Archives for January 2015

The German 10 Year Bund Effectively a Call Option at 30 Basis Points

Courtesy of EconMatters

Bonds are not Stocks

On Friday the German 10 Year Bund yield touched the 0.30 mark or 30 basis points, yeah that`s right the same instrument that was yielding 90 basis points in November of last year, a 140 basis points last May 2014, and 195 basis points at the beginning of 2014. It has gotten so ridiculous in the bond markets that I think investors have forgotten what bonds actually are as an asset class, they trade based on price appreciation like stocks, and this perverted mentality has completely ignored the risk component of what bonds represent as debt obligations.   

German Core CPI expected to be 1.1% in 2015

But the case of the German 10 year Bund has gotten so idiotic that all finance logic has been thrown out the window. Excluding food and energy, consumer prices are expected to increase by 1.1 percent year on year in Germany for 2015. Yes energy has dropped 50% and so the comps are skewing everyone`s inflation readings to the downside, this is the rationale for focusing on the core inflation readings historically because of the high volatility of these two categories. Once the bad year over year comps start coming out of the energy components all the inflation readings will start spiking up again late next year, but remember the German Bund yielding 30 basis points is for the duration of 10 years, not 3 months!

Bund Yields in the Financial Crisis

There is talk about slow growth in Europe responsible for these low yields, but during the financial crisis of 2008/2009 the German 10 year yield was between 3% and 4%, and this was a time of the global recession where oil was trading as low as $33 a barrel, things were much worse during the financial crisis compared to today.

ZIRP is the Elephant in the Room

The real reason the German 10 year yield has dropped so dramatically is the abundance of cheap money in the financial system, all the big financial institutions are basically borrowing at ZIRP levels from government central banks, levering up their balance sheets, and taking advantage of this delta or difference in abnormally low borrowing costs and government bond yields, without any concern or notion of the risks associated with this strategy.

Remember these are 10 year bond durations we are talking about, and not 3 months! Do the central banks themselves think these are wise investments for financial institutions to be taking on their balance sheets at these prices and yield levels? They have to know, we can see the direct correlation of the ECB`s equivalent Fed Funds Rate dropping from 0.25 to 0.15 to 0.05 and the yield crashing in the German 10 Year Bund. But again this is for a duration of 10 years, for instance just 6 short years ago the ECB main borrowing rate was set at 3.75%.

Unintended Consequences

Does the ECB realistically think about the long term consequences of these financial institutions levering up their balance sheets with German 10 year Bunds trading with a 30 basis points yield? They have to realize that their policies are directly incentivizing this insane, irresponsible investing behavior with fallout being far more detrimental to the entire financial system of the European Union than a Greek exit, or a slow growth environment. 

All of these European Bonds are going to be extensively underwater from current price and yield levels for any holders at anywhere near these valuation metrics 5 and 10 years from now. This is like buying real estate in a hot real estate market, with no down payment loans, no documentation loans, and at zero percent borrowing costs with no borrowing limits, it is the housing crisis on steroids.

I have heard the response that these financial institutions believe that the ECB will buy these underwater bonds in a bailout scenario so they don`t really worry about traditional bond valuation metrics. Really the ECB is going to be able to buy all these bonds from them without steep haircuts? Why would any rationale central bank even go down this road in the first place, kicking the can down the road is one thing, going full boar into a suicide financial implosion is another matter entirely?

Out of the Money Prices versus Risk under Normal Mean Reversion of 10 Year Average

At 30 basis points yield, a short on this German Bund via the futures market is basically a call option on the utter destruction of this Massive Yield Chasing Strategy on behalf of financial institutions that has taken place over the last few years.

Seriously what is the downside risk of this trade, does the German Bund go down to yielding only 15 basis points? And what after the deflationary cycle the inflationary, or even hyper-inflationary cycle takes off? Remember it isn`t like Germany doesn`t remember the hyper-inflationary cycle. So what is the upside of this trade, it really is off the charts for the next 10 year period from a risk reward standpoint. 


Just to put some rough numbers here let`s say 15 basis points risk, and 400 plus basis points reward on this trade scenario over the duration of this 10 year bond. Actually the sound investment for financial institutions is exactly the opposite of the one they are so aggressively seeking out at the moment in the bond markets. Remember these positions often sit on financial institutions balance sheets for years if not decades in some cases. I can just imagine the write downs on these Yield Chasing Trading Positions at the large financial institutions in the future.

There is no way in hell the German 10 Year Bund is trading at 30 basis points in five years’ time, let alone in ten years. When bond yields become so compressed that they represent far out of the money call option`s prices, but are not even premium priced for a normal reversion to the mean of the last 10 year average yields of the bonds, this sets up the entire financial system for systemic risk on a grand scale that central banks better start focusing on right now. We have a problem central banks, and it isn`t the problem you are worrying about, forget sluggish growth, we have the biggest financial bubble brewing right now in the largest financial asset class in the world, and the German 10 Year Bund yielding 30 basis points is a disaster waiting to happen for any investor levering up their balance sheets with this ridiculous bond investment.


Diving Into the GDP Report – Some Ominous Trends – Yellen Yap – Decoupling or Not?

Courtesy of Mish.

Yellen Yap

On Thursday, Fed Chair Janet Yellen met with Senate Democrats at a private luncheon. She told the Democrats that the U.S. Economy is Strong.

My first thought was “what the heck is Yellen doing holding a private lunch with Democrats only?” Had she met with Senate Republicans, I would have asked the same question.

Apparently this is common procedure for Yellen, so perhaps I am reading too much into it.

Yet, I cannot help wondering if the real purpose of the meeting was to persuade Democrats to block any “Audit the Fed” Initiatives.

Glowing Report

Regardless of the reason, Yellen had some pretty glowing things to say.

“She went through the issues of unemployment and inflation. Very positive. And economic growth numbers were good, have been good. There’s work to be done,” Sen. Richard Durbin (D-Ill.) said after the luncheon.

No Rate Hike Soon

Bloomberg reported Yellen Tells Senators No Rate Rise Soon Amid Concerns Abroad.

“Her message is that the economy’s getting better but there’s still a ways to go in terms of job creation,” New York Senator Charles Schumer said today in an interview on Capitol Hill. “That worry seems, in her mind, to be paramount and that’s why she is not going to raise rates immediately.”

The Fed upgraded its assessment of the U.S. economy in a statement on Wednesday after a meeting of its policy-setting committee, while adding a reference to “international developments” which investors took as a sign of mounting worry about weakness overseas. …

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It’s Greece vs. Wall Street

Courtesy of The Automatic Earth

DPC Grand Central Station and Hotel Manhattan, NY 1903

On the one hand, I’ve written so much about Greece lately I fear I’m reaching overkill. On the other hand, there’s so much going on with Greece, and so fast, that I wouldn’t know here to begin. Moreover, I’m thinking and trying to figure what is what and what is actually happening so much it’s hard to stay focused for more than a short while before something else happens again and it all starts all over. And I’m thinking it must feel that way for the Syriza guys as well.

One thing I do increasingly ponder is that it gets ever harder to see the eurozone survive. In its present shape and form, that is. Damned if you do, doomed if you don’t, is an expression I’ve used before. It’s like this big experiment that a bunch of power hungry Europeans really get off on, that now all of a sudden is confronted with the democracy they all only thought existed in books of history anymore.

But if you take your blind hunger far enough to kill people, or ‘only’ condemn them to lives of misery, they will eventually try to speak up, even if not nearly soon enough. It’s like a law of physics, or like Icarus in, yes, Greek mythology: try to reach too high, and you’ll find you can’t.

What is Brussels supposed to do now? Throw Athens off a cliff? Not respect the voice of the Greek people? That doesn’t really rhyme with the ideals of the union, does it? If they want to keep the euro going, they’re going to have to give in to a probably substantial part of what Syriza is looking for. Or Greece will leave the eurozone, and bust it wide open, exposing its failures, its lack of coherence, and especially its lack of democratic and moral values.

The problem with giving in, though, is that there are large protest demonstrations in Spain and Italy too. Give anything at all to Greece, and the EU won’t be able to avoid giving it to others as well. And by then you’re talking real money.

They called it upon themselves. They got too greedy. They thought those starving Greek grannies would not be noticed enough to derail their big schemes. That claiming “much progress has been made”, as Eurogroup head Dijsselbloem did again this week, would be considered more important than the fact that an entire eurozone member nation has been thrown into despair.

That’s a big oversight no matter how you put it. The leadership can be plush and comfy in Berlin, Paris, Helsinki, but that doesn’t excuse them sporting blinders. And now they know. Or, let’s say, are beginning to know, because they still think they can ‘win this battle’, ostensibly with the aim of deepening the Greek misery even further, while continuing to proclaim that “much progress has been made”.

Not very smart. At least that much is obvious. But what else is? Greek Finance Minister Varoufakis declares in front of a camera that Greece ever paying back its full debt is akin to the Santa Claus story. Less than 24 hours later, PM Tsipras says of course Greece will pay back its debt. Varoufakis lashed out about Syriza not being consulted on EU sanctions against Russia, but shortly after their own Foreign Minister was reported to have said he reached a satisfactory compromise on the sanctions with his EU peers.

Discontent, confusion, or something worse, in the ranks? Hard to tell. What we can tell, however, is that the obvious discomfort with Dijsselbloem, Draghi, and the entire apparatus in Brussels – and Frankfurt – is a fake move. Either that or it’s only foreplay. If Yanis and Alexis want to get anywhere, they’ll need to take on Wall Street and its international, American, French, German, TBTF banks, primary dealers. And if there’s one thing those guys don’t like, it’s democracy.

Syriza is not really up against the EU or ECB, or the Troika, that’s a sideshow. They’re taking the battle to the IMF, a sort of silent partner in the Troika, and the organization that rules the world for the rich and the banks they own. And that, if they had paid a bit more attention and a bit less hubris, could have gone on the way they have, small squeeze after small squeeze, without hardly anyone noticing, until the end of – this – civilization. But no. It had to be more.

It’s going to be a bloody battle. And it hasn’t even started yet. But kudos to all Greeks for starting it. It has to be done. And I don’t see how the euro could possibly survive it.

Canada in Recession, US Will Follow in 2015

Courtesy of Mish.

On January 21 when the Canadian Central Bank unexpected slashed interest rates, I wrote Canadian Recession Coming Up.

Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.

