Archives for March 2015

Living in a Free-Lunch World

Living in a Free-Lunch World

Courtesy of John Mauldin, Thoughts from the Frontline

“Everyone is a prisoner of his own experiences. No one can eliminate prejudices – just recognize them.”

– Edward R. Murrow, US broadcast journalist & newscaster (1908 – 1965), television broadcast, December 31, 1955

“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) Deleveraging

The world has been on a debt binge, increasing total global debt more in the last seven years following the financial crisis than in the remarkable global boom of the previous seven years (2000-2007)! This explosion of debt has occurred in all 22 “advanced” economies, often increasing the debt level by more than 50% of GDP. Consumer debt has increased in all but four countries: the US, the UK, Spain, and Ireland (what these four have in common: housing bubbles). Alarmingly, China’s debt has quadrupled since 2007. The recent report from the McKinsey Institute, cited above, says that six countries have reached levels of unsustainable debt that will require nonconventional methods to reduce it (methods otherwise known as defaulting, monetization; whatever you want to call those measures, they amount to real pain for the debtors, who are in many cases those least able to bear that pain). It’s not just Greece anymore. Quoting from the report:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (see chart below). That poses new risks to financial stability and may undermine global economic growth.

This report was underscored by a rather alarming, academically oriented paper from the Bank for International Settlements (BIS), “Global dollar credit: links to US monetary policy and leverage.” Long story short, emerging markets have borrowed $9 trillion in dollar-denominated debt, up from $2 trillion a mere 14 years ago. Ambrose Evans-Pritchard did an excellent and thoroughly readable review of the paper a few weeks ago for the Telegraph, summing up its import:

Sitting on the desks of central bank governors and regulators across the world is a scholarly report that spells out the vertiginous scale of global debt in US dollars, and gently hints at the horrors in store as the US Federal Reserve turns off the liquidity spigot….

“It shows how the Fed's zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences. This abundance enticed Asian and Latin American companies to borrow like never before in dollars – at real rates near 1pc – storing up a reckoning for the day when the US monetary cycle should turn, as it is now doing with a vengeance.”

Ambrose’s parting takeaway?

[T]he message from a string of Fed governors over recent days is that rate rises cannot be put off much longer, the Atlanta Fed’s own Dennis Lockhart among them. ‘All meetings from June onwards should be on the table,’ he said. [This is from a regional president whose own research suggests GDP growth in the first quarter of 1%! – JM]

The most recent Fed minutes cited worries that the flood of capital coming into the US on the back of the stronger dollar is holding down long-term borrowing rates in the US and effectively loosening monetary policy. This makes Fed tightening even more urgent, in their view, implying a ‘higher path’ for coming rate rises.

Nobody should count on a Fed reprieve this time. The world must take its punishment.

Ouch! Please sir, may I have another? Punishment indeed. Ask the Greeks. Or the Spanish. Or… perhaps there is punishment coming soon to a country near you!

I began a series on debt a few weeks ago, and we return to that topic today. I believe the fundamental imbalances we are seeing in the world (highlighted in the two papers mentioned above) are the result of the massive increases in global debt and misunderstandings about the use and consequences of debt. Too much of the wrong kind of debt is going to be the central cause of the next investment crisis. As I highlighted in my February 24 letter, the right type of debt can be beneficial. However, as the McKinsey Report emphasizes,

High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.

Read that again. This isn’t the Mises Institute. This is #$%%*# McKinsey. As establishment as it gets. And they are clearly echoed by the BIS, the central banker’s central bank. Unless this time is different, they are saying, the high levels of debt are the reason for slowed growth in the developed world, a point we have highlighted for years in our research. There is a point at which too much debt simply sucks the life out of an economy.

Nobody Understands Debt

A useful starting point for today’s letter is Paul Krugman’s lament that “Nobody understands debt.” But to borrow a phrase from Bill Clinton, it really depends on what your definition of “debt” is.

Paul Krugman has actually written two New York Times columns entitled “Nobody Understands Debt.” The first, and more nuanced, one was published on January 1, 2012; and the second one appeared last month (on February 9). It is a constant theme for him. If you want a short take on what at an uber-Keynesian believes on debt, these columns are a good place to start. (Paul [may I call him Paul?] is as good a representative of the neo-Keynesian species – Homo neo-keynesianis – as there is, an interesting subset of the human genus.) In our musings on debt, we are going to look at these two essays in the effort to understand the differences between those who want more government spending and increases in debt and those who favor what is now disparagingly referred to as austerity.

I choose Krugman not because of any need to disparage him (he does write some rather good essays) but because he writes remarkably clearly for an economist, he has an extensive body of public work to choose from, and he says many things about debt that I think everyone can agree with. The differences between his positions and mine can, however, be pronounced; and I have spent some time trying to discern why reasonably intelligent people can have such significant disagreements. My goal here is to be respectful and gentlemanly while trying to expose the foundations (there is a pun here, soon to be revealed) of our disagreement.

