Archives for April 2014

Inside The “Low-flation” Myth: A Disquisition On Inflation Seen And Not Seen – Part 1

Courtesy of David Stockman at Contra Corner

After paying my bills the other day I had home heating and electric utility costs on my mind—the winter having been an unusually harsh one in NYC like much of the rest of the nation. But then I noticed a story by an outfit called CNS that contained some great historical graphs on decades worth of utility prices, and I was duly reminded that this wintery winter wasn’t all that: Home utility and fuel costs have been rising at a pretty robust clip for more than a decade now.

Indeed, notwithstanding the modest weight (5%) ascribed to utilities and fuel in the BLS price basket, there are few households in America that have escaped their relentless grind higher. Nor would most everyday Americans shuck this off as a trivial component of their own cost-of-living index or express relief that all remains copasetic on the inflation front— since these large utility and fuel gains have been offset by falling iPad prices and hedonic adjustments to the price of their $40,000 family sedan.

The fact is, the price index for electrical power increased by 5.3% during the past 12 months and has reached an all-time high. But I get it. That doesn’t count as “inflation” because its not in the Fed’s preferred measuring stick—the PCE deflator ex-food and energy. And, yes, they do have a point about the short-run volatility of commodity-driven components of the index like the price of Kwh’s from your local utility.

Heck, the price of power is even seasonal—-rising in the spring, peaking with the summer air-con load and then re-tracing in fall-winter. The latter is supposedly already factored into the BLS’ seasonal maladjustments. But, still, it can be granted that on a short-run basis of a few quarters or even years there is probably a lot of off-trend “noise” in electricity prices.

When it gets to a time frame of a decade running, however, I’ll put my foot down. Back in 2004-05, the government said the average price for electrical power was 9.0 cents/ Kwh compared to the 13.5 cents posted last week for March. Doing the math, that’s a compound growth rate of 4.5% over a decade. And that’s not noise. Its signal. Its inflation.

Electricity Price in March

In its article on the surging trend in utility bills, actually cited the whole index numbers for March and prior year, not just the monthly delta. It then added insult to bubble news injury by placing the utility power gain in the context of overall energy prices trends:

The BLS’s seasonally adjusted electricity price index rose to 209.341 this March, the highest it has ever been, up 10.537 points or 5.3 percent–from 198.804 in March 2013…..Over the last 12 months, the energy index has increased 0.4 percent, with the natural gas index rising 16.4 percent, the electricity index increasing 5.3 percent, and the fuel oil index advancing 2.1 percent. These increases more than offset a 4.7 percent decline in the gasoline index.”

So the above paragraph begs some questions. For one thing, given the magnitude of the index number change for electricity and the double digit year/year change for natural gas something other than falling iPad prices comes to mind. Yet the financial press has so dumbed-down the economic data release narrative via near exclusive focus on algo-feeding monthly “deltas” that our monetary politburo can get away with ludicrous memes like “low-flation”. The trends which refute this nonsense are actually there in plain sight in the data—but are rarely encountered by even the attentive public.

So herein an essay on the overwhelming evidence of inflation during the decade long era in which the central bankers have been braying about “deflation”. Herein, too, some startling evidence of the complicity of the government statistical mills in using the inflation that is not seen (i.e. “imputed”) to dilute and obscure the inflation that is seen (i.e. utility bills).

To be sure, the above paragraph from CNS News might be read to mean that on a 12-month basis inflation is well-contained—even in the energy world. While electrical power and natural gas prices have been roaring upward, weakness in crude oil based products—fuel oil and gasoline—have off-set nearly all the rise. So possibly nothing to see here. Just more “noise” in the index to be left to the experts in the Eccles Building.

Not exactly. Some deep historical perspective is always a good place to start. Otherwise you get caught up in the Fed’s futile mind game of trying to assess the vast outpouring of short-term noise and signal emanating from a $17 trillion post-industrial economy. Indeed, such “in-coming” data is so riddled with guesstimates, imputations, faulty seasonal maladjustments and subsequent revisions as to be nearly meaningless.

And the proof of that is in the transcripts of Fed meetings themselves—released as they are with a 5-year lag. The transcripts show that especially at turning points in the economic and financial cycle, the monetary politburo is essentially clueless—- as it was in much of the spring, summer and early fall of 2008. More importantly, the “in-coming” data cited with grave authority by many FOMC participants with respect to GDP components, jobs, inflation and other macroeconomic trends is often nowhere to be found in the current official data—it having been revised away in the interim.

So starting off with a 100-year perspective on electrical power prices, the chart below makes the big picture point that the rise of Keynesian central banking after August 1971 has been associated with persistent inflation, not deflation. Thus, between 1913 and the early 1960s, electrical power prices in the US were flat—there was no trend inflation whatsoever.

Not coincidently, that era ended with the Johnson-Nixon assault on fiscal rectitude and sound money after 1965. Indeed, ever since the official arrival of discretionary central banking in 1971—that is, floating money anchored to the whims of only the FOMC— there has been a systematic inflationary bias in utility prices as is self-evident below.

During the subsequent 17 years the Fed’s balance sheet has exploded from $400 billion to what will soon be $4.5 trillion. Call it 10X. For perspective, compare it to money GDP of 2X over the same period.But there’s more. June 1997 can well be pinpointed as the date at which the Greenspan Fed went all-in for its modern policy of endless financial market accommodation as its primary policy tool. At that juncture the Fed had spent a few months contemplating Greenspan’s famous “irrational exuberance” warning of December 1996 and had actually made a half-hearted attempt to slow Wall Street’s thundering herd by nudging up interest rates in April. After a decidedly negative reaction, however, rates were eased in June 1997, and the Eccles Building has never looked back.

More importantly, recall that during most of this period the Fed has conducted recurrent jousts against threated, looming or just imagined “deflation”. Yet as the graph below shows, the average CPI gain over the period was 2.3%/year; and, appropriately, nothing is “ex’d” out of that number because every single American citizen did eat and need heating and transportation fuel during that 17-year time frame.

But here’s the bigger point. With respect to that part of inflation which is “seen”, as in a monthly utility bill, the rate of increase was much higher at 3.5% per annum. For those who think this kind of “moderate” inflation is a salutary thing, consider what a dollar saved today would be worth after a thirty year working life time under that 3.5% inflation regime. Answer: 35 cents.

In short, not a single one of America’s 115 million households—renters, owners and borrowers alike—escape the monthly electric utility bill. At $200 per month its not trivial, and the 3.5% trend of the past 17 years has just accelerated to 5.3%. And that happened straight into the jaws of what is being heralded as “low-flation”.

The above flat-out inflationary trend of nearly two decades running is by no means unique to electrical power prices. Consider gasoline, which has ticked down slightly during recent quarters, but about which there is no doubt regarding the trend.

Over the past seventeen years, retail gasoline prices are up at a 6.5% CAGR and by an almost equally inflationary 6.0% over the past nine years. Even giving allowance to the skyrocketing global petroleum prices after September 2007 and their subsequent crash after crude peaked at $150/bbl. a year later, gasoline prices have been heading upwards at a 3.0% rate since the eve of the financial crisis.

So let the recent downward squiggles depicted in the chart below not trouble the monetary politburo. People who travel by internal combustion machine have experienced a steady wallop of inflation for a long as the Fed’s fireman have been professing to be warding off deflation.

OK, there were some people around the Princeton campus who didn’t own a car and ambulated by bike or on foot. But they did need heating fuel in the winter and there was nothing disinflationary about meeting that expense—especially for the 10 million households who heat with home heating oil.

During the last 17-years the index has climbed at a 11% annual rate; and by a 6% CAGR since 2007. The fact that we are not at the momentary oil-price blow-off peak of mid-2008 is truly a case of “cold comfort”. An essential commodity that cost about $0.50 per gallon when Bernanke first started gumming about the “deflation” danger in 2002 now costs $3.00.

Yes, over reasonably long periods of time, most people eat and drink, too. Self-evidently, there is nothing deflationary, disinflationary or otherwise benign about the BLS sub-index for food and beverages. It is up by 2.4% annually during the 17-years since Greenspan kicked monetary discipline out of the Eccles building; and by 2.0% per year since Bernanke launched his own war against deflation in late 2007.

Moreover, there is nothing in that relentlessly ascending curve that speaks of a sudden downshift in recent quarters. During the 12 quarters ending in March 2014, food and beverage prices rose at a 2.2% annual rate.

The above observation leads to an obvious corollary. If you heat it, you have to rent it or own it. For the 40 million households who rent their castle, there has obviously been nothing very deflationary for a long time. For the past 17-years, rents have risen a 3.0% compound rate. And there is no sign of meaningful deceleration there, either. Rents were up by 2.8% in the year ending in March, and by 2.7% in the year before that.

There remains the 75 million households who own their homes, and according to the BLS, the rate of inflation there has been considerably more benign. We will take that apart forthwith, but it is worth noting that whether households own or rent, they end up with costs for water and sewer, trash collection and repairs.

According to the BLS, there has been no signs of deflation in any of these expense categories, either. The cost of water and sewer and trash collection, for example, has doubled since Greenspan had his irrational exuberance moment. That amounts to an 4.5 % rate of annual increase in every day life. As for home repairs, the CAGR is up by 4.8% per year since 1997. And in none of these categories there been any significant deceleration during recent periods.


So that gets us to the proverbial owners equivalent rent(OER)—about which three things are notable. First, it counts for 25% of the regular CPI. Secondly, it comprises 40% of that unique specie of inflation visible in the Eccles building—that is to say, the CPI less things which are inflating such as food and energy. And finally, it is derived by a methodology that can only be described as a preposterous bureaucratic farce.

Specifically, each month several thousand survey respondents, who own their homes and would likely not dream of renting their castle to strangers, and who are also not in the professional landlord business, are asked what they might expect to earn monthly if the did rent their home.

Self-evidently, they have no clue— and so neither does the Commerce Department which conducts the survery or the BLS which processes the data. And that assumes that the raw data did indeed data come from respondents, rather than consisting of numbers plugged in at the end of the month by Census Bureau employees rushing to finish their quota of interviews. There have been some recent news leaks to exactly that point.

Yet even as so dubiously measured, there has been significant OER inflation over the last 17 years: 2.4% annually to be exact. That figure has mysteriously slowed down to 1.7% annually since 2007, but even that rate of gain would not exactly qualify as deflation. OER would double every 40 years at that rate.


But here’s the thing. During the same 17-year period home prices as measured by the Case-Shiller repeat sales index have risen at a 5.2% annual rate—double the OER. And that’s notwithstanding the partial round trip of the housing sector boom and bust during that period.

Undoubtedly, some spreadsheet wiz at the Fed would say do not be troubled by this yawning gap between housing prices and OER. In its wisdom, the Fed has radically repressed the benchmark Treasury rate over this period, meaning that the “carry” cost of homeownership has declined sharply. So, yes, the fact that the housing asset price rose at 2X the rate of imputed rents over the past 17 years all makes sense!

Needless to say, now that interest rates are beginning to normalize the implication would be that the carry cost of ownership—that is, OER—-should begin to accelerate, too. Self-evidently, the deflation fighters in the Eccles building do not expect that—perhaps because they have a front row seat at the government fudge factory where OER is manufactured.

There is one component of the CPI that has experienced genuine deflation since the 1990s—and that is tradable goods subject to the withering force of labor cost reduction that resulted from draining the rice paddies of East Asia. Thus, the index for household furniture, appliances, furnishings, tools and supplies—which has a 4% weight in the CPI— has actually decline slightly since 1997.

