Archives for June 2014

What Was The ‘Real’ Level of 1st Qtr GDP?

Courtesy of Larry Doyle.

Anyone with a modicum of ‘sense on cents’ is well aware of the maxim ‘garbage in, garbage out.’

If we are to believe that the inflation data reported by Uncle Sam does not properly capture the true level of price increases in our economy — did somebody say intentionally misleading — then the immediate question begs, what is the real level of economic activity in the nation?

Recall that real GDP is defined as:

A measure of economic growth from one period to another expressed as a percentage and adjusted for inflation (i.e. expressed in real as opposed to nominal terms). The real economic growth rate is a measure of the rate of change that a nation’s gross domestic product (GDP) experiences from one year to another. 

If inflation is under reported, and the rate of change in our economic growth is a known figure, then by definition the output (that is, real GDP) will be overstated. So I repeat my question: What is the real level, that is a more honest and accurate assessment, of our 1st quarter GDP?

Let’s navigate and review the fabulous work of Rick Davis at Consumer Metrics Institute who goes deeper into this analysis than Uncle Sam and his lapdogs might care:

.  .  .  for this report the BEA assumed annualized net aggregate inflation of 1.27%. 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 -3.51% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been an horrific -5.62%.

We can keep our heads in the sand as Uncle Sam and others might like, but I prefer to actually know the truth so I can have a better read on what is really going on along our economic landscape and . . . navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

For those reading this via syndicated outlet or by e-mail or another delivery, please visit the blog to comment on this piece of ‘sense on cents.’


Expert opinion… that was dead wrong.

It pays to question assumptions, even from ‘expert’ sources.

By Dr. Paul Price of Market Shadows

Short Oil!  Barron's Cover Story  Mar. 31, 2014


Too Much TV Linked to Premature Death – Yahoo News

Before you congratulate yourself for engaging in less than 4 hours of T.V. a day, watching tickers move across your computer screen is not doing your health any good either. And the Mediterranean diet and running on the treadmill are not undoing the damage. 

Too Much TV Linked to Premature Death

By Rachael Rettner 

Adults who watch a lot of TV may be at an increased risk of dying at a relatively young age, a new study suggests.

The study involved more than 13,200 adults in Spain who were all college graduates, and were around 37 years old at the study's start. Participants were followed for about eight years, over which there were 97 deaths.

Those who watched three or more hours of TV a day were twice as likely to die over the study period, compared with those whose watched TV for one hour or less daily, the study found.

In addition, the researchers found that participants' total time spent sitting — including time spent watching TV, using a computer or driving — was also linked to an increased risk of death during the study period. [Don't Sit Tight: 6 Ways to Make a Deadly Activity Healthier]

The findings held even after the researchers took into account factors that could affect a person's risk of death, including age, sex, smoking habits, total daily calorie intake, snacking habits, body mass index, physical activity level and whether participants adhered to a Mediterranean diet, which has been linked to a longer life span.

Keep reading Too Much TV Linked to Premature Death – Yahoo News.

How Barclays Got Caught Red-Handed With “Pernicious HFT Fraud”

Courtesy of ZeroHedge. View original post here.

First it was gold, now it is HFT – poor Barclays just can't get away with any market rigging crime these days.

Remember when in the aftermath of the most recent Michael Lewis-inspired HFT scandal, one after another HFT and Dark Pool exchange swore up and down they know, see, hear and certainly trade no predatory algo evil? Turns out they lied, as usual.

As was reported earlier, the NY AG just charged Barclays with fraud (or rather, as Schneiderman called it repeatedly "pernicious fraud") for not only misrepresenting the nature of its dark pool to clients, but also exposing them to numerous "toxic" and predatory HFT algos – another word for algos which frontran orderflow either within the Barclays dark pool, Barclays LX – arguably the second largest venue in the US second only to Credit Suisse' Crossfinder – or on different lit and unlit venues as soon as they had seen the flow as indicated by Barclays.

As Bloomberg explains, "Barclays Plc was so bent on lifting its private trading venue to the upper ranks of Wall Street dark pools that it lied to customers and masked the role of high-frequency traders, according to New York’s attorney general."

Barclays falsified marketing materials to hide how much high-frequency traders were buying and selling, according to a complaint filed today by Eric Schneiderman. Barclays runs one of Wall Street’s largest dark pools, a private trading venue where investors can trade stocks mostly anonymously. Mark Lane, a spokesman for London-based Barclays, declined to comment.

Here Bloomberg goes so far as to give "critics" like us credit for something we have said since 2009:

Schneiderman’s action will fortify a suspicion common among critics of dark pools and high-frequency firms, which have proliferated in the past decade with advances in computer power and efforts to spur competition among U.S. trading venues. Namely, that in the rush to attract traders to their markets and boost profits, the venues have catered to computerized market makers to the detriment of individuals.

Actually, replace "fortify" with "confirm." Because what the Scheinderman action proves without doubt is that in order to generate ever-bigger trading revenue profits and to pull as much activity from lit exchanges, big banks and all other exchanges for that matter, would gladly sell order flow of traditional clients to HFTs in order to allow frontrunning of their orders. In exchange for this Barclays et al (yes, every other dark pool out there does the same) would be compensated handsomely from the same HFTs that make money without taking any risk, as all they do is simply frontrun legitimate orders.

Additionally, while comic, the recent spate of activity to tame HFTs appears to be solely the result of Michael Lewis' book… even though sites such as this one had described precisely what happens with HFT on both lit and unlit venues as early as 2009. Oh well, "whatever it takes."

Michael Lewis’s “Flash Boys,” released in March, said bank-owned dark pools serve as a key intersection between high-frequency traders and brokers’ investor clients. The banks, Lewis wrote, charge high-frequency traders for the right to trade against orders placed by their brokerage customers.

“Why would anyone pay for access to the customers’ orders inside a Wall Street bank’s dark pool?” Lewis wrote. “The straight answer was that a customer’s stock market order, inside a dark pool, was fat and juicy prey.”

But, wait, they swore that the only "provide liquidity." Oh, and they also lie constantly and also just happen to engage in criminal activity now and then. Btw, how is that Virtu IPO going? Because as everyone knows there is always only one cockroach, and today Barclays picked the short straw.

What is perhaps most interesting about the Barclays case is that the AG appears to have gotten assistance from some high level executives at Barclays itself.

Schneiderman paints a picture of “fraud and deceit” at Barclays perpetrated by unidentified executives who lied to customers about the role played by high-frequency traders in its market as part of an effort to increase its size. Some former “high-level” Barclays insiders helped frame the case, according to the complaint.

Well, clearly it was former, because if they were employed by the criminal bank before today's blockbuster lawsuit they certainly aren't any more.

* * *

Here are some of the choice quotes from the NY AG lawsuit vs Barclays, and with at least 24 instances of the word "toxic" in the lawsuit, one can be sure there are many more good selections that we just wont have the space to fit:

Barclays allows high frequency traders to “cross-connect” to its servers. As of the filing of this Complaint, several dozen of the most well-known and sophisticated high frequency trading firms in the world are cross-connected with Barclays, allowing them to take advantage of Barclays’ non-high frequency trading clients, by getting a speed advantage over those slower-moving counterparties.

* * *

While Barclays represented that it used ultra-fast “direct data feeds” to process market price and trade data in order to deter latency arbitrage by high frequency traders in its dark pool, Barclays in fact processed that market data so slowly as to allow latency arbitrage. Internal analyses confirmed that Barclays’ slow processing of market data allowed high frequency traders to engage in such predatory activity.

* * *

According to a former senior Director in that division, “[a]t every sales meeting or product meeting, the main goal they were talking about was to grow the size of [Barclays’ dark pool] to become the largest pool. All the product team’s goals, which would also include their compensation[,] were tied to making the pool bigger. [Barclays had] great incentive at all costs to make the pool bigger.

To grow its dark pool, Barclays had to increase the number of orders that Barclays, acting as a broker, executed in the dark pool. This required Barclays to send more of its clients’ orders into the dark pool, and to make sure that there was sufficient liquidity in the dark pool to fill those orders. Barclays looked to attract high frequency traders to its dark pool to meet this need.

To grow its dark pool, Barclays had to increase the number of orders that Barclays, acting as a broker, executed in the dark pool. This required Barclays to send more of its clients’ orders into the dark pool, and to make sure that there was sufficient liquidity in the dark pool to fill those orders. Barclays looked to attract high frequency traders to its dark pool to meet this need.

In written marketing materials, statements to the media, and in sales meetings with clients, potential clients, and other market participants (hereinafter, “clients”), Barclays represented that it provides a safe, transparent trading environment, and helps to protect its clients from the risks of aggressive high frequency traders.

* * *

Far from being transparent regarding trading activity in its dark pool, Barclays made material misrepresentations regarding the extent of aggressive or predatory high frequency trading activity in the pool, and the level of protection Barclays provided from such activity.

Barclays Falsified an Analysis Purporting to Show the Extent of High Frequency Trading in its Dark Pool

Barclays’ sales staff heavily promoted this analysis to investors as a representation of the trading within the dark pool, and marketed that analysis as “a snapshot of the  participants” in order to show clients “an accurate view of our pool.” In addition, certain Barclays marketing materials appended a notation to the chart explaining that it  portrays the top 100 clients trading in the dark pool.

These representations were false. The chart and accompanying statements misrepresented the trading taking place in Barclays’ dark pool. That is because senior Barclays personnel de-emphasized the presence of high frequency traders in the pool, and removed from the analysis one of the largest and most toxic participants in Barclays’ dark pool.

* * *

On October 5, 2012, a draft version of the analysis was circulated by email to senior executives in Barclays’ Equities Electronic Trading division. The accompanying email noted that Barclays “de-emphasized the number of ELPs [electronic liquidity providers, or high frequency traders] by moving them to the back.” The email also stated that the chart “remov[es] Tradebot.” Tradebot Systems had historically been, and was at that time, the largest participant in Barclays’ dark pool, with an established history of trading activity that was known to Barclays as “toxic.” Those alterations had the effect of obscuring the amount of high frequency trading activity in the dark pool by disguising the total number of high frequency trading firms, and deleting one significant firm altogether. In a response email, one employee objected to the  modified chart, stating that removing Tradebot from the analysis was a falsification of the data.

