Archives for January 2014

Lured into “The Optimistic Unknown”

Lured into “The Optimistic Unknown”

Screen Shot 2014-01-31 at 10.02.30 PMCourtesy of  

What does the fixed income side of your portfolio look like these days? What kind of Frankenstein Funds, leveraged fixed income plays or “structured products” have been shoveled into it as a result of ultra-low rates and the siren song of “alternative yield”?

You might be surprised once you take a glance.

This kind of thing happens to everyone, there’s no shame in it.

The worm is turning now and rates have been rising since last summer. Many forecasters see the ten-year treasury yielding north of 3.5% by year-end 2014. This leads to dislocations and a reversal of flows into many niche areas within the investable markets that would never have gotten as popular if not for the Fed-driven distortions of the post-crisis period.

It may be a good time to have a rethink some of the bizarro substitutions for plain vanilla Treasurys, munis or investment grade corporates you might be holding onto. Do they make as much sense in a post-ZIRP world or during inning two of the stimulus taper?

The below comes from Chris Goolgasian, CPA, CFA, CAIA who is the Head of Portfolio Management, Investment Solutions Group of State Street Global Advisors. You can tell by the amount of acronyms after his name that he knows his stuff ;)

Anyway, Chris calls this herding into new products or strategies “The Optimistic Unknown” – wherein people decide they have to do something unfamiliar and assume it will work out fine because they haven’t thought through the consequences…

This is one of the legacies of today’s Central Bankers. They may not have created goods or wage inflation yet, but their actions certainly have created asset inflation. The Central Banks have distorted the risk-free rate to such a degree that some investors have embraced what we call “the optimistic unknown.” That is, they’ve been lured into higher-yielding instruments today, even though they don’t fully “know” the underlying construction or potential risks, on the hope those investments don’t falter tomorrow. This sort of behavior has a number of ramifications, including:

  1. The marketplace will create more products to meet the demand.
  2. As the most likely buyers are less familiar with these types of investments, they are, therefore, less sure of themselves and potentially may flee at the first sign of danger.
  3. The lack of understanding will end badly in some cases and as with all communication snafus, the seller of the product will be blamed.

Chris’s note cites some obvious examples of this sort of thing:

* MLP’s: in less than three years, the largest Master Limited Partnership ETF in the industry has grown from $600 million to over $6 billion in 2013.

* Bank loans: mutual fund assets have grown from $14 billion in 2008 to $114 billion in 2013.

* Emerging Market debt: mutual fund assets have grown from $11 billion to $75 billion since 2008.

These are just a few examples, but there are many more including the growth of “business development companies” and the growth of “credit” hedge fund strategies, both of which tend to offer attractive yields.

He goes on to note that there is nothing wrong with the asset classes or products themselves, just that they can be used incorrectly or with limited understanding.

Consider whether or not you’ve succumbed to the Optimistic Unknown. Is your portfolio laden with instruments or exposures that you do not truly understand? If you were starting over with your allocation now that rates have moved and are moving, would you truly be investing in these vehicles? Would your advisor be recommending them in a brand new portfolio being constructed today?

The answer may be yes in come cases – but it may be no in others.

The important thing is to ask.

Source:

The Optimistic Unknown – SSgA Capital Insights (PDF)

Vol Happens

Picture source here. 

Vol Happens

Courtesy of 

The market is not sticking with the 2013 playbook. We have gap-down opens and the Vix is back in the mix. Market participants are actually paying attention to overseas news – and not just the good news, the bad news too.

In 2013, good news was good news, bad news was good news and no news was good news. This was an infuriating environment for anyone who wasn’t 100% long US equities.

Things aren’t playing out that way anymore.

Volatility is back after its artificial Fed-induced suppression for most of the last two years.

This is a good thing. Unless you enjoy adding to your 401(k) and other investment accounts only at record highs. I had a markets reporter ask me “If volatility is coming back this year, should investors hide out in cash until it’s over?” No wonder the American public is investment-illiterate. Look at the shit they’re reading.

 

Pending Home Sales Chart – Housing Inflation Despite Weak Sales As Inventories Stay Tight

Latest from Lee Adler of the Wall Street Examiner

The National Association of Realtors (NAR) Pending Home Sales Index (PHSI) number for December fell by 8.7%, crushing clueless Wall Street economists whose consensus guess was for a decline of 0.2%. The headline number is a seasonally adjusted representation of the trend, and may or may not reflect actual market conditions at the time.

Actual Pending Home Sales

The actual, not seasonally adjusted number of pending home sales (sales going under contract) for December was approximately 250,800, based on the historical average ratio of the PHSI to actual final sales. That was a drop of 86,400 from November.The average December decline going back to 2005 was a drop of 62,000. The December reading was the lowest level of sales since December 2010 when a sales vacuum followed the expiration of the second home buyers tax credit housing stimulus program.

The current pending home sales index was down 6.1% from the year ago period. Blame the weather if you want, but any way you slice it, it was a bad performance. The disastrous seasonally adjusted representation was actually on point.

Pending Home Sales Fall But Listing Inventories Remain Tight

The NAR released closed sales and inventory for December earlier in January. It showed that listing inventories remained just above the record lows set the year before. 

Pending Home Sales and Inventory Chart - Click to enlarge

Pending Home Sales and Inventory Chart – Click to enlarge

As a result of the fall in pending home sales, the inventory to contracts ratio, a measure of market tightness, rose from 6.1 in November to 7.4 in December. This is normal seasonality. Listings typically increase more than sales in December. However, the ratio also rose on a year to year basis from 6.85 in December 2012. This would normally indicate a loosening market, but in this case the number still indicates tight conditions. Other than 2012, it’s the lowest reading since 2005.

Pending Home Sales Inventory to Sales Ratio Chart - Click to enlarge

Pending Home Sales Inventory to Sales Ratio Chart – Click to enlarge

These numbers are calculated from all US Multiple Listing Services. Conditions are even tighter in the more active, desirable US markets.

Online real estate broker Redfin.com gathers real time MLS data for listing inventories and properties that went under contract each month from 19 large US metros. These markets represent some of the most active US markets.  Its data for December 2013 shows that inventories in those markets fell versus December 2012. There were 199,461 total homes for sale in the 19 markets, a year to year decline of 12.5%. A total of 67,509 homes went under contract in December 2013, down 3.7% from December 2012. The inventory to sales ratio in those markets was just 2.95 in December 2013. That was down from 3.31 in December 2012. With conditions that tight, as the spring selling season gets under way, prices could skyrocket.

Extremely tight conditions continue to drive housing inflation in spite of historically weak demand. If the December weakness was really due to bad weather, that latent demand will return as the weather improves.

Redfin reports the aggregate median contract price for the current month in the 19 markets where it has offices. It showed that prices actually rose in December by 0.8% month to month, and 13.1% year to year. While somewhat slower than gains earlier in 2013, these increases are still bubble like. The uptick in sale prices in December is unusual. Prior Decembers showed prices flat or falling in December.

Real Time Pending Home Sales Prices - Click to enlarge

Real Time Pending Home Sales Prices – Click to enlarge

Real time listing prices have also proven to accurately show the overall trend of prices as subsequently verified by the lagging closed sales data released several months after the fact.The NAR, Dataquick, and Corelogic release national sales data without smoothing about 2 months after the close of the period in which the contracts were signed. They all confirm the accuracy of current listing price trends in terms of depicting market direction in real time.  The widely followed Case Shiller Index compounds the lag by reporting only a moving average of sales over the previous 3 months, resulting in a lag of 5 1/2 months at the time of release. 

DepartmentofNumbers.com accumulates median listing prices from 55 of the largest US metros and reports an aggregate median listing price for the US as a whole. This data is a good representative sample, including both good and bad markets. The median listing price at the end of January was $250,088, up 1.15% from December and up 11.7% from the year before. The total number of listings as of January 27 was 662,571, barely above the record low reading of 648,938 in January 2012.