Nine days later, the Canadian yield curve is still inverted. Let’s compare what I posted about the curve on January 21 vs. January 30.

Canadian Yield Curve January 21

  • 30-year: 2.044% (Today’s Low 1.998%)
  • 10-Year: 1.426% (Today’s Low 1.366%)
  • 05-Year: 0.791% (Down 19 basis points, an 18% decline)
  • 03-Year: 0.590% (Down 27 basis points, a 31% decline)
  • 02-Year: 0.560% (Down 29 basis points, a 34% decline)
  • 01-Year: 0.580% (Down 34 basis points, a 37% decline)
  • 01-Month: 0.640% (Down 22 basis points, a 26% decline)

Canadian Yield Curve January 30

  • 30-year: 1.834% (Down 21.0 basis points)
  • 10-Year: 1.250% (Down 17.6 basis points)
  • 05-Year: 0.603% (Down 18.8 basis points)
  • 03-Year: 0.386% (Down 20.4 basis points)
  • 02-Year: 0.392% (Down 16.8 basis points)
  • 01-Year: 0.490% (Down 9.0 basis points)
  • 01-Month: 0.580% (Down 6.0 basis points)

Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years.

Recession Has Arrived

There is no point in waiting for further data. The Canadian recession has already arrived.

On Friday, the Financial Post reported Canada GDP Shrinks on Biggest Factory Drop in Six Years.

The Canadian dollar plunged below 79 cents US today after data showed Canada’s gross domestic product contracted in November as manufacturing dropped the most since January 2009 and on declines in mining and oil and gas extraction….

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Greece Will Not Accept Bailout Extension or Deal With “Rottenly Constructed” Troika; Mish’s Game Theory Math

Courtesy of Mish.

Greece Will No Longer Deal with ‘Troika’

It now strongly appears as if Greece, Germany, and the nannycrats in Brussels are all on one hell of a collision course. Both sides have dug in, and the war of words has escalated in all corners.

For example, please consider Greece Will No Longer Deal with ‘Troika’, Yanis Varoufakis Says

Greece will no longer co-operate with the “troika” of international lenders that has overseen its four-year bailout programme, the country’s finance minister said.

Yanis Varoufakis also said Greece would not accept an extension of its EU bailout, which expires at the end of February, and without which Greek banks could be shut off from European Central Bank funding.

“This position enabled us to win the trust of the Greek people,” Mr Varoufakis said during a joint news conference with Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, who was visiting Athens for the first time since a leftwing government came to power this week.

He also blasted the deeply unpopular bailout monitors from the European Commission, IMF and ECB, also known as “ the troika”, saying: “We are not going to co-operate with a rottenly constructed committee.”

Germany Prepared for Negotiation But Won’t Negotiate

The position of Germany and Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, is equally one-sided.

Mr Dijsselbloem warned the new government against taking unilateral steps or ignoring arrangements with lenders, saying “the problems of the Greek economy have not disappeared overnight with the elections.”

Wolfgang Schäuble, German finance minister, warned Athens on Friday against trying to “blackmail” Germany with its financial demands.

Mr Schäuble said Germany was ready to co-operate but only on the basis of current agreements. “We’re prepared for any discussions at any time but the basis can’t be changed,” he said. “Beyond that, it is hard to blackmail us.” 

Martin Jäger, the German finance ministry spokesman, said any request for an extension of the existing financing programme would only be acceptable when it was “tied with a clear readiness of Greece to implement the agreed reforms”.

Gaming Theory

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Financial Blogger Profile of “Mish” on Equities.Com

Courtesy of Mish.

Daniel Banas at Equities.Com interviewed me last week via phone for their profile series on “the most distinct and noteworthy voices in the world of financial blogging.”

The interview transcript follows. First a few words …

I am honored to be on that list.

The interview kicked off with a question on how I got started. I have commented on this before, but the short story is I was out of work, hanging around stock message boards, and Bill McBride (Calculated Risk) created the first template to my blog. Bill had just started his own blog and within a few years we became two of the top three economic blogs in the US.   

Somewhere along the line Barry Rithotz at the Big Picture Blog discovered me, frequently linking back to my blog. I like to mention those who have helped me out, even if we have recent differences of opinion on various issues.

Of the three top bloggers (not counting syndicates like Paul Krugman, or multiperson sites), Calculated Risk or Ritholtz typically held the top spot, but on a few occasions, I did.

Tweet From Barry

Today, Barry was nice enough to tweet “Nice Profile of Mike Shedlock (@MishGEA) at Global Financial Community“.

Thanks Barry. Appreciated. Here is a link to Mish Profile on Equities.Com.

Interview with Daniel Banas

EQ: What inspired you to start Mish’s Global Economic Trend Analysis?

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Eurozone, Including Germany, in Deflation; Strange Times for Denmark, Deutschland and EU

Courtesy of Mish.

Eurostat released HICP Harmonized Index of Consumer Prices statistics today.

In spite of promising that deflation would not hit again, here we are, and for the second month too.

Euro area annual inflation is expected to be -0.6% in January 2015, down from -0.2% in December 2014 according to a flash estimate from Eurostat, the statistical office of the European Union. This negative rate for euro area annual inflation in January is driven by the fall in energy prices (-8.9%, compared with -6.3% in December). Prices are also expected to fall for food, alcohol & tobacco (-0.1%, compared with 0.0% in December) and non-energy industrial goods (-0.1%, compared with 0.0% in December). Only prices for services are expected to increase (1.0%, compared with 1.2% in December).

HICP vs. Year Ago

click on any chart for sharper image

HICP Components by Month

HIPC 2005 to 2015 History

Even Germany in Deflation

The BBC reports Denmark, Deutschland and deflation: strange times for EU.

New official figures from Germany show that prices have fallen, by 0.5%, over the previous 12 months.

Meanwhile the Danish Central Bank has cut one of its main interest rates for the second time in a week.

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Looks Like I’ll Be Able To Retire Comfortably At Age 91

Courtesy of Charles Hugh-Smith of OfTwoMinds

You've probably seen articles and adverts discussing how much money you'll need to "retire comfortably." The trick of course is the definition of comfortable. The general idea of comfortable (as I understand it) appears to be an income which enables the retiree to enjoy leisurely vacations on cruise ships, own a well-appointed RV for tooling around the countryside, and spend as much time on the golf links as he/she wants.

Needless to say, Social Security isn't going to fund a comfortable retirement, unless the definition is watching TV with an box of kibbles to snack on.

By this definition of retiring comfortably, I should be able to retire at age 91–assuming I can work another 30 years and the creek don't rise.

Since I earned my first real Corporate America paycheck at 16 in 1970 (summer job for Dole Pineapple), I've logged 45 years of work. Now if I'd been smart and worked for the government, I could have retired 15 years ago with generous pension and healthcare benefits for life.

But alas, I wasn't smart, so here I am, a self-employed numbskull.

The articles and adverts usually suggest piling up a hefty nestegg to fund a comfortable retirement. As near as I can make out, the nestegg should be around $2.6 million–or maybe it's $26 million. Let's just say it's a lot.

This presents retirees without generous government pensions two basic problems. One is making enough money to pay the bills of survival and set aside the two million or whatever the number is to retire comfortably.

The average full-time earned income in the U.S. is around $50,000, depending on how the statistics are massaged. At this income, the worker would need to to save every dime for 40 years to assemble the nestegg. This isn't practical (unless you inherit a trust fund, in which case you don't have to bother with earned income).

The magic solution is unearned income, i.e. dividends, interest, capital gains on investments, etc. If the worker aiming for that comfortable retirement holds his/her retirement nestegg in high-yielding investments, the nestegg will grow over time to the sky — the $2 million needed to retire comfortably will accrue.

This raises the second problem: identifying those magical high-yielding investments that won't suddenly turn to dust when the long-awaited retirement approaches.

In the good old days, plain old savings earned 5.25% annually by federal law. Buying a house was not a way to get rich quick, it was more like a forced savings plan, as over time real estate earned about 1% above the core inflation rate.

But all the safe ways of gaining earned income have been eradicated by the Federal Reserve. As I described in The Fed's Solution to Income Stagnation: Make Everyone a Speculator (January 24, 2014), the status quo "fix" for economic stagnation was to financialize the U.S. economy. What this means on the ground is eliminate safe returns and make everyone a speculator in high-risk, high-yield financial games.

The essence of financialization is turning debt into a tradeable security that can be leveraged into speculative pyramids. If I loan you $100,000 to buy a house, that loan is called a mortgage. The collateral for the mortgage is the property. In the pre-financialization era, I held the mortgage to maturity (30 years) and collected the interest and principal. This trickle of earnings from interest was the entire yield on the loan.

In the securitized economy, I divide the loan into tranches that are sold to investors like stocks and bonds. I can "cash out" my entire gain in the present, and then sell derivatives on the securitized debt as a form of "portfolio insurance" to other buyers.

Clever financiers can pyramid security on security and debt on debt, all collateralized by debt on one property.

This enables the generation of vast profits not from producing goods and services but from financial churning. The more debt I underwrite, the more I can securitize and the more debt instruments I can conjure out of thin air.

The key dynamic of speculative financialization is that pyramiding credit expansions lead to bubbles which eventually pop, wiping out the phantom wealth created by the bubble.

In effect, the central bank/state's policies of low interest rates, easy money and limitless liquidity sought to compensate for the decline of real income by generating speculative income on a vast scale.

The problem is that speculative financialization only benefits speculators with access to nearly free money and the securitization markets–Wall Street financiers, corporate raiders, hedge funds and other financial Elites. These Elites pocketed immense fortunes but very little of this wealth trickled down to households for the simple reason that there is no mechanism for such a transfer except taxes–and this mechanism is controlled by the central state, which is easily influenced by wealth (campaign contributions, lobbying, etc.)

The Federal Reserve's solution to stagnating household income was to make every homeowner into a speculator. The Great Housing Bubble of the 2000s was the perfection of this strategy: as every home in the nation was floating higher in valuation as the result of an enormous credit/financialization bubble, homeowners were granted a form of "free income" via home equity lines of credit (HELOCs) and second mortgages.

That this increase in home equity was a form of phantom wealth that would necessarily vanish was not advertised as being an intrinsic feature of the solution.

In the wake of the implosion of the housing bubble, the Fed sought to repeat the exact same strategy of inflating speculative bubbles in widely held assets: stocks, bonds and real estate.

