Archives for May 2014

Volatility is all about Liquidity

Volatility is all about Liquidity

Courtesy of Surly Trader

(Originally published on May 21, 2014)

The S&P 500 tried to pull back yesterday, but as usual the late day trading pushed the loss to just 65 bps. This has become the normal market. In 2012, volatility puttered at 12.77%. In 2013 it fizzled down to 11.07%. YTD we have crept up to 11.73%. These metrics tell you to expect daily gains and losses to be +/- .75%. Very Exciting.

What does this market remind me of?  I would say the nearest example is 2004-2006 when volatility cycled between 10-11%. What do these two periods in time have in common?  Extremely easy monetary policy provided by the Fed.

The most powerful chart to show you the impact of Fed provided liquidity plots realized volatility against the steepness of the yield curve as measured by the spread between the 10y and 2y treasury rates. As the fed keeps the front part of the curve low through the Fed Funds rate, the steepness is held high.  A steep yield curve induces investors to borrow at cheap shorter rates and buy riskier assets to earn a spread.  Party on while the Fed provides the punch bowl.

Liquidity and Volatility

The current steepness of the yield curve is a great indicator for future market volatility

The red line above is the steepness inverted, so higher numbers represent the curve flattening or the Fed taking punch away from the party. Low numbers say party on. The blue is the trailing 90 day realized volatility of the S&P 500.  When the Fed says to party, the volatility stays abnormally low.

Key point to make in this chart is that the red line is two years behind the blue line so the red line starts at 1/31/1977 while the blue line starts in ’79. This implies that the tightening of monetary conditions or reduction in market liquidity takes about 2 years time in order for volatility to pick up. If the curve can remain steep for another two years, then how large will the volatility dislocation become when the Fed does ease off the gas pedal? Most punch bowls are provided for 2 years or less. Right now we are in the 6th year of zero interest rate policy with a strong indication that they will maintain it well into 2015.  Maybe this time the volatility will come even before the Fed eases off the pedal?

 

Fresh lows for industrial commodities, other indicators still point to persistent risks to growth in China

Fresh lows for industrial commodities, other indicators still point to persistent risks to growth in China

Courtesy of SoberLook.com
 
In spite of what appeared to be an improvement in China's manufacturing sector (see chart), China's economic picture remains cloudy. A number if indicators point to rising uncertainty and slowing industrial demand. 

Investors are becoming increasingly uneasy with the nation's property markets, which JPMorgan called "a major macro risk". Volumes of unsold real estate are now at record levels and sales continue to slow. Nomura's researchers are convinced "that the property sector has passed a turning point and that there is a rising risk of a sharp correction". Of course since the authorities can easily intervene, the situation may not be as dire as Nomura predicts. Nevertheless, the nation's property markets continue to pose significant risks. 

Moreover, some high frequency indicators are once again flashing warning signals. According to the ISI Group research, exports to and sales in China by US corporations have turned materially lower after remaining stable since early 2013 – indicating weakening demand. Anecdotal evidence suggests that a similar slowdown has also occurred for Japanese and euro area firms selling to China.

The most worrying indicators however are the key industrial commodity prices. Futures on iron ore sold at China's ports fell below $100 for the first time in years.

 
June China iron ore futures contract (source: barchart.com)

And steel rebar futures on the Shanghai exchange are also continuing to fall. Some of these declines are of course related to declining construction activity.
 

June China steel rebar futures contract (source: barchart.com)


Once again, most economists do not expect a "hard landing" for PRC because the government has enormous resources to "backstop" the nation's economy. Nevertheless, a number of indicators from China still point to persistent risks to growth.

 

Staging the QE exit

Staging the QE exit

Courtesy of Sober Look 

Fed officials are hinting that the rate hike could take place before the Fed ends the policy of reinvesting securities that pay down or mature. The order of events would look something like this:

1. Securities purchases end later this year but the Fed maintains its balance sheet at constant level.
2. The rate hike takes place (some time in 2015)
3. The Fed begins to allow securities to mature (or amortize for MBS) without replacing the declining notional.

William Dudley: – … it would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility. This goal would argue for lift-off occurring first followed by the end of reinvestment, rather than vice versa. Delaying the end of reinvestment puts the emphasis where it needs to be—getting off the zero lower bound for interest rates. In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer.

Fed officials are afraid that if the balance sheet begins to naturally decline, the markets will interpret this as additional tightening. But once again, by delaying step 3, the Fed introduces incremental uncertainty. The markets and the media will be buzzing with "when does the reinvestment policy end?" question. The reality is that this delay will have a minimal impact on the trajectory of the massive balances at the central bank.

 

Here is a situation in which the policy itself will have no material impact on anything except that it introduces more uncertainty – something the US economy doesn't need. The Fed should just finish the QE program, stop buying any more securities, and focus on normalizing rates. Staging this process is a bit like ripping off the bandaid slowly rather than getting it over with, particularly when the bandaid is no longer of much use.

 

The U.S. Job Market is Gaining Traction

Courtesy of EconMatters  

Claims Data

The Jobless claims data came out on Thursday and the trend is still in place and bodes well for the May Employment Report coming out next Friday as jobless claims fell sharply in the May 24 week, down 27,000 to 300,000. The 4-week average is down a significant 11,250 to a new recovery low of 311,500. Continuing claims are also down, falling 17,000 in data for the May 17 week to a new recovery low of 2.631 million. The 4-week average is down 33,000 to 2.655 million, also a recovery low. The unemployment rate for insured workers, also at a recovery low, came in at 2.0 percent. Notice a pattern here, new recovery low, new recovery low, and new recovery low. 

Headhunters Buzzing Right Now

I can tell the job market is really on fire through a couple of the measures I interact with in my daily life which shows a couple of things, first that wages are going up, and second that headhunters are really calling a bunch of my colleagues in Corporate America with multiple job opportunities. 

But it is just not corporate jobs as the businesses in my area post job openings along with wage info on their billboards when they really need people, like cashiers, installers, and Car Wash Sales positions and going by the rise in wages posted on these billboards the job market is tightening for workers at this level as well. 

Albeit we reside in an area that outperforms the overall economy, and in some cases economies are subject to local pressures, but this area has always outperformed, and the level of increased activity is quite noticeable, which means business is picking up relative to previous levels. 

Strong Employment Report

We expect a strong Employment report next week for another new recovery record for consecutive months of jobs added at these levels of 200k plus, and we expect the unemployment rate to drop below 6% sooner than most believe at this pace. 

I know the doom and gloom crowd will focus on those who have left the workforce, and sure that is an area for improvement, but it starts by employing as many people who are in the workforce first, and then as conditions tighten further in the job market, enticing people to work and come back into the job market. This is related to a tightening job market where employers lower some of their standards and wages rise, both of which we anticipate coming down the pike over the next six months as the job market continues to strengthen.

Wage Pressures & Inflation

But from an inflation standpoint if those workers never come back to the workforce for various reasons, the pool of talent available who are looking for a job is fought over by employers needing to fill positions, and in some cases attracting workers to switch jobs or companies, we also have seen an uptick in this area in the Corporate world. 

Consequently what really matters for jobs is the pool who are in the market looking for work, and if this is shrinking that is bullish for workers’ opportunities and salaries, bad for inflation and companies needing to fill those positions, but overall leads to a tightening job market where the Fed will need to start normalizing interest rates to avoid runaway inflation. 

Elevated inflation would be fueled by wages rising substantially all along the wage continuum for the first time in the post recovery world, and the inflation numbers start trending well above the Fed`s target, we anticipate this occurring once these wage pressures start showing up in the data set.

Labor Starting to Gain Negotiating Power

Tightening in the job market carries over to all types of positions, if an employer who used to get away with hiring contract workers to lower costs, now has to change these positions to full-time hires and raise the salaries to attract the talent they need to complete projects, contract salaries end up going higher as well. 

This is the area we haven`t seen a significant spike since the recession, and we feel the entire market and employers are behind the curve on and have become too complacent with the status quo. Employers and HR are in for a real shock when they need to start refining their budgets and raising wages to fill positions, they are used to always negotiating from a position of strength, we see the tables turning in this area as the labor market continues to tighten.

The Employment Trend is Bullish

Despite all the doom and gloom in the market, we would have loved to have these employment numbers three years ago, jobs and the economy are trending higher, and better times are ahead for those looking for work, and those not looking for work, don`t be surprised if you find your services in demand once again, as companies reach out of their comfort zone to fill positions.

