Archives for October 2014

US Now Importing the World’s Deflation

Courtesy of John Rubino.

With US QE about to end, the rest of the world faced the prospect of another “taper tantrum” financial crisis, one that this time around could suck the world into a deflationary vortex. So it should come as no surprise that the end of QE was countered with a series of offsetting treats for the global financial markets:

• The US Fed promised to keep interest rates low for a really long time.

• The European Central Bank announced that in November it would start buying asset backed bonds, in effect beginning an open-ended, potentially huge debt monetization program of its own.

• Japan’s version of Social Security is massively increasing its equity purchases:

Japan’s public retirement-savings manager will put half its holdings in local and foreign stocks and start investing in alternative assets as the world’s biggest pension fund seeks higher returns.

The 127.3 trillion yen ($1.1 trillion) Government Pension Investment Fund set allocation targets of 25 percent each for Japanese and overseas equities, up from 12 percent each, it said at a briefing today in Tokyo. GPIF will reduce domestic bonds to 35 percent of assets from 60 percent. The new figures don’t include an allocation to short-term assets, while the previous targets did. Analysts surveyed by Bloomberg this month had anticipated levels of 24 percent for local stocks, 15 percent for global shares and 40 percent for Japanese bonds, taking short-term holdings into account.

And last but definitely not least:

Japan central bank shocks market with fresh easing

LOS ANGELES (MarketWatch) — In an unexpected move, the Bank of Japan’s policy board voted by a 5-to-4 margin to expand the pace of its quantitative easing, sending Tokyo stocks soaring and the Japanese yen falling sharply.

The central bank expanded the size of its Japanese Government Bond purchases to the equivalent of “about 80 trillion yen” ($727 billion) a year, an increase of ¥30 trillion from the previous pace. It said it would also buy longer-dated JGBs, seeking an average remaining maturity of 7-10 years.

The central bank also said it would triple its purchases of exchange-traded funds and real-estate investment trusts.

Concerns about dwindling inflation appeared to drive the move, with the Bank of Japan saying that “on the price front, somewhat weak developments in demand following the [April 1] consumption-tax hike and a substantial decline in crude-oil prices have been exerting downward pressure recently.”

The equity markets loved all this, of course. Japan’s Nikkei index rose an amazing 4.83% on Friday. The S&P 500 is up about 3% on the week and most emerging markets are soaring. From the point of view of bureaucrats attempting manipulating formerly-free markets, this is a ringing success. Unfortunately, like most attempts to mess with the laws of nature, it contains the seeds of its own demise.

First and foremost, the end of QE in the US coupled with a ramp-up of bond buying in Europe and Japan has the dollar up sharply:

US dollar index Oct 2014

A surging currency is functionally the same thing as rising interest rates in that it tends to cut corporate profits while making debt harder to manage for pretty much everyone. So it’s good for savers (who see the value of their savings rise) and bad for borrowers, both individual and governmental. And that — more onerous debts and plunging corporate profits — is what the US is looking at in 2015.

This is coming at a really bad time for some crucial parts of the economy. Housing, for instance, is looking like the end rather than the beginning of a recovery, with mortgage purchase applications at 19-year lows (chart courtesy of Zero Hedge):

Mortgage purchase applications Oct 2014

The upshot: As good as things feel right now in the stock and bond markets, they’ll feel that bad or worse when it dawns on the leveraged speculating community that the rest of the world is exporting their deflation to America.

Visit John's Dollar Collapse blog here >

 

Could Non-Citizens Determine the Outcome of the Midterm Elections?

Courtesy of Mish.

Here's the question of the day: Could Non-Citizens Determine the Outcome of the Midterm Elections?

Some elections, especially for Senate are so close, the unfortunate answer is "yes" as the following video insight from Insight from the Libre Institute explains.

Mike "Mish" Shedlock

Visit Mish here > 

 

US Now Importing the World’s Deflation

Courtesy of John Rubino.

With US QE about to end, the rest of the world faced the prospect of another “taper tantrum” financial crisis, one that this time around could suck the major economies into a deflationary vortex. So it should come as no surprise that the end of QE was countered with a series of offsetting treats for the global financial markets:

• The US Fed promised to keep interest rates low for a really long time.

• The European Central Bank announced that in November it would start buying asset backed bonds, in effect beginning an open-ended, potentially huge debt monetization program of its own.

• Japan’s version of Social Security is massively increasing its equity purchases:

Japan’s public retirement-savings manager will put half its holdings in local and foreign stocks and start investing in alternative assets as the world’s biggest pension fund seeks higher returns.

The 127.3 trillion yen ($1.1 trillion) Government Pension Investment Fund set allocation targets of 25 percent each for Japanese and overseas equities, up from 12 percent each, it said at a briefing today in Tokyo. GPIF will reduce domestic bonds to 35 percent of assets from 60 percent. The new figures don’t include an allocation to short-term assets, while the previous targets did. Analysts surveyed by Bloomberg this month had anticipated levels of 24 percent for local stocks, 15 percent for global shares and 40 percent for Japanese bonds, taking short-term holdings into account.

And last but definitely not least:

Japan central bank shocks market with fresh easing

LOS ANGELES (MarketWatch) — In an unexpected move, the Bank of Japan’s policy board voted by a 5-to-4 margin to expand the pace of its quantitative easing, sending Tokyo stocks soaring and the Japanese yen falling sharply.

The central bank expanded the size of its Japanese Government Bond purchases to the equivalent of “about 80 trillion yen” ($727 billion) a year, an increase of ¥30 trillion from the previous pace. It said it would also buy longer-dated JGBs, seeking an average remaining maturity of 7-10 years.

Concerns about dwindling inflation appeared to drive the move, with the Bank of Japan saying that “on the price front, somewhat weak developments in demand following the [April 1] consumption-tax hike and a substantial decline in crude-oil prices have been exerting downward pressure recently.”

The equity markets loved all this, of course. Japan’s Nikkei index rose an amazing 4.83% on Friday. The S&P 500 is up about 3% on the week and most emerging markets are soaring. From the point of view of bureaucrats attempting manipulating formerly-free markets, this is a ringing success. Unfortunately, like most attempts to mess with the laws of nature, it contains the seeds of its own demise.

First and foremost, the end of QE in the US coupled with a ramp-up of bond buying in Europe and Japan has the dollar up sharply:

US dollar index Oct 2014

A surging currency is functionally the same thing as rising interest rates in that it tends to cut corporate profits while making debt harder to manage for pretty much everyone. So it’s good for savers (who see the value of their savings rise) and bad for borrowers, both individual and governmental. And that — more onerous debts and plunging corporate profits — is what the US is looking at in 2015.

This is coming at a really bad time for some crucial parts of the economy. Housing, for instance, is looking like the end rather than the beginning of a recovery, with mortgage purchase applications at 19-year lows (chart courtesy of Zero Hedge):

Mortgage purchase applications Oct 2014

The upshot: As good as things feel right now in the stock and bond markets, they’ll feel that bad or worse when it dawns on the leveraged speculating community that the rest of the world is exporting their deflation to America.

Visit John’s Dollar Collapse blog here >

The 10 Biggest Energy Company Bankruptcies

The 10 Biggest Energy Company Bankruptcies

Courtesy of Andrew Topf of OilPrice.com

Running a multi-billion dollar energy company isn’t easy. Just ask the executives in the corner suites of some of the energy companies that have gone bust over the years. Some, like Enron, were brought down because of insider malfeasance. A few, like ATP, blamed damaging government policies, while others went off the rails due to market forces that left the company and its shareholders flat-footed, deep in debt, and eventually broke. Here are the bankruptcies that will be etched into the tombstones of failed energy fortunes for time immemorial.

1. Enron. Bankrupt December 2, 2001. Assets $65.5 billion

Enron grew from a simple pipeline company into the world’s largest energy trader by using the Internet to buy and sell natural gas and electric power to help utilities and industrial power users hedge against price fluctuations. By 2000, Enron was worth an astonishing $68 billion, but when the U.S. Securities and Exchange Commission started investigating, it was revealed that much of the money was based on shady accounting practices and un-recorded losses. In one year, Enron’s stock price plummeted from more than $90 to less than $1, resulting in $11 billion in shareholder losses. The subsequent bankruptcy remains the largest in U.S. history. CEO Kenneth Lay and fellow Enron executive Jeffrey Skilling were convicted in 2006 of fraud and conspiracy. Lay died from a heart attack while awaiting sentencing. Skilling is still in prison.

2. Energy Future Holdings. Bankrupt April 29, 2014. Assets $36.4 billion

Energy Future Holdings became the largest power producer in Texas in 2007 after a $45 billion buyout of TXU Corp.  But the company struggled under the weight of $40 billion in debt after revenues plunged due to lower prices for natural gas and electricity. Energy Future Holdings was broken up in April under the terms of a restructuring deal.

3. Pacific Gas & Electric Company. Bankrupt April 6, 2001. Assets $36.1 billion

California’s largest publicly-owned utility went bust after deregulation led the company to incur billions in debt. After selling its gas power plants, the company had to buy power from other energy companies. Buying at fluctuating prices and selling at fixed prices led to losses and eventual bankruptcy. But according to Time, wholesale prices eventually dropped, and the day the company emerged from bankruptcy in 2004, its stock was worth three times as much as when it filed for protection.

4. Texaco. Bankrupt April 12, 1987. Assets $34.9 billion

Texaco started out in 1901 as the Texas Fuel Company and was independent for 100 years before merging with Chevron in 2001. However, in the 1980s, Texaco became embroiled in a legal battle with Pennzoil, and ended up owing the company $10.5 billion. That led to Texaco filing for bankruptcy, which at the time, was the largest in U.S. history.

