destroy the credibility of its issued money. That is just another way of going broke, though it might beat a shorter path to the general loss of legitimacy of governments and other institutions.

     Young people, harken: prepare for careers in agriculture and activities that support it. Consider moving to small towns in parts of the country where farming is possible and get ready to rebuild a very different economy.  Also, consider repudiating your college debt en masse, since the fantasy of repayment is but another mental shackle holding you back from your future.

     As for the other parts of the global economy, a digest:

     Europe doesn’t have enough oil and gas to run itself. Its suppliers (Russia, various Islamic states) are all basically hostile to it. As the late, great Tony Soprano might say, “end of story.” Europe has been playing financial pocket pool with itself for five years with credibility ebbing. Soon Europe will descend into painful economic re-set. Its era as the go-to theme park of advanced civilization is ending. Go there while it’s still possible and take some snapshots of what comfort and artistry used to look like.

     China is imploding under the weight of its half-assed crony command economy and banking system. Nice try. Cookie fortune says, “Industrial era entered too late in game.” All else there is desperation: e.g. the idea of moving hundreds of millions of peasants into new cities. As Tony would say, “Fuggeddabowdit.” They’re better off growing bok choy en situ. Anyway, no one should assume that China can remain politically stable. Let’s hope that its economic and political crack-up doesn’t transmute into war.

    Russia’s oil production is in permanent decline. It has a lot, but it gets most of its income from selling it to other people. Hence, Vlad Putin’s notion of finding something else to base Russia’s economy on. Like…what? I don’t think they’re going to replace China in making salad shooters. Farming would be the way to go, and Vlad’s government is hoping that global warming improves Russia’s prospects for doing more of that. In any case, Russia might benefit in the long term by not selling off all of its oil and gas — though Western Europe would surely suffer from that decision. On the plus side, Russia’s government is not crippled by idiot squabbles over abortion, gay marriage, and the Bible in schools.

     Japan. Sorry to repeat myself. Going medieval. They have no oil and gas. (Cue Tony Soprano again.) In the event, Japan’s financial hara-kiri will drag down the rest of the world’s banking system — or at least hasten the damage already self-inflicted elsewhere around the globe. I’m also informed that much of the essential computer chip fabrication in the world still happens in Japan, and that will go away, too, as the Japanese engine seizes, smokes, and expels its final belch of CO2.

     What else is there? South America? Think: spreading jungle (or desert, take your pick). Canada? There’s an idea. Maybe Labrador becomes the new Hamptons? Second biggest national land mass… 30 million people (2 percent of China’s population). Only one drawback: the view to the south.

Bifurcation Nation

Courtesy of Charles Hugh-Smith of Of Two Minds

Many observers focus on the economic causes of the widening wealth inequality, but the divide appears to be both cultural and financial.

To say there are haves and have-nots and two major political camps does not distinguish this era from any other. But despite this surface similarity to previous eras, there is a palpable zeitgeist that the nation is bifurcating into two camps which no longer overlap or communicate using the same cultural signifiers and symbology.

There is also a growing awareness that the divide between very wealthy and the middle income households has widened into an enormous canyon of inequality:

Just as clearly, labor's share of the national income has been declining sharply: unearned income from capital is reaping more of the national income as the share earned by labor shrinks.

Politically, I have long commented on the rising political divide not between the "two sides of the same coin" parties but between those who depend on and support the Savior State and those who pay the majority of taxes that fund the Savior State. This has created the divide feared by the Founding Fathers, The Tyranny of the Majority.

A neofeudal Elite rules the roost but the Savior State buys the complicity of the lower classes with entitlements and social programs.

Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010)

The Three-and-a-Half Class Society (October 22, 2012)

According to demographer Joel Kotkin, California has become a two-and-a-half-class society, with a thin slice of "entrenched incumbents" on top (the "half class"), a dwindling middle class of public employees and private-sector professionals/technocrats, and an expanding permanent welfare class: about 40% of Californians don't pay any income tax and a quarter are on the Federal Medicaid program.

I would break it down somewhat differently, into a three-and-a-half class society: the "entrenched incumbents" on top (the "half class"), the high-earners who pay most of the taxes (the first class), the working poor who pay Social Security payroll taxes and sales taxes (the second class), and State dependents who pay nothing (the third class).

This class structure has political ramifications. In effect, those paying most of the tax are in a pressure cooker: the lid is sealed by the "entrenched incumbents" on top, and the fire beneath is the Central State's insatiable need for more tax revenues to support the entrenched incumbents and its growing army of dependents.

This leads to a systemic question: Is Democracy Possible in a Corrupt Society? (November 12, 2012)

We can phrase the question as a corollary: in honor of my book Why Things Are Falling Apart and What We Can Do About It (print) (Kindle), let's call it WTAFA Corollary #1:

If the citizenry cannot replace a dysfunctional government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only.