 

US GDP Even Worse Than It Looks, Again

Courtesy of John Rubino.

As expected, the US revised the most recent quarter’s GDP from barely positive to sharply negative today. But once again the true extent of the problem was hidden by some statistical sleight of hand, in this case wildly-optimistic inflation assumptions.

Here’s an excerpt from the Consumer Metrics Institute’s just-published analysis:

May 29, 2014 – BEA Revises 1st Quarter 2014 GDP Sharply Downward to Outright Contraction at Nearly a 1% Annual Rate:

In their second estimate of the US GDP for the first quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was contracting at a -0.99% annualized rate. When compared to prior quarters, the new measurement is down over 3.6% from the 2.64% growth rate reported for the 4th quarter of 2013, and it is now more than 5% lower than the 4.19% reported for the 3rd quarter of 2013.

The previously reported quarterly growth in real annualized per-capita disposable income was revised downward to $95 (and that disposable income figure is now $227 per year lower than it was during the fourth quarter of 2012), while the household savings rate shrank again to 4.0% (down -0.9% from the 4.9% in the prior quarter and down -2.6% from the fourth quarter of 2012).

And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.28%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -1.52% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been a staggering -3.64%.

Summary and Commentary

This is a bad report, and the numbers speak for themselves. And looking at the trend lines, things are unlikely to get better anytime soon.

But we also feel compelled to digress from the bad news itself. While other people may be utterly shocked to find that the economy is in contraction, we are much more inclined to outrage at the possibility that the BEA published clearly fictitious numbers last month in an effort to “ease” the readings towards the bad news that they knew (or should have known) would follow shortly :

– If they (the BEA) did not realize last month that the US economy was in contraction during the first quarter of 2014, they are sufficiently incompetent (in practice and procedure) to merit a complete overhaul and/or gutting of the agency.

– That said, gross incompetence is probably the lesser evil — simply because if they knew full well last month how bad the news really had become, they simply descended into a Goebbelesque world of publishing what they wanted the world to think.

Some thoughts
Isn’t it interesting that of all the available inflation indicators, the BEA always seems to choose the one that makes GDP look most favorable? What a fascinating coincidence.

Another stat that’s worth noting is “annualized per-capita disposable income,” which is lower today than at the end of 2012. How can an economy be growing if the disposable income of the average citizen is shrinking? The answer is that it can’t. And remember that under realistic inflation assumptions, the shrinkage would be even bigger, meaning that the contraction in the size of the US economy would appear to be accelerating rather than abating.

Visit John’s Dollar Collapse blog here >

Pam Martens on Hot Topic ‘Inclusive Capitalism’ Meet-Up

For ongoing commentary about the worst of Wall Street’s behavior (is there any other?), visit Pam Martens at Wall Street on Parade. Ms. Martens is very familiar with the Wall Street culture having spent 21 years on the Street observing it. She is now an outspoken critic of Wall Street’s corrupt practices and its private justice system.

In Try to Contain Your Laughter: Prince Charles and Lady de Rothschild Team Up to Talk About ‘Inclusive Capitalism’, Pam quotes Christine Lagarde, Managing Director of the IMF, citing a statistic I had been looking for:

The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population  – that is 3.5 billion people.

This statistic was previously noted in Forbes in January 2014. Forbes reported, “Oxfam International has released a new report called, “Working for the Few” that contains some startling statistics on what it calls the “growing tide of inequality.” Other statistics are also provided. (Forbes)

I had not heard the term “Inclusive Capitalism” until two days ago when Tim Richards of the Psy-Fi Blog weighed in on it (here).

 

Try to Contain Your Laughter: Prince Charles and Lady de Rothschild Team Up to Talk About ‘Inclusive Capitalism’

Courtesy of Pam Martens

Lady-de-Rothschild-on-Bloomberg-News

Lady de Rothschild Speaks on Bloomberg News About the Inclusive Capitalism Conference

Prince Charles, who lives in four mansions in England, Scotland and Wales, delivered the opening speech yesterday for a conference on “Inclusive Capitalism” hosted by Lady de Rothschild, wife of multi-billionaire Sir Evelyn Robert de Rothschild, in the heart of financial skulduggery, the City of London, Wall Street’s alter ego.

Rounding out the day’s speakers were former President Bill Clinton, who repealed the depression era investor protection legislation known as the Glass-Steagall Act which deregulated Wall Street and is widely blamed for the 2008 financial collapse and for ushering in the greatest wealth inequality in America since the Gilded Age; and former Treasury Secretary Lawrence Summers who helped Clinton muscle through the deregulatory legislation. (You can see the full-day agenda here.)

The lurking undertone of the conference was not so much a noblesse oblige gesture to spread the wealth as it was an effort to address the growing anxiety among the well-heeled that if they don’t step up their PR game, government and/or a populist revolution is going to take the reins – and possibly their heads.

Lady de Rothschild (Lynn Forester) summed up the anxiety the day before in an interview with Bloomberg News, saying it’s “really dangerous when business is viewed as one of society’s problems.” She noted further that 61 percent of Britons say they will elect the party “that is toughest on big business.”

The web site of the Inclusive Capitalism Initiative which sponsored the conference adds this note to explain its motivations: “To avoid heavy-handed government interference in the banking sector, a revolution in management, supervision and ethics is required.”

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BLS Employment Projections Through 2022: How Many Jobs Require a College Degree?

Courtesy of Mish.

Inquiring minds are taking a look at BLS Occupation Forecast for 2022.

The above table is by the BLS. In the following table, I stripped out all the occupations that I believe should not realistically require a college degree. Here are the results.


 

Results

Of the projected 15,628,000 jobs that will be filled by 2022, only 2,731,000 of the jobs in the first table should require a college degree.

However, given the emphasis on getting a degree (and brutally overpaying for it), and given the sheer number of people with degrees who are jobless, many employers will only hire those with degrees simply because they have ability to be picky.

There is another gotcha for the unemployed. Other employers do not want overqualified applicants fearing they will leave at the first opportunity. 

Thus, applicants need to correctly figure out whether to dumb-down or trump-up their resume to improve their own chances, even though overall chances for higher paying jobs is poor.

Those who don't make good use of their college degree will be stuck competing for low-wage jobs as personal care aids, retail sales clerks, food prep workers, and as various assistants.

Education for Education's Sake 

My friend "BC" explains … 

 In effect, the US is "educating"/socializing a large share of our young people coming of age to be hopelessly indebted and unemployed or unemployable.

With record debt to wages and GDP, withering costs of "health care", and fully mature and costly urban/suburban/penturban infrastructure build out and associated high fixed costs, a growing majority of millennials simply cannot afford to begin or sustain the urban/suburban, auto-, oil-, and debt-based lives as "consumer units".

And neither will a majority of Boomers be able to sustain their lifestyles into late life. The situation is made worse in that the US economy has not created a net new full-time private sector job per capita in 30-35 years.

Automation of services sector employment now occurring at an accelerating rate will exacerbate conditions for paid employment and purchasing power, especially for women who make up a disproportionately larger share of employment in medical services (80-85%), "education" (80%), gov't (60%), and financial services (60%).

Consequently, women face loss of paid employment as a share of the work force and population on a scale that men have experienced in the goods-producing sector since the 1970s-80s.

The relative payoff to a bachelor's degree peaked in the 1990s and will continue to decline hereafter for the rest of millennials' lifetimes, especially those in the bottom 90% of households who cannot actually afford a post-secondary credential.

Many argue that the jobs lost in the aforementioned sectors will be replaced by even better jobs in the helping, human touch, and other occupations that we cannot predict; but this presupposes, incorrectly in my view, that the loss of tens of millions of jobs will allow an economy that still produces sufficient level and growth of after-tax, real purchasing power, discretionary income, and tax receipts to support what are more often than not public sector or costly private sector services for the top 1-10% .

Education Model Broken

The US education model is fatally broken because the cost of education is far too high. Soaring student debt with no way to pay it back is one consequence.

In turn, high student debt guarantees low family formation rates with kids moving back in with their parents. Here is a shocking chart that shows what I mean.

 

The above chart was part of my Wine Country Conference II presentation, which will be out shortly.