So anyone assembling a nestegg for retirement is gambling that the bubbles don't all pop before he/she cashes out. If the bubbles keep inflating steadily for another decade, making assets ever-more richly valued and unaffordable to anyone who isn't using leverage to buy them, then maybe I could retire after only 55 years of work at age 71.

But what are the chances that monumental bubbles in stocks, bonds and real estate will continue inflating for another decade? Most gigantic asset bubbles pop after five years of expansion. The current bubbles are in Year 6 of their speculative expansion, and it seems highly unlikely that they will be the only bubbles in the history of humanity to never pop.

If the current bubbles follow the pattern of all other speculative credit-driven bubbles, they will pop, without much warning and with devastating consequences for all those who believed the bubbles couldn't possibly pop. In that case, it looks like I'll need to work another 30 years, logging 75 years of labor before I can retire comfortably at 91.

My advice is to focus not on retiring comfortably, but on working comfortably. Line up work you enjoy that can be performed in old age. That's a much safer bet than counting on the serial bubble-blowing machinery of the Fed to keep inflating speculative bubbles that magically never pop.

How Do You Solve A Problem Like Syriza?

Courtesy of The Automatic Earth

Edwin Rosskam Shoeshine, 47th Street, Chicago’s main Negro business street 1941

First off, no, I don’t think Syriza is a problem, I just couldn’t resist the Sound of Music link once it popped into my head, as in ‘headlines you can sing’. I think Syriza may well be a solution, if it plays its cards right. But that still leaves politicians and investors denominating Tsipras et al as a problem, if not a menace. Now, investors may not need to possess any moral values – though things would probably have been much better if that were a requirement  but you can’t say the same for politicians. Politics is supposed to BE about moral values.

And supporting Samaras and his technocrat oligarchy, as has been the EU/Troika policy, doesn’t exactly show a high moral standard. Not just because trying to influence an election is an no-go aberration (though it’s so common in the EU you’d almost forget that), but certainly also because of what Samaras and the EU have done to the Greek people over the past few years. And neither does it show in what happens now, where the Greeks, steeped in Troika-induced misery as they are, are labeled greedy bastard cheats.

Since the EU lies as much about Greece as it does about Russia, it’s only fitting that the former should speak out for the latter. And it’s deliciously easy: the EU wants to step up sanctions against Russia (because the Ukraine shelled Mariupol?!), but EU sanctions decisions require unanimity. Since Greek-Russian relations have historically been close, Syriza resisting ever tighter sanctions should be no surprise.

At the end of the day, European taxpayers shouldn’t be angry at Greece, no matter how much their media try to stoke that anger, but at their own banks, governments and central banks. Things pertaining to Greece and its debt are not at all what they seem. Most of it is just another narrative originating in Brussels, Frankfurt and the financial media cabal. Not much is left of this narrative if we dig a little deeper. This from Mehreen Khan for the Telegraph today may be a little ambivalent in what it points to, but it certainly puts the Greek debt in a different light from the ‘official’ one:

Three Myths About Greece’s Enormous Debt Mountain

€317bn. Over 175% of national output. That’s the enormous debt mountain that faces the new Greek government. It is the issue over which the country is set to clash with other countries in the eurozone. As it stands, Greece’s debt-to-GDP ratio is the highest in the currency bloc. It has been steadily rising as the country has undergone painful austerity and experienced a severe contraction in economic output. The new far-left/right-wing coalition is now demanding a write-off of up to 50% of its liabilities. The government argues that this is the only way Greece can remain in the single currency and prosper.

According to the newly appointed finance minister, who first coined the term “fiscal waterboarding” to describe Greece’s plight, the EU has loaded “the largest loan in human history on the weakest of shoulders – the Greek taxpayer”. So far, the rest of the eurozone is adamant that it will not meet demands for debt forgiveness. And yet, the value of Greece’s debt mountain has been called a meaningless “accounting fiction” by Nobel laureate Paul Krugman. So what does Greece’s €317bn debt really mean for the country and its creditors? And can it ever be paid back?

Myth 1: They can never pay it back. Ever. Never say never. On the issue of repaying back its liabilities, it’s more a question of time, rather than money. Greece has already been the beneficiary of a number of debt extensions, and in 2012, underwent the biggest private sector debt restructuring in history. The average maturity on Greek government debt currently stands at 16.5 years. The sustainability, or otherwise, of the country’s burden relies more on the timetable for repayment rather than the overall stock of the debt, argue many economists. The chart below shows the repayment schedule on the country’s €245bn rescue package and extends all the way out to 2054.



Source: Hellenic Republic Public Debt Bulletin


Although the question of cancelling any portion of the principal owed to Greece’s creditors seems to be a firm no-go area, the idea of further debt extensions could be an option. But as noted by Ben Wright, allowing Greece more time to payback its loans is still a fiscal transfer in all but name.

Myth 2: Greece is paying punitive interest rates. Not really. Greece has managed to negotiate favourable terms on which it can service the cost of its loans and the interest paid by the country is far below that of Spain, Ireland, and Portugal (see chart below). Think-tank Bruegel calculates that Greece paid a sum equal to around 2.6% of its GDP (rather than the widely quoted figure of around 4%) to service its loans last year. This is because Greece will actually receive back the interest it pays to the ECB should it continue to meet its bail-out conditions.



Even without a further renegotiation on interest payments, the costs could be even lower this year. In the words of economist Zolst Darvas from Bruegel:

Given that interest rates have fallen significantly from 2014, actual interest expenditures of Greece will be likely below 2% of GDP in 2015, if Greece will meet the conditions of the bail-out programme.

It is this combination of such long maturities and rock-bottom interest rates, that has led at least one former ECB governing board member to argue that Greece’s debt burden is far more sustainable than many of its southern neighbours.


Who owns Greek debt? (Source: Open Europe)


Myth 3: Greece won’t recover without debt forgiveness. Wrong again. For all the fixation on the outstanding stock of Greek debt, kickstarting growth in the country is more likely to happen through a relaxation of budget rules rather than a debt cancellation. With the coffers looking sparse, the Syriza-led government is also asking for a renegotiation of the surplus rules imposed on the country. Greece is currently required to run a primary surplus of 4.5% of its GDP. Before taking account of its debt interest payments, it is likely to achieve a primary budget surplus of around 3% of its national output this year. This severely limits the new government’s room for fiscal manoeuvre. It also makes it almost impossible for Syriza to fulfil its pre-election promises to raise the minimum wage and create public sector jobs.

According to calculations from Paul Krugman:

Dropping the requirement that Greece run a primary surplus of 4.5% of GDP would allow spending to rise by 9% of GDP, and that this would raise GDP by 12% relative to what it would have been otherwise. Unemployment would fall by around 10% relative to no relief.

None of this is to deny that Greece would hugely benefit from a significant debt cancellation. But the politics of the eurozone means that this is virtually impossible. However, there do seem to be other ways that Greece could start tackling its enormous debt mountain.

And if that is not enough to change your mind about what the reality is in the Greek debt situation, David Weidner at MarketWatch has more, from an entirely different angle, that nevertheless hammers the official narrative just as much, if not more. Weidner refers to work by French economist Eric Dor, as cited by Mish Shedlock last week. What Dor contends is that a very substantial part of Greece’s debt to EU taxpayers was nothing but Wall Street wagers gone awry.

Not exactly something one can blame the Greeks in the street for, just perhaps the elite and oligarchy. Instead of restructuring their banks, the richer nations of Europe, like the US, decided to transfer their gambling losses to the people’s coffers. And though there are all kinds of reasons provided, which even Weidner suggests may be ‘genuine’, not to restructure a banking system, in the end it is a political choice made by those who owe their power to those same banks.

The result has been that Greece was saddled with so much debt, they had to borrow even more, and the Troika could come in and unleash a modern day chapter of the Shock Doctrine. How convenient.

How Wall Street Squeezed Greece – And Germany

Europe’s political leaders and bankers would have you believe that the conflict between Greece and the European Union is a tug of war between a deadbeat nation and its richer ones who have come to the debtor’s aid time and time again. Instead, what most of these leaders miss is that it’s a bank bailout in plain view.

What’s really happened is that since Greece ran into serious trouble repaying its debts four years ago, Germany, France and the EU have instituted what can only be described as a massive bailout of its own financial system – shifting the burden from banks to taxpayers. Last week, Mike Shedlock republished research by Eric Dor, a French business school director, and it shows the magnitude of the shift. To put it simply, German taxpayers are on the hook for roughly $40 billion in Greek debt. German banks? Just $181 million, though they do hold $5.9 billion in exposure to Greek banks. Those numbers are a flip-flop from where things stood less than five years ago.



German banks were heavily exposed to Greek debt when the crisis began, but they’ve been bailed out and now German taxpayers are on the hook. French banks were similarly bailed out by the European Union.



This massive shift from private gains to public losses was done through the European Financial Stability Facility. Created in 2010, this was the European Union’s answer to the U.S. Troubled Asset Relief Program, the Treasury Department’s 2008 bailout program. There are some differences. The EFSF issues bonds, for instance, but the principle is the same. Governments buy bad bank debt and hold it on the public’s books.

The terms set by the EFSF are basically what’s at issue when we hear about Greece’s new government being opposed to austerity in their nation. The Syriza victory, which was a sharp rebuke to the massive cost-cutting in government spending, including pensions and social welfare costs, drew warnings from leaders across Europe. “Mr. Tsipras must pay, those are the rules of the game, there is no room for unilateral behavior in Europe, that doesn’t rule out a rescheduling of the debt,” ECB’s Benoît Coeuré said.

“If he doesn’t pay, it’s a default and it’s a violation of the European rules.” British Prime Minister David Cameron’s Twitter account said, the Greek election results “will increase economic uncertainty across Europe.” And Jens Weidmann, president of the German central bank, warned the new ruling party that it “should not make promises that the country cannot afford.” Those sound like very threatening words. And one wonders if these same officials made the same tough statements to Deutsche Bank, Commerzbank, Credit Agricole or SocGen when they were faced with potentially billions in losses when the banks were holding Greek debt.

European leaders such as Angela Merkel in Germany, Francois Hollande in France and Finnish Prime Minister Alexander Stubb have been eager to beat down Greece and stir broader support at home by making it an us-against-them game. Not to deny that Greece’s financial troubles do threaten the European Union, but today’s crisis pitting nation against nation was created by these leaders in an effort to minimize losses at their biggest lending institutions. Perhaps the move to shift Greek liabilities to state-owned banks (Germany’s export/import bank holds $17 billion in Greek debt) was necessary, but that doesn’t make it fair, or the right thing to do. Europe, like the United States, seems to be at the beck and call of its financial industry.