In other words, if the citizenry cannot dislodge a parasitic, predatory financial Aristocracy via elections, then "democracy" is merely a public-relations facade, a simulacra designed to create the illusion that the citizenry "have a voice" when in fact they are debt-serfs in a neofeudal State.

Many observers focus on the economic causes of the widening wealth inequality, but the divide appears to be both cultural and financial. Author Charles Murray describes a cultural divide that informs the political and economic divides that are obvious to all in his book Coming Apart: The State of White America, 1960-2010.

Murray has collected evidence that Caucasian America has bifurcated into cultural/social haves and have-nots: the haves are married, have college degrees, avoid military service, are less likely to attend religious services, and have little contact with those outside their own upper-middle class.

The have-nots are divorced/single parents, less educated, are more likely to serve in the military and attend church, and earn much less than the haves.

The social glue that binds the nation includes these core values: the Constitution (and particularly the Bill of Rights), that no one is above the law, and upward mobility, that anyone born without privilege or wealth can attain status, wealth and power by exerting their own will and initiative.

What Murray suggests is not that upward social mobility has ceased, but that it's become more difficult for the have-nots to join the haves, not necessarily for lack of opportunity but for the values-based reasons he describes.

In my analysis, the cultural upper class has the income and connections to build abundant human and social capital, while the lower class has neither the values-tools, income or connections to assemble these critical building blocks of wealth.

This sociological/economic reality is ideologically inconvenient on a number of fronts, largely because it ties "personal choice" issues such as marriage to what appears to many to be a strictly economic issue.

The resentment toward the privileged class that is bubbling up suggests people don't need to read a lengthy sociological study to sense the divide is widening. The Mobile Web technology boom in San Francisco has sent rents and resentments to new heights: In defense of San Francisco's techies (S.F. Chronicle)

A growing number of San Franciscans are fed up, not just with startups, but with techies in general. With their apps and (company) buses, their gourmet coffee and skinny jeans, their venture capital wishes and IPO dreams. They're tired of watching rents soar, friends forced to relocate and beloved neighborhoods drained of diversity.

I understand the frustration, but wonder: Are we embracing a soft xenophobia applied to a sector rather than a race, to some cohesive elite tech class that doesn't exist outside of our own minds?

Rebecca Solnit discusses this issue in Diary:

The buses roll up to San Francisco’s bus stops in the morning and evening, but they are unmarked, or nearly so, and not for the public. They have no signs or have discreet acronyms on the front windshield, and because they also have no rear doors they ingest and disgorge their passengers slowly, while the brightly lit funky orange public buses wait behind them. The luxury coach passengers ride for free and many take out their laptops and begin their work day on board; there is of course wifi. Most of them are gleaming white, with dark-tinted windows, like limousines, and some days I think of them as the spaceships on which our alien overlords have landed to rule over us.

Sometimes the Google Bus just seems like one face of Janus-headed capitalism; it contains the people too valuable even to use public transport or drive themselves. In the same spaces wander homeless people undeserving of private space, or the minimum comfort and security; right by the Google bus stop on Cesar Chavez Street immigrant men from Latin America stand waiting for employers in the building trade to scoop them up, or to be arrested and deported by the government. Both sides of the divide are bleak, and the middle way is hard to find.

I think Solnit's point touches on two key dynamics: the shrinking middle, and the casual privilege of those with earning power and the resentment of the increasingly powerless.

This is hardly unique to America: Priced out of Paris: global cities pricing out the upper-middle class.

Is this the result of capitalism? The question is an active one, for example Capitalism and Inequality: What the Right and the Left Get Wrong (Foreign Affairs, March/April 2013; the article is behind their paywall; check out a copy at your local library).

While capitalism certainly rewards the most productive (in the context of whatever incentives are in place) and creatively destroys what is no longer productive/profitable, we have to differentiate between classical open-market capitalism and the state-cartel (crony) version that is passed off as capitalism for PR purposes.

Then there are the economic forces that are sweeping aside the old structures not just in America but in China, Europe and elsewhere:

1. Automation, software and robotics are eliminating human labor on a vast scale.

2. Financialization has given those with capital and access to financier expertise ways to skim great wealth from the system without creating any value whatsoever.

3. The emerging economy gives tremendous advantages to those with ample human and social capital and the value system that enables them to continue adding to their human and social capital throughout their working lives. Those without these skills and values will increasingly be marginalized.

These are dynamics that don't track neat ideological lines, nor do they lend themselves to tidy, simplistic solutions. Before we propose fixes, perhaps we need to do more work on understanding the many interconnected feedback loops in the widening bifurcation of the nation.