To do this, we are now going to step out of the economic realm and move a little farther afield. Some readers may wonder at the journey I am am about to take you on, but this diversion will be helpful in explaining Paul’s and my different approaches to debt. We’ll return to our central theme by and by. Stick with me.

Foundational Presuppositions

One of the things I learned in my religious studies (yes, I did attend – and graduate from – seminary as penance for what must have been multiple heinous sins in my past lives) is that disagreements are often driven not by the “logic path” of an individual’s thoughts but instead by their core presuppositions. Presuppositions are often more akin to tenets of faith and insight than they are to actual, provable observations or facts. They are things assumed to be true beforehand, ideas taken for granted. Sometimes our presuppositions are rooted in prejudice, but more often than not they just arise from normal human behavior. Often, presuppositions are formed because of beliefs stemming from other areas of our lives or imposed by society. Your basic presuppositions, what “everyone” knows to be true, can lead to absurd conclusions. If you believe, as people did in Galileo’s day believed, that the Bible teaches the earth is flat and that the Bible is the authoritative source for understanding physical geography along with everything else, then it is logical to believe you can sail off the end of the Earth.

We are, as the great journalist Edward R. Murrow said, “prisoners of our own experiences.”

Presuppositions (we all have them) are at the heart of all sorts of irrational behavior that we are learning about from the growing understanding of behavioral economics. Not only can we demonstrate that humans are irrational, we are predictably irrational. That irrationality was actually bred into us when we were a young species, dodging lions and chasing antelopes on the African savanna. But what were useful survival traits two million years ago can now be problematic in modern society. Our presuppositions can lead us to errors in investing and cause all sorts of societal problems. Bluntly put, presuppositions can come seemingly out of nowhere and bite you on the ass.

Presumably, if two people start with the same presuppositions, then logic and reasoning should allow them to come to agreement about their conclusions. (Yes, I know, it’s not quite that simple, but I don’t want to write a book on presuppositionalism here. Van Til did that, and it is unreadable. So work with me.)

Long-time readers know that I also send out a weekly letter called Outside the Box. It features the work of other writers I find interesting. I often send out material that I don’t necessarily agree with but that makes us think. If you can’t read something you disagree with and know why you logically disagree, then maybe you need to examine your own presuppositions and possibly arrive at different conclusions.

I think the difference that Mr. Krugman and I have on debt basically comes down to our presuppositions. I suspect they impact other aspects of our lives similarly. Like me, Mr. Krugman grew up on science fiction and still keeps up. He credits reading science fiction as a youth with his ultimate choice of economics as a career. In a very real sense, so do I. But I was more influenced by Lazarus Long (a recurring character in the books of Robert Heinlein) than Hari Selden (the genius who saves the galaxy in Isaac Asimov’s brilliantFoundation series.) The former is distrustful of government, while the latter assumes that humanity is better off with a few brilliant people running the show, if behind the scenes. (I say “people,” but after following the exploits of Hari Selden for a few decades, we learn that the real masters are technocratic robots.)

While I agree with Krugman that the Foundation trilogy may be the finest science fiction books ever written (and still highly recommend them to anyone wanting to jump into science fiction), they are a poor manual for the organization of government.

Two years ago Krugman wrote this about Asimov’s trilogy: “My Book – the one that has stayed with me for four-and-a-half decades – is Isaac Asimov's Foundation Trilogy,written when Asimov was barely out of his teens himself. I didn't grow up wanting to be a square-jawed individualist or join a heroic quest; I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behaviour to save civilisation.” (This is an excellent review, by the way, and I encourage those who are interested to read it.)

Am I cooking up a simplistic analogy? Perhaps not, since our presuppositions actually show up in our views on economics. It is Hayek versus Keynes (though admittedly you get better writing and plot lines when you read Asimov and Heinlein than you do when you peruse our economic giants). Asimov, as my friend (and Science Fiction Hall of Fame writer) David Brin wrote,

… was quite liberal and progressive. His Robots universe, however, kept toying with notions of technocracy – a concept of his youth – in which the best and brightest over-rule the hot-tempered and irrational masses…. [H]is fiction cycled around an ambivalence about humans’ ability to govern themselves with foresight and wisdom.

Heinlein, on the other hand, would be called a libertarian in today’s world. He was committed to absolute freedom and individual responsibility mixed in with patriotism, mixed in with some personal eccentricity.

(David Brin is one of the world’s true experts on Heinlein and Asimov and knew them both well. He told me in a recent conversation that they each recognized the weaknesses in the philosophies that underpinned their created worlds, if those worlds are taken to their logical conclusion. Ironically, in their novels, both authors end up espousing a sort of neofeudalism. Asimov, however, became very uncomfortable later in life with the technocratic, omnipresent government that dominated the Foundation Trilogy.)

The fundamental difference in Asimov’s and Heinlein’s views, and in the views of Keynes and Hayek, is the power of individuals and markets versus the power and influence of government. So let’s take a look at some of Mr. Krugman’s views on debt; and then you can see whether you agree with his assumptions and in general with Keynes and much of academic economics today, or with Hayek. This topic may take a few weeks to cover fully, but it’s important. Your assumptions about how the world works will translate into investment decisions. Ideas have consequences, and nothing is more fundamental to the way you interface with the world of macroeconomics today than your views on debt.