Michael Hudson recognized this early on. In 2011 he wrote that in Europe there is a belief “governments should run their economies on behalf of banks and bondholders. “They should bail out at least the senior creditors of banks that fail (that is, the big institutional investors and gamblers) and pay these debts and public debts by selling off enterprises, shifting the tax burden onto labor. To balance their budgets they are to cut back spending programs, lower public employment and wages, and charge more for public services, from medical care to education.”

Yes, Greece overspent. But to do so, someone had to overlend. German and French banks did so because of an implicit guarantee by the EU that all nations would stick together. Well, the bankers and politicians have stuck together. Everyone else seems to be on their own. Merkel and the austerity hawks of Europe who won’t share the responsibility for a system’s failure are doing the bidding of banks. At least in Greece, the lawmakers are put into power by the people.

And that still leaves unaddressed that Greece as a whole may have overspent and -borrowed, but it was the elite that was responsible for this, egged on by the likes of Goldman Sachs, whose involvement in the creative accounting that got Greece accepted into the EU, as well as the derivatives that are weighing down the nation as we speak, is notorious.

The world’s major banks got rich off the back of the Greek population at large, and when their wagers got so absurd they collapsed, the banks saw to it that their losses were transferred to European -and American – taxpayers. And those taxpayers are now told to vent their anger at those cheating, lazy Greeks, who are actually notoriously hard workers, who have doctors prostituting themselves, and many of whom have no access to the health care those same doctors should be providing, and whose young people have no future to speak of in their own magnificently beautiful nation.

The Troika, the EU, the IMF, and the banks whose sock puppets they have chosen to be, are a predatory force that has come a long way towards wiping Greece off the map. And we, whether we’re European or American, are complicit in that. It’s Merkel and Cameron etc., who have allowed for their banks to transfer their casino losses to the – empty – pockets of the Greeks, and of all of us. That is the problem here.

And that’s what Syriza has set out to remediate. And for that, they deserve, and probably will need, our unmitigated support. It’s not the Greek grandmas (they’re dying because they have no access to a doctor) who made out like bandits here. It’s the usual suspects, bankers and politicians. And you and I, too, are eerily close to being the usual suspects. We should do better. Or else we are dead certain of being next in line.

Marine Le Pen Soars Into Lead in French Presidential Polls for 2017; Don’t Worry, Nothing Can Possibly Go Wrong

Courtesy of Mish.

In spite of the Charlie Hebdo murders that raised the popularity of French president Francois Hollande and his staff, Les Echos reports than in the 2017 presidential election anti-euro candidate Marine Le Pen in the 1st Round Lead With Nearly 30% of the Vote.

According to an IFOP 2017 presidential poll released Thursday, Marine Le Pen would come out clearly in the lead if the first round of presidential elections was held on Sunday.

Le Pen would get 29 to 31% of the vote. No rival would exceed 23%. Nicolas Sarkozy, Manuel Valls, and Alain Juppé, each have around 23%. François Hollande would get 21%.

Francois Bayrou would obtain 7 to 9%, Mélenchon 8%, Cécile Duflot and Nicolas Dupont-Aignan between 3 and 4% and the far left between 2 and 3%.

Prime Minister Valls would do better than Francois Hollande, with 23% of the vote.

Too Early Too Worry

Don't worry about 2017 until December 31, 2016. Instead worry about Greece and especially Spain. Spanish elections are scheduled for November of 2015.

On January 12, in Zugzwang! I noted the Spanish radical left party Podemos surges into lead. That surge adds another contagion wrinkle given the Podemos "Economic Manifesto" Calls for Debt Restructuring, Spain to Abandon the "Euro Trap".

"Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. The euro was conceived as a real trap, but nowhere is it written that people have to accept it ."

Inquiring minds may also wish to consider the Incredible Populist Positions in Podemos' "Economic Manifesto".

Don't Worry, Everything Under Control

In retrospect, it appears there may be too many things to worry about. So instead, sit back and relax. Repeat after me … Nothing can possibly go wrong because central bankers are in complete control.

Mike "Mish" Shedlock

More from Mish here > 


Drink Up World: The 4 Companies That Control Global Whiskey Production

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While there are eighty people who hold half the world's wealth, ten 'people' who run the world, and ten corporations that control nearly everything you buy… these four companies control what is – to some – the most precious commodity in the world… world whiskey production.

h/t @BarbarianCap

Conscription of People, Cars, Businesses in Ukraine for Mindless Slaughter; Entire Villages Leave to Avoid Servitude; Hop on the Bus Gus

Courtesy of Mish.

Ukrainians Fighting Ukrainians

Forced military conscription (slavery is a better word) imposed on citizens of Ukraine has reached new heights recently.

The government in Kiev now demands those forced into slavery to hand over their cars for military use. As one might expect, avoidance of needless military slaughter has also reached new heights.

Before we get to those stories, I have a video to share. It is in Russian, but with English subtitles. I am told by reader Jacob Dreizin the translation is essentially correct, but a couple things were translated too literally.

I do offer this warning. The video is graphic and it does contain a lot of harsh language. The video is about captured Ukrainian POWs on a fool’s mission to retake the Donetsk airport. After about 12 minutes or so it gets gruesome, the beginning is not so bad.

Warning aside, I recommend watching the video, entirely. Watch the scenes where locals confront the Ukrainian POWs. The video accurately portrays Ukrainians fighting Ukrainians, not Ukrainians fighting Russians.

Ukrainian POW’s Face NAF Commander Givi and the Fury of Donetsk Residents

Link if Video Does not Play: UAF Storms Donetsk Airport and Gets Asses Handed to them by NAF.

Want a translation to Spanish, German, Dutch, Danish, or French? Go to Information Clearing House. That is where I picked up the Video.

Translation Corrections

Continue Here

“The Thread By Which Venezuelan Socialism Hangs May Soon Snap”

Courtesy of Pater Tenebrarum via Acting-Man

Fixing the Dollar Drought

Say you are a socialist, and you have intervened heavily in the economy. Suddenly, things don’t work as you thought they would. Somehow, economic laws seem to refuse to bend to your will. However, you cannot really believe that since according to your convictions, wealth is a byproduct of government plans and decrees. Moreover, your predecessor (also a socialist revolutionary) had the best advice oil money can buy – even from people who are now advising socialist parties over in good old Europe. So the solution to the unintended consequences of the initial intervention is to intervene further, in an attempt to refine the plan, so to speak.

You may have heard about a certain proverb attributed to Einstein about insanity, but you can’t quite recall what it was. So you try again. And again. And again. Chances are, your name is Nicolas Maduro. But eventually, you quit trying – sort of.


Image via

As Bloomberg reports, Maduro wants to fix the dollar shortage in Venezuela by introducing the fifth parallel currency market in 12 years – Venezuela will end up with three different official exchange rates as a result, one of which should actually track what was hitherto the black market rate (i.e., the real market exchange rate):

“Venezuela will create its fifth parallel currency market in 12 years to boost U.S. dollar supplies as plunging oil revenue worsens food and medicine shortages and pushes the nation deeper into recession.

The new market will allow private companies and individuals to trade the greenback through brokerages, President Nicolas Maduro told Congress in a televised address Wednesday night. The government will continue importing essential products at the primary exchange rate of 6.3 bolivars a dollar, while combining two other existing currency auctions into one, he said.

“This is the decision I have taken: a system of three markets,” he told lawmakers after being welcomed by live salsa, ceremonial cannon shots and chanting supporters. “This exchange system is a transitory system to attend the country’s development needs” while oil prices stabilize, he said.

Maduro has preferred tighter currency controls to ease economic strife as he seeks to avoid cuts to social spending. A 61 percent drop in the value of Venezuelan oil since June has brought it to the brink of a debt default, according to prices in the swaps market. Oil provides 96 percent of revenue to the country, which imports almost everything it consumes.

“The set of reforms announced in the annual report were incomplete and insufficient to disentangle accumulated distortions over 15 years,” Hernan Yellati, Miami-based head of research at brokerage BancTrust & Co., wrote in a note to clients after the speech. “Plus an unanticipated plunge in oil prices.”

Venezuela last sold dollars at the two secondary auction markets for 12 and 52 bolivars.

Maduro said he has approved $8.1 billion of food purchases this year at the preferential rate. This compares with the $11.4 billion allocated to importers at 6.3 bolivars per dollar in the whole of 2014, according to Barclays Plc estimates.

Below is an updated chart of the Venezuelan bolivar’s exchange rate against the US dollar on the black market in Cucuta, a town near the Colombian border. Interestingly, it seems to have temporarily stabilized in a volatile trading range since November last year. This is interesting mainly because the US dollar has continued to rise against almost every other currency, but then again, the bolivar has already plummeted rather precipitously for most of 2014:

Bolivar black market rate

Venezuelan bolivar vs. USD, black market rate (data via dolartoday) – click to enlarge.

Making free trade in bolivars legal is undoubtedly one of Mr. Maduro’s better ideas, quite possibly the best one he ever had. It is a result of desperation, and it appears it is also a case of too little, too late. Venezuela’s foreign currency reserves amount to slightly over $20 billion, while its total foreign liabilities amount to approx. $135 billion as of Q3 2014 (of which $11 bn. in government debt are coming due this year). After many years of heavy-handed regimentation of the economy, characterized by expropriation/nationalization and price controls, Venezuela has indeed not much it can export besides oil – and even oil production has steadily declined.

The inflationary regime has moreover undoubtedly pulled resources from the consumer stages to higher orders in those parts of the economy still in private hands, so that consumer goods production is likely especially subdued. According to Professor Steven Hanke, Venezuela’s implied consumer price inflation rate is around 194% at the moment, which is about three times what the country’s central bank has lately admitted to. While the ‘general level’ of prices is inherently impossible to ascertain – as there exists simply no fixed yardstick that can be used to measure it – Venezuela’s money supply growth has definitely exploded into the blue yonder:


Venezuela’s narrow money supply M1 since 2004, in millions of VEF – click to enlarge.

