Archives for March 2014

Thoughts from the Frontline: When Inequality Isn’t


Thoughts from the Frontline: When Inequality Isn’t

By John Mauldin at Thoughts from the Frontline

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”

–Plutarch, Greek historian, first century AD

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

“Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

–Frédéric Bastiat, “That Which Is Seen and That Which Is Unseen,” 1850

“Still one thing more, fellow-citizens – a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities.”

–President Thomas Jefferson, first inaugural address

Plutarch argued over 1900 years ago that it was income inequality that lay at the heart of the failure of the Greek republics. Other writings of that period demonstrate that the leaders were worried about the distribution of wealth in society. The causes of unequal distribution have certainly changed over time, but it seems to be built into our DNA to obsess over what we have relative to what others have.

That we are living in the most splendid golden age in the history of humanity – if by golden age we mean that for the world at large there is less hunger, longer lives, less poverty, better healthcare, better and more universal education, and a host of other factors that are manifestly superior as compared to 2000, 1000, 200, 100, 50, and even 20 years ago – is patently evident. We are far from the world Thomas Hobbes described in 1651 in Leviathan when he said “[T]he life of man [is] solitary, poor, nasty, brutish, and short.” He would be amazed at the relative abundance achieved by mankind in the last 263 years.

And still, authority after authority the world over, in rich country and poor, from the President of the United States to the leaders of some of the most impoverished nations, describes income inequality as a fundamental injustice and the source of many problems .

We have spent three letters (so far) dealing with the topic of income inequality. The topic is everywhere in our daily conversation and in economic research. I’ve dealt with many of the facts of income inequality in these three issues and will try to conclude the topic this week. We’ve discovered so far that income inequality is a fact; however, income mobility has remained roughly the same over the last 40 years. That is, a person’s chances of rising from a lower stratum of wealth distribution to a higher stratum is approximately the same as it was in 1975.

We have liberals and progressives who use data to demonstrate the correlation between income inequality and recessions or slow growth and then erroneously equate correlation with causation. I think we have sufficiently shown the absurdity of their conclusions. This week we will look at some of the actual causes of income inequality, and in an argumentum ad absurdum I will offer “solutions” that I guarantee can absolutely reduce income inequality just as easily as taking money from the rich and giving it to the poor. In fact my solutions are far more direct, as they affect the causes rather than the effects of income inequality. I must warn you, however, that if you harbor a religious passion for pursuing higher taxes rates on the rich and rely on income inequality as your excuse, you may not be happy with my suggestions or with the rather inconvenient facts I present.

I would like to begin this week’s letter with a quote that might at first appear to have nothing to do with income inequality, but it strikes me that it is at the heart of the argument advanced by those who favor more progressive taxation. Charles Gave argues that there is a correlation (and he sees causation) between the financial repression perpetrated by central banks and the reduction of growth in the developed-world economies. And he links the low-interest-rate policies of central banks to an increased Gini coefficient and income inequality. Those of us who are of a more classical economic persuasion will find this correlation more attractive than we do the supposed one between income inequality and recessions. And we will see that the logic behind Charles’s argument is more compelling.

The simple fact is that there are many correlations to be found in the economic world, and politicians find economists useful in supplying justifications to support almost any policy. The fact that economists might not agree on the data that is used in this way is immaterial to politicians who are simply looking for an excuse to do what they want to do anyway. In this regard, economists perform the same function as shamans and witch doctors in tribal societies, who regard the entrails of sheep or some other unfortunate animal and predict the future, which generally corresponds to what the chief wants to hear. Economists are far more advanced than that, of course. We painstakingly gather data and develop complex computer models to show what our politicians want to hear.

I realize that I argue at the extreme and that most economists are actually well-intentioned and trying hard to figure out how the world works. But they cleave to economic theories in much the same way that people hold religious beliefs to try to explain how the world functions. These theories often predetermine the conclusions economists come to when they analyze data. Maybe someday we will have more precise models and better theories, but until then it is probably best to be somewhat humble in setting forth our conclusions.

Now, let’s devote a few moments of our attention to six paragraphs from Charles Gave’s latest note ( – subscribers only) (emphasis mine):

I read everywhere that the US budget deficit is contracting because government consumption is falling as a percentage of GDP, now that the worst of the crisis has passed. This would be very good news indeed; however, I am not so sure that this decline is for real. In fact, I believe it is an accounting illusion.

Over a period of time long [interest] rates, if left to their own devices, always converge to the nominal GDP growth rate (this was called the “golden rule” by Economics Nobel laureate Maurice Allais, and [this] is the core belief in Knut Wicksell’s theory). However, a central bank can fight against this natural tendency by maintaining short rates at abnormally low levels, as the Federal Reserve did from the early 1970s until 1980 and again since 2002. During these two periods long rates were conspicuously lower than growth rates, violating the golden rule.

If negative, the difference between long bond rates and the economic growth rate is effectively a subsidy paid by the saver to the government. In short, this difference measures the amount of financial repression taking place in an economy. The fact that it is not paid to the Treasury does not mean it doesn’t exist. It is a tax paid by a nation’s savers – e.g., pensioners in Peoria….

This shows us that US savers have been paying a virtual tax equivalent to between 1% and 2% of GDP almost every year since 2002 – a sign of the “euthanasia of the rentier” central to every Keynesian analysis. The problem is that subsidizing government spending ultimately leads to lower productivity, slower structural growth and higher financial-crisis risk. We saw a similar euthanasia from 1966 to 1980, when the real structural growth rate of the economy was also in collapse…. The re-imposition of that dreadful tax by Alan Greenspan in 2002, only to be further aggravated by his successor Ben Bernanke, is a key factor behind the falling structural growth rate, the financial crisis and the subsequent slow recovery.

Unnaturally low funding costs undermine the structural growth rate of the US economy, because of capital misallocation. The losers in this deal are usually ordinary folk. Pensioners get no interest on their savings, while rich investors use cheap capital to chase up the cost of property, oil, etc. The Gini coefficient rises, as the poor are seldom asset-rich, and real disposable incomes take a hit as prices rise. Sometimes banks are pressured to make up the shortfall with consumer loans to the struggling classes – adding to the bonfire when the inevitable financial crisis comes.

At the end of the day, it is simple. Savings equal investments, so any tax on savings leads to lower economic growth over time. We may be seeing declining ratios in government spending as a percentage of GDP, but this is really an accounting decline. Financial repression means the government is still taxing the savers, leaving less aside for meaningful investment in the future.

Charles’s fellow Frenchman, Bastiat, argued (as I quoted in the opening of the letter) that in economics there is both what we see and what we don’t see. Charles argues that what we see is declining government spending as a percentage of GDP, but what we don’t see is the “contribution” of financial repression and a tax on savers in making up the difference.

With regard to income inequality, what we see is the growing gap between the 1% and the rest of the world. What we don’t see (because it is not often talked about in the New York Times or economics journals) are the natural and real reasons for that inequality. Most of the reasons for income inequality are in fact things we do not want to discourage. While we could devote multiple chapters of a book to each reason (and there is a massive amount of research on each), today we’ll stay focused on the big picture.

Getting Old Has Its Rewards

The most significant factor in income inequality, which some research suggests is close to 75% of the problem, is that  human beings get older. And the older you get, the more money you make and the more net assets you typically have. Let’s look at a few charts to give us a visual picture.

At every point across the net worth curve, the older you are the more likely you are to be wealthier, up until the time you cross into serious retirement and begin to consume your savings.

Furthermore, your income tends to rise the older you get (again, up until retirement age). The data shows that the peak earning period stretches between ages 45 to 65. This is not a shocking revelation, but it doesn’t get mentioned often enough in the debate about income inequality.

I think you can make the case that rising income inequality is significantly attributable to Baby Boomers reaching their peak income years. There are other factors, of course, but the demographics are what they are. Boomers are reaping the rewards from investing time and money in themselves and their businesses over 40+ year careers. They are able to develop and capitalize on three factors. (I’m pulling these off the top of my head; there may be more.)

1. Savings compounded over 40+ years in the workforce

2. Skills developed over 40+ years in the workforce

3. Networks developed over 40+ years in the workforce

It therefore seems logical that income inequality should be rising as the pig in the US population python reaches age 45-65.

The question that goes begging is … what happens next? What happens if medical technology allows Boomers to extend their lifetimes, and perhaps dramatically?

If you really want to start pondering very-long-term issues, what happens when medical technology allows the next generation of elders to live not a mere 10 years longer but to the age of 120 or 150? Will the age at which people are subjected to the Soylent Green solution be 130 instead of 30? Sadly, that will be a problem my kids get to deal with. But I digress.

Academic scholars are beginning to argue that conclusions about income inequality should be adjusted for age-related reasons. You can see one such paper, from Norway, with links to many others, at The authors demonstrate that age factors are significant across a range of countries and that when you adjust for age, income inequality (with the obvious exception of the extreme 1/10 of 1%) narrows dramatically.

(Hopefully we will see a detailed research paper on aging and income inequality written by retired North Carolina State professor John Seater in an upcoming Outside the Box.)

The Usual Suspects 

While it may be inconvenient for those who want to blame income inequality on factors deemed politically correct, it should not come as a shock that much of the inequality can be attributed to characteristics that most people hold as positive values.

report from the American Enterprise Institute gives us a good summary. Notice in the chart below that while the income of the highest fifth of the US population is almost 18 times that of the lowest fifth, there is only a 3.5x differential when it comes to the average earnings of the people actually working and making money in the household. It is just that high-income households have more than four times as many wage earners (on average) as poor households.

And married and thus two-earner households make more than single-person households. That seems obvious, of course, but it is a significant factor in income inequality. That doesn’t make the plight of the single working mom any better or easier, but it does help explain the statistical difference. And it does make a difference in lifestyle. Marriage drops the probability of childhood poverty by 82%.

And as we noted in previous letters on income inequality, education is an important factor, too. The relationship between families with higher incomes and the educational attainment of their children is also quite statistically significant.

The AEI report ends on this positive note:

Bottom Line: Household demographics, including the average number of earners per household and the marital status, age, and education of householders are all very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in lower-income quintiles, and individuals in high income households are far more likely than individuals in low-income households to be well-educated, married, working full-time, and in their prime earning years. In contrast, individuals in lower-income households are far more likely than their counterparts in higher-income households to be less-educated, working part-time, either very young (under 35 years) or very old (over 65 years), and living in single-parent households.

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever. Fortunately, studies that track people over time indicate that individuals and households move up and down the income quintiles over their lifetimes, as the key demographic variables highlighted above change…. And Thomas Sowell pointed out earlier this year in his column “Income Mobility” that:

Most working Americans who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%. People who were initially in the bottom 20% in income have had the highest rate of increase in their incomes, while those who were initially in the top 20% have had the lowest. This is the direct opposite of the pattern found when following income brackets over time, rather than following individual people.