Note that approximately 12% of women and 17% of men aged 25-34 now live with their parents. The implications on household formation, child raising, and home buying are obvious.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
More by Mish Here

 

The Bond Market Explained Part II

Courtesy of EconMatters

Addendum Needed

Since so many people are still slightly confused about how all the pieces come together in this move lower in yields, we feel the need to add some follow-up commentary to our previous article entitled "The Bond Market Explained for CNBC" on the subject which should help investors better understand the behind the scenes dynamics of the bond market.  

Filling in the Details

The High Yield Carry Trade is what has brought the 10-Year down to the 2.62% area. Hedge Funds started realizing what was going on in the Bond market, and started getting involved when yields were around 2.8%, but they are just jumping on the tails of the High Yield crowd with the size required to move this market 50 basis points.

Once we settled into the 2.62% area hedge funds made a run for the 2.58% area lows, then covered and we were back up around 2.65% yield. From there European Bonds started rallying in price, going down in yield on the belief that Mario Draghi was going to do some kind of stimulus program involving bond buying, investors wanted to front run this event, this led US Bonds to also rally in price and go down in yield which is the move down to 2.47%, then the traders covered and we retraced back to the 2.56% area yield. 

From there traders waited until the econ news came out on Tuesday where yields rallied, and then with no econ data to worry about made the next push down to the 2.43% area on Wednesday in a relatively light volume trading environment. This is straight out of the trend trading handbook, and traders have yet to cover this latest push down hoping for additional profit with protective stops in place. 

This is just a trade for these folks with no long-term conviction regarding where bond yields should trade relative to the economic fundamentals. These same traders will be pushing in the other direction in a couple of months; this is how momentum trading works these days.

Market Moving Events Next Week

There is economic data on Thursday with GDP revisions and Jobless Claims numbers, but relatively speaking, next week is where the rubber meets the road on this trade. Hedge Funds are piling into this trade trying to push some technical areas in a light volume week, see where yields end up next Friday for any commitment to this trade by Hedge Funds. (Read also: May's Employment Report To Top 300k)

My guess is that there is major covering or closing out of positions by the end of next week similarly to how the Hedge Funds all ran out of the Natural Gas trade, sending NG Futures down two bucks in two days as nobody wanted to take delivery of said natural gas in their largely paper world. 

Lots of Stops Protecting Profits

Therefore, to sum up the High Yield chasing environment fueled via Low Interest Rates for Borrowing is the reason all rates are this low, but this last move down in bond yields has been due to front-running the ECB decision on June 5, and hedge funds piling in as they always do, smelling blood in a hot market for technical damage. 

As an aside, these aren`t high yields all things considered, but high relative to essentially zero percent borrowing costs once you factor in the kind of leverage being used in this trading strategy.

It might be worth pointing out that the bond market is tightening like a coiled spring and can explode higher in yields an easy 20 basis points at the drop of a hat, look for the ECB Meeting or the USEmployment Report to be a potential catalyst next week!

 

Debt Rattle May 29 2014: The New Normal is Negative

Courtesy of The Automatic Earth.


Arthur Rothstein President Roosevelt tours drought area, Bismarck, North Dakota August 1936

No, the nonsense will not stop, and neither will the torture. At least 5 years into the alleged recovery, US GDP contracted by -1% in Q1 2014, down from last month’s estimate of a 0.1% growth. Why? It’s still the weather, say the “experts”. But worry not, because now the sun will shine and we will reach the promised land our deity and his high priests laid out before us. Bloomberg has gathered this bouquet of whatever:

U.S. Economy Shrank for First Time Since 2011

A pickup in receipts at retailers, stronger manufacturing and faster job growth indicate the first-quarter setback will prove temporary as pent-up demand is unleashed. Federal Reserve policy makers said at their April meeting that the economy has strengthened after adverse weather took its toll. “We do have business investment picking up, the household sector is in pretty good shape with the labor market improving a bit,” Sam Coffin, an economist at UBS Securities LLC in New York, said before the report. “That combination of slightly braver businesses, slightly faster job growth, should add up to broader, better growth.” [..]

Wait. A pick-up at retailers? Retail was down, way down in Q1, the most in 13 years. Faster job growth? Excuse me? Pent-up demand? Where? People spent their sparse cash on heating fuel. And no, the proper expression would be: “That combination of slightly braver businesses (Geez!), slightly faster job growth, should HAVE ADDED up to broader, better growth.” And it didn’t, did it?

Companies boosted stockpiles by $49 billion in the first quarter, less than the $111.7 billion in the final three months of 2013. Inventories subtracted 1.62 percentage points from GDP from January to March, the most since the fourth quarter 2012. Slower inventory accumulation may encourage factories to step up production should demand accelerate.

“Growth in key indicators such as employment, income, and consumer spending have recently begun to improve from weather-affected levels earlier in the year,” Robert Niblock, the chief executive officer at home-improvement retailer Lowe’s, said on a May 21 earnings call. “Performance has already improved in May, and continued improvement in the macroeconomic landscape and the consumer sentiment” help give the chain a positive outlook in 2014. The economy in the second quarter will expand at a 3.5% rate, according to the median projection of 72 economists surveyed by Bloomberg from May 2 to May 7.

“Slower inventory accumulation may encourage factories to step up production should demand accelerate.” Or it may not, because retailers know demand is dead. Take your pick. What useless drivel.

Non-residential investment dropped at a 1.6% annualized rate. Companies reduced their spending on structures at a 7.5% pace, the biggest decrease in a year. Spending for equipment fell 3.1%, the most since the third quarter 2012. Consumer purchases, which account for about 70% of the economy, increased at a 3.1% annualized rate in the first quarter. The gain, which added 2.1 percentage points to GDP, was more than the previous estimate of 3%. The increase reflected a stronger pace of spending on services, including utilities as colder winter weather prompted Americans to adjust their thermostats, than the previous three months.

Hello! People spent more on keeping warm. That’s all the positives that are on offer. And they didn’t have that extra cash lying around somewhere either, so what they spent on heating they won’t spend again through some pent-up demand on something else, because they already spent it! So exactly how is that positive, and how positive is it exactly? Let me put it like this: if consumer purchases (70% of GDP) were up 3.1% annually in Q1, shouldn’t you guys be looking at how totally disastrous the rest of the economy was to still print a -1% rate for Q1, instead of cheerleading something that doesn’t even exist?

Today’s report offered a first look at corporate profits. Earnings fell 9.8% in the first quarter from the previous three months, and declined 3% from the same period last year. Exports declined at a 6% rate in the first quarter, while imports rose as trade subtracted 0.95 percentage point from GDP, the most since the second quarter 2010.

Less exports, less imports, less earnings and corporate profits down. Is that how you spell recovery these days? It’s all snow and ice? Let’s turn to Tyler Durden’s take:

US Economy Shrank By 1% In The First Quarter: First Contraction Since 2011

Weather 1 – Quantitative Easing 0. Joking aside, while the realization that nobody can fight the Fed except a cold weather front, is quite profound, in the first quarter GDP “grew” by a revised -1.0%, down from the +0.1% first estimate, and well below the -0.5% expected, confirming that while economists may suck as economists, they are absolutely horrible as weathermen. This was the worst print since the -1.3% recorded in Q1 2011. Bottom line: for whatever reason, in Q1 the US economy contracted not only for the first time in three years, but at the fastest pace since Q1 of 2011. It probably snowed then too. Some highlights:

  • Personal consumption was largely unchanged at 2.09% from 2.04% in the first estimate and down from 2.22% in Q4. Considering the US consumer savings rate has tumbled to post crisis lows at the end of Q1, don’t expect much upside from this number.
  • Fixed investment also was largely unchanged, subtracting another 0.36% from growth, a little less than the -0.44% in the first estimate and well below the 0.43% contribution in Q4.
  • Net trade, or the combination of exports and imports, declined from -0.83% to -0.95%, far below the positive boost of 0.99% in Q4.
  • The biggest hit was in the change in private inventories, which tumbled from -0.57% in the first revision to a whopping -1.62%: the biggest contraction in the series since the revised -2.0% print recorded in Q4 2012.
  • Finally, government subtracted another -0.15% from Q1 growth, more than the -0.09% initially expected.

So there you have the priced to perfection New Normal growth (inclusive of “harsh weather”, which obviously has to be excluded for non-GAAP GDP purposes), which also now means that in the rest of the year quarterly GDP miraculously has to grow at just shy of 5% in the second half for the Fed to hit the “central tendency” target of 2.8%-3.0%.

And now we await for stocks to soar on this latest empirical proof that central planning does not work for anyone but the 1%.