Maduro even admitted that the official consumer price inflation rate of 64% was a little on the high side, and announced he would only approve a 15% minimum wage hike this year and would ponder whether to cut fuel subsidies. Even such tentative reform proposals may once have been received quite positively by the markets. However, due to the decline in oil prices, markets have refused to budge. Implied annual default probabilities for Venezuela’s government debt remain at a record high near 20% (based on 5 year CDS spreads and a 40% recovery rate), in spite of government debt only amounting to about 50% of GDP at the current juncture (this is set to rise even if no debt is added, as GDP is set to shrink sharply this year).

Venezuela default probability

Venezuela’s sovereign debt sports the highest CDS spreads and default probabilities in the world – click to enlarge.

Effects of Price Controls Are Getting Worse

Maduro would have to adopt a radical program of economic liberalization if he wanted to effectively counter the increasingly acute economic crisis Venezuela is faced with. However, even if he were aware of that – which he possibly isn’t – he seems to be afraid that cutting subsidies would worsen his already sharply declining popularity further.

Not surprisingly, price controls have denuded the shelves of shops of even the most basic goods, with the result that people are these days forced to queue for hours to buy food and other necessities – reminiscent of Soviet times. The situation is evidently becoming more desperate by the day, as the government has just announced it will deploy the military to “protect shoppers”. Meanwhile government officials are telling people with a straight face that the bare shelves are actually “full”, in an Orwellian twist that would be quite funny if it weren’t so sad for the citizenry.

“Shoppers thronged grocery stores across Caracas today as deepening shortages led the government to put Venezuela’s food distribution under military protection. Long lines, some stretching for blocks, formed outside grocery stores in the South American country’s capital as residents search for scarce basic items such as detergent and chicken.

“I’ve visited six stores already today looking for detergent — I can’t find it anywhere,” said Lisbeth Elsa, a 27-year-old janitor, waiting in line outside a supermarket in eastern Caracas. “We’re wearing our dirty clothes again because we can’t find it. At this point I’ll buy whatever I can find.”

A dearth of foreign currency exacerbated by collapsing oil prices has led to shortages of imports from toilet paper to car batteries, and helped push annual inflation to 64 percent in November. The lines will persist as long as price controls remain in place, Luis Vicente Leon, director of Caracas-based polling firm Datanalisis, said today in a telephone interview.

Government officials met with representatives from supermarket chains today to guarantee supplies, state news agency AVN reported. Interior Minister Carmen Melendez said yesterday that security forces would be sent to food stores and distribution centers to protect shoppers.

“Don’t fall into desperation — we have the capacity and products for everyone, with calmness and patience. The stores are full,” she said on state television.”

It seems to us the time of “calmness and patience” is long past, and we wonder how the government plans to “guarantee supplies” that evidently simply don’t exist. We were also wondering what precisely shoppers are supposed to be protected from. Evil capitalists? Actually, it seems that they by now mainly need to be protected from each other, as fights over scarce goods have become quite frequent. Good queuing behavior has also gone out of the window.

Maduro and Melendes

Venezuelan president Nicolas Maduro and his heavily mil-bling adorned interior minister Carmen Melendez.

Photo credit: Prensa Miraflores

But worry not, true believers, an “economic counteroffensive” is in the works – as soon as the details have been worked out. And please take no photos of the full shelves dwelling in Ms. Melendez’ imagination:

“President Nicolas Maduro last week vowed to implement an economic “counter-offensive” to steer the country out of recession, including an overhaul of the foreign exchange system. He has yet to provide details. While the main government-controlled exchange sets a rate of 6.3 bolivars per U.S. dollar, the black market rate is as much as 187 per dollar.

Inside a Plan Suarez grocery store yesterday in eastern Caracas, shelves were mostly bare. Customers struggled and fought for items at times, with many trying to skip lines. The most sought-after products included detergent, with customers waiting in line for two to three hours to buy a maximum of two bags. A security guard asked that photos of empty shelves not be taken.

Police inside a Luvebras supermarket in eastern Caracas intervened to help staff distribute toilet paper and other products.

“You can’t find anything, I’ve spent 15 days looking for diapers,” Jean Paul Mate, a meat vendor, said outside the Luvebras store. “You have to take off work to look for products. I go to at least five stores a day.”

Venezuelan online news outlet VIVOplay posted a video of government food security regulator Carlos Osorio being interrupted by throngs of shoppers searching for products as he broadcast on state television from a Bicentenario government-run supermarket in central Caracas.

Unfortunately VIVOplay is a subscription service, so we cannot post the video of government shill Carlos Osorio getting almost run over by shoppers mentioned above (he is known for regularly pronouncing that everything is perfectly fine on state-owned TV, and they prepare selected supermarkets for his appearances). Here is however a video by the FT summarizing the situation in early December:

Queues and shortages in Venezuela – note that annual imports amount to $43 billion – it will be quite difficult to pay for both imports and debt redemptions if oil prices remain near their current levels for an extended time period, hence the rising default probabilities.


For many years, the Venezuelan government was able to mask the failures of Hugo Chavez’ “socialist revolution” somewhat with the help of the country’s oil revenues. However, it should be remembered that shortages of basic goods in Venezuela are nothing new; the first press reports appeared about two years ago, when oil prices were still quite high (see also this late 2013 article of ours: “The Hygienically Challenged Crack-Up Boom”). As we quoted from a press report on that occasion, some Marxists – as long as they are members of the ruling class – seem actually not overly worried about scarcity:

“Not everyone thinks these shortages spell bad news. Planning Minister Jorge Giordani, an avowed Marxist, famously quipped in 2009 that “socialism has been built based on scarcity.”

Of course it was easy to make such quips, callous though they may be, back when the hugely popular Hugo Chavez was still around and able to distribute large oil revenues with both hands. The situation is a lot more difficult for Nicolas Maduro, who is probably slowly but surely getting worried about the potential for a counter-revolution (there has already been intermittent unrest in Caracas – and at the time the bolivar’s black market rate was still 85 to the dollar instead of 185).

Russia’s economy is likewise suffering from the decline in oil prices , but its government has a lot more breathing room in terms of debt and foreign exchange reserves and would be able to greatly help its economy merely by getting serious about tackling corruption.

Maduro has a much bigger problem, as he would essentially be forced to abandon the very ideology he so wholeheartedly supports if he wants to turn the floundering ship around. He does have one advantage over Putin though: he has very little to lose anymore in terms of his approval ratings. He probably must worry about his party comrades though, many of whom will be reluctant to abandon the late and great Hugo Chavez’ “socialist achievements”. It will be interesting to see how things will play out, in light of Maduro lately adopting steps he would never have taken a year ago. Still, given the government’s debt situation and Venezuela’s monetary statistics, a complete loss of confidence in the currency remains a very real possibility. In other words, the thread by which Venezuelan socialism hangs may soon snap.


Venezuela’s official inflation rate is a (more or less) comforting fantasy concocted by its central bank, but it is nevertheless worth showing, as the chart illustrates that the rise in prices has greatly accelerated over the past two years – click to enlarge.

The First Casualty of a Bear Market

Clear thinking? Confidence?  Consider what Mr. Buffett would do when the market is crumbling, next time you're fully invested in a falling market….

The First Casualty of a Bear Market

Courtesy of 

Nick Murray says “The ability to distinguish between volatility and loss is the first casualty of a bear market.”

I turned to one of my favorite passages of his masterpiece Simple Wealth, Inevitable Wealth this morning as turmoil from overseas and the commodity markets made its way through the headlines. Nick relays a great anecdote about how much money one investor personally “lost” during the last Russian Ruble crisis in the summer of 1998…


Yes, that’s right, it’s six billion two hundred million dollars. A very large sum of money, wouldn’t you say? Now what, you ask, does it represent?

It is roughly how much Warren Buffett’s personal shareholdings in his Berkshire Hathaway, Inc. declined in value between July 17 and August 31, 1998. And now for the six billion dollar question. During those forty-five days, how much money did Warren Buffett lose in the stock market? 

The answer is, of course, that he didn’t lose anything. Why? That’s simple: he didn’t sell.

In July and August of 1998, I was doing time at a brokerage firm on Long Island as a summer intern. The brokers were panicking and the partners began yelling at them to get off margin and help maintain order in the Asia Pacific technology stocks in which the firm made markets. It wasn’t working, from what I could surmise. The simultaneous meltdown of several Far East currencies and then the toppling of the Ruble proved too much for US markets and eventually the contagion found its way here.

People forget that, in the midst of the massive late 1990’s bull market, we had this two-month bear market episode in which the S&P 500 dropped by a quick 25 percent. The giant Nobel laureate-run hedge fund, Long Term Capital, imploded as a result and Greenspan was forced to slash rates overnight while the New York Fed arranged a Wall Street-subsidized bailout. Things got back to normal by the end of the fall, but, for a minute there, the panic was palpable and it eventually slammed everyone.

I bring this up because there are some parallels between then and now (along with some highly notable differences, as always). The drama surrounding the Russian economy, currency and stock market – along with the dual crash in crude oil – has shaken confidence around the world. Volatility has spread throughout the US stock and bond markets in recent days. History tells us it can get significantly worse really quickly before the storm passes – a la the currency crises of the summer of 1998. At the end of the day, we just don’t know.

Warren Buffett didn’t change his plans or blast a great big hole in his portfolio that summer. He did not turn temporary declines into permanent losses. Instead, he stuck to his investment strategy while so many others lost their grip.

Buffett didn’t have any information about the future then just as we don’t today. But what he did have, according to Murray and all of his biographers, was an incredibly even-keeled temperament. It is Buffett’s temperament and not his analytical skill that allows him to ride out episodes like this. But more than that, it is Buffett’s ability to distinguish between volatility and risk.

One of the things that probably helps him do that is his own experience with difficult markets. Murray points out us that Buffett had been through the crash of October 1987 and had only “lost” $347,000,000 that day. He didn’t sell during that crash either. This is the precise reason why, 11 years later, Buffett was even in a position to have a temporary drawdown of $6.2 billion.

The smile never left his face, and it’s easy to see why. Berkshire Hathaway closed on October 19, 1987 at $3,170 a share. On August 31st, 1998, it closed at $60,500. And just the other day, I saw it at $150,000.

In case you’re keeping score, Berkshire’s A shares go for $218,000 as I write. Buffett’s biggest risk would have been allowing the momentary madness of a market panic to divert him from the bigger picture.