Real Time US Homes for Sale Listing Inventory - Click to enlarge

Real Time US Homes for Sale Listing Inventory – Click to enlarge

So in spite of near record low sales, tight inventories continue to push prices higher. This is a manifestation of the selective inflation caused by the distortions that result the Fed’s policies of QE and ZIRP. Rising house prices are not included in the CPI however. The conventional definition of inflation excludes asset prices. Conventional economics confuses people about whether there is or is not inflation. There is asset inflation, but CPI inflation is suppressed by the exclusion of housing, and the fact that QE and ZIRP suppress the value of labor. The prices of consumer goods can hardly rise if 90% of consumers are broke and losing purchasing power.

Real Time US Home Prices - Click to enlarge

Real Time US Home Prices – Click to enlarge

Thanks to the Fed’s policies of ZIRP and QE which benefit mostly broker dealers, bankers, and speculators, both the financial and housing markets and the economy as a whole are distorted. The recovery, in particular the so called “housing recovery,” is an illusion.  

Follow my reports on how the Fed and other central banks pump liquidity into the markets weekly in the Wall Street Examiner Professional Edition. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. 

Schiff vs. Ritholtz: Political Correctness vs. Law of Supply and Demand

Courtesy of Mish.

PolicyMic says There’s a Good Reason Why Everyone’s Cricizing Peter Schiff.

Jon Stewart’s Daily Show mocked Schiff in an amusing video interview Wage Against the Machine. The video allegedly explores “the devastating economic effects of raising the minimum wage to the poverty level.

Schiff’s opponent in the interview was Barry Ritholtz at the Big Picture blog. Before the show aired, Barry explained How I Ended Up On The Daily Show.

The feedback against Schiff was enormous. Ritholtz has the details in Follow Up: Daily Show Blowback.

Political Correctness Points

I am no fan of Schiff. We have radically different views on the inflation-deflation debate. And I do find the way he stated his case to be very distasteful.

That said, it’s clear the Daily Show was out to score political points, not explore economic reality.

Given that Schiff was purposely displayed in the worst light possible and Ritholtz the best light possible (Ritholtz admits retake after retake) it is not shocking in the least to see all this blowback.

Merits of the Debate

Political correctness or not, I want a sound discussion of economic principles.

There are no reputable studies that show increasing minimum wages increase employment.

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Nigel Farage Video: UKIP Takes Lead in British Polls; Message to Cameron

Courtesy of Mish.

I am pleased to report some good news today:  UKIP takes lead in British polls ahead of EU parliamentary elections to be held in May.

Nigel Farage Video

Inquiring minds should watch the an interesting Video Interview of UKIP leader Nighel Farage. Here’s the opening lead “The UK Independence Party has managed to win over the hearts of the British public.

Also consider UKIP Tops Independent Poll as Nation’s Favourite Party

‘The UK Independence Party is the nation’s favourite political party, a poll for The Independent on Sunday reveals today.

Voters regard Nigel Farage’s party more favourably than Labour, the Conservatives or the Liberal Democrats. The surprising finding will underline concerns inside the mainstream Westminster parties that Ukip is on course to come first in May’s European elections and could deny Labour or the Tories an outright victory in next year’s general election.

What is more, Mr Farage is favoured over Ed Miliband and Nick Clegg as a party leader, beaten only by David Cameron, the ComRes survey reveals. Ukip is the favourite choice of 27 per cent of voters, while Labour is favoured by 26 per cent. The Conservatives are next, on 25 per cent, and the Lib Dems last, on 14 per cent. Although the differences in the first three parties are within the margin of error, the findings will fuel unease inside Downing Street that the Prime Minister has failed to close down the question of Europe and that Ukip’s support remains strong.

Message to David Cameron

This shift in voter sentiment is a clear message to prime minister David Cameron: Get your head out from where the sun doesn’t shine and announce a referendum on EU membership this year.

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

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“Suspicious White Powder” Found At 5 Superbowl Hotels

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While joking about potential terrorist plots is below us, the fact that New Jersey police are investigating the appearance of suspicious white powder at several hotels near the site of the Superbowl was too close to an "Onion" headline for us to ignore. As AP reports, the FBI is investigating the substance (found in envelopes – which we suspect were not marked with player's names). No injuries or overnight bouts of unexplained euphoria have been reported.

Via AP,

The FBI and other law enforcement are investigating a suspicious white powder that was mailed to at least five New Jersey hotels near the site of Sunday's Super Bowl.

Carlstadt Police Det. John Cleary says someone at an Econo Lodge found the substance in an envelope on Friday.

Cleary says similar mailings arrived at the Homestead Inn in East Rutherford and a Renaissance Inn in Rutherford. He says investigators intercepted additional envelopes from a mail truck before it reached a Holiday Inn Express and Hampton Inn in Carlstadt.

Hazardous materials teams are checking out the substance. The FBI says it is investigating and no injuries have been reported.

We hope this is not a replay of Washington's Anthrax issues but otherwise suggest NJ's blow-dealers consider other forms of delivery (e.g. McDonalds Happy Meal or Amazon Drone)

South Parked

Jon Stewart: South Parked
Lindsey Graham predicts the world's end, and two inches of snow brings Atlanta to a standstill.  

Theft Is Deflationary – Especially The Crony-Capitalist/State Kind

Courtesy of Charles Hugh-Smith of OfTwoMinds

Monopoly power in all its forms–in our system, crony capitalism and its partner, the neofeudal state–enables theft on a systemic scale.

If a monopoly forces its customers to pay more for low-quality goods and services because they have no choice, how is that not theft?

If the Mafia raises the price of "protection" on small businesses (another case of monopoly and no other choice), how is that extortion not theft?

When a local government raises junk fees to fund its cronies' excessive (i.e. non-market-rate) salaries and pensions, how is that monopoly power to extort more money from those with no other choice any different from Mafia extortion/theft?

If a pharmaceutical company extends a patent on a costly medication by changing the dosage slightly, how is that not theft via regulatory capture? If a government contractor charges the Pentagon $1,000 for a hammer (all those overhead charges, tsk-tsk–lobbying corrupt politicos costs a lot, you know), how is that not theft of taxpayers' money?

When the Federal Reserve drops the yield on savings to near-zero to funnel all that stolen wealth to its cronies on Wall Street, how is that not theft?

Monopoly power in all its forms–in our system, crony capitalism and its partner, the neofeudal state–enables theft on a systemic scale. When crony capitalism and the state are essentially one system, the propaganda organs of the state and mainstream corporate media combine to persuade the stripmined populace that their theft is not theft, it's "capitalism and democracy at work." This is known as The Big Lie. What we have is systemic theft, predation and exploitation.

Calling things what they really are would upset the apple cart of systemic exploitation. Let's Call Things What They Really Are in 2014 (January 15, 2014)

Correspondent Jeff W. explains that all this systemic theft is inherently deflationary:

ll forms of stealing are deflationary. Stealing cuts into the average citizen’s disposable income, it reduces how much he can buy. Because there are now fewer dollars chasing more goods, deflation is the inevitable result. Stealing is actually worse than a zero-sum game. Society loses more than the thief takes. In addition to losses from theft, a victim often has to spend more on security measures. Theft also has a chilling effect on capital investment and commerce in general.

Consider how many different kinds of theft the American citizen is exposed to: street crime, sickcare industry ripoffs, legal system ripoffs including huge fines for traffic violations, high taxes, interest earnings on his savings that amount to ZIRP, a corporatist state determined to suppress his wages by any means necessary, unending victimization at the hands of predators enabled and protected by the state. If he owns a small business, he has to deal with a corrupt regulatory state, higher taxes, and an enlarged menagerie of predators. Today there are thieves everywhere.

So one big deflation trend is theft. As theft increases, deflation increases. As society collapses and thieves start roaming freely all over the landscape, a deflationary collapse can be expected—absent a determined and persistent campaign of money printing.