5.  Calpine Corporation. Bankrupt December 20, 2005. Assets $26.6 billion

In the mid-2000s, Calpine was the biggest owner of natural gas-fired plants in the U.S. But soaring fuel costs led the company to incur more than $22.5 billion in debt. The subsequent bankruptcy filing followed the ouster of top executives after they lost a fight with bondholders to use proceeds from asset sales to buy fuel. The company received $2 billion in financing to allow it to keep its plants supplying customers.  

6.  ATP Oil & Gas. Bankrupt April 17, 2012. Assets $3.6 billion

In 2009, ATP Oil & Gas, an offshore oil producer, refinanced $1.5 billion in debt, with the goal of doubling its production to 50,000 barrels a day. Then came the BP Deepwater Horizon disaster. A 2010 moratorium on deepwater operations in the Gulf of Mexico meant ATP was not able to complete wells on its Titan production platform. Forced to spin off Titan and borrow $350 million, ATP spiralled downward, crushed by $2.7 billion in debt obligations. In a Forbes article, ATP’s CEO blamed the Obama Administration and “its illegal ban on deepwater drilling in the wake of the BP disaster,” for the implosion of the company.

7.  Patriot Coal. Bankrupt July 9, 2012. Assets $3.6 billion

As the largest producer of thermal coal in the eastern U.S., Patriot Coal was particularly vulnerable to low coal prices, competition from cheap natural gas, a slowing U.S. economy and tougher environmental rules. Patriot Coal lost money every year since 2010, and in 2012 recorded a loss of $198.5 million. To stay afloat during the Chapter 11 bankruptcy process, the company received $802 million from three major banks.

8.  James River Coal. Bankrupt April 8, 2014. Assets $1 billion.

Another victim of the U.S. coal downturn, James River Coal declared itself bankrupt in April, 2014, having emerged from a previous bankruptcy in 2004. The company listed $818.7 million in debt after being forced to close a dozen mines. James River Coal was granted a $110-million loan to keep operating under court protection. At the time of the bankruptcy, the company's stock was trading for 36 cents, compared to $60 a share in 2008.

9.  OGX. Bankrupt Oct. 30, 2013. Debts $5.1 billion

Darling of Brazilian billionaire Eike Batista, OGX Petróleo e Gas Participações SA filed for bankruptcy protection after failing to reach an agreement with creditors to negotiate part of its $5.1 billion debt. The bankruptcy was the largest in Latin America. The blow to Batista’s mining and oil and gas empire came after disappointing output from offshore wells set off a crisis of investor confidence.

10.  Suntech. Bankrupt March 20, 2013. Debts $1.6 billion

The Chinese solar panel manufacturer, one of the world’s biggest, was forced into bankruptcy court after the company missed a $541 million payment to bondholders. The company’s misfortunes were blamed on a glut in the market for solar panels, which collapsed prices. Another solar industry giant, Germany’s Q-Cells, was caught in the downturn the year earlier.

Benefit from the latest energy trends and investment opportunities before the mainstream media and investing public are aware they exist. The Free Oilprice.com Energy Intelligence Report provides this and much more. Click here to find out more.

Photo by LeeHuzysberg at Pixabay.

The End Of An Era: Is The US Petrodollar Under Threat?

Recent trade deals and high-level cooperation between Russia and China have set off alarm bells in the West as policymakers and oil and gas executives watch the balance of power in global energy markets shift to the East.

The reasons for the cozier relationship between the two giant powers are, of course, rooted in the Ukraine crisis and subsequent Western sanctions against Russia, combined with China's need to secure long-term energy supplies. However, a consequence of closer economic ties between Russia and China could also mean the beginning of the end of dominance for the U.S. dollar, and that could have a profound impact on energy markets.

Reign of the USD

Before the 20th century, the value of money was tied to gold. Banks that lent money were constrained by the amount of their gold reserves. The Bretton Woods Agreement of 1944 established a system of exchange rates that allowed governments to sell their gold to the U.S. Treasury. But in 1971, U.S. President Richard Nixon took the country off the gold standard, which formally ended the linkage between the world's major currencies and gold.

The U.S. dollar then went through a massive devaluation, and oil played a crucial role in propping it back up. Nixon negotiated a deal with Saudi Arabia whereby in exchange for arms and protection, the Saudis would denominate all future sales of oil in U.S. dollars. Other OPEC members agreed to similar deals, ensuring perpetual global demand for greenbacks. The dominance of the U.S. "petrodollar" continues to this day.

Russia and China Cozy Up

Recent news coming out of Russia, however, suggests that the era of U.S. dollar dominance could be coming to an end, due to increasing competition from the world's second largest economy and primary consumer of commodities, China.

China and Russia have been furiously signing energy deals that indicate their mutual energy interests. The most obvious is the $456 billion gas deal that Russian state-owned Gazprom signed with China in May, but that was just the biggest in a string of energy agreements going back to 2009. That year, Russian oil giant Rosneft secured a $25 billion oil swap agreement with Beijing, and last year, Rosneft agreed to double oil supplies to China in a deal valued at $270 billion.

Since Western sanctions against Russia took hold in reaction to the Russian land grab in Crimea and the shooting down of a commercial airliner, Moscow has increasingly looked to its former Cold War rival as a key buyer of Russian crude — its most important export.

Liam Halligan, a columnist for the Telegraph, says "the real danger" of closer Russian-Chinese ties is not a bust-up between China and the U.S., which could threaten crucial shipping routes for China-bound coal and LNG, but its impact on the U.S. dollar.

"If Russia’s 'pivot to Asia' results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates and a marked loss of power for the U.S. and its allies," Halligan wrote in May. "With China now the world’s biggest oil importer and the U.S. increasingly stressing domestic production, the days of dollar-priced energy, and therefore dollar-dominance, look numbered."

While no one is arguing that could happen anytime soon, considering the dollar remains the currency of choice for central banks, Halligan's proposition is gathering strength. In June, China agreed with Brazil on a $29 billion currency swap in an effort to promote the Chinese yuan as a reserve currency, and earlier this month, the Chinese and Russian central banks signed an agreement on yuan-ruble swaps to double trade between the two countries. Analysts says the $150 billion deal, one of 38 accords inked in Moscow, is a way for Russia to move away from U.S. dollar-dominated settlements.

"Taken alone, these actions do not mean the end of the dollar as the leading global reserve currency,” Jim Rickards, portfolio manager at West Shore Group and partner at Tangent Capital Partners, told CNBC. “But taken in the context of many other actions around the world including Saudi Arabia's frustration with U.S. foreign policy toward Iran, and China's voracious appetite for gold, these actions are meaningful steps away from the dollar."

Rise of the Yuan

It is no secret that Beijing has been looking to promote the yuan as an alternative reserve currency. Having that status would allow China cheap access to world capital markets and cheaper transaction costs on international trade, not to mention increased clout as an economic power commensurate with its rising proportion of world commerce.

However, the Chinese have a problem in their plans for the yuan. The government has not yet removed capital controls that would allow full convertibility, for fear of unleashing a torrent of speculative flows that could damage the Chinese economy.

However, "[It] is clear that China is laying foundations for wider acceptance of the yuan," said Karl Schamotta, a senior market strategist at Western Union Business Solutions," as quoted in an International Business Times article. IBT pointed out that "more than 10,000 financial institutions are doing business in Chinese yuan, up from 900 in June 2011, while the pool of offshore yuan, non-existent three years ago, is now near 900 billion ($143 billion). And the proportion of China’s exports and imports settled in yuan has increased nearly sixfold in three years to nearly 12 percent."

Conspiracy Theory Spoiler Alert

Adding some vivid color to this story, Casey Research energy analyst Marin Katusa speculated in a recent column that the death of Total CEO Christophe de Margerie, whose private jet collided with a snowplow in Moscow, may not have been an accident. Instead, Katusa muses that the mysterious circumstances surrounding his death and the unlikely odds of being hit by a snowplow at an airport, could have more to do with de Margerie's business interests in Russia than being at the wrong place at the wrong time.

According to Katusa, de Margerie was "a total liability" due to Total's involvement in plans to build an LNG plant on the Yamal Peninsula along with partner Novatek. The company was also seeking financing for a gas project in Russia despite Western sanctions.

"It planned to finance its share in the $27-billion Yamal project using euros, yuan, Russian rubles, and any other currency but U.S. dollars," Katusa writes, then entices the reader with this: "Did this direct threat to the petrodollar make this 'true friend of Russia'—as Putin called de Margerie – some very powerful and dangerous enemies amongst the power that be, whether in the French government, the EU, or the U.S.?"

That may be a stretch, but Katusa's U.S. dollar reference shows that any developments that point to a move away from the dominance of the greenback are not going un-noticed.

 

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When one door closes…

Predictions that the US equity market would collapse at the end of QE have so far been wrong (and in a very painful way if you shorted the market based on the Fed’s actions). The end-of-the-world-QE bears failed to factor in another surprise move by the Bank of Japan. The BOJ announced its own QE program today — it is donating $124Bn ($80 trillion yen) to the market-propping cause. It plans to triple the amount of Japanese ETFs and REITs it buys on the open market.

As  at Business Insider wrote on Oct. 26, If You Missed The Rally, Then You Just Made The Most Classic Mistake In Investing. Since then, the market continues higher…

Screen Shot 2014-10-31 at 1.53.42 PM

When one door closes…

Courtesy of 

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”
– Alexander Graham Bell

The prevailing wisdom on QE in Policy Bear circles has been that the Fed was” trapped” and could never exit QE without sending the US economy into a tailspin.

This week the Fed ended QE and the stock market has exploded to the upside. The one thing the policy bears may not have counted on was that someone else would cover the Fed’s back as it walked away. That someone else is the Bank of Japan, which shocked the markets this morning with an $80 trillion yen QE program that aims to triple the amount of Japanese equity ETFs and REITs it is buying on the open market. In addition, there is continued talk that the ECB will follow the Fed and the BoJ’s lead with a QE program of its own before too long.