Simple Wealth, Inevitable Wealth (


This post originally appeared here on December 17th, 2014


3 Things – Fed Mistake, ECB QE, Housing

Courtesy of Lance Roberts of STA Wealth Management

The Fed May Be Making A Mistake

On Wednesday, the Federal Reserve made their latest monetary policy announcement.  Janet Yellen, the current Chairwoman, made several statements that led the markets to believe that they remain on course for increasing the overnight lending rate this year. 


However, the real state of economic expansion, as discussed yesterday, is highly questionable as the global deflationary forces have already begun to wash back onto domestic shores.  While the Federal Reserve stated they were not worried about the decline in oil prices, as it boosts disposable household incomes, it is a point that they should reconsider since there is little evidence supporting that claim.


In addition, the strong job gains, as examined earlier this week are also quite suspect.  Given that the employment numbers are likely extremely overinflated, which accounts for the extremely low labor force participation rates and declining wage growth, the negative feedback loop to employment could occur very quickly.


The real concern for investors and individuals is the actual economy. There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get out of the potential trap they have gotten themselves into without cratering the economy, and the financial markets, in the process.

It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy.  However, I also believe that the Fed understands that we are closer to the next economic recession than not.  For the Federal Reserve, the worst case scenario is being caught with rates at the "zero bound" when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed’s perspective this might be the “lesser of two evils.”

The ECB’s QE May Lead To Further Declines In Euro Equities

There is much hope that the ECB’s newly minted QE program of €60 billion a month will be the spark that creates inflation in the Eurozone, sparks economic growth and boosts asset prices.  It is a lofty objective to say the least considering there is very little evidence that QE programs either create inflation or economic growth.  A quick look at Japan and the U.S. suggests that the ECB will likely be disappointed on both counts.


However, when it came to asset growth, the Federal Reserve was very successful as the liquidity that was pumped into the system was recycled into the financial markets.  As I have shown many times in the past, there was a high degree of correlation between the expansion of the Fed’s balance sheet and the S&P 500 index.


The reason this worked in the U.S. was because the excess reserves created by the quantitative easing program yielded a positive interest carry. This is not the case in the Eurozone where the reserves created by the bond buying program with the ECB are held with a negative interest rate.  This makes the program much less attractive to sellers of the bonds.

However, there is another issue that was recently pointed out by the very smart gentlemen at GaveKal Research:

“When we overlay the MSCI Europe, we find a somewhat surprising relationship– equities have risen as the central banks' assets have contracted over the last several years, implying that asset purchases (inverted on the following chart) could actually be negative for stocks:”


“We have no way of knowing for sure whether or not this pattern will hold, but this chart would seem to suggest that MSCI Europe equities could decline ~30% by the end of 2016.”

Given that the majority of the Eurozone is either near or in recession, there is little reason to hope that a QE program the size that is being suggested by the ECB will be effective. However, there is currently little evidence that investors should be betting heavily on a resurgence of international asset prices. As shown in the chart below the correlation between domestic and international equities has been quite high and more correlated to the Federal Reserve’s repetitive QE programs. 


With the domestic markets now struggling due to lack of liquidity, it is unlikely that international equities will provide any safety net for investors. Of course, while the mainstream media may be telling you to keep investing in stocks, it is clear that the “smart money” has been heading into the safety of bonds.

Low-Interest Rates Failing To Spark Housing Recovery

Dr. Ed Yardeni penned an interesting note recently stating:

“In particular, US exporters could suffer if the greenback continues to strengthen. However, that could be offset by stronger US consumer spending and home building.”

There is currently little evidence that US consumer spending is getting stronger.  But the point I want to address today is this continued hope for a revival of home ownership in the U.S. That hope is grounded in the belief that if more people buy homes, not even considering whether they can afford it or not, it will boost the economic recovery. This has been one of the points that the Federal Reserve have pointed to in supporting their monetary interventions.

However, despite abnormally low interest rates, home ownership rates in the U.S., as I showed in “Housing, Not Much Recovery,” have fallen markedly while renters now make up the majority. The percentage of apartments, relative to total new home construction, is near the highest levels on record which explains the chart below.


More importantly, given that the Federal Reserve has spent the last six years artificially suppressing interest rates to boost borrowing and home buying, it has been of only marginal success.  Considering the trillion’s of taxpayer dollars spent on bank bailouts, TARP, mortgage fraud forgiveness, HAMP, HARP, etc., the results are quite disappointing.


Now, with the Fed set to start raising interest rates, the collapse in energy prices, and rising concerns about financial market stability, don’t be surprised to see housing activity begin to slow in the months ahead.  

Real estate related investments are already far ahead of the underlying activity as investors have chased “yield and hope.”  Both of those reasons are quite devoid of fundamental realities that have subsequently tended to have a nasty bite when ignored.

Alexis Tsipras “Open Letter” to German Citizens Regarding Extend-and-Pretend Unserviceable Debt

Courtesy of Mish.

Here's a story from January 13 that just came my way today thanks to a reader wootendw who posted a link as a comment to one of my articles.

The background to this story is SYRIZA leader Alexis Tsipras' "Open Letter" to German Citizens, published on Jan.13 in Handelsblatt, a leading German language business newspaper.

Alexis Tsipras, now prime minister of Greece, sent this letter to Handelsblatt:

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds bigotry, nationalism, even violence.

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-recovery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans….

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Initial Claims Show The Healthiest Jobs Market in History, Or Maybe Not

Courtesy of Lee Adler of the Wall Street Examiner

The headline, fictional, seasonally adjusted (SA) number of initial unemployment claims for last week came in at 265,000, which blew out the Wall Street conomist crowd consensus guess of 301,000. The pundits had shaved 1,000 off  their guess after missing on the low side last week. My, my! Such pessimists!

But my interest is not in the silly expectations game of pin the tail on the number. My interest is in the actual, unmanipulated data. Analyzing that is the only way to be sure that you are seeing what’s really going on.

The Department of Labor prominently reports the actual unadjusted data clearly and illustrates it in comparison with the previous year. As it does with virtually all government economic data releases, the mainstream financial media crowd chooses to ignore reality by not reporting the actual number. In the case of this report, the DoL also reports exactly how messy the seasonally adjusted data is by reporting what the seasonal adjustment had forecast based on the arbitrary mathematical calculation of what’s normal.

According to the Department of Labor the actual, unmanipulated numbers were as follows. “The advance number of actual initial claims under state programs, unadjusted, totaled 280,237 in the week ending January 24, a decrease of 102,358 (or -26.8 percent) from the previous week. The seasonal factors had expected a decrease of 57,297 (or -15.0 percent) from the previous week. There were 357,806 initial claims in the comparable week
in 2014.”

Initial Claims and Annual Rate of Change- Click to enlarge

Initial Claims and Annual Rate of Change

The actual week to week change last week was a drop of 102,000 (rounded). This is a greater decline than the 10 year average decrease for that week, which was a decrease of 88,000 (rounded). This year’s drop was also larger than the comparable weeks of 2014 and 2013 which fell by 58,000 and 68,000 respectively.

Actual first time claims were 21.7% lower than the same week a year ago. This is at the extreme of the normal range, which since 2010 years has mostly fluctuated between -5% and -15%. There have only been a few weeks where the year to year decline was more than 20%. But that’s the 4th instance since last September.

In the past 5 months, businesses have been unusually reluctant to cut workers. In fact, these are all time record lows in terms of the number of claims per million workers. Is that a sign of a healthy, growing economy, or a bubble economy stretched to the limit? The last two times these numbers were nearly as strong were at the tops of the housing bubble and the internet/tech bubble. The current readings come on the heels of the long running US oil/gas bubble, which has recently collapsed.

I track the daily real time Federal Withholding Tax data in the Wall Street Examiner Professional Edition. It too has been very strong over the past couple of weeks. The growth rate of withholding taxes is now running at an annual rate of gain of about 3.75% in real terms, adjusted for the trend rate of increase in workers’ weekly incomes.

While we have been teased with signs of change in the claims data from time to time, the trend is still in force. Only if we start to see the numbers coming in above the comparable week for the past year for a few weeks would it be a sign of material change in trend, and a possible excuse for the Fed to bring back the Ghost of QE Past. The current data will encourage the Fed start the smoke and mirrors game of pretending to raise interest rates.

I have been reporting that claims were at record bubble levels since September 2013. At the tops of the last two bubbles in 1999-2000 and in 2006-07 claims persisted at record low levels for a year before the economy plunged. The economic foundations were already beginning to crumble by the time the first anniversary of record readings rolled around. In other words, employers were either slow to get the message or slow to act. In the current market, the claims numbers have stayed near or at record lows from September 2013 until now. The extreme condition has now persisted for 17 months. It seems that this is either the healthiest job market ever, or the bubble to end all bubbles.

I have inverted the scale on the chart below to show the correlation with stock prices. The rate of improvement clearly slowed in 2013 and 2014 concurrent with the massive surge in Fed QE. The rate of improvement in claims was much stronger in 2012 when the Fed was not doing QE. And it appears that once again when the Fed has stopped shoveling cash at financial engineers and speculators, the jobs numbers perk up.

While the direction of the stock market is positively correlated with QE, since 2012, improvement in the job market has been negatively correlated. This is clear evidence that the conomists and media pundits are wrong. QE did NOT boost the US recovery. It suppressed it while enabling and encouraging their financial engineers ran their skimming scams.

Claims and Stock Prices? Click to enlarge

Claims and Stock Price

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!

The Fed That Never Sees It Coming

Courtesy of Pam Martens.

Alan Greenspan, Former Fed Chairman, Testifying to the House Oversight Committee on How He Got It Wrong, October 23, 2008

Alan Greenspan, Former Fed Chairman, Testifying to the House Oversight Committee on How He Got It Wrong, October 23, 2008

There is growing unease in stock and bond markets around the world that the current Chair of the U.S. Federal Reserve, Janet Yellen, has retrieved former Fed Chair Alan Greenspan’s blinders out of the mothballs in some musty old closet at the Fed, thus setting the U.S. economy up for more epic convulsions.

Yesterday, the Federal Open Market Committee (FOMC) released its policy statement and rattled markets here and abroad overnight. The statement contained a number of economic absurdities. The first sentence argued that “economic activity has been expanding at a solid pace” while a few sentences later we are told “inflation has declined further below the Committee’s longer-run objective.” A solid expansion simply does not correlate with declining inflation in the U.S. and mushrooming deflation among our trading partners.