It’s highly likely that most of today’s high-income, college-educated, married individuals who are now in their peak earning years were in a lower-income quintile in their … single younger years, before they acquired education and job experience. It’s also likely that individuals in today’s top income quintiles will move back down to a lower income quintile in the future during their retirement years, which is just part of the natural lifetime cycle of moving up and down the income quintiles for most Americans. So when we hear the President and the media talk about an “income inequality crisis” in America, we should keep in mind that basic household demographics go a long way towards explaining the differences in household income in the United States. And because the key income-determining demographic variables change over a person’s lifetime, income mobility and the American dream are still “alive and well” in the US.

The Myth of Increasing Income Inequality

Now let us turn to to a fascinating if lengthy article from the Manhattan Institute. The report is by Diana Furchtgott-Roth, and it’s a treasure trove of data. It is exceptionally well footnoted and uses the same data available to all researchers from government sources. It just offers the data up in a manner that doesn’t play to a progressive/liberal narrative that is looking for an excuse to increase taxes and engage in income redistribution. Let’s look at her introduction:

Published government spending data by income quintile show that the ratio of spending between the top and bottom 20 percent has essentially not changed between 1987 and 2012. In terms of total spending, inequality is at the same level as 1987.

Why do other measures show increasing inequality? First, many studies use measures of income before taxes are paid and before transfers, such as food stamps, Medicaid, and housing allowances. Including these transfers reduces inequality.

Second, many studies do not take into account demographic changes in the composition of households over the past 25 years. These changes include more two-earner households at the top of the income scale and more one-person households at the bottom. Studies that show increasing inequality are capturing these demographic changes.

Third, some of this increase in measured inequality is due to the Tax Reform Act of 1986, which lowered top individual income-tax rates from 50 percent to 28 percent, leading more small businesses to file taxes under individual, rather than corporate, tax schedules (Joint Committee on Taxation, “General Explanation of the Tax Reform Act of 1986” (H.R. 3838, 99th Congress, Public Law 99-514), May 4, 1987). 

A superior measure of well-being that avoids these pitfalls is real spending per person by income quintile. Spending power shows how individuals are doing over time relative to those in other income groups. These data can be calculated from published consumer expenditure data from the government’s Consumer Expenditure Survey. An examination of these data from 1987 through 2012 shows that inequality has not changed. [Emphasis mine]

Is Inequality Increasing?

Ask almost anyone the most important economic facts about income distribution in America, and you are almost certain to hear that income distribution has worsened dramatically over the past generation and over the past decade in particular, with people at the top getting a bigger fraction of total personal income.

But measuring inequality is not simple. The choice of the measure of income, along with the measure of the household unit, substantially influences the results of the inequality measure. Should income be measured before the government removes taxes, or after? Should income include government transfers such as food stamps, Medicare, Medicaid, unemployment benefits, and housing supplements? Furthermore, should wealth measures be included? 

In order to measure inequality, disposable income is the most accurate measure. This is what Americans can spend to make themselves better off. Hence, income should be measured after taxes are paid because households cannot avail themselves of tax revenue for expenditures. Similarly, income should include transfer payments because those are available for spending.

The report goes on to give us in detail a number of charts and data in support of the conclusions listed above. Those interested can read it for themselves, and those who wish to argue with it need to offer reasons why the analysis is not valid. Let me offer a couple of interesting observations I get from reading the report.

As noted above, there is a high correlation between income inequality and single-person households. The data from the US Census Bureau shows that the number of single-person households has more than doubled in the last 50 years. Is it any wonder that income inequality in an absolute sense – as measured by household (which is the standard measure cited in the press and used in most academic economic studies) – has risen dramatically during that time?

You can slice and dice the data (and Furchtgott-Roth does) by gender, age, marital status, family status, and so on. None of the outcomes are other than what you would expect them to be.

A few more interesting tidbits:

Another factor that can influence measures of inequality is changes in the tax code. The Tax Reform Act of 1986 lowered the top individual tax rate to 28 percent, and the corporate rate to 35 percent (Joint Committee on Taxation, “General Explanation of the Tax Reform Act of 1986” [H.R. 3838, 99th Congress, Public Law 99-514], May 4, 1987). In 1986, the top individual rate was 50 percent, and the top corporate rate was 46 percent, so small businesses would pay tax at a lower rate if they incorporated and filed taxes as corporations With the implementation of the Tax Reform Act of 1986, the top individual tax rate of 28 percent meant that small businesses were often better off filing under the individual tax code. Revenues shifted from the corporate to the individual tax sector. In the late 1980s and 1990s, that made it appear as though people had suddenly become better off and income inequality had worsened. This had not happened; rather, income that had been declared on a corporate return was being declared on the individual return. This makes any comparisons between pre- and post-1986 returns meaningless.

Finally, inequality appears greater because the cost of living varies substantially in different parts of the country. College graduates tend to move to locations with higher costs of housing, food, and services, such as New York, Boston, Washington, D.C., and San Francisco. College students prefer these cities because they have amenities such as museums, theaters, shopping, and restaurants. As more well-educated people move into these locations, they become more attractive.

What this means for the study of inequality is that high incomes are less valuable in high-cost locations. A $200,000 salary goes further in Mobile than in New York, for instance, and if more $200,000 wage earners move to New York, the distribution of income is more unequal.

Low-income individuals spend a higher proportion of their income on food and clothing, and high-income people spend more on services. The price of food and clothing, nondurables, has been rising more slowly than the price of services, which are disproportionately consumed by higher-income individuals.

I’m going to include one chart from her study, as I find it pretty well demonstrates her point. It turns out if you use actual expenditures on individual items, not much has changed over the last 25 years. There are some significant differences in a few items such as education and clothing, but by and large the ratios among income quintiles for real expenditures per person have not changed all that much. That is not what you would conclude from stories in the press. Note: this is about expenditures and not incomes.

At the beginning of this letter I promised you a “solution” to income inequality. Let me offer this one tongue-in-cheek, as an argumentum ad absurdum.

We simply need to penalize the incomes of older people, take away any advantage there is from being married, reduce opportunities for education, penalize people for working more than 35 hours per week, and of course levy a significant tax on any accumulated savings. This will quickly reduce inequalities of income. It has the slight disadvantage that it will also destroy the economy and create a massive depression; but if the goal is equal outcomes for all, then communist Russia might be the model you are looking for. Except that even there the bureaucrats and other insiders did quite well.

And speaking of insiders and cronyism, that is a serious part of the problem of income inequality. This report from the Heritage Foundation offers some real meat:

While many on the Left – particularly the Occupy Wall Street movement – confuse the two, free-market economics could not be more different from crony capitalism. Whereas the free-market system treats all players equally, from the largest conglomerate to the smallest mom-and-pop shop, crony capitalism rigs the rules of the game in favor of the entrenched big players.

Whereas the free-market system celebrates and encourages competition, crony capitalism is about shielding the powerful and well-connected from competition. Subsidies, which have no place in a free-market system, form a basic staple of crony capitalism, as do waivers and bailouts.

In the long run, Americans pay a heavy price for this marriage of business and government. Crony capitalism forces taxpayers to subsidize well-connected players and restricts opportunities for the rest of us. As Paul Ryan has explained:

"Pitting one group against another only distracts us from the true sources of inequity in this country—corporate welfare that enriches the powerful and empty promises that betray the powerless…. That’s the real class warfare that threatens us: a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules, and preserve their place atop society. And their gains will come at the expense of working Americans, entrepreneurs, and that small businesswoman who has the gall to take on the corporate chieftain."

If you’re really serious about dealing with income inequality, you need to worry about equality of opportunity in education, and specifically about making sure that the education system is radically reformed by taking it out of the hands of bureaucrats and unions. We need to make sure the economic and legal playing field is level by getting government favoritism and bureaucratic meddling out of the way and making the pie larger for everyone. However, as I demonstrated a few weeks ago, a natural outcome of doubling the size of the economic pie over the coming 15 years will be that there is an even greater differential between those who have next to nothing and those who have accumulated the most. The only way to prevent such an outcome is to keep the total economic pie from growing, and that doesn’t seem like a very good economic policy.

I think it is appropriate to close with another quote from the concluding remarks of President Thomas Jefferson in his first inaugural address:

[A] wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.

Income inequality will not be solved by taxing the rich at higher levels. At some point, that “solution” would reduce savings and therefore investment and thus shrink the total potential for economic growth. To argue any differently is to argue with basic economics and simple math. The goal should not be equality of income or wealth but equality of opportunity. The role of government should be to make sure the playing field is level and the rules are simple and fair.

What constitutes a level playing field will change over time as society becomes richer and technology progresses, but the principle should remain the same. There is a place for the governments of developed economies and their societies to establish safety nets, including healthcare. But these are safety nets, not substitutes for personal endeavor and achievement.

In summary, in the last four weeks we’ve seen that while income inequality is real, increasing taxes and redistributing income is not the answer if the true goal is to improve the incomes and lifestyles of everyone. If we do that, we will actually make the problem worse rather than better.

Please click here to visit John Mauldin at Thoughts from the Frontline.

South Africa, New York, Europe, and San Diego

I finish this letter tonight from Cafayate, Argentina. Sunday I start the trek back to Dallas, where I will be for eight hours – and then take off for 12 days in South Africa. That will mean three straight nights in airplanes, a first for me. I will need that vacation resort, with lots of massages and hydrotherapy, to unwind me. I’m going to try something new this trip and post a few pictures and comments to Twitter. Follow me if you like. After South Africa I’m back home for like a day before I have to run up to New York to do some videos. Then it’s back home for a few weeks (or so it appears) before I head to Amsterdam, Brussels, and Geneva. I’ll come home for a few days and then head to San Diego for our Strategic Investment Conference – one of my real highlights of the year. And then I’ll be home for more than two whole weeks before heading to Tuscany for a few weeks of vacation. Whew. I will be ready to relax at the end of all that travel.

I urge you to consider coming to the Strategic Investment Conference, May 13-16 in San Diego. We have the most phenomenal list of speakers of any conference in the country, I think. If you are trying to figure out how to deal with the Code Red world and find opportunities for capitalizing on the misalignment of government policies, both here and abroad, I think you’ll find no better place to do so. You will be with like-minded people (including the speakers, who typically hang around and meet the attendees!) for three days, and we’ll go deep into ways to position your portfolios for what lies ahead.

Also, I will be speaking for Peak Capital Management on April 24 in Dallas. You can find out more and secure a place by clicking on this link.