I can’t tell you what these programs will do for the economies of these countries or for the wages and spending of their constituent workers. But it’s pretty clear what happens to their stock markets…

Via the Wall Street Journal:

European stocks rose sharply Friday, tracking gains in both the U.S. and Asia, where equities were buoyed by upbeat growth data and the Bank of Japan unexpectedly announcing additional stimulus measures.

The Stoxx Europe 600 was up 1.3% by midmorning, mirroring a 1% climb on the Dow Jones Industrial Average on Thursday…

In Asia the Nikkei index closed the session at its highest level since November 2007 on Friday, after the central bank surprised investors saying it was aggressively expanding stimulus measures by bolstering asset purchases for the first time in over a year and a half.

As Alexander Graham Bell explained, when one door closes, another opens.

While QE is over for now in the US, it is just getting warmed up around the developing world in many respects. Our portfolios are positioned accordingly. It helps that the assets meant for increased stimulation are almost universally cheaper than our domestic markets anyway.

******

Door pictures via Pixabay.

Top: Chefkeem (fake jail)

Middle: PeterKraayvanger (entrance)

Lower: Sipa (security)

 

Nikkei Futures Up Limit, Yen Collapses, Dollar Up, Gold Down as BoJ Pledges “Unwavering Determination” to Get 2% Inflation

Courtesy of Mish.

“Whatever it Takes” Japanese Style

It’s a world truly gone mad.

In a surprise move today, the Bank of Japan announced further quantitative easing, dominated by long-term Japanese government bonds. The BoJ also announced it  and would triple annual purchases of exchange traded funds and property investment trusts.

BoJ governor Haruhiko Kuroda defied objections from four fellow board members, arguing that a tax-hit economy and a lower oil price have led to “a critical moment” in the country’s bid to escape from deflation.

The Financial Times quotes Kuroda as follows: The extra action “shows our unwavering determination to end deflation. There was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset. This is a pretty drastic step, so I think there will be a significant effect [on the economy].”

Stunning Market Reaction

  • Nikkei futures up lock limit (1160 points)
  • S&P 500 up 1.0% (new all-time high)
  • Yen plunges 2.5%
  • Dollar rises 0.9%
  • Gold sinks 2.75%
  • Oil down 1.1%

Nikkei Futures

S&P 500 Futures

Yen Futures

Continue Here

The 10th Man: Midterm Elections: Would a Republican Win Be Bullish for the Stock Market?

The 10th Man: Midterm Elections: Would a Republican Win Be Bullish for the Stock Market?

By Jared Dillian

I had an instant-messenger conversation with one of my clients the other day. It was pretty annoying—he wrote things like “BULL MARKET, DUDE,” and harangued me about my net-short positioning.

Then he started telling me that the market was going to rip if the Republicans took both houses of Congress in the midterm elections. At that point, I felt like I needed to intervene.

First of all, just about every single piece of academic research on the subject shows that the stock market (and GDP, and many other metrics) outperforms under Democratic presidents.

You don’t need to look very far for a contemporary example, considering that the stock market has done a three-bagger under our current leader, and the economy has recovered.

Wait, that doesn’t make any sense. The current administration is the least friendly to business and private enterprise in recent history—so why have stocks been in a prolonged bull market?

There are a million reasons why, but let’s focus on the biggest and most obvious one: the Federal Reserve.

Shaping the Fed Board of Governors

Lots of people have opinions on the Fed without really knowing the Fed as an institution or how it works.

There are seven members of the Federal Reserve’s Board of Governors who live and work in Washington, DC. They are presidential appointees, and their term of service is 14 years.

There are 12 regional bank presidents, who are nominated by their respective boards of directors. They are not, theoretically speaking, political appointees. Four of them at a time serve on the FOMC, on a rotational basis. The president of the New York Fed is a permanent member of the FOMC. Their term of service is five years.

In the old days, a Fed governor would serve all 14 years, but now they have to go make money on the speaker circuit, so they serve only three to five years if they are lucky. This means that a two-term president has the opportunity to “pack the court” with Fed governors of similar political affiliation over an eight-year period.

I would argue that the power to shape the Fed Board of Governors is even greater than the power to shape the Supreme Court.

Look at the current Board of Governors:
Janet Yellen
Stanley Fischer
Daniel Tarullo
Jerome Powell
Lael Brainard

There are two vacancies, but these are all Obama appointees. Yellen served as president of the San Francisco Fed before joining the Board of Governors as vice chair.

By and large, you can divide up central bankers into two camps: dovish central bankers, who prefer easy monetary policy (low interest rates) and hawkish central bankers, who prefer tighter monetary policy (high interest rates). Dovish central bankers tend to be Democrats. Hawks tend to be Republicans. It’s not a one-for-one correlation, but it’s close.

Everyone currently on the Board of Governors is a dove. (Powell is sometimes thought of as a centrist.) There are some hawks at the regional Federal Reserve banks, since the boards of directors are businesspeople and tend to appoint other businesspeople. Jeffrey Lacker, Charles Plosser, and Richard Fisher are all notable hawks. Inconveniently, though, they only end up on the FOMC once every three years.

George W. Bush packed the Fed, too (Duke, Warsh, Mishkin, Kroszner), but his appointees are all gone now. However, if they had served out their 14-year terms, they would still be around, and we would have a much more balanced Fed.

What Life Would Look Like Under a Hawkish Fed

Even though the presidential election is two years away, I think it’s worth having this conversation today. Seriously, what would happen if someone like Rand Paul became president? And Congress were solidly Republican?

Let’s start with the Fed. Yellen would not be reappointed; that is very clear. Over the course of a few years, the Board of Governors would be reshaped.

It’s hard to imagine in a day and age where every time a relatively benign stock market correction occurs, Fed officials are dropping hints of quantitative easing, but a hawkish Fed wouldn’t go for that kind of stuff. It would allow the market to purge its own excesses. It might even be a little laissez-faire.

We’ve had an interventionist Fed and an interventionist monetary policy on and off throughout the history of central banking, but especially since 1998, when the Greenspan Fed bailed out everyone during the blowup of Long-Term Capital Management (LTCM).

I remember reading articles about the “Greenspan Put” in 2000. That turned into the Bernanke Put, then the Yellen Put, and more recently, the Bullard Put. If there’s a perception that the Fed doesn’t allow the stock market to go down, it is probably because the Fed really doesn’t want the market to go down.

All kinds of conspiracy theories have blossomed from this (the Plunge Protection Team, for example), which I don’t like. But the Fed has nobody to blame but itself.

Under a hawkish Fed, valuations would be sharply lower. “Sharply” is italicized here for a reason. If we get away from QE and ZIRP and back to something resembling a normal rate environment, you’d be looking at the stock market being down 20-40%.

Would a Republican Midterm Win Be Bullish?

Aside from the Federal Reserve, a Republican administration, together with Congress, would completely reshape government, in ways that we can’t even conceive of right now. Would the resulting legislation be more business-friendly? Well, it might be more market-friendly, and market-friendly and business-friendly are two different things.

I think there is a reason that the stock market outperforms during Democratic administrations. Two, actually.

  1. Republicans appoint hawkish Fed officials who tend to tank the market.
  2. Republicans tend to pass supply-side legislation, which works with a long lag.

I think Reagan should get credit for the massive expansion of the ‘80s and ‘90s, and Clinton should get credit for expanding free trade, but people forget that the early years of Reagan’s presidency were very tough. Paul Volcker unleashed a hurricane-force bear market—the ‘82 recession was one of the worst on record, though the economy recovered quickly.

So, no—I don’t think it’s clear that Republicans winning the midterm elections is bullish at all, aside from what a few computer algorithms will do the day after. In fact, I think it could be the prelude to a lot of pain in the markets.

I’m sure investors will be exchanging some inadvisable fist bumps the morning after Election Day. When George W. Bush was reelected in 2004, the market went bananas, but let’s not forget that he campaigned on lower taxes on dividends and capital gains. 2016 will be very, very different.

Jared Dillian
Jared Dillian

 

How Long Can The Top 10% Households Prop Up The “Recovery”?

Courtesy of Charles Hugh-Smith of OfTwoMinds

The question of "recovery" really boils down to this: how much longer can the top 10% prop up the expansion?

A flurry of recent media stories have addressed housing unaffordability, for example Why Middle-Class Americans Can't Afford to Live in Liberal Cities.
 
The topic of housing unaffordability crosses party lines: Housing Ownership Back to 1995 Levels (U.S. Census Bureau).
 
Other stories reflect an enduring interest in the questions, what is a living wage?  And what is a middle-class income? These questions express the anxiety that naturally arises from the sense that we're sliding downhill in terms of our purchasing power–a reality that is confirmed by this chart:
 

 

Here's a recent story that delves into the question of "getting by" versus "middle class": How Much Money Does the Middle Class Need to Get By?

"Just getting by" in costly coastal cities requires an income in the top 20%: around $60,000 for individuals and $100,000 for households.
 
The article references MIT's Living Wage Calculator, which I found to be unrealistic in terms of the high-cost cities I know well (Honolulu and the San Francisco Bay Area). It appears the calculator data does not represent actual rents or food prices; the general estimates it uses woefully under-represent on-the-ground reality.
 
Current market rents in the S.F. Bay Area far exceed the estimated housing costs in this calculator, and that one line item pushes the living wage from $36,000 for two adults closer to $45,000 in my estimate–roughly the average wage in the U.S. (not the median wage, which is $28,000).
 
If you want to know where you stand income-wise, here is a handy calculator: What Is Your U.S. Income Percentile Ranking?
 
Here are the data sources:
 
Wage Statistics for 2013 (Social Security Administration)
 
2013 Household Income Data Tables (U.S. Census Bureau)
 
There are many complexities in these questions. For example, Social Security data does not include food stamps, housing and healthcare subsidies provided by the government, etc., so lower-income households' real (equivalent) income is much higher than the published data.
 
Then there are the regional differences, which are considerable; $50,000 in a Left or Right Coast city is "just getting by" but it buys much more in other less pricey regions.
 