Later in the statement the Fed tells us that inflation will be heading back toward the goal of 2 percent once “the transitory effects of lower energy prices and other factors dissipate.” There is no evidentiary basis offered to support the idea that the historic collapse in oil prices will be “transitory.” The “other factors” remain vague because to enumerate the other factors – slack demand around the globe creating a monster surplus of supply – would destroy the argument that the oil price collapse will be transitory. (And remember, it’s not just energy prices that are swooning, it’s a broad range of industrial commodities which the Fed conveniently fails to mention.)

Bond markets around the world, including the U.S. Treasury market, think Yellen is full of it. Shortly after the FOMC statement was released, the 30-year Treasury hit an historic record low yield of 2.295 percent. The yield on our longest dated Treasury bond reflects two elements: the long-range outlook for inflation and a perceived safe-haven to weather a looming economic upheaval.

Yesterday, the yield on the 30-year Treasury also represented one more thing: a no confidence vote that the U.S. Fed knows how to read the global tea leaves.

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Putin’s Unexpected Victory: Germany Furious That Greece Is Now A Russian Sanctions Veto

Putin's Unexpected Victory: Germany Furious That Greece Is Now A Russian Sanctions Veto

Courtesy of ZeroHedge. View original post here.

Two days ago, Zero Hedge first, and shortly thereafter everyone else, pointed out something stunning: the biggest surprise to emerge so far out of the new anti-Troika/austerity Greek government was not so much its intention to proceed with the first test of "Odious Debt" – this was largely known in advance – but its dramatic pivot away from Germany and Europe, and toward Russia.

As we noted before, not only has Greece already blocked all ongoing privatization processes, a clear snub of Merkel and the Troika which demands the piecemeal blue light special sale of Greece to western buyers as part of the "bailout", but is also looking at plans to reinstate public sector employees and announce increased pensions for those on low incomes: further clear breaches of the Troika's austerity terms.

But the most important message that Tsipras is sending to Europe is that (after meeting the Russian ambassador first upon his election) Greece is now effectively a veto power when it comes to future Russian sanctions!

This was first hinted when the Foreign Minister Nikos Kotzias, who arrives in Brussels today to discuss possible additional sanctions on Russia over the conflict in Ukraine, said a few days ago that the Greek government disagreed with an EU statement in which President Donald Tusk raised the prospect of “further restrictive measures” on Russia. As Bloomberg observed before, in recent months, Kotzias wrote on Twitter that sanctions against Russia weren’t in Greece’s interests. He said in a blog that a new foreign policy for Greece should be focused on stopping the ongoing transformation of the EU “into an idiosyncratic empire, under the rule of Germany.

And Europe, shocked that one of its own has dared to question its "unanimous" policy toward Russia, a policy driven by the US foreign state department whose opinion of Europe is best captured by the hacked and intercepted "Fuck the EU" outburst by Victoria Nuland in February 2014, has been forced to backtrack. From DPA:

The European Union denied Wednesday that it ignored Greek objections when it issued a statement raising the prospects of new sanctions against Russia.

The row is the first of several clashes expected between Brussels and Greece's new prime minister, Alexis Tsipras, who was elected Sunday on promises to renegotiate the bailout granted to Greece by its European neighbours and the International Monetary Fund.

Tsipras has in the past also spoken out against sanctions on Russia, rejecting the use of "Cold War language."

The EU has imposed several rounds of sanctions on Russia for its role in the Ukraine crisis, notably economic measures restricting Russian access to European credit markets and European exports. On Tuesday morning, EU leaders in a joint statement tasked their foreign ministers with considering "further restrictive measures" when they meet on Thursday.

But Tsipras complained to Greek media that his country had not been consulted on the statement. "Greece do not consent," a statement by Tsipras' office said on Tuesday evening, adding that the announcement from Brussels violated "proper procedure."

A spokesman for EU President Donald Tusk, who issued the statement on behalf of the leaders, denied that Athens had been sidelined during the preparation of the text.

"We consulted everybody, as we always do, and we didn't ignore or sidestep Greece in any way – quite to the contrary," Preben Aamann told dpa. "We tried to find a special solution that would accommodate them."

Actually what the EU "always does" is to ignore the voices and interest of everyone but the most powerful. And as for "not ignoring" Greece, apparently the EU failed. Only this time Greece, its government no longer a Eurozone lackey, will no longer let it slide: "Greek broadcaster Skai said newly appointed Foreign Minister Nikos Kotzias would bring up the issue at Thursday's meeting in Brussels. Tsipras is also expected in the Belgian capital on February 12 for an EU summit that will touch upon the situation in Ukraine."

And here is how Russia just won another completely unexpected victory in Europe: "EU sanctions require unanimity to be implemented, so a Greek veto could block any further measures." And all thanks to the epic blunder by Brussels to allow a European nation to voice its opinion in a democratic fashion.

It wasn't just Zero Hedge who first suggested the Greek Russian pivot: here is RBS' Greg Gibbs who says that there are now "concerns Greek government may threaten to veto further Russian sanctions in exchange for debt relief fuels fear of conflict."

To be sure, Germany, whose theatrical opposition to money printing folded like Boehner's lawn chair last week, as it is now all too clear the preservation of German export dominance (and hence aversion to the DEM) and the sanctity of Deutsche Bank is what it is all about no matter the hyperinflationary concerns of the people, is quite furious that the grand ambitions of Europe's economic powerhouse – which as we reported moments ago has now officially entered deflation – have been crushed by tiny, depression-ridden Greece.

Here is Germany's economy minister Gabriel, who was on the tape earlier, casting fire and brimstone at Greece. From Reuters:

Greece should not burden the rest of Europe with its internal political debates, German Economy Minister Sigmar Gabriel said on Thursday, adding that Greece's own inequalities were to blame for problems that it tried to blame on its multilateral lenders.

Gabriel told parliament Greece should stay in the euro but the new leftist leader Alexis Tsipras must respect the terms of its bailout. Greece could not blame the "troika" of multilateral lenders for its own unfair distribution of wealth, he said.

"All democratic people must respect the democratic decision of voters and a newly-elected government's right to decide its course – but the rest of Europe's citizens should not have to expect changes in Greek politics to burden them," he said.

Of course, as long as the changes in Greek politics allowed the rest of Europe's citizens to continue to benefit at Greek expense, nobody batted an eyelid. But change the equation and all hell breaks loose.

And the final confirmation that suddenly tiny Greece may have all the leverage in Europe is that moments ago Germany's Foreign Minister Frank-Walter Steinmeier said that European sanctions on Russia are complicated by the "new Greek government."

The good news for Greece, of course, is that it now has all the optionality: it can use its veto power as a bargaining chip to unblock US foreign policy in Ukraine (because at the end of the day, Europe is merely losing as a result of the Russian sanctions) and demand a debt haircut in exchange for siding with John Kerry on further Russian "punishment." Or he may simply hold the line and hold off for a competing, better offer from Russia and the BRICs, whose leverage may be nominal  now that crude is plummeting, but if and when the last shale junk bond investor blows up and the US shale renaissance is over sending crude soaring right back to $100, then watch as the oil exporters are back with a bang, and dictating geopolitical terms.

And whatever happens, please don't remind Brussels that point 40 of Syriza's 40 Point Manifesto, aka the "nuclear option", is "Closure of all foreign bases in Greece and withdrawal from NATO."

It is so bad that Business New Europe went so far as to ask if the New Greek Government is "Russia's Trojan horse inside the EU?"

In any event, the European balance of power has just shifted and in a way that nobody anticipated:

The biggest winners: if only for now: Greece and Russia (and, while it will never be admitted, all those Europeans who desperately need the Russian import market).

The biggest losers: all the unelected Eurocrats in Brussels who at this moment are scratching their heads how to bring the bad news that there is no longer unanimity on Russian sanctions to John Kerry, and all thanks to a country nobody thought would dare to speak up.

Asset Price Deflation Coming Up? Food Prices About to Drop? CPI About to Go Negative? Credit Deflation?

Courtesy of Mish.

When inflation alarmists want to convince everyone the dollar is about to become worthless, they post this chart of the CPI.

CPI – Urban Consumers – All Items – Index

Inflationists claim that is a trend to oblivion. And actually it is. But it’s a slow trend towards oblivion with intermittent disruptions as the following chart shows.

CPI – Urban Consumers – All Items – Percent Change From Year Ago

As measured by consumer prices, inflation went negative from December 2008 until October 2009.

CPI – Urban Consumers – All Items – Percent Change Detail

The CPI hit a record low of -1.959 in July of 2009.

My prediction made in 2005 or so, was and still is “The US would go in a and out of deflation a number of times over a long period of time“.

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Why The U.S. Shale Boom May Come To Abrupt End

Courtesy of Arthur Berman via

U.S tight oil production from shale plays will fall more quickly than most assume.

Why? High decline rates from shale reservoirs is given. The more interesting reasons are the compounding effects of pad drilling on rig count and poorer average well performance with time.

Rig productivity has increased but average well productivity has decreased. Every rig used in pad drilling has approximately three times the impact on the daily production rate as a rig did before pad drilling. At the same time, average well productivity has decreased by about one-third.

This means that production rates will fall at a much higher rate today than during previous periods of falling rig counts.

Most shale wells today are drilled from pads. One rig drills many wells from the same surface location, as shown in the diagram below:


The Eagle Ford Shale play in South Texas is one of the major contributors to increased U.S. oil production. A few charts from the Eagle Ford play will demonstrate why I believe that U.S. production will fall sooner and more sharply than many analysts predict.

The first chart shows that the number of active drilling rigs (left-hand scale) in the Eagle Ford Shale play stabilized at approximately 200 rigs as pad drilling became common. The number of producing wells (lower scale), however, has continued to increase. This is because a single rig can drill many wells without taking the time to demobilize and remobilize. In other words, drilling has become more efficient as less time is needed to drill a greater number of wells.


The next chart below shows Eagle Ford oil production, the number of producing wells and the number of active drilling rigs versus time.


This chart shows that production growth has not kept pace with the rate of increase in new producing wells since mid-2012. That is because the performance of newer wells is not as good as earlier wells.

The final chart shows that the rate of daily production is now more dependent on the number of drilling rigs than on the number of producing wells. Rig productivity–the barrels per day per rig–has increased but average well productivity–the barrels per day per well–has decreased. In other words, production can only be maintained by drilling an ever-increasing number of wells.