And whaddaya know, they did:

S&P 500 Pushes To All Time Highs On First Economic Contraction In Three Years

What do you do when GDP prints twice as bad as expected… buy stawks! And so it is that -1.0% GDP print for Q1 has been greeted with a buying drive in S&P 500 futures to lift it back near all-time record highs this morning. Gold, silver, and the USD are also rising.. and bond yields are rising very modestly.

There’s so much nonsense in all this it makes you wish that, while everyone can accept the government will lie as long and as much as it can (and is still forced to take a -1% number “lying” down), at least Bloomberg would make an attempt at actual reporting. Instead, something tells me the media are just getting started. Still, it’s of course absolute nonsense to contend that US retailers hit their worst patch in 13 years because it snowed. Wal-Mart, Staples and Target simply hit disastrous numbers in Q1, and less snow won’t change that.

The bottom line remains that 5 years into the “recovery”, there is no recovery to be seen other than in the S&P, and that is fully due to QE, which won’t last forever, a truth that will exert a heavy downward pressure on the future of America. Just not on the upper echelons. But other than them, Americans, and America, are getting progressively poorer day by day. That is the new normal. And that is what this GDP number tells you. It’s not an aberration, it’s a trend. Despite many trillions worth of QE, recovery has been elusive for 5 years now. Why do you think that is?

Examinations of Wall Street’s Biggest Banks Come Under Foreign Microscopes

Courtesy of Pam Martens.

Thomas Curry, Comptroller of the Currency

You know there is a lot more to the story when the top Federal regulator of Wall Street’s biggest banks turns to three foreign countries to figure out how to beef up examining these complex webs of darkness. And London (infamous now for its blinders as the biggest banks rigged Libor interest rates, foreign currency exchange and the metals market) can’t feel too good about being snubbed in the process.

It all started last year when the head of the Office of the Comptroller of the Currency (OCC), Thomas Curry, commissioned a peer review study by senior financial supervisors from Australia, Canada and Singapore. Why these three countries?

According to the study, “the selection criteria were countries with significant and mature financial markets, well-respected supervisory regimes, and large commercial banks that have been consistently rated among the safest in the world. While virtually all of the major financial sectors around the world were affected by the crisis, major banks in these three countries demonstrated strong resilience.” (That may just as likely be a function of a central government refusing to allow its  commercial banks to become global gaming casinos as it is an outcome of competent supervision.)

The international peer group was led by Jonathan Fiechter, a former OCC senior deputy Comptroller and, more recently, head of the Monetary and Capital Markets Department’s financial supervision and crisis management group at the International Monetary Fund.

The peer group’s members included  Keith Chapman, Executive General Manager of the Australian Prudential Regulatory Authority; Brigitte Phaneuf, Managing Director of Canada’s Office of Superintendent of Financial Institutions (OSFI); Ted Price, former Deputy Superintendent of the OSFI; and Teo Swee Lian, Special Advisor, and former Deputy Managing Director for Financial Supervision at the Monetary Authority of Singapore.

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US Economy Shrank By 1% In The First Quarter: First Contraction Since 2011

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Weather 1 – Quantitative Easing 0.

Spot on the chart below just how high the culmination of over $1 trillion in QE3 proceeds "pushed" the US economy.

Joking aside, while the realization that nobody can fight the Fed except a cold weather front, is quite profound, in the first quarter GDP "grew" by a revised -1.0%, down from the +0.1% first estimate, and well below the -0.5%  expected, confirming that while economists may suck as economists, they are absolutely horrible as weathermen. This was the worst print since the -1.3% recorded in Q1 2011.

Bottom line: for whatever reason, in Q1 the US economy contracted not only for the first time in three years, but at the fastest pace since Q1 of 2011. It probably snowed then too.

The breakdown by components is as follows:

Some highlights:

  • Personal consumption was largely unchanged at 2.09% from 2.04% in the first estimate and down from 2.22% in Q4. Considering the US consumer savings rate has tumbled to post crisis lows at the end of Q1, don't expect much upside from this number.
  • Fixed investment also was largely unchanged, subtracting another 0.36% from growth, a little less than the -0.44% in the first estimate and well below the 0.43% contribution in Q4.
  • Net trade, or the combination of exports and imports, declined from
    -0.83% to -0.95%, far below the positive boost of 0.99% in Q4.
  • The biggest hit was in the change in private inventories, which tumbled from -0.57% in the first revision to a whopping -1.62%: the biggest contraction in the series since the revised -2.0% print recorded in Q4 2012.
  • Finally, government subtracted another -0.15% from Q1 growth, more than the -0.09% initially expected.

So there you have the priced to perfection New Normal growth (inclusive of "harsh weather", which obviously has to be excluded for non-GAAP GDP purposes), which also now means that in the rest of the year quarterly GDP miraculously has to grow at just shy of 5% in the second half for the Fed to hit the "central tendency" target of 2.8%-3.0%.

And now we await for stocks to soar on this latest empirical proof that central planning does not work for anyone but the 1%.

France Budget Forecast “Wildly Inaccurate” Leaving €14 Billion Black Hole; Sharp Rise in French Unemployment

Courtesy of Mish.

French President Francois Hollande hiked income taxes, VAT and corporation tax following his election two years ago. Hollande estimated those tax hikes would raise €30 Billion in revenue.

The BBC reports France Faces €14 Billion Budget Hole.

The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year.

French President Francois Hollande has raised income tax, VAT and corporation tax since he was elected two years ago.

The Court of Auditors said receipts from all three taxes amounted to an extra 16bn euros in 2013.

That was a little more than half the government’s forecast of 30bn euros of extra tax income.

The Court of Auditors, which oversees the government’s accounts, said the Elysee Palace’s forecasts of tax revenue in 2013 were so wildly inaccurate that they cast doubt on its forecasts for this year.

It added the forecasts were overly optimistic and based on inaccurate projections.

Surprise, Surprise, Not

Surprise, Surprise, Not (at least in this corner). Nor was there any surprise in this corner regarding French Unemployment.

Sharp Rise in French Unemployment

Via translation from Les Echos please note a Sharp Rise in French Unemployment

The number of Class A job seekers reached 3,626,500 in April. At this rate, the threshold of half a million more unemployed since the election of François Hollande will be reached this summer.

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Bacon Prices To Soar Even More: The Pig Diarrhea Virus Is Back For Round Two

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The last time we looked at the rather unpalatable issue of soaring bacon prices back in March, it was the direct result of exploding, no pun intended, prices of lean hogs stricken by the aptly named porcine epidemic diarrhea (PED) virus, which killed up to 7 million pigs and pushed the price of pork and its derivatives to record highs. We have bad news: according to Reuters an Indiana farm has become the first to confirm publicly it suffered a second outbreak of a deadly pig virus, fueling concerns that a disease that has wiped out 10 percent of the U.S. hog population will be harder to contain than producers and veterinarians expected. That's right, the PEDv, aka pig diarrhea bug, is back, and this time it may have mutated.

Prepare for round two:

The state and federal effort to stamp out PEDv has operated on an assumption that a pig, once infected, develops immunity and will not be afflicted by the disease again for at least several years. Likewise, farms that had endured the disease were not known to suffer secondary outbreaks.

But a year after the virus was identified, repeat outbreaks have occurred at farms but not been publicly confirmed before now. These so-called secondary outbreaks are a challenge to efforts to stem the disease, which is almost always fatal to baby piglets.

Apparently the state and federal effort ignored the possibility that a virus may, gasp, strike again! "Nationwide, PEDv outbreaks seem to recur in about 30 percent of infected farms, the American Association of Swine Veterinarians told Reuters, confirming for the first time the likelihood of repeated outbreaks." So it really the first time someone even considered this possibility.

Were they hoping Bernanke would just print more healthy pigs if things didn't go according to plan? Probably not, but now it is time to scramble to glue the pieces back together:

The U.S. Department of Agriculture is fighting against repeated outbreaks by trying to extend immunity in female hogs through effective vaccines, Chief Veterinary Officer John Clifford told Reuters at the general session of the World Animal Health Organization in Paris. "It happens and it could happen again," he said about secondary outbreaks of PEDv. "We need to practice good bio-security, cleaning and disinfection, all-in all-out, in order to break the cycle and prevent its re-emergence."

Something about shutting the farm door after the pig has died from diarrhea…

The one good news, so far, is that the repeat virus does not appear to be a mutant.