There are interesting contrasts here in Northern Argentina. The remarkably fertile valley in which Cafayate is situated is surrounded by towering mountains that change colors dramatically throughout the day. During the trip up to Guafin to see my friend Bill Bonner’s vast collection of rocks and sand interspersed with marvelous little fertile valleys, we encountered some of the most rugged and spectacular canyons I’ve ever seen, either in person or photos. It is as if the Andean gods were competing with each other to create the most stark sculptures imaginable in sandstone and granite. It must have been a violent time, as the players with rocks were clearly throwing them in every which direction, including backwards. The locals keep referring to these 10,000-18,000-foot mountains as the “foothills” of the Andes. And yes, off in the distance you can see the snowcapped ranks of the real mountains. This country is different from the green majesty of the Rockies, not to mention the barrenness of the Big Bend country of South Texas.

I doubt that it will be a short or easy trip, but I do need to somehow figure out how to cross the Andes at a few points. That’s on my bucket list. And from talking with fellow travelers (including an enthusiastic David Kotok), I have put Patagonia on that list as well.

Argentina is an odd mix. Beautiful people, and by that I mean beautiful in terms of graciousness and style, hospitality, and (am I about to make a politically incorrect statement?) their almost anti-French way of accepting strangers into their midst. They are industrious and hard-working, and to look around the country you would think it is quite prosperous.

And yet at least a half a dozen times in the past hundred years Argentina has completely destroyed the value of its currency, wiping out generations that were unable to protect themselves from the devastation wreaked by government bureaucracy. Famine, disease, pestilence, and natural disasters have all attacked the human species, but there are times when I think there is no more pernicious or wicked force than human government. Ensconced down here in what is admittedly a hotbed of radical libertarians, I find myself calling into question my optimism about government and the future of our country. A pessimist is someone who sees the problems in every opportunity, and an optimist is someone who sees the opportunities in every problem. For whatever reason, I find myself constitutionally firmly planted in the latter camp, but sometimes I wonder.

I know the problems our country faces. I’ve written about the problems that the rest of the world faces – and yes, we all confronted them every day in the media. Most of the problems are created by well-intentioned people who have decided they know better than you how to run your own life and business. But the road to hell, as my Less-Than-Sainted Dad often told me, is paved with good intentions. It is the unintended consequences of someone’s good intentions (even our own) that always end up biting us in the ass.

It is time to hit the send button, for which you are probably grateful, as I’m in a rambling, philosophical mood, and you need to go on to more important topics. I will report to you next week from Kruger Park, South Africa. Assuming that I can avoid the lions until I begin my weeklong speaking tour for Glacier next Sunday, starting from Cape Town. It is going to be a fascinating two weeks.

Your going out to try to hit a golf ball now analyst,

John Mauldin

The article Thoughts from the Frontline: When Inequality Isn’t was originally published at

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The science of getting drunk

In one easy chart. 

The Science of Getting Drunk

Teaching Revolution: Online, Accredited, Free; Start Learning Now!

Courtesy of Mish.

One of the things I staunchly believe is that the cost of education will drop sharply. It has to. The current path of graduating student loan zombies is simply not sustainable.

Eventually, online education will be both inexpensive and accredited. In turn that will drive down costs at brick-and-mortar colleges.

MOOCS Pick Up Steam

The Financial Times reports Teaching Revolution Gathers Pace.

Regina Herzlinger is a bit of a superstar. She was the first woman to be a tenured professor at Harvard Business School, and is now leading its march into Moocs – massive open online courses – which promise to revolutionise the world of higher education.

Professor Herzlinger, whose 11-week course on Innovating in Healthcare will start this month, is an advocate of this model of free online education. “I believe Moocs can democratise education,” she says. “It’s fantastic to reach so many people.”

Harvard, MIT Sloan, the University of Virginia’s Darden school and several other big-brand US business schools are experimenting with Moocs. The Wharton school at the University of Pennsylvania has gone so far as to put 10 per cent of its MBA core courses online for free access. Like Prof Herzlinger, Wharton’s vice-dean of innovation Karl Ulrich believes the social impact of these programmes is a central reason for promoting Moocs. He cites the example of one Wharton Mooc that enrolled more than 130,000 students. “There’s just a huge, huge take-up.”

In Europe, business schools such as IE in Spain and Warwick in the UK have taught online MBA programmes alongside their highly ranked full-time programmes.

Now, top schools in the US, such as Kenan-Flagler at the University of North Carolina with its MBA@UNC, are validating the online mode of delivery.

Prof Anandalingam, formerly dean at the Smith school at the University of Maryland, says the technology is “state of the art compared with anything I have seen in the US. Students get a rich learning environment”.

Khan Academy

Reader Philip writes …


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You Can’t Make This Up: MF Global Sues PWC, Blames It For Its Collapse

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

File this one in the "you can't make it up" category. Over two years after the MF Global collapse, in which the primary dealer headed by Jon "I don't recall" Corzine all but admitted it had engaged in the cardinal sin of any financial intermediary, i.e., commingling money, to cover up a trade gone horribly bad and which resulted in the disappearance of some $1 billion in client funds until such time as the bankruptcy process managed to "liberate" funds from other part of the company, MF Global has suddenly figured who is at fault: not the CEO, not his brown-nosing lackey, not some janitor meant to be scapegoated precisely in a situation such as this, not even the infamous "glitch" – no, the party that is accountable for the firm's theft of client funds, and horrible investing decisions that led to its bankruptcy, are the accountants.

No really: yesterday MF Global Holdings sued PricewaterhouseCoopers LLP for $1 billion, alleging accounting malpractice helped bring down the brokerage company.

Like we said, you can't make this up. From Bloomberg:

PwC, which provided outside auditing and accounting experts, failed to advise the firm to account properly for its European sovereign debt holdings, leading it to over-invest in them, MF Global Holdings said in a complaint filed today in Manhattan federal court.

But for PwC’s erroneous accounting advice, MF Global Holdings could not have — and would not have — invested heavily in European sovereign debt to generate immediate revenues and would not have suffered the massive damages that befell the company in 2011,” MF Global Holdings said in the complaint.

MF Global filed for bankruptcy on Oct. 31, 2011. Customers have claimed in lawsuits against the firm’s former executives that more than $1.6 billion of their funds that should have been segregated went missing, transferred to other parts of the company during the liquidity crisis.

Christopher Atkins, a PwC spokesman, didn’t immediately return a voice-mail message seeking comment on the suit.

In retrospect: almost brilliant. MF Global, or what's left of the estate, is using the old tried and true "Enron defense", where if there was corporate criminality, the accountants were surely involved. And they most probably were. There is one problem though: in the case of Enron, all of its key executives, Lay, Skilling and Fastow, got prison sentences. In MF Global's case of Jon Corzine… not so much.


Why? The answer:


Debt Rattle Mar 29 2014: Candy Crush, Ukraine Style

Courtesy of The Automatic Earth.

National Photo Co. Janes’ candy store, Ninth Street, Washington, D.C. 1924

Boxing champ Vitali Klitschko, who was reportedly the most popular opposition leader in Ukraine during the Maidan protests before Yanukovych was chased away, and was then shunned by the west as interim PM in favor of banker-boy Yatsenyuk, this morning announced he’s no longer a candidate in the presidential elections in May. Instead, he’ll throw his heavyweight behind Ukraine’s own Willy Wonka, candy man Petro Poroshenko, known locally as the ‘chocolate king’. Poroshenko, who officially announced his candidacy yesterday, made billions in the confectionery business.

It would appear the only competitor for the presidency that remains is Yulia Tymoshenko, who became a billionaire herself through an opaque monopoly in – Russian – gas deliveries. Isn’t it lovely, a country that will soon be driven to its knees through austerity is certain to be governed by billionaires.

Poroshenko has been moving through a political revolving door, coming and going in and out of parliament and successive governments, since 1998. He’s currently an independent member of parliament, which gives him a Teflon-like quality that may come in handy if ever anyone investigates recent Ukraine politics. No confirmation yet on Victoria Nuland’s approval, but that’s undoubtedly long been arranged.

Not that everything will go down smoothly between now and the May 25 election. The Ukraine parliament is seeking to ban the Right Sector, though its support was important in executing the “coup”, and there’s not that much wiggle room between that group and the Svoboda one that is actually part of the interim government. Both lean towards what we would label far right, and have at some time used symbols that we would label highly undesirable.

Will the Right Sector simply evaporate just because parliament wants to ban it? Who’s going to make it? Who has a real grip on power in Ukraine over the next two months? The army looks to be in a bit of a shambles, with large numbers having “defected” to Russia, there doesn’t seem to be a very effective police force, and there are all sorts of militia ‘roaming’ the country on both sides of the pro/contra Russia divide. Who’s going to stop the well armed militia, rapidly filling up with – economically and ideologically – desperate young men, from instigating mayhem if they don’t get what they want?

At least Putin still has his troops at the border.

Reader Question on Banking System Insolvency, QE, and “Necessity”

Courtesy of Mish.

In response to Will Prices Rise Significantly When Velocity of Money Picks Up? reader Dave, a friend, noted that as the Fed jacked up its balance sheet, velocity has mirrored the curve to the downside.

Dave asks “Can’t an argument be made that since much of the banking system is really insolvent, that the Fed increasing its balance sheet is necessary?


This depends on what you mean by “necessary” and more importantly, who gets to decide.

I am one of those who staunchly believes that banks should fail. More precisely: Banks did fail, but taxpayers bailed them out.

Was the last bailout “necessary”?

No – not to me. The world will not end if banks fail. Bondholders would have and should have paid the price. Who are the bondholders? In general, the wealthy own most of the assets, including bonds.

However, if “necessary” means in the eyes of central bankers, then yes – it was deemed “necessary”.

It’s all part of the moral hazard tactics of central banks that tells the “too big to fail banks” that no matter what they do, they will be bailed out, again and again and again.

Privatize the Gains, Socialize the Losses 

Last time, Tim Geithner preached to Congress that financial Armageddon was right around the corner if Congress failed to pass a resuce package. Congress did pass a packages on the second attempt. Then Geithner promptly changed the terms of it to do what he wanted with the money. …

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A U.S.-Saudi Move to Lower Oil Prices?

Courtesy of Nick Cunningham via

Could the U.S. unleash a flood of oil from the strategic petroleum reserve that would drive down prices in order to punish Russia? While the idea has been kicked around over the last few weeks – most recently by George Soros – it has also been dismissed as not a serious option. Some say the impact of an oil sale, if it actually succeeded in lower prices, would be temporary. Saudi Arabia could cut back on production to keep oil prices at their current levels. Others decried the idea as contrary to the objective of the SPR, which has been setup to be used only in cases of emergency.

However, over at Quartz, Steve LeVine wrote an interesting article about the possibility of a coordinated response between the U.S. and Saudi Arabia that could have a much broader impact on oil markets. President Obama is, after all, meeting with the Saudi King on March 28. Ukraine is certainly going to come up in their discussions – his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security.