As for what household income qualifies as "middle class," it depends on your definition of middle class. In my view, the definition has been watered down to the point that "middle class" today is actually working class, if we list attributes of the "middle class" that were taken for granted in the postwar era of widespread prosperity circa the 1960s.
 
In What Does It Take To Be Middle Class? (December 5, 2013), I listed 10 basic "threshold" attributes and two higher qualifications for membership in the middle class. Please have a look if you're interested.
 
I came up with an annual income of $106,000 for two self-employed wage earners and the mid-$90,000 range for two employed wage earners, the difference being the self-employed couple have to pay 100% of their healthcare insurance, as there is no employer to cover that staggering expense.
 
$90,000 puts a household in the top 25%, and $101,000 places the household in the top 20%. $150,000 a year qualifies as a top 10% household income.
 
If we set aside income and consider net worth, net worth (i.e. ownership of assets and wealth) of most households is modest:
 
 
 
This shows the decline in household wealth since 2003:
 
 
Can an economy in which the majority of households are "just getting by" experience robust growth, i.e. "recovery"? If we discount the millions of households who are paying for today's consumption with tomorrow's earnings, i.e. credit cards, auto loans, student loans, etc., I think it's self-evident that only the top 20% (and perhaps really only the top 10%) have the income and net worth to expand a $16 trillion economy.
 
By definition, the top 10% cannot be "middle class." Yet it seems that these top 12 million households are propping up the "recovery" – dining out at pricey bistros, paying $200 a night for hotels, buying homes that cost $500,000 and up, paying slip fees for their boats, funding their children's college education with cash rather than loans, etc.

The question of "recovery" really boils down to this: how much longer can the increasing debt of the bottom 90% and the wealth of the top 10% prop up the expansion?

 

Charting Banzainomics: What The BOJ’s Shocking Announcement Really Means

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Still confused what the BOJ's shocking move was about, aside from pushing the US stock market to a new record high of course? This should explains it all: as the chart below show, as a result of the BOJ's stated intention to buy 8 trillion to 12 trillion yen ($108 billion) of Japanese government bonds per month it means the BOJ will now soak up all of the 10 trillion yen in new bonds that the Ministry of Finance sells in the market each month.

In other words. The Bank of Japan’s expansion of record stimulus today may see it buy every new bond the government issues.

This is what full monetization looks like.

More from Bloomberg:

The central bank is already the largest single holder of Japan’s bonds, and the scale of its buying could fuel concerns it is underwriting deficits of a nation with the heaviest debt burden. The BOJ could end up owning half of the JGB market by as early as in 2018, according to Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo.

 

“Kuroda knows when to go ALL in,” Okubo wrote in a note. “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.

The unprecedented efforts to stoke inflation could scare bond investors, said Chotaro Morita, the chief rates strategist in Tokyo at SMBC Nikko Securities Inc.

Kuroda said earlier this month that while the BOJ holds only about 20 percent of Japan’s outstanding government bonds, the Bank of England holds approximately 40 percent of U.K. government debt.

We wish Japan the best of luck in avoiding becoming a "failed nation."

Then again there is something to be said about a nation which is now desperately, and obviously, trying to unleash hyperinflation… and, for now at least, is failing.

Looking for a Good Education at a Low Price, Perhaps Free? Head to Europe

Courtesy of Mish.

On June 7, 2014 I wrote Looking to Drastically Reduce College Costs? Study Abroad!

Yesterday, a writer for the Washington Post expressed the same opinion.

Please consider 7 countries where Americans can study at universities, in English, for free (or almost free).

Since 1985, U.S. college costs have surged by about 500 percent, and tuition fees keep rising. In Germany, they've done the opposite.

The country's universities have been tuition-free since the beginning of October, when Lower Saxony became the last state to scrap the fees. Tuition rates were always low in Germany, but now the German government fully funds the education of its citizens — and even of foreigners.

What might interest potential university students in the United States is that Germany offers some programs in English — and it's not the only country. Let's take a look at the surprising — and very cheap — alternatives to pricey American college degrees.

Germany

Americans can earn a German undergraduate or graduate degree without speaking a word of German and without having to pay a single dollar of tuition fees: About 900 undergraduate or graduate degrees are offered exclusively in English, with courses ranging from engineering to social sciences.

Finland

This northern European country charges no tuition fees, and it offers a large number of university programs in English. However, the Finnish government amiably reminds interested foreigners that they "are expected to independently cover all everyday living expenses." In other words: Finland will finance your education, but not your afternoon coffee break.

France

There are at least 76 English-language undergraduate programs in France, but many are offered by private universities and are expensive. Many more graduate-level courses, however, are designed for English-speaking students, and one out of every three French doctoral degrees is awarded to a foreign student. "It is no longer needed to be fluent in French to study in France," according to the government agency Campus France.

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Picture from Tpsdave at Pixabay; it's a school in Russia. 

Why Mitochondria Matter

Patrick starts by reviewing what a "broken record" is. (Sadly, I know and you probably do too.) He notes that biotechnology has undergone more enormous changes than the music delivery industry, and that most people do not have a proper appreciation of how big this "biotech transformation" is. Then, he reviews what mitochondria are, how they work and why they are so important to us.

Within all the cells of our bodies, microchondria produce energy – the energy supply needed to run the cells' activities. Without the ability to take nutrients and convert them to energy, via these little cellular machines, we are dead. And that, in brief, is why mitochondria are important. 

Illustration of a Mitochondrion by Kelvinsong, modified by Sowlos, posted on Wikipedia.

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TransTech Digest: Why Mitochondria Matter

By Patrick Cox

I may sound like a broken record saying this again, but it’s critical that we realize that scientific understanding of the biological world is increasing at an exponential rate. For younger readers, I should explain that the term “broken record” is a reference to a common failure of the old pressed-vinyl audio recording technology. Occasionally, the spiraled groove on a record imprinted with physical representations of sound would be scratched or otherwise damaged. As a result, the needle that transferred analog information to the amplifier would be knocked outward from the groove to play the same section of the recording over and over again.

For those of you who already knew this, it’s useful to realize that the technology of audio recording that was once universal is not just obsolete, most younger people don’t even know what a skipping record is today. The reason that this is such a useful realization is that biotechnology has undergone even bigger changes than the transformation of recorded music from bumps in vinyl grooves to streamed electrons. Most people, however, have no real appreciation of how big the ongoing biotech transformation really is.

New tools let us see deep into the atomically precise world of molecular biology. Just as important is a growing base of biological knowledge that is available to anybody. Though Google Scholar is only 10 years old, I find it hard to imagine a world without instant access to peer-reviewed literature. GeneCards, which is only 15 years old, puts the combined body of genomic knowledge at your fingertips and has recently added cell development and disease pathogens as well as analytical tools to its master databank.

Among the most exciting areas of modern biological research is mitochondria and the role of a molecule critical for their function, nicotinamide adenine dinucleotide (NAD). In terms of scientific research, our growing understanding of these tiny bacteria-like mitochondria inside every cell of the body is breaking news. Weekly, we seem to be learning something critical about the relevance of metabolic efficiency, on the biochemical level, to long-term health.

Only recently have we learned that mitochondria play a much larger role in the diseases of aging than previously known. This means research into the mechanisms of mitochondria and their interactions with the rest of the cell may lead directly to extended health spans. This is why I think that you should be interested in this subject. As scientific knowledge grows, and the popular media is increasingly overwhelmed by this explosion of data, individuals will need to keep abreast of science to take advantage of new possibilities. This may not have been necessary in the days of vinyl record, but those days are gone.

A few years ago, we saw a number of papers like this one. The authors, in 2009, proposed that protection of mitochondrial function would result in increased longevity. The article describes how mitochondrial function in muscle cells declines over time, suggesting that it may be related to oxygen uptake. This leads the authors to recommend long-term aerobic exercise as a solution. While I believe that exercise, though not solely aerobic exercise, is an important part of health maintenance, more recent research suggests that there are other effective ways to prevent the decline of mitochondrial health.

Before I get into the intricacies of just how mitochondrial function can be affected positively, we should go over background information on what a mitochondrion is and how, in layman’s terms, it harvests energy from sugar molecules to power cellular processes.

The Mitochondrial Basics

The discovery of mitochondria occurred over the second half of the 19th century as the improvement of microscopes and associated technologies provided insights into the world of cells. In 1894, the scientist who developed new ways to preserve cells for microscopic analysis, Richard Altmann, coined the term “bioplasts” to describe mitochondria. What these cells within cells actually did, however, was not clear.

Given the size of a mitochondrion and the primitive tools available for studying them, this was not surprising. Mitochondria measure one micrometer across. That’s one thousandth of a millimeter or a micron. To put that in perspective, the size of a human red blood cell is usually about five microns.

In textbooks and in many diagrams on the Internet you will see one or two mitochondria in the cell. In fact, there may be thousands of them, all converting stored energy in the chemical bonds of our food into usable energy currency called ATP, which is short for adenosine triphosphate. ATP is comprised of an adenosine molecule with three phosphate groups bonded in a chain to it. Inside the outer membrane of the mitochondrion resides yet another layer of membrane, which folds up into itself many times. This layered membrane is referred to as the matrix, and it contains within it enzymes that work to further break down glucose molecules.

In most biology 101 classes you will get a review of all the “organelles” of a typical human-like cell. One of the most important is the mitochondria, which function as the power supply to the rest of the cell. The average human contains only about half a pound of total ATP in their body, but the astounding fact is how much that ATP turns over. In just one day, the average human goes through about 60 septillion molecules of ATP. This equates to our own body weight in ATP being processed and recycled each day.

Mitochondria, the Aliens Within

Mitochondria are fascinating not only because they are so vital to virtually every biological process, but also they are distinct from all other organelles of a cell. Two peculiar things about the mitochondria’s structure stand out.