In the Indiana case, genetic sequencing showed the "exact same strain" of PEDv hit pigs at the farm in May 2013 and again in March 2014, said Ackerman, who collected samples from the farm.

Piglets born to sows that were infected for a second time have a death rate of about 30 percent, compared to near-total death loss among newborn piglets during the first outbreak, he said.

The incidence of the disease “re-breaking” on farms after it appeared to have been wiped out, indicates that the risk for ongoing severe losses from the virus is bigger than previously expected. The lack of long-term immunity also means hog producers must keep up strict bio-security measures to fight the disease, which has already spread to 30 states.

However, this leads to another just as problematic possibility: the natural immunity to the PED virus is far shorter than expected:

Preliminary results from studies on immunity, directed by the National Pork Board, confirm "immunity does appear not to be very long lived," said Lisa Becton, director of swine health information for the board. The board has collected more than $2 million for research on PEDv.

Veterinarians and others have been unable to predict the duration of immunity to PEDv in hogs following exposure, in part because the disease had never been in the United States before last year.

Ackerman had thought hogs would have a natural immunity to PEDv for three years after being infected because that is the case for a similar disease called Transmissible Gastroenteritis. "Just because a farm broke with PEDv last year doesn't mean that they are protected from re-breaking with it this year," he said in a telephone interview.

Ackerman said he did not know why the female pigs, or sows, on the Indiana farm were re-infected after being exposed to the virus during the original outbreak last year. At the time, they were about six months to a year old. The sows are having piglets and passing limited immunity on to their offspring, he said.

The farm "does an excellent job of sanitation," he said. "That's why it's so hard to figure out why they're struggling with it."

The repeat case of PEDv in Indiana puts to rest gossip about a re-break in the state that has passed from one Midwest farmer to another for weeks. Producers are on edge because no vaccine has yet been able to completely protect pigs from the disease.

PEDv is transmitted from pig to pig by contact with pig manure, which contains the virus. It can be transmitted from farm to farm on trucks, and many veterinarians also believe it is spreading through animal feed.

Summarizing it best:

The re-breaking is causing concern among farmers and meat packers across the country, as the PEDv outbreak continues to spread with no definitive solution in sight. "If you have that disease, it causes a huge death loss, and then you get it again," said Josh Trenary, executive director of Indiana Pork. "It's pretty clear why it would be concerning."

The other good news: "The virus does not pose a risk to human health and is not a food safety issue, according to the USDA."

It does, however, pose a huge risk to human wallets, especially those who enjoy eating pork or bacon, because one should certainly expect hog prices to hit fresh new all time highs shortly, only for the BLS to declare them hedonically overstated due to the return of that perfect substitute for pretty much everything: Pink Slime.

Google Unveils Self-Driving Car, No Steering Wheel, No Accelerator, No Brake Pedal; Self-Driving Taxi Has Arrived

Courtesy of Mish.

In yet another step towards self-driving vehicles, Google Unveils Steering Wheel-Less Car Prototype.

Ever since we started the Google self-driving car project, we’ve been working toward the goal of vehicles that can shoulder the entire burden of driving. Just imagine: You can take a trip downtown at lunchtime without a 20-minute buffer to find parking. Seniors can keep their freedom even if they can’t keep their car keys. And drunk and distracted driving? History.

We’re now exploring what fully self-driving vehicles would look like by building some prototypes; they’ll be designed to operate safely and autonomously without requiring human intervention. They won’t have a steering wheel, accelerator pedal, or brake pedal… because they don’t need them. Our software and sensors do all the work.

We started with the most important thing: safety. They have sensors that remove blind spots, and they can detect objects out to a distance of more than two football fields in all directions, which is especially helpful on busy streets with lots of intersections. And we’ve capped the speed of these first vehicles at 25 mph. On the inside, we’ve designed for learning, not luxury, so we’re light on creature comforts, but we’ll have two seats (with seatbelts), a space for passengers’ belongings, buttons to start and stop, and a screen that shows the route—and that’s about it.

First Drive

Not a Car, It’s The Future

David Pierce on The Verge writes Google’s Self-Driving Car Isn’t a Car, It’s the Future

On Tuesday night, onstage at the Code Conference in California, Brin revealed an entirely new take on a self-driving car, one decidedly more ambitious than anything we’ve seen before.

Nothing about this car is traditional: it has a front made of compressible foam, a flexible plastic windshield, and a dual-motor system that keeps the car running even if part of its engine fails. It’s easy to imagine executives at GM balking at quite literally reinventing the wheel to help Google X with its latest moonshot.

Self-driving cars are coming. That’s essentially a given: the technology already mostly works, and nearly all automakers believe autonomous vehicles are both a good and feasible idea. They disagree only on the timing, though “by 2020” has become an increasingly popular refrain. The biggest remaining challenges appear to be regulatory rather than technological, as governments start to answer questions like who’s responsible when a self-driving car gets in an accident.

In classic Google fashion, though, Brin talked less about what the Google car could mean for Google and more about how it might change the world. What if we all sold our cars? What if every time we needed a car, we unlocked our smartphones and called for one with a single tap, and as soon as it dropped us off it went off to its next job? We’d need fewer parking lots, reduce our emissions, stop driving drunk, and get in fewer accidents. Those who couldn’t or shouldn’t drive – the blind, the elderly — could still get around. This is the future Brin imagines, one with huge ramifications on everything from the environment to the economy. And the cute little car he’s been developing at Google X is the closest thing we’ve ever seen to making that idea real.

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Calling all bulls: Bitcoin climbs 32% in a week, prompting cheers of “to the moon”

Of the theories presented, I like the notion the price of bitcoin is increasing due to the lack of a new scandal. At least for now, believers have gained control. But "to the moon" for the battered digital currency? Doubt it. ~ Ilene 

Calling all bulls: Bitcoin climbs 32% in a week, prompting cheers of “to the moon”

By  of Pando

The bitcoin message boards are again flooded with calls of “to the moon” from crypto-currency bulls as the price has climbed more than 30 percent over the last five days. The Coindesk Bitcoin Price Index is currently at $582.27 (and rising) after opening last Monday at $444.81. Yesterday’s closing price was the highest since March 26, erasing a medium-term downtrend. The last week’s price increase has added more than $1.8 billion in total systemic value, with all 12.8 million bitcoins in circulation now worth $7.46 billion.

The question, following a run-up like this is what’s driving the increased enthusiasm and how long will it last? As with any securities market, there are no sure answers, only speculation, but there are several theories of varying degrees of validity.

Many observers have pointed to the rapid decline in value of the XRP – following Ripple Labs co-founder Jed McCaleb’s decision to sell his XRP holdings – and similarly the steady but substantial decline in the Dogecoin price, suggesting the refugees of these markets are now flooding into bitcoin.

[…]

There is legitimate progress being made on both the infrastructure and regulatory fronts that give reason for optimism, but the size and speed of this latest run up in price would seem to outpace those more modest factors…

Full article Calling all bulls: Bitcoin climbs 32% in a week, prompting cheers of “to the moon” | PandoDaily.

Image via sofamax.

Debt Rattle May 28 2014: Everything You Think You Own Has Been Borrowed

Courtesy of The Automatic Earth.



Esther Bubley Soldier treats his date to a coke, Idaho Hall, Arlington Farms, VA June 1943

 

Let’s take another look at debt. We’ve probably all gotten so used to huge debt numbers that we’re losing sight of what they actually mean. In the following article, Tyler Durden made me rethink both the debt issue and the perverse consequences of 7 years of zero interest policies (ZIRP) and/or ultra low interest rates. The destruction to society is far greater than anyone seems to be willing to let on. But that doesn’t make it any less real. Here goes:

Here Is The Mystery, And Completely Indiscriminate, Buyer Of Stocks In The First Quarter

According to the most recent CapitalIQ data, the single biggest buyer of stocks in the first quarter were none other than the companies of the S&P500 itself, which cumulatively repurchased a whopping $160 billion of their own stock in the first quarter! Should the Q1 pace of buybacks persist into Q2 which has just one month left before it too enters the history books, the LTM period as of June 30, 2014 will be the greatest annual buyback tally in market history. And now for the twist. Unlike traditional investors who at least pretend to try to buy low and sell high, companies, who are simply buying back their own stock to reduce their outstanding stock float, have virtually zero cost considerations: if the corner office knows sales and Net Income (not EPS) will be weak in the quarter, they will tell their favorite broker to purchase $X billion of their shares with no regard for price.