The same is true of apparel and shoes which account for another 3.5% of the CPI. Still, household goods are down by only a cumulative 2% over the past 17 years and apparel and shoes by 4%. Those welcome but modest declines pale into insignificance relative to the 50-100% cumulative gains for the commodities and services highlighted above.

And the decline in tradable goods prices do not even begin to off-set the massive but partially invisible rise in the cost of medical, education and other services as will be outlined in Part 2.

Suffice it to say, the monetary politburo has well and truly reached a point of sheer desperation. To keep the Wall Street gamblers in play it needs to keep the money market rates at zero, and therefore the carry trades in business. But 7 years of ZIRP is so insensible on its face that it requires the invention of a giant, preposterous lie—-the myth of “low-flation”—to keep the printing presses humming in the basement of the Eccles Building.

Part 2: The Inflation Which Is Invisible.

17 Facts Showing That The U.S. Economy Is Not Just Fine

Courtesy of Michael Snyder of The Economic Collapse

No, the economy is most definitely not "recovering." Despite what you may hear from the politicians and from the mainstream media (shrugging off today's terrible GDP print), the truth is that the U.S. economy is in far worse shape than it was prior to the last recession. In fact, we are still pretty much where we were at when the last recession finally ended

When the financial crisis of 2008 struck, it took us down to a much lower level economically.  Thankfully, things have at least stabilized at this much lower level.  For example, the percentage of working age Americans that are employed has stayed remarkably flat for the past four years.  We should be grateful that things have not continued to get even worse.  It is almost as if someone has hit the "pause button" on the U.S. economy.  But things are definitely not getting better, and there are a whole host of signs that this bubble of false stability will soon come to an end and that our economic decline will accelerate once again.  The following are 17 facts to show to anyone that believes that the U.S. economy is just fine…

#1 The homeownership rate in the United States has dropped to the lowest level in 19 years.

#2 Consumer spending for durable goods has dropped by 3.23 percent since November.  This is a clear sign that an economic slowdown is ahead.

#3 Major retailers are closing stores at the fastest pace that we have seen since the collapse of Lehman Brothers.

#4 According to the Bureau of Labor Statistics, 20 percent of all families in the United States do not have a single member that is employed.  That means that one out of every five families in the entire country is completely unemployed.

#5 There are 1.3 million fewer jobs in the U.S. economy than when the last recession began in December 2007.  Meanwhile, our population has continued to grow steadily since that time.

#6 According to a new report from the National Employment Law Project, the quality of the jobs that have been "created" since the end of the last recession does not match the quality of the jobs lost during the last recession…

  • Lower-wage industries constituted 22 percent of recession losses, but 44 percent of recovery growth.
  • Mid-wage industries constituted 37 percent of recession losses, but only 26 percent of recovery growth.
  • Higher-wage industries constituted 41 percent of recession losses, and 30 percent of recovery growth.

#7 After adjusting for inflation, men who work full-time in America today make less money than men who worked full-time in America 40 years ago.

#8 It is hard to believe, but 62 percent of all Americans make $20 or less an hour at this point.

#9 Nine of the top ten occupations in the U.S. pay an average wage of less than $35,000 a year.

#10 The middle class in Canada now makes more money than the middle class in the United States does.

#11 According to one recent study, 40 percent of all Americans could not come up with $2000 right now even if there was a major emergency.

#12 Less than one out of every four Americans has enough money put away to cover six months of expenses if there was a job loss or major emergency.

#13 An astounding 56 percent of all Americans have subprime credit in 2014.

#14 As I wrote about the other day, there are now 49 million Americans that are dealing with food insecurity.

#15 Ten years ago, the number of women in the U.S. that had jobs outnumbered the number of women in the U.S. on food stamps by more than a 2 to 1 margin.  But now the number of women in the U.S. on food stamps actually exceeds the number of women that have jobs.

#16 69 percent of the federal budget is spent either on entitlements or on welfare programs.

#17 The number of Americans receiving benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million.

Taken individually, those numbers are quite remarkable.

Taken collectively, they are breathtaking.

Yes, things have been improving for the wealthy for the last several years.  The stock market has soared to new record highs and real estate prices in the Hamptons have skyrocketed to unprecedented heights.

But that is not the real economy.  In the real economy, the middle class is being squeezed out of existence.  The quality of our jobs is declining and prices just keep rising.  This reality was reflected quite well in a comment that one of my readers left on one of my recent articles

It is getting worse each passing month. The food bank I help out, has barely squeaked by the last 3 months. Donors are having to pull back, to take care of their own families. Wages down, prices up, simple math tells you we can not hold out much longer. Things are going up so fast, you have to adopt a new way of thinking. Example I just had to put new tires on my truck. Normally I would have tried to get by to next winter. But with the way prices are moving, I decide to get them while I could still afford them. It is the same way with food. I see nothing that will stop the upward trend for quite a while. So if you have a little money, and the space, buy it while you can afford it. And never forget, there will be some people worse off than you. Help them if you can.

And the false stock bubble that the wealthy are enjoying right now will not last that much longer.  It is an artificial bubble that has been pumped up by unprecedented money printing by the Federal Reserve, and like all bubbles that the Fed creates, it will eventually burst.

None of the long-term trends that are systematically destroying our economy have been addressed, and none of our major economic problems have been fixed.  In fact, as I showed in this recent article, we are actually in far worse shape than we were just prior to the last major financial crisis.

Let us hope that this current bubble of false stability lasts for as long as possible.

That is what I am hoping for.

But let us not be deceived into thinking that it is permanent.

It will soon burst, and then the real pain will begin.

Bubble – Photo by Jeff Kubina

World Money Analyst: Europe: Cliff Ahead?

World Money Analyst: Europe: Cliff Ahead?

By Dirk Steinhoff

Europe: Cliff Ahead?

(This article originally appeared in World Money Analyst)

When Kevin Brekke, managing editor [of World Money Analyst], contacted me last week, I knew it was time again to survey the investment landscape. This month, I will focus on Europe and its decoupled financial and real-economy markets.

Globally, the last two years were marked by booming stock exchanges of developed markets, disappointing bond markets, and devastation across the precious metals markets.

Since June 2012, the EURO STOXX 50 Index, Europe’s leading blue-chip index for the Eurozone, has advanced by approximately 50% and outperformed even the S&P 500 and the MSCI World indices.

Over the last six months, European stock exchanges have seen a surprising change of leadership: The major stock market indices of the “weaker” countries, like Portugal, Spain, and Italy, have outperformed those considered stronger, like Germany. One of the top performers was a country that was and still remains in “bankruptcy” mode: Greece.

The question at this point is: Can these outstanding European stock market performances continue?

Let’s start with a closer look at the economic conditions within the European Union (EU), where approximately 2/3 of total “exports” (internal and external) of the EU-28 are traded. And then let’s have a look at the economic setting of some major trading partners, such as the US and BRIC countries, which account for roughly 17% and 21%, respectively, of the external exports of the EU-28.

Although the EURO STOXX 50 Index has soared since June 2012, certain key measures of the underlying real economies paint a different picture.

The GDP of the EU-28 is not really growing. In 2012, it contracted by 0.4% and grew by the smallest fraction of 0.1% in 2013. The GDP growth numbers for the countries in the euro area are even worse: -0.7% in 2012 and -0.4% in 2013. Whereas Germany’s GDP was up in 2013 by 0.5%, economic growth was down in Spain, Italy, and Greece by -1.2%, -1.8%, and -3.6%, respectively.


Real GDP Growth Rates 2002-2012






















































































The EU unemployment rate stood at 10.2% at the beginning of 2012 and stands at 12.1% today. That the European Union is anything but a homogenous body that moves in unison can be seen in the following chart:

Where Germany has a current unemployment rate of 5.2% and a youth (under 25) unemployment rate of 7.5%, the numbers for other countries are worrisome: Current unemployment in Spain is 26.7%, and 12.7% in Italy, with youth unemployment in Spain at an incredible 57.7%, and 41.6% in Italy. And don’t forget Greece, which is mired in a historically unparalleled economic depression where unemployment is 28% and youth unemployment is a shocking 61.4%. Keep in mind that all of these numbers are those officially released by bureaucratic agencies. The real numbers would likely be even worse.

Recent EU industrial production numbers have shown some slight improvement. Nevertheless, industrial production has only managed to recover to its 2004 level, and remains way below its 2007 heights (see next graph).

Source: Eurostat

So let’s see: a shrinking GDP, high and rising unemployment, and stagnant production significantly below 2007 levels. Those are not the rosy ingredients of a booming economy (as indicated by the stock exchanges) but of one that is struggling.

Europe is not in growth mode.

This verdict is further supported by the export numbers for trade between EU countries, known as internal trade. In 2001, internal trade accounted for 67.9% of EU exports. Today, this share is down to 62.7%. In an attempt to compensate for sluggish European growth, EU companies had to develop other export markets, such as the US or the emerging markets.

Will these markets help rescue European companies?

Time to Taper Expectations

With regards to the US, two important developments are worth mentioning. The first key development, which will have severe consequences for the global economy, was brought to my attention by my friend Felix Zulauf, an internationally well-known investor and regular member of the Barron’s Roundtable for more than 20 years. Running ever-increasing deficits in its trade and current accounts for almost 30 years, the US thus provided an enormous amount of stimulus for foreign exporters. Since 2006, however, the US trade deficit has shrunk, with deteriorating trade data for many nations as a consequence.

The second key development is that the newly appointed head of the US Federal Reserve system, Janet Yellen, seems determined to continue the taper of its bond buying program. This fundamental shift in monetary policy could be questioned if the economic numbers for the US begin to show significant weakness. But in the meantime, the reduction of economic stimulus in the US should lead to a reduced appetite for European export goods.

The emerging markets had been seen, not too long ago, as the investment opportunity and alternative to the fiscal and debt crisis-stricken countries of the developed world. Today, on a nearly daily basis, you hear bad news about the situation and developments in the emerging countries: swaying stock markets, plunging currencies, company bankruptcies, corruption scandals, and even riots.

The emerging markets are dealing with the unintended consequences of the Quantitative Easing (including liquidity easing and credit easing) programs in the West. The increased liquidity spilled over into the emerging markets in the hunt for yield. This flow of capital into the emerging markets lowered capital costs, inflated asset prices like stocks and real estate, and boosted commodity prices. All that, and more, sparked the emerging markets boom.

Now, this process has reversed. The natural conclusion to exaggerated credit-driven growth, the tapering of QE programs, the shrinking US trade deficit, and lower commodity prices has been an outflow of capital from emerging markets, triggering lower asset prices and exchange rates. The attempt of some countries to defend their currencies by raising interest rates will only exert further pressure on their economies.

With weaker emerging market economies and currencies, there will be no big added demand for European exports. Revenues and profits for EU companies (measured in euros) will fall.

When Trends Collide

So, over the last two years we had opposing trends—booming European stock markets and weak underlying real economies. This conflicting mix was mainly fostered by easy money that drove down interest rates to historic low levels. Plowing money into stocks, despite the poor fundamentals, was the only solution for most investors.

At their current elevated levels European stock markets appear vulnerable, and it seems reasonable to doubt that we will see a continuation of booming stock markets. Of course, such a decoupling can continue for some time, but the longer it continues, the closer we will get to a correction of this anomaly. Either the real economy catches up to meet runaway stock prices, or stock prices come down to meet the poor economic reality. Or some combination of the two.

Because of the economic facts that I discussed above, in my view, we may be seeing just the beginning of a stronger correction in stock prices.

Dirk Steinhoff is chief investment officer of portfolio management (international clients) at the BFI Capital Group. Prior to joining BFI in 2007, Mr Steinhoff acted as an independent asset manager for over 15 years. He successfully founded and built two companies in the realm of infrastructure and real estate management. Mr Steinhoff holds a bachelor’s and master’s degree in civil engineering and business administration, magna cum laude, from the University of Technology in Berlin, Germany. 