First, there’s the matter of packaging. Every large organelle, including the nucleus that protects the DNA, is contained with a membrane. This is the same kind of membrane that surrounds, and encapsulates, the entirety of the cell. Mitochondria are the only exception. Mitochondria, for some reason, have two membrane layers surrounding them, just like bacteria. Secondly, mitochondria are the only organelles that contain DNA besides the nucleus. Whereas the DNA of your genome is linear (with a beginning and an end), mitochondrial DNA is circular, just like bacterial DNA.

The similarity of mitochondria to bacteria is extremely important. Bacteria are independent organisms, but they can cooperate in quite astonishing ways by transferring chemically coded information among themselves. This ability helps them, for example, pass immunities to antibiotics to others of their species. Scientists have actually harnessed this ability to build a type of bacterial computer capable of solving complex problems.

This is not simply some bit of interesting trivia. Perhaps the central realization in the new science of mitochondria is that our mitochondria function like a biological computer network. Singly, a mitochondria has 37 genes, compared to the tens of thousands of protein-coding genes in the DNA of the nucleus. Mitochondria, however, often have multiple copies of their circular DNA plasmids, and there can be thousands of mitochondria in a cell.

Mitochondria, like bacteria, split and merge and repeat the process with other mitochondria innumerable times. Unlike bacteria, however, they operate in conjunction with the master genome in the cell’s nucleus. We are only beginning to understand everything that mitochondria do, but only a few percent of the mitochondrial DNA is involved with the critical production of ATP. This leaves a lot of computation capacity for other functions. So we are beginning to see this mitochondrial network in a new and far more important light. More importantly, we’re beginning to understand how this network fails as we age and how this failure impacts many areas of health. We’ll get to this later, but I will say here that there are ways to rescue this network even when we are quite old. To understand how we can do this, we should understand at least the basics of mitochondrial energy function.

Cellular Respiration: Three Not-So-Simple Steps

Mitochondria are found in human cells, mammal cells, animal cells, and plant cells. In fact, the presence of mitochondria is one of the characteristics that biologists use to distinguish eukaryotic cells (these are the cells that make up all animals, plants, and fungi) taxonomically from prokaryotic cells like bacteria. There are a few other distinctions, the most important being the presence of a nucleus in our cells (eukaryotic cells). As you know, the nucleus contains and protects our entire genome like a vault or an encrypted hard drive.

Mitochondria are the power grid for the entire cell including the nucleus, which uses the energy for numerous and complex molecular biological processes that go on within. They take in molecules of glucose through the several metabolic pathways, harvest the energy, and store it as ATP for intercellular use.

The first step in converting glucose into energy is called glycolysis, which actually doesn’t happen in the mitochondria but in the cytosol of the cell (the cytosol is the liquid that fills up our cells). Glycolysis basically works like a pair of scissors, cutting glucose molecules precisely in half from six carbons long to only three. These chopped up glucose molecules are now called pyruvate, and these are the molecules that actually enter into the mitochondria’s matrix.

Once inside the mitochondrion, the pyruvate goes through the citric acid cycle, a set of biochemical reactions far too complex for me to even begin to explain here. Instead I’ll just tell you what the results are. We do get a little bit of ATP from the citric acid cycle, but not nearly as much as in the electron transport chain.

The most important part of the citric acid cycle is the transfer of hydrogen atoms from the pyruvate to NAD+ and FAD+, which then turn into their reduced forms NADH and FADH2, respectively. In chemical terms, reduction/oxidation reaction is defined as the transfer of electrons to or away from a molecule. In many biological functions, however, the transfer of entire hydrogen atoms is also considered reduction or oxidation. So when a hydrogen is transferred from a pyruvate derivative, it’s considered to be reduced. And when that hydrogen atom bonds to an NAD+ molecule, it’s considered to be reduced.

After they receive the hydrogen atoms, they become NADH and FADH2. NADH and FADH2 then head into the electron transport chain, which you might guess concerns itself mostly with the transfer, or transport, of electrons.

Again, without getting too far into the nitty-gritty biochemical details, the electron transport chain works essentially like a water mill. The water mill harnesses the energy of water flowing toward a lower state of potential energy. The water, which starts at both a higher elevation and a higher energy state, performs work on its way to water’s ultimate resting place: ocean level. The electron transport chain works exactly the same way but with the flow of electrons instead of water. Electrons, because they are negatively charged, want to “flow” toward the nuclei of the atoms they surround because nuclei are made of positively charged protons.

You can think of electrons as screaming fans, the nuclei as the Beatles in the mid-1960s, and the electron transport chain as the box office. The electron transport chain lets them get closer to the positive charges, but before it does, it must stamp their tickets and receive payment in the form of energy.

Today I have attempted to give a very broad overview of the processes involved in cellular respiration, the main function of a mitochondrion. I want this information to be the backdrop for the new and exciting story of repair, which I intend to tell you about in next week’s editorial.

Sincerely,

Patrick Cox

To learn more about the new research driving Patrick's investigations at his Transformational Technology Alert letter for Mauldin Economics, click here.

The article TransTech Digest: Why Mitochondria Matter was originally published at mauldineconomics.com.

3 Things Worth Thinking About

Courtesy of Lance Roberts via STA Wealth Management,

QE Is Dead, But Likely Not Gone

As I wrote on Monday, the end of quantitative easing (QE) has come. While it was announced during Janet Yellen's post FOMC meeting press conference on Wednesday, the last official permanent open market operation (POMO) was this past Monday.

The question that remains to be answered is whether the economy and the financial markets are strong enough to stand on their own this time? The last two times that QE has ended the economy slid towards negative growth and the markets suffered rather severe corrections as shown in the chart below.

 QE-GDP-SP500-103014-2

Asset prices have a coincident effect with the starting and ending of QE programs. As liquidity is extracted from the markets, the propulsion of asset prices has faded. The economy, not surprisingly, lags changes in monetary interventions as the decline in asset prices eroded consumer confidence that weighed on growth.

As I discussed recently, the Fed's ongoing QE programs have had little effect on the real economy. While the liquidity push drove asset prices higher, only the small percentage of the economy with assets to invest received a benefit.

"While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service. The issue, of course, is not just a central theme to the U.S. but to the global economy as well. After five years of excessive monetary interventions, global debt levels have yet to be resolved."

Alan Greenspan recently reiterated this point in a WSJ Report:

“'Effective demand is dead in the water' and the effort to boost it via bond buying 'has not worked. Boosting asset prices, however, has been 'a terrific success.'”

“I don’t think it’s possible for the Fed to end its easy-money policies in a trouble-free manner….Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different."

Greenspan has this correct; there is an underlying belief that the Fed can raise interest rates without "pricking" elevated asset prices. The removal of liquidity from the markets by the ending of the latest QE program is indeed a "tightening" of monetary policy. The raising of interest rates in a 2% economic growth environment is a stranglehold. (Read: Will Rising Fed Rates Cause A Problem for a complete explanation)

 However, as Dr. Lacy Hunt states in a recent CNBC interview:

"The Fed has spawned this 'buy now, pay later' scheme of the American consumer… but there comes a point when the 'pay later' overwhelms the 'buy now'… and when that happens monetary policy is basically ineffective"

Dr. Hunt hits on the right points in suggesting that we are unprepared for what the future holds. The structural shift in employment, a growing demographic issue, and ballooning entitlement programs have only been masked by the Fed's monetary interventions. As Dallas Fed President, Dr. Richard Fisher, previously pointed out:

"1) QE was wasted over the last 5 years with the Government failing to use "easy money" to restructure debt, reform entitlements and regulations.

2) QE has driven investors to take risks that could destabilize financial markets.

3) Soaring margin debt is a problem.

4) Narrow spreads between corporate and Treasury debt are a concern.

5) Price-To-Projected Earnings, Price-To-Sales and Market Cap-To-GDP are all at 'eye popping levels not seen since the dot-com boom.'"

So, as the latest round of QE fades into history, I would suggest that we have not seen the last of it.

Oil Prices Due For A Bounce – But Lower Lows Likely

Oil prices have fallen sharply in recent months due to the slowdown in global economic growth and rising deflationary pressures. However, there is also a growing supply/demand imbalance that is being driven by the "shale boom" as I discussed recently.

"First, the development of the “shale oil” production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below."

Oil-Consumption-Supply-101614

"The obvious ramification of this is a “supply glut” which leads to a collapse in oil prices."

In the short-term the collapse in oil prices has reached a technical extreme. As shown in the weekly data chart below, oil prices (as represented by West Texas Intermediate Crude) have fallen by more than 3-standard deviations from the 50-week moving average. I have highlighted past historical periods where such declines from extreme overbought to oversold conditions have existed.

Oil-Prices-103014

While the current extreme oversold condition suggests that a bounce in oil prices is likely, historically bounces from such early extremes have led to either a period of consolidation with retests of recent lows, or further declines.

Many investors have gotten trapped in energy related issues by chasing either yield or returns in a "hot sector" over the last year. Therefore, it is advisable that bounces in oil prices, which should lead to a relative bounce in energy stocks, be used to reduce exposure to the sector until the current storm passes.

US Dollar Rally Likely Over

The US dollar has had an extremely strong rally in recent months as the global slowdown driven by deflationary pressures has driven money into the safety of the USD. However, utilizing the same technical setup as above for oil prices, the USD is now more than 3-standard deviations above its 50-week moving average.

USD-Prices-103014

Historically, such extremes have marked the end of counter trend rallies in the US Dollar. This time will likely be no different as not much in the world has changed over the course of the last several years (i.e. accelerating economic growth, wage growth, etc.) What is beneficial to the U.S. dollar currently is that it just is not as bad as everywhere else. Since oil is priced in US dollars in terms of trade, a strong dollar also has a negative impact on global growth, this is not something that our foreign trading partners are likely to tolerate for long.

However, IF, and this is a fairly big "if," the ECB can indeed launch some type of quasi-quantitative easing program in the months ahead, it will likely reverse flows from the USD back into the Euro. If that analysis is correct, this could provide a lift to depressed European asset prices relative to US related investments in the short term.