LeVine argues that it is possible that the U.S. could sustain a sale of 500,000 to 750,000 barrels of oil per day from the SPR. If the U.S. coordinated with the Saudis to ensure that they did not cut back production – indeed, they could even step up production from 9.7 million bpd – the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. A former Ford and Carter administration official believes a U.S. SPR release could lower oil prices by $12 per barrel, potentially costing Russia $40 billion in lost revenue.

But by LeVine’s own account, there are few signs that such a move is in the works. Saudi officials, including Prince Turki bin al-Faisal, recently remarked about the global nature of today’s oil market, and the inefficacy of a single nation’s move to impact supply. Moreover, Saudi incentives aren’t exact in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to breakeven. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from the $105-$110 range, where they have been for the last few months.

Not only that, but as LeVine notes, the Saudi King is convinced the U.S. is “unreliable,” and relations between the two countries hit a low point after Obama’s back and forth over air strikes on Syria last year. With Saudis increasingly frustrated with the U.S., why would they shoot themselves in the foot just to help out an unreliable partner? Now they could be interested in striking a blow against Iran, which lower oil prices would do. But, that doesn’t seem like enough of an upside.

Back in the U.S., President Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to U.S. drillers. Their Republican allies will also oppose the move, at least they did when Obama used the SPR back in 2011 during the Libyan civil war. Republicans may have more difficulty justifying their opposition this time around, given that they have been the loudest about using American energy as a geopolitical weapon. But they will surely argue that exports are the better answer to Russia than an SPR release.

For now, Obama will probably hold the SPR card in his back pocket. Should Russia resist any further action in Ukraine, nothing will come of it. But, he is almost certainly mulling over the idea in the event that Russia takes broader action in Eastern Europe.

It’s possible MtGox didn’t fail over transaction malleability


It’s possible MtGox didn’t fail over transaction malleability

By  at PandoDaily.

As we know, when MtGox fell over it insisted that it had been tricked by transaction malleability into shipping out off the exchange hundreds of thousands more Bitcoin than it actually had. Losing a few hundred million $ worth of something by paying it out twice or more might well have that effect of making an exchange fall over.

Then just this week we were told that MtGox had actually found 200,000 Bitcoin down the back of the digital couch. Just spare change that they’d forgotten about in an old wallet. Which rather disturbs their story about transaction malleability, for if they lost, as they now say they did, those 200,000 three years back then the alt-currency obviously wasn’t there for someone to steal just recently.

Now there’s another blow to their story. By monitoring the network a couple of researchers have tracked how much of that double demanding of coin was actually going on. Turns out the answer is very little — and pretty much none before MtGox went down:

In Bitcoin, transaction malleability describes the fact that the signatures that prove the ownership of bitcoins being transferred in a transaction do not provide any integrity guarantee for the signatures themselves. This allows an attacker to mount a malleability attack in which it intercepts, modifies, and rebroadcasts a transaction, causing the transaction issuer to believe that the original transaction was not confirmed. In February 2014 MtGox, once the largest Bitcoin exchange, closed and filed for bankruptcy claiming that attackers used malleability attacks to drain its accounts. In this work we use traces of the Bitcoin network for over a year preceding the filing to show that, while the problem is real, there was no widespread use of malleability attacks before the closure of MtGox.

Keep reading It’s possible MtGox didn’t fail over transaction malleability | PandoDaily.

5 Things To Ponder: Words Of Caution

Courtesy of Lance Roberts of STA Wealth Management

The financial markets have not done much since the beginning of the year but that is not necessarily bad news.  Despite Russia's annexation of Crimea which sparked threats of military conflict, the Federal Reserve tapering asset purchases, massive "polar vortexes" and less than impressive economic data – the markets have remained mostly resilient. I discussed yesterday that there are signs of deterioration in the market internals which are typical of market tops. 

Howard Marks once wrote that being a "contrarian" is a lonely profession. However, as investors, it is the downside that is far more damaging to our financial health than potentially missing out on a short term opportunity.  Opportunities come and go, but replacing lost capital is a difficult and time consuming proposition.  So, the question that we will "ponder" this weekend is whether the current consolidation is another in a long series of "buy the dip" opportunities, or does "something wicked this way come?"  Here are some "words of caution" worth considering in trying to answer that question.

1) Born Bulls by Seth Klarman via Zero Hedge

In the world of investing there are only a handful of portfolio managers that are really worth listening to.  Ray Dalio, Howard Marks and Seth Klarman rank at the top of my "read every word" they say list.  In this regard, I suggest that you take some time this weekend to read Seth's year-end 2013 investor letter which details the many dangers that lay ahead.  The problem is that most investors are blind to those dangers as they continue to follow the madness of crowds.  

"In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.

If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stocks probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town.

But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about.

A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.

There is a growing gap between the financial markets and the real economy."

2) What A Mean Reversion Would Mean To The Market by Shawn Tully, CNNMoney

I have often written about the consequences of mean reversions, read "30% Up Years", to the average investor.  However, during ripping bull markets, as Seth states above, there are few individuals that have the "worry gene."  I do.  Therefore, I agree with Shawn analysis of the markets and the framework for an eventual reversion.

"Seldom have so many of the metrics that influence stock prices strayed so far from the long-term trends we've come to consider 'normal.' Corporate earnings are far above what's normal historically, interest rates are way below normal because of Fed intervention, and bond prices that wax when rates wane are hovering at seemingly unnatural heights. The typical investor might echo something Yogi Berra could have said: 'I'm confused by the 'new normal' because it's so unusual.'

The total expected return is that 4% plus inflation of around 2%, or a total of 6%. That return comes in two parts. The first is the dividend yield of around 1.6% a year (large companies today pay out about 40% of their profits), and the second is earnings-per-share growth of 4.4% annually. Keep in mind that earnings per share increase at a far slower rate than overall corporate earnings that over long periods track GDP, because companies typically issue large numbers of shares each year, in excess of buybacks, to fund their plans for expansion.

That's hardly a wonderful outlook, and it's a long way from bountiful future Wall Street expects. But the second scenario is far more daunting. It demonstrates the dastardly meanness in mean reversion.

The abnormally low real rates are the work of the Fed. They cannot last. Once demand for capital supplants money supply creation as the principal force driving rates, as it must, real rates are bound to rise sharply, restoring the trend that began in mid-2013. That's why the mean-reversion scenario is the most likely, if not inevitable, outcome. One scenario is fair, the other is poor, and the poor one will probably reign. The Wall Street pundits can't stop thanking the Fed. They should reconsider."

3) Stocks On The Precipice Of A Huge Move by Todd Harrison via

"Neil Young famously sang, "I caught you knocking at my cellar door; I love you baby, can I have some more; ooh, ooh, the damage done."
The bears have repeatedly knocked on both sides of the cellar door that is S&P 1850 seventeen times as they tried to break out to the upside and another seven times as they tried to knock it back down.

"The first is the percentage of Russell 2000 stocks above their 200-week moving averages, which is at 40% (MKM Partners).  Historically, when that percentage reaches 40%, it was at or near an intermediate-term top in the index.  The second is the average return for the 1-, 3-, 6-month and 1-year periods following those events. Take a good look."


"History doesn't always repeat but it often rhymes, and after the insane run in the small caps and biotech stocks some perspective is an important context when mapping forward risk. As we often say, to fully understand where we are, we must understand how we got here."

4) Is This A Correction Or A Coming Crash? by Michael Gayed via MarketWatch

"Has the correction finally started? There are enough things happening behaviorally within the market to consider this. The deflation pulse, which has been a big theme of mine over the past year, remains alive and well. We must all ask ourselves why in the world Treasurys are so well bid when the Fed is stepping away from stimulus.

"Judge a man by his questions rather than his answers."



We must also ask ourselves why defensive sectors such as consumer staples, health care and utilities are leading. When low-beta areas of the market outperform, that tends to be a warning sign of coming volatility and a potential correction ahead for equities."

5) Keep Buying Or Get Out?by Martin Pelletier via Financial Post

Retail investors have a very bad habit of "buying high and selling low."  This is due to the combined effect of an always bullish media bias combined with the emotional flaw of greed.  However, retail investors generally lack the tools, information and discipline to identify major turning points in the market.  Martin makes some valid points about what "smart money " is doing and focuses on the single most important point.

"But it isn't the smart money doing the buying. Recent Bank of America research shows institutional clients have been large net sellers of stocks since mid-February despite receiving large inflows from investors.

Corporate insiders have also been hitting the sell button. As cited by Mark Hulbert, editor of Hulbert Financial Digest, officers and directors in recent weeks have on average been selling six shares of their company stock for every one that they bought. This is more than double the long-term adjusted ratio since 1990 and is the most pessimistic insiders have been in more than 25 years. The closest we've come to this level was in early 2007 and early 2011.

With the smart money exiting, who's behind the bids?


"Not surprisingly, average retail investors have been huge net buyers of stocks and stock funds since early June of last year. This trend has gained so much momentum that these investors now hold eight times as much money in bull funds compared to bear funds, setting a new all-time high.

If you are considering going all-in or, worse, leveraging up, we recommend taking a step back to examine what your long-term investment goals really are and measure them in the context of the current market environment. Moving away from the herd can help you avoid buying market tops and selling market bottoms.

Finally, remember that no one truly knows what is going to happen when pundits call for new highs or the next major correction. Your time is better spent focusing on what you can control and that is managing risk, because if history teaches us anything it’s that irrational behaviour works both ways."

Bonus Video:  WSJ Interviews Yale economist Dr. Robert Shiller on his thoughts about what actually drives markets.

If You’re Bullish About Stocks, You Should Ponder This Quote From One Of The Smartest Investors Ever

If You're Bullish About Stocks, You Should Ponder This Quote From One Of The Smartest Investors Ever

Courtesy of  


Seth Klarman

[Seth Klarman]


Seth Klarman, one of the most successful investors in history, recently returned $4 billion of capital to his clients. He also reportedly has 40% of his portfolio in cash.


Because Klarman can't find anything he is comfortable investing this money in.

Klarman recently sent a letter to his clients explaining his view of the world. This view can be described as "confident that these good times will come to an end."

Klarman doesn't say stocks are "a bubble." He doesn't say prices are "ridiculous." He doesn't say the things that some of the louder doom-and-gloomers are howling about the coming devastation. 

But he certainly thinks that what's happening now is, in large part, the result of unsustainable easy-money policies from the Fed, and that it is too good to last.

One of the most important things you can do as an investor is to try to seek out smart arguments that lay out the opposite side of the views that you hold. In other words, if you're bullish, you should seek out smart bears, and vice versa.

So every investor who is bullish on stocks should read Seth Klarman's recent letter.

And if you just don't have time to do that — if you're so sure that stocks are just going to keep going up and that anyone who voices caution is a moron — then at least read Klarman's conclusion below.

And don't just read it. Actually think about it.

Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy – maybe not today or tomorrow, but someday. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.