Exhibit A for the case that stealing is deflationary is the Dark Ages. Stealing was rampant in the Dark Ages. How did people react to that? By “going medieval.” They wore clothing that made them look poor so as to avoid attracting the attention of thieves. Their dwellings looked poor for the same reason. If they had cash, they would bury it in the ground; no one could be trusted. Unless one was an insider who could get protection from the state, no one’s property was safe.

Capital investments were much too risky, and out of the question. What were the price characteristics of the Dark Ages? Wages were low. Real estate valuations low. Prices of manufactured items (such as they were) were low. Only food was expensive. People can cut back on clothing and shelter, but there is a limit to how much they can cut back on food. In the Dark Ages, people really hunkered down and just focused on basic survival.

Exhibit B is Detroit. Detroit for many years has been a high crime area, i.e. it had lots of thieves running around. What are the price characteristics of Detroit? Wages low. Real estate valuations low. There is very little manufacturing being done inside the city limits today because of high property taxes and crime. There is also very little capital investment for the same reasons.

There is a vicious circle at work here.

1) Thieves control the government;

2) Which results in increased stealing;

3) Deflation results from that;

4) Which gives the thieves a reason to print money and give it to themselves;

5) Which enriches the thieves some more;

6) Which gives them more resources they can use to consolidate their control of the government;

7) Back to step 1.

Many people seem confused about how there could be deflation in the paper (or digital) money era. If they would recognize how much stealing is going on, and if they understood the powerful deflationary effect of stealing, then perhaps they would not be so surprised to observe price decreases, particularly in wages and the prices of manufactured products.

Thank you, Jeff, for explaining the causal connection between systemic theft and deflation. To all those terrified of deflation (for example, central bankers and their cronies holding trillions of dollars in phantom assets and illusory collateral), the solution is obvious: get rid of systemic theft. But since those terrified of deflation are at the top of the monopoly-power thievery pyramid, that is asking the impossible: for the thieves to relinquish their power to steal.

Pending Home Sales Chart – Housing Inflation Despite Weak Sales As Inventories Stay Tight

Courtesy of Lee Adler of the Wall Street Examiner

The National Association of Realtors (NAR) Pending Home Sales Index (PHSI) number for December fell by 8.7%, crushing clueless Wall Street economists whose consensus guess was for a decline of 0.2%. The headline number is a seasonally adjusted representation of the trend, and may or may not reflect actual market conditions at the time.

Actual Pending Home Sales

The actual, not seasonally adjusted number of pending home sales (sales going under contract) for December was approximately 250,800, based on the historical average ratio of the PHSI to actual final sales. That was a drop of 86,400 from November. The average December decline going back to 2005 was a drop of 62,000. The December reading was the lowest level of sales since December 2010 when a sales vacuum followed the expiration of the second home buyers tax credit housing stimulus program.

The current pending home sales index was down 6.1% from the year ago period. Blame the weather if you want, but any way you slice it, it was a bad performance. The disastrous seasonally adjusted representation was actually on point.

Pending Home Sales Fall But Listing Inventories Remain Tight

The NAR released closed sales and inventory for December earlier in January. It showed that listing inventories remained just above the record lows set the year before. 

Pending Home Sales and Inventory Chart - Click to enlarge

Pending Home Sales and Inventory Chart – Click to enlarge

As a result of the fall in pending home sales, the inventory to contracts ratio, a measure of market tightness, rose from 6.1 in November to 7.4 in December. This is normal seasonality. Listings typically increase more than sales in December. However, the ratio also rose on a year to year basis from 6.85 in December 2012. This would normally indicate a loosening market, but in this case the number still indicates tight conditions. Other than 2012, it’s the lowest reading since 2005.

Pending Home Sales Inventory to Sales Ratio Chart - Click to enlarge

Pending Home Sales Inventory to Sales Ratio Chart – Click to enlarge

These numbers are calculated from all US Multiple Listing Services. Conditions are even tighter in the more active, desirable US markets.

Online real estate broker Redfin.com gathers real time MLS data for listing inventories and properties that went under contract each month from 19 large US metros. These markets represent some of the most active US markets.  Its data for December 2013 shows that inventories in those markets fell versus December 2012. There were 199,461 total homes for sale in the 19 markets, a year to year decline of 12.5%. A total of 67,509 homes went under contract in December 2013, down 3.7% from December 2012. The inventory to sales ratio in those markets was just 2.95 in December 2013. That was down from 3.31 in December 2012. With conditions that tight, as the spring selling season gets under way, prices could skyrocket.

Extremely tight conditions continue to drive housing inflation in spite of historically weak demand. If the December weakness was really due to bad weather, that latent demand will return as the weather improves.

Redfin reports the aggregate median contract price for the current month in the 19 markets where it has offices. It showed that prices actually rose in December by 0.8% month to month, and 13.1% year to year. While somewhat slower than gains earlier in 2013, these increases are still bubble like. The uptick in sale prices in December is unusual. Prior Decembers showed prices flat or falling in December.

Real Time Pending Home Sales Prices - Click to enlarge

Real Time Pending Home Sales Prices – Click to enlarge

Real time listing prices have also proven to accurately show the overall trend of prices as subsequently verified by the lagging closed sales data released several months after the fact.The NAR, Dataquick, and Corelogic release national sales data without smoothing about 2 months after the close of the period in which the contracts were signed. They all confirm the accuracy of current listing price trends in terms of depicting market direction in real time.  The widely followed Case Shiller Index compounds the lag by reporting only a moving average of sales over the previous 3 months, resulting in a lag of 5 1/2 months at the time of release. 

DepartmentofNumbers.com accumulates median listing prices from 55 of the largest US metros and reports an aggregate median listing price for the US as a whole. This data is a good representative sample, including both good and bad markets. The median listing price at the end of January was $250,088, up 1.15% from December and up 11.7% from the year before. The total number of listings as of January 27 was 662,571, barely above the record low reading of 648,938 in January 2012.

Real Time US Homes for Sale Listing Inventory - Click to enlarge

Real Time US Homes for Sale Listing Inventory – Click to enlarge

So in spite of near record low sales, tight inventories continue to push prices higher. This is a manifestation of the selective inflation caused by the distortions that result the Fed’s policies of QE and ZIRP. Rising house prices are not included in the CPI however. The conventional definition of inflation excludes asset prices. Conventional economics confuses people about whether there is or is not inflation. There is asset inflation, but CPI inflation is suppressed by the exclusion of housing, and the fact that QE and ZIRP suppress the value of labor. The prices of consumer goods can hardly rise if 90% of consumers are broke and losing purchasing power.

Real Time US Home Prices - Click to enlarge

Real Time US Home Prices – Click to enlarge

Thanks to the Fed’s policies of ZIRP and QE which benefit mostly broker dealers, bankers, and speculators, both the financial and housing markets and the economy as a whole are distorted. The recovery, in particular the so called “housing recovery,” is an illusion.  

Follow my reports on how the Fed and other central banks pump liquidity into the markets weekly in the Wall Street Examiner Professional Edition. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. 

“Secret” Meetings on Greece? Say It Ain’t So; Euro Contagion Coming Up

Courtesy of Mish.

How long can secret ECB meetings stay secret? Allowing time to write a story, the answer is something like 3 days, if that. The Wall Street Journal today reports on a secret meeting that took place Monday evening regarding Greece finances.

Please consider Greece Creditors, France, Germany Held Secret Meeting Monday.

Top officials peeled away from colleagues after a euro-zone finance ministers meeting in Brussels Monday evening for a secret meeting to discuss mounting concerns over Greece’s bailout.

Greek Finance Minister Yiannis Stournaras, who was briefing the press in a building across the street at the time, wasn’t invited.

High-level officials from the International Monetary Fund, the European Commission, the European Central Bank, senior euro-zone officials and the German and French finance ministers were present, according to people with direct knowledge of the situation. They spoke on condition of anonymity because they aren’t authorized to talk to the press.

