Archives for October 2013

Five Reasons Obamacare Legislation Failed; The Worst Legislation Money Can Buy; Putting the Patient in the Driver’s Seat

Courtesy of Mish.

Here’s an exceptionally well written, on-target email from Claudette, an occupational therapist from Michigan, in response to my post Physical Therapist in NY Chimes in on Health Care Costs.

Claudette wants to “Put the Patient in the Driver’s Seat“.

Claudette writes …

Hello Mish

I do not disagree with the PT who wrote to you about consolidation of hospital systems resulting in increases in cost of care, but there are other pertinent problems to consider.

For example, in the current system, the physician and hospital make more money if they perform more services…so there is an incentive to order more tests, do more therapy and generally “do more to make more”.

Under the ACA, there should be one bundled payment per diagnosis/incident.

What I suggest is not new, or radical. Medicare instituted DRGs or Diagnosis Related Groups with inpatient day and dollar limits per diagnosis 38 years ago (I was just beginning to work as an OT then).

DRGs drastically cut the cost of inpatient care and spawned the development of new service models including inpatient rehabilitation centers, Homecare and rehab in nursing homes, none of which fell under the constraints of the inpatient DRG.

Was this good? Yes, getting out of the hospital earlier is less expensive and healthier. There is no better place to get really sick than in a hospital.

Healthcare will not be truly competitive or cost effective until the patient is the one in the drivers seat. The patient should be informed, empowered to make care decisions and should pay the bill.

The bill should be discussed and agreed upon before service, whenever possible. Service prices should be posted so that consumers can comparison shop.

Continue Here

Elliott’s Singer On America’s “Insidious And Life-Draining” Dependency Culture

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Given our previous discussion of the "born-again" jobs scam, the growing use of robots, and shift in technology, and the increasing disincentivization (via benefits) of the US labor force, Paul Singer's detailed discussion below of the"serious dysfunction" in the US employment markets is crucial to comprehending why the Fed is just making things worse.

Via Elliott Management's Paul Singer,

The employment situation in America is in a state of serious dysfunction. The problems existed before the 2008 crisis, to be sure, but they are getting worse, and the current Administration’s job-related policies are seriously deficient. Most parts of the developed world are facing similar challenges, but our focus in this section will be on the U.S., where the labor participation rate has reached a 40-year low. This is a nasty statistic, one that reveals the published unemployment figures to be a deception. In reality, five years after the crash, unemployment remains at recession levels. The fall in the labor participation rate reflects the perils of long-term unemployment, which turns millions of workers into unemployables as their skill sets rust with disuse and their attractiveness to employers diminishes.

One element in the long-term jobs picture is the march of technology. The technologies that are chewing up jobs are actually accelerating in their efficiency and their ability to perform tasks previously done by people. The fear that technology will make workers obsolete predates the industrial revolution, but the future will likely prove that this is only partially true. Technological advances may not be the death of employment, but they will require seriously creative policies to counteract their negative effects on jobs without impeding overall growth. We believe that this can and must be achieved.

These advances, of course, include the Internet, robotics, 3D printing, GPS, cheap shipping and nanotechnology, among others. Entire industries are being revolutionized and their profitability models altered or destroyed. There is no “solution” to this problem from the standpoint of workers who are displaced or displaceable. There is only adaption, education, retraining and moving workers in both developed and developing countries to jobs that are created by such technological advances. Where some manufacturing and service jobs are destroyed by technology, others are created. The job of government leaders (which is currently being done incredibly poorly) is to make sure their educational systems are as high-quality as possible, including a good amount of vocational training, and that their employment policies are as flexible as possible in order to avoid employer flight. Sovereigns must become platforms for, and remove impediments to, entrepreneurship, innovation and start-ups. It is not a solution to the employment challenge for policymakers to behave like Luddites or protectionists.

A related problem in America is benefits policies that encourage dependency. This is insidious and life-draining, because a balance must be struck between helping those truly in need and providing harmful incentives for able-bodied people not to work. If the government makes it less economically attractive to work than to receive a check, the predictable result will be an increase in handouts and a drain on the productive sectors of the economy. This is a self-reinforcing trend if it is practiced by politicians buying votes by promising benefits. Benefits can come only from other citizens, and this form of corruption is terrible policy with dreadful results: a cycle of dependency, class warfare, declining productivity, slower growth, fewer opportunities and unmet hopes and dreams.

A third employment-related problem in America and other countries in the developed world is competition from emerging markets, where goods and services are increasingly being produced with comparable or better efficiency, quality, range and sophistication. It is a great and wonderful human development that the opportunity for prosperity is spreading throughout the world. We should all be in favor of policies aimed at helping people and countries all over the world develop tools and methods for educating their people and providing new foundations for entrepreneurship, higher education, creativity, innovation and work at the highest possible level.

The difficulty that developed countries face from this surge in developing-world capability stems from the developed countries’ tendency to coast on past glories and to have uncompetitive wage and cost structures, in addition to an aversion to working harder/smarter/better to stay in the game. The best and only sustainable growth is that which emanates from the human mind – from smarter and more creative efforts and better organizations. “Growth” from policies that depend on beggaring thy neighbor by depreciating one’s currency, erecting trade barriers or cutting wage rates is often chimerical, and such policies are ultimately likely to backfire.

None of the aforementioned headwinds to full employment is disputable. One could assert that the developed countries are doing all they can with the best possible policies, or that nothing can be done about education, labor policy, training, free trade and other important levers for generating good jobs in a tough environment because of internal or external politics. These assertions would be false. While admittedly the cures may be politically difficult, they are there for the taking for leaders and people of courage and vision. Increasing the rigidity of labor policies, combined with protectionism, is not the answer.

In the absence of serious reforms and more effective leadership in the developed countries, their workforces and their economies are probably headed for a spiral of dependency, strife, poverty, inflation and political unrest. Although the long-term budget curves provide some clues about the outer boundaries of timing, the exact moment when we will reach a tipping point is uncertain. However, if that point is reached, which could happen sooner rather than later, it won’t be pretty.

Of course, for any given set of technological changes, policies and conditions related to jobs and the labor force, a stronger rate of economic growth makes things easier and better. Unfortunately, current government policies in the developed countries are no more conducive to providing the conditions for and removing the impediments to stronger economic growth than they are at intelligently helping the work forces in these countries manage the challenges of technological change.

First fall in US manufacturing output since 2009 as the Eurozone pulls ahead

First fall in US manufacturing output since 2009 as the Eurozone pulls ahead

Courtesy of

The US government's dysfunction that created tremendous uncertainty recently is now filtering through the economy. The impact on manufacturing is already visible, as the output of US factories takes a dive in October.

Chris Williamson (Chief Economist)/Markit: – The flash PMI provides the first insight into how business fared against the backdrop of the government shutdown in October, and suggests that the disruptions and uncertainty caused by the crisis hit companies hard. The survey showed the first fall in manufacturing output since the height of the global financial crisis back in September 2009.

Aside from the numbers, this means loss of well-paying manufacturing jobs and further economic weakness. Congratulations go to the elected officials in Washington who helped create this mess.

Just to put this into perspective, here is the equivalent indicator for the Eurozone – a group of nations that has been struggling with recession until quite recently. Note that a measure above 50 indicates growth in output, showing that the Eurozone manufacturing output growth is now stronger than it is in the US.

Source: Markit



BNP Warns “You Can Never Leave” From The Fed’s “Hotel California”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Via BNP's Paul Mortimer-Lee,

In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that "you can check out anytime you like, but you can never leave".

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave. The backup in yields that the announcement had sparked, together with worries about fiscal fisticuffs in Washington, was damaging an already not-very-vigorous recovery and hurting confidence. So, the Fed took a rain check. Is that not just like QE1 and QE2, the scheduled ends of which had to be reversed within relatively short periods?

The question now is whether or not we should expect repeated market obstacles to a QE3 exit.

Chart 1 shows that at the end of previous QE periods, stock-market volatility has, after a short time, risen considerably. This is part of the rationale behind the “open-ended QE” introduced in 2012. Instead of being date-dependent, Fed balance-sheet expansion became state-dependent: QE will be scaled down only when the economy is robust enough and the recovery sufficiently well entrenched that QE can be phased out without a derailment.

The effects of this most recent episode of QE compared with others have been different for the bond market and for equities. What we saw with QE1 and QE2 was that the start of QE was marked by a bond-market sell-off. This time, it was the flagging of the end of QE that prompted higher bond yields. In contrast, the end of QE1 and QE2 was marked by lower bond yields. When QE1 and QE2 ended, we saw a rise in VIX volatility. This time, it did not happen. The question is, how to explain these differences?

Let’s take the last one first. Previous episodes of QE saw higher equity-market volatility after a time. It may be that the VIX was affected by other events (such as the euro crisis) in the earlier episodes, or that the change in flows takes a while to feed through to the equity market. In May/June, QE3 did not end. There were extraneous events – the fiscal shenanigans in Washington, for example – but the market shrugged them off. Our assessment is that QE does matter to the equity market, but it takes time to work through. What appears to matter to equities is the actual size of the Fed balance sheet, as is clearly shown in Chart 2.