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The article World Money Analyst: Europe: Cliff Ahead? was originally published at

Even Worse Than It Looks

Courtesy of John Rubino.

No US GDP report is complete without an explanation from the Consumer Metrics Institute of how Washington is fooling us. The latest one is even scarier than usual:

There are a number of disturbing items in this report:

– Even at first glance this is not a good report. Although the headline number itself says “stagnation,” in the context of earlier reports it shows an economy in dynamic transition from lackluster growth towards outright contraction. The overall headline number is down 2.5% from the prior quarter and down 4% from the next earlier quarter. These are significant changes, with the prior quarter’s trend extended and the downward slope intensifying.

– Private commercial investment dropped substantially, led by reduced outlays for residential construction, transportation equipment and IT infrastructure.

– The year-long 2013 cycle of inventory building has come to an end. Over an extended time period inventories are mostly a cyclical zero-sum game, with excessive growth or contraction over any period being corrected (i.e., reversed) during a subsequent period. Moving forward we should expect that inventories will continue their cyclical contraction, with negative consequences to the headline number.

– Collapsing exports are likely confirming a weakening global economy. If so, exports are unlikely to provide the same kind of growth boost that they have provided during 2013, when they grew at about twice their historic rate.

– A positive contribution to the headline growth rate from imports is historically an inverse growth indicator, since it is usually a consequence of reduced domestic demand (e.g., positive import contributions were particularly notable during 2008 and early 2009, and again during the overall weak 4Q-2012).

– The Federal government’s “shutdown” subtracted roughly 1% from the fourth quarter’s reported growth rate. Since it is likely that some part of the reduced spending was actually only deferred (rather than foregone), we had expected a sharp “bounce-back” in Federal spending in 1Q-2014. While that did occur to some extent in the non-defense portions of the Federal budget, it was offset by ongoing cutbacks in defense spending and shrinking state and local expenditures on infrastructure.

– Although real household income improved somewhat (at a respectable real 1.22% annualized rate), it is still below levels seen in the fourth quarter of 2012. It bears repeating that total aggregate real per-capita income growth since the second quarter of 2008 has been just 1.04% — an average annualized growth rate of just 0.19% during the entire “recovery.” The household savings rate is down over 2.5% since the fourth quarter of 2012, and it remains well below the historical long term savings rate.

– The growth in consumer spending was caused by increased household costs for non-discretionary services — healthcare, housing, utilities and financial services (e.g., rising interest rates). Spending on goods remained essentially flat, with the “growth” in consumer services spending coming once again mostly out of savings — which is unsustainable over the long haul.

– Most of the increasing spending on services was channeled/transferred to large-cap corporate America. Discretionary spending at shops on “Main Street” America — the quickest source of economic growth or new jobs — is under renewed (and probably unrelenting) pressure.

– The headline growth rate is likely enhanced by an understatement of inflation. Even using BLS data to “deflate” the nominal data results in a contracting headline number, while using data from the BPP to deflate the data results in an eye-opening -2.5% contraction rate.

Enjoy this (barely) positive headline number while it lasts. Even if it survives the next two months of revisions, the economic momentum signaled by the past two quarters will likely carry the headline number into the red in the very near future.

Wow, that’s a lot of bad news under the surface of what was already a disappointing headline. Especially interesting is the size of the drop in GDP the US would have seen if it was using honest inflation numbers. Which is no doubt why we don’t use honest numbers.

Now the question is how much of this multi-faceted weakness was weather-related and destined to be reversed when the Spring sun brings out all the latent shoppers and home buyers. Time will tell. But for now, the contrast between a stalling economy and soaring stock prices is pretty striking.

Visit John’s Dollar Collapse blog here >

Can We Say When It Will End? No. Can We Say That It Will End? Yes

Courtesy of Lance Roberts of STA Wealth Management

This morning I received a blog written by Brad DeLong which asked a simple question; why are people depressed about medium-term prospects for equity investments? He claims he doesn't understand the gloomy mindset. However, look at the evidence contradicts DeLong's underlying assumption about investor attitudes. And when we dig deeper, we find that history doesn't support his assumption about future market returns.

The title of his post suggests that MANY individuals are depressed about future equity returns which would suggest that investors are bearish and are hoarding cash. However, this is hardly the case when the majority of investors are fully invested and leveraged as shown in the two charts below.



There are only a few people, besides myself, that discuss the probabilities of lower returns over the next decade. Henry Blodget, the focus of the DeLong's post, Jeremy Grantham, Doug Short, Crestmont Research and John Hussman are the most notable.

 Let's jump into Brad's math.  He states:

"I see that stocks are likely to return:

  • 6%/year in real (inflation adjusted) terms,
  • plus or minus whatever changes we see in valuation ratios.

That means that if we expect to see P/E10 fall over the next decade from 25X to 19X then we can expect to see returns of 3%/year real–that is, 5%/year nominal. That means that if we expect to see P/E10 fall all the way back to 15X over the next decade, then we can expect to see returns of 1%/year real–that is 3%/year nominal. But that is unlikely to happen. And if P/E10 remains at its current valuation ratios, we have 6%/year real returns–8%/year nominal.

Equities still look very attractive to me…"

First, he makes the assumption that stocks will compound at 6% per year, every year, going forward.  This is a common mistake that is made in return analysis. Equities do not compound at a stagnant rate of growth but rather experience a rather high degree of volatility over time.

The chart below shows the S&P 500 as compared to annualized returns and the average of market returns since 1900.  Over the last 113 years, the market has NEVER had a 6% return. The two closest years were 6.94% in 1993 and 5.24% in 2005. If we give it a range of 5-7%, it brings the number of occurrences to a whopping three.

Assuming that markets have a set return each year, as you could expect from a bond, is grossly flawed. While there are many years that far exceeded the average of 6%, there are also many that haven't. But then again, this is why 6% is the "average" and NOT the "rule."


Secondly, and more importantly, the math on forward return expectations, given current valuation levels, does not hold up.  Brad assumes that valuations can fall without the price of the markets being negatively impacted.  History suggests, as shown in the next chart, that valuations do not fall without investment returns being negatively impacted to a large degree.


Furthermore, John Hussman recently did the "math" in this regard showing this to be true.

"Let’s assume that despite the weak economic growth at present, nominal GDP picks back up to a nominal growth rate of 6.3% annually from here. This may be overly optimistic, but near market peaks, optimistic assumptions often still result in troubling conclusions. Given the present market cap / GDP ratio of 1.25 and an S&P 500 dividend yield of just 2%, what might we estimate for total returns over the coming decade?

(1.063)(0.63/1.25)^(1/10) – 1.0 + .02 = 1.3% annually.

Since we use a whole range of additional measures, including earnings-based methods, to estimate prospective returns, our actual estimates are somewhat higher here, at about 2.4% annually over the coming decade. Tomato. Tom-ah-to. Keep in mind that these estimates assume a significant acceleration in economic growth. One can certainly quibble that the long-term ratio of market capitalization to GDP will have a somewhat higher norm in the future. But the present ratio is still 100% above its pre-bubble norm. It’s unlikely that this situation will end well.

The chart below shows the record of these estimates since 1949, along with the actual 10-year S&P 500 total returns that have followed."


As the Buddha taught, “This is like this, because that is like that.” Extraordinary long-term market returns come from somewhere. They originate in conditions of undervaluation, as in 1950 and 1982. Dismal long-term returns also come from somewhere – they originate in conditions of severe overvaluation. Today, as in 2000, and as in 2007, we are at a point where “this” is like this. So “that” can be expected to be like that."

Nominal GDP growth is likely to be far weaker over the next decade.  This will be due to the structural change in employment, rising productivity which suppresses real wage growth, still overly leveraged household balance sheets which reduces consumptive capabilities and the current demographic trends.

Therefore, if we assume a 4% nominal economic growth, the forward returns get much worse at -5.2%.

Brad is an extremely smart economist. However, the analysis makes some sweeping assumptions that are unlikely to play out in the future. The market is extremely volatile which exacerbates the behavioral impact on forward returns to investors. (This is something that is always "forgotten" in most mainstream analysis.)  When large market declines occur within a given cycle, and they always do, investors panic sell at the bottom.  

The most recent Dalbar Study of investor behavior shows this to be the case.  Since the inception of the study (1984), the S&P 500 has had an average return of 11.11% while equity fund investors had a return of just 3.69%.  This has much to do with the simple fact that investors chase returns, buy high, sell low and chase ethereal benchmarks. (Read "Why You Can't Beat The Index"The reason that individuals are plagued by these emotional behaviors, such as "buy high and sell low," is due to well-meaning articles espousing stock ownership at cyclical valuation peaks.

As I stated previously, the current cyclical bull market is not likely over as of yet. Momentum driven markets are hard to kill in the latter stages particularly as exuberance builds.  However, they do eventually end. That is unless Brad has figured out a way to repeal economic and business cycles altogether.  As we enter into the sixth year of economic expansion we are likely closer to the next contraction than not.  This is particularly the case as the Federal Reserve continues to extract its financial supports in the face of weak economic underpinnings.

Will the market likely be higher a decade from now?  A case can certainly be made in that regard.  However, if interest rates or inflation rises sharply, the economy cycles through normal recessionary cycles, or if Jack Bogle is right – then things could be much more disappointing. As Seth Klarman from Baupost Capital recently stated:

"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."

We saw much of the same analysis as Brad's at the peak of the markets in 1999 and 2007. New valuation metrics, IPO's of negligible companies, valuation dismissals as "this time was different," and a building exuberance were all common themes. Unfortunately, the outcomes were always the same. It is likely that this time is not different and while it may seem for a while that Brad analysis is correct, it is "only like this, until it is like that."


3D Printer Builds 10 Small Houses a Day for $5,000 Each

Courtesy of Mish.

Chinese construction firms can 3-D print 10 low-cost houses a day with machines that add layer after layer of quick-drying cement in a process called “contour crafting”.

A private company in east China recently used a giant printer set to print out ten full-sized houses within just one day.

The stand-alone one-story houses in the Shanghai Hi-Tech Industrial Park look just like ordinary buildings. They were created using an intelligent printing array in east China’s city of Suzhou.

The array consists of four printers that are 10 meters wide and 6.6 meters high and use multi-directional automated sprays. The sprays emit a combination of cement and construction waste that is used to print building walls layer-by-layer.

Ma Yihe, the inventor of the printers, said he and his team are especially proud of their core technology of quick-drying cement. Ma said he hopes his printers can be used to build skyscrapers in the future.

This technology allows for the printed material to dry rapidly. Ma has been cautious not to reveal the secrets of this technology.

MarketWatch provides this image of the 33 foot wide by 22 foot tall building.

To label aesthetics as “unappealing” would be a huge understatement. But what do you expect for a house that costs $5,000?

2,500 Sq Ft Printed Home

Using similar technology, and larger printers, MSN notes 3D Printer Can Build 2,500 Square Foot House in 24 Hours.

The University of Southern California is testing a giant 3D printer that could be used to build a whole house in under 24 hours.

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Japan’s manufacturing contracts for the first time in 14 months

Japan's manufacturing contracts for the first time in 14 months

Courtesy of

Japan's consumption tax hit the nation's manufacturing sector harder than economists had anticipated.

Markit: – Japanese manufacturing firms saw a decline in output for the first time in 14 months in April. Alongside this fall in output was a deterioration in new orders which also decreased for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax.