They were trying to figure out how to tackle two issues threatening to unsettle the fragile economic recovery in Greece and the broader euro zone.

They discussed how to press the Greek government to forge ahead with unpopular structural reforms; and second, how to scramble together extra cash to cover a shortfall in the country’s financing for the second half of the year, estimated at €5 billion-€6 billion ($6.81 billion-$8.17 billion).

The meeting was inconclusive, the people familiar with the situation said.

Creditors Worried

Clearly, creditors are worried over Greece’s ability to pay back bailout money (loans). They should be worried because there is no possible way Greece can ever pay back those loans.

The best time to be worried about getting paid back is before stupid loans are made, not now. It’s far too late to be worried now about loans already made. There is still time to not compound the mistake of making further loans (something they have done several times already).

Politics

Support for Prime Minister Antonis Samaras’ New Democracy coalition has crumbled to pieces. If an election were held today, opposition party SYRIZA would win without a doubt. …

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The Worst Unemployment Chart In The World

The Worst Unemployment Chart In The World

Courtesy of  at Business Insider

In the US and the UK, the unemployment rate is falling sharply, and it's causing growing angst about when their central banks will be forced to consider a tightening labor market, and what that means for inflation.

Of course, there's some debate about the significance of various factors in driving the unemployment rate lower (job creation vs. people leaving the labor force).

But check out the newly released chart of Eurozone unemployment.

The line to look at is the thin blue line. It's just flatlined. Despite the main Eurozone crisis being long over, there's been no improvement in months. It's just not getting better. The EU 28 line includes non-Eurozone European countries like the UK, which as we noted is seeing a sharp drop in unemployment, and so that explains why that one is dropping.

But back to the Eurozone one. Unemployment is at staggering levels and it's not improving.

 

Here's a country-by-country breakdown of the unemployment rate.

Screen Shot 2014 01 31 at 5.43.30 AM

Eurostat

 

Meanwhile, Eurozone inflation just hit its all-time lowest level. Europe is looking more and more like it's in a "Japanese" deflation scenario every day.

 

A Turning Point in Junior Gold Stocks?

A Turning Point in Junior Gold Stocks?

By Jeff Clark at Casey Research 

It's not exactly news that gold mining stocks have been in a slump for more than two years. Many investors who owned them have thrown in the towel by now, or are holding simply because a paper loss isn't a realized loss until you sell.

For contrarian speculators like Doug Casey and Rick Rule, though, it's the best of all scenarios. "Buy when blood is in the streets," investor Nathan Rothschild allegedly said. And buy they do, with both hands—because, they assert, there are definitive signs that things may be turning around.

So what's the deal with junior mining stocks, and who should invest in them? I'll give you several good reasons not to touch them with a 10-foot pole… and one why you maybe should.

First, you need to understand that junior gold miners are not buy-and-forget stocks. They are the most volatile securities in the world—"burning matches," as Doug calls them. To speculate in those stocks requires nerves of steel.

Let's take a look at the performance of the juniors since 2011. The ETF that tracks a basket of such stocks—Market Vectors Junior Gold Miners (GDXJ)—took a savage beating. In early April of 2011, a share would have cost you $170. Today, you can pick one up for about $36… that's a decline of nearly 80%.

There are something like 3,000 small mining companies in the world today, and the vast majority of them are worthless, sitting on a few hundred acres of moose pasture and a pipe dream.

It's a very tough business. Small-cap exploration companies (the "juniors") are working year round looking for viable deposits. The question is not just if the gold is there, but if it can be extracted economically—and the probability is low. Even the ones that manage to find the goods and build a mine aren't in the clear yet: before they can pour the first bar, there are regulatory hurdles, rising costs of labor and machinery, and often vehement opposition from natives to deal with.

As the performance of junior mining stocks is closely correlated to that of gold, when the physical metal goes into a tailspin, gold mining shares follow suit. Only they tend to drop off faster and more deeply than physical gold.

Then why invest in them at all?

Because, as Casey Chief Metals & Mining Strategist Louis James likes to say, the downside is limited—all you can lose is 100% of your investment. The upside, on the other hand, is infinite.

In the rebound periods after downturns such as the one we're in, literal fortunes can be made; gains of 400-1,000% (and sometimes more) are not a rarity. It's a speculator's dream.

When speculating in junior miners, timing is crucial. Bear runs in the gold sector can last a long time—some of them will go on until the last faint-hearted investor has been flushed away and there's no one left to sell.

At that point they come roaring back. It happened in the late '70s, it happened several times in the '80s when gold itself pretty much went to sleep, and again in 2002 after a four-year retreat.

The most recent rally of 2009-'10 was breathtaking: Louis' International Speculator stocks, which had gotten hammered with the rest of the market, handed subscribers average gains of 401.8%—a level of return Joe the Investor never gets to see in his lifetime.

So where are we now in the cycle?

The present downturn, as noted, kicked off in the spring of 2011, and despite several mini-rallies, the overall trend has been down. Recently, though, the natural resource experts here at Casey Research and elsewhere have seen clear signs of an imminent turnaround.

For one thing, the price of gold itself has stabilized. After hitting its peak of $1,921.50 in September of 2011, it fell back below $1,190 twice last December. Since then, it hasn't tested those lows again and is trading about 6.5% higher today.

The demand for physical gold, especially from China, has been insatiable. The Austrian mint had to hire more employees and add a third eight-hour shift to the day in an attempt to keep up in its production of Philharmonic coins. "The market is very busy," a mint spokesperson said. "We can't meet the demand, even if we work overtime." Sales jumped 36% in 2013, compared to the year before.

Finally, the junior mining stocks have perked up again. In fact, for the first month of 2014, they turned in the best performance of any asset, as you can see here:

(Source: Zero Hedge)

The writing's on the wall, say the pros, that the downturn won't last much longer—and when the junior miners start taking off again, there's no telling how high they could go.

To present the evidence and to discuss how to play the turning tides in the precious metals market, Casey Research is hosting a timely online video event titled Upturn Millionaires next Wednesday, February 5, at 2:00 p.m. Eastern.



 

register here for free

 

Initial Unemployment Claims Chart In Danger Zone

Courtesy of Lee Adler of the Wall Street Examiner

Initial unemployment claims for the week ended January 25 were worse than Wall Street economists expected based on the seasonally adjusted headline number.

The actual number of initial claims, not seasonally adjusted, for this week of January was 354,604, a drop of 59,700 from the prior week. The average decline for the fourth week of January over the prior 10 years was 64,600. The current number was well within the typical range. It the lowest number of initial unemployment claims for that week since 2006, at the top of the housing bubble, and was even lower than that week of January 2005. It oddly suggests an overheating economy, driven by the distortions caused by QE and ZIRP.

Initial Unemployment Claims Chart- Click to enlarge

Initial Unemployment Claims Chart- Click to enlarge

Strengthening Trend in Initial Unemployment Claims Chart Slows

The trend of improvement in the initial unemployment claims chart has slowed in recent months. That’s to be expected as the year to year comparisons get tougher. But other than that, not much has changed. The current number was down 4% year over year. That compares with down 5.2% the previous week. That’s still in the range of 0 to -15% that has prevailed since 2010. It’s too soon to say if this is a sign of persistent slowing, but if it is, it would be a warning of potential trouble for the stock market.

The Department of Labor reports the actual, NSA data, but the mainstream media ignores it. Here’s what the DOL had to say about it. “The advance number of actual initial claims under state programs, unadjusted, totaled 354,604 in the week ending January 25, a decrease of 59,707 from the previous week. There were 369,480 initial claims in the comparable week in 2013.”

Stock prices and initial unemployment claims have historically had a strong inverse correlation. That’s depicted on the chart below. A negative divergence developed in the final burst of the last bubble in 2007, with the trend of claims stalling from 2006 through 2007 while stock prices entered their final blowoff. No such divergence has developed yet in the current market. The chart below uses a log scale for stock prices to better depict the percentage gain in stocks over time.