What about bonds? Why did the end of QE1 and QE2 result in lower bond yields, when bond yields rose this year on the suggestion of QE3 ‘tapering’? The answer is that bonds are a far simpler asset than equities and their pricing depends much more on expectations of future rates. Chart 3 shows 10-year bond yields and Fed funds futures 24-pos. It is clear that bond sell-offs and expectations of higher Fed funds go together (the simple correlation is about 70%). Also, in state-dependent QE, a decision to taper is a signal by the Fed that everything is okay – so prompting the markets to price in a return to normalcy quickly.

Exactly how bond yields and future Fed funds expectations move will depend on the circumstances surrounding changes in market expectations as to Fed policy, in its various dimensions. QE1 and QE2 were responses to concerns about deflation, as shown in Chart 4, while 10-year breakevens were at local lows before the announcement of each programme. QE was seen as potentially inflationary to a greater degree than it is now. QE was, therefore, associated with a rise in breakevens that was pronounced. Higher future inflation raised market estimates of future Fed funds and bonds sold off. When QE1 and QE2 ended, breakevens fell back. To a considerable extent, the first two episodes of QE were perceived by the market as a substitute for Fed funds action.

This has not been the case with QE3. Breakevens had been on an upward drift during Operation Twist. Q3 was not motivated by fears of deflation, as QE1 and QE2 had been, but by hopes of achieving “escape velocity” for the economy. Furthermore, previous experience had calmed market fears – and the fears of some on the FOMC – that QE would be inflationary. Signals that ‘tapering’ would come were associated with the market moving forward its estimates of the timing and extent of Fed funds hikes. Why the difference?

The answer is that the first two episodes of QE were date dependent and QE3 is state dependent. Tightening policy – what the end of QE1 and QE2 represented – was not seen as economically justified by the market, so bond yields fell when they finished. QE3’s state dependence makes it logical for the market to conclude that an economic state that would persuade the Fed to taper would also be likely to prompt it to hike earlier than previously thought. To the market, Fed funds and QE are now complements, not substitutes.

The other important factor that explains the sell-off in bonds over the late spring and summer is the increase in term premium sparked by the talk of ending QE3 (Chart 5).

So, now that we understand the past, we can ask whether we are ready to check out of hotel QE or not. We can break this down into a number of parts:

  • What will be the effect of tapering on Fed funds expectations in future?
  • What will be the effect on the term premium?
  • What will be the effect on equities once the Fed’s cash flows change?

The minutes of the Fed’s September meeting make it clear that the committee was disturbed by how much the market was pricing in higher Fed funds. It discussed various ways of delinking the decision to taper from the decision to move the Fed funds rate, including clarifying its guidance to state that the committee would not raise its Fed funds target if inflation were seen running below a given level, or providing more information about its intentions after the 6½% threshold for unemployment was crossed.

Other options could include, we would suggest, reverting the Fed funds to date dependency (unlikely, considering the relatively recent switch from date to state dependency) and giving a clearer forecast path for the Fed funds rate (à la Riksbank). It would be useful, we think, if the Fed were to give some metric to guide the market about how the economy’s evolution would affect the pace of tapering and its duration. We know what the threshold is for rates, 6½%, but what is it for tapering? 200k payrolls? If tapering starts and then payrolls fall back to, say, 140-150K, will tapering cease or slow down?

Some action to try to separate Fed funds and tapering expectations (if not these specific measures) seems likely, though the timing is uncertain. Will it succeed? The efficacy seems doubtful. Expected Fed funds will increase when the Fed announces tapering, because the market will conclude it has changed its assessment of the robustness of the recovery. The only question is, how much? There is some evidence from the eurozone that is pertinent here.

Remember the rate hike in July 2011? The ECB at that stage was appealing to the “separation principle”. It contended that it could use interest rates to control the economy and inflation risks, while less conventional policies could be used to control the crisis. It quickly learned that the separation principle was one thing and separation practice was something entirely different. The market saw them as two aspects of the same thing. It will probably be like that for the Fed also, no matter how fervently the FOMC wants to separate Fed funds action from QE tapering.

The term premium seems less likely to spike when actual ‘tapering’ is announced than in May/June, simply because it has not gone back to previous levels, though it has declined a bit. Another way of looking at this is that the Treasury 5y5y sold off very aggressively during the ‘taper tantrum’ and has only rallied part of the way back. Based on where future nominal GDP growth and the Fed funds rate are likely to settle, this does not seem as overly optimistic as it did early in the year.

Closely tied in to the discussion of how far the term premium can rise is whether QE’s effect is due to the stock of QE outstanding or the flow?

The Fed has historically been in the stock camp, as this ties in with the portfolio-balance model it has used to calibrate QE. Markets generally put more emphasis on the flow, as prices are determined at the margin. Even if the stock matters, we can rationalise an apparent important flow impact by saying that a change in the flow alters the long-run expected stock of assets the central bank will hold.

One other reason that central banks may be inclined to believe that it is the stock that matters is the Hotel California syndrome. If it’s the flow that matters, stopping purchases may be tough, especially when the flow is large. Like a smoker needs another cigarette to feel normal, the economy may need continued purchases to feel ‘normal’. If, in contrast, it’s the stock that matters, then stopping purchases leaves a very large stock of easing still out there and the impact on markets of tapering should be much smaller.

What does the evidence suggest? May/June indicates that there is a significant flow effect. Certainly, the sell-off in bonds and the associated rise in mortgage rates were much larger than the Fed expected and they had a notable impact, on mortgage applications, for example. However, we could rationalise some of the effect on the back of the Fed statement pointing to a big change in the future terminal stock of purchases in circumstances where the market did not view data as sufficiently strong to trigger tapering.

Perhaps more instructive is the end of previous date-dependent periods of Fed QE. The end date was known in advance, so the expected shift in stock should have been small. If this was a pure stock effect, there should have been no impact on markets. As we saw in the charts above, this was not the case. This is very decent evidence of a flow effect.

In terms of QE’s impact on markets, a variety of studies (by the Bank for International Settlements and the Bank of England, among others) put the impact on bond yields of QE at 100bp or more (the BIS calculated that in the absence of altered Treasury issuance, US yields could have been 180bp higher than they were and that the net Fed/Treasury effect was of the order of 120bp). However, these tend not to isolate the term-premium effect from the Fed funds expectations effect. Nonetheless, it is interesting to note that the impact of ‘tapering’ talk was broadly of the same order of magnitude.

With markets having rallied since the FOMC baulked at ‘tapering’ in September, we should still expect some impact from the announcement of future QE ‘tapering’ on the term premium and some further effect as ‘tapering’ proceeds. How much will depend on the economy, as the Fed has said it is data dependent. Overall, we should not expect the same degree of sell-off in bonds as with the false start to ‘tapering’ this year. But it seems likely that we will breach the 3% barrier (the previous high) within a few months of the announcement of the start of ‘tapering’.

When it comes to equities, announcement effects seem less important than for bonds, and flows seem to matter more. Moreover, with state-dependent QE, the signals are more mixed than for bonds. Equities will have to cope with higher bond yields, but these will only come if the Fed thinks the economy is sufficiently robust to withstand them. Moreover, if QE adversely affects the term premium on bonds, investors may choose to switch from bonds to equities. It is possible to argue for a more favourable reaction of equities after the end of state-dependent QE than date-dependent QE.

We should, on the basis of past evidence, expect stocks to suffer with a lag and maybe to see a fuller reaction once QE stops altogether. At that stage, and depending on the impact on the economy, we could see the adverse impact on bonds diminish or reverse.

Our overall assessment is that when the Fed decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy. Chart 6 suggests that when bond yields rise by more than 25% of their previous level, it tends to represent a challenge to economic growth.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.

What does all this mean for Fed ‘tapering’? On the one hand, it can be argued that the ‘taper tantrum’ in the earlier part of the year should make the Fed more cautious about beginning to wind down QE now. The counter-argument is that as the level of yields has moved up a good deal, the benefits of QE are now less than before, so that hurdle has been lowered because the benefits of continuing QE have diminished. Both are probably too tactical in outlook.

The Fed will make the choice on strategic grounds, namely, whether the recovery is sufficiently robust to warrant a slower pace of purchases. The prospect of fiscal disagreements early next year and uncertainties about the data and distortions to them currently make it difficult to be sure when tapering will start. Our best estimate is March, with roughly a one-third probability that it will come later.

Once tapering does start, the indications are that the Fed would like to complete it within a year. However, if it is data dependent, this is far from certain. In the event of adverse reactions from markets that impact the real economy, the Fed may have to slow its exit, or even pause it. We do not buy into the full Hotel California story, but we can see that leaving, as with QE1 and QE2, might be a bit more difficult than the Fed expects. Why? Because flows matter.

GROSS: I Got Rich At The Expense Of The Less Well-Off And Now I Feel Guilty

BOND BILLIONAIRE BILL GROSS: I Got Rich At The Expense Of The Less Well-Off And Now I Feel Guilty

Courtesy of SAM ROBusiness Insider

bill gross

Bill Gross' latest monthly PIMCO Investment Outlook is out, and it spends some time discussing the massive wealth disparity in America.

"Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off," he writes.

Gross calls for the wealthiest Americans to support higher taxes rather than be "Scrooge McDucks."

From his note:

Having benefited enormously via the leveraging of capital since the beginning of my career and having shared a decreasing percentage of my income thanks to Presidents Reagan and Bush 43 via lower government taxes, I now find my intellectual leanings shifting to the plight of labor. I often tell my wife Sue it’s probably a Kennedy-esque type of phenomenon. Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off, writing very public Investment Outlooks that “dis” the success that provided me the soapbox in the first place.

If your immediate reaction is to nod up and down, then give yourself some points in this intellectual tête-à-tête. Still, I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make.

In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent “1%” grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.

Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ‘40s, ‘50s or ‘60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions. You’ll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You’ll just have to write a little bit smaller check. Scrooge McDuck would complain but then he’s swimming in it, and can afford to duck paddle to a shallower end for a while.

If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals …

"The era of taxing 'capital' at lower rates than 'labor' should end," he said.

Last week, Gross made headlines for calling out corporate raider Carl Icahn on a similar matter. Icahn has called for Apple to initiate a massive share repurchase plane.

"Icahn should leave Apple alone & spend more time like Bill Gates," tweeted Gross. "If Icahn’s so smart, use it to help people not yourself."

Interestingly, Gross attacks the wealth creation that has come from share repurchases of late. And he believes there are lessons to be learned by both corporate America and America as a whole.

bill gross earnings


"Profits … increased because the company cut expenses along the way," wrote Gross. "Earnings per share (EPS) did even better, because X used some of its cash flow to buy back stock instead of reinvesting much of it in new plant and equipment.

"The simple answer is that long-term growth for each company, and for all countries, depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company or a country’s 'products,'" he said.

Read Gross's whole note at

SEE ALSO:  CITI: This Is What Will Happen To The World In The Next 4 Years

(Photo: PIMCO / YouTube, Bill Gross)

Has the Great Recession created behavioral changes in the labor markets?

Has the Great Recession created behavioral changes in the labor markets?

Courtesy of SoberLook

The US civilian unemployment rate, which clocked at 7.2% last month, has been declining at the fastest rate in nearly two decades. The focus however has been on other labor market indicators. One of those is the employment-population ratio, the proportion of the US working-age population that is employed (discussed here). With declines in the unemployment rate one would expect an increasing fraction of working-age population getting back to work. The ratio however has remained nearly constant since the recession.

The dispersion between the two measures is quite clear if one plots them on a year-over-year basis.

Source: FRED (h/t Robert Mellman/JPM)

Most would interpret this divergence as an indicator of Americans leaving the workforce in large numbers, particularly as their unemployment benefits run out. But that's not the full story. The question is whether the Great Recession had created "behavioral changes" in the labor markets. Here are a few points worth addressing with respect to the flows in and out of the workforce (based on recent work by Robert Mellman/JPM):

1. Are people more likely to get discouraged and leave the workforce after the Great Recession than in the past? The answer is quite surprising. The "dropout rate" is actually similar to historical trends.

JPMorgan: – Despite the background of high unemployment, drop-out rates of the unemployed are surprisingly similar to prior expansions. 

2. Then why have so many people left the workforce? The answer is simple. Taking roughly the same "dropout rate" as before but applying it to a much larger number of unemployed people than in the past will create a large total "drop-out" pool.

3. But are those who exited the workforce more reluctant to reenter the job market than has been the case historically? Once again it turns out that the "reentry willingness rate" is not materially different from history.

JPMorgan: – … there has been no increased reluctance of those out of the labor market to enter the labor market in any given month (whether into employment or unemployment). An average of 7.6% of those out of the labor market entered every month in the prior expansion, and the figure is 7.5% for the current expansion.

4. Why has the employment-population ratio not budged since the recession? One of the persistent problems with the US labor markets is the current pool of unemployed people taking far longer to find work than in the past. This would suggest that the key for those without work is to enter the workforce as quickly as possible – even if it means part-time, temp, consulting, etc. The barriers to re-entry are much higher these days than any time in recent decades.

JPMorgan: – The labor flow data show that the chance of an unemployed worker finding a job in a given month fell dramatically during the last recession and has remained near its lows since.

The meager 1.6% GDP growth in 2013 is partially self-inflicted

The meager 1.6% GDP growth in 2013 is partially self-inflicted

Courtesy of SoberLook

More evidence is emerging that the US economic activity has slowed recently. In addition to the manufacturing output decline (see Twitter chart) and slower home sales (chart), the latest private payrolls number from ADP now shows a decline in job creation.

Source: ADP

The US is now on track to reach only 1.6% real GDP growth for 2013 – in spite of the extraordinary amount of central bank stimulus. The sad part about this weakness is that to some extent it has been self-inflicted. Policy uncertainty, including "taper"-related fears and the recent dysfunction in Washington have continued to impede growth in the United States.

The chart below shows the Conference Board's consumer confidence index. Consumer expectations, which tend to influence larger expenditures and investment, have been particularly vulnerable to "internally generated" shocks. Corporate spending and hiring is not far behind the consumer.

Source: Barclays Research

Sense on Cents Housekeeping: New Comment System

Courtesy of Larry Doyle.

cleaning-suppliesSense on Cents will be implementing a new comment system in the next day or so. Disqus is an application used on many websites, so I’m sure it will look familiar to many of you. It will add functionality to the comments, and hopefully generate greater interaction for our readers.

Posting comments, replies, like/dislike should be self-explanatory (you may need to sign in/create an account), but we will provide further instructions if needed. Stay tuned . . .


Today’s Reads

By Ilene

(Also posted at a new site, in Beta-Testing, visit: Talk Markets)

Reasearchers at Oregon Health & Science University’s Knight Cancer Institute stopped a double blind study of a new drug for prostate cancer. Patients in the placebo group were switched to the real drug, Enzalutamide, because the results were so impressive. Enzalutamide is hormone-based pill which causes very few side effects. Look out Dendreon. (OHSU develops promising prostate cancer drug).

Read this with a glass of wine and think about how to invest in an upcoming shortage. Ideas? (Drink it while you can, as study points to looming wine shortage.)

To the rescue of troubled Google, Oracle and Red Hat. Experts at these companies are used to fixing big problems. (Google, Oracle, Red Hat experts to help fix Obamacare website.)

Meanwhile, the G.O.P. unveils its own health-care website, Only number to remember: 911. (That’s a joke.)

Can you learn anything from big trading loses? James Altucher thinks you can because he did (12 or 13 Things I Learned About Life From Daytrading Millions of Dollars).

Joshua Brown argues that Karl Marx had it wrong when he said that religion was the opiate of the masses. No, no, portfolio gains are.

Larry Fink, CEO of BlackRock, the world’s largest money manager, admits there are ‘Bubble-Like Markets Again.’ Blames the Federal Reserve for contributing.

Ambrose Evans-Pritchard writes, “If we ever need more QE it should go straight into the veins of the economy by direct deficit financing of big investment projects (fiscal dominance) and damn the torpedoes, and the taboos. Just print money to build houses for the poor, and solve two problems at once…” (JP Morgan sees ‘most extreme excess’ of global liquidity ever.)

Optimism, complacency and the S&P reaching new highs. “Strategas explains: Investors around the globe ‘left our team warmly wrapped in the blanket of near-universal optimism’ during recent client visits…” But then again, optimism could be risky. (Investors “Wrapped In A Blanket Of Near-Universal Optimism”.)


Picture source. 


Instability Starts On The Margins

Courtesy of Chales Hugh-Smith of OfTwoMinds


What is the prudent response when hefty profits beg to be booked and assets purchased with leverage/debt start declining? Sell, sell, sell.

Many analysts have described the core-periphery dynamic: instability tends to manifest first in the periphery and then move inexorably to the core. Social and economic changes work in a similar fashion, originating on the margins of the economy/society and then gaining wider influence/acceptance once roughly 4% of the populace (a 64/4 Pareto Distribution) utilizes the innovation.

Everything from fashion fads to Internet useage follows this model of expansion from the margins to widespread acceptance.

Though we welcome this model of technology and fashion distribution, destabilizing financial crises tend to propagate in a similar way, from the margins/periphery to the core. For example, the "Asian contagion" crisis of 1997 began in Thailand, far from the core of the global economy. Once the crisis infected other Asian economies, it soon disrupted core economies.

In the same era, the losses experienced by one firm, Long-Term Capital Management (LCTM), ignited a financial firestorm that quickly spread to global capital markets.

How do we interpret India's brewing crises in currency devaluation (rupee) and inflation? The conventional view is that these are unique to India and therefore isolated. This was of course the conventional view of the Thai currency crisis of 1997–that it was unique to Thailand, and therefore of little concern to the rest of the global economy.

Financial crises spread not because conditions that triggered the crisis are universal, but because fear and loss of faith are universal emotions. What happens in financial crises is the initial disruption/instability causes participants to ask if risk is truly as low as advertised/assumed in the markets where they're exposed. Prudence demands lowering not just conventionally measured risk but potential risk and perceived risk, both of which may diverge radically from pre-crisis risk measured by various portfolio insurance methodologies.