Someday, professional investors will come to work and fear will have come to the markets and that fear will spread like wildfire. The news flow will be bad, and the markets will be tumbling.

Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…

The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.

In that last paragraph, Klarman reveals the full extent of his wisdom: He admits that he doesn't know when the current euphoria will end. 

In an environment when market pundits are supposed to have a black-and-white, minute-to-minute view of what the market will do next, this admission is startling. And it's also true.

No one knows that the market will do next.

Some people, though — Jeremy Grantham, Seth Klarman, John Hussman, Robert Shiller, and many others — are looking at the current level of stock prices and comparing them to average prices over the past 150 years. And, based on these prices (and other factors, like the Fed), they are concluding that stocks have a lot of downside risk. So much so that, Klarman at least, is forgoing fees to avoid getting clobbered by this risk.

Klarman, et al, may be wrong. We may still be in the early stages of an amazing new bull market. Stocks may climb this little "wall of worry" and march much, much higher from here. They may never return to historical averages again.

But if you are confident that that's what stocks will do, at least do yourself the favor of thinking carefully about why you believe that—that you're not just optimistic because the last 5 years have been so good and that you have a strong fundamental thesis to support your views. And be comfortable with the 40%-50% downside that you might experience if you are wrong.

Because hope is not a strategy. And no one benefits from ignoring smart folks on the other side of the trade.

You can read a long excerpt from Seth Klarman's letter a Zero Hedge here >

SEE ALSO: Anyone Who Thinks Stocks Will Keep Going Up If The Economy Keeps Growing Should Brush Up On History


Debt Rattle Mar 28 2014: The China Clock Goes Tick Tock

Courtesy of The Automatic Earth.

Esther Bubley Daily Greyhound commute to Memphis September 1943

How do we know what’s really going on in China’s economy? Given that it’s – at least officially – under central control, that’s not easy. The Chinese leaders know their way around spin and propaganda; one might argue that their lives depend on it. Still, maybe following and connecting the dots as they appear in the news can be helpful. So I thought I’d squirrel together a few data and talking points from the past week, and see what comes out.

Of course the biggest news came 3 weeks ago, when the Custom Administration announced that Chinese exports in February dropped 18.1% from a year earlier. No matter what anybody may claim about Lunar New year, that’s a devastating number. It shows that China is simply losing its buyers. And for an economy that is singlemindedly focused on exports, that is earth shattering. But from inside the nation as well, there are increasing reports that things are not running smoothly.

The manufacturing index seems well embedded below the 50 break even point.

China Manufacturing Gauge Falls as Slowdown Deepens (Bloomberg)

China’s manufacturing industry weakened for a fifth straight month, according to a preliminary measure for March released today, deepening concern the nation will miss its 7.5% growth target this year. The Purchasing Managers’ Index from HSBC and Markit dropped to 48.1, compared with a 48.7 median estimate [..]

Real estate prices are starting to fall. Not everywhere, nor everywhere at the same pace, but for the many dozens of millions who’ve put their money in apartments, this is a grave worry.

Angry Chinese Homeowners Vent Frustrations After Price Cuts

Groups of angry homeowners put up banners and demanded their money back after Hong Kong-listed property developer Wharf Ltd. cut prices on new homes in an eastern Chinese city [..] They said they wanted their money back after prices at the project, called Phoenix Lake Garden, were cut by as much as 16% [..]

Debt levels among local governments are probably one of the murkiest issues in the country. It hardly matters at all what the state auditor says, because government-related debt is just the tip of the iceberg. In China, when you say local government, you say shadow banking. Local officials kept themselves sitting pretty through shadow borrowing. Where the money came from, how leveraged it is, who knows? WHat we do know for sure is that it’s much more expensive than ”official” loans.

China’s Local Government Debt Burden Varies Widely: Moody’s (CNBC)

China’s state auditor said in a report in December that local governments owe almost $3 trillion in outstanding debt as of the end of June last year, up 67% from the last audit in 2011. [..] Among the top 31 upper-tier local governments reporting government-related debt on their websites, indebtedness ranged from 69% to 156% of revenues, with the median at 108%, Moody’s said.

There are new forms of lending popping up, if only because the demand is so great due to debt needing to be rolled over and serviced, lest the scores of little emperors find themselves exposed.

China Banks Drained by Internet Funds Called Vampires (Bloomberg)

It has been labeled a “blood-sucking vampire” by a prominent commentator on state-run television. Executives at China’s largest banks have called for regulators to curb its rapid expansion. [..] The focus of this ire is Internet financing, specifically Yu’E Bao, the fund pioneered nine months ago by Alibaba Group Holding Ltd.’s online-payment affiliate Alipay. Its ease of use, involving a few taps on a smartphone, has drawn deposits from 81 million customers, more than the population of Germany, as they chase returns higher than China’s banks can offer. The total exceeded 500 billion yuan ($80 billion) as of Feb. 28 [..]

Despite surging pollution levels, China actively keeps drawing up plans to get more people into cities. It has understood that this is closely linked to growth numbers. We may find that short-sighted, and it is, but take a step back and imagine what US-style urban sprawl would look like on the scale of China.

China’s Urbanization Loses Momentum as Growth Slows (Bloomberg)

The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years [..] Today’s report from the World Bank and the State Council’s Development Research Center, which helped inform the government’s plan, recommends changes including on land use to spur more-efficient and denser cities. That can save China $1.4 trillion from a projected $5.3 trillion in infrastructure spending over the next 15 years [..]

Bank runs look inevitable in China. At the first sign that Beijing loses only a little bit of control, people will demand cash to put into their mattresses. Cash that, just like in western nations, is of course not there if everyone wants it at the same time. The government’s biggest nightmare? There are many, but it might well be.

Hundreds Rush To Rural Chinese Banks After Solvency Rumours (Reuters)

Hundreds of people rushed on Tuesday to withdraw money from branches of two small Chinese banks after rumours spread about solvency at one of them, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults. The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Or could this be the biggest nightmare? China allegedly has 90,000 property developers in a system that even if it runs well only has space for maybe 30,000. How do you bring down numbers like that in an orderly fashion? I’m very glad that’s not my job. How many of those developers will go down with badly built properties, huge levels of bad debt and scores of very angry “investors”?

High Debt, Slow Sales Loom Over Chinese Property Firms (SCMP)

All eyes are now on a few Chinese real estate developers particularly vulnerable to slow sales and tight credit, as mainland China’s property market enters a new downturn. [..] At the end of June, Glorious Property (36%) and Hopson (42.8%) had the lowest ratio of cash versus short-term debt among all mainland Chinese developers rated by Moody’s.

China’s stimulus far outnumbers anything the US has done. And that’s when you get these insane debt levels. Which may be sort of bearable, temporarily, when exports keep growing at double digit rates. Not when they’re down 18%. Note also that China now needs $7-8 of new debt to generate $1 of economic growth, approaching levels that are set to doom western economies.

China Finds The Credit Habit Hard To Kick (Satyajit Das)

Chinese government debt, including local government debt, is about 55% of GDP –about $5 trillion (£3 trillion) – an increase of about 60% from 2010.

But the official Chinese government debt figure may not be complete, as it may exclude debts from local governments and central departments outside the finance ministry. If these items are included, China’s government debt including contingent liabilities would be higher, perhaps 90% of GDP. There has been a parallel increase in private sector debt. Corporate debt has increased sharply, approaching 150% of GDP. Traditionally considered compulsive savers, Chinese households have increased borrowing levels from about 20-30% to 40-50% of GDP. [..]

Another measure is the credit gap – the difference between increases in private sector credit growth and economic output. Research studies have found that 33 countries with credit gaps experienced a subsequent rapid slowdown in growth, typically by at least 50%. In China, the credit gap since 2008 is over 70% of GDP. Chinese credit intensity (the amount of debt needed to create additional economic activity) has increased. China now needs about $3-$5 to generate $1 of additional economic growth, although some economists put it even higher, at $6-$8. This is an increase from the $1-$2 needed for each dollar of growth 8 to 10 years ago.

I personally find this one especially worrisome, because it raises the question: where do Chinese industry and Chinese local government get their credit? And under what terms? As a local official, if you need those $7-8 of new debt to generate $1 of growth, you’re probably going to take it, as long as interest rates allow for it. But what are you getting your community into for the future?

Who are China’s lenders? How solid are they? How leveraged? What’s the level of bad loans they already have on their books? And who are the borrowers? Does either side do proper research on the other?

In the end, just about everything is state owned, all factories, enterprises etc. And as we know from history (Soviet Union), parties involved figure out very quickly that state enterprises don’t need to make a killing; the profit would only go to the state anyway. So buyers, suppliers, middle men and local officials start skimming off profits.

A company will buy an X amount of steel or copper with credit from lender Y. It will then turn to lender Z and use the steel as collateral to get credit for the purchase of an even larger amount of copper or steel. And down the line, who is worth what anymore? The individuals involved have all loaded up their pockets, preferably with dollars, but what’s going to happen to the company that’s left with all that steel? I would expect imports to start falling quite dramatically.

Hong Kong’s Soaring Bank Exposure to China Sparks Credit Concerns (Reuters)

In just a few years, Hong Kong banks have ramped up lending to China from near zero to $430 billion [..] Foreign bank claims on China hit $1 trillion last year, up from nearly zero 10 years ago, Bank of International Settlements data shows. The biggest portion of that is provided by Hong Kong, according to analyst estimates of the BIS data. The $430 billion in loans outstanding represents 165% of Hong Kong’s GDP [..] By the end of 2013, Hong Kong banks’ net claims on China as a percentage of their total loan book was nearing 40%, compared with zero in 2010.

If Beijing no longer offers implicit guarantees of loans state banks have put on their books, these banks are going to be a whole lot worse off than merely “spooked”. And the economy will become even more dependent on financing from the deep dark shadows. Beijing has put so much money into the economy that doubling up on that is hardly an option anymore. What seems left for Xi and Li now is to try and manage the path down. Whether that’s even an option is a great unknown and anyone’s guess.

Spooked By Defaults, China Banks Begin Retreat From Risk (Reuters)

Some of China’s struggling firms are finally getting the reception that regulators have been hoping for — a cold shoulder from banks in the form of smaller and costlier loans. [..]There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks. “Interest rates are going up 10% for the entire industry …” [..]

Some gauges of China’s corporate debt are already flashing red. Non-financial firms’ debt jumped to 134% of China’s GDP in 2012 from 103% in 2007, according to Standard & Poor’s. It predicted China’s corporate debt will reach “stratospheric levels” and become the world’s largest, overtaking the United States this year or next.

Don’t be surprised if heavy industry in China gets a series of very hard blows. The levels of leveraged finance will be crucial, and it’s not easy to be confident in that respect.