Initial Claims and Stock Prices - Click to enlarge

Initial Claims and Stock Prices – Click to enlarge

 

The slowing of the drop in claims over the past year shows that the Fed’s QE 3-4, which was announced in September 2012 and took effect in November of 2012, has been ineffective in stimulating greater job growth but has worked to send stock prices into the stratosphere.  

I cover the relationship between stock prices and the Fed’s open market operations weekly in the Wall Street Examiner Professional Edition. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner.

Greece Is Back: Germany, France, Creditors Hold Secret Meeting Due To Greek Bailout “Mounting Concerns”

Courtesy of ZeroHedge. View original post here.

There was a time – roughly between May 2010 and the spring fall of 2011 – when all the world had to worry about was Greece. Then the realization finally dawned that since a Grexit from the Eurozone would kill the EUR and the European integration dream with so much "political capital" invested, crush Deutsche Bank, and bring back the much dreaded (by German exporters) Deutsche Mark, it became clear that there is no fear that Greece, which is now a decrepit shell of a country with a collapsed economy and society in shambles, has now become a slave state to European bureaucrats, business and banks (in Nigel Farage's words), will never be formally kicked out of Europe and only an internal coup would allow it to finally break free from the clutches of unelected European tyrants. And then the world moved on to more important things: like Japan, China Emerging Markets and how they are all enjoying the Fed's taper. Sadly, we have to report, that Greece is once again baaaaack.

According to the WSJ, "top officials peeled away from colleagues after a euro-zone finance ministers meeting in Brussels Monday evening for a secret meeting to discuss mounting concerns over Greece's bailout.

WSJ adds:

High-level officials from the International Monetary Fund, the European Commission, the European Central Bank, senior euro-zone officials and the German and French finance ministers were present, according to people with direct knowledge of the situation. They spoke on condition of anonymity because they aren't authorized to talk to the press.

They were trying to figure out how to tackle two issues threatening to unsettle the fragile economic recovery in Greece and the broader euro zone.

They discussed how to press the Greek government to forge ahead with unpopular structural reforms; and second, how to scramble together extra cash to cover a shortfall in the country's financing for the second half of the year, estimated at €5 billion-€6 billion ($6.81 billion-$8.17 billion).

Of course, this being Europe, nothing was decided: "The meeting was inconclusive, the people familiar with the situation said. Talks with the Greek authorities continue remotely—though representatives of the three institutions, known as the troika, have put on hold their plans to travel to Athens. Concerns are growing because Greece faces a large maturity of government bonds in May of €11 billion. The IMF hasn't disbursed any aid to Greece since July and is €3.8 billion behind in scheduled aid payments. The IMF insists on having a clear view of the country's finances 12 months ahead, and this condition hasn't been met."

And so the posturing resumes, with the Troika pretending it won't hand over the funds unless Greece "reforms", and Greece promising the "reform" as soon as it gets the funds. Nothing new here. What is new, is that finally the facade of Greek sovereignty and independence was stripped away as decisions regarding Greece took place… without
Greece: "Greek Finance Minister Yiannis Stournaras, who was briefing the
press in the same building at the time, wasn't invited."

Which is right – after all when a nation is enslaved and has no sovereignty, it doesn't deserve to have a voice in its future.

Third Banker, Former Fed Member, “Found Dead” Inside A Week

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If the stock market were already crashing then it would be simple to blame the dismally sad rash of dead bankers in the last week on that – certainly that was reflected in 1929. However, for the third time in the last week, a senior financial executive has died in what appears to be a suicide. As Bloomberg reports, following the deaths of a JPMorgan senior manager (Tuesday) and a Deutsche Bank executive (Sunday), Russell Investments' Chief Economist (and former Fed economist) Mike Dueker was found dead at the side of a highway in Washington State. Police said the death appeared to be a suicide.

Via Bloomberg,

Mike Dueker, the chief economist at Russell Investments, was found dead at the side of a highway that leads to the Tacoma Narrows Bridge in Washington state, according to the Pierce County Sheriff’s Department. He was 50.

He may have jumped over a 4-foot (1.2-meter) fence before falling down a 40- to 50-foot embankment, Pierce County Detective Ed Troyer said yesterday. He said the death appeared to be a suicide.

Dueker was reported missing on Jan. 29, and a group of friends had been searching for him along with law enforcement. Troyer said Dueker was having problems at work, without elaborating.

Dueker was in good standing at Russell, said Jennifer Tice, a company spokeswoman. She declined to comment on Troyer’s statement about Dueker’s work issues.

But as Michael Snyder noted recently, if the stock market was already crashing, it would be easy to blame the suicides on that. The world certainly remembers what happened during the crash of 1929

Historically, bankers have been stereotyped as the most likely to commit suicide. This has a lot to do with the famous 1929 stock market crash, which resulted in 1,616 banks failing and more than 20,000 businesses going bankrupt.

The number of bankers committing suicide directly after the crash is thought to have been only around 20, with another 100 people connected to the financial industry dying at their own hand within the year.

Dueker had also been a research economist at the St. Louis Fed:

He published dozens of research papers over the past two decades, many on monetary policy, according to the St. Louis Fed’s website, which ranks him among the top 5 percent of economists by number of works published. His most-cited work was a 1997 paper titled “Strengthening the case for the yield curve as a predictor of U.S. recessions,” published by the reserve bank while he was a researcher there.

So, with stocks a mere 4% off their highs, are so many high ranking and well respected bankers committing suicide?

Real Disposable Income Plummets Most In 40 Years

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We may not know much about "Keynesian economics" (and neither does anyone else: they just plug and pray, literally), but we know one thing: when real disposable personal income drops by 0.2% from a month earlier, and plummets by 2.7% from a year ago,  the biggest collapse since the semi-depression in 1974, something is wrong with the US consumer.

 

And longer-term chart:

Source: BEA

 

What the Crisis Taught Us: More Bubbles! We Need Bigger Bubbles to Combat Deflation!

Courtesy of Mish.

The Monetarists are out in full force warning about pending deflation.

First it was Christine Lagarde with her message about the deflation ogre (see Christine Lagarde Warns of Lord Voldemort, Hopes to Put Deflation Ogre in a Bottle).

Next on the list, deflation fighter extraordinaire, Telegraph writer Ambrose Evans-Pritchard, picked up on Lagard’s commentary and screamed at the top of his lungs “More Bubbles! We need bigger and bigger bubbles to combat the threat of deflation!

Of course Pritchard did not state it precisely that way, but it is indeed exactly what he called for, in equally loud, unmistakable tones.

World Risks Deflationary Shocks

I invite you to read World risks deflationary shock as BRICS puncture credit bubbles by Ambrose Evans-Pritchard.

It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.

Tightening? What Tightening?

Pritchard calls a decrease in asset purchases by the Fed from $85 billion a month to $65 billion a month “tightening”. The claim is preposterous.

It’s very much like telling an obese child you can only have three pieces of cake after dinner, not four.

Correctly viewed, tapering asset purchases is a reduction in stimulus, not tightening.

Actual Tightening in Emerging Markets

Pritchard discussed Turkey, South Africa, India, Brazil, Indonesia, and every other country that actually did tighten recently, but he never addressed the reason they had to: inflation was completely out of control in those countries, with obvious asset bubbles in many of them. Tightening should have started long ago….

Continue Here

A central banker’s ‘license to lie’

A central banker’s ‘license to lie’ 

By Anatole Kaletsky, at Reuters

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

I am not trying to aim a valedictory insult at Bernanke or his central banking colleagues. On the contrary, I am drawing attention to the skill and determination required by central bankers to perform one of the world’s most demanding and important jobs. For just as James Bond has a “License to Kill” in the Ian Fleming books, so central bankers possess a “License to Lie” — or, putting it more diplomatically and politely, to make promises about the future that cannot be honored and often turn to be false.