In other words, potential and/or perceived risk triggers selling, which then raises the premiums on risk management. These indicators of risk then trigger a wider perception that risk is rising, which then unleashes more liquidation of assets. This prudent risk-management selling depresses prices, tripping margin calls, trading stops and thus more selling.

In a financial system that is heavily dependent on leverage, credit, phantom collateral and sky-high asset valuations, selling begets more selling, launching a self-reinforcing feedback dynamic in which selling leads to more selling that then triggers margin calls (i.e. selling assets that were purchased with borrowed money) and technical selling (i.e. selling when critical support levels are broken).

What is the prudent response when hefty profits beg to be booked and assets purchased with leverage/debt start declining? Sell, sell, sell, until the entire profit is booked and all at-risk debt is paid off. Anything less invites risk, loss and even insolvency if declines get away from those who purchased assets with leverage/debt.

Could India's currency/inflation crises spread to other nations? That is an open question, but what could easily spread is prudent doubts about the risks that are as yet unrecognized in other markets. If prudence demands selling first and asking questions later, risk is quickly repriced. That repricing itself triggers doubt, fear and a loss of faith in the supposedly permanent bull markets in bonds, real estate, stocks, 'roo bellies, quatloos, etc.

A financial sell-off doesn't even need a real crisis to spread like wildfire; it simply needs nosebleed asset valuations, excessive leverage/credit and risk priced at "the bull market is guaranteed to last essentially forever" levels. Prudence alone will ignite the conflagration.

Hollande’s Tax Everything Plan Blows Sky High With Riots by Farmers; Hollande Backs Down on Ecotax, on a Tax on Savings, On Corporate Earnings; Something For Nothing

Courtesy of Mish.

President Francois Hollande wants to balance the French deficit by taxing the rich, taxing the poor, taxing trucks, raising the VAT, and increasing the tax on corporations.

That policy blew sky high this week in a storm of riots by Brittany farmers.

Please consider French Gov’t Backs down on Truck Tax After Riots

French Prime Minister Jean-Marc Ayrault on Tuesday indefinitely suspended the introduction of a green tax on trucks following riots at the weekend in the Brittany region.

 The move comes three days after a protest by hundreds of food producers, artisans and distributors in the western Brittany region ended in the worst riots in the area in years.

One person was seriously injured in clashes between police and a group of around 1,000 demonstrators, who blocked a national road with convoys of vehicles and tonnes of produce on Saturday in protest over the tax.

Bretons say the levy will squeeze the already wafer-thin margins of the region’s struggling chicken, pork and other food producers.

The protests were seen as the expression of growing frustration nation-wide with the escalating tax burden on businesses and households.

Taxes have risen 70 billion euros (96 billion dollars) in the past three years, as France battles to shrink its budget deficit.

The truck tax, which is to apply to all vehicles of over 3.5 tonnes that use French roads, aims to raise 1 billion euros a year towards the development of rail and river transportation.

French Way of Getting Your Message Across

Mr. Ayrault denied that the government had caved in to the protesters.

To be courageous is not to be obstinate; it’s to listen and understand,” he said after a meeting with Breton lawmakers and several Cabinet Ministers….

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Claims Data Affirms That Government Shout Down Had No Lasting Impact, But Stocks Still Dangerously Extended

Courtesy of Lee Adler of the Wall Street Examiner

First time unemployment claims essentially met expectations this week as ‘conomists had one of their rare correct guesses. But I should not be so hard on the ‘conomist crowd. The seasonal adjustment factor applied to the comparable week of the year over the prior 10 years has varied by +/-30,000 claims from year to year. So when the market gets upset or excited about a ‘conomists’ consensus miss of 10,000 or 20,000 or even 30,000, it’s really much ado about nothing. It’s statistical noise.

The Labor Department reported that in the week ending October 26, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 10,000 from the previous week’s unrevised figure of 350,000.

The consensus estimate of economists of 335,000 for the SA headline number was close to the mark (see footnote 1). Over the prior month economists were consistently unable to guess the impact of the government shout down, severely underestimating claims in those weeks. They apparently are not aware of the real-time hard data on Federal Withholding taxes, which I track weekly in the Treasury Update. That showed withholding tax collections dropping sharply over the period of the shout down.

The whole weekly ritual of reacting to these fictional, seasonally adjusted headline numbers is ridiculous. But the weekly data does have real value. Tracking only the actual, not seasonally finagled number exactly as the Feds collect the actual filings from the 50 states gives us a good picture of the trend of the economy nearly in real time, unlike most economic data which usually has a lag of at least a month. With no more government and related workers being furloughed since October 16, last week’s and this week’s actual, unadjusted numbers give us a good idea of the underlying trend.

The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in the current press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 317,580 in the week ending October 26, an increase of 6,064 from the previous week. There were 339,917 initial claims in the comparable week in 2012.”  [Added emphasis mine] See footnote 2.

Claims were up year to year in the first week of the government shout down, then nearly even on a year to year basis in the second week. By the October 19 week claims began to return to their past trend of trending lower at about 8% per year. In the latest week actual filings were down 6.6% versus the corresponding week last year, slightly worse than the trend average of -7.9% per year over the past 104 weeks.

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge


There’s significant volatility in this number, with a usual range of zero to -20%.  In the second and third quarters, claims as a percentage of the total employed were at levels last seen at the end of the housing bubble, just before the market and economy collapsed. Since then they’re returned to a somewhat higher level, settling in at about 0.23% of total employed.

Initial Unemployment Claims Percentage of Total Employed - Click to enlarge

Initial Unemployment Claims Percentage of Total Employed – Click to enlarge

The fact that the numbers rebounded immediately after the ending of the government shout down suggests that there will be no lasting damage, contrary to the braying of the political and economic chattering classes, all of whom are pushing  their own agendas.

The current weekly change in the NSA initial claims number is an increase of 6,000 (rounded and adjusted for the usual undercount) from the previous week. That compares with a decrease of  5,000 for the comparable week last year. The fourth week of October was an up week in 6 of the prior 10 years. The average change  for the comparable week over the prior 10 years was an increase of 13,000.  This week’s number, while worse  than last year was in line with the prior 10 year average.

Federal withholding tax data slumped sharply in the first half of October. It then began a gradual recovery after mid month but is not back to trend yet. Since withholding is collected after the end of the pay period, the effects of Federal workers returning to work should be seen fully in that data within the next few days. I’ll report on that in the weekly Professional Edition Treasury update.

To signal a weakening economy, current weekly claims would need to be greater than the comparable week last year. With the exception of  the October 5 week, which got a mulligan because of the government shout down, that has not happened. The trend had previously been one of accelerating improvement in spite of the fact that the comparisons are now much tougher than in the early years of the 2009-13 rebound. The data has returned to trend over the past two weeks, but again, with much tougher comparisons versus the prior year now, I would expect some slowing in the rate of improvement to be normal, and not an indication of a weakening economy.

Relative to the trends indicated by unemployment claims, stocks have been extended and vulnerable since May.  QE has pushed stock prices higher but has done nothing to stimulate jobs growth.

Initial Unemployment Claims and Stock Prices - Click to enlarge

Initial Unemployment Claims and Stock Prices- Click to enlarge

I plot the claims trend on an inverse scale on this chart with stock prices on  a normal scale. The acceleration of stock prices in the first half of 2013 suggested that bubble dynamics were at work in the equities market, thanks to the Fed’s money printing. Those dynamics appeared to have ended in July but the zombie has kept coming back to life.  

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

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


By Andy Borowitz at The New Yorker


WASHINGTON (The Borowitz Report)—Saying that “the American people are fed up with a disastrous Web site that doesn’t work and never will,” House Majority Leader Eric Cantor (R-Virginia) and a phalanx of congressional Republicans today unveiled their own health-care Web site,


The Virginia Republican wasted no time touting the cost savings of, comparing it favorably with the notoriously expensive Obamacare site: “Unlike, which private contractors built at a cost running into the hundreds of millions, was built for nine hundred dollars by my intern Josh.”

And in contrast with’s maze of forms, links, and phone numbers, he said, “ has just one phone number: 9-1-1.”…


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Photograph by Melina Mara/The Washington Post via Getty.

Lessons from the Madoff Account Statements

Courtesy of Pam Martens.

Millions of Americans, if not most Americans, have no idea how to go about checking their investment statements for accuracy and to protect against fraud. In that respect, Bernard L. Madoff might render a service to the country – if we pay close attention.

To veterans of Wall Street who handle retail accounts (those for the average individual investor), there has been the ongoing mystery as to how Madoff could have created fake account statements for thousands of clients showing the nitty-gritty details that we know to be captured on legitimate account statements.

For example, every transaction that generates cash into the account must be captured: the quarterly payment of dividends on a stock or semi-annual interest on a bond; the proceeds of a sale of a security; the payment of interest on a money market fund used to “sweep” the proceeds of sales. (And, of course, there are also the transactions that remove cash from the account such as stock purchases and payouts.)