PMI < 50 = contraction (source:

Many of Japan's consumers are expected to stay out of stores for a while, having bought all they could prior to the tax hike (see story). The BOJ had factored some of that slowdown into their analysis. The full extent of the damage to the economy however remains uncertain.


The Fed’s Deadly Error: Penalties For Labor And Thrift; Windfalls For Speculation In Land And Financial Assets

Courtesy of Lee Adler of the Wall Street Examiner

There’s no law that says the stock market can’t have a major correction when central banks are pumping money into the system via the Primary Dealers. But in the 12 years since the Fed began publishing detailed data on its operations, and since I began observing those operations closely, the correlations between central bank liquidity flows and market movements have been undeniable. So I continue to feel that there will not be a major correction in stocks until the Fed and its cohorts are forced to change course.

That course change is inevitable, in my view. It is foreordained by the Fed’s history of once or twice a generation serial blunders. The current reactionary policy causes massive malinvestment and economic distortion. The unintended consequences of that are building. They will eventually rear their ugly heads and force a change. That change will be another counter-reaction to the current mistake. It will not correct that mistake, it will only deflect or spread the pain from one subset of victims to others. As Ben Bernanke himself said, “monetary policy has winners and losers.” The only constant seems to be a constantly growing pool of losers and a concentration of winnings in an ever smaller group as well. The Fed has chosen both the winners–bankers, speculators, financial engineers– and the losers–workers, savers, and retirees.

Fed Policy Effects- Capital Bubble, Labor Suppression - Click to enlarge

Fed Policy Effects- Capital Bubble, Labor Suppression – Click to enlarge

Most ironically,  neither the chosen winners nor the losers have deserved their fate. Not only is it bad policy. It is immoral, fostering moral hazard and punishing labor and thrift. A society built on such perverse incentives can not prosper and grow. There will be consequences.

For the time being, the negative consequences of current policy are invisible to the Fed. The most disastrous effect has been the steady, insidious destruction of the US and European middle class as distorted financial incentives result in the destruction of jobs, an ever growing labor surplus, suppression of returns to labor, and consequent destruction of mass purchasing power. Policy favors land and capital, mindless risk and speculation. It promotes outsized returns to speculative capital while labor is decimated. As prices of assets inflate to the stratosphere, gradually, gains to capital will become harder to come by. 

Meanwhile, there’s no inflation because Conomic Theory views only consumer prices and labor rates as subject to inflation. Land and capital don’t “inflate,” they “appreciate.” What bullshit. As long as conomists, central bankers in particular, have an excuse for not seeing the reality of rampant inflation because it is limited to land and capital, they have an excuse to continue a policy that slowly but surely destroys the value of work and pushes the income available to compensate labor ever lower.

Policy makers have been content to ignore or deny the fact that monetary policy has been a cause, if not the cause of the destruction of the middle class. They feel no pressure because of that. However, at some point this trend will begin to materially impact top line economic growth. At the same time, other negative consequences loom from the asset bubbles that policy has spawned. It’s only a matter of time for the central banks to be forced to face the sad consequences of their insanity. At that point, many speculators will get crushed and crony capitalists will suffer a few losses but as usual be protected from complete ruin or from even facing consequences for malfeasance. Worst of all, the steady destruction of the middle class will only accelerate.

The composite liquidity indicator surged to another new high last week (see below).

Composite Liquidity Indicator - Click to enlarge

Composite Liquidity Indicator – Click to enlarge

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. 

Karl Marx Makes a Comeback — And That’s Okay

Courtesy of John Rubino.

A perfect sign of the times is the unexpected success of a 700-page economics text called Capital in the 21st Century by French college professor Thomas Piketty. As of April 30, it is the best-selling book in the world and is generating the kind of controversy that one would expect for what is reportedly an updating of Marxist theory for the Internet age.

I haven’t read it, so can’t comment on the book itself. But the subject is a good springboard for a look at the actual tragedy of Karl Marx, which is that his ideas got tried out in the real world.

There are two parts to Marx’s main theory. One is a critique of capitalism as a system in which the guys who own factories and hire workers coalesce into an international class with a very specific set of goals: to drive workers’ wages down to just enough to keep them alive, to accumulate as much wealth as possible and to use that wealth to take over the political as well as the economic system. Eventually this process reaches a point where the 1% own pretty much everything, the 99% own virtually nothing, and the latter finally get fed up and take it all back for themselves. You get either a violent revolution or a political process that results in massive wealth taxes and comprehensive social programs to redistribute the capitalists’ ill-gotten gains.

So far, so good. This pretty much describes the period since 1971 when the world stopped basing their currencies on gold and began pouring trillions of newly-created, totally-unbacked dollars into a banking system that evolved from supporting real wealth creation to basically running everything for its own benefit. Bankers and their corporate and political allies accumulated vast fortunes while the rest of the world was pushed ever-further down the economic ladder. And now comes the revolution, with rising taxes and massive new entitlements in the developed world (see Obamacare in the US and a doubling of the sales tax in Japan) and violent revolutions in much of the developing world.

So Marx got this right and would be seen as a prophet if he’d stopped there. Unfortunately, he went on to predict that the revolt of the 99% would result in a “dictatorship of the proletariat” in which workers of the world abolished private property ran things so wisely that government would just fade away.

This is of course crazy, and when it was tried in the 20th century it failed with catastrophic consequences for the Soviet Union, China, and a long list of smaller but no less tragic countries. In case the reasons for this failure aren’t obvious, here are the two big ones:

1) You can’t eliminate ownership of property. If it exists, someone has to own it, and if private individuals don’t, then government does. Governments are run by people and people are infinitely corruptible, so giving politicians and bureaucrats the infinite power of total ownership necessarily, always and everywhere, produces dictatorship. You just end up replacing rapacious but creative international bankers with brutal and uncreative political hacks.

2) This economic vision is static. It says that today’s factories represent society’s “wealth” and that running them right and distributing the proceeds equitably produces a happy world. But a modern economy is dynamic. Today’s factories are constantly being surpassed by tomorrow’s, as entrepreneurs come up with better ways of doing things. This creative destruction is the real source of wealth and the reason that capitalist societies progress — in terms of product quality and cost, if not necessarily in good sense and compassion. Compare today to 1950 and, well, there’s no comparison. One would have to be insane to go back to a time before smart phones, stem cell therapies and the Internet.

To freeze progress by putting bureaucrats in charge of everything is, in effect, telling creative individuals not to bother working 16 hours a day and taking big risks to revolutionize biotech or microchips or solar power because even if they can get their ideas past the people who would be made obsolete, they (the inventors) won’t be rewarded for their efforts in any tangible way. So, as Ayn Rand explained in Atlas Shrugged, the creative class goes on strike and society stagnates.

The result: brutal dictatorships and the eventual dismissal of the Marxist ideas on which those societies are founded.

Which is too bad, because Marx’s critique of the modern world was right-on, and the first half of his scenario is playing out just as he predicted. Now the challenge is devising a monetary/financial reset that brings the 99% back into the game without producing a stagnant dictatorship. It will help if we understand why it’s happening.

Visit John’s Dollar Collapse blog here >

I’m Shocked, Shocked!

I’m Shocked, Shocked!


Technology-land is abuzz these days about net neutrality: the idea, supported by President Obama, (until recently) the Federal Communications Commission, and most of the technology industry, that all traffic should be able to travel across the Internet and into people’s homes on equal terms. In other words, broadband providers like Comcast shouldn’t be able to block (or charge a toll to, or degrade the quality of), say, Netflix, even if Netflix competes with Comcast’s own video-on-demand services.*

Yesterday, the Wall Street Journal reported that the FCC is about to release proposed regulations that would allow broadband providers to charge additional fees to content providers (like Netflix) in exchange for access to a faster tier of service, so long as those fees are “commercially reasonable.” To continue our example, since Comcast is certainly going to give its own video services the highest speed possible, Netflix would have to pay up to ensure equivalent video quality.

Jon Brodkin of Ars Technica has a fairly detailed yet readable explanation of why this is bad for the Internet—meaning bad for the choices available to ordinary consumers and bad for the pace of innovation in new types of content and services. Basically it’s a license to the cable providers to exploit a new revenue source, with no commitment to use those revenues to actually upgrade service. (With an effective monopoly in many metropolitan areas and speeds already faster than satellite, the local cable provider has no market pressure to upgrade service, at least not until fiber becomes more widespread.) The need to pay access fees will make it harder for new entrants on the content and services side; in the long run, these fees could actually be good for Netflix, since it won’t have to worry as much about competition. The ultimate result will be to lock in the current set of incumbents that control the Internet, ushering in the era of big, fat, incompetent monopolies.

Not only is this bad for consumers and for innovation, but it’s a reversal (or at least a severe watering-down) of the FCC’s earlier position on net neutrality, established in 2010 under a different FCC chair. Why did this happen? Well, look at this:


That’s from another article that Brodkin published yesterday, on the revolving door at the FCC. To summarize: Tom Wheeler, the current chair of the FCC, has previously been the CEO of the industry organizations for both the cellular industry (CTIA) and the cable industry (NCTA). The NCTA is currently headed by Michael Powell, a former chair of the FCC. The CTIA announced that its next CEO will be Meredith Attwell Baker. Her résumé goes like this: lobbyist for the CTIA; lobbying firms; National Telecommunications and Information Administration (part of the Department of Commerce), where she sided with Comcast against the FCC; FCC commissioner who voted for the Comcast-NBC merger (that’s Kabletown, for 30 Rock fans); head lobbyist for the NBC division of Comcast; and now CEO of the CTIA.

To put things in more familiar terms, this is roughly like Tim Pawlenty leaving the Financial Services Roundtable to become chair of the Federal Reserve and Ben Bernanke leaving the Fed to become head of the American Bankers Association, or Phil Gramm becoming a senior bank executive after shepherding the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act. (Wait, one of those things actually happened.)

Many business groups like to say that they are against regulation because of free market, big government, economic efficiency, consumer choice, blah blah blah. But in fact, the history of regulation is one of large incumbents (or well-funded, well-connected newcomers) buying politicians and using them to extract rents, raise barriers to entry, erect tariff barriers, and do other things to pad the bottom line. Very occasionally, like in 2009–2010, people sit up and take notice. But most of the time, the casino is open and everyone looks the other way.

* There’s a separate issue about peering deals between different parts of the Internet backbone, which conceptually is a net neutrality issue, but is not addressed by the FCC’s net neutrality rules.

The Conspiracy Behind the B of A “Mistake”

The Conspiracy Behind the B of A “Mistake”

By James Kwak

Some very clever people deep in the bowels of Bank of America’s accounting and regulatory compliance departments came up with a clever strategy to show, once and for all, that their bank is too big to manage. On Monday, the bank admitted that it had misplaced $4 billion in regulatory capital because of an error in accounting for changes in the value of its own debts. Coming less than two months after Citigroup misplaced $400 million in cold, hard cash in its Mexican subsidiary, this latest mixup is clearly part of a concerted campaign by employees of the big banks to definitively prove that their top executives have no idea what is going on.

This shadow lobbying campaign can be traced back to its origins in the LIBOR scandal (“Let’s rig the world’s largest market and see if Vikram Pandit notices.”) and the London Whale trade (“Let’s make a colossal bet on the relative values of different corporate bond indexes and see if Jamie Dimon notices.”). The only possible explanation for this seemingly never-ending stream of embarrassing disclosures is the existence of a conspiracy, orchestrated by some of the smartest bankers in the world, designed to broadcast to the world the message that regulators and politicians somehow failed to take from the financial crisis: the Masters of the Universe can’t even figure out what’s going on four floors down in their own buildings. The Bank of America accomplices even managed to miscalculate the bank’s regulatory capital for five full years before tipping off their bosses, showing the premeditation behind their scheme.