Nobody ever blamed a central banker for promising to support the currency and then suddenly allowing a massive devaluation — as happened in Argentina last week and may soon happen in Turkey, Ukraine, Russia and many other emerging markets

Keep reading A central banker’s ‘license to lie’ | Anatole Kaletsky.

Bill Gates Backs Renewable Battery Startup

Bill Gates Backs Renewable Battery Startup

Courtesy of John Daly at Oil Price

Bill Gates did not become the world’s richest man by making foolish investments. Now Gates and venture capitalist Vinod Khosla, Tao Invest, Kleiner Perkins and Foundation Capital among others, are betting that the Aquion battery, invented by Jay Whitacre of Carnegie Mellon University in Pittsburgh, has a high-tech future. The Aquion battery costs the same as a lead-acid battery, but lasts twice as long.

Aquion Energy was founded in 2007. Kleiner Perkins, the first firm to invest in Aquion Energy, partner emeritus Ray Lane said, “We are expecting Aquion Energy’s commercial launch in 2014 to be disruptive to the world of stationary energy storage. It is a testimony to Aquion’s team and innovative technology that it has been able to attract these high-quality investors. The company is well positioned for impressive growth in the burgeoning global market for energy storage.”

Aquion Energy, flush with $55 million from Gates and other venture capitalists, has taken over a disused factory near Pittsburgh, where Sony TVs were once made, to begin production of the battery, with full-scale production slated to begin later this year. The factory is supposed to start shipping products to early customers by June and eventually expects to create 400 jobs by the end of 2015.

The environmentally friendly battery, unlike those utilizing lead, is made of inexpensive materials including manganese oxide and water. While it functions similar to a lithium-ion battery, the Aquion battery uses sodium ions instead of lithium ones, which makes it possible to use a salt water electrolyte instead of the more expensive and flammable electrolytes used in traditional lithium-ion batteries. The battery couples a carbon anode with a sodium-based cathode, and a water-based electrolyte shifts the ions between the two electrodes during charging and discharging.

The Aquion Energy battery’s design is modular, allowing the batteries can be scaled up and down depending on how much storage is needed, with the intended clientele being power grid operators and utilities seeking for low cost and easy-to-deploy batteries to offer grid services or for coupling with renewable power farms.

For storing large amounts of power from the grid, success is “all about cost,” Whitacre says. In the future, Aquion Energy is to partner with major power giants like Siemens, who in Oct. 2013 purchased a shipment of Aquion Energy grid batteries to test with Siemen’s in-house power inverter technology. Aquion Energy hopes that if Siemens likes their battery technology and it performs as expected, Siemens could eventually bundle the batteries with its power grid infrastructure and sell it to customers like solar farm developers.

Cost?

Aquion Energy’s CEO Scott Pearson said that in several years when the battery has been manufactured at a commercial scale, prices could drop to $300 per kilowatt hour, roughly a third of the cost of some of the more expensive lithium ion battery grid products currently on the market, adding that even now at the pilot scale that its batteries are “not radically above that” $300 per kwh level.

A low cost and easily installed grid energy storage option could level the playing field for renewable energy in its struggle against more traditional hydrocarbon-fired thermal power plants. The next several years will see solar and wind farms constructed at a record pace worldwide, opening up tremendous market opportunities for reliable and low cost batteries for use in such power applications as renewable energy integration, power grid load shifting and ancillary services like frequency regulation.

Not that Aquion Energy has the field to itself, as it will be competing with a number of companies, including GE and Fluidic Energy, which are also manufacturing innovative batteries for connection to the grid.

Gates as a techie has clearly done his homework, and is betting on Aquion Energy. It will be interesting to see if his buddy Warren Buffett does as well.

Benefit From the Latest Energy Trends and Investment Opportunities before the mainstream media and investing public are aware they even exist. The Free Oilprice.com Energy Intelligence Report gives you this and much more. Click here to find out more.

Need Heroin? Just Head To Your Friendly Neighborhood McDonalds

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While we are sure it is hard to make ends meet on the minimum-wage-paying positions at fast food restaurants these days; the lengths that one McDonald's employee in Pittsburgh went to subsidize her income could be a little much. As CNN reports, Shantia Dennis, 26, would drop a handy baggy of heroin in drive-thru customers' boxes if they uttered the secret phrase "I'd like to order a toy" with their food order. Police recovered over 50 bags of heroin and a small amount of marijuana… brings a whole new meaning to the term "Happy Meal".

 

 

Via CNN,

A McDonald's employee in Pittsburgh was arrested Wednesday after undercover police officers said they discovered her selling heroin in Happy Meal boxes, according to a criminal complaint.

Shantia Dennis, 26, was arrested after undercover law enforcement officials conducted a drug buy, according to a statement from Mike Manko, communications director for the Allegheny County District Attorney's Office.

Customers looking for heroin were instructed to go through the drive-through and say, "I'd like to order a toy." The customer would then be told to proceed to the first window, where they would be handed a Happy Meal box containing heroin, Manko said.

 

 

During the drug buy, the undercover officers recovered 10 stamp bags of heroin inside of a Happy Meal box, according to the statement.

Officers immediately arrested Dennis and recovered an additional 50 bags of heroin, as well as a small amount of marijuana, according to the complaint.

We wonder what she did if the customers said "Supersize me"?

 

Of course, with the way McDonalds same store sales are going, perhaps they need to start thinking of "alternative" business lines? At least in Colorado and Washington?

“Fed Has Fingers & Thumbs On The Scales Of Finance,” Grant Tells Santelli And It “Will End Badly”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

In a mere 140 seconds, Jim Grant explains to an almost stunned into silence Rick Santelli how we all "live in a valuation hall of mirrors" as the Fed manipulates everything. Thanks to it's "fingers and thumbs on the scales of finance," Grant continues, the Fed "insists on saving us from 'everyday low prices'" – what they call deflation – and by doing so it manufactures "redundant credit" which "does mischief" in and out of markets. Grant, ominously concludes, "there is no suspense as to how [this will] end… [it will] end badly."

Must watch… (especially for EM asset managers)…

Harris v. Quinn: A Mother Petitions the Supreme Court in Fight Against Parasitic Unions

Courtesy of Mish.

I have tried to steer clear of inflaming names like “parasite” when speaking about public unions. In this case, no other word comes close to describing the setup.

Making Millions Off the Disabled

One brave mother, Pam Harris, has resisted forced unionization of herself (as a sole home-caretaker, in her own home, for her disabled son Josh). She resisted all the way to the Supreme Court.

An email from Diana Rickert at Illinois Policy Institute describes the setup. You can also find her article on the Chicago Tribune.

With immense disgust, I present Making Millions Off the Disabled

Josh, the youngest child in the Harris family, was born with a rare genetic disorder. He lives with severe physical, cognitive and emotional struggles. This means the day-to-day tasks most of us take for granted — waking up, splashing water on his face, eating — require a lot of help.

But Josh is blessed to have a family that loves him. They always have been there for him.

In fact, his mother, Pam, has stayed home full time to take care of Josh for the past 25 years. Josh is her primary focus. Not her career. Not vacations. Not social outings with other moms. The truth is, Pam is doing what any mom would do: fighting to give her son the very best care she can.

Josh’s care is expensive. The Harris family is fortunate enough to receive a modest Medicaid benefit administered by Illinois state government. Josh is eligible to receive up to $2,130 per month, or roughly $25,000 a year.

But here is where the Harris family’s story takes a disgusting turn.

Henry Bayer wants some of Josh’s money. In fact, he feels entitled to it.

Who is Henry Bayer?…

Continue Here

Janet Yellen’s Impossible Task

Courtesy of Pater Tenebrarum of Acting Man blog

Plans Galore

janet-yellenAs the Bernanke era is winding down, a number of articles have appeared at Bloomberg and elsewhere in the mainstream press with authors opining on the things his successor Janet Yellen must do. That's the problem when you have a job as a central planner: everybody else thinks only their plan is the right one, and they are trying to get you to implement it. Apparently it hasn't yet occurred to anyone that central planning simply does not work. People seem to believe that the power to manipulate interest rates and the money supply somehow means one can do whatever needs doing, if only one puts one's mind to it (and preferably follows their advice).