To determine how Madoff carried out his fraud for decades, the Trustee of the recovery fund, Irving Picard, hired super sleuth Bruce G. Dubinsky, a Managing Director at Duff and Phelps, to conduct a forensic accounting of the Madoff business. Dubinsky found that during the 1970s when Madoff was claiming to deploy a convertible arbitrage trading strategy, “dividend payments and/or accrued interest were not reported” on many of the account statements. That this went undetected by customers and their accountants is testimony to how many Americans, even today, open their account statements, check the total value on page one, then shove the document into a file never to be seen again.

A convertible arbitrage trading strategy looks for pricing discrepancies between the market value of the convertible bond (or convertible preferred stock) versus the value of the common stock it would eventually convert into. Dubinsky, in his forensic report, explains what Madoff was really doing:

“The so-called ‘convertible arbitrage trading strategy’ purportedly implemented by BLMIS [Bernard L. Madoff Investment Securities] in the 1970s utilized fictitious trades that in many instances exceeded the entire reported market volume for the particular security on the day it was purportedly traded. On numerous trading days, trades were recorded at prices that did not represent true prices, as the prices reported for the purported trades were outside the range of market reported trading prices on a given day. Dividend payments and/or accrued interest were not reported by House 17 on many customer statements even though the real convertible securities paid such dividends and/or interest. Further, convertible securities were reported by House 17 as being traded on days after the actual date of conversion reported by the issuing corporation, thereby evidencing the fictitious nature of the purported trades. Lastly, there was no evidence that the purported convertible securities were ever actually converted, again supporting the fictitious nature of the purported trading activity.”

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Obamacare Trojan Horse: Is White House Muzzling Insurance Companies?

Courtesy of Larry Doyle.

Classics scholars are familiar with Virgil’s legendary warning, “Timeo Danaos et dona ferentes,” i.e. “Beware of Greeks bearing gifts.

Just as the Greeks on the mainland would have been well served to be leery of what the Trojans were hiding in their “gift,” the American public may also want to be very careful as to what lies deeply within the administration’s newly released horse, aka Obamacare.

If transparency is indeed the great disinfectant, then there is seemingly a lot that might smell in the Obamacare stable. Put on the heavy boots and let’s navigate.

Our President and his minions would like the American public to believe that it is “only” 5 per cent of the population that are experiencing the cancellation of “junk” insurance policies purchased on the individual market. They make that arrogant assertion contrary to the endless number of personal stories indicating otherwise. (e.g. Los Angeles Times commentary Obamacare: Unfair to the Young Middle Class, Punished Enough Already)

The administration maintains that if not for this seemingly small percentage of people, then we might believe the President should still be regarded as genuine, honest, and honorable in stating, “If you like your health care plan, you can keep it. Period.”

Do you hear a heavy naying sound in the background?

Let’s dig a little deeper through the dung to reveal that it is not merely 15 million people who are poised to have or already have had their policies cancelled.

Forbes provides meaningful transparency on the Obamacare Trojan Horse (now we understand what Ms. Pelosi meant in stating, “We have to pass the bill so you can find out what is in it”) in writing, Obama Officials in 2010: 93 Million Americans Will Be Unable To Keep Their Health Care Plans Under Obamacare:

On Tuesday, White House spokesman Jay Carney attempted to minimize the disruption issue, arguing that it only affected people who buy insurance on their own. “That’s the universe we’re talking about, 5 percent of the population,” said Carney. “In some of the coverage of this issue in the last several days, you would think that you were talking about 75 percent or 80 percent or 60 percent of the American population.” (5 percent of the population happens to be 15 million people, no small number, but let’s leave that aside.)

But Carney’s dismissal of the media’s concerns was wrong, on several fronts. Contrary to the reporting of NBC, the administration’s commentary in the Federal Register did not only refer to the individual market, but also the market for employer-sponsored health insurance.

Section 1251 of the Affordable Care Act contains what’s called a “grandfather” provision that, in theory, allows people to keep their existing plans if they like them. But subsequent regulations from the Obama administration interpreted that provision so narrowly as to prevent most plans from gaining this protection.

Subsequent regulations? As in the administration changed the legislation ex post facto? Sniff, sniff, sniff . . . digging deeper through the manure we uncover:

“The Departments’ mid-range estimate is that 66 percent of small employer plans and 45 percent of large employer plans will relinquish their grandfather status by the end of 2013,” wrote the administration on page 34552. All in all, more than half of employer-sponsored plans will lose their “grandfather status” and get canceled. According to the Congressional Budget Office, 156 million Americans—more than half the population—was covered by employer-sponsored insurance in 2013.

How many people are exposed to these problems? 60 percent of Americans have private-sector health insurance—precisely the number that Jay Carney dismissed. As to the number of people facing cancellations, 51 percent of the employer-based market plus 53.5 percent of the non-group market (the middle of the administration’s range) amounts to 93 million Americans.

How might the White House keep under muzzle the fact that Obama’s signature legislation was changed after the fact, and that 93 millions will likely have their healthcare plans cancelled? Compel the insurance companies to STFU.

Is that right? Listen to this 3-minute delivery on CNN to learn more,

How much do you trust and believe what is being put forth by the White House and others on this largest gift horse running wild across the American economic landscape? I mean regardless of your political leaning, who does not believe that President Obama intentionally misrepresented — er, lied — to the American public in his oft-referenced statement about keeping your plan.

The real question now is not did Obama lie in the past, but did he lie once again just yesterday in stating that it is only a small percentage of people who would have their plans cancelled.

Yes indeed, transparency is the great disinfectant.

Navigate accordingly.

I thank our regular reader Ray who linked to video clip yesterday in his comment.

How Can We Have Record Bad Loans And Record Excess Liquidity At The Same Time?

Courtesy of The Automatic Earth.

Dorothea Lange Trunk Show February 1936
"Dust Bowl drought refugees in California"

We can read these days that Spain has come out of its recession. The Bank of Spain reported last week that GDP expanded by 0.1% in Q3. But in a country with 26% unemployment and 55% youth unemployment, such statements are devoid of any real meaning. They're mere technicality niceties. Because if anything screams recession, it's those kinds of unemployment numbers. Moreover, where do you think that 0.1%, even it you would take it seriously, came from? It's really not that hard. Spain’s return to growth is due to a 15% fall in labour costs since the 2008 financial crisis. In other words: the rich side of the economy gets to look good at the expense of the poor side. A global phenomenon.

And economists then get to spin that as the end of a recession. That sort of spin, generated first and foremost by a government's own spindoctors and spread by its financial media, is not only meaningless gibberish, what makes it worse is that it's demeaning for those who pay the price for it. Who either lost their jobs altogether or saw 15% or more cut from their often low pay. Who have suffered through multiple years of austerity in the form of higher taxes, severely cut services and diminished savings and often lost their homes too. And who, now they're at the bottom of the gutter, see their leaders boast the success of the policies that put them there.

Spain exits recession, but jobs outlook tempers enthusiasm

After more than two years of grinding recession and the destruction of 3.8 million jobs, Spain has returned to growth. But the improvement was so weak that the jobless rate is not expected to fall to pre-recession levels for many years.

The Bank of Spain reported Wednesday that gross domestic product expanded by 0.1% in third quarter. In the previous quarter, GDP shrank by the same amount. Still, the improvement delivered a psychological boost to the centre-right government of Prime Minister Mariano Rajoy, who has been under enormous pressure to provide evidence that austerity programs and the sacrifices that go with them are not the route to eternal recession.

Spain’s recovery is all the more fragile because its banks, which received a €40 billion ($57.3 billion) European bailout early this year, are sitting on enormous quantities of dud loans. AFI, a financial and economics consultancy in Madrid, said in a note last week that the non-performing loan rate had edged up to 12.1% of loan portfolios in August. [..]

Spain’s return to growth was in good part due to an export surge fuelled by a sharp fall in labour costs since the 2008 financial crisis. AFI said that unit labour costs are down 15% …

Note the mention of Spain's banks"sitting on enormous quantities of dud loans". Makes you wonder what it takes to get rid of those, doesn't it, after all the tens of billions of euros already handed to these banks. Well, it's not just Spain: the German edition of Der Spiegel quotes an Ernst&Young report as saying Europe's banks sit on a record amount in bad loans (my translation).

Eurobanks Sit On Record $1.3 Trillion In Bad Credit

Consulting firm Ernst & Young says banks in the eurozone have amassed €940 billion in bad credit, but are still set to make higher profits this year.

7.8% of all loans are predicted to be either late, or not paid back at all, Ernst&Young claim in their "Eurozone Financial Services Forecast". That adds up to €940 billion, or €120 billion more than in 2012, and the highest amount in bad loans ever.

Throughout Europe, the number of bank clients who can no longer service their debt has clearly gone up. Most bad loans are in Spain (12%) and Italy (11.5%).

In the US, the Fed once again has delayed shrinking its $85 billion a month QE purchases. The reason given is that the economy is "still too weak". But, unless everyone at the Fed is very blind, awfully deaf and extremely dumb, QE can never have been aimed at boosting the economy; it was always, just like all the games played with accounting standards, meant to bolster the "outlook" of the major, too big to fail (but failing nevertheless), financial institutions.