* * *

A Vice President responsible for selling the dark pool to clients disputed that explanation, replying to the group that “[m]y point when selling that picture was always: ‘here is a snapshot of the participants in [Barclays’ dark pool] as an accurate view of our pool.’ I was never using it like an ‘illustration’” of Barclays capability to monitor the pool. “I had always liked the idea that we were being transparent, but happy to take liberties if we can all agree” (emphasis added).

Barclays’ Head of Product Development (who was also the second in command within Barclays’ Equities Electronic Trading division) agreed. He responded, “I think the accuracy [of the chart] is secondary to [the] objective” of showing clients that Barclays monitors the trading in its dark pool, and “so if you want to move/kill certain bubbles, it doesn’t really matter.”

Barclays’ Head of Equities Sales responded, “Yes! U smart.”

* * *

The analysis also determined that the trading venues to which Barclays routed unfilled orders (after first having routed them to its own dark pool) tended to be venues hosted by high-speed trading firms, “[n]one of which,” recalled one Director, “had a reputation for being favorable to clients from an execution perspective.” Those venues included Knight Capital, Getco, and Citadel.

* * *

Another Director was then instructed to change crucial figures in the PowerPoint presentation, in order to make them more favorable to Barclays. Specifically, that Director was instructed to change Barclays’ internalization rate for all orders routed to dark venues from 75%, as noted above, to 35% – a number far less damning to Barclays and which would have the effect of making the Institutional Investor’s 88% internalization rate look like an outlier. As described by this former Director, this was an “intent [by Barclays] to shift blame to the client . . . This 35 percent is not true and not validated by anything.” Despite this Directors’ protestations, the analysis was altered, and the PowerPoint was presented to the Institutional Investor. Shortly after this incident, this Director resigned from Barclays.

* * *

On numerous occasions since 2011, Barclays disclosed detailed, sensitive information to major high frequency trading firms in order to encourage those firms to increase their activity in Barclays’ dark pool. That information, which was not generally supplied to other clients, included data that helped those firms maximize the effectiveness of their aggressive trading strategies in the dark pool. The information included:

  • The routing logic of Barclays’ order router, including the percentage of Barclays’ internal order flow that was first directed into its own dark pool;
  • A breakdown of trades executed in the dark pool by participant type (e.g., percentage of orders from institutional investors, high frequency traders, etc.); and
  • A breakdown of trades executed in the dark pool by “toxicity” level (see Section III (C), above, for discussion of Liquidity Profiling “toxicity” levels

Barclays shared this information in order to attract high frequency trading activity to its dark pool. For instance, in 2013, Barclays was approached by a prominent high  frequency trading firm seeking information similar to that set forth above. This firm informed Barclays that “we have our largest trading team . . . looking to get into the dark pool space,” and “are try[ing] to get more teams connected to your dark pool.” Barclays readily provided the requested information, despite the fact that this information was not generally provided to other clients.

* * *

As described by one former senior-level Director within the Equities Electronics Trading division, “Barclays was doing deals left and right with high frequency firms to invite them into the pool to be trading partners for the buy side. So the pool is mainly made up of high frequency firms.” “[T]he way the deal would work is [Barclays] would invite the high frequency firms in. They would trade with the buy side. The buy side would pay the commissions. The high frequency firms would pay basically nothing. They would make their money off of manipulating the price. Barclays would make their money off the buy side. And the buy side would totally be taken advantage of because they got stuck with the bad trade . . . this happened over and over again.”

* * *

In sum, Barclays’ courting of high frequency traders, and its willingness to falsify the extent of high frequency trading activity in its dark pool, was contrary to Barclays’ representations to clients that Barclays operated with “transparency” and provided a safe venue in which to trade. As described by one former senior Barclays Director, “There was a lot going on in the dark pool that was not in the best interests of clients. The practice of almost ensuring that every counterparty would be a high frequency firm, it seems to me that that wouldn’t be in the best interest of their clients . . . It’s almost like they are building a car and saying it has an airbag and there is no airbag or brakes.”

* * *

In conclusion, Barclays response to all of the above, from its spokesman, "Integrity of the markets is a top priority of Barclays."

Clearly: why else would MarketsMedia award Barclays its "Best Dark Pool: Barclays LX" prize? Oh wait, more circular payment kickbacks. Never mind.

Source: The People of the State of NY against Barclays Capital

Bed, Bath & (Beyond explanation)

BBBY management had said previously that they expected the May quarter to come in at $0.92 – $0.96 per share.

Actual EPS were right in that range, at $0.93, flat with last year. Fiscal Q2 is also projected to be flattish. The company still expects a slightly positive full year comparison.

The stock plunged by more than 6% after hours on what I consider to be non-news.

BBBY after hours Jun. 25, 2014

Prior to the after-market session the 52-week range had been $59.89 – $80.82.

I added to my posiiton at $56.44.


Truly Inane Bloomberg Analysis On Gold

Courtesy of Mish.

Bad economic analysis abounds. Some of it is so bad you wonder if the authors understand how any markets work, not just the topic of discussion.

For example, please consider Gold Euphoria Won’t Last With Yellen’s Rally Fading, a truly remarkable exercise because it took three Bloomberg writers to produce.

Here are some snips, followed by my comments.

After the biggest gold slump in three decades left investors heartbroken, they’re following Taylor Swift’s advice and never, ever getting back together.

Janet Yellen, the one person able to make the lovers reconcile, did her best. Prices surged the most since September the day after the Fed chair signaled last week that low interest rates are here to stay. Traders and analysts surveyed by Bloomberg News aren’t expecting the euphoria to last.

For starters, there is no euphoria in gold. Arguably, one of the best measures of sentiment on gold is articles like the one above.

Here is a look at Yellen’s “Fading Rally”.

Yellen’s Rally Fading

Supposedly it makes sense to discuss “gold’s fading rally” but not countless other “fading rallies” some of which are actually fading.

Apple’s Fading Rally

Let’s march on. …

Continue Here

“Three Es Suggest Massive Change is Upon Us” Chris Martenson’s Accelerated Crash Course

Courtesy of Mish.

Chris Martenson at Peak Prosperity put together a condensed version of his 4.5-hour long Crash Course Video Series.

The condensed version is just under an hour long, and it’s well worth your time to play it.

The video is not about an “economic crash” per se, although Chris and I both think one is highly likely.

Rather, Chris analyzes “The Three Es” (Economy, Energy, and Environment) to highlight serious problems in assumed Exponential Growth, an “E” that neither of us believes likely.

Here is a link to the Accelerated Crash Course Transcript.

Mike “Mish” Shedlock

Continue Here

Diving Into the GDP Report of -2.9% Growth

Courtesy of Mish.

The first quarter GDP initial projection was 0.1%. The second estimate came in at -1.0%. Today the third estimate came in at -2.9%.

Gosh, first quarter weather was far worse than anyone realized.

Let’s dive into the First Quarter 2014 Third Estimate from the BEA for some weather-details.

Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. The downturn reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in nonresidential fixed investment and in state and local government spending, partly offset by an upturn in federal government spending.


The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the first quarter, the same increase as in the second estimate; this index increased 1.5 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the first quarter, compared with an increase of 1.8 percent in the fourth.


  • Real personal consumption expenditures increased 1.0 percent in the first quarter, compared with an increase of 3.3 percent in the fourth. 
  • Durable goods increased 1.2 per cent, compared with an increase of 2.8 percent.
  • Nondurable goods decreased 0.3 percent, in contrast to an increase of 2.9 percent. Services increased 1.5 percent, compared with an increase of 3.5 percent. 
  • Real nonresidential fixed investment decreased 1.2 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth. Nonresidential structures decreased 7.7 percent, compared with a decrease of 1.8 percent. Equipment decreased 2.8 percent, in contrast to an increase of 10.9 percent.
  • Intellectual property products increased 6.3 percent, compared with an increase of 4.0 percent.
  • Real residential fixed investment decreased 4.2 percent, compared with a decrease of 7.9 percent.
  • Real exports of goods and services decreased 8.9 percent in the first quarter, in contrast to an increase of 9.5 percent in the fourth.
  • Real imports of goods and services increased 1.8 percent, compared with an increase of 1.5 percent.
  • Real federal government consumption expenditures and gross investment increased 0.6 percent in the first quarter, in contrast to a decrease of 12.8 percent in the fourth. National defense decreased 2.5 percent, compared with a decrease of 14.4 percent. Nondefense increased 5.9 percent, in contrast to a decrease of 10.0 percent.
  • Real state and local government consumption expenditures and gross investment decreased 1.7 percent; it was unchanged in the fourth quarter.
  • The change in real private inventories subtracted 1.70 percentage points from the first-quarter change in real GDP , after subtracting 0.02 percentage point from the fourth-quarter change.
  • Private businesses increased inventories $45.9 billion in the first quarter, following increases of $111.7 billion in the fourth quarter and $115.7 billion in the third. Real final sales of domestic product — GDP less change in private inventories — decreased 1.3 percent in the first quarter, in contrast to an increase of 2.7 percent in the fourth. 


Real gross domestic income (GDI), which measures the output of the economy as the costs incurred and the incomes earned in the production of GDP, decreased 2.6 percent in the first quarter, in contrast to an increase of 2.6 percent in the fourth . For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change.

Key Item Synopsis

  • Exports (which add to GDP) were down 8.9%.
  • Imports (which subtract from GDP) were up 1.8%.
  • Durable goods were up 1.2%
  • Nonresidential fixed investment decreased 1.2%
  • Consumer prices rose 1.3%.
  • Federal spending was up 0.6%
  • Personal spending was up 1.0%.