Average rig productivity has almost tripled since early 2012. Average well productivity has decreased by one-third over the same period. This means that every rig taken out of service today has more than three times the impact on daily production as before pad drilling became common.

Most experts do not anticipate any significant decrease in U.S. tight oil production in the first half of 2015. Their analyses may not have accounted for the effect of pad drilling and the decrease in average well productivity.

Using the Eagle Ford Shale as an example, U.S. oil production should fall sooner and more sharply than many anticipate. This will be a good thing for oil price recovery but maybe not such a good thing for the future profitability of the plays.

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Trade by Fibonacci Numbers?

Trade by Fibonacci Numbers?

The Fibonacci series of numbers make me think of designs in nature, and patterns that come to life again in art and architecture. Images like these:




I also think of some rather mystic notion that the Fibonacci series of numbers — which generate the “golden ratio” — can somehow help equity traders examining a chart predict which way the price line is going move. I’ve assumed we’re looking at “group think” and not magic, and certainly not the rules of the universe affecting something so contrived as the US stock market.

In the third interview in our series, I asked John Ehlers about the Fibonacci series and whether he puts Fibonacci numbers to use in his trading algorithms.

Ilene: Has Fibonacci or his series of numbers influenced your trading system?

John:  Fibonacci is a hero of mine.  He is also called Leonardo de Pisa and was born in about 1170 AD.  His father was a merchant who directed a trading post in what is now Algeria.  He returned to Pisa in about 1200 AD.  He introduced the Hindu-Arabic numbering system to the western world when he published Liber Abaci (Book of Calculation) in 1202 AD.  Up till then, Roman numerals had been used, and they were terribly inefficient for commerce.  Just think about it.  Roman numerals had no concept of zero.  Negative numbers were not used in Europe until much later – but that was before they had margin calls.

In his book, Liber Abaci, Fibonacci solved a problem involving the idealized growth of a rabbit population, solving generation by generation as a sequence of numbers.  That sequence creates the next number in the sequence as the sum of the previous two numbers as:  1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89  144, 233, 377, etc. The golden ratio is taken as the ratio of the limit of the ratio of the consecutive numbers in the sequence.  For example, 377/233 = 1.618 — the golden ratio.

Some 20th century artists and architects have proportioned their works to approximate the golden ratio because it seems to be aesthetically pleasing.  Some traders have picked up the concept, probably for the same reason.  The golden ratio, and its reciprocal, are used to establish targets for advances and pull-back.  By assigning Fibonacci numbers to the time axis, logarithmic spirals can be plotted that are supposedly predictive of price peaks and troughs. I think these are just “magic numbers,” numerology, if you will. One would have thought that Fibonacci would have had the common sense to start his sequence with two rabbits.

Ilene: Well, I was going to ask why he set out to describe rabbit reproduction starting with ONE rabbit…

John:  Actually, you can start a Fibonacci sequence with any two numbers.  My friend Greg Morris gave me an example.  Suppose you start the Fibonacci sequence with 2 and 19.  Then, the sequence would be 2, 19, 21, 40, 61, 101, 162, 263, 425, 688, etc.  In this case, the golden ratio computes to be approximately 688/425 = 1.6188.  In the limit, the ratio is the same as with the original Fibonacci sequence. This shows that the golden ratio can be achieved with numbers other than the Fibonacci numbers, depending on the starting seeds. Since we are talking about numerology, let’s examine the seed numbers we used.  B is the second letter of the alphabet and S is the nineteenth letter of the alphabet. So that is what the Fibonacci sequence is:  B.S.

Ilene:  So you do not use these numbers, the golden ratio, or the derivative patterns in your trading systems?

John:  Not just no. Hell No. It is my goal to bring science to the art of trading as opposed to using magic numbers.  Magic numbers are a wonderful way of explaining history, but I don’t think they have any predictive powers. Using magic numbers, any one of them is bound to be correct if you put enough lines on the chart.  The scientific approach involves applying information theory with the use of modern Digital Signal Processing (DSP) to arrive at higher probability forecasts of future prices. These forecasts produce trading signals.  At we use a very fast-acting cycle indicator to identify the troughs of tradable cycles.  If a cycle has been present in the past, the presumption is that it will continue a short time into the future – long enough for us to take a short-term position.  Since the cycle indicator is fast-acting it can lead to some whipsaw trades, and so we combine it with a more slowly reacting momentum indicator to form a reliable trade setup.  A trade setup occurs when the cycle indicator is at a trough, indicated by the green bar, and the blue line momentum indicator is declining or at a minimum. Click here to see an example of the Trade Setup Analyzer chart.  A trade setup is a necessary, but not sufficient, condition for a trade signal.  Trade signals are produced by additional data mining for such things as degree of the trend, absolute cycle amplitude, and so forth – things that are difficult to chart.


Note:  Brett Steenbarger, Ph.D., at TraderFeed has been following Stock Spotters, and wrote this on his blog on Jan. 14, 2015: “On a related note, I have mentioned in the past the Stock Spotter site of John Ehlers and Ric Way.  They make use of cycle analysis to generate buy and sell signals for individual stocks and ETFs.  Notably, they publish their track record of signals and have done well overall.  I note that, as of yesterday’s close (Jan. 13), they had 138 buy signals on stocks.  Since late 2013, when I began tracking the service, there have only been five occasions in which we’ve had 100 or more buy signals.  It’s a small sample, to be sure, but all five occasions were higher in SPY five trading sessions later, by an average of 1.59%.”

While the engineers at usually talk about the science of their trading signals and make no ridiculous get-rich-quick claims, the StockSpotter trading performance last week (Jan. 20-24) — the week following Brett’s comment — was outstanding:

97.2 percent of the 71 trades closed out last week were profitable. The Profit Factor (ratio of gross winnings to gross losses) was also very high.  Profit Factor is analogous to the payout in gaming.  If you think in terms of gaming, the combination of percent winners and Profit Factor are a statistical description of performance.  This is only an example for last week but the long-range statistics are pretty good too. (Review the performance here.)

Special Offer: Try StockSpotter for only $16 for 20 days by clicking here and using the promo code XPN4387 for a 20% discount. Traders have free and unlimited access to Trade Setup Analyzer and Forecasting charts, as well as to the Stealth Hot Stocks and Momentum Screeners.

Previous interviews with John Ehlers:

The Surprising Consequences Of The Global Frenzy For Positive Yield

Courtesy of Charles Hugh-Smith of OfTwoMinds

As central banks rush to depreciate their currencies and push yields into negative territory, what's becoming scarce globally is real yield in an appreciating currency. Real yield is yield adjusted for inflation/deflation: if inflation is 3% and bonds yield 2%, the real yield is negative 1%. If inflation is negative 1% (i.e. deflation), and the yield on bonds is 0.1%, the real yield is 1.1%.
What's the real yield on a bond that earns 1% annually in a currency that loses 10% against the U.S. dollar in a year? Once the foreign-exchange (FX) loss/gain is factored in, the investor lost 9% of his investment.
Needless to say, the real yield must include the foreign-exchange loss/gain. An investor earning 10% in a currency that's losing 20% annually against other currencies is losing 10% annually, despite the apparent healthy nominal yield.
An investor earning 1% in a currency that's appreciating 10% annually against other major trading currencies is earning a yield of 11%. Clearly, the nominal yield is deceptive; the real yield can only be calculated by factoring in both inflation/deflation in the issuing economy and the appreciation/depreciation in the issuing currency against major tradable currencies.
Now we understand why what's scarce globally is real yield in an appreciating currency: the only major trading currency that's appreciating is the U.S. dollar. Any nominal yield on bonds issued in euros or yen turns into a loss when measured in U.S. dollars. Even the Chinese renminbi, which is pegged to the U.S. dollar, has slipped against the dollar as Chinese authorities have responded to the devaluation of the Japanese yen and other Asian-exporter currencies.
One result of the global scarcity for real yield is high demand for U.S. Treasuries, which are denominated in U.S. dollars. High demand pushes bond yields down, effectively replacing the Fed's quantitative easing (QE) bond-buying programs, which the Fed ended last year. The U.S. gets the benefits of strong demand for its bonds (i.e. low interest rates) without having to issue new money (QE).
Another factor is the reduced issuance of new Treasury bonds as the U.S. fiscal deficit declines. This effectively reduces supply as demand remains strong.
This is a self-reinforcing feedback loop: as the U.S. dollar strengthens and the U.S. fiscal deficit declines, the Fed has no need to buy Treasury bonds (with freshly issued money) to keep interest rates low. Since the U.S. central bank isn't issuing new money while every other major central bank is printing massive amounts of new money to depreciate their currencies, this pushes the U.S. dollar even higher.
Picture via Pixabay.

And as the dollar soars, so does the real yield on bonds denominated in dollars. That may not surprise everyone, but few can support a claim of predicting this a few years ago.

Slope of Hope vs. Reality: Greek Assets Hammered, 3-Year Yield Near 17%; Worst Day Ever for Greek Bank Stocks

Courtesy of Mish.

Investors who plowed into Greek assets ahead of Mario Draghi’s QE €60 billion a month bond-buying spree figuring the ECB could paper over this mess have been pounded almost nonstop recently.

Today alone, Greek bank shares plunged 22-29%, and yield on the 3-year Greek treasury hit 16.97%.

Worst Day in History for Greek Bank Shares

Bloomberg reports Greek Markets Hammered as Fears Grow Over New Government.

Greek bank shares suffered their worst one day loss on record on Wednesday, as anxiety grew over the new government’s plan to renegotiate Greece’s €240bn bailout.

The country’s four biggest lenders saw their stock prices plummet by an average of more than 25 per cent just two days after Alexis Tsipras, leader of leftwing party Syriza, was sworn in as prime minister. It was the third day of double-digit share slides for the banks.

In the space of a few hours, the yield on three-year Greek bonds jumped 2 percentage points to almost 17 per cent, as investors wondered whether Greece would honour its debts in the near term.

Shares in Piraeus, Greece’s largest bank by assets, whose stock price has halved over the past month, plunged 29 per cent. National Bank of Greece and Eurobank each fell 25 per cent and Alpha Bank 26 per cent.

Greek banks have been tapping the European Central Bank’s “emergency liquidity assistance” facility to replenish funds in the face of withdrawals by depositors and foreign banks’ reluctance to lend.

A few charts will confirm the above picture.

Greek 3-Year Bond

Greek 3-Month Bond Yield

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