Just some things to think about.

 

Earnings Cheating Season: Is Your Favorite Company Cooking the Books?

Courtesy of Mish.

In his latest Global Strategy Report, Albert Edwards at Societe Generale discusses "earnings season" which he calls "cheating season".

We have always found that swings in analyst earnings expectations mirror the economic cycle quite well, but because of the weekly frequency, swings in analyst earnings optimism often act as a timely leading indicator for the economic cycle. If that is still the case, the recent data for the US should be worrying. Despite the soothing Q3 headline earnings reports as US companies ‘game’ the system, all is not well once you look into the ‘MUC’ (Manipulated Underperforms Conservative).

Remember the so-called Fed model? We were told that the extraordinarily high PEs were justified by low bond yields. The key plank of the Ice Age theory was that this positive correlation would break down and that equities would de-rate in absolute and relative terms compared to government bonds thereby inverting the close positive correlation between bond and equity yields.

What this also means is that in an Ice Age world, the equity cycle will more closely correlate with economic and profits cycles. Most correlation analysis finds virtually no post-war relationship between economic growth and the stock market.

But, this does not hold true during the Ice Age. Indeed, we knew from Japan that the equity market would start to track the economic and earnings cycle closely.

In the Ice Age, equity investors need to pay close attention to economic and earnings cycles and not be comforted by lower bond yields. If that is the case equity investors should be getting nervous NOW as earnings optimism starts to fall away sharply.

Earnings Upgrades vs. Downgrades as Percentage of Changes

We have long believed that the US reporting season should in fact be called the US cheating season as companies game the market to ramp earnings down ahead of company announcements only to beat analysts estimates by 1¢ on the day!

Apparently companies believe the feel-good news headlines of a earnings beat will offset the negative impact of downward guidance ahead of the report. In fact the evidence suggests otherwise: my colleague Andrew Lapthorne has shown that those companies that engage in earnings manipulation underperform those that do not. He developed a very useful MUC Score, Manipulated Underperforms Conservative.

(An update of the MUC is being delayed while Andrew works on an update of a more comprehensive earnings quality score, formally called the cheating, or C-score. Developed by my former colleague James Montier, Andrew changed the name as companies got mighty shirty when they appeared on this list!)

I rely on Andrew for this timely weekly data which he highlights every Monday in the Global Equity Market Arithmetic….

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Tim Cook: “I’m Proud to be Gay”

 

Tim Cook discusses being gay on BusinessWeek. Recent bullying statistics show that gay teens are from 2 to 3 times more likely to commit suicide than others, and almost 30% of completed suicides are related to problems dealing with sexual identity. Perhaps Tim Cook's story will help people accept their differences, whatever they are, and move on to achieve their goals. 

Excerpt:

Being gay has given me a deeper understanding of what it means to be in the minority and provided a window into the challenges that people in other minority groups deal with every day. It’s made me more empathetic, which has led to a richer life. It’s been tough and uncomfortable at times, but it has given me the confidence to be myself, to follow my own path, and to rise above adversity and bigotry. It’s also given me the skin of a rhinoceros, which comes in handy when you’re the CEO of Apple.

The world has changed so much since I was a kid. America is moving toward marriage equality, and the public figures who have bravely come out have helped change perceptions and made our culture more tolerant. Still, there are laws on the books in a majority of states that allow employers to fire people based solely on their sexual orientation. There are many places where landlords can evict tenants for being gay, or where we can be barred from visiting sick partners and sharing in their legacies. Countless people, particularly kids, face fear and abuse every day because of their sexual orientation.

I don’t consider myself an activist, but I realize how much I’ve benefited from the sacrifice of others. So if hearing that the CEO of Apple is gay can help someone struggling to come to terms with who he or she is, or bring comfort to anyone who feels alone, or inspire people to insist on their equality, then it’s worth the trade-off with my own privacy.

Full article: Tim Cook: "I'm Proud to be Gay" – Businessweek.

Zero Hedge commented on Cook's admission here and shared the chart below showing how homosexuality is viewed in other countries. Only in France and Canada is it not viewed as a "moral" issue by about 50% of the population. Combining "morally acceptable" with "not a moral issue," the most accepting countries are Spain, Germany, France, Czech Republic, Canada and Britain.

Tim Cook’s decision to openly discuss his sexual orientation is dominating the news cycle with many hoping it can be a watershed moment in the acceptance of openly gay people in the workforce. While it appears nothing but a positive in the United States, there are still stunningly many nations around the world (including Iran, where Apple is trying to sell to now) where Tim Cook’s admission is considered “morally unacceptable” by the great majority.

[Source: @ConradHackett]

 

Ebola “Turning Point” and Perspective

Courtesy of Mish.

Last Week the Huffington Post reported Ebola.com Sells For More Than $200,000 — Including 19,000 Shares Of Cannabis Sativa Stock.

Two Las Vegas entrepreneurs attempting to sell the rights to Ebola.com succeeded in selling to the highest bidder — literally.

Chris Hood and Jon Schultz paid $13,500 for the rights to Ebola.com back in 2008 and have just sold it to a company called Weed Growth Fund.

The terms of sale call for Hood and Schultz to get $50,000 in cash and 19,192 shares of Cannabis Sativa, Inc., a company run by former New Mexico governor Gary Johnson that hopes to market legal cannabis products throughout the world.

The stock is currently trading under the CBDS ticker symbol at $8.55 share, which means the value of the shares sold to Hood and Schultz is $164,091.

Add it up and they received $214,091. That's quite a profit, but the sellers made even more on LasVegasRealEstate.com and PayDayLoans.Com.

There is certainly a lot of attention on the disease. But what are the real risks?

The following chart of number of ebola cases and the country of origin from The Guardian will add a much needed perspective.

Ebola Cases

Turning Point

Admittedly the disease is very scary. About 70% of the people who contract the disease die from it. But according to  Dr Jeremy Farrar of Wellcome Trust and as reported by The Guardian in Ebola ‘May Have Reached Turning Point’

The Ebola epidemic in west Africa may have reached a turning point, according to the director of the Wellcome Trust, which is funding an unprecedented series of fast-tracked trials of vaccines and drugs against the disease.

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Here’s Why the Fed’s $4.45 Trillion Balance Sheet Is Not Going to Shrink

Courtesy of Pam Martens.

Federal Reserve's FOMC Meeting in March 2014

Federal Reserve’s FOMC Meeting in March 2014

Back on June 25 of this year, Wall Street On Parade ran the following headline: “BOE’s Carney: Inflated Central Bank Balance Sheet the New Normal; Expect to Hear the Same Conclusion from the U.S. Fed.”

The day before our headline, Bank of England Governor, Mark Carney, had just explained to Parliament why their central bank’s balance sheet, bloated through quantitative easing, was not going to be shrinking anytime soon.

Carney: “…I would define – picking up on what my colleagues have said – pre-crisis position as a position that’s consistent with the normal course of liquidity requirements of the banking system…What has changed, to the good, in terms of the banking system here is that through regulation and supervision we have put much more responsibility on the banks themselves to hold liquidity to manage liquidity shocks. And, as a consequence of that, their demand for reserves can be expected to be higher. The further consequence of that is that the balance sheet of the Bank of England will be larger…”

Translation: We have no idea how to unwind this mess any better than the Americans do.

We commented in the article that: “There is a very real suspicion that Carney was simply laying the groundwork for Fed Chair Janet Yellen to begin to slip the same hints into her forthcoming speeches.”

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GDP- Surprise, Surprise, Surprise…Not

Courtesy of Lee Adler of the Wall Street Examiner

The advance number for third quarter GDP came in at 3.5%, surprising the Wall Street conomists, whose consensus guesspectation was 3%.

It should not have been a “surprise.”

The US Treasury reports tax collection data virtually in real time, every day. I publish a chart of the withholding tax data and report the implications of that data for the markets every week in the Wall Street Examiner Professional Edition Money/Liquidity service reports. It showed that the average inflation adjusted growth rate in Q3 was 3.55%. That data is available to the whole world in real time. Remind me again what Wall Street’s excuse is  for not understanding exactly how the economy is doing. And what about the Fed, whose economic growth perceptions are NEVER on the mark. What is its excuse?

Here’s the latest data through October 28.

Federal Withholding Taxes Growth- Click to enlarget

Federal Withholding Taxes Growth- Click to enlarge

This data has also proven to be a good indicator of whether non-farm payrolls will beat or miss conomic guesspectations.Unfortunately the BLS data is manipulated, and the seasonally adjusted headline number is absolute fiction, that gets massively revised in subsequent months and years. The tax data is real, hard data, that is never subject to major revision. If you want to know what the economy is doing, follow the money, in this case, the taxes.  Follow it in real time every week in the Wall Street Examiner Professional Edition.

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2014 The Wall Street Examiner. All Rights Reserved.

Outside the Box: The Colder War

Outside the Box: The Colder War

By John Mauldin

The story of energy is the story of human expansion. From the days when we roamed the African savanna, we tamed first fire and then other forms of energy, using them as tools to control our environment and improve our lives. The control of energy has always been at the heart of the human story.

This week our Outside the Box essay is from my friend Marin Katusa, who has written a fascinating book about a part of that story, a subplot of intrigue and conspiracy. Under Putin, Russia has aspired to dominate the energy markets. Called The Colder War, Marin’s book is a well-written tale of the rise of Putin and his desire to change the way the world’s energy markets are controlled.

I sat down a few months ago with an advance copy, not sure what to expect. Marin is personally very colorful and entertaining, but would that charisma translate to words on a page? I started on a Sunday afternoon and finished before I laid my head on the pillow that night. The Colder War was an entertaining and gripping story of the rise of Putin and the shifting sands of the world of oil. It was also an insightful overview of the last century. I highly recommend it.