GDP and GDI match over time. GDP was down 2.9% while GDI was down 2.6%. Take your choice. The numbers are awful….

Continue Here

They’re Lying To Us, Part 2: GDP

Courtesy of John Rubino.

Today the US took its next-to-last stab at calculating First Quarter GDP, and the downward revision was impressive even by recent standards. It now appears that the economy, well, here’s how Bloomberg puts it:

U.S. Economy Shrank in First Quarter by Most in Five Years

The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled.

Gross domestic product fell at a 2.9 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in health care spending.

And this, believe it or not, is still an unrealistically positive spin on the actual numbers. The Consumer Metrics Institute (CMI) specializes in finding the truth in the Bureau of Economic Analysis’ statistical fog, and here’s a telling paragraph in CMI’s longer, must-read report:

And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.27%. 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 -3.51% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been an horrific -5.62%.

That’s right, the government is assuming that inflation is running at a rate of 1.27%. To anyone who eats (beef, eggs, and citrus prices are up 9%, 5%, and 22%, respectively, in the past year) or drives (gasoline is at record highs in many states) this seems just a tad on the optimistic side. As CMI noted, MIT’s Billion Prices Project, which monitors real-time pricing across the Internet, is rising at a nearly 4% rate, which for most people probably feels more accurate.

Oil price June 2014

So why is Washington using such deceptive inflation numbers when calculating GDP? Because 1) it makes the economy look bigger, which makes US economic policy look more effective and its architects more competent, and 2) they can get away with it. Most media accounts of this and other economic statistics simply repeat the headline number without considering how it was calculated, so what the government says is exactly what most people hear. Only in the sound money community is this debated, and that’s far too small a forum to affect general perception.

But an effective lie is still a lie, and this one is a whopper.

Visit John’s Dollar Collapse blog here >

Debt Rattle June 25 2014: We Live in Our Own Past

Courtesy of The Automatic Earth.

Harris & Ewing Kids, police motorcycles with sidecars, and streetcar, WashingtonDC 1922

I’m going to step into uncharted territory, a for lack of a better word philosophical theme that I’ve long had on my mind but can’t quite figure out completely yet, and I would like you to tell me how much of it you recognize, or that maybe I’m a total fool for looking at things the way I do. You see, I often have this notion that we are living in our own past; not even our present, and certainly not our future.

It’s a feeling that creeps up on me a lot when I do my daily perusing of the financial press. It makes me think: wait a minute, that whole financial world is dead, because if you would subtract all the debt from all the assets, there would be nothing left, or at the very minimum not nearly enough to keep it going at anything like the size it had until recently, and which it needs to continue functioning (you can’t just chop off a third or half or more off a system and expect it to keep working).

Sure, it’s being kept ‘alive’ – though there’s a lot of virtual world in there – by adding more debt to the existing debt and by hiding much of that existing debt from prying eyes, but that doesn’t solve any of the fundamental problems, that’s all just lipstick on the zombie pig. And it can only lead to problems growing worse, certainly for the weaker segments of our societies.

And if the world of finance is broke, so must the economy at large be, and hence the entire model of society we live in. Which I think about on a regular basis when I see all these people live in their increasingly identical homes and get in their increasingly identical cars on their way to do increasingly identical jobs in increasingly identical offices or retail buildings. Sometimes I think perhaps the lack of variety itself is a sign of death, or dying. In any case, I wonder why all these people keep doing what they do. Don’t they have the same notion that I have that it’s really over, this model, maze, matrix, they live in, that perhaps they should take a step back and look at themselves?

I think they don’t. But I also still don’t think that makes me the crazy one. I see it as evidence that the manipulation and propaganda or whatever you call it, is doing its job, and the job is easy, because people don’t want to reflect on the fact that everything they’ve ever known, and that they’ve built their entire existence around, is not just crumbling but effectively already gone. People don’t like change, and certainly not the kind that threatens to make things ‘worse’. Whatever ‘worse’ may actually mean in this context, it could be an unfounded fear and it would make little difference to their attitude.

And it’s by no means just the financial world that looks like a bankrupt remnant of our past. Our energy resources, too, are dwindling. Over a somewhat longer timeframe, but what difference does that make? There’s very little doubt left that we hit peak conventional oil in the last decade, and it’s all downhill and harder and in the end less from there.

Shale is a pipedream, wind and solar can’t keep the grid running; these things, like the debt situation, look so obviously threatening to our way of life you’d think we’d be looking hard at seriously adapting that way of life. But we don’t, we just want to substitute one energy source with another, even though they’re hugely different and to a large extent incompatible.

We’re so addicted to the comfortable feeling of having all rooms in our homes heated or cooled, and to taking our own little transport units the same half hour drive to work and back every single day that we’d rather not think about why we do it than change our ways. Even as it’s glaringly obvious that our ways must and will stop at some point. We’re not going to find some new magical mystery energy source, and besides, both our own legacy of profligate energy use and the 2nd law of thermodynamics tell us it wouldn’t be all that magical anyway.

The consumption of energy is a potentially very destructive force, as physics clearly states. Which should really teach us that we need to be very careful about using it, burning it, and building our societies in ways that necessitate for us to use more of it all the time. Even if burning more of it makes us feel more comfortable in the short run.

Which leads to the third issue to give me the feeling that we live in our past: the damage we’ve done by using the planet’s energy resources to abandon over the past 150 years or so (an arbitrary number), to our living environment. There are many kinds of energy consumption related pollution that various sizes of ecosystems won’t be able to clean up in hundreds of years or more. Pesticides, insecticides, plastic oceans, nuclear waste we have no storage solutions for, the list is so absolutely endless it’s no use trying to name all individual items.

And then there’s the impact of methane, CO2 and other substances, which scores of people, for all sorts of reasons, seek to deny. While the principle is dead simple, even if the earth’s ecosystem is far more complex than we are smart enough to comprehend: increase the amount of these substances in the atmosphere – and soil, and oceans -, and temperatures will rise. Again, basic physics.

A world of violent storms and heatwaves, of crop losses and flooded nations, a world which at the same time will have far less energy available to deal with these issues, and no money/credit to speak of to buy that energy with. That looks like a pretty accurate picture of the world that we – or is that our children? – will live in.

The bright side is there’ll be far less of them, and per capita energy consumption will come down something big. The dark side is they will be fully unprepared, because we will have chosen to live in our past until our future caught up with it. For anyone wanting to emphasize how clever we are as a species, please explain what is so smart about this hitting the wall at 100 miles an hour thing. Or, alternatively, your instinctive denial of it.

For the rest of you, please tell me if you ever have the same feeling I do when you look around where you live, that you’re really looking at a society that has already died. See, I think that perhaps the longer we insist on pretending this is our future, not our past, and that everything is fine and/or easily solvable, the further and the more violently we’ll be thrown back into that past.

BOE’s Carney: Inflated Central Bank Balance Sheet the New Normal; Expect to Hear the Same Conclusion from the U.S. Fed

Courtesy of Pam Martens.

Mark Carney, BOE Governor, Testifying Before Parliament on June 24, 2014

The tabloids in London are having a field day today with headlines calling Bank of England Governor, Mark Carney, an “unreliable boyfriend” – a remark made yesterday by MP Pat McFadden during a hearing of the Treasury Select Committee of Parliament over the mixed signals Carney is sending the market about the timing of interest rate hikes by the BOE. (Carney, a Canadian and former head of the Bank of Canada, where he masterfully steered the Canadian economy through the financial crisis, might be forgiven for alternately thinking he’s on a bad blind date in his current assignment.)

Carney suffered a withering grilling yesterday over a speech he delivered on June 12 in which he said “There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.” (See full text of speech linked below.)

The real stunner of yesterday’s hearing, however, and the import of its underlying message, came at almost the end of the session in response to questions from MPs John Thurso and Stewart Hosie. Carney, who is also Chairman of the G20 Financial Stability Board, raised the very real possibility that the big asset purchases that have inflated both the BOE’s balance sheet as well as created a $4 trillion balance sheet at the U.S. Fed, are not going to be fully unwound – they are the new normal.

Thurso started off with this line of questioning:

John Thurso, Member of Parliament's Treasury Select Committee

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The Happy Story of Boomers Retiring on Their Generational Wealth Is Wrong

Courtesy of Charles Hugh-Smith, Of Two Minds

This happy story is wrong on multiple counts.

The conventional view of the Baby Boomers' retirement is a happy story: since we're living longer and remaining productive longer, Boomers will not be as much of a burden on Gen-X and Gen-Y as doom-and-gloomers assume.

Not only are Boomers staying productive longer, they will draw upon their vast generational wealth as they age, limiting the financial burden on younger generations.

This happy story is nicely summarized in this lengthy piece The Fear Factor: Long-held predictions of economic chaos as baby boomers grow old are based on formulas that are just plain wrong.

In this view, the only thing needed to prop up Social Security for the rest of the 21st century is a higher tax on high-income earners, in effect moving the limit on earned income exposed to Social Security taxes from about $114,000 to $217,000.

This happy story is wrong on multiple counts. Let's start with the most egregious errors:

1. It ignores the End of Work and the decline of full-time jobs

2. It ignores the Elephants in the Room, Medicare and Medicaid

3. It ignores the inconvenient reality that there is nobody to buy the Boomers' overpriced stocks, bonds and homes when they start to unload them

Put another way: the happy story ignores the changing nature of work and jobs, the unsustainable cost trajectory of Sickcare (a.k.a. healthcare) and the inability of Gen-X and Gen-Y to buy Boomer assets at bubble valuations. Take these factors into minimal consideration and the claim that 76 million people (out of 316 million) can retire with no negative repercussions falls completely apart.

1. The end of work and changing nature of jobs: I have covered this for many years, most recently in a program with Gordon Long: The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube).