Default Risks Surge At China Steel Mills (FT)

Chinese steel mills were suffering a medley of woes in mid-March as sales slowed, production levels slumped and profits plunged, according to an investment bank survey published on Tuesday that foreshadows the rising risk of debt defaults in the world’s largest steel producer.

Macquarie Commodities Research, quoting a proprietary survey of Chinese steel mills and traders conducted in mid-March, found that large, medium and small steel mills were all enduring a contraction in orders compared to the same period in February, and profits had declined to historic lows. “Looking at profitability, it is clear why the smaller mills are making the largest cuts (in production) – for the first time in the history of the steel survey not one smaller mill reported that they are making money …

Oh yeah, why not give the developers, of which there are far too many to begin with, the option to sell mortgage-backed securities and things like that, offering people more great returns on their investments that way. Worked great in the US!

Chinese Developers Seek Alternative Financing As Investors Grow Wary (Reuters)

China’s property developers are turning to commercial mortgage-backed securities and looking at other alternative financing as creditors grow more discriminating in the face of rising concerns about the country’s real estate and debt markets. Bond buyers are shying away from second-tier developers because property sales have cooled as the economy slows. The expected bankruptcy of a local developer and the country’s first domestic bond default this month have heightened scrutiny of borrowers. [..]

Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. to offer a private placement of shares, opening up a fund raising avenue that had been closed for nearly four years. New rules were also unveiled last week allowing certain companies to issue preferred shares [..]

Big one. Importers backing out of deals. A system built on quicksand falls back to earth. They have to pay back the loans they bought the soy and rubber with, and are squeezed between those payments and less demand for their products. China’s like an oceanliner at full steam ahead that needs to step on the brakes. Too much inertia.

China Soybean, Rubber Importers Renege on Deals (WSJ)

Chinese importers of soybeans and rubber are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy. Most purchases are private, with little data on the volumes affected, but traders at Asian trading firms say they are seeing a sharp rise in canceled contracts this year while other buyers are demanding heavy discounts. The U.S. Department of Agriculture confirmed that China has canceled orders for 517,000 metric tons of soybeans … [..]

The cancellations are a big worry for the commodity markets as exporters around the world had relied for years on China’s insatiable appetite for a wide range of raw ingredients. But now as jitters rise over the health of the economy, the fallout is rippling through into agricultural commodities, just weeks after the price of copper and iron ore tumbled on worries they had been used in risky Chinese financing deals. [..]

Rubber prices have dropped more than 20% since the beginning of the year, due to worries over China’s slowing economy and a global surplus of the commodity. Many sellers who bought at high prices are unwilling to sell at a loss, pushing up stocks at the port of Qingdao to near-record levels recently. Stockpiles in some other commodities like soybeans and iron ore are also high as buyers hang on.

More developers, more trouble. Pray tell, what’s the difference with the US, Ireland or Spain in 2006? Well, true, Chinese debt may well be even more leveraged.

China’s Developers Face Shakeout as Easy Money Ends (Bloomberg)

The collapse of a Chinese developer in a city south of Shanghai foreshadows a shakeout among the nation’s almost 90,000 real estate companies as the government reins in credit and the housing market slows. [..] Zhejiang Xingrun’s demise comes after a policy shift by Premier Li Keqiang to tighten credit. The effort to contain surging home prices comes after they climbed 60% since the government’s 4 trillion yuan of fiscal stimulus in 2008 to bolster the economy after the global financial crisis. Officials have stepped on the brakes even as economic growth was already estimated to grow 7.4% this year, the slowest pace since 1990 [..] China’s seven-day repurchase rate, which measures interbank funding availability, hit a record high of 10.8% on June 20

Bad banks are rarely a good idea. China is no exception. Wait till the state banks begin to wobble, that should be fun.

China’s Rapidly Expanding Black Box (WSJ)

China’s “bad bank” experiment is entering unchartered territory. China Cinda Asset Management, created as a bailout vehicle for China’s bad debts, is scooping up distressed loans at blistering pace. Assets rose by 51% last year to 384 billion yuan ($62 billion), much faster than earlier management guidance of 20% to 30% [..]

A loan bought for 30% to 40% of face value, as seems the company’s historical precedent, should provide enough cushion. But investors know little about the assets. Debt backed by a closed coal mine or property in a ghost city might be worth even less. Cinda, like much of China’s financial system, is still in many ways a black box. In the meantime, Cinda’s financial performance is weakening. Return on assets fell to 2.9% in 2013 from 3.4%, the third straight year of decline. And despite the rise in leverage, return on shareholder equity fell, to 13.8% from 15.8%.

So, anybody feel good about China after all that?

China. A behemoth government stimulus since 2008, a shadow banking system that has grown exponentially and is as opaque as can be, and a level of corruption most South American countries cannot touch. What’s not to like? And then it all comes back to earth. The transition from central control to free(r) market is never going to be easy, trying to juggle both at the same time is another thing still. And yes, China’s easily big enough to drag us all down with it.

I don’t know about you, but I don’t see this end well. The sunny side, though, is that we’ll need to start making a lot of our own stuff again. Sunny because, you know, we’ll create jobs. And can we please not do all the useless plastic trinkets, have a little more taste when we rebuild our manufacturing?

Soaring Bacon Prices Got You Down? Blame The “Porcine Epidemic Diarrhea Virus”… And Spiking Inflation

Food inflation is undeniable. Not only are prices up but portions are down. Yet the government insists there minimal inflation in prices. Food, obviously, is one of the few essentials that people with limited funds MUST spend their money on. ~ Ilene 

Courtesy of ZeroHedge. View original post here.

We recently noted the soaring cost of US foodstuffs this quarter (handily outperforming stocks) but without a doubt it is lean hogs that are the best performer – up a stunning 51% in Q1. As Bloomberg reports, the reasons are varied and, fair warning, sometimes disgusting: The same Ukraine story that is helping to keep a lid on equities is fueling a rally in wheat on concerns about Russian crops; the pigs in China are gobbling up U.S. soy, while the hog supply in the U.S. is being hurt by a nasty case of “porcine epidemic diarrhea virus.”

Via Bloomberg:

So far in 2014 it’s worth taking note of the leaders to show that while alpha may not grow on trees, it can sometimes grow in the fields:

Lean hogs are up 51 percent this quarter.


Corn is up 16 percent.


Even untradable chicken wings (specifically the USDA Georgia Dock Chicken Ready To Cook Wings Spot Price) are up 8.9 percent.

And of course, the broad US Foodstuff index


Must be the weather? But summing it all up – Q1 has been the quarter of food inflation and financial asset deflation

Bacon picture source here. 

McCain Wants More Weapons Delivered to Al Qaeda Rebels; How Do Warmongers Get Elected?

Courtesy of Mish.

Lawmakers Bash Obama’s Delusional Syria Policy

In a recent post I noted Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting. As a followup, please see Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry.

Meanwhile, back in the US Lawmakers Bash Obama’s “Delusional” Syria Policy.

U.S. lawmakers lashed out at the Obama administration’s handling of Syria’s civil war on Wednesday, demanding a stronger American response to the conflict and better communication from the White House about its plans.

Senator Robert Menendez, chairman of the Senate Foreign Relations Committee, expressed deep frustration after Anne Patterson, the assistant secretary of state for Near Eastern affairs, declined to answer a question about strategy in a public setting.

“I have a problem with a generic answer to a generic question that I can’t believe is classified,” Menendez, a New Jersey Democrat, said during a committee hearing.

Members of the Foreign Relations panel in particular are frustrated by the administration’s failure to do more in Syria, where 140,000 people have been killed, millions have become refugees and thousands of foreign militant fighters have been trained as rebels have fought to oust President Bashar al-Assad.

Arizona Republican John McCain, a frequent critic of Obama’s foreign policy, called U.S. Syria policy “a colossal failure.”

Secret Deals and the Failure to “Do More”

Once again McCain proves he is little more than a war-mongering puppet for the military “offense” industry. “Defense” has nothing to do with involvement in Syria.

Late January, Reuters reported Congress secretly approves U.S. weapons flow to ‘moderate’ Syrian rebels.

It seems that was about as secret as Turkey’s secret discussion on intervention in Syria.

Rebel Infighting

Continue Here

Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry

Courtesy of Mish.

Normally I stay far away from the rumor mill. Typically, most rumors turn out to be false.

However, actions in Turkey suggest at least some substance to this rumor. Moreover, it’s entirely believable. First let’s tune in to what Bloomberg reports (which I also commented on yesterday).

Please consider Turkey Blocks YouTube After Syria Incursion Plans Leaked

Turkey defended its decision to block YouTube after a leaked recording of a meeting where top officials discussed a possible military incursion into Syria appeared on the site.

Foreign Minister Ahmet Davutoglu today equated the leak to an “attack on Turkey’s borders” in an interview with NTV television. Davutoglu said he had chaired the meeting with the head of national intelligence and other military and diplomatic officials to discuss how to respond to threats by Islamist militants against an enclave of Turkish territory inside Syria. Some sections of the tape were “doctored,” the foreign ministry said in a statement yesterday.

The leaked tape is the latest in a series of recordings posted anonymously on the Internet since December, some of them allegedly from a police investigation, which have embroiled Prime Minister Recep Tayyip Erdogan in a corruption scandal and led to the departure of four cabinet ministers. It comes before weekend local elections, where Erdogan is seeking a victory that he says will lay to rest the allegations of graft.

Under fire since the corruption investigation burst into the open in December, he has purged dozens of prosecutors and thousands of police, as well as imposing media curbs. Yesterday’s YouTube shutdown follows similar measures against Twitter last week. The government says some of the recordings were assembled by montage.

What We Know

The above is what is claimed by Erdogan and discussed by Bloomberg. We do know that Erdogan tried to shut down Twitter (but failed), and he did shut down YouTube.

He also called the leak an act of treason and refused to let media even discuss the allegation. What follows is the rumor.

Turkey Transcript

Here is the alleged Turkey Transcript involving a plot to invade Syria.

Select Quotes

Hakan F?DAN: But hear me out, we know how to put two and to together. Now, we know that what happens there has no real strategic value for us, besides the political outward appearance and whatever. Now, if we are going to enter a war, let us plan this beforehand and do it. Now, I..

Continue Here

Why Gold Is Falling & A Gold Forecast You May Not Like

Why Gold Is Falling & A Gold Forecast You May Not Like

Courtesy of Chris Vermeulen

The bitter truth about what may happen to gold is not all that exciting and you likely don’t want to know, but this is what I think is unfolding…

Long story short, the prices of bonds look as though they are about to rally once again. Mounting fears of a stock market correction has money flowing into bonds which in turn will drive interest yields lower yet gain. But the BIG PICTURE of what the FED said the other week about how they plan to raise rates in 2015 and cut QE down to $55 billion per month hurts the long term outlook for gold.

This news may not sound that important, it actually is and undermines the price of miners, silver and gold in a big way.