At the end of the day, I disagree with Marin as to Putin’s ability to achieve his vision. While Putin wants to displace the petro-dollar as the global medium of energy exchange, he will fail. But maybe that’s the hometown boy in me thinking my team will win.

But that is the last 10% of the book. The first 90% is an easy must-read. Warning: it is not written from a US perspective. Marin’s view of the events of the last century sound more like those I hear when I travel outside the US.

I took the liberty of checking his story with a good friend of mine, Jerry Fullenwider, a very successful Texas oil entrepreneur, who lived in Russia during Putin’s rise. He confirmed Marin’s tales and more. He has his history right. And what a history it is. Today’s OTB is the introduction to the book, and if you’re intrigued, you can listen to Marin talk about the book and obtain a copy here.

I write this note from the airport in Geneva, where I am waiting on a plane to return to Atlanta for a day and then home. It is hard to imagine a more perfect few days than I have spent here on the lake.

It has been an exhilarating week, full of thought-provoking lectures and conversations. I am ready to go home and meditate on what I have learned. As usual, I intend to work and write on my way back to the States, so that I am ready to go to bed when I arrive. You have a great week.

Your watching the dollar analyst,

John Mauldin, Editor
Outside the Box subscribers@mauldineconomics.com

 

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The Colder War

By Marin Katusa

I am going to tell you a story you’ll wish weren’t true.

Sometime soon, likely in the next five years or so, there is going to be an emergency meeting in the White House Situation Room. It probably will start in the wee hours of the morning, when the early risers among Europe’s oil traders and currency speculators have already begun to scramble out of the way of what’s coming. None of the worried participants in that meeting will have a good solution to propose, because there will be no way for the United States to turn without embracing calamity of one kind or another.

The president will listen as his closest advisers lay out the dilemma. After a long silence, he will say, “You’re telling me that everything – everything – is coming unglued.”

He’ll be right. At that point, there will be no good options, only less awful ones.

Don’t count on the wise and worldly who occupy the highest echelons of government power to know what they are doing when they sit in that meeting. Solving the puzzle of what to do will fall to the same kind of people who today are standing by and letting the disaster build.

Some of them just don’t know any better. They see all of mankind’s turmoil as cartoonlike conflicts between white hats and black hats. Others know that reality is more complex, but choose to feign ignorance – it’s so easy, and often politically convenient, to let everything boil down to good guys battling bad guys.

For years, political power players in the United States have joined their media allies in portraying Vladimir Putin as a coarse bully, a leftover from the KGB, a ruthless homophobic thug, a preening would-be Napoleon who worships men of action – especially himself. Even Hillary Clinton, who should know better, likened him to Hitler.

The ruthless part is quite real, but there is so much more to the truth. I’ve been studying Putin’s moves for as long as I’ve immersed myself in analyzing world energy markets – over a decade now. He’s a complicated man whom Americans have been viewing through the simplifying lens their leaders like to hold up. He is less of an ogre but far more dangerous than politicians and the media would lead you to believe.

It has been a terrible mistake for Washington’s political circles to dismiss him for so many years as just a hustler temporarily running a country, to cast him as a shooting star destined to flame out in the unforgiving world of Russian politics. It has been to his advantage that short people tend not to be taken seriously, even if, like Putin, they are martial arts champions and have a chiseled physique to display at age 62. And his less-than-dignified moments posing as He-Man have played into our readiness to treat him more as a clown than as a dangerous competitor.

But Washington should never have thought of him as a Cold War relic, any more than it should have thought of Russia as a once-lionlike country that had devolved into a goat. It should have seen that Putin has a long-range plan for Mother Russia – a map covering decades, not the four-year election cycles that dominate the attention of U.S. politicians – and both the vision and the resources to make the plan work. For 15 years, Putin has been formulating, bankrolling, and directing Cold War: The Sequel. Or, as I like to term it, The Colder War. He’s in it to win it.

And the way he plans to win it isn’t through the sword, but through control of the world’s energy supplies.

There’s no undoing the U.S. government’s failures to date. What I can do now is tell you the true story of the Colder War. I can trace the connections of world events you’ve read about and that only seemed unrelated. I can explain why Putin does what he does, so that you can anticipate what he’s likely to do next. I can show you the worldchanging power shift that is little recognized even though it is unfolding in plain sight, right before our eyes.

It’s all about energy – oil, gas, coal, uranium, hydroelectric power. Today, when you’re talking about energy, you’re talking about Putin. And vice versa.

Energy is what makes the world go round. For most of the past 60 years, the United States has prospered, largely because it has dominated the energy market but also because it issues the currency in which energy and other resources are traded – a nice monopoly to have. The United States has been top dog for so long, it’s a shock to imagine that things might soon be different.

Slowly but surely, however, U.S. strength has been ebbing as Putin positions himself for the final push. While the United States dithers over green energy, Russia has a Slavic tiger in its tank.

To understand where Vladimir Vladimirovich Putin is taking Russia, you need to go back to the country’s lost decade, the years after the collapse of the Soviet Union in 1989. If you were a Westerner, it was a time of prosperity and of self-congratulation for having won the Cold War. But if you were an average Josef Vodka caught up in the chaos that followed the demise of communism, it was a time of hardship, dislocation, and frightening uncertainty. And if you were Vladimir Putin, it was a time of anger and hardening – and preparing.

Given the country’s stunning rise since the 1990s, it’s easy to forget how bad things were.

It was 10 dismal years of lawlessness presided over by politicians who had been left bewildered by the task of bringing their country into the modern world. The sad decade was marked by the ascent of wildly profitable criminal syndicates and a coterie of oligarchs who fed on the government’s naïve plans for turning state enterprises into private ones. Operating as barely legal businessmen, they became billionaires almost overnight.

While the few celebrated, morale among ordinary Russians sank. They had just suffered through a long war in Afghanistan and its humiliating end. Then came the implosion of the Soviet Union, the grand empire they’d been told had been built for the ages. National pride had become a painful memory.

When the communist economy ground to a halt, no one in the government of the newborn Russian Federation knew what to do. Free markets were just beginning to emerge. Sizable and mature private businesses didn’t exist. There were no banks competent to judge credit risks. Almost no one understood stocks, bonds, commodities, or any kind of market other than the black one that had long flourished – and continued to do so. Property rights were a slogan with uncertain application. The ruble was worthless outside the country while internally inflation ran wild. Jobs disappeared, leaving millions unemployed. Infrastructure was crumbling. Millions of Russians fell into destitution.

It was the very definition of hard times. People’s prospects were so bleak that many clamored for a return to communism, the despised regime under which they at least knew where they stood (“We pretend to work; they pretend to pay us,” as the Soviet-era joke went). And the problems weren’t just with the economy.

There was, in particular, Chechnya. A secessionist movement of Islamic Chechens was reading the disorganization in Moscow as an invitation to press their bid for independence. They accepted the invitation, and in late 1994 the First Chechen War began.

Putin’s predecessor, Boris Yeltsin, was still in office at the time. Despite Moscow’s superior manpower, weaponry, and air support, the ragtag Chechen guerrillas fought Yeltsin’s mighty Russian army to a bloody, embarrassing stalemate.

By late 1995, Russian forces were utterly demoralized. That, along with a Russian public still smarting from the Afghanistan disaster and deeply opposed to the present conflict, led Yeltsin’s government to declare a ceasefire at the end of the following year.

Putin had been watching the debacle from afar, and it ground away at him. During most of the conflict, he was just another minor political figure in St. Petersburg, far removed from Kremlin politics. But he was filled with ambition and had already set his sights on higher office. To that end, he gathered together a circle of close confidants and in 1996 moved to Moscow, where a former colleague had invited him to join the Yeltsin administration.

Surrounding himself with loyal supporters was a shrewd strategy, or it might have been simply a matter of caution, given the hazards of Russian politics. Either way, it insulated him from potential enemies and would give him an unassailable base when he later moved to consolidate power.

Later came soon.

By 1998, Vladimir Putin – a formerly-obscure, low-level KGB agent – had become an ascendant political star to whom Yeltsin had taken a liking. First, in July 1998, Yeltsin had installed him as head of the Federal Security Service (FSB, successor to the KGB). Then, barely a year later, he appointed Putin to the office of prime minister.

In retrospect, it seems a meteoric rise. At the time, though, no one thought much of Putin. After all, he was Yeltsin’s sixth prime minister in eight years; it was a dead-end job. The new guy wasn’t expected to last longer than any of his predecessors.

Not for the last time, Putin was badly underestimated.

Becoming prime minister immediately drew Putin into the Chechen fray, which had heated up again. But rather than see it as a hopeless mess, he saw an opportunity to prove how different he was from the indecisive Yeltsin, whom he already felt confident he could replace. And the first milestone on that path was to engineer an ending very different from the first Chechen conflict.

Which he did.

In late September of 1999, newly-installed Prime Minister Putin ordered Russian warplanes to strike the Chechen capital of Grozny. A week later, Russian armored battalions that had been amassed on the border for months rolled across it. The Second Chechen War was on.

This time around, following a scorched-earth strategy, the Russian military turned its weapons on civilian targets. To avoid a repeat of the heavy Russian casualties sustained in the First Chechen War, they advanced slowly and in overwhelming force, using artillery and air power to soften Chechen defenses. Nearly 300,000 of Chechnya’s 800,000 civilians fled from the Russian advance and sought refuge in neighboring Russian republics.

The early success of the campaign in Chechnya positioned Putin perfectly for the stunner that came next: On December 31, 1999, Boris Yeltsin – whose approval rating had fallen to single digits – abruptly resigned. As provided in the Russian constitution, Prime Minister Putin succeeded Yeltsin and became acting president. Putin had jumped from an appointment as head of the FSB in July 1998 to an appointment as prime minister barely a year later, and then to acting president three months after that. It was an astonishing rise, unprecedented in Russian political history.