Insert end of work in the custom search box on this site and you'll get 10 pages of articles published here on that topic. For example:

Global Reality: Surplus of Labor, Scarcity of Paid Work (May 7, 2012)

The reality is sobering: 57 million people draw Social Security benefits, tens of millions more draw Medicaid, Section 8 housing credits, etc., and full-time jobs number 118 million:

The Good And The Not- So-Good News About US Jobs In One Chart (Zero Hedge)


That's a ratio of roughly two workers for every retiree and considerably less than that for workers to the total number of government dependents. As the Baby Boom retires en masse, if full-time jobs don't rise as dramatically as the number of retirees, the system fails.

The happy story repeats the usual falsehood that Social Security has a Trust Fund it can draw down. This is a falsehood because the Trust Fund is fiction: when Social Security runs a deficit, the Treasury funds it by selling Treasury bonds, the same way it funds any other deficit spending. If the Treasury can't sell bonds, the phantom nature of the Trust Fund will be revealed.

2. Everyone who looks at numbers rather than fictional claims knows the intractable problem is Medicare and Medicaid. In Sickcare, there are no real limits on cost, and so every attempt to impose cost discipline fails or triggers blowback.

Here is Medicare's twin for under-age-65 care for low-income households, Medicaid:

As I have observed for years, Obamacare and Medicare/Medicaid do not tackle the underlying problems of Sickcare costs in America. If you haven't read these analyses, please have a look:

Why "Healthcare Reform" Is Not Reform, Part I (December 28, 2009)

Why "Healthcare Reform" Is Not Reform, Part II (December 29, 2009)

That Which is Unsustainable Will Go Away: Medicare (May 16, 2012)

Obamacare is a Catastrophe That Cannot Be Fixed (December 6, 2013)

3. As I explained in The Generational Short Part 2: Who Will Boomers Sell Their Stocks To?, the Boomers' vast generational wealth will shrivel once they start selling assets en masse. The reality is neither Gen-X nor Gen-Y have the savings, income or desire to buy bubble-level assets from their elders.

This reality has been papered over for the past 5 years of super-low interest rates, which have enabled unqualified buyers to buy overpriced assets with modest income. Once the defaults start pouring in (and/or interest rates rise), the reality will become visible: you can't cash in your wealth if there are no buyers.

There are numerous other fatal flaws with the happy story that 76 million Boomers can retire on full pensions and live off their home equity and stock portfolios. Here are a few of many:

4. Pension funds based on annual returns of 7.5% will be unable to fund the promised pensions when annual returns decline to negative 5%. As John Hussman has explained, every asset bubble in effect siphons off all the future return: when the bubble finally pops, average annual returns are subpar or negative for years.

5. The ultimate buyer of all Boomer assets is presumed to be the Federal Reserve.I explain why this isn't going to happen in The Fed's Hobson's Choice: End QE and Zero-Interest Rates or Destabilize the Dollar and the Treasury Market (June 24, 2014).

6. It's presumed the Federal government can borrow as many trillions of dollars as it needs to fund retirement and social benefits as far as the eye can see. Please see the article linked above to understand why limits on the Fed's money printing and buying of governemnt bonds imposes limits on Federal borrowing.

To quote Jackson Browne: Don't think it won't happen just because it hasn't happened yet.

7. Boomers are staying productive longer and keeping their jobs longer. The reasons for this are many, but one consequence is a dearth of opportunities for Gen-Y job seekers. As full-time employment stagnates or even declines, it's a zero-sum game for the generations: every job a Boomer holds onto is one a Gen-Y applicant can't get.

A 12-hour a week low-pay part-time job will not support a wage earner or fund a retiree.

8. A Boomer who bought his home for $50,000 decades ago can live very well on $75,000 a year; it's a different story for Gen-Y. The Boomer has a low mortgage payment (presuming he didn't extract all the equity in the go-go years) and low property taxes in states with Prop-13-type limits. The Boomer who hits 65 has relatively modest medical expenses as Medicare does all the heavy lifting.

Low housing and medical expenses leave Boomers with relatively ample discretionary income. The Gen-Y wage earner who takes the same $75,000 a year job is not so fortunate. The Gen-Y wage earner is offered the Boomer's $50,000 home for $550,000, and crushing property taxes to go with the gargantuan mortgage.

The Gen-Y wage earner typically still has often-monumental student loan debt to pay off, and much higher healthcare expenses as companies offload rising Sickcare costs onto employees. Higher Social Security and Medicare taxes hit Gen-Y square in the financial solar plexus, while retiring Baby Boomers escape these taxes altogether unless they're still working.

The point is an income that offers a Boomer a middle class lifestyle does not offer a corresponding discretionary income to Gen-Yers. The entire pyramid of well-funded retirement is based on a generational continuation of massive borrowing and discretionary spending.

If that doesn't happen for structural reasons, the pyramid of well-funded retirement collapses under its own weight.

1st Qtr GDP (-2.9%) Turns Corner, Goes Off Cliff

Courtesy of Larry Doyle.

Are you sick of being lied to?

Virtually every economist and political pundit came into 2014 touting this year as being the one in which our economy turns the corner. Well, in the first quarter of the year I guess we did turn the corner . . . and in doing so ran right off the proverbial cliff.

How could so many be so wrong by such a wide margin in assessing the health and projection of our economy? I will tell you: when the virtues of truth, transparency, and integrity are subjugated to such an extent at the behest of the financial, political, and regulatory ruling triumvirate, we fail to get a fair and honest reading as to what is really going on in our economy, let alone our nation. 

An economy does not retract by 2.9% because of weather, folks. Why did the economy suffer such a slowdown? The American consumer is getting increasingly squeezed and is not spending on a wide array of products, especially discretionary items. Why so? Have you checked the costs of fuel, food, rent, and healthcare lately? Where I tank up, a gallon of regular unleaded now runs $4.20/gallon. Bloomberg provides the following insights:

Consumer purchases, which account for about 70 percent of the economy, rose at a 1 percent annualized rate in the first quarter, the weakest pace in five years. The gain, which added 0.71 percentage point to GDP, compared with the previous estimate of 3.1 percent.

The revision reflected a drop in spending tied to health care services. The Bureau of Economic Analysis had estimated that major provisions of President Obama’s signature health care law would boost outlays. A quarterly services survey released this month showed the assumptions were too optimistic. Outlays for health spending actually dropped in the first quarter, subtracting 0.16 percentage point from GDP. The Commerce Department previously estimated those outlays added 1 percentage point to GDP.

Rather than talking more openly and honestly about the costs of these basic goods and services, we get a steady diet of drivel from most major news organizations. Even my favorite outlet, that being Bloomberg, was talking about men’s fashion rather than the economy at 8:38am this morning. Little wonder so many folks continue to look elsewhere for meaningful analysis of the news of the day. I recommend that folks follow the work and analysis of Keith McCullough and team at Hedgeye who have had as good a read on the economy as any I have seen in a long time.

With the 1st quarter retracement in the economy, we would now have to grow at better than a 3.5%  rate over the balance of the year to get close to an annual GDP for 2014 of 2%.

I’m an optimist, but I’m also a seeker of the truth wherever it may reside and whatever it might tell us. Better than 3.5% growth for the next three quarters?

I’m taking the under.

Navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

For those reading this via syndicated outlet or by e-mail or another delivery, please visit the blog to comment on this piece of ‘sense on cents.’

Please subscribe to all my work via e-mail.

GDP Disaster: Final Q1 GDP Crashes To -2.9%, Lowest Since 2009, Far Below The Worst Expectations

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Remember when in January 2014, Q1 GDP was expected to rise 2.6%? Well, here comes the final Q1 GDP revision and it's a doozy: at -2.9%, far below the -1.8% expected and well below the -1.0% second revision, it is an absolute disaster, and is the worst print since Q1 2009.

And while a bad GDP print was largely expected, the driver wasn't: personal consumption expenditures somehow crashed from 3.1% to just 1.0%, far below the 2.4% expected, meaning that all hope of a consumer recovery is dead. Finally, as a reminder, US GDP has never fallen more than 1.5% except during or just before an NBER-defined recession since quarterly GDP records began in 1947. Good luck department of truth propaganda machine, because even assuming 3% growth every other quarter in 2014 means 2014 GDP will be 1.5% at best!

GDP long-term:

And GDP broken down by components:

For some context, this is a 6 standard deviation miss – as economists were striongly biased to the upside beat…


Do you believe in miracles?

Source: Dept of Commerce


H is for Hindsight Bias


H is for Hindsight Bias

Courtesy of Tim Richards at Psy Fi Blog

Hindsight Bias is the tricky problem that in the past we think we predicted the present, so here in the present we think we can predict the future. Only we didn't predict the present, we only think we did, and we can't predict the future because we don't have the gift of foresight. Nobody does (that only happens in movies and magic shows and it's not real).


One study of investors showed that not only did investors confuse their predictions with their outcomes but that they couldn't actually recognize their mistakes afterwards. Interestingly real financial managers were more biased than students, probably because their incentives to be correct were greater. Hindsight bias is a particularly nasty problem because the more invested you are in an outcome the more likely you are to suffer from it.


Unsurprisingly, according to one study there are multiple, interlinked causes. We seem to have a need to see the world as a structured place within which we can exert control, so we tend to create stories out of history to make sense of it, but we can only remember things which have already happened, not those that didn't: the net result is that the stories we create seem to have been inevitable. But they weren't, in fact they aren't even what really happened. This type of oversimplification of the past is probably a way of guiding future action – it's just not a very good one in our modern, complicated world.


Even the CIA agrees that it's virtually impossible to eliminate hindsight bias, but at least attempting to consider possible alternative outcomes to our actions – e.g. we go bust betting on that sure-fire stock instead of becoming billionaires – and putting actual probability values on those alternatives can at least force us to consider the possibility that we may be biased. Keeping a diary and occasionally re-reading it can be a real eye-opener too.