Or, the other possibility is that the banks are both incompetent and unmanageable. But that can’t be true, can it?

Separatism Spreads; Kiev Admits Losing Grip in Eastern Ukraine; Putin Threatens to Retaliate Against Sanctions

Courtesy of Mish.

Pro-Russia forces seized administration buildings in Horlivka today forcing Kiev to admit reality. Please consider Kiev Admits Losing Grip in Eastern Ukraine.

Ukraine’s acting president on Wednesday admitted that government authorities had lost control of the eastern Donetsk and Lugansk provinces to separatists, and said the challenge now was to “prevent terrorism from spreading to other regions”.

Oleksandr Turchynov also warned that pro-Russian groups were planning “subversive acts” in six other eastern and southern Ukrainian regions during Thursday’s May Day holiday, formerly one of the biggest events in the Soviet calendar for mass marches.

In Lugansk, capital of Ukraine’s easternmost province, gunmen were on Wednesday in control of several government buildings after easily overpowering them late on Tuesday, using weapons and explosives from the state security headquarters, which they seized control of earlier this month.

Lugansk’s regional administration building was also in separatist hands after a crowd easily seized control on Tuesday from police, who remained in the building and surrendered control. Residents of the depressed mining city, population 450,000, approached men guarding the building with gifts of cigarettes.

“We saw policemen in anti-riot gear guarding the building, but they didn’t put up any resistance to the occupiers,” Andrea Cellino, leader of an Organisation for Security and Co-operation in Europe monitoring team in Lugansk who witnessed Tuesday’s government building takeover. “The population is mostly either sympathetic or openly supports the occupiers and their motives.”

Ukraine Vows to Stanch Separatism

Bloomberg reports Ukraine Vows to Stanch Separatism as Militants Spread

Ukraine’s acting president vowed to create a special police force to staunch the spread of separatism in the country’s east, vowing to overcome unrest he says is stoked by Russia and hold an election slated for May 25.

As part of a creeping campaign by pro-Russian militants across Ukraine’s east, armed men seized government buildings in the city of Horlivka today, while news service Unian reported a member of the Donetsk electoral commission was kidnapped by “terrorists.” The U.S. and EU say Putin’s government is helping the separatists to destabilize the country of 45 million people in the run-up to next month’s presidential ballot in their worst standoff with Russia since the Cold War.

“Our first and main task is to prevent the spread of the terrorist threat to other regions,” Ukraine’s acting President Oleksandr Turchynov said in Kiev today. “Because there is a real threat of Russia starting a continental war, our army is on full combat alert.”

About 1,000 gunmen have seized buildings in more than 10 cities in eastern Ukraine, according to the country’s Interior Ministry. About 20 seized the Horlivka city council and regional police headquarters today, Interfax said. Yesterday, hundreds of activists wielding sticks and waving Russian flags stormed the Luhansk regional administration.

Putin Threatens to Retaliate Against Sanctions

Europe wants to “do something” as long as it does not cost anything, an impossible challenge. For example, European Commission President Jose Manuel Barroso said today that officials should make sure any future actions don’t harm the European economy.

Meanwhile, Putin Threatens to Retaliate for Sanctions.

President Vladimir Putin’s threats to retaliate for further sanctions on Russia set the stage for escalating economic warfare that may have painful effects for U.S. and European companies.

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SEC Chair Says Markets Are Not Rigged Versus SEC Diagram Showing How the Market Is Rigged

Courtesy of Pam Martens.

SEC Chair, Mary Jo White, Testifies on Rigged Markets Before the House Financial Services Committee on April 29, 2014

The scene in the House Financial Services Committee hearing yesterday was surreal. After Mary Jo White bluntly told the panel that “The markets are not rigged,” (countering heavily publicized charges made by bestselling author Michael Lewis in his new book, “Flash Boys,” as well as a host of key market participants) members of Congress continued to ask about specific forms of market rigging that they know to be happening. While White refused to acknowledge that this obvious wrongdoing was occurring on her watch, she insisted repeatedly that these various non-problems were, nonetheless, being studied. Congressman David Scott from Georgia told White he sensed a lack of urgency on her part.

The remarks from Congressman Michael Capuano of Massachusetts were particularly heated and generally reflected the frustration with White’s responses from a large part of the Committee. Capuano said:

“Six years ago we had a humongous financial crisis — greatest in my lifetime, hopefully the last in my lifetime, we’ll see. Five years ago we passed a significant law to try to address some of the things that caused that crisis. Three years ago the SEC passed some proposed regulations, adopted proposed regulations, relative to credit rating agencies that came out of that Dodd-Frank bill – three years later those rules are still not finalized.

“A few years ago Supreme Court made a ruling that corporations are people and they can spend money any where they want…many of us asked the SEC to address that issue — to simply require corporations who make political donations to simply publicize them — and the SEC has now taken a walk on that request after several years of being asked.

“Recently you had one of your long term attorneys, who I understand is well respected within the agency, retire. At his retirement party, he basically criticized the SEC’s approach over the last several years as being too timid relative to enforcement actions against some of the biggest names on Wall Street, therefore leading to an attitude on Wall Street that what’s the big deal, we can get away with it; maybe pay a small fine relative to the rewards we reap.

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Debt Rattle Apr 30 2014: The Boy In The Bubble

Courtesy of The Automatic Earth.

Alfred Palmer Nose section of B-17F “Flying Fortress”, Douglas Aircraft, Long Beach, CA. October 1942

That’s how I feel these days, or I should say these years. Since the name of this site comes from Paul Simon’s song by that title, it comes easily. Funny enough, I watched one of the Making of Graceland docs on Sunday night, and then on Monday morning read that the grand small 70-year old songwriter has been arrested because his wife’s mother had called 911 for a domestic disturbance situation. Given that Edie Brickell is about a foot taller than Simon, that made me smile. All the more so because in the documentary he’s talking about how he’s not good at writing angry songs, and that’s why Graceland came out the way it did, instead of being filled with loud protests against the injustices of South Africa. But, he said, outside of my songs, I’m very capable of expressing my anger, and I do get angry. Got ya, Paul.

Personally, I perhaps find it harder to not get angry all the time, and try to channel it into expressing amazement at what I see around me in this bubble I find myself in. For instance, I’ve seen more than one person claim this week alone that London real estate is not in a bubble – because there’s just so much demand -. And then I read that the average price of a 3-bedroom house in London’s plushest neighborhoods has gone up in “value” by $8000 per week, $1150 per day, over the past year, which represents a 20% rise overall. But I’m supposed to believe that that’s not a bubble. That all those buyers who owe their fortunes to Russia’s energy bubble and China’s $14 trillion stimulus bubble somehow represent the new normal. Let’s see what lifelong Londoners have to say about that who are getting pushed out ever further from the city center.

And in the US, to my utter bewilderment, there’s a second Enron, 12 years after the demise of the first one. the ghost of Kenny-Boy haunts the hallways of Wall Street. I’d say there were quite a few faces outside of Kenny Lay and Jeffrey Skilling, like amongst regulators, who should have been looked at at the end of 2001. But to let it happen again?! TXU slash Energy Future Holdings goes broke with a $40 billion debt. And Bernie Madoff is still in jail?! It’s not always easy to define what exactly is wrong with America, but whatever it is, it’s huge. The largest leveraged buy-out in history gambled on gas prices, and they lost. Investors thought they’d make a killing and got killed. Check your pension fund, I’d say. If only because Energy Future CEO John Young had this comment: “We are pleased to have the support of our key financial stakeholders for a consensual restructuring .. [..] We fully expect to continue normal business operations during the reorganization.” These guys lost $40 billion at the crap table, and they’re allowed to restructure, stiff junior investors, and get more loans? Where’s this going?

In the energy corner, there’s shale. Automatic Earth readers have known for a long time what shale is really about: land speculation. But how many other people realize that? The entire industry runs on junk debt, and you know what the collateral is? Land. Which is supposed to deliver enormous profits through the resources underneath it. But never quite does. I’ve asked it before: why do you think Shell and Exxon quit shale to the extent that they did, two companies who would kill their CEO’s grandma’s for some proven reserves? Bloomberg spells it out neatly:

Shale Drillers Feast on Junk Debt to Stay on Treadmill (Bloomberg)

The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays.

That’s what keeps the shale revolution going even as companies spend money faster than they make it. “There’s a lot of Kool-Aid that’s being drunk now by investors,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Peritus Asset Management.

“People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.” Rice Energy was able to borrow so easily because of the quality of its assets, which are in some of the best areas of the Marcellus, a shale formation beneath western Pennsylvania and West Virginia, and the company’s drilling success there, said Gray Lisenby, Rice’s chief financial officer. [..]

“Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?” Ivan Sandrea, a research associate at the Oxford Institute for Energy Studies in England, wrote in a report last month. “The benevolence of the U.S. capital markets cannot last forever.” The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London. Since output from shale wells drops sharply in the first year, producers have to keep drilling more and more wells to maintain production. That means selling off assets and borrowing more money. “The whole boom in shale is really a treadmill of capital spending and debt,” Chauhan said.

“It’s a perfect set-up for investors to lose a lot of money,” Gramatovich said. “The model is unsustainable.”

Not a bubble? I’m not a vindictive person, but sometimes I think people deserve what they get. Serves them right for not reading The Automatic Earth. Shell has written off billions in its investments in shale, this morning it announced a drop in net profit of -45%, and you still think Shell wouldn’t be all over this if it could find a way to make a buck? At least you must admit this article makes the claims of exporting US oil and gas look even funnier than they already did. And like with Enron and TXU, you should wonder who the people in government are that allow for this kind of trickery to happen.

And then, timely ahead of Fed announcements later today, David Stockman tells it like it is:

The Fed Is Fueling The Century’s ‘Greatest Bubble’

The Fed is “a posse of academic zealots and unreconstructed Keynesians who think debt is the magic elixir, and they won’t stop printing money and putting their foot on the floorboard until they really blow something up …” At this point, his biggest concern is the impact that the Fed’s stimulative policies have had on equities. “I think the Fed is now inflating the greatest and third bubble yet of this century [..] The Russell 2000, even though it’s come off a little bit, is still trading at 80 time trailing earnings. That’s crazy, and you can say that about many other sectors of the market.” “What we need to do is get the Fed out of there, free interest rates, let the money market find the natural balance and purge some of this enormous speculation …”

There are people who know a bubble when they see one. But not everyone does, and it’s not in everyone’s interest either. Politicians can be made to look good inside a bubble, and businessmen can make a lot of money off the public purse. And you yourself get to feel for a fleeting moment in time as if you’re richer than you actually are. Because make no mistake about it, when this bubble bursts, it’s going to hurt. A lot worse than the last one. A comment in the Guardian on the “benefits” of austerity said: “… how does the logic of austerity sound in Britain? The country is richer, but its people are poorer. This now counts as a recovery.” That is a nice way to put it. Except that the country, too, will be poorer after the bubble pops, and a lot. And that will, of course, make the people poorer too. A lot.

There are lots of you, probably most, who like to live in a bubble. As long as you don’t feel forced to see it for what it is. It’s like the Truman Show. Exactly like that. But I know full well I live in a bubble. And I want to get out. It’s suffocating. Because I know what’s going to happen once it bursts, and it will, and the longer that takes, the worse the outcome will be. For the man in the street. Who I care more for than for those who seek only money or power. That, after all, is why there’s an Automatic Earth. Unlike the original boy in the bubble, you and I are not going to drop dead as soon as the bubble bursts. But just like him, the bubble keeps us from experiencing real human contact. That’s a huge price to pay. It’s not all that great to be a boy in a bubble. I should know.