Had Putin expected to move so far so fast? Was it all planned? Of course we can’t know. But whether it happened mostly by design or mostly by chance, we can see that he played carpe diem masterfully.

He knew the kind of leader Russians had been pining for, so he gave priority to advancing his persona as the fearless tough guy. The one who pushed the take-no-prisoners approach in Chechnya. The one who would leave the president’s office to fly into the war zone to express his support of, and solidarity with, the troops. That was something Yeltsin never would have done.

The Russian people notice shows of strength, and they like them.

In an August 1999 poll, Putin had garnered less than 2 percent support as a presidential candidate despite (or perhaps because of) Yeltsin’s backing. By the time Election Day arrived in March 2000, his situation had changed entirely. Putin faced a lot of opposition. But none of the other candidates had a prayer. Russian troops had captured Grozny in February and the lightning victory in Chechnya was fresh in people’s minds. Putin was riding a wave of popularity. He took 53 percent of the vote and became president.

The reign of Vladimir Putin had begun. Like Peter the Great, the historical figure he most admired, he vowed to restore his country as a power of consequence. He knew that it wasn’t going to happen easily. But he believed he had been endowed with all the right qualities to bring it off: physical stamina, a keen intellect, a deep understanding of the ways of politics in the real world (and the role that energy plays), and an unwavering boldness of vision. It was time to tighten his hold on power by dealing with his enemies.

Next in Putin’s sights: the oligarchs.

Marin Katusa’s The Colder War is available here.

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Important Disclosures

The article Outside the Box: The Colder War was originally published at mauldineconomics.com.
 
Picture credit: Pixabay, Jodylehigh

NYSE Margin Debt Drifts Higher Again in September

NYSE Margin Debt Drifts Higher Again in September

Courtesy of Doug ShortAdvisor Perspectives

Note from dshort: The NYSE has released new data for margin debt, now available through September. I've updated the charts in this commentary to include the latest numbers.

The New York Stock Exchange publishes end-of-month data for margin debt on the NYXdata website, where we can also find historical data back to 1959. Let's examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter.

The first chart shows the two series in real terms — adjusted for inflation to today's dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July 2007, three months before the market peak.

Debt hit a trough in February 2009, a month before the March market bottom. It then began another major cycle of increase. Margin debt hit an all-time high in February of this year.

The latest Margin Data

Unfortunately, the NYSE margin debt data is about a month old when it is published. Following its February peak, real margin declined sharply for two months, -3.9% in March -3.2% in April and was flat in May. It then jumped 5.7% in June, its largest gain in 17 months. July saw a 0.9% decline, but number has drifted higher the two subsequent months, up 0.6% in August and 0.2% in September. It is now only is 0.4% below the February peak.

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The next chart shows the percentage growth of the two data series from the same 1995 starting date, again based on real (inflation-adjusted) data. I've added markers to show the precise monthly values and added callouts to show the month. Margin debt grew at a rate comparable to the market from 1995 to late summer of 2000 before soaring into the stratosphere. The two synchronized in their rate of contraction in early 2001. But with recovery after the Tech Crash, margin debt gradually returned to a growth rate closer to its former self in the second half of the 1990s rather than the more restrained real growth of the S&P 500. But by September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market.

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After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August, 2010 Jackson Hole speech. The appetite for margin instantly returned, and the Fed periodically increased the easing until the beginning of tapering purchases now underway.

NYSE Investor Credit

Lance Roberts of STA Wealth Management analyzes margin debt in the larger context that includes free cash accounts and credit balances in margin accounts. Essentially, he calculates the Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt. The chart below illustrates the mathematics of Credit Balance with an overlay of the S&P 500. Note that the chart below is based on nominal data, not adjusted for inflation.

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Here's a slightly closer look at the data, starting with 1995. Also, I've inverted the S&P 500 monthly closes and used markers to pinpoint the monthly close values.

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As I pointed out above, the NYSE margin debt data is a several weeks old when it is published. Thus, even though it may in theory be a leading indicator, a major shift in margin debt isn't immediately evident. Nevertheless, we see that the troughs in the monthly net credit balance preceded peaks in the monthly S&P 500 closes by six months in 2000 and four months in 2007. The most recent S&P 500 correction greater than 10% was the 19.39% selloff in 2011 from April 29th to October 3rd. Investor Credit hit a negative extreme in March 2011.

There are too few peak/trough episodes in this overlay series to take the latest credit-balance data as a leading indicator of a major selloff in U.S. equities. But we'll definitely want to keep an eye on this metric in the months ahead.

Note on the data: The NYSE website only posts the Free Credit Cash Accounts data back to 2003. The Free Credit Cash Accounts data back to 1980 is available on a fee basis from Haver Analytics.

Orbital Sciences Shares Crash After Its Unmanned Rocket Explodes

Orbital Sciences Shares Crash After Its Unmanned Rocket Explodes

By  at Business Insider

Antares 1

YouTube/Brad Panovich

Orbital Sciences' Antares rocket exploded shortly after takeoff Tuesday night.

And now the company's shares are crashing as well.

In premarket trade on Wednesday, Orbital Sciences shares were down more than 15% after the company's unmanned Antares rocket exploded shortly after taking off for the International Space Station with about 5,000 pounds of supplies.

In a statement, Orbital Sciences said that shortly after takeoff the rocket experienced a "catastrophic failure."

No was hurt in the incident. 

Keep reading >

Meet “OSHBot” Lowes New Store Helper; Goodbye Retail Associates, Hello Robots

Courtesy of Mish.

Goodbye Retail Associates, Hello Robots

The future of shopping has arrived, and its not human.

Not only do robots cost less than humans, they don’t complain, they speak multiple languages, and most importantly, by scanning aisles they know where every item is in the store and can take you straight to it.

Meet “OSHbot”

OSHbot is the newest member of the “Fellow Robots” family, and developed in partnership with Lowes Innovation Labs.

The future of shopping has arrived

Retail Robotics is an exciting and fast growing new market and Fellow Robots is at the forefront. Advances in sensors, wireless networking, voice recognition and design prototyping are enabling us to build the smart retail robots that can autonomously navigate through stores, help communicate with customers to understand what they need and locate it quickly.

OSHbot incorporates the latest of these advanced technologies. For example, a customer may bring in a spare part and scan the object using OSHbot’s 3D sensing camera. After scanning and identifying the object, OSHbot will provide product information to the customer and guide them to its location on store shelves.

OSHbot Specs

  • Front Screen: 19.5 inches
  • Back Screen: 29 inches
  • Height: 5 ft
  • Weight: 85 pounds

OSHbot Technologies

  • Voice recognition
  • Advanced sensors
  • Autonomous navigation
  • Scanning
  • Obstacle avoidance

Making Science Fiction a Reality

Continue Here

And The Biggest Beneficiary Of QE3 Is…

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Aside from the S&P 500 of course, which made billionaires out of millionaires (even if it failed to make billionaires into trillionaires this time around –  we will have to wait for QE4 or QE5 for that), some may wonder: who was the biggest beneficiary of QE3? It certainly wasn't the US middle class, which has seen its real wages decline in 6 of the past 7 months, and its disposable income is back at levels not seen since the mid-1990s. No, the biggest winner of QE3 is the same entity that we noted benefited the most from QE over the past 6 years, and which even the WSJ realized was the primary beneficiary of the trillions in cash created out of thin air by the Fed, when in late September Hilsenrath wrote "Fed Rate Policies Aid Foreign Banks"…  something we first said back in 2011 with "Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went."

So when it comes to the Fed's QE3 generosity to foreign banks, what was the real number?

Here is the answer.

The first chart below shows that since starting in December 2012, when QE3 was formally launched, and continuing through today, the Fed injected some $1.3 trillion reserves with banks, which has manifested as extra cash held by various banks operating in the US, both domestic, but most importantly, foreign.

 

So how does this increase in bank cash assets look like when broken down by banking group? The answer is shown below:

And the bottom line:

  • Small domestic banks, such as your mom and pop regional bank which is anything but Too Big To Fail: change in cash: zero.
  • Large domestic banks, think JPM's CIO group, i.e., its London Whale division which used precisely this "excess" Fed cash to try to corner the IG market and blow up in the process: call it just under $600 billion in cash as a result of QE3.
  • And the winner, with over $700 billion in extra cash added thanks to QE3, is: foreign (mostly insolvent European) banks.

So yes, European banks: feel free to send your thank you cards to the Fed: without its $1.3 trillion cash injection who knows how many of you would have passed the ECB's "no deflation to model" most recent Stress Test.

A word of warning: let's all hope that now, with some $1.5 trillion in Fed cash on foreign (most insolvent European) bank balance sheet, or just about half of all QE liquidity injections since the start of QE1, European banks are finally solvent. Or else, deflation, inflation, stagflation, hyperinflation, or what have you, the Fed will be storming right back in to bail out Europe's insolvent banks the US middle class all over again.

No Plans for Normalization: Fed Ends QE, Will Hold Rates Low for “Considerable Time”, Will Reinvest Proceeds

Courtesy of Mish.

Inquiring minds may wish to slog through today’s FOMC Press Release on Monetary Policy but it’s really not worth the time it takes to read it.

Here are a few details, generally expected

  • The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program.
  • The Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
  • The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
  • If incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
  • The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Reinvesting Principal Payments

The Fed also released a Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities.

NEW YORK — On October 29, 2014, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conclude the current asset purchase program by the end of October . The FOMC also directed the Desk to maintain the existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Reinvestments in agency MBS will continue to be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market. The Desk will adjust the number of individual agency MBS operations per month as needed for operational efficiency. The distribution of agency MBS purchases could change if market conditions warrant.

10-Year Treasury Yield

Curve Watchers Anonymous points out the yield on 10-year treasuries barely budged today as shown in this chart of TLT.

The 10-year treasury yield is up a mere six basis points today to 1.20%.

No Plans For Normalization

In spite a bit of rah-rah about jobs, the Fed practically committed to holding rates low indefinitely.

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