Read also: 

Hindsight Bias
A Liberal Arts Investor's Reading List
and The A to Z of Behavioral Bias

More “noise” from the futures markets

More "noise" from the futures markets

Courtesy of Sober Look
Lean hogs: Aug-14 contract –

Source: Barchart

Live cattle: Aug-14 contract –

Source: Barchart

These price increases are mostly driven by exogenous factors such as the 2012 drought and the Porcine Epidemic Diarrhea virus. Nevertheless combine this with higher energy and shelter prices and it's not simply Yellen's CPI “noise”: 

Steve Liesman, CNBC: Is every reason to expect, Madam Chair, that the PCE inflation rate, which is followed by the Fed, looks likely to exceed your 2016 consensus forecast next week? Does this suggest that the Federal Reserve is behind the curve on inflation? And what tolerance is there for higher inflation at the Federal Reserve? And if it's above the 2 target, then how is that not kind of blowing through a target the same way you blew through the six and a half percent unemployment target in that they become these soft targets? Thanks. 

Chair Yellen: Well, thanks for the question. So, I think recent readings on, for example, the CPI index have been a bit on the high side, but I think it's– the data that we're seeing is noisy . I think it's important to remember that broadly speaking, inflation is evolving in line with the committee's expectations.

Kurdistan Leader Calls for “Self-Determination”; Kurds Sell Oil to Israel; Kerry’s New Definition of “Intervention”

Courtesy of Mish.

Iraqi Kurdistan leader Massoud Barzani says ‘the time is here‘ for self-determination.

Iraqi Kurdish President Massoud Barzani gave his strongest-ever indication on Monday that his region would seek formal independence from the rest of Iraq.

“Iraq is obviously falling apart,” he told CNN’s Christiane Amanpour in an exclusive interview. “And it’s obvious that the federal or central government has lost control over everything. Everything is collapsing – the army, the troops, the police.”

“We did not cause the collapse of Iraq. It is others who did. And we cannot remain hostages for the unknown,” he said through an interpreter.

“The time is here for the Kurdistan people to determine their future and the decision of the people is what we are going to uphold.”

Iraqi Kurds Deliver Oil to Israel

In a move that draws criticism from the U.S. State Department, Iraqi Kurds Deliver Oil to Israel.

Oil piped from Iraqi Kurdistan has been successfully delivered directly by the region’s semiautonomous government for the first time, despite opposition from the U.S. and the Iraqi central government.

The Kurdish Regional Government said late Friday that one million barrels of its oil piped through the Turkish port of Ceyhan “was safely delivered to the buyers.” The KRG declined to say who the buyers were.

The oil is currently being unloaded at an Israeli port, according to officials at the terminal.

The U.S. State Department confirmed the delivery, criticizing the semiautonomous region’s unilateral sale without Baghdad’s approval and warning buyers of its oil.

Criticism is Not Intervention

Criticism is not intervention. Nor is pressure. Nor is sending 300 military advisors to Iraq. Nor is sending the U.S. Secretary of State to Iraq in an attempt to stop the Kurds from “Going It Alone”.

How do I know these things?

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These Fake Rallies Will End In Tears: “If People Stop Believing In Central Banks, All Hell Will Break Loose”

Courtesy of Detlev Schlichter

Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? To what extent do prices reflect support from policy, in particular super-easy monetary policy, and to what extent other, ‘fundamental’ factors? And how is all this market manipulation going to play out in the long run?

It is obvious that most markets would not be trading where they are trading today were it not for the longstanding combination of ultra-low policy rates and various programs of ‘quantitative easing’ around the world, some presently diminishing (US), others potentially increasing (Japan, eurozone). As major US equity indices closed last week at another record high and overall market volatility remains low, some observers may say that the central banks have won. Their interventions have now established a nirvana in which asset markets seem to rise almost continuously but calmly, with carefully contained volatility and with their downside apparently fully insured by central bankers who are ready to ease again at any moment. Those who believe in Schumpeter’s model of “bureaucratic socialism”, a system that he expected ultimately to replace capitalism altogether, may rejoice: Increasingly the capitalist “jungle” gets replaced with a well-ordered, centrally managed system guided by the enlightened bureaucracy. Reading the minds of Yellen, Kuroda, Draghi and Carney is now the number one game in town. Investors, traders and economists seem to care about little else.

“The problem is that we’re not there [in a low volatility environment] because markets have decided this, but because central banks have told us…” Sir Michael Hintze, founder of hedge fund CQS, observed in conversation with the Financial Times (FT, June 14/15 2014). “The beauty of capital markets is that they are voting systems, people vote every day with their wallets. Now voting is finished. We’re being told what to do by central bankers – and you lose money if you don’t follow their lead.”

That has certainly been the winning strategy in recent years. Just go with whatever the manipulators ordain and enjoy rising asset values and growing investment profits. Draghi wants lower yields on Spanish and Italian bonds? – He surely gets them. The US Fed wants higher equity prices and lower yields on corporate debt? – Just a moment, ladies and gentlemen, if you say so, I am sure we can arrange it. Who would ever dare to bet against the folks who are entrusted with the legal monopoly of unlimited money creation? “Never fight the Fed” has, of course, been an old adage in the investment community. But it gets a whole new meaning when central banks busy themselves with managing all sorts of financial variables directly, from the shape of the yield curve, the spreads on mortgages, to the proceedings in the reverse repo market.

Is this the “new normal”/”new neutral”? The End of History and the arrival of the Last Man, all over again?

The same FT article quoted Salman Ahmed, global bond strategist at Lombard Odier Investment Managers as follows: “Low volatility is the most important topic in markets right now. On the one side you have those who think this is the ‘new normal’, on the other are people like me who think it cannot last. This is a very divisive subject.”

PIMCO’s Bill Gross seems to be in the “new normal” camp. At the Barron’s mid-year roundtable 2014 (Barron’s, June 16, 2014) he said: “We don’t expect the party to end with a bang – the popping of a bubble. […] We have been talking about what we call the New Neutral – sluggish but stable global growth and continued low rates.”

In this debate I come down on the side of Mr. Ahmed (and I assume Sir Michael). This cannot last, in my view. It will end and end badly. Policy has greatly distorted markets, and financial risk seems to be mis-priced in many places. Market interventions by central banks, governments and various regulators will not lead to a stable economy but to renewed crises. Prepare for volatility!

Bill Gross’ expectation of a new neutral seems to be partly based on the notion that persistently high indebtedness contains both growth and inflation and makes a return to historic levels of policy rates near impossible. Gross: “…a highly levered economy can’t withstand historic rates of interest. […] We see rates rising to 2% in 2017, but the market expects 3% or 4%. […] If it is close to 2%, the markets will be supported, which means today’s prices and price/earnings are OK.”

Of course I can see the logic in this argument but I also believe that high debt levels and slow growth are tantamount to high degrees of risk and should be accompanied with considerable risk premiums. Additionally, slow growth and substantial leverage mean political pressure for ongoing central bank activism. This is incompatible with low volatility and tight risk premiums. Accidents are not only bound to happen, they are inevitable in a system of monetary central planning and artificial asset pricing.

Low inflation, low rates, and contained market volatility are what we should expect in a system of hard and apolitical money, such as a gold standard. But they are not to be expected – at least not systematically and consistently but only intermittently – in elastic money systems. I explain this in detail in my book Paper Money Collapse – The Folly of Elastic Money. Elastic money systems like our present global fiat money system with central banks that strive for constant (if purportedly moderate) inflation must lead to persistent distortions in market prices (in particular interest rates) and therefore capital misallocations. This leads to chronic instability and recurring crises. The notion that we might now have backed into a gold-standard-like system of monetary tranquility by chance and without really trying seems unrealistic to me, and the idea is even more of a stretch for the assumption that it should be excessive debt – one of elastic money’s most damaging consequences – that could, inadvertently and perversely, help ensure such stability. I suspect that this view is laden with wishful thinking. In the same Barron’s interview, Mr. Gross makes the statement that “stocks and bonds are artificially priced,” (of course they are, hardly anyone could deny it) but also that “today’s prices and price/earnings are OK.” This seems a contradiction to me. Here is why I believe the expectation of the new neutral is probably wrong, and why so many “mainstream” observers still sympathize with it.

1. Imbalances have accumulated over time. Not all were eradicated in the recent crisis. We are not starting from a clean base. Central banks are now all powerful and their massive interventions are tolerated and even welcome by many because they get “credited” with having averted an even worse crisis. But to the extent that that this is indeed the case and that their rate cuts, liquidity injections and ‘quantitative easing’ did indeed come just in time to arrest the market’s liquidation process, chances are these interventions have sustained many imbalances that should also have been unwound. These imbalances are probably as unsustainable in the long run as the ones that did get unwound, and even those were often unwound only partially. We simply do not know what these dislocations are or how big they might be. However, I suspect that a dangerous pattern has been established: Since the 1980s, money and credit expansion have mainly fed asset rallies, and central banks have increasingly adopted the role of an essential backstop for financial markets. Recently observers have called this phenomenon cynically the “Greenspan put” or the “Bernanke put” after whoever happens to lead the US central bank at the time but the pattern has a long tradition by now: the 1987 stock market crash, the 1994 peso crisis, the 1998 LTCM-crisis, the 2002 Worldcom and Enron crisis, and the 2007/2008 subprime and subsequent banking crisis. I think it is not unfair to suggest that almost each of these crises was bigger and seemed more dangerous than the preceding one, and each required more forceful and extended policy intervention. One of the reasons for this is that while some dislocations get liquidated in each crisis (otherwise we would not speak of a crisis), policy interventions – not least those of the monetary kind – always saved some of the then accumulated imbalances from a similar fate. Thus, imbalances accumulate over time, the system gets more leveraged, more debt is accumulated, and bad habits are being further entrenched. I have no reason to believe that this has changed after 2008.