The only prerogative is to reduce the amount of shares outstanding and make the S in EPS lower, thus boosting the overall fraction in order to beat estimates for one more quarter. Compounding this indiscriminate buying frenzy is that ever more companies (coughaaplecough… and IBM of course) are forced to issue debt in order to fund their repurchases. So since the cash flow statement merely acts as a pass-through vehicle and under ZIRP companies with Crap balance sheets are in fact rewarded (as even Bloomberg noted earlier) the actual risk of the company mispricing its stock buyback entry point is borne by the bond buyer who in chasing yield (with other people’s money) serves as the funding source for these buybacks.

Corporations buy back their own shares in order to fool investors about their performance numbers. It’s a profitable undertaking for them because they can borrow at next to nothing. A very simple calculation: if we buy and borrow $1 billion worth, what’s the effect on our balance sheet? How about $10 billion? The essence: there is a reason junk bonds are so popular: there are no ‘normal’ yields left because of central banks’ ZIRP. That’s not to say Apple issues junk, but the principle is the same. Bond buyers, e.g. money market funds, will buy anything. VIX volatility is ultra low, everyone’s doing it, what could go wrong? Well, the answer to that question might to a large extent lie in private and public debt numbers. If only because much of the money corporations borrow to do buybacks has in turn also been borrowed.

When you follow the dots, you must wonder where there is still any ‘money’ left that has not been borrowed. You may even want to wonder whether you have any of it. And you might ask how it is possible that while any and all borrowing is supposed to be collateralized, it’s hard to find ‘hard’ collateral anywhere in the cycle. We can understand that when a Chinese state owned enterprise uses one load of iron ore, bought with credit, as collateral for the next one, something’s amiss. But do we also understand that in our own economies, despite the huge existing debt, and because of ZIRP policies, there is more borrowing instead of less, as would seem to be the smart thing to do. ZIRP thus leads to more debt, and – inevitably – exponentially more bad debt. You can’t heal a sick economy with more debt if it already has historically high levels of it, but that’s still exactly what central bankers claim they try to do.

First, a Daily Mail graph from 2012 gives an indication of total debt numbers for a handful of countries.



 

And if you think that looks bad (not that it doesn’t, mind you), there’s this 2011 Haver/Morgan Stanley one we’ve seen before here:



 

In which total debt for the US, but even more for Japan and especially the UK, are much higher than in the first graph. This may largely be due to underestimating debts in the financial sector, though it’s hard to say. And for the argument I’m trying to make, it doesn’t even matter all that much. Though I would like to say that it’s crazy that we have no better insight in bank debt than we have. We’re asked to recognize that some of our banks are so big they could bring down our entire economies, but we’re not supposed to know how close they are to doing just that. Honesty would kill us, apparently. The 2nd graph shows a huge, 600% of GDP, debt for the UK, but only perhaps 100% for the US. Oh, really? Let’s see the books.

What’s a little easier to figure out concerning all this debt are the household and government parts. Here’s a comparison:

 



 

Let’s take the US as an example. There are 300 million Americans, so about 100 million families. 2013 GDP was $16.7 trillion, the graph says household debt was 80%, so there’s $13.3 trillion in household debt, or $133,000 debt per family, $44,333 per capita. That’s just household debt. Now, forgetting about the details, because we would just get stuck in discussions about which graph is better, Let’s move on to a country that stands out when it comes to household debt, the Netherlands. A 2011 Wall Street Journal graph:

 



 

Netherlands GDP is about $800 billion. Household debt is 250% of that, or $2 trillion. Population is 16.8 million, so household debt per capita is $119,000, or $357,000 per family of 3. Again, that’s just household debt. What people, certainly in government, like to say when they see numbers such as there, is that these are just liabilities, and they have even larger assets. That seems reasonable at first sight, and after all The Netherlands hasn’t completely collapsed under its debt load yet, but it doesn’t cover the whole thing.

As Ann Pettifor said recently about Britain: people don’t sell their assets to pay their debts, they pay them out of their income. The Dutch think they have a lot of value in their homes and their pension plans. But that is true only if both retain their values. And to find out whether that is true or not, in a global economy where, as we’re seeing, everything has been borrowed, we’d have to presume that cheap credit will be available as long as these families have mortgages outstanding on their homes, while their pension plans would have to achieve the returns they aim for, which you can bet they won’t if cheap credit vanishes and asset markets sink. What will remain, however, are the debts.

Dutch public debt is relatively benign at about 75% today, $680 billion, $40,476 per capita, $121,428 per family:

 



 

Between public and household debt, but before corporate debt, both financial and non-financial, every Dutch household is on the hook for $478.428, and every individual, newborn or 95 years old, for $159,476. That’s quite a welcoming gift into this world. And, even though the debt is divided somewhat differently between various countries, a total debt level of 300-400% of GDP is not unusual. Japan is much higher than that, but Japanese sovereign bonds are sold domestically to a large extent. And British debt is much higher because its banking sector is much bigger. The general picture is bad enough. For instance, US total debt at about 350% of GDP is close to $60 trillion, which means some $200,000 per capita, and $600,000 per family of 3.

 



 



 

The Netherlands is about in that vicinity. Many countries are. Japan is a case to watch. Abenomics is adding a lot of yen to the public debt that is already through the roof. Sweden and Norway look much less healthy than you might think. The Mediterranean nations are – burned – toast as long as they have the euro. China’s in a debt league of its own.

There’s a nice correlation between (TCMDO) total credit market debt and the S&P in this next graph, a pretty eerie way of showing how we keep our economies looking good: by throwing more debt after what we already owe. It’s the only way we seem to have left to look good. That’s what low interest rates are for. They allow more people and corporations to borrow more so they can buy stuff they can’t afford. At those rates, who could refuse?



 

But it’s not terribly smart to think rates can stay that low forever. And when they start rising, it’ll be like we’re watching the walls of Jericho. The longer rates stay artificially low, the less believable an economy becomes. because there’s no telling who’s healthy and who’s not: cheap credit allows parties to put on a mask. It’s like everyone’s playing with a stacked deck of cards, and everyone’s winning too. But what’s going to happen when governments will need to pay a normal 5% or so on sovereign debt, and when you have to pay 7-8% on your mortgage? Why do you think home sales and mortgage originations are under such pressure? Could it be the air’s exiting the bubble? More important than when that will happen is THAT it will. And when it does, we’ll find out what our assets are worth. We already know what our debts are. And unlike asset values, they won’t vanish. Or be forgiven.

So the title of this article is dead on. Whatever part of your assets you haven’t borrowed yourself, someone else has either borrowed or borrowed against. And the value of your assets will plummet once cheap credit is no longer available and interest rates rise, while your debt stays, household, public and your share of corporate. And that debt is really all yours. A country’s government can only borrow against the assets of its citizens, and their future labor. A corporation can borrow to look better, but it can only continue to look healthy if you buy its products. But what are you going to do that with? What will be left? Debt will.

John Hussman’s Rant: “Someone Is Going To Have To Hold Stocks At These Prices”

John Hussman has a word of two for those of you who haven't been fans and don't like his message. Buy stocks.

John Hussman's Rant: "Someone Is Going To Have To Hold Stocks At These Prices"

Courtesy of ZeroHedge. View original post here.

Excerpted from John Hussman's Weekly Market Comment,

I’m sometimes viewed as an evil quant, sitting in a dimly lit room, stroking a hairless cat ironically named Mr. Whiskers, and hoping for the worst. That’s undoubtedly because of my view that all of the market’s gains since roughly April 2010 are likely to be wiped out in a rather ordinary completion to the present market cycle, coupled with my broader criticisms of Fed-induced speculation and other ill-conceived policies.

If you’ve been with us for a while, you know that I take no joy in market plunges, and my adamant concern about severe losses this time around reflects a discomfort with having been right about the other two 50% losses in recent memory (not to mention becoming constructive in-between, though my fiduciary stress-testing inclinations in 2009 clearly did us no good in the face of QE – see Setting the Record Straight for the full narrative). Some also have the impression that our objective is to talk the markets down, in a way that interferes with their bullish outlook.

The reality is this. While we certainly hope to provide evidence and data sufficient for disciplined investors to maintain their confidence in our full-cycle approach, we have no particular desire to convert disciplined buy-and-hold investors or reckless speculators to our views (though I do think “buy-and-hold” investors with horizons shorter than 7-10 years have poorly matched their strategy with their objectives). Meanwhile, given that the majority of my income is directed to charity, I have a rather vested interest in doing good for others over time (undoubtedly, my particular focus on finance and autism research demands unusual patience, long horizons, a deep respect for evidence, and no expectation that progress evolves smoothly).