Find out why gold is falling and the threat that could trigger a much larger meltdown in the long run with my gold forecast video.

Please check out our ETF Trading Newsletter.

Sincerely, Chris Vermeulen Founder of Technical Traders Ltd. – Partnership Program

Bernard Baruch’s 10 Rules of Investing


Bernard Baruch’s 10 Rules of Investing

Courtesy of 

You want someone to emulate?

Bernard Baruch (August 19, 1870 – June 20, 1965) was the son of a South Carolina physician whose family moved to New York City when he was eleven year old. By his mid-twenties, he is able to buy an $18,000 seat on the exchange with his winnings and commissions from being a broker. By age 30, he is a millionaire and is known all over The Street as “The Lone Wolf”.

In his two-volume 1957 memoirs, My Own Story, Baruch left us with the following timeless rules for playing the game:

“Being so skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learned from my own experience which might be worth listing for those who are able to muster the necessary self-discipline:”

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”

3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.

Baruch would later go on from Wall Street to Washington DC as an advisor to both Woodrow Wilson and to FDR during World War II.

Later, he became known as the Park Bench Statesman, owing to his fondness for discussing policy and politics with his acquaintances outdoors.

He lived til a few days shy of his 95th birthday in 1965. You could do worse than to invest and live based on these simple truths.


This post originally appeared on February 17th 2013

Robert Shiller: Bubbles are a Good Motivator


Robert Shiller: Bubbles are a Good Motivator

Courtesy of 

The Wall Street Journal’s David Wessel interviews Nobel laureate Professor Robert Shiller about investing and bubbles this week. I particularly liked this bit, on why bubbles aren’t necessarily “bad” or “good”, but perhaps necessary for capitalism:

Q: Are bubbles always a bad thing, or do they have some good effects?

A: First of all, it’s a free world and people can do what they want. I’m not proposing we put the straightjacket on these things. The other thing is that human nature needs stimulation and people have to have some sense of opportunity and excitement. I think profits are an important motivator. In the long run, it’s hard to say that bubbles are really bad.

Take the Internet bubble in the 1990s. What that did was generate a lot of start-ups, some of them foolish, some of them failed, but others survived, so is it a bad thing? I find it hard to think what the alternative would be. We could have had a Federal Reserve that tried to lean against that. Ultimately, our policies in economics are somewhat intuitive and our models are not accurate enough to tell us what the right policy is, so I’m thinking we might have been better off if we tamed these bubbles, but there is no way to be sure.

I’ve been talking a lot about the biotech bubble this week. I actually think there are some real benefits to it continuing – with all of the money raised by the sector, a ton of research and clinical trials will be funded that might not otherwise have had the chance. Who knows what might come out of that, even if a lot of this capital sloshing around will ultimately be wiped out. As I’ve said, better to have a medical research bubble that leave behind possibly world-changing life sciences progress than a stupid social media bubble or another credit bubble that leave behind only debt and nothing of substance.

Don’t miss the rest of the Shiller interview, link below…


Robert Shiller’s Nobel Knowledge (Wall Street Journal)

Read Also:

Yes, Biotech is a Bubble. SFW. (TRB)

Chink In The Market’s Armor?

Courtesy of Lance Roberts of STA Wealth Management

Initial Claims Suggest That This Bubble Has Reached Its Limit

Courtesy of Lee Adler of the Wall Street Examiner

The seasonally finagled headline number for weekly initial unemployment claims was 311,000 last week, soundly trouncing the consensus wild guess of the Wall Street conomist crowd, who were looking for 330,000.

Seasonally adjusted (SA) data represents an idealized, fictional, dumbed down, smoothed, abstract impressionistic version of reality that is supposed to more clearly represent the trend. Admittedly, sometimes it comes close, but sometimes it doesn’t.

Rather than using the faked data that the mainstream media loves to idiotically parrot, I like to look at the actual number of claims reported to the Department of Labor (DOL) each week by the 50 state unemployment departments. When that actual data is plotted on a chart with a few filters it’s easy to see the actual trend. It’s easy to see whether the most recent data shows any material deviation from the trend. This is, in essence, the application of technical analysis to economic data. If you like charts and trendlines, you like this method. If you like smooth abstract impressionist propaganda, stick with the news headlines.

The media ignores it, but the DOL dutifully reports the actual not seasonally adjusted (NSA) data right along with the SA data each week. Here’s what it had to say today about last week:

The advance number of actual initial claims under state programs,unadjusted, totaled 273,411 in the week ending March 22, a decrease of 12,559 from the previous week. There were 315,620 initial claims in thecomparable week in 2013.

As a critical observer, I want to know how this compares with the trend, along with how this week’s change compares with the same week last year and with the historical average for the comparable week. It’s like going to the optometrist. Is it better or worse than the trend? Is it better or worse than average? Is it better or worse than this week last year? That information helps to make clear whether anything is actually changing, or if job losses are simply moving along the same curve which they’ve been on all along, subject to minor short term random squiggles.

In that vein, the drop of -12,559 last week compares with an increase of +14,669 in the comparable week last year.The current week was a good deal stronger than the same week last year. The 10 year average for the comparable week was a drop of -8,700. The current week was slightly better than that, not materially so. It was a pretty good week, all told.

The year to year rate of change was a decline of 13.4%. That is a significant strengthening from the momentum of the trend since January, which was typically in the zero to -5% range, and had been decelerating toward zero. However, while stronger than the past 3 months, it is consistent with the rate of change of the past 4 years since the recovery stabilized in mid 2010 following the initial bungee rebound from the extreme of 2009.

Initial Unemployment Claims Drop- Click to enlarge

While the Fed’s QE program has had great success in its true intended goal of inflating stock prices (see Bernanke’s November 2010 Washington Post oped), it had no measurable impact on the rate of job losses. Those have remained in a stable trend for 4 years whether QE was going full blast or was in a long pause as in mid 2011 through late 2012. It was then that the Fed suddenly and inexplicably panicked and launched QE3-4.

Rampant speculation triggered by an inexhaustible supply of guaranteed free money for wild eyed leveraged speculators (but not for Ma and Pa Saver) has no impact on creating real jobs or real wealth. It only creates massive speculative bubbles, which eventually crash and have the unfortunate side effect of destroying real jobs.

Are approaching that point. Timing is, as always, the issue.

Stock Bubble Rages as Jobless Claims Slow At Steady Rate- Click to enlarge

How much is too much of a good thing? Current weekly initial claims of 273,411 is the lowest rate for this week since March of 2007 when it hit 273,432. That was just a few months before the stock market and economy began their epic collapse. It was when nobody at the Fed or in the Wall Street shill community, or among the mainstream reporters who curry their favor, saw any major problems on the horizon. They saw only hints of minor problems, which they thought could be easily contained with a few policy tweaks. Meanwhile, those of us on the outside looking in were screaming that the market and economy were in a massive credit and housing bubble that were collapsing.

A year earlier, in the comparable week of March 2006, in the dying days of that massive bubble, there were 265,370 initial jobless claims. That was equivalent to 0.2% of total nonfarm payrolls that month. In March of 2006, all looked rosy to the mainstream crowd. To them, there were no black clouds on the horizon.

The current weekly reading of the ratio of initial claims to nonfarm payrolls is…drum roll please… 0.2% of total nonfarm payrolls. By that standard, the current ZIRP-QE free money driven bubble, like the one in 2006, may have reached the as-good-as-it-gets stage. But this time really is different.

Or is it? The Fed stopped expanding its balance sheet in May of 2007. It is making noises about doing the same this time within just a few months. Once the unthinkable is done and the spigot is turned off, I suspect that this time won’t be different, or that if it is, it will be because it’s worse–a bigger, badder bubble–a central bank balance sheet bubble–with a bigger badder aftermath.

Are the dealers getting ready to shake the market out, just so they can run it up the flagpole again?

Get regular updates on 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. 

As Its Ultranationalists Rage, Ukraine’s Ousted President Calls For Regional Referendums

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While the US and its allies are locked in a war of words which Russia has so far been completely ignoring, things continue to move both literally (along the Russian side of Ukraine's eastern border) and metaphorically. Overnight, ousted President Viktor Yanukovych has called for a national referendum to determine each region's "status within Ukraine". As a reminder, the Kremlin still refuses to accept the current Ukraine government, claiming it got there only after an illegitimate, violent overthrow of Yanukovich. "As a president who is with you with all my thoughts and soul, I urge every sensible citizen of Ukraine: Don't give in to impostors! Demand a referendum on the status of each region within Ukraine."

In his first comments since Crimea voted to become part of Russia, Mr Yanukovych denounced fresh presidential elections planned for 25 May. BBC adds that at the same time Russia's defense minister, Sergei Shoigu, said that all Ukrainian service personnel loyal to Kiev have now left Crimea and all military installations there are under Russian control.

And while the Russian noose continues to tighten, first around East Ukraine, it almost appears as if developments in Kiev are doing their best to help out Putin. Perhaps Kiev took a little too much to heart the statement by Schauble that Ukraine has Greece as a role model to look up to, because while it has skipped the entire economic collapse phase (for now), it has jumped straight to the infighting with its ultra-nationalist, far-right "Right Sector" elements, which were certainly one of the main factors for the ascent of the current acting government and the overthrow of the last one.

FT adds that the ex-president’s call, reported by Russian media, came as members of a radical rightwing fringe group, Right Sector, staged a second protest outside Kiev’s parliament in little more than 12 hours. The reason: Ukraine's interim President Olexander Turchynov has condemned the ultra-nationalist Right Sector, saying the group is bent on "destabilisation".

Right Sector activists blocked the parliament (Rada) building in Kiev on Thursday night and smashed windows. They blamed the interior minister for the killing of a Right Sector leader Muzychko, ak Sashko Bily. From BBC: 

At a parliament session on Friday, Mr Turchynov, called the Right Sector rally outside parliament "an attempt to destabilise the situation in Ukraine, in the very heart of Ukraine – Kiev. That is precisely the task that the Russian Federation's political leadership is giving to its special services".

Right Sector activists are furious over the death of Oleksandr Muzychko, better known as Sashko Bily, one of their leaders. The interior ministry said he died on Monday night in a shoot-out with police in a cafe in Rivne in western Ukraine.

A member of the far-right group in Rivne threatened revenge for the killing of Mr Muzychko.

"We will avenge ourselves on [Interior Minister] Arsen Avakov for the death of our brother…

Keep track of the internal strife as the Right Sector played a prominent role in the Kiev protests – and the clashes with police – which led to the removal of Mr Yanukovych from power. Its main support base is in western Ukraine. Should the government escalate its relations with the "Right Sector" the new government may be overthrown just as fast as its predecessor.