2. Six years of super-low rates and ‘quantitative easing’ have planted new imbalances and the seeds of another crisis. Where are these imbalances? How big are they? – I don’t know. But I do know one thing: You do not manipulate capital markets for years on end with impunity. It is simply a fact that capital allocation has been distorted for political reasons for years. Many assets look mispriced to me, from European peripheral bond markets to US corporate and “high yield” debt, to many stocks. There is tremendous scope for a painful shake-out, and my prime candidate would again be credit markets, although it may still be too early.

3. “Macro-prudential” policies create an illusion of safety but will destabilize the system further. – Macro-prudential policies are the new craze, and the fact that nobody laughs out loud at the suggestion of such nonsense is a further indication of the rise in statist convictions. These policies are meant to work like this: One arm of the state (the central bank) pumps lots of new money into the system to “stimulate” the economy, and another arm of the state (although often the same arm, namely the central bank in its role as regulator and overseer) makes sure that the public does not do anything stupid with it. The money will thus be “directed” to where it can do no harm. Simple. Example: The Swiss National Bank floods the market with money but stops the banks from giving too many mortgage loans, and this avoids a real estate bubble. “Macro-prudential” is of course a euphemism for state-controlled capital markets, and you have to be a thorough statist with an iron belief in central planning and the boundless wisdom of officers of the state to think that this will make for a safer economy. (But then again, a general belief in all-round state-planning is certainly on the rise.) The whole concept is, of course, quite ridiculous. We just had a crisis courtesy of state-directed capital flows. For decades almost every arm of the US state was involved in directing capital into the US housing market, whether via preferential tax treatment, government-sponsored mortgage insurers, or endless easy money from the Fed. We know how that turned out. And now we are to believe that the state will direct capital more sensibly? — New macro-“prudential” policies will not mean the end of bubbles but only different bubbles. For example, eurozone banks shy away from giving loans to businesses, partly because those are costly under new bank capital requirements. But under those same regulations sovereign bonds are deemed risk-free and thus impose no cost on capital. Zero-cost liquidity from the ECB and Draghi’s promise to “do whatever it takes” to keep the eurozone together, do the rest. The resulting rally in Spanish and Italian bonds to new record low yields may be seen by some as an indication of a healing Europe and a decline in systemic risk but it may equally be another bubble, another policy-induced distortion and another ticking time bomb on the balance sheets of Europe’s banks.

4. Inflation is not dead. Many market participants seem to believe that inflation will never come back. Regardless of how easy monetary policy gets and regardless for how long, the only inflation we will ever see is asset price inflation. Land prices may rise to the moon but the goods that are produced on the land never get more expensive. – I do not believe that is possible. We will see spill-over effects, and to the extent that monetary policy gets traction, i.e. leads to the expansion of broader monetary aggregates, we will see prices rise more broadly. Also, please remember that central bankers now want inflation. I find it somewhat strange to see markets obediently play to the tune of the central bankers when it comes to risk premiums and equity prices but at the same time see economists and strategists cynically disregard central bankers’ wish for higher inflation. Does that mean the power of money printing applies to asset markets but will stop at consumer goods markets? I don’t think so. – Once prices rise more broadly, this will change the dynamic in markets. Many investors will discount points 1 to 3 above with the assertion that any trouble in the new investment paradise will simply be stomped out quickly by renewed policy easing. However, higher and rising inflation (and potentially rising inflation expectations) makes that a less straightforward bet. Inflation that is tolerated by the central banks must also lead to a re-pricing of bonds and once that gets under way, many other assets will be affected. I believe that markets now grossly underestimate the risk of inflation.

Some potential dislocations

Money and credit expansion are usually an excellent source of trouble. Just give it some time and imbalances will have formed. Since March 2011, the year-over-year growth in commercial and industrial loans in the US has been not only positive but on average clocked in at an impressive 9.2 percent. Monetary aggregate M1 has been growing at double digit or close to double-digit rates for some time. It presently stands at slightly above 10 percent year over year. M2 is growing at around 6 percent.

U.S. Commercial & Industrial Loans (St. Louis Fed - Research)

U.S. Commercial & Industrial Loans (St. Louis Fed – Research)

None of this must mean trouble right away but none of these numbers indicate economic correction or even deflation but point instead to re-leveraging in parts of the US economy. Yields on below-investment grade securities are at record lows and so are default rates. The latter is maybe no surprise. With rates super-low and liquidity ample, nobody goes bust. But not everybody considers this to be the ‘new normal’: “We are surprised at how ebullient credit markets have been in 2014,” said William Conway, co-founder and co-chief executive of Carlyle Group LP, the US alternative asset manager (as quoted in the Wall Street Journal Europe, May 2-4 2014, page 20). “The world continues to be awash in liquidity, and investors are chasing yield seemingly regardless of credit quality and risk.”

“We continually ask ourselves if the fundamentals of the global credit business are healthy and sustainable. Frankly, we don’t think so.”

1 trillion is a nice round number

Since 2009 investors appear to have allocated an additional $1trn to bond funds. In 2013, the Fed created a bit more than $1trn in new base money, and issuance in the investment grade corporate bond market was also around $1trn in 2013, give and take a few billion. A considerable chunk of new corporate borrowing seems to find its way into share buybacks and thus pumps up the equity market. Andrew Smithers in the Financial Times of June 13 2014 estimates that buybacks in the US continue at about $400bn per year. He also observes that non-financial corporate debt (i.e. debt of companies outside the finance sector) “expanded by 9.2 per cent over the past 12 months. US non-financial companies’ leverage is now at a record high relative to output.”


Most investors try to buy cheap assets but the better strategy is often to sell expensive ones. Such a moment in time may be soon approaching. Timing is everything, and it may still be too early. “The trend is my friend” is another longstanding adage on Wall Street. The present bull market may be artificial and already getting long in the tooth but maybe the central planners will have their way a bit longer, and this new “long-only” investment nirvana will continue. I have often been surprised at how far and for how long policy makers can push markets out of kilter. But there will be opportunities for patient, clever and nimble speculators at some stage, when markets inevitably snap back. This is not a ‘new normal’ in my view. It is just a prelude to another crisis. In fact, all this talk of a “new normal” of low volatility and stable markets as far as the eye can see is probably already a bearish indicator and a precursor of pending doom. (Anyone remember the “death of business cycles” in the 1990s, or the “Great Moderation” of the 2000s?)

Investors are susceptible to the shenanigans of the manipulators. They constantly strive for income, and as the central banks suppress the returns on many mainstream asset classes ever further, they feel compelled to go out into riskier markets and buy ever more risk at lower yields. From government bonds they move to corporate debt, from corporate debt to “high yield bonds”, from “high yield” to emerging markets – until another credit disaster awaits them. Investors thus happily do the bidding for the interventionists for as long as the party lasts. That includes many professional asset managers who naturally charge their clients ongoing management fees and thus feel obliged to join the hunt for steady income, often apparently regardless of what the ultimate odds are. In this environment of systematically manipulated markets, the paramount risk is to get sucked into expensive and illiquid assets at precisely the wrong time.

In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside, I believe. As they are not beholden to the need for steady income, speculators should also find it easier to be patient. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. But when the right opportunities come along they hope to be nimble and astute enough to capture them. This is what macro hedge funds, prop traders and commodity trading advisers traditionally try to do. Their moment may come again.

As Sir Michael at CQS said: “Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose.”

I couldn’t agree more.

Italy: When Hope Is a Strategy

Thoughts from the Frontline: Italy: When Hope Is a Strategy

By John Mauldin, Thoughts from the Frontline

I came back from Italy this week, and one of my guilty pleasures was being able to sit down and watch the last three episodes, including the season finale, of Game of Thrones. For those readers who are not enthralled with the fantasy epic from HBO or have not read the first five books (will he ever finish?), author George R.R. Martin has written one of the most complex fantasy series ever, about a world where everyone is occupied with who will sit on the Iron Throne.

It is a land of numerous countries and cultures, where the average person might just enjoy a little peace and quiet but where their leaders are seemingly always ready to go at one another, dragging their armies behind them, whether at the hint of an insult or the prospect of the ultimate prize. The series is utterly unpredictable, as Martin seems to routinely to kill off both protagonist and antagonist alike with unexpected finality. You have to be careful not to become too involved with any of the characters, as fate (i.e., the author) can pluck them from the scene all too quickly. Plot twists abound in every chapter, and seemingly minor characters can become major players as time unfolds.

In other words it’s a place not unlike Europe.

After spending a few days in Rome trying to deepen my understanding of the situation in Italy – which of late has seemed as convoluted as the plot from Game of Thrones, mercifully minus the swordplay but with about the same level of spectacle (who could come up with this cast of characters?), I think I have perceived what might become a significant plot twist in the offing.

So let’s look this week at what I uncovered in Italy, which rather surprised me, and think through some of the implications that the new developments suggest for the ultimate outcome of the euro project.

I want to acknowledge up front the significant help of Christian Menegatti and Brunello Rosa of Roubini Global Economics in setting up key meetings with politicians, bureaucrats, and the Italian central bank. I am also grateful for the candid conversations we had after the meetings, as we tried to work through what we had heard. While this letter will not present a consensus view of our meetings and conversations, I did learn a great deal more than if I had simply gone on my own. Thanks, guys. (They of course are not responsible for any mistakes or inaccurate predictions herein. I can make enough of those on my own.)

Game of Thrones, European-Style

What surprised me about Italy was the emergence of something that felt like speranza, which I am told is the Italian word for hope. On my previous visits to Italy over the years, I have seen frustration, anger, and resignation – generally, there was a feeling that there was very little anyone could do to really change things. Even though the names and personalities and even governments changed, there was an underlying assumption behind every conversation that simply said, “This is the Italian way,” especially when it came to doing business. Government was slow and inept and bureaucratic; it took years or decades to get anything through the courts; and that’s just the way it was. Italians have displayed a marvelous aptitude for getting things done in spite of government, not because of it.