Yet as much as we focus on the long-term good, equilibrium creates an unfortunate constraint: by encouraging one investor to defend their financial security by selling overvalued stocks, the result is that someone else must end up buying the stock at these same levels. That poor soul, we expect, is likely to be worse off for the trade. That may explain my philosophical aversion to speculating in steeply overvalued markets, and my ethical objection to policies like quantitative easing that encourage it. In order to profitably exit that speculation, someone else must be guaranteed misery.

In a financial market where price signals encourage savings to be allocated toward productive uses, what helps an individual investor often helps the entire economy. But in a severely distorted and speculative market, any effort to help one investor is really quite a zero-sum game that requires someone else to be injured. This is just an unhappy result that years of quantitative easing have now foisted upon us.

Accordingly, I am changing my guidance. For those investors who trust our analysis and discipline, no change of course is encouraged. But for those who find our work to be a constant source of irritation to be regarded with open disdain, I am retracting all of it herewith – for you alone – and I leave you free to buy with both hands to whatever extent you are inclined. Not that I encourage it really – that would be bad Karma – but someone is going to have to hold equities at these prices. It would best be those who are fully aware of our concerns and prefer to reject them. So the more you dislike my work, and particularly if you are nasty about it, I have no objection to you accumulating – perhaps on margin – as much stock from other investors as possible.

* * *

John is, of course, completely right… and here he is presenting his vision of the meanness of reversion:

 

Why Are Food Prices So High?

 

Why Are Food Prices so High? Because We're Eating Oil 

Courtesy of Charles Hugh-Smith Of Two Minds 

Regardless of what we eat, we're actually eating oil.

Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero.
 
Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income.
 
While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil. Courtesy of our friends at Market Daily Briefing, here is a chart of a basket of basic foodstuffs and Brent Crude Oil:
 
In other words, regardless of what we eat, we're actually eating oil. Not directly, of course, but indirectly, as the global production of tradable foods relies on mechanized farming, fertilizers derived from fossil fuel feedstocks, transport of the harvest to processing plants and from there, to final customers.
 
Even more indirectly, it took enormous quantities of fossil-fuel energy to construct the aircraft that fly delicacies halfway around the world, the ships that carry cacao beans and grain, the trucks that transport produce and the roads that enable fast, reliable delivery of perishables.
 
Though many observers see money-printing as the master narrative of the global economy, we don't see much correlation between the Fed's ballooning balance sheet and food/oil. If money-printing alone controlled oil (and thus food), prices of oil/food should have soared as the flood of QE3 (and other central bank orgies of credit-money creation) washed into the global economy from late 2012.
 
Instead, oil/food have traced out a wedge: prices have remained in a relatively narrow trading range during the orgy of money-printing.
 
 
While money creation is one influence on commodity prices, supply and demand matter too; in that sense, money printing only matters if it pushes demand higher while constricting supply.
 
Other observers use gold as the "you can't print this" metric of price. In other words, rather than price grain in dollars, yuan, yen or euros, we calculate the cost of grain in ounces of gold.
 
The gold/food ratio is around the level it reached in 2009 after spiking in 2008.
 
 
This tells us food is cheap when priced in gold compared to 2002, but it's more expensive (priced in gold) than it was at gold's peak in 2012.

In effect, the influences of monetary inflation and supply/demand show up in food via the price of oil. Until we stop eating oil (10 calories of fossil fuels are consumed to put one calorie of food on the table), oil is the master commodity in the cost of food.

Success, Redux?

By Dr. Paul Price of Market Shadows

In Market Shadows’ Virtual Value Portfolio, we booked a 92.7% profit when we sold Kelly Services Class A (KELYA) last Dec. 23, 2014, for $25.30 per share.

While not 100% perfect, our timing was very good. Today, with Kelly Services back down to $18. This time, we sold eight November 22, 2014, $20 put contracts for $2.65 per share. (Track our Virtual Put Selling Portfolio here.)

KELYA  put with chart

Our worst-case scenario is if KELYA is below $20 and we’re forced purchase Kelly Services at a net $17.35 per share ($20 strike price – $2.65 put premium).

That potential buy would come very close to KELYA’s 52-week low of $16.83 and substantially below its March, 2014, peak price of $26.17.

The best case result will occur if KELYA recovers to $20 or better before the November 22, 2014, expiration date. If the stock is trading over the strike price of $20, the Market Shadows Virtual Put Writing Portfolio will keep 100% of the $2,120 we received upon selling the puts. We won’t need to buy back any Kelly shares.

Disclosure: Long KELYA shares, short KELYA Puts in my personal account.

Employers Struggle to Find Qualified Graduates: Poorly Written Resumes to Blame?

Courtesy of Mish.

Graduates looking for jobs struggle to fine them. Employers cannot find qualified graduates. Are poor resumes to blame? An article in The Independent suggests that is part of the problem.

Please consider Graduate Employers Struggling to Fill Vacancies.

The class of 2014 who graduate from university this summer still have a choice of hundreds of jobs that they could snap up, says a poll out today.

Nine out of 10 companies surveyed by the Association of Graduate Recruiters are struggling to fill all their vacancies, it concludes.

The reasons are twofold, according to the AGR – more vacancies being on offer after years of austerity and too many applications of insufficient quality.

The AGR surveyed 68 top companies – with 87 per cent reporting unfilled vacancies. These covered a range of occupations – IT, electrical and electronic engineering and general managements jobs.

In all, 55 per cent of the companies said they had increased the number of jobs on offer this year – but two thirds (67 per cent) said applications were of insufficient quality.

Mr Isherwood added: “sometimes they have not paid drafting the application the attention it deserves. It’s like a spray-and-pray approach and then bang the application out.

“As an employer if you’ve got someone who has put a lot of thought into their application, then that clear the first hurdle.”

Assume for a second, every application was perfectly written. There would still be too many people seeking jobs, than jobs exist.

Other than a possible internship, most of these graduates have no real world experience. Moreover, some of those with internships did not do meaningful work.

What’s left is those who get hired.

The problem is lack of relevant experience vs. expectations, and there is no way to hide that problem, no matter how creative the application.

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Goldman’s Cohn Says Inactive Trading Environment Is Abnormal

Lack of trading volatility and volume has negatively affected investment firms. Goldman Sachs, Citigroup (up to a 25% decline in trading revenue) and JP Morgan (20% shortfall) have had to compensate for revenue losses. GS's Gary Cohn won't guess as to the extent of Q2's decline, but noted that the company has been laying off employees as one means to boost earnings in spite of revenue losses. ~ Ilene 

Goldman’s Cohn Says Inactive Trading Environment Is Abnormal

By Michael J. Moore at Bloomberg

Goldman Sachs Group Inc. (GS) President Gary Cohn said low volatility and interest rates that are holding in tight ranges have resulted in an “abnormal” trading market.

“The environment for all the firms is quite difficult right now,” Cohn, 53, said today at an investor conference in New York. “What drives activity in our business is volatility. If markets never move or don’t move, our clients really don’t need to transact.”

Citigroup Inc. (C) Chief Financial Officer John Gerspach, 60, said yesterday that second-quarter trading revenue could fall as much as 25 percent from year-earlier levels, and JPMorgan Chase & Co. (JPM) estimated a 20 percent drop earlier this month. Cohn stopped short of forecasting the decline for New York-based Goldman Sachs.

“We think, at the end of the day, it’s economic in nature,” Cohn said of the cause of lower client volume. “We don’t have clear vision of economic growth or lack of growth.”

Full article Goldman’s Cohn Says Inactive Trading Environment Is Abnormal – Bloomberg.

Try to Contain Your Laughter: Prince Charles and Lady de Rothschild Team Up to Talk About ‘Inclusive Capitalism’

Pam quotes Christine Lagarde, Managing Director of the IMF:

The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population  – that is 3.5 billion people.
 
This statistic was noted in a Forbes article in January. I had wanted to find the source of this surprising number floating around in my mind.
As the World Economic Forum begins in Davos, Switzerland, Oxfam International has released a new report called, “Working for the Few,” that contains some startling statistics on what it calls the “growing tide of inequality.” (Forbes)

Tim Richards discusses "Inclusive Capitalism" today also. It's the first time I heard the term. ~ Ilene 
 

Try to Contain Your Laughter: Prince Charles and Lady de Rothschild Team Up to Talk About 'Inclusive Capitalism'

Courtesy of Pam Martens.