This time we don't want to discuss far-out ideas such as the one that the Fed should use credit dirigisme to stop 'climate change' (which has to be one of the most hare-brained proposals yet).

There is of course the by now often repeated assertion that 'Yellen needs to cope with too low inflation'.  A headline of this sort generally indicates that the author knows zilch about monetary theory and doesn't realize what has actually happened over the past five or six years as a result of the Fed's ultra-loose monetary policy. There is no other explanation that is viable. The broad US money supply has increased by about 90% since 2008, and there are still people clamoring for more inflation. It simply leaves one flabbergasted. What's even more astonishing is that several Fed board members have likewise broached this idea on a number of occasions over the past year or so. It is probably an example of the Peter principle at work. How else can we explain this? The guys actually operating the levers are just as clueless as their countless armchair advisers.

Admittedly, we are armchair advisers of sorts as well, but we have only one very consistent advice and that basically is: abolish the whole enchilada and replace it with free banking and a money freely chosen by the market. We are not trying to 'make plans' for anyone, we want the planning to end.

There is no need to discuss again what the flaws of this '2% inflation targeting' policy are. Anyone who hasn't realized yet what this policy produces has likely been asleep for the past two decades or so. Let us just note here that 1. the policy has created booms and busts of rarely seen amplitude and 2. it may end up creating even worse consequences down the road. We say this because we can quite easily envisage a future situation when even this targeting of a modest rate of change in CPI is ditched because 'more urgent problems' demand to be addressed by the printing press.

And let's be clear about one thing, all the extensive blather about the 'monetary policy tool box' is  just so much smoke and mirrors. In the end it always comes down to the printing press, or its 'electronic equivalent' these days (i.e., the whole thing is far less complicated than it is made to look).

This is a good opportunity to show the most important chart in the world again, namely that of the true money supply:

 

TMS_2-Greenspan-Bernanke era

 

During Bernanke's chairmanship, the broad US money supply has roughly doubled, with the bulk of the growth spurt occurring from 2008 onward. Because Bernanke doesn't understand money, he was surprised by the bust. During his first three years on the job the annualized growth rate of TMS slowed down to less than 3% annualized from a peak of more than 20% annualized in 2001/2. It was this slowdown in monetary inflation that revealed the wealth destruction of Greenspans's echo boom/housing bubble implemented after the tech bubble went belly-up.

Note the important distinction: real wealth is actually not destroyed by the bust. The wealth destruction happens during the boom – that is when scarce capital is misallocated and consumed. When the bust begins one has arrived at the moment when perceptions change: illusory phantom wealth is no longer mistaken for the real thing. It suddenly becomes clear that economic calculation was falsified during the boom, and that what looked like profits was really an accounting chimera – click to enlarge.

Anyway, we have just come across an article discussing yet another problem that Janet Yellen is supposed to tackle, which struck us as quite amusing, especially in view of the above chart (which has in a way almost crystal-ball like qualities: it cannot tell us when it will happen, but it does tell us with apodictic certainty that a denouement of major proportions is coming).

 

'Easing Bubbles'

The author starts out by naming Yellen's task, and by stating something that should be blindingly obvious, but apparently it isn't to everyone, so he feels compelled to mention it:

“Janet Yellen probably will confront a test during her tenure as Federal Reserve chairman that both of her predecessors flunked: defusing asset bubbles without doing damage to the economy.

The central bank’s easy money policies already have led to pockets of frothiness in corporate debt and emerging markets. The danger is that unwinding such speculative excesses will end up shaking the financial system and hurting growth.

Yellen is “going to be trying to do something that no one has ever done,” said Stephen Cecchetti, former economic adviser for the Bank for International Settlements, the Basel, Switzerland-based central bank for monetary authorities. She needs “to ensure that accommodative monetary policy doesn’t create significant financial stability risks,” he said in an interview.”

(emphasis added)

Sometimes we're no longer sure if we're reading Bloomberg or the Onion. Say what? Clearly, it is true that Greenspan and Bernanke have 'flunked the test' as the author avers. It is interesting that there is an almost grudging admission that there may be 'pockets of frothiness' out there, although they sure aren't in emerging markets anymore. Perhaps the author doesn't look at charts much (many EMs are looking rather frayed and have done so for some time now). The biggest bubbles seem to be in a number of developed market stock and bond markets (especially junk bonds). The admission is still remarkable because the mainstream media and central bankers alike have spent months trying to convince us that there are no bubbles in sight anywhere. Ben Bernanke himself has only recently said so again.

Other than that, what can one do aside from having a good laugh? Poor Janet Yellen! She is supposed to accomplish what simply cannot be done, namely 'unmake' the mistakes she and her predecessor have jointly committed (let us not forget, she was vice chair and never once dissented with the decision to implement an extremely loose policy). We mentioned above that it is important to keep in mind that capital consumption and wealth destruction occur during the boom, not during the bust. It is already too late in short. Someone would need to give Ms. Yellen a time machine. But even if it were possible for her to travel back into the past, why would she change anything? The current bubble has not yet burst after all and once it does, it is absolutely certain that she will be just as clueless as Bernanke was when Greenspan's bubble burst in 2007/8.

Mr. Cecchetti from the BIS mentions en passant that “Yellen is going to be trying to do something that no one has ever done”. Well, there is a reason why 'no-one has ever done it': it can't be done. The air cannot be 'let out slowly' from a bubble. Once a bubble is underway, it keeps expanding until it doesn't anymore – and thereafter it collapses, with all the attendant unpleasantness. The idea that the central planners who have lit the fire under the bubble with their inflationary policy will somehow be able to 'fine tune' its eventual demise strikes us as utterly ludicrous.

The only question is really for how much longer and to what extent it will expand before it bursts. This is not knowable in advance. Recall our recent discussion of the 1998 to 2000 period – even a short term crash in asset prices (such as in 1998) would not necessarily constitute firm evidence that the bubble is over. It may merely be the prelude to an acceleration.

We can only make a few educated guesses regarding this point. For instance, we know that the 'tapering' of 'QE' is currently underway and that therefore the probability is very high that the recent slowdown in US money supply growth will continue (in spite of the impressive chart above, the annual rate of growth of TMS has actually slowed down even before 'tapering' began). We know for a fact that this will eventually create a major problem for currently extant bubbles. What we do not know is what lead and lag times will be involved, and what threshold the growth rate must cross before things become dicey (we regard the recent correction still only as a 'warning shot' so far, but obviously that will possibly have to be reassessed depending on developments).

We also cannot be certain yet how quickly and with what measures the Yellen Fed will react to any untoward developments in asset prices. Whether or not the bubble can be extended similar to what happened after 1998 may well depend on these factors. Once again, an educated guess partly based on experience is all we can go by (our current assumption is that they will be slow to react). None of this invalidates our central point though: there is no way for the bubble to end painlessly, regardless of when precisely it ends. All that can be said in addition regarding the timing is 'the later it happens, the worse it will be'.

The Bloomberg article provides a bit more detail and color on the monumental task awaiting Yellen (snicker):

“Yellen faces two challenges in dealing with bubbles: she has to identify and deflate them before they get too big and dangerous; and she has to manage monetary policy without causing them to burst in a way that causes havoc in financial markets and undercuts the expansion.”

Oh well, if that's all there is to it…

After reminding us again that both Greenspan and Bernanke have not proved to be exactly proficient in the bubble spotting department, the article also repeats the credulity-straining story about Ms. Yellen's alleged above average abilities in this regard.  A statement by president Obama is quoted in support of the idea:

“President Barack Obama spoke repeatedly last year about the need to avoid what he called “artificial bubbles.” He praised Yellen for “sounding the alarm early about the housing bubble” when he announced her nomination for the job of Fed chairman on Oct. 9. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work,” he said.”