Italy, and especially the north of Italy, is a manufacturing powerhouse; and while it’s not the export behemoth that Germany is, the Italians do quite well, thank you very much. It is a testimony to their entrepreneurial skills and design talent that they have done as much as they have, given the ineptitude of their government. That might seem a little harsh, but I think you could find more than a few Italians who would agree.

But something different seems to be happening now. In the last European elections, a clear winner was an upstart politician in Italy. The EU Observer explains what happened:

In June 2013, Matteo Renzi was still pretending that his greatest ambition was to serve a second mandate as mayor of Florence, a mid-sized town of less than 400,000.

A year on, he is rubbing shoulders with the likes of Barack Obama at G7 summits, and is emerging as the biggest counterweight to German Chancellor Angela Merkel on the EU political landscape.

A historic win in last month’s European Parliament elections, where his Democratic Party (PD) took 40.8 percent of votes – the best-ever result for the Italian left, and the highest score ever recorded by a single party since the Christian Democrats in 1958 – has given him a strong hand to challenge Berlin-backed austerity policies, as Italy takes on the EU’s six-month presidency on 1 July.

“He has meticulously planned his rise to the top for the past 10 years. Not many people, be it in politics, journalism or business, have the same tenacity, drive and determination that he has displayed,” says David Allegranti, a political reporter from Florence who has written two books on Renzi. In February, the 39-year-old became Italy’s youngest-ever prime minister.

Renzi is photogenic and charismatic, but most of the commentary I read prior to going to Italy three weeks ago seemed to dismiss him as just another one in the series of soon-to-be-sacked Italian prime ministers, there having been four in as many years. Given the current volatility of Italian politics, it seemed just a matter of (not very much) time before Renzi’s government would fall. The only question was what might emerge next from the sausage grinder of Italian politics.

In a little bit we’re going to cover in detail some of the rather serious economic realities that face any Italian government. The challenges are daunting, and heretofore the system seemingly just hasn’t been properly designed to deal with them. With a debt-to-GDP ratio of over 135%, simple interest costs of 5% of GDP, ultra-low inflation, high unemployment, low to no growth, and rising debt, Italy’s economic problems are all too real.

So where is the hope coming from? Renzi is not just going after the economic troubles. He seems to be attacking the very deep structural issues in a novel way. He is seeking serious constitutional reform in a country that has seen no constitutional changes for 30 years. Changing the constitution is difficult and requires a super-majority, which Renzi does not have. But when you meet with Parliament members and ministers from Renzi’s party, there is an optimism that is almost catching. Somehow or another Renzi has convinced a lot of people in the Italian political system that reform is possible. In particular, he wants to do away with the upper house (their senate) and streamline the decision-making process in the remaining house of Parliament, with different rules for creating majorities.

Further, he is looking to reform the judicial process in a way that will allow court cases to actually be resolved in a realistic timeframe, removing the “justice delayed is justice denied” issue. Of course, labor reforms are also on the docket.

Meeting with ministers and government leaders who are involved in developing the budget, I found acknowledgment that the only way they can get out of their current situation is to grow their economy. They admitted they needed 2% real GDP growth, 2% inflation, and a 4% “primary surplus” (more on that later). They candidly acknowledged that this outcome is possible is only with significant outside foreign direct investment, substantial growth in exports, and a drop in the unemployment rate. “We have to unleash Italian industry and business.”

The current system discourages foreign direct investment and is actually chasing Italian businesses from Italy. The recognition that things need to change if there’s going to be any progress in the economy is widespread across the spectrum of political views.

Renzi is seemingly unafraid of pressing ahead on multiple fronts and is perfectly willing to see his government fall and to then hold new elections as a referendum on his policies. For a center-left politician, he is forging political pacts and alliances with an odd cast of characters.

I think the mood can best be summed up by a snippet from a conversation I had late one evening. I was talking with a successful businessman and long-time nominal conservative supporter who told me that he had recently picked up his 18-year-old son at the airport, as the young man returned home from college in another part of Europe. He came back on the day of the recent elections, and as his dad was driving him to the polls, he asked, “Papa, I really don’t understand anything about this election, as I’ve been away. Whom should I vote for?” His father told him to vote for Renzi.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin – please click here.

Important Disclosures

Rebels Down Ukraine Helicopter in Ceasefire Violation; Putin Offers Concessions; Merkel’s Misguided Threat

Courtesy of Mish.

With the downing of a another Ukraine helicopter by pro-Russia rebels, one would think tensions in the region would be up. Yet, analysts seem excited by a symbolic move from Putin.

Bloomberg reports Ukraine Rebels Down Chopper as Putin Makes Concessions.

Pro-Russian rebels in Ukraine shot down a government helicopter in violation of a cease-fire, killing nine troops just hours after President Vladimir Putin met a key European Union demand to help end months of fighting.

Separatists downed an Mi-8 chopper with a shoulder-fired missile in the eastern city of Slovyansk at about 5 p.m. local time, killing everyone on board, a spokesman for the Defense Ministry, Vladyslav Seleznyov, said on his Facebook page.

Earlier today, Putin asked lawmakers in Moscow to rescind the authorization they gave him on March 1 to use force in Ukraine, a conciliatory gesture that sent shares and the ruble higher before he traveled to EU-member Austria. The EU yesterday demanded Russia overturn the mandate, which helped fuel months of volatility in Russian and Ukrainian markets. Putin’s spokesman, Dmitry Peskov, said the Russian leader was trying to stabilize Ukraine after peace talks started yesterday.

“This is most certainly long-awaited positive news in the Ukrainian crisis, but by no means is the Ukrainian crisis over,” Lilit Georgian, a senior analyst at Ihs Global Insight, said by e-mail. “The Russian move is rather symbolic, considering the likelihood of a direct intervention has not been high anyway. Moreover, Moscow could safeguard its interests through the armed pro-Russian insurgents, as well as through economic means.”

Rather symbolic, or completely meaningless? If Putin never intended to invade Ukraine, and I believe he never did, then rescinding the authorization to use force was meaningless.

German Chancellor Angela Merkel told members of her party yesterday that Russia faces full economic sanctions at a June 26-27 EU summit unless it takes verifiable steps to calm the crisis in Ukraine by Friday, according to two people present at the meeting.

Ukraine remains to be convinced that Putin’s moves are more than a tactical retreat to avoid broader sanctions, Yuriy Yakymenko, head of political research at the Razumkov Center, said by phone from Kiev.

Definition of “De-escalation”

If rebels stop their attacks on Ukrainian government troops, if they stop taking hostages, if Russian mercenaries leave Ukraine, if weapons are taken back to Russia, then we’d say that the process of de-escalation has started,” said Yakymenko.

If Yakymenko implies all of those need to happen, don’t expect de-escalation any time soon. If he means any of those, there may be de-escalation over time.

Merkel’s Misguided Threat

The German threat of “full economic sanctions at a June 26-27 EU summit” is either a foolish bluff or economic silliness.

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Things That Make You Go Hmmm: The Slip ‘n’ Fail Mutts

Things That Make You Go Hmmm: The Slip ‘n’ Fail Mutts

By Grant Williams

Now the news has arrived
From the Valley of Vail
That a Chippendale Mupp has just bitten his tail
Which he does every night before shutting his eyes
Such nipping sounds silly. But, really, it's wise.

He has no alarm clock. So this is the way
He makes sure that he'll wake at the right time of day.
His tail is so long, he won't feel any pain
'Til the nip makes the trip and gets up to his brain.
In exactly eight hours, the Chippendale Mupp
Will, at last, feel the bite and yell "Ouch!" and wake up.
-Dr. Seuss

Theodore Seuss Geisel was a master of anapestic meter.

An anapest is a metrical foot used in poetry which comprises two short syllables, followed by a long one. More familiarly (particularly in the world created by Seuss), it consisted of two unstressed syllables followed by a stressed one:

"Twas the night before Christmas and all through the house…"

Description: euss%20Stamp.psd

Or, in keeping with this week's theme:

"The sun did not shine.
It was too wet to play.
So we sat in the house
All that cold, cold, wet day."

Simple, but at the same time extremely difficult to pull off effectively.

Geisel was an English major at Dartmouth who eventually became the editor-in-chief of the college humor magazine, the Dartmouth Jack O' Lantern; but after being forced by the dean to resign his post after being caught drinking gin in his dorm room, he rather cunningly adopted the nom de plume "Seuss" in order to continue to be able to write for the magazine.

Apparently, nobody at the Ivy League college figured out the identity of the mysterious "Seuss."

When banned from his post for a gin-drinking crime
The scribe picked a name and then bided his time.
In a different guise he remained on the loose
By pretending to be the mysterious "Seuss."

Geisel graduated from Dartmouth and left the USA to pursue a PhD in English literature at Lincoln College, Oxford; but, whilst there, he met a lady named Helen Palmer who persuaded him that he should give up his dream of becoming an English teacher and pursue a career as a cartoonist.

Returning home without a degree but with a fiancée (named Helen Palmer), Geisel found that his drawing ability allowed him to earn a rather handsome living as a cartoonist after he succeeded in getting his first cartoon published in theSaturday Evening Post on July 16, 1927.

Geisel took a job as a writer and illustrator at the humourous magazine Judge in October of 1927, married Palmer a month later, and five months after that, his first work was published and credited simply to "Dr. Seuss."

A successful career as an illustrator allowed Geisel and his wife to travel extensively. According to Geisel himself it was on the journey home from an ocean voyage to Europe that the rhythmic noise of the ship's engines inspired him to write his first book, the anapestically titled And to Think That I Saw It on Mulberry Street.

While at Oxford (in England) a lady supposed
To suggest he choose drawing instead of his prose.
When the young man relented his future unfurled
And he ended up famous all over the world.

And that, Dear Reader, is how Theodore Geisel became Dr. Seuss.

Thirty-five years after the publication of And to Think That I Saw It on Mulberry Street, Seuss wrote The Sleep Book, the brilliant story of a contagious yawn, started by a small bug called Van Vleck, that would lull even the most spirited toddler successfully off to sleep.