It has gotten so bad that Ukraine security officials, taking another page of the Greek playbook, are actively considering banning the "Right Sector." RT reports:

Following a siege of Kiev parliament building by the Right Sector nationalists, Ukraine’s security officials have discussed banning the movement during an urgent security meeting, a source in Batkivshchina party told Ria. According to the source, the meeting was attended by the acting Interior Minister Arsen Avakov, National Security and Defense Council chief Andrey Parubiy, as well as Oleg Tyagnibok, the leader of nationalist Svoboda party.

During the meeting, Avakov suggested a complete ban of the organization given the radicalization of the Right Sector, the source said.

Parubiy was allegedly supportive of the idea of dismantling the neo-Nazi movement and said such a move would allow those present at the meeting to whitewash themselves of having any connections to the radicals, the source said. Tyagnibok reportedly did not take any sides.

According to the source, the proposal will be further discussed on Friday “within a wider circle.”

Meanwhile on Friday, Verkhovna Rada is also expected to hold an emergency session to discuss the possibility of Avakov’s resignation, after hundreds of Ukrainian nationalists gathered outside the parliament building threatening to storm it unless Avakov takes personal responsibility for the killing of one of their leaders and resigns.

The right-wing militant leader Muzychko, also known as Sashko Bilyi, was killed in a police raid against his gang in Rovno, western Ukraine.

It is here that Russia may suddenly have found an unwilling "the enemy of my enemy is my friend" ally. It perhaps explains why Russia was just cited as escalating the war of words yet again. Via Reuters:


Last, and least, there is Obama who said in a CBS interview that Russia "needs to move back the troops" from Ukraine border. Obama says Putin is “certainly misreading American foreign policy" adding that “we have no interest in encircling Russia."

The problem is that Russia certainly has an interest in encircling Ukraine: "You’ve seen a range of troops massing along that border under the guise of military exercises,” Obama says "these are not what Russia would normally be doing."

Perhaps Obama should explain the whole "costs" thing again, because over a month in and Putin still hasn't quite understood it.

Are You Minding the Curves? Sweet Spot is Likely Not Where You Think

Courtesy of Mish.

Curve Watcher’s Anonymous has its eye on the yield curve again.

Over the course of the last year, and except for the close front-end, US treasury yields have risen across the board, and in some cases dramatically. This is what one would expect from a tapering Fed that is also discussing rate hikes.

However, the action is the last three months is not what one would expect.

click on any chart for sharper image

In the past year, 5-year treasuries have been hit the hardest (sharpest yield increase). That is not what one might expect from a strong recovery. And certainly a drop in the 30-year long bond is not what one would typically expect either.

Typically, when the Fed start hiking or announces intention to hike, the long end of the curve changes the most. It did, until the beginning of the year. The following charts will help put things in perspective.

Yield Curve as of 2014-03-28 Monthly

The above chart shows monthly “closes” where the yield was at the end of the month. The current month shows the present value.

Yield Curve as of 2014-03-28 Weekly

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Limitations of the Elliott Wave

Courtesy of Chris Vermeulen

A large number of investors rely on Elliott wave theory as part of their market trend analysis to help them make good decisions, and it is a very good, very accurate tool.  But it is merely one tool, and as with anything, it is unwise to become over reliant on any single tool or methodology.

At the root, Elliott wave theory revolves around the idea that people tend to react to stimuli in the same, predictable ways, and that by identifying the stimuli (either specifically or broadly), it becomes possible to predict market movements. Its namesake, Ralph Nelson Elliott, developed the theory and the analytic tools that surround it in the 1930’s, proposing that market prices unfold in accordance with specific patterns.

Although the theory has an enormous number of practitioners and is used as part of the analytic methodology of a number of many successful fund managers, it is not without its critics and drawbacks. Of those criticisms, there are three primary ones, and they must be understood before deciding if this particular analytic tool is right for you.

The first of the three objections is simply that the theory contradicts the Efficient Market Hypothesis. The counter argument goes that if Elliott’s theory were true and correct then all investors wise to the “trick” would act on it, and in doing so, destroy the very waves they had measured and discovered.

[Comment: the Efficient Market Hypothesis has been largely disproven particularly on a short term basis. ~ Ilene]

The second is simply an observation that wave principle in general is too vague to be of specific use since it cannot consistently identify when a wave begins or ends, and that forecasts using this methodology are prone to subjective revision.

[Comment: It’s easy to look at a chart and label the “waves” but much harder if not impossible to consistently predict the future from the waves. One move to the right of the end of the chart will change the labeling to the left–i.e., the future move willl change the interpretation of the chart in retrospect. ~ Ilene]

Finally, there are some who believe that the principle is “too dated” to be of use, or even applicable in today’s markets. That technological, governmental, regulatory, economic and social changes have all occurred since the theory was first put forward, but that the theory itself remains unchanged and thus, unable to adapt to its new environment, or serve as a reliable predictor.

[Comment: That begs the question: Did the principle ever really apply beyond its self-fulfilling nature in that other people and trading programs use EW theory to position themselves in the market? ~ Ilene]

Despite these objections, it should again be noted that many of the top performing fund managers use the theory as part of their own analysis, and it is hard to argue with their success. Whichever side of the fence you’re on regarding the methodology, one thing remains clear. It is unwise to place absolute faith or reliance in any single method, but as part of a larger set of analytic tools, and despite the various criticisms leveled against it, it is impossible to deny its record of success.

What we do at is add additional technical analysis tools to our Elliott Wave views to keep ourselves in check. We also tend not to try to label every single squiggle or wave pattern as they occur. Taking a more big picture approach in our opinion works better than getting bogged down in the short term wave counts and details. Often, using a weekly chart can be of help in identifying obvious patterns, which is what I call “zooming out”. We also look at sentiment indicators such as the investment advisor surveys, or what we see on the cover of major media publications for example.

In addition, we use Fibonacci analysis of prior wave patterns to help identify the most likely foreward scenarios. If we feel that a view we have is getting off track, instead of staying stubborn we will quickly analyze other potential wave counts and then quickly re-adjust if necessary. We are also not fans of having multiple alternate counts, as that only serves to confuse the investor. 

Elliott Wave Theory is a working blueprint, but not a Bible. You can take the basics of Elliott Wave Theory and then add in a few more elements to improve your results.

Become A Member Of Our Exclusive Elliott Wave Theory Forecasting Newsletter


GULF COAST PADD 3 The New U.S. Oil Bottleneck

Courtesy of EconMatters

As Cushing supplies decline due to increased logistic options out of the storage hub in the Midwest PADD 2 in Cushing, Oklahoma inventories are rising to elevated levels in the Gulf Coast which eventually will provide the bottleneck and back up oil flows all along the supply and logistics chain.

The shortsighted obsession of building and expanding pipelines out of Cushing, just to store it on the gulf coast serves as an important reminder to look at problems more broadly, without an aggressive oil export market (even with increased refinery capacity for petroleum products along the Gulf Coast) there is just too much domestic and North American Oil with no place and market destination to soak up this extra production.

One doesn`t just all the sudden start pumping over 8 million barrels of oil a day and drastically reducing foreign imports without providing unintended consequences for supplies which have been elevated for years in the United States currently standing at over 380 million barrels and climbing with over 200 million alone being stored along the Gulf Coast in PADD 3.  

The geniuses in the oil market thought all they had to do was build more pipelines out of Cushing Oklahoma and the glut of domestic oil was solved, not really taking into account the demand fundamentals of supply and demand. Just moving oil from one bottleneck to another bottleneck a few states over doesn`t address the core problems of oversupply and lack of economic demand to soak up additional supply globally with weak emerging markets and increased fuel efficiency standards and changing driving patterns in the US its strongest market. 

At what point does the bottleneck along the Gulf Coast just back all the way back to Cushing, Oklahoma again? Thus completely mitigating all the capital and resources spent on increasing pipeline capacity out of the energy hub where even with the recent declines are still above their five year historical averages. How much oil are we going to store in this country? It is obvious that supply is more than demand and the reason that despite a huge reduction in imports in the largest market for demand oil supplies are near record levels in the United States.


Another question is what does the WTI contract represent? Does it strictly represent Cushing Oil or is it a proxy for domestic US Oil? Does it really matter if you move Oil two states over from one storage hub to another? Have you really solved the glut of US Oil supplies? It is not like anyone actually takes delivery of the WTI Cushing based contract in a well-supplied energy market, less than one percent of one percent of oil traded takes physical delivery. This shell game of moving oil from one PADD 2 storage hub to another PADD 3 storage hub doesn`t address the core problem and the rise in PADD 3 Oil supplies makes this abundantly clear. 

There is just too damn much oil stuck in the United States with no real market for it to go to given the unprecedented increases in North American and US domestic Oil production of the last three years. This is the big picture issue that still needs to be resolved in the oil energy space and just increasing refinery capacity along the Gulf Coast isn`t enough to solve this supply glut as the rising PADD 3 inventories point out in the latest EIA reports.  


Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting

Courtesy of Mish.

Turkey is threatening military intervention in Syria. A leaked recording proves it. In response, an angry Turkish Government Banned YouTube.

The Foreign Ministry called the leak a “despicable attack” on national security, in a statement e-mailed from Ankara yesterday. It said the meeting, attended by Foreign Minister Ahmet Davutoglu, the head of national intelligence and other military and diplomatic officials, was held to discuss how to respond to threats by Islamist militants against an enclave of Turkish territory inside Syria. Some sections of the tape were “doctored,” the ministry said.

Turkey’s telecommunications authority said it has blocked access to YouTube, where the recording was posted. The government imposed a temporary ban on news about the recording, according to Turkey’s broadcasting watchdog.

The recording included Davutoglu discussing an attack against Islamist militants who have threatened the tomb of Suleyman Shah, a monument that’s on Turkish territory inside Syria under international agreements. It comes three days before local elections, where Prime Minister Recep Tayyip Erdogan is seeking a victory that he says will lay to rest allegations of corruption that surfaced in earlier Internet leaks.

Erdogan attacked the leak of the recording at an election rally in Diyarbakir, calling it “unethical, sordid and contemptible.” He vowed to bring the perpetrators to justice, saying: “We’ll go after them in their lairs.”

The leaked tape is the latest in a slew of recordings posted anonymously on the Internet since December, some of them allegedly from a police investigation, which have embroiled Erdogan in a corruption scandal and led to the departure of four cabinet ministers.

First Twitter, Now YouTube

The ineptitude, cowardice, corruption, and foolishness of Prime Minister Recep Tayyip Erdogan is stunning. Last week Erdogan banned Twitter, proclaiming “The international community can say this or that – I don’t care. They will see the power of the Turkish Republic.”

The next day a “digital coup” occurred and Twitter Use in Turkey Jumped to New High.

In response, I proposed the Law of Social Media.

Law of Social Media: Arrogant fools who think they can control social media quickly discover social media controls them.

Today’s YouTube episode is yet another lesson for Erdogan.

Mike “Mish” Shedlock

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