Elizabeth Warren Exposes Larry Summers: The Game Is Rigged

Courtesy of Larry Doyle.

Why is it that our nation does not have real statesmen in public service?  Why is it that very real corruption and scandal — legal and otherwise — have gained a stranglehold on our political process? Why is it that an SEC attorney states at his retirement sendoff that “the system is broken?”

Say what you want about Senator Elizabeth Warren (D-MA), her politics, and her personal foibles, but she provides a national public service in exposing the fraud that is disguised as Washington politics in her new book, A Fighting Chance.

Credit to The New York Times’ acclaimed financial journalist Gretchen Morgenson for launching into the charades played by those in Washington who profit personally while America grows increasingly disenchanted if not totally disgusted. Senator Warren uses the same term to characterize our political process as recently used by Michael Lewis in describing our equity markets.

“The game is rigged and the American people know that. They get it right down to their toes.” 

Morgenson draws further attention to Warren’s work and specifically this revealing passage in which the senator from Massachusetts exposes one Larry Summers:

A telling anecdote involves a dinner that Ms. Warren had with Lawrence H. Summers, then the director of the National Economic Council and a top economic adviser to President Obama. The dinner took place in the spring of 2009, after the oversight panel had produced its third report, concluding that American taxpayers were at far greater risk to losses in TARP than the Treasury had let on.

After dinner, “Larry leaned back in his chair and offered me some advice,” Ms. Warren writes. “I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.

“I had been warned,” Ms. Warren concluded.

When honest public debate and dialogue is stifled, the fertile ground for scandal, corruption, and payoffs under the guise of politics is enriched.

Make no mistake, the American public suffers tremendously under this construct. Not that this pathetic and corrosive reality is anything new but at what point does the American public say, “ENOUGH!!

I would only hope that a massive anti-incumbent and anti-corruption movement develops in our country and sweeps the land. While the media can direct enormous focus on stories that play on our sense of public decency, the simple fact is under the current construct in Washington, we are getting screwed in spades each and every day.

Major props to Warren for exposing the “way the game is played” that leads to the fleecing of the American public. Major props to Gretchen Morgenson for giving Warren’s work an elevated platform.

Where is the rest of the media to further expose the likes of Larry Summers and the other phonies who present themselves as supposed leaders but are cloaked in the money and power that has little meaningful connection to this land we call America?

We are long overdue to clean out the Washington sty and throw these pigs and bums out!

Simply Irresistible

By Paul Price of Market Shadows

I added two new put positions today, selling puts in these high quality, old favorites: Bed Bath & Beyond (BBBY) and Coach (COH). These two are too cheap to resist for put writing purposes.

We sold two contracts of the BBBY Jan. 2016, $60 strike price puts @ $6.40 per share for our Virtual Put Writing Portfolio.

BBBY  Jan. 2016  $60 Puts


Break-even on this new BBBY trade becomes $53.60 ($60 strike price – $6.40 put premium). That is below the absolute low prices touched in all of 2012, 2013 and 2014 YTD. Sales, earnings and cash flow have been rising even as the share price has been regressing.


BBBY Jan. 1, 2012 - Apr. 29, 2014


Coach shares got crushed yesterday after reporting better than expected March quarter results. Today’s further dip into the $44’s made selling a pair of new LEAP puts irresistible. We added two contracts of the Jan. 2016, $45 strike price puts @ $7.40 per share.


COH Jan. 2016  $45 Put as of Apr. 30, 2016


The ‘If Put’ price drops all the way down to $37.60 ($45 strike price – $7.40 put premium). As with BBBY, that net ‘if exercised’ price is beneath all recent years’ actual lows. With Coach, the ‘If Put’ price has not been seen since 2010.


COH  Jan. 1, 2012 - Apr. 29, 2014

Follow all Market Shadows’s closed-out and current option trades by clicking here Virtual Put Writing Portfolio.

For a fuller discussion of Coach’s prospects click on the link below

The only positive take you are likely to see on Coach this week.

Japan Output and New Orders Decline at Fastest Pace Since 2012; Abenomics in Review

Courtesy of Mish.

Abenomics said Japanese stimulus efforts would offset tax hikes. I disagreed. Although one month is not proof, Markit reports Japanese Output and New Orders Decline For First Time in 14 Months Following Tax Hike

Key points:

Output falls at fastest pace since December 2012
New orders also down; exports decline slightly
Rate of job creation accelerates to highest since February 2007

Summary: Japanese manufacturing firms saw a decline in output for the first time in 14 months in April. Alongside this fall in output was a deterioration in new orders which also decreased for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax.

The headline seasonally adjusted Markit/JMMA Purchasing Managers’ Index™ (PMI™ ) – a composite indicator designed to provide a single – figure snapshot of the performance of the manufacturing economy – posted at 49.4 in April, down from 53.9 in March. This was the first time in 14 months that the Japanese manufacturing sector saw a deterioration in business conditions. Output fell to the greatest extent seen since December 2012.

The main contributor according to anecdotal evidence was a decline in demand. Indeed, similar to output, new orders decreased, with evidence suggesting the increase in the sales tax was the main factor behind lower new orders, as clients had brought forward purchases in March to avoid paying additional costs the following month.

Japan Manufacturing PMI

Abenomics in Review

One month does not present a complete picture. However, Abenomics has so far resulted in a declining Japanese balance of trade, inflation (foolishly wanted), little to no increase in exports, and soaring import costs (especially food and energy).

For those results, many leading world economists think prime minister Shinzo Abe is a hero. In contrast, I think he is a fool.

Mike “Mish” Shedlock

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China to Surpass USA as World’s Largest Economy THIS YEAR

Courtesy of George Washington

Financial Times reports:

The US is on the brink of losing its status as the world’s largest economy, and is likely to slip behind China this year, sooner than widely anticipated, according to the world’s leading statistical agencies.

This is – rightly – front page news (hat tip to Drudge for the headline):

But this is not entirely surprising.

As we reported in April 2012, leading Chinese economic analyst (and American ex-pat) professor Michael Pettis argued in 2011 that China’s GDP might already higher than America’s in terms of purchasing power parity.

And we noted that Arvind Subramanian – former assistant director in the Research Department of the International Monetary Fund, and now senior fellow jointly at the Peterson Institute for International Economics – says that China passed up the USA in 2010.


Via FT: China poised to pass US as world’s leading economic power this year

The ECB betting on “creditless” recovery

The ECB betting on "creditless" recovery

Courtesy of

The story from the Eurozone is beginning to sounds like a broken record. The area's monetary conditions continue to tighten as the Eurosystem's balance sheet shrinks. 

Eurosystem total balance sheet (source: ECB)

The decline is driven by banks' deleveraging, as the LTRO balances decline.

LTRO balances (source: ECB)

As a result of bank deleveraging, loans to area's households are now growing at merely 0.4% per year,

Loan growth to households (YoY; source: ECB)

… while loans to Eurozone's businesses are falling at over 3% per year.

Loan growth to companies (YoY; source: ECB)

This has resulted in the overall decline in private loans of 2.2% from a year ago, which was worse than economists had expected. With credit contraction continuing, it is not a surprise that the broad money supply growth has stalled at just over 1% a year.

M3 broad money supply growth (YoY; source: ECB)

According to some however, these trends do not matter much because the Eurozone is simply undergoing a "creditless" recovery. We are supposedly paying too much attention to credit growth. The ECB will simply stay on the sidelines and watch the area's economy blossom.

WSJ: – But if the banking system is in poor shape, why are policy makers increasingly optimistic about the recovery? 

Part of the answer is that too much focus is being placed on credit growth

One in five recoveries is "creditless" according to a 2011 International Monetary Fund working paper. Credit growth remained very subdued for several years during the recovery from Sweden's financial crisis in the early 1990s, according to J.P. Morgan research. U.K. bank lending is only now starting to pick up, more than a year after a strong recovery began. 

The early stages of a recovery are funded from income and savings rather than new debt. Indeed, continued deleveraging is inevitable as loans issued during the boom are repaid. 

More importantly, there is encouraging evidence that the ECB's ongoing "comprehensive assessment" of bank balance sheets is having a cathartic effect.

Of course Japan too had a "creditless" recovery – until it didn't. But let's not make such silly comparisons.


Ukraine Separatists Seize Another Local Government Headquarters; Two Points of View; EU Expands Sanction List by 15

Courtesy of Mish.

Making it readily apparent that no one has any control over the separatists, nor can anyone speak for them, Separatists Seize Another Local Government HQ in Ukraine.

Hundreds of pro-Russian separatists seized the regional government headquarters in Luhansk on Tuesday, unopposed by police, underlining the lack of control of central government over swathes of eastern Ukraine.

Lines of riot police surrounded the back of the building, facing hundreds of men and women. At the front, dozens of men, some in green camouflage and holding shields, walked into the imposing, white building, while others smashed windows and raised the Russian tricolor.

The government in Kiev has all but lost control of its police forces in parts of eastern Ukraine since pro-Russian activists seized buildings in the region’s second biggest city of Donetsk and several smaller towns.

In separatist-held Slaviansk, the self-declared mayor said he would discuss the release of detained military observers only if the European Union dropped sanctions against rebel leaders.

“The regional leadership does not control its police force,” said Stanislav Rechynsky, an aide to Interior Minister Arsen Avakov, referring to events in Luhansk where separatists had earlier only occupied the local security services’ building.

“The local police did nothing.”

He added that the ministry had information that they would next try to take the local television center.

Ukraine’s authorities are struggling to find a way to evict the separatists, who also took a small town hall in Pervomaisk in the Luhansk region on Tuesday.

Separatists in Donetsk, eastern Ukraine’s second biggest city, have said they will hold a referendum on independence for the Donbass region on May 11.

That would undermine government efforts to hold a non-binding consultative referendum across Ukraine on May 25 or June 15, when the country votes for the president, to gauge appetite for the decentralization of power.

Two Points of View

Some claim Russia is orchestrating these events. Russia denies it. Which story is true? If Russia is not leading these efforts, then how is sanctioning Russia supposed to help?…

Continue Here

The Madison County Bridges In Nowhere And The Perennial Myth Of Crumbling Infrastructure

Courtesy of David Stockman via Contra Corner

Whenever the beltway bandits run low on excuses to run-up the national debt they trot out florid tales of crumbling infrastructure—that is, dilapidated roads, collapsing bridges, failing water and sewer systems, inadequate rail and public transit and the rest. This is variously alleged to represent a national disgrace, an impediment to economic growth and a sensible opportunity for fiscal “stimulus.”

But most especially it presents a  swell opportunity for Washington to create millions of “jobs.” And, according to the Obama Administration’s latest incarnation of this age old canard, it can be done in a fiscally responsible manner through the issuance of “green ink” bonds by a national infrastructure bank, not “red ink” bonds by the US Treasury. The implication, of course, is that borrowings incurred to repair the nation’s allegedly “collapsing” infrastructure would be a form of “self-liquidating” debt. That is, these “infrastructure” projects would eventually pay for themselves in the form of enhanced national economic growth and efficiency.

Except that the evidence for dilapidated infrastructure is just bogus beltway propaganda cynically peddled by the construction and builder lobbies. Moreover, the infrastructure that actually does qualify for self-liquidating investment is overwhelmingly local in nature—urban highways, metropolitan water and sewer systems, airports. These should be funded by users fees and levies on local taxpayers—not financed with Washington issued bonds and pork-barreled through its wasteful labyrinth of earmarks and plunder.

Nowhere is the stark distinction between the crumbling infrastructure myth and the factual reality more evident than in the case of the so-called deficient and obsolete bridges. To hear the K-Street lobbies tell it—-motorist all across American are at risk for plunging into the drink at any time owing to defective bridges.