If she is such a maven in this respect, then surely we can all breathe easier. This is because right now, she sees no bubbles anywhere, just like her soon departing predecessor. Unfortunately we think that she not only lacks a crystal ball, but several of the other attributes listed by the president as well.

“The Fed is devoting “a good deal of time and attention to monitoring asset prices in different sectors” to see if bubbles are forming, Yellen, currently Fed vice chairman, told the Senate Banking Committee on Nov. 14.

“By and large,” she said, “I don’t see evidence at this point in major sectors of asset-price misalignments, at least of a level that would threaten financial instability.”

(emphasis added)

The fact that she is in fact unable to recognize bubbles or evolving threats to financial stability was revealed in her refreshingly honest testimony to the Financial Crisis Inquiry Commission in 2010 (a recording of it may still be online).

“For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” Her startled interviewers noted that almost none of the officials who testified had offered a similar acknowledgment of an almost universal failure.”

(emphasis added)

We don't believe that she has acquired new bubble and stability risk recognition powers since then. We are rather inclined to agree with Mr. Stockman's assessment of the ways in which she is different from Bernanke (in no way that actually matters, that is). Stockman incidentally makes the not unimportant point that the gaggle of central planners she belongs to are all bureaucrats with not the faintest conception of capitalism and free markets.

 

total credit market debt

 

Total credit market debt in the US economy: it is the size of this debtberg – the result of unfettered money and credit creation since the early 1970s – that has made deflation into the big bogeyman. This ensures that the vicious cycle of intervention heaped upon intervention will continue to the bitter end – click to enlarge.

 

Bernanke's Parting Error

We do get some insight into the current thinking about bubbles at the Fed, when Ben Bernanke reveals what its 'bubble prevention policy' currently consists of. In essence he simply repeats his flawed analysis of what caused the housing bubble and this analysis is what the new policy is based on (basically, bubbles have nothing to do with interest rates according to Bernanke – all we need is more regulation and especially alert, super-human regulators):

“The Fed’s zero-interest-rate policy is prompting investors to take greater risks with their money. The extra yield that buyers demand to own older, smaller junk bonds that trade infrequently shrank to an average 0.25 percentage point in the first half of this month from more than 1 percentage point a year ago, according to Barclays Plc data.

Bernanke, 60, has set out a two-stage process for identifying potentially dangerous buildups in speculation. First, officials try to pinpoint asset markets where prices are grossly misaligned. Then they consider whether a sudden drop in those prices would be amplified throughout the financial system, as happened during the housing bust. Such intensification could occur if the investors holding those assets were highly leveraged, illiquid or interconnected with others.

The Fed’s “first, second and third lines of defense” for dealing with such imbalances is to rely on supervision, regulation and so-called macro-prudential policies, such as mortgage loan-to-value restrictions, Bernanke told the Brookings Institution in Washington on Jan. 16. Only as a last resort would it consider raising interest rates.”

(emphasis added)

So let's get this straight: the zero interest rate policy is “prompting investors to take greater risks with their money” – not according to Bernanke to be sure, but according to the data and common sense.  But raising interest rates is only deemed a 'last resort' if the Fed happens to spot emerging financial system risks – which we can already guarantee it won't.

The paragraph in the middle which we highlighted is ludicrous from beginning to end: “First, officials try to pinpoint asset markets where prices are grossly misaligned.” These guys have proved over and over again that they are utterly incapable of recognizing bubbles that are staring them right in the face. It is in fact ridiculous that the same people who are responsible for the misalignment of prices are expected to 'pinpoint' said misalignment. The economy's entire structure of prices is distorted when interest rates are artificially suppressed below the natural rate dictated by society-wide time preferences. All prices are thus 'misaligned' as a result of the policy. There is no need to go out and try to 'pinpoint' anything.

“Such intensification could occur if the investors holding those assets were highly leveraged, illiquid or interconnected with others.” – So where exactly in the current bubble era are investors who are not 'highly leveraged' or 'interconnected with others'? That must be a group of investors stranded on a remote island without access to telecommunication (and presumably speculating in coconut milk futures priced in cowry shells). Even though the banking system is superficially better able to deal with bank runs than prior to 2008 because 'QE' has increased the amount of covered relative to uncovered money substitutes outstanding, there are far more deposit liabilities in existence now. Moreover, there are countless ways in which risk has been shunted into other, even more opaque corners of the financial markets. It is not even necessary to mention the endless rehypothecation chains employed by the shadow banking system or the one quadrillion dollars in outstanding derivatives notionals (in spite of netting out reducing this exposure considerably, these will in extremis depend on the ability of links in the chain to actually perform. We saw what can happen when a big link threatens to break when AIG suddenly realized that the CDS contracts it had written were bankrupting it practically overnight). Just look at this example that concerns one of the biggest currently raging bubbles (one of those neither Bernanke nor Yellen profess to be able to see):

“A U.S. bank regulator is warning about the dangers of banks and alternative asset managers working together to do risky deals and get around rules amid concerns about a possible bubble in junk-rated loans to companies.

The Office of the Comptroller of the Currency has already told banks to avoid some of the riskiest junk loans to companies, but is alarmed that banks may still do such deals by sharing some of the risk with asset managers.

"We do not see any benefit to banks working with alternative asset managers or shadow banks to skirt the regulation and continue to have weak deals flooding markets," said Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the OCC, in a statement in response to questions from Reuters. Among the investors in alternative asset managers are pension funds that have funding issues of their own, he said.

"Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy," he added.

The breadth of the statement from the OCC is unusual because it technically oversees banks and not asset managers. Regulators are eying a number of risks to the financial system as they aim to prevent a repeat of the mortgage bubble that spurred the 2008-2009 financial crisis. They are not comfortable with different players sharing risk if the total level of risk in the system is getting dangerously high.

That may be happening with leveraged loan issuance, which hit a record $1.14 trillion in the U.S. in 2013, up 72 percent from the year before, according to Thomson Reuters Loan Pricing Corp. A measure of the riskiness of these loans has also been rising – the average size of the debt for companies taking these loans in 2013 was 6.21 times a form of cash flow known as EBITDA or earnings before interest, tax, depreciation and amortization, up from 5.86 times in 2012 and the highest since 2007, LPC said.”

(emphasis added)  

Mind that this is just one example of how Bernanke's echo bubble has once again increased systemic risk. We would be willing to bet that no-one at the Fed has ever raised this particular issue. It is also worth pointing out that the main reason why regulators have become cognizant of this risk at all is because it is already too late to do anything about it. The fact that they have even noticed that something is possibly amiss proves ipso facto that the bubble in this corner of the financial universe has become so gargantuan that all that is left to do is to wait until it bursts and maybe say a few prayers.

Conclusion:

There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.

 

janet-yellen

Janet Yellen: I swear there's no bubble in sight anywhere!

HY bond market weathering the storm

HY bond market weathering the storm

Courtesy of SoberLook.com

The US corporate high yield market remains incredibly resilient in the face of increasing global volatility. Year to date the broad HY index has outperformed the S&P500 by over 4.25%.
 

SPY = SPDR S&P 500 ETF; JNK = SPDR Barclays High Yield Bond ETF (source: Ycharts)

One reason for this stability is the strong performance of the treasury market this month. Also many investors have become quite comfortable (perhaps too comfortable) with junk debt. Part of the reason is the low default rates recently as well as vibrant primary markets that have been willing to refinance (roll) maturing debt. In addition, supply of new bonds has been relatively light, while fund inflows remain robust (see story). As a result HY spreads are less than 10bp higher than they were at the end of last year.

 
Experienced analysis and investors in this space openly admit that it's just a "matter of time" before this market "cracks". It simply needs a catalyst, such as a large unexpected corporate default. Maybe a major event in the sovereign bond market could dislodge HY. Short of that, junk bonds could remain at frothy valuations for some time.