On page 32 of The Sleep Book, we are introduced to the Chippendale Mupp, a curious creature with an extraordinarily long tail. The Mupp bites the end of that tail when he goes to sleep every night, and its length ensures that the sensation of pain only reaches him eight hours later, causing him to wake up. It's a brilliant and flawless alarm clock.

Description: upp%20Cropped.psd

Of course, once the Mupp has bitten his tail, the end result — in this case, a rather nasty, sharp pain — though delayed for quite some time, is assured; and there is nothing he can do about it.

I was discussing the Chippendale Mupp with Steve Diggle recently as we pondered the actions of central banks in recent years and, more specifically, the great inflation/deflation debate that has raged constantly ever since the dawn of QE. As the ECB battles to stave off what looks like deflationary pressures, Japan continues to struggle to generate the promised 2% inflation, and the US continues to pretend to the world that the cost of living from sea to shining sea is rising at just 1.46% per annum, it's abundantly clear to me that the day QE was unleashed into the world was the very same day that the world's central bankers — the Slip 'n' Fail Mutts — bit their own tails.

The pain from that bite is now working its way towards the brain and will, at some point, manifest itself in an almighty "OUCH!" that will wake the entire world; BUT there is one X-factor at this point: none of us knows exactly how long the Slip 'n' Fail Mutts' tail actually is.

We will find out.

Description: 303.png

Back in 2012 — July 26th to be precise — Mario Draghi, in a speech at the Global Investment Conference in London, uttered those famous words which put an end to the seismic volatility roiling European debt markets once and for all for the time being:

(Mario Draghi): …the third point I want to make is in a sense more political.

When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders underestimate the amount of political capital that is being invested in the euro.

And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible.

But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Almost instantaneously, the clouds seemed to part, the oceans calmed, and the storm abated — all based on an ephemeral promise from a man under immense pressure who, let's face it, if he was prepared to DO whatever it took, would most certainly SAY whatever it took.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Debt Rattle Jun 24 2014: QE And CDS Are Weapons Of Mass Deception

Courtesy of The Automatic Earth.

John Vachon Soft drinks and war bonds truck, Montgomery AL March 1943

The age of financial innnovations found such an exalted high priest in Alan Greenspan that in his days as Fed governor he couldn’t stop talking about the dangers of regulating them, even though that was in his job description, and even though he had far too little detailed knowledge of them. His sidekicks over at the Treasury, Bob Rubin and Larry Summers, made sure their friends at Citi and JPMorgan had nothing to fear from the US government in this regard either, just as Glass-Steagall was repealed.

That’s how we got see the spread of a zillion kinds of securities and derivatives, and that’s why the vast majority of them were lauded as being highly beneficial for the economy, and therefore for all of us. Many of these instruments were and are being touted as insurance policies for the finance industry, in the same way farmers had been able to buy crop insurance since the days of old.

But that’s at best only part of the story. For instance, whether the hugely popular credit default swap may or may not initially have been ‘invented’ to serve as an insurance tool in the financial markets, is hardly interesting or relevant. What’s more important is that it very rapidly became, while it got cheaper as its popularity soared, a way for corporations and financial institutions to hide, and get rid of, their debts and liabilities.

In somewhat simplified terms, once you can claim that you have insurance against potential losses on your assets, you no longer have to carry reserves against the risk of these losses. At the height of the crisis this made many a balance sheet look a whole lot better than it really was .

And that situation continues to this day. Even if conditions have changed, and been adapted. A lot of the riskiest paper has been bought up by central banks since 2008. That buying spree, too, continues. This has lowered the risks – of credit defaults – substantially, at least for now and at least in the eyes of the industry.

And since the central banks have not only taken on a lot of the worst risk, but also made sure stock markets have been propped up and interest rates kept low, and moreover are today even increasingly purchasing stocks and bonds themselves, asset prices are skyhigh and risk assessments are ultra low. Stocks, bonds, securities have all been bought up with central banks’ thin air money in such quantities that central banks have become the markets instead of regulating them.

The reality of central bank stimulus measures, such as QE 1,2,3,x, is as different from perception as that of credit default swaps. And their aim and function are very similar: to hide from sight the risks that exist inside the financial system. Both for CDS and for QE this so far works like a charm. The dark side is, however, that if no-one knows the real value of any assets anymore, they have no way of gauging the risks involved either.

Central banks’ policies today are geared towards one goal, and one only: that no-one will find out what anything at all is really worth. The very fact that the Chinese, Japanese, European and American central banks engage in this behavior in the first place should raise flaring red flag suspicions about actual values.

Both QE and CDS – along with many other “securities” – are weapons of mass deception. We live in a global economic system that has been intentionally deprived of the means to find out what assets are worth, and that’s not a coincidence. The system couldn’t survive in its present state if there were price discovery; real values and losses may have been hidden, but they haven’t gone away.

Values may have been artificially inflated, and losses artificially limited, but nothing of the underlying reality has changed. Quite the contrary: decisions are being made on a daily basis by governments, companies and individuals, based on the false assumptions about values, risks and losses that result from financial innovations specifically designed to produce an artificial portrait of where we stand.

The consequence is that no-one truly knows where they stand anymore, but almost everyone thinks they do, thinks that we’re in a rough patch, but otherwise doing fine, that we’re growing, just at a temporarily slow pace. While in reality, we haven’t grown in years, and have very little chance of doing so in the next decade, at least.

We don’t like the idea that everything we see that looks and feels good in this regard needs to be borrowed from somebody’s future. So we ignore it. We’re a sad lot, really, we can’t face our own truth. We’d rather sell our souls for a lie that makes us feel better for a fleeting moment. We all like to think our homes, our pensions, our investments are worth more than they are.

QE, CDS et al are “innovations” designed to take advantage of that.

What Your Stockbroker Is Doing With Your Stock Order and Why You Should Care

Courtesy of Pam Martens.

It’s gotten to the point that to maintain an account on Wall Street you have to surrender to a no-law zone. Wall Street is the only industry in America that can force its customers’ claims into its own private justice system, effectively closing the nation’s courts to its customers, while imposing a system where case law and legal precedent can be ignored and the public and press are barred from observing the proceedings.

Under that shield from the courts and the full measure of the law, Wall Street rules itself much of the time. Just yesterday it was reported that after Wall Street firms pummeled their self-regulator with angry letters, the Financial Industry Regulatory Authority (FINRA) withdrew a proposed rule that would force brokerage firms to tell customers what financial incentives they had paid a broker to switch firms. Often those incentives require reaching set commission goals which can encourage brokers to churn accounts. The Public Investors Arbitration Bar Association (PIABA) filed a noteworthy letter explaining why customers are required to have this “material” information and what the proposed rule left out. As usual, the industry got its way.

Sometimes, the iron will of Wall Street is such that investors completely overlook the rights that they do still have. Let’s take a look at how millions of stock trading orders are conducted every business day on Wall Street between the retail client and their stockbroker.

Let’s say you call your broker to sell 100 shares of XYZ stock held in your account. The conversation typically goes something like this?

Broker: Shall I put that in as a market order or a limit order?

You: a limit order at $38.00, good-until-cancelled. (You could also enter the order just for the day.)

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Simple to Say, Harder to Do

Trading Course 101: Buy Low, Sell High

By Dr. Paul Price of Market Shadows

Everybody knows they should buy low and sell high, but few traders have the psychological fortitude to actually stick with the plan. When shares are cheap there are always negatives that get well publicized.

Fund managers and guest hosts on CNBC are much more prone to explain price weakness while acting as if they had predicted it, than to recommend buying shares that are currently bargains, but sport ‘bad charts’.

Conversely, when stocks are soaring it’s hard to find anyone who isn’t telling viewers or readers why the stock in question is deservedly hitting new peaks and is likely headed even higher.

A greater percentage of daily volume is made up of short-term traders than ever before. That gives longer-term thinkers an edge.

Our Market Shadows Virtual Value Portfolio has traded Coca-Cola (KO) and Kelly Services (KELYA) previously for nice gains. Today we sold our latest batch of KO while deploying the sales proceeds plus most of our cash reserves back into KELYA.

Sold KO bought KELYA


A glance at the charts illustrates why we made the swap. Coke is near its three-year high while Kelly Services is close to a yearly low. We booked an 11.67%, 4-month gain, plus $61 in dividends on the latest KO trade. That’s pretty good on an annualized basis, particularly on a very conservative holding.

KO  3-years (weekly)


KELYA was one of our original picks when we started up our Value Portfolio on Oct. 26, 2012. We paid $13.13 per share back then. Kelly was sold on Dec. 23, 2013, at $25.30. That was a stellar 92.96%, plus dividends, gain. We were able to buy KELYA back for $17.64 per share this morning.

KELYA  1-year (daily)


As of 11:12 AM today the entire portfolio had gained more than 52% since inception (about 31.5% annualized) simply by following our buy-sell discipline while adhering firmly to our well-diversified approach. We are well ahead of the benchmark S&P 500, a very tough hurdle to beat for most actively managed accounts.

We also made one new trade in our Virtual Put Writing Portfolio today. Market Shadows sold 3 contracts of the January 17, 2015, $55 puts on Jacobs Engineering (JEC) @ $3.40 per share.

JEC  Quote with Jan. 2015 Put prices

We are now committed to purchase 300 shares of JEC at a net price of $51.60 ($55 strike – $3.40 put premium) if exercised.

Our best case gain would be keeping 100% of the $1,020 collected. This will occur if JEC closes at $55 or better on Jan. 16, 2015. That is not much of a stretch. JEC was bidding $54.84 at the time we initiated the trade.

JEC  1-year (daily) with If Put price

There can never be a guarantee that shares will not go below your break-even price. We find it reassuring, however, to know that JEC has not spent even one day during the past 12-months at that low a price.

Check out all our closed-out and current equity and option positions by clicking on the following links…

Virtual Value Equity Portfolio and Virtual Put Writing Portfolio.