Even Ronald Reagan fell for that one. During the long trauma of the 1981-1982 recession the Reagan Administration had stoutly resisted the temptation to implement a Keynesian style fiscal stimulus and jobs program–notwithstanding an unemployment rate that peaked in double digits. But within just a few months of the bottom, along came a Republican Secretary of Transportation, Drew Lewis, with a Presidential briefing on the alleged disrepair of the nation’s highways and bridges. The briefing was accompanied by a Cabinet Room full of easels bearing pictures of dilapidated bridges and roads and a plan to dramatically increase highway spending and the gas tax.

Not surprisingly, DOT Secretary Drew Lewis was a former governor and the top GOP fundraiser of the era. So the Cabinet Room was soon figuratively surrounded by a muscular coalition of road builders, construction machinery suppliers, asphalt and concrete vendors, governors, mayors and legislators and the AFL-CIO building trades department. And if that wasn’t enough, Lewis had also made deals to line up the highway safety and beautification lobby, bicycle enthusiasts and all the motley array of mass transit interest groups.

They were all singing from the same crumbling infrastructure playbook. As Lewis summarized, “We have highways and bridges that are falling down around our ears—that’s really the thrust of the program.”

The Gipper soon joined the crowd. “No, we are opposed to wasteful borrow and spend”, he recalled,”that’s how we got into this mess. But these projects are different. Roads and bridges are a proper responsibility of government, and they have already been paid for by the gas tax”.

By the time a pork-laden highway bill was rammed through a lame duck session of Congress in December 1982, Reagan too had bought on to the crumbling infrastructure gambit. Explaining why he signed the bill, the scourge of Big Government noted, “We have 23,000 bridges in need of replacement or rehabilitation; 40 percent of our bridges are over 40 years old.”

Still, this massive infrastructure spending bill that busted a budget already bleeding $200 billion of red ink was not to be confused with a capitulation to Keynesian fiscal stimulus. Instead, as President Reagan explained to the press when asked whether it was a tax bill, jobs bill or anti-recession stimulus, it was just an exercise in prudent governance: “There will be some employment with it, but its not a jobs bill as such. It is a necessity…..(based) on the user fee principle–those who benefit from a use should share its cost”.

Needless to say, none of that was remotely true. Twenty percent of the nickel/gallon gas tax increase went to mass transit, thereby breeching the “user fee” principle at the get-go, and paving the way for endless diversion of gas taxes to non-highway uses. Indeed, today an estimated 40% of highway trust fund revenues go to mass transit, bicycle paths and sundry other earmarks and diversions.

More importantly, less than one-third of the $30 billion authorized by the 1982 bill went to the Interstate Highway System—the ostensible user fee based national infrastructure investment. All the rest went to what are inherently local/regional projects—-state highways, primary and secondary roads, buses, and mass transit facilities.

And this is where the tale of Madison County bridges to nowhere comes in; and also where the principle that local users and taxpayers should fund local infrastructure could not be more strikingly illustrated.

It seems that after 32 years and tens of billions of Federal funding that the nations bridges are still crumbling and in grave disrepair. In fact, according to DOT and the industry lobbies there are 63,000 bridges across the nation that are “structurally deficient”, suggesting that millions of motorists are at risk for a perilous dive into the drink.

But here’s the thing. Roughly one-third or 20,000 of these purportedly hazardous bridges are located in six rural states in America’s mid-section: Iowa, Oklahoma, Missouri, Kansas, Nebraska and South Dakota. The fact that these states account for only 5.9% of the nation’s population seems more than a little incongruous but that isn’t even half the puzzle. It seems that these thinly populated country provinces have a grand total of 118,000 bridges. That is, one bridge for every 160 citizens—men, women and children included.

And the biggest bridge state among them is, well, yes, Iowa. The state has 3 million souls and nearly 25,000 bridges–one for every 125 people. So suddenly the picture is crystal clear. These are not the kind of bridges that thousands of cars and heavy duty trucks pass over each day. No, they are mainly the kind Clint Eastwood needed a local farm-wife to locate—so he could take pictures for a National Geographic spread on covered bridges.

Stated differently, the overwhelming bulk of the 600,000 so-called “bridges” in America are so little used that the are more often crossed by dogs, cows, cats and tractors than they are by passenger motorists.  They are essentially no different than local playgrounds and municipal parks. They have nothing to do with interstate commerce, GDP growth or national public infrastructure.

If they are structurally “deficient” as measured by engineering standards that is not exactly a mystery to the host village, township and county governments which choose not to upgrade them. So if Iowa is content to live with 5,000 bridges—one in five of its 25,000 bridges— that are deemed structurally deficient by DOT, why is this a national crisis? Self-evidently, the electorate and officialdom of Iowa do not consider these bridges to be a public safety hazard or something would have been done long ago.

The evidence for that is in another startling “fun fact” about the nation’s bridges.  Compared to the 19,000 so-called “structurally deficient” bridges in the six rural states reviewed here, there are also 19,000 such deficient bridges in another group of 35 states–including Texas, Maryland, Massachusetts,  Virginia, Washington, Oregon, Michigan, Arizona, Colorado, Florida, New Jersey and Wisconsin, among others. But these states have a combined population of 175 million not 19 million as in the six rural states; and more than 600 citizens per bridge, not 125 as in Iowa.

Moreover, only 7% of the bridges in these 35 states are considered to be structurally deficient rather than 21% as in Iowa. So the long and short of it is self-evident: Iowa still has a lot of one-horse bridges and Massachusetts— with 1,300 citizens per “bridge”— does not. None of this is remotely relevant to a national infrastructure crisis today—any more than it was in 1982 when even Ronald Reagan fell for “23,000 bridges in need of replacement or rehabilitation”.

Yes, the few thousands of bridges actually used heavily in commerce and passenger transportation in American do fall into disrepair and need  periodic reinvestment. But the proof that even this is an overwhelmingly state and local problem is evident in another list maintained by the DOT.

That list would be a rank ordering called “The Most Travelled Structurally Deficient Bridges, 2013″. These are the opposite of the covered bridges of Madison County, but even here there is a  cautionary tale. It seems that of the 100 most heavily traveled bridges in the US by rank order, and which are in need of serious repair, 80% of them are in California!

Moreover, they are overwhelmingly state highway and municipal road and street bridges located in Los Angeles, Orange County and the Inland Empire. Stated differently, Governor Moonbeam has not miraculously solved California endemic fiscal crisis; he’s just neglected the local infrastructure. There is no obvious reasons why taxpayers in Indiana or North Carolina needed to be fixing California’s bridges— so that it can continue to finance its outrageously costly public employee pension system.

And so it goes with the rest of the so-called infrastructure slate. There is almost nothing there that is truly national in scope and little that is in a state of crumbling and crisis.

Indeed, the one national asset—the Interstate Highway System—is generally in such good shape that most of the “shovel ready” projects on it during the Obama stimulus turned out to be resurfacing projects that were not yet needed and would have been done in the ordinary course anyway, and the construction of new over-passes for lightly traveled country roads that have happily been dead-ends for decades.

One thing is clear. The is no case for adding to our staggering $17 trillion national debt in order to replace the bridges of Madison county; or to fix state and local highways or build white elephant high speed rail systems; or to relieve air travelers of paying user fees to upgrade local airports or local taxpayers of their obligation to pay fees and taxes to maintain their water and sewer systems.

At the end of the day, the ballyhooed national infrastructure crisis is a beltway racket of the first order. It has been for decades.

Here is the bridge data in all its splendid detail!



The following table shows the ranking of states according to number of deficient bridges (left hand side) and percentage of bridges defective (right hand side):

Click to enlarge

State Bridge Rankings from artba

The nation’s 250 most heavily traveled bridges in need of repair are ranked in the following table:

Click to enlarge

Investing is a Bizarro World

By Paul Price of Market Shadows

Bizzaro World Comic cover

Three separate brokerage firms decided Boardwalk Pipeline Partners (BWP) had risen enough to finally get interested in buying again. God forbid they would have told anyone to buy near the multi-year low.

BWP upgrades  Apr. 29, 2014

The MLP’s units (similar to shares) have now gone up about 37.5% since hitting $11.99 in mid-March.

As of 3:05 PM on Tuesday BWP was trading for $16.50.

High Frequency Trading Is Not Like a First Class Airline Ticket – Unless You Have Also Hijacked the Plane and Robbed the Passengers in Coach

Courtesy of Pam Martens.

Mary Jo White, the Chair of the Securities and Exchange Commission, will appear before the House Financial Services Committee this morning at 10 a.m. to boast about the past year’s accomplishments at the SEC and possibly handle a few queries about the growing public perception that stock markets are rigged. 

White’s appearance before a Congressional panel comes at a time when the SEC is undergoing a serious discrediting of its oversight of Wall Street. Earlier this month, James Kidney, an SEC trial attorney who retired at the end of March, unleashed a firestorm of negative attention on morale inside the SEC. In a March 27 retirement speech, Kidney criticized upper management for policing “the broken windows on the street level” while ignoring the “penthouse floors.” Kidney blamed the demoralization at the agency on its revolving door to Wall Street as the best and brightest “see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched.” (Retirement Remarks of SEC Attorney, James Kidney (Full Text).) 

It also does not help White’s credibility that a self-regulatory body overseen by the SEC, the Financial Industry Regulatory Authority (FINRA), has an enforcement chief suffering from foot in mouth disease.

Last week Megan Leonhardt, writing at, tipped off the public that J. Bradley Bennett, Executive Vice President of Enforcement at FINRA, suggested that high frequency trading was no different than buying a first class ticket on an airplane. (Both Bradley and White previously worked for big Wall Street go-to law firms: Bradley at Baker Botts, White at Debevoise and Plimpton.)  

What exactly is high frequency trading? As thoroughly detailed in the new Michael Lewis book, “Flash Boys,” and previously detailed in Wall Street Journal reporter Scott Patterson’s book, “Dark Pools,” and exquisitely explained for years by the brilliant Eric Hunsader of Nanex, as well as those courageous fellows, Sal Arnuk and Joseph Saluzzi at Themis Trading, high frequency trading is a rigged game where big money buys computer speed, hires physicists and programmers to design ever more complex algorithms and artificial intelligence programs which then ply their wares on U.S. stock exchanges to loot the pockets of ordinary investors.

Here is what is currently happening every day on Wall Street by high frequency traders. See if any part of this sounds to you like simply buying a first class seat on an airplane:

Continue Here


Debt Rattle Apr 29 2014: Economists Are Stupid, Useless And Dangerous

Courtesy of The Automatic Earth.

Andreas Feininger Production of B-17 Flying Fortress bomber, Seattle March 1936

Economists are stupid because they have studied economics. Which doesn’t mean they weren’t born stupid, but that’s hardly relevant. Economists are useless because, well, they have studied economics. And economists are dangerous because they have studied economics, and people still listen to them; entire government policies are built around what they say. Now, you may think: isn’t that a bit harsh?, but don’t worry, I have proof.

In economics, growth is regarded as a physical law, similar to gravity. Never mind that in physics, eternal growth is prohibited. If there occurs an absence of growth in an economic system, it must be, by default, because the wrong policies have been applied. Economists will then prescribe the right policies. After which growth is certain to return. Unless the right policies turn out to be wrong, in which case the right policies will be applied. It’s foolproof. This set of ideas can lead to hilarious statements. Which would be quite alright if they were exclusively meant for entertainment purposes, but we have no such luck.