Lady de Rothschild Speaks on Bloomberg News About the Inclusive Capitalism Conference

Now that the worldwide Occupy Wall Street protest movement has been beaten, pepper-sprayed, mass-arrested and hog-tied into submission; now that assorted financial luminaries have exhorted corporate media to stop giving air time to people calling bankers evil; it’s now safe for the 1 percent to take over the debate – or so the thinking goes in London.

Prince Charles, who lives in four mansions in England, Scotland and Wales, delivered the opening speech yesterday for a conference on “Inclusive Capitalism” hosted by Lady de Rothschild, wife of multi-billionaire Sir Evelyn Robert de Rothschild, in the heart of financial skulduggery, the City of London, Wall Street’s alter ego.

Rounding out the day’s speakers were former President Bill Clinton, who repealed the depression era investor protection legislation known as the Glass-Steagall Act which deregulated Wall Street and is widely blamed for the 2008 financial collapse and for ushering in the greatest wealth inequality in America since the Gilded Age; and former Treasury Secretary Lawrence Summers who helped Clinton muscle through the deregulatory legislation. (You can see the full-day agenda here.)

The lurking undertone of the conference was not so much a noblesse oblige gesture to spread the wealth as it was an effort to address the growing anxiety among the well-heeled that if they don’t step up their PR game, government and/or a populist revolution is going to take the reins – and possibly their heads.

Lady de Rothschild (Lynn Forester) summed up the anxiety the day before in an interview with Bloomberg News, saying it’s “really dangerous when business is viewed as one of society’s problems.” She noted further that 61 percent of Britons say they will elect the party “that is toughest on big business.”

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If the Shoe Fits… Sell Puts

Market Shadows’ Virtual Put Writing Portfolio is back in action.

By Dr. Paul Price

We took advantage of a clearance sale in DSW (Designer Shoe Warehouse) shares after a weaker than expected, but decent, fiscal Q1 profit.

DSW  Sep. 30, 2011 - May 28, 2014

We sold (wrote) 6 contracts of the January 2015, $25.00 puts for $3.40 per share in our Virtual Put Selling Portfolio. 

DSW  Jan. $25 puts

Our worst case scenario would be the forced purchase of 600 DSW shares at a net cost of $21.60 ($25 strike price – $3.40 put premium). DSW hasn’t traded that low since January of 2012,  when the stock was on the way to last November’s peak of $47.55.  The company is debt-free and pays a 2.12% dividend (at share price of $23.55).

Today’s plunge to $23.45 brought increased volatility and great put premiums.

Our best-case scenario will be achieved if DSW recovers to $25 or better by January 16, 2015. In that event we’ll keep 100% of the $2,040 we received for selling the puts. Track this trade and all our other options activity by reviewing our Virtual Put Writing Portfolio.

Disclosure: I am now long DSW shares and short DSW puts in my personal account.

 

Just Add Wedges

Capitalism in Crisis Again (Not)

 

Capitalism in Crisis Again (Not)

Courtesy of Tim Richards of The Psy-Fi Blog

Beans

I imagine we all think that what the world needs is a conference on the topic of Inclusive Capitalism, a jolly beanfest of the world’s great and the good dedicated to discussing how to renew trust in capitalism.  Even better to hold it in London, where the dreadful consequences and devastating effects of the last financial crisis are plain for all to see in the proliferation of designer retail outlets, the high rise growth of iconic skyscrapers and the influx of the world’s billionaire elite seeking democratic boltholes. 

But let’s face it, you couldn't get the world’s top brains to attend a conference in downtown Mogadishu could you? Although, frankly, that might provide them with a better perspective on the pros and cons of capitalism.

 

Worthy

 

In its own words Inclusive Capitalism is a:

“Movement that seeks to respond to the serious dislocations caused by developments in the capitalism of the last 30 years:  worldwide increases in income inequality, large-scale corporate and financial scandals and the fraying of public trust in business, historically high and persistent unemployment and short-term approaches to managing and owning companies.”
All of which is undoubtedly worthy, although perhaps it rather misses the point that the growth of inequality may not be a function of capitalism going wrong but a side-effect of adding the odd billion or so highly educated people to the global workforce. However, let’s ignore that and consider the point at hand. 

 

Elevator

 

Inclusive Capitalism takes as its central metaphor economist Larry Katz’s elevator from The Crisis of Middle Class America:

“Think of the American economy as a large apartment block … A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”
Behind Katz’s metaphor is a nasty reality, one we've touched on before in Repellent: The Magical Law of Attraction, that social mobility in America and Britain is less a dream than a credit-induced delusion.  If you’re born poor you’ll almost certainly die poor.  Katz’s own research backs this up, and hints at the underlying cause of the problem:

“Since 1980, however, a sharp decline in skill supply growth driven by a slowdown in the rise of educational attainment of successive U.S. born cohorts has been a major factor in the surge in educational wage differentials. Polarization set in during the late 1980s with employment shifts into high- and low-wage jobs at the expense of the middle leading to rapidly rising upper tail wage inequality but modestly falling lower tail wage inequality.”
 

Globalization

 

So, just at the point at which India and China started modernizing, and computerization made higher skilled, and higher paid, jobs transferable to any location, U.S. educational attainment moderated, and the result is the hollowing out of the middle, as all those new jobs fled offshore, leaving an under-educated cohort floundering around in a rapidly shrinking pool of jobs. Perhaps a general decline in living standards has been attenuated by the downward pressure that globalization has placed on the price of consumer goods, but in the end the whole thing risks becoming a gigantic Ponzi scheme; if the middle classes in the developed world collapse then who will buy the manufactured goods from the developing nations? 

 

This is an inconvenient truth for politician and talking heads of all kinds, who’d far rather blame some nebulous “capitalist” entity for the world's woes and declining living standards of their citizens than do something practical, such as pointing out to their electorates that if they don’t take it upon themselves to get a decent education they’re simply flotsam in the whirlpool that is the global economy. Living standards in developed nations can be sustained for a long time by our deep reserves of capital of all kinds: democratic institutions are hard to replicate, as we saw in History's Financial Shadow, and as many hard-pressed oligarchs would concede as they flee to London and New York from various troubled global economic hot spots; but even so there's a limit to the size of the social security safety net.

 

Not Broken

 

What this all misses is that capitalism isn't broken. It’s exactly the same rapacious, self-interested machine it’s always been, and the fact that a bunch of bad bankers and reckless regulators brought the world to the point of financial catastrophe, and that the financial elite are a greedy bunch of selfish bastards who'd rather live behind barbed wire in a fortress than share their spoils with the masses on the streets, is nothing new, as I outlined in The Zeitgeist Investor. History tells us that this is the nature of capitalism, it's how people behave when they become rich, it's not an emergent property of our particular time and place – see Born Rich, Born Greedy, for example.

 

Nor can we fix our financial system by exporting the morals and values of other cultures.  Suggesting, for instance, that other countries should adopt the German model of participatory capitalism is wrong-headed – it's a product of German culture, not a gold standard we should even attempt to adhere to globally.  You'd have thought the European Union was already example enough of what can go wrong when you yoke different cultures together (see: Fear and Loathing in the Eurozone).
 
And the inherent short-termist nature of businesses and shareholders isn't anything new either: much though I dislike it the truth is that most long-term planning fails.  Unpredictability is inherent in the world.  At best we should have long-term goals, at least that way we know which general direction to head in, but five-year plans died with Stalin and Mao, and never delivered much other than abject misery, mass extermination and economic collapse anyway. In comparison the crisis of capitalism is small beer, indeed.

 

Point Missed

 

Of course, this type of conference isn't really expecting to fix any of these things.  It’s a way of focusing attention on these issues, but the reality is that the attendees could make more of a difference by donating their salaries and expenses for the day to a charity dedicated to truly improving the world.  They could talk forever and never come to a conclusion while providing mosquito nets and educating women in poor nations will make the world a measurably better place (see: Economic Parasites).

 

There’s nothing fundamentally wrong with capitalism that reforming the funding of political parties won’t fix.  But until we’re willing and able to do that we ought to spend our time doing things that make a real difference, not holding conferences that allow the great and the good to talk to each other as though they were going to change anything for anyone.  They’re not.