And now we know it's an ongoing affair. Something that is put in a very eery light by a report coming from JPMorgan Chase's Nikolaos Panigirtzoglou, which describes the "Most Extreme Ever Excess Liquidity" bubble. After all, why throw more QE billions at the too big to fail banks when they're already drowning in the stuff? That can mean only one thing, I must assume, in the eyes of the Fed: that these banks are in a much worse state than anyone lets on. The point of view of the banks themselves, of course, is that they're not going to refuse free money handed on a platter, whether they need it or not.

But what does it mean when we see the records in credit gone sour in Europe, and at the same time "Most Extreme Ever Excess Liquidity” in the global economy? Why is that liquidity not used to restructure those bad loans? Again, the only reasonable answer seems to be that banks are in much worse shape than we are led to believe.

JP Morgan sees 'most extreme excess' of global liquidity ever

If you think there is far too much money sloshing through the global financial system and causing unstable asset booms, you are not alone.

A new report by JP Morgan says the bank's measure of excess global money supply has reached an all-time high. "The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude," said the report, written by Nikolaos Panigirtzoglu and Matthew Lehmann from the bank's global asset allocation team.

They said the latest surge is far beyond anything seen in the last three episodes of excess liquidity: 1993-1995, 2001-2006, and during the Lehman emergency response from October 2008 to September 2010, all of which set off a blistering rise in asset prices.

The bank says there is enough juice to keep the boom going for several more months, but it stores up bigger problems for later. "It could be a warning if fundamentals are out of whack. Markets could be vulnerable next year if that liquidity starts to disappear… " The bank says there is enough juice to keep the boom going for several more months, but it stores up bigger problems for later. "It could be a warning if fundamentals are out of whack. Markets could be vulnerable next year if that liquidity starts to disappear… "

Which is why the Fed has pledged to keep it coming ….

They argue that the global M2 money supply has risen by $3 trillion this year, up 4.6% in just nine months to $66 trillion. Roughly $1 trillion is showing up in the G4 bloc of the US, eurozone, Japan, and the UK.

The lion's share, some $2 trillion, is showing up in emerging markets where credit continued to surge at $170 billion a month in July and August despite the Fed Taper scare earlier that hit the Fragile Five (Brazil, India, Indonesia, South Africa, and Turkey). Mr Panigirtzoglu said there is an internal credit boom in emerging markets that is running in parallel to QE in the West. [..]

JP Morgan measures "broad liquidity" held by firms, pension funds, households (etc) as well as banks. They say correctly (a crucial point often missed) that QE bond purchases from banks do not necessarily boost the broad money supply. You have to buy outside the banks.

In very crude terms, excess liquidity is the gap between "money demand and money supply". When confidence returns, demand for money falls, so it finds a home elsewhere in stocks, property, and such.

If JP Morgan is right, you can see why the BIS, the IMF, and Fed hawks are biting their fingernails worrying about the next train wreck. There is clearly a huge problem with the way QE has been conducted.

Turns out, we have yet another moniker to remember thanks to Ambrose: the Fragile Five. Oh, well, one more or less … By the way, did you see that S&P declared Greece an emerging market? Can it still be a PIIG now?

Tyler Durden also read the JPM report:

JPM Sees "Most Extreme Ever Excess Liquidity" Bubble After $3 Trillion "Created" In First 9 Months Of 2013

JPM's Nikolaos Panigirtzoglou, editor of the "Flows and Liquidity" weekly research piece, is one of the greater experts on, not surprisingly, global monetary flows and liquidity. Which as we noted back in 2009, is all that matters in a world in which the micro, and recently the macro, have all been made obsolete by one simple thing: credit-money creation by the monetary authorities.

Excess money supply is currently at record high positive territory. The residual of the regression turned positive in May 2012 and has risen steadily since then. This is both because of real money supply increasing and money demand decreasing due to lower uncertainty (Figure 3). In particular, global M2 is up $3 trillion or 4.6% since the beginning of the year (to September), outperforming the Global CPI inflation index which is up by only 2% since then. Global M2 reached $66 trillion in September this year.

Of the $3 trillion increase in global M2 money supply in the first three quarters of the year, around $1 trillion is due to G4 countries, i.e. US, Euro area, UK and Japan. The remaining $2 trillion is due to Emerging Markets countries, driven by strong bank lending growth in EM. As we highlighted last week, EM bank loan credit creation has been unaffected by the EM selloff in the summer and was running in July/August at a $170 billion per month pace. So strong credit growth in EM economies continues to boost our measure of excess liquidity.

Conclusion: The rise in excess liquidity, i.e. the residual in the model of Figure 4, is supportive for risky assets especially when we compare the past nine months with the period between the end of 2010 and the beginning of 2012 when excess money supply was negative. Looking further back in Figure 4, we can see three major episodes of excess liquidity (i.e. positive residual): 1993-1995, 2001-2006 and Oct 2008-Sep 2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at the time. The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude.

To summarize:

• In just the first 9 months of 2013, Developed Markets countries have injected $1 trillion in liquidity sourced exclusively by central banks; EMs have injected another $2 trillion driven by bank loan demand.
• The total global M2 is over $66 trillion, growing at an annualized pace of over 6%.
• The amount of excess liquidity, i.e. the infamous "liquidity bubble" in the global fungible system is "the most extreme ever in terms of its magnitude"

And that's really all there is to know: the music is playing and everyone has to dance… just don't ask what happens when the music ends.

I guess the conclusion must indeed be that the banks, certainly in Europe, but just as certainly not only there, after receiving all those trillions of dollars, euros, yen and yuan, are still in terrible shape. There is no trust in the banking sector, there is a temporary faith in central banks injecting liquidity into the banks. That's what holds our financial system together. And as long as accounting standards, or the lack thereof, allow for banks to not restructure their credit gone sour, and they at the same time receive all the liquidity they need and more, which enables them to prop up assets, nothing will change: they will be in just as bad a shape a year from now, or two.

Unless the music stops playing before that, i.e. one of the central banks no longer sloshes out more excess liquidity, or this liquidity turns on itself. Not an uncommon phenomenon among zombies. Because that of course is what we're describing here: zombies. The Undead. Halloween.

And it's not just the banks either. What do you think drives the world stock exchanges to new record highs? How can Spain claim it's out of its recession when record numbers of its people are unemployed and its banks set new records for bad loans? It's all zombies all the way down, as far as you can see. And at the bottom there's you.



By Andy Borowitz at The New Yorker


WASHINGTON (The Borowitz Report)—Saying that “the American people are fed up with a disastrous Web site that doesn’t work and never will,” House Majority Leader Eric Cantor (R-Virginia) and a phalanx of congressional Republicans today unveiled their own health-care Web site,


The Virginia Republican wasted no time touting the cost savings of, comparing it favorably with the notoriously expensive Obamacare site: “Unlike, which private contractors built at a cost running into the hundreds of millions, was built for nine hundred dollars by my intern Josh.”

And in contrast with’s maze of forms, links, and phone numbers, he said, “ has just one phone number: 9-1-1.”…


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Photograph by Melina Mara/The Washington Post via Getty.

Obamacare: Winners, Losers and Politics

This was another post that messed up the home page possibly because I removed an image while removing part of the original post. I’m going to try posting again. The comments are now pasted at the bottom of the post. There’s a chance that this post will also cause problems with the home page in which case I’ll try again — warning for email subscribers….

My Comment:

I was hoping for a balanced discussion of the economics of Obamacare. The comments – thank you – help achieve some balance. 

Of course there is no free lunch and obviously Obamacare is going to shift costs between groups. How this plays out is an interesting discussion. There are so many factors involved that it’s almost impossible to weave them together and predict outcomes.


Original Post (censored version):

Obamacare: Winners and Losers

By Paul Price of Market Shadows 

No Free Lunch - Milton Friedman


There is “No Free Lunch.” Free healthcare does not exist.

Here is a short list of areas where you can win on Obamacare and areas where you might lose–the results are not mutually exclusive.

 Obamacare's Winners  &  Losers



  1. Garrett Woolley says:

    Excellent summary Dr. Price!

  2. Polly serial says:

    I typically enjoy your blog, and appreciate that you do this for free, but this is making me question the relevance of your writing. There isn’t even a vague nod to balanced thinking in this piece.

  3. Everything you say is true.
    Just a few questions:
    Who is currently paying for all the ambulance rides and emergency room supplied medical care for the uninsured and under-insured?
    Why are the medical costs as a percentage of GDP much higher in this country than any other industrialized country?
    Why does the higher amount spent bring some of the poorest statistical outcomes?
    Why is it that even among insured people, medical costs rank among the highest causes of personal bankruptcy.

    I have a friend who is a medical insurance broker and he makes the point that we are apparently moving from one broken system to another broken system.
    Unless your willing to shut to the doors of emergency rooms, and control the costs or availability of 100K/year pill regiments, and 70K stomach stapling, it isn’t a simple question of no free lunch, or not. It quickly becomes multiple tangled questions such as how expensive the lunch is going to be, how filling is it, and how will anybody ever be able to afford the tab?

    I suppose if there were easy solutions they would have been found decades ago.


    Dr. Paul Price says:


    A better solution would have been to first set up a pool to cover all those with preexisting conditions. They need to be guaranteed care and must be subsidized.