The Associated Press apparently conducts a monthly survey of a group of 30 economists – carefully selected, no doubt -, something Bloomberg can’t get enough of either for some reason, even if the predictions provided are far too often plain embarrassing. But this is the AP survey:

Economists Back Increased US Oil And Gas Exports

Whether to allow more exports of U.S. oil and natural gas has become a matter of political debate in Washington. But to economists, the answer is clear: The nation would benefit. The vast majority of economists surveyed this month by The Associated Press say lifting restrictions on exports of oil and natural gas would help the economy even if it meant higher fuel prices for consumers. More exports would encourage investment in oil and gas production and transport, create jobs, make oil and gas supplies more stable and reduce the U.S. trade deficit, they say.

As domestic energy production has boomed, drilling companies have pushed to be allowed to sell crude oil and natural gas overseas, where they can command higher prices. Such exports are restricted by decades-old energy security regulations. Those opposed to opening trade say exports could make it more expensive for Americans to heat their homes and fill up their cars. But even economists who think exports might increase fuel prices for U.S. consumers — an open question — say the overall benefit to the economy would outweigh any possible harm.

It would be better to allow the exports and use tax breaks or other methods to help those struggling with higher prices, they say. “The economy in general is better off if we can sell something to someone and bring money into the economy,” said Jerry Webman, chief economist at Oppenheimer Funds. “I’d rather deal with any side effects directly than limit our ability to do business with the world.” The AP survey collected the views of private, corporate and academic economists on a range of issues. Of the 30 economists who participated, nearly 90% responded that more exports of oil and gas would help the U.S. economy. [..]

For economists, there is no such thing as a possible scarcity. And even if there were, that would just be something to maximize profits on. You could perhaps choose to keep it for yourself, but only if and when higher profits were ensured. One may need to presume that this panel of “experts” get their supply numbers from the industry and possibly the EIA (but now I’m repeating myself). And as for the 3 or 4 “dissidents”, they have AP Energy Writer Jonathan Fahey to deal with:

Robert Johnson, director of economic analysis at Morningstar, doesn’t embrace the idea of unfettered natural gas exports. “We’ve already got a few industries building on the concept that we’re going to have a long-term energy advantage here, and I’d hate to interrupt those plans,” Johnson said. He also argues that higher energy prices would disproportionally hurt those with lower incomes, who spend a relatively large portion of their paychecks on energy. That leaves them with less cash for other things, which, in turn, hampers consumer spending — by far the biggest portion of the U.S. economy.

Fahey is having no part of that. As long as it isn’t sure that exports raise prices, those dissidents should shut up. There’s money to be made, and growth to be targeted. And come on, when you need to make a choice between consumers and the economy, isn’t it obvious?

But it is far from clear that exports would raise fuel prices or eliminate the country’s competitive advantage. Exports are even less likely to affect prices of fuels made from oil, such as gasoline and diesel. U.S. crude oil prices have been about 10% cheaper than global oil prices in recent years. But consumers don’t enjoy most of that benefit because exports of gasoline and diesel are not restricted.

I find it strange to see discussions like this one. If it’s fine to let Americans pay more as long as the economy benefits, why not simply raise prices? Presumably that would grow the economy as well. And not addressing possible future scarcity issues is just as strange. I guess economists may have heard of peak oil, but discarded it because it doesn’t fit their models. And it probably won’t until a replacement for oil and gas is found. Have mercy on the lot of them if that fails to materialize.

It looks as if in that same survey, AP asked about China as well. Interestingly, the following article is not from Jonathan Fahey, whose list of specialties seems limited to not understanding energy issues, but from Chris Rugaber, presumably AP’s Asia expert.

China’s Lending Bubble Seen As Global Threat

Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it. That’s the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing’s high-stakes drive to reform its economy — the world’s second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run.

I find that confusing right off the bat. But then I’m not trained to see growth beneath every rock. And it gets weirder:

“They’ve really got to change the way they do business,” said William Cheney, chief economist at John Hancock Asset Management. “But they have a good track record of doing just that. I’m an optimist about their ability to make this transition.” The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.

Wait, China has “a good track record of changing the way they do business”? And we know that because they went from Communist to dollar store in record time, the last 6 years of which pumped by a $14 trillion government stimulus arrangement amplified by an $X trillion push from an absurdly highly leveraged underground finance system? And what do you mean “The source of concern is a surge in lending by Chinese banks.” Isn’t it a lot more than that? Isn’t the shadow banking system at least as mush of a concern, given that Beijing has a very hard time getting a grip on it? Oh, wait:

On Monday, the International Monetary Fund issued a warning about China’s private debt. It released a report citing “rising vulnerabilities” in China’s financial system, including lending outside traditional banks. Lending by that “shadow” banking system now equals one-quarter of China’s economy, the report said. The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments. If it continues, “this could spark adverse financial market reaction both in China and globally,” the IMF said. The bubble has caused land prices in China to double in five years, according to an estimate by Nomura, a Japanese bank. Outstanding credit surged from 130% of the economy in 2008 to 200% in 2013, according to a forecasting firm.

I read things like these two articles, and I find them terribly hard to understand, because all these questions pop into my head that I think need to be addressed, but then find they’re not. Here’s that IMF (all economists all the time) report as RT wrote it up:

Japan And China Threaten Asian Economic Growth: IMF

Asian growth will remain steady at 5.4% in 2014, however a steeper than expected slowdown in China and a failure in Japan’s “Abenomics” program could derail the region’s economic progress, says the IMF. Asia also faces risks from outside the region, including improving growth in the US, which could raise global interest rates the new IMF study said. “Bouts of capital flow and asset price volatility are likely along the way, with exchange rates, equity prices, and government bond yields affected by changes in global risk aversion and capital flows,” the IMF concludes.

The IMF raised its growth forecast for Asia this year due to a pickup in external demand alongside a recovery in advanced economies. Growth is also expected to improve slightly to 5.5% in 2015. Last year, the region grew 5.2%. However, the IMF predicts China will slowly decelerate to growth of 7.5% this year and 7.3% in 2015, to a “more sustainable path”.

A more sustainable path? Like what, Christine et al, 2%? Not what you had in mind, is it? That would break China. How about 4%? Would still break ‘em, but is also ridicules to label “sustainable”. Not that 2% is not, but I need to remember you’re economists and therefore confused about growth issues. I don’t understand that bit about “a pickup in external demand”. From where? You can’t mean Japan, or continental Europe. Russia? Ha!, got you there for a moment. So that leaves the US?! The overall growth forecast for Asia as a whole is raised because US consumers will start buying more trinkets again? The same US that saw its new home sales and mortgage originations fall by 14% in March, while its biggest landlord, Blackrock, cut its purchases by 90%? Interestingly, a WSJ article today quotes Markus Rodlauer, deputy director for Asia and the Pacific at the IMF, as saying: “That model that Asia had of relying on the trade channel, that’s gone”. Take your pick.

2014 has been a bumpy start for China, due to financial sector vulnerabilities, and the temporary cost of reforms, along with the transition toward a more sustainable growth path would have significant adverse regional spillover. Domestic and global political tensions could also create trade disruptions and weaken investment and growth across the region. In some frontier economies, high credit growth has led to rising external and domestic vulnerabilities.

The IMF expects Japan’s growth to decrease to 1% in 2015 from 1.4% this year, due to a reduction in the stimulus effects from monetary and fiscal easing. Another barrier towards growth will be a need to reduce debt, the outlook said. “The advanced economies are turning a corner and many Asian economies which depend on exports as a main growth engine are in a good position to capitalize on the recovery. That’s the main reason why we are positive on the Asian region,” CNBC quotes Changyong Rhee, the director of Asia and Pacific Department at the IMF.

I’d say the IMF is cherry picking here, wanting to come up with positive messages and growth predictions no matter what. I guess maybe that’s in their job description. Free Kool Aid for everyone. reality doesn’t seem to be willing to cooperate, though (not that the IMF economists have a strong bond with reality, of course). Bloomberg:

China’s Provinces Miss Growth Goals Even After Targets Lowered (Bloomberg)

Almost all Chinese provinces failed to meet their growth targets in the first quarter even after scaling back their ambitions as the government instructs officials to focus on reining in debt and curbing pollution. 30 of 31 provinces and municipalities reported missing their goals, with the biggest shortfall in northeastern Heilongjiang, where an expansion of 4.1% compared with an 8.5% target for the year. Most localities’ targets are lower than in 2013. The latest data were released by government websites and newspapers. Premier Li Keqiang risks the nation sliding into a deeper slowdown as the government cracks down on overcapacity in the steel industry, wrestles with shadow banking risks and rolls out economic restructuring measures.

While the government has supported expansion with measures such as reserve-ratio cuts for rural banks, it has so far avoided broader stimulus as Li chases a national growth target of about 7.5%. “The central government will continue to refrain from all-out stimulus and the slowdown pressure may continue to rise,” said Zhu Haibin, the chief China economist with JPMorgan Chase & Co. in Hong Kong. After a 7.4% expansion in the first quarter, growth may sink closer to 7% during the second half of this year, Zhu said.

Well, Zhu, I think maybe it’s time to acknowledge that China’s growth may sink well below 7%. Obviously, being an economist, you have no reason to say that out loud until it actually happens, being a JPMorgan guy and all, but it sure doesn’t make you look any smarter. Heilongjiang’s growth is more than 50% below target, and I know for instance that so is Heibe, which is being whacked upside the head by the iron ore mess that’s only now coming to light in the west. FT:

China Plans Crackdown On Iron Ore Import Loans

China plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5% on Monday. Rumours of the stricter measures, which are expected after the May 1 holiday, have been circulating in China for at least two months, after a hasty stock sale caused ore prices to tumble in late February.

Steel mills and traders have used iron ore imports to raise money as other sources of credit dry up, in yet another channel for off-book or “shadow” financing. Part of the attraction of the practice is that mills benefit from lower international interest rates compared to those in China. Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.

Iron ore stocks at Chinese ports are at 109.55m tonnes, data from Steelhome showed on Friday, historically high in absolute terms but still relatively low in terms of the size of the industry’s import demand. Data from the first quarter of the year show that China is on track to produce 822m tonnes of steel this year, a rise of 5.5% from last year’s output, despite the rising debt levels, increased financing costs and the prospect of more environmental regulation. More capacity is still being built, lamented CISA vice-chairman Zhang Changfu, further squeezing margins in the industry. “With the industry in such a state, how can new capacity still be built?”

Saw that? “Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.” One of those creative channels has been the use of iron ore to be used as collateral for leveraged loans to buy more iron ore and finance other endeavors. Which has been so lucrative that despite overcapacity and new regulations and rising debt, inventories are still rising.

And, predictable even for an economist, iron ore prices are falling. The combination of falling prices for an asset and leveraged loans that use the asset as collateral is a lethal one. Beijing is taking huge risks tackling the issue, it must therefore be pretty desperate to take a bite of the shadow banking’s power structure. What was it that John Hancock economist said? ‘China has “a good track record of changing the way they do business”‘ Well, I have no idea what that is based on, but I guess we can find out if it’s true pretty soon. As Chinese industries take advantage of the rise in external demand the IMF predicts but which seems to be the effect of the direct injection of Kool Aid into one’s veins.

The real job of an economist seems to be not to depict reality, but a version of it that looks reliable enough to induce people into spending their money (and trust) on whatever it is the economist’s employers – be they governments or corporations – are selling at any given point in time. The best way to achieve that is to make them believe their own nonsense, and by the look of things I would say there’s a much higher success rate there than in actual predictions. Regardless, whether they’re plain stupid or good liars, economists don’t have to tell the truth, they just have to be believed. Which is true for any con job.

PS Apologies to my friend Steve Keen: you know I’m not talking about you here.