    One set of standardized plans for all Americans would have been a major step forward over having 47 different state plans. That this wasn’t done when starting from scratch was absurd. Including non-citizens on a cost-free basis is not allowed in any other country (Canada, England, France etc. actively disallow foreigners from reaping free coverage simply because they are in their countries. They protect their taxpayers from the need to support people not intended to be covered.

    Obamacare does not lower healthcare expenses. It merely shifts the costs from one set of people to another. Fully subsidized coverage is ‘free’ to recipients. Premiums for all non-subsidized people, whether covered at work or privately, must rise dramatically to cover the costs of the group that doesn’t pay anything. The ACA is simply the next step in class warfare. It is designed to penalize those who work and earn in order to give more ‘free stuff’ to those who pay zero, ore close to zero in Federal income tax already.

    The ultimate goal of the ACA is to make the current Obamacare program so bad that the public will clamor for a single-payer system which puts the government in full charge. All members of congress, and their staffs, would continue to be exempt from this monstrosity, of course.


Physical Therapist in NY Chimes in on Health Care Costs

Courtesy of Mish.

Reader “Chris”, a physical therapist in private practice in New York, pinged me about Obamacare and rising health care costs in general.

Chris writes ….

Hello Mish

I wanted to comment on your recent posts regarding Obamacare. Most of the criticism from you, and others, has focused on the issues and difficulties surrounding the website, dropped coverage, legal disputes, and rising costs you called “Obamashock!

As a healthcare provider, I would like to point out a seldom heard critique regarding competition and hospital consolidation.

A cornerstone of ACA (Obamacare) is promotion of Accountable Care Organizations (ACOs) intended to be fully integrated systems, capable of taking patients through a complete continuum of care.

Allegedly, ACOs would reduce price.

However, a recent study on the Impact of Hospital Consolidation by the Robert Wood Johnson Foundation found the opposite was true.

Providers and the specialty groups remain in isolated silos. The hospitals merge simply to increase their market share and ability to leverage higher fees from insurers, which they have done.

Four Points From the Study

  1. “The Patient Protection and Affordable Care Act (ACA) promotes Accountable Care Organizations (ACOs) and the bundling of payments across providers for an episode of care (bundled payments), both of which encourage consolidation between hospitals and physician practices.”

  3. “Hospital consolidation generally results in higher prices. This is true across geographic markets and different data sources. When hospitals merge in already concentrated markets, the price increase can be dramatic, often exceeding 20 percent.”

  5. “Hospital competition improves quality of care. This is true under both administered price systems, such as Medicare and the English National Health Service, and market determined pricing such as the private health insurance market. The evidence is more mixed from studies of market determined systems, however.”

  7. “Physician-hospital consolidation has not led to either improved quality or reduced costs. Studies find that consolidation was primarily for the purpose of enhanced bargaining power with payers, and hence did not lead to true integration. Consolidation without integration does not lead to enhanced performance.”

Contrary to the success of these hospital systems in raising their rates, private practice physical therapy, the sector that I work in, has seen inflation adjusted reimbursement down 40% between 1992 and 2012.

Medicare has cut physical therapy reimbursement an additional 16% more since 2012.  …

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Scathing Attack on Rajoy in Spanish Press; Spain on Brink of Deflation, CPI Goes Negative

Courtesy of Mish.

Spain’s CPI has declined for four consecutive months and eight out of the last twelve. A decline of .4 percentage points in October pushed the CPI negative for the first time since 2009.

Via translation from El Economista

The Consumer Price Index (CPI) fell four tenths of a percent in October to -0.1% due to falling prices of food and non-alcoholic beverages and the lower rise in university education, according to the leading indicator of the evolution of prices in Spain released Wednesday by the National Statistics Institute (INE).

Deflation requires a fall in prices over an extended period of time, but with the decline in October, the annual chained CPI shows four consecutive months of declines.

“It’s not the first time that consumer prices fall in annual figure in Spain during the crisis. But it is striking that they do when the optimism about the recovery takes hold among economic agents and authorities,” said Jose Luis Martinez, a strategist Citi in Spain.

Scathing Attack on Rajoy

Rarely does one see a scathing attack of government officials in mainstream media, but this attack by El Confidencial (mainstream to Spain) qualifies.

Via translation please consider Recession Continues and Spain on Brink of Deflation

Liars, irresponsible and heartless have brought misery to the poor and middle class crushed with confiscatory taxes. These are the qualifications of prime minister Rajoy and his henchmen who hypocritically celebrate deception to a people. They have not taken Spain out of the recession, but they have brought us to the brink of deflation that will bring more poverty, pain and tears.

The reported GDP and employment figures for the third quarter of 2013 are clearly incompatible. A job loss of 70,000 people in seasonally adjusted terms is not compatible with a rise of GDP (albeit marginal) given the fall of 98% of its components. It’s an impossible metaphysical.

As Jean Claude Trichet, former ECB president said “Spanish statistics are hard to believe.” Since then Spain’s official GDP figure exceeds actual around 30%.

Nonetheless, Rajoy has started marketing the same lies as Zapatero regarding green shoots of 2009, that have not yet arrived.

Even though taxes have risen to a confiscatory level, they have cut wages, pensions, unemployment and imposed all kinds of misery on more than 3 million people.

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Understanding Europe’s Delusion, Dilemma, and Endgame in Under 9 Minutes

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If one watches (or reads) any of the mainstream media, it might seem 'obvious' that Europe is doing well; it's recovering; and the crisis is over (almost over..). However, as Punk Economic's David McWilliams explains in this excellent overview of the European delusion and Merkel's dilemma, there is a "wedge" of unreality between the so-called "markets" and the reality of economic progress. From playing with Germany's money to moar bailouts, and from Merkel's enabling of Draghi's excess to the reality that nothing has changed across the European region, in under 9 minutes, McWilliams brief tour-de-force is a must-watch before you 'chase' more performance with the herd. McWilliams concludes, however, with a darker edge of the inevitable endgame of a "slow trudge" to federalization (and loss of sovereignty) that will likely see Nigel Farage (and many others) apoplectic.

10 Signs That Obamacare Will Wreck The U.S. Economy

Courtesy of Michael Snyder of The Economic Collapse

It is hard to find the words to adequately describe how much of a disaster Obamacare is turning out to be.  The debut of has been probably the worst launch of a major website in history, millions of Americans are having their current health insurance policies canceled, millions of others are seeing the size of their health insurance premiums absolutely explode, and this new law is going to result in massive numbers of jobs being lost.  It is almost as if Obamacare was specifically designed to wreck the U.S. economy.  Not that what we had before Obamacare was great.  In fact, I have long argued that the U.S. health care system is a complete and total train wreck.  But now Obamacare is making everything that was bad about our system much, much worse. 

Americans are going to pay far more for health care, the quality of that care is going to go down, they are going to have to deal with far more medical red tape, and thousands upon thousands of U.S. employers are considering getting rid of the health plans that they offer to employees altogether due to Obamacare.  If the U.S. health care system was a separate nation, it would be the 6th largest economy on the entire planet, and now Obamacare is going to absolutely cripple it.  To say that Obamacare is an "economic catastrophe" would be a massive understatement.

Of course we were assured that it wouldn't turn out this way.  We were promised over and over that we were going to pay less for health care, get better coverage, and be able to keep our current health plans if we were pleased with them.  The following is what Obama said at a rally in 2009

"First of all, if you’ve got health insurance, you like your doctors, you like your plan, you can keep your doctor, you can keep your plan. Nobody is talking about taking that away from you."

Oh really?

That was such a dramatic lie that even NBC News is turning on him.  They discovered that Obama has known for three years that most people that rely on individual health insurance policies would not be able to keep them…

Buried in Obamacare regulations from July 2010 is an estimate that because of normal turnover in the individual insurance market, “40 to 67 percent” of customers will not be able to keep their policy. And because many policies will have been changed since the key date, “the percentage of individual market policies losing grandfather status in a given year exceeds the 40 to 67 percent range.”

That means the administration knew that more than 40 to 67 percent of those in the individual market would not be able to keep their plans, even if they liked them.

Pretty much everything that Obama told us when he was selling us on his plan has turned out to be a lie.

So what can we expect from Obamacare moving forward?  The following are 10 signs that Obamacare is going to wreck the U.S. economy…

#1 It is being projected that millions upon millions of Americans are going to lose their current health insurance plans thanks to Obamacare.  Most will be faced with the choice of either purchasing much more expensive health insurance or going uninsured.  This will put even more stress on a middle class that is already disintegrating rapidly.  The following is from the recent NBC News investigation mentioned above…

Four sources deeply involved in the Affordable Care Act tell NBC News that 50 to 75 percent of the 14 million consumers who buy their insurance individually can expect to receive a “cancellation” letter or the equivalent over the next year because their existing policies don’t meet the standards mandated by the new health care law. One expert predicts that number could reach as high as 80 percent. And all say that many of those forced to buy pricier new policies will experience “sticker shock.”

#2 The health insurance premium increases that some families are experiencing are absolutely mind boggling.  According to Mike Adams of Natural News, one family in Texas just got hit with a 539% rate increase…

Obamacare is named the "Affordable Care Act," after all, and the President promised the rates would be "as low as a phone bill." But I just received a confirmed letter from a friend in Texas showing a 539% rate increase on an existing policy that's been in good standing for years.

As the letter reveals (see below), the cost for this couple's policy under Humana is increasing from $212.10 per month to $1,356.60 per month. This is for a couple in good health whose combined income is less than $70K — a middle-class family, in other words.

According to NBC News, an elderly couple in North Carolina was hit with a similar rate increase…

George Schwab, 62, of North Carolina, said he was "perfectly happy" with his plan from Blue Cross Blue Shield, which also insured his wife for a $228 monthly premium. But this past September, he was surprised to receive a letter saying his policy was no longer available. The "comparable" plan the insurance company offered him carried a $1,208 monthly premium and a $5,500 deductible.

Many Americans that were formerly in favor of Obamacare are now against it after they have seen what it is going to do to their budgets.  The following is one example of this from a recent Los Angeles Times article

Pam Kehaly, president of Anthem Blue Cross in California, said she received a recent letter from a young woman complaining about a 50% rate hike related to the healthcare law.

"She said, 'I was all for Obamacare until I found out I was paying for it,'" Kehaly said.

#3 Obamacare actually includes incentives for people to work less and make less money.  The following is one example from a recent article by Sean Davis

In California, a couple earning $64,000 a year would not qualify for health care subsidies. A bronze plan for them through Kaiser would cost them about $1,300 each month, or $15,600 a year. But if that same family earned just $2,000 less, it would qualify for over $14,000 in annual health care subsidies, dropping their premiums for that same Kaiser plan to less than $100 per month.

#4 Thankfully the employer mandate in Obamacare was delayed for a little while, but it will ultimately result in widespread job losses all over the country.  In fact, we are already starting to see this happen.  The following is from a recent article in the Economist

BEFORE the recession, Richard Clark’s cleaning company in Florida had 200 employees, about half of them working full time. These days it has about 150, with 80% part-time. The downturn explains some of this. But Mr Clark also blames Barack Obama’s health reform. When it comes into effect in January 2015, Obamacare will require firms with 50 or more full-time employees to offer them affordable health insurance or pay a fine of $2,000-3,000 per worker. That is a daunting prospect for firms that do not already offer coverage. But for many, there is a way round the law.

Mr Clark says he is “very careful with the threshold”. To keep his full-time workforce below the magic number of 50, he is relying more on part-timers. He is not alone. More than one in ten firms surveyed by Mercer, a consultancy—and one in five retail and hospitality companies—say they will cut workers’ hours because of Obamacare. A hundred part-timers can flip as many burgers as 50 full-timers, and the former will soon be much cheaper.

You can find a very long list of some of the employers that have either eliminated jobs or cut hours because of Obamacare right here.

#5 Even if you are able to keep your job, there is no guarantee that your employer will continue to offer health insurance as an employee benefit.  In fact, it is being reported that large numbers of employers have already decided to no longer offer health insurance to their employees because of Obamacare.

#6 According to CBS News, so far the number of people that have had their health insurance policies canceled is more than three times greater than the number of people that have signed up for new policies under Obamacare…

CBS News has learned more than two million Americans have been told they cannot renew their current insurance policies — more than triple the number of people said to be buying insurance under the new Affordable Care Act, commonly known as Obamacare.

#7 If what is going on in New York is any indication, those that are signing up for health insurance under Obamacare are going to have a really, really hard time finding a doctor

New York doctors are treating ObamaCare like the plague, a new survey reveals.

A poll conducted by the New York State Medical Society finds that 44 percent of MDs said they are not participating in the nation’s new health-care plan.

Another 33 percent say they’re still not sure whether to become ObamaCare providers.

Only 23 percent of the 409 physicians queried said they’re taking patients who signed up through health exchanges.

#8 Obamacare is turning out to be a gold mine for hackers and identity thieves.  The personal information of millions of Americans could potentially end up being compromised.  According to CNN, was found to be teeming with security holes…

The Obamacare website has more than annoying bugs. A cybersecurity expert found a way to hack into users' accounts.

Until the Department of Health fixed the security hole last week, anyone could easily reset your password without your knowledge and potentially hijack your account.

And according to the New York Post, has been designed so badly from a security standpoint that it might have to be "rebuilt from scratch"…

The chairman of the House Intelligence Committee said ObamaCare’s website, already a tangled mess, might need to be rebuilt from scratch to to protect against cyber-thieves because he fears it’s not a safe place right now for health-care consumers to deposit their personal information.

“I know that they’ve called in another private entity to try to help with the security of it. The problem is, they may have to redesign the entire system,” Rep. Mike Rogers said on Sunday on CNN’s “State of the Union” political talk show. “The way the system is designed, it is not secure.”

#9 As I noted in a previous article, approximately 60 percent of all personal bankruptcies in the United States are related to medical bills.  Because millions of Americans are now losing their health insurance policies and millions of others will choose to pay the fine rather than sign up for Obamacare, more Americans than ever will find themselves overwhelmed with medical bills when they get seriously sick.  This will result in even more personal bankruptcies.

#10 In the end, the burden for paying for the subsidies that Obamacare offers is going to overwhelmingly fall on the taxpayers.  This is going to cause our nightmarish national debt to get even worse.  Peter Schiff recently explained why this is going to happen…

It is also ironic that high-deductible, catastrophic plans are precisely what young people should be buying in the first place. They are inexpensive because they provide coverage for unlikely, but expensive, events. Routine care is best paid for out-of-pocket by value conscious consumers. But Obamacare outlaws these plans, in favor of what amounts to prepaid medical treatment that shifts the cost of services to taxpayers. In such a system, patients have no incentive to contain costs. Since the biggest factor driving health care costs higher in the first place has been the over use of insurance that results from government-provided tax incentives, and the lack of cost accountability that results from a third-party payer system, Obamacare will bend the cost curve even higher. The fact that Obamacare does nothing to rein in costs while providing an open-ended insurance subsidy may be good news for hospitals and insurance companies, but it's bad news for taxpayers, on whom this increased burden will ultimately fall.

So what do you think of Obamacare?

Has it directly affected your life yet?

12 or 13 Things I Learned About Life From Daytrading Millions of Dollars

12 or 13 Things I Learned About Life From Daytrading Millions of Dollars

By James Altucher

I was a daytrader for many years and it almost killed me.

I made money by making profits on my own money and also taking a percentage of the profits for the people I traded for. I traded up to $40 or $50 million a day at my peak. I did this from 2001 to 2004.

I learned about daytrading but I also learned a lot about myself and what I was good at, what I was horrible at, and what I was psychotic at. Things that had nothing to do with daytrading.

Daytrading is the best job in the world on the days you make money. You make a trade, then maybe 20 minutes later you are out of the trade with a profit, and for the rest of the day you think about how much money you made.

It's the worst job in the world on a bad day. I would make a trade, it would go against me, and then I wanted my heart to stop so my blood would stop thumping so loudly.

I did it for years, though, because I was unemployable in every other way…

Keep reading 12 or 13 Things I Learned About Life From Daytr… – The Altucher Confidential – Quora.

How the NSA Hacked Google and Yahoo! – Part Two – Man in the Middle – “Flying Pigs”, “Hush Puppy”

Courtesy of Mish.

In response to NSA Breaks Into Secure Communication Links of Google and Yahoo I received a few comments worth exploring.

Reader “Fury” commented “True encryption using the RSA algorithm is unbreakable today. No way can the NSA break the prime number encryption that is used, I don’t care how many supercomputers they have.

A knowledgeable friend commented “The secure parts are impenetrable by computer technology. A break-in is impossible unless Google let them in or the NSA somehow got the encryption key. The latter would require human agents.

The article I linked to above came from an October 30 article in the Washington Post. Here is the chart in question.

Man in the Middle

Mainstream media is nearly always late to these stories, and so was I. The answer to how the NSA hacked Google and Yahoo! comes from Schneier on Security a “blog covering security and security technology”.

With thanks to reader “marvinmartian” for the link, please consider Bruce Schneier’s September 13 post New NSA Leak Shows MITM Attacks Against Major Internet Services.

The Brazilian television show “Fantastico” exposed an NSA training presentation that discusses how the agency runs man-in-the-middle attacks on the Internet. The point of the story was that the NSA engages in economic espionage against Petrobras, the Brazilian giant oil company, but I’m more interested in the tactical details.

The video on the webpage [NSA Documents Show United States Spied Brazilian Oil Giant] is long, and includes what I assume is a dramatization of an NSA classroom, but a few screen shots are important. The pages from the training presentation describe how the NSA’s MITM attack works:

However, in some cases GCHQ and the NSA appear to have taken a more aggressive and controversial route — on at least one occasion bypassing the need to approach Google directly by performing a man-in-the-middle attack to impersonate Google security certificates. One document published by Fantastico, apparently taken from an NSA presentation that also contains some GCHQ slides, describes “how the attack was done” to apparently snoop on SSL traffic. The document illustrates with a diagram how one of the agencies appears to have hacked into a target’s Internet router and covertly redirected targeted Google traffic using a fake security certificate so it could intercept the information in unencrypted format.

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