Debt Is Money We Owe to Ourselves – Sort of

“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) deleveraging

I rather suspect that Paul Krugman would take issue with the statement above, given his column of February 6, 2015, entitled “Debt Is Money We Owe To Ourselves.” Let’s look at his first couple of paragraphs:

Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: no, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves – an obviously true statement that, I have discovered, has the power to induce blinding rage in many people.

Think about the history shown in the chart above. Britain did not emerge impoverished from the Napoleonic Wars; the government ended up with a lot of debt, but the counterpart of this debt was that the British propertied classes owned a lot of consols.

Consols are a type of British government bond that are perpetual in nature, in that they are interest-only bonds. They were first issued in 1751 and eventually financed the Napoleonic wars. There are multiple other instances where governments amassed large amounts of debt to finance wars and were able to pay the debt down over time. Think the US after the Civil War and World War II. Proponents of such massive government debt issuance will point out that growth was not constrained in 19th century Britain or after the Civil War or World War II in the US.

Krugman contends that “the problems with public debt are also mainly about possible instability rather than ‘borrowing from our children’.” He completely dismisses this latter idea as nonsensical rhetoric (his words).

So, do historically high levels of debt drag down growth, as McKinsey and the Bank of International Settlements assert, or do they not? In general, I think they do, but I would agree that sometimes it depends on the type of debt and the situation. Certainly you can find examples where nations took on huge debts and there was still adequate growth in the wake of doing so. But in the overwhelming preponderance of cases, when governments and/or the private sector have taken on too much debt, there has not only been a drag on growth, there have  also been devastating financial crises and deep recessions or depressions.

As I tried to make clear in the last letter, not all debt is bad. There are times when debt can be actually quite productive, whether it is personal or governmental debt. But the issue hinges on the difference between good debt and bad debt and on who owes debt to whom.

Very simply, “bad debt” is debt, whether private or public, that cannot be repaid from current cash flows. All debt is “good” until the moment it is defaulted upon (both legally and realistically).

Further, it is intuitively obvious that if a country or company is using current cash flows to repay debt that was incurred for nonproductive purposes, that limits its ability to use that cash for other purposes. Assuming the other purposes are important to further growth, then growth is constrained, and options are reduced.

 If taxes must be increased to pay off the debt, that limits the cash available to finance further private-sector growth, which is far and away the largest source of growth for the economy. Only if you contend that government spending per se and in general is an engine of growth can you argue that it makes no difference whether spending is public or private.

While certain types of government spending are conducive to growth (think infrastructure development, education, scientific research, and law enforcement as examples), only a small portion of US federal government spending falls into those categories; so the preponderance of federal spending does not enhance productivity. I think the bulk of academic research supports that conclusion. That is not to say that some government expenditures for nonproductive uses are not proper or necessary, but that’s a different argument for a different day. (A social safety net comes to mind.)

You can’t contend that there is not a cost, in terms of private-sector productivity, incurred by taxes. That is not saying that a particular tax expenditure may not be worth the cost. Some government expenses are vital to public well-being and to a stable, properly functioning economy. Just be clear that there is always a cost. The negative slope of the curve when growth is plotted against taxation rates is quite clear. At some point, high overall taxes and high debt become a drag on growth (in terms of GDP, not effects on individuals, although you can make that argument). Think Europe. And Japan.

Most periods of high government debt that were not a drag on growth followed wars, when previously massive defense spending was radically decreased and the resulting extra income was then used to reduce the debt. Further, wars are the epitome of nonproductive spending, even when they are necessary for survival. A cessation of hostilities and the returning of soldiers to productive activities will in and of itself increase productivity and GDP, and that growth in turn increases the ability of an economy to pay back debt! That scenario is significantly different from a period where government debt, incurred to fund current consumption, is allowed to increase beyond the ability of cash flows to pay off the debt.

Greece is now in the latter situation. Rogoff and Reinhart detail over 260 other such episodes in history, where countries incurred insupportable debt and were forced to default in one manner or another. Default can take several different forms: deferral, restructuring of the terms to the detriment of the creditor, outright refusal or the inability to pay, etc. Monetization is a form of default that we will deal with shortly. From the point of view of the creditor, if you have to change the terms in such a way that you get less than you originally bargained for, even if that is the best outcome under the current circumstances, you will now have less money than you expected to have. You can call it what you like, give it all sorts of pretty names, but it means that a debtor did not live up to the terms originally agreed upon.

Mrs. Watanabe’s Bonds

It is time to take up the question of whether government debt is just money we owe to ourselves. Let’s take a real-world example of a nation that has incurred a very large debt that it increasingly struggles to make payments on and yet essentially owes the money to itself. I refer to Japan.

Japan has amassed a debt that is roughly 250% of GDP, far higher than that of any other country. The government has been able to grow such an outsized debt precisely because its citizens have, either directly or indirectly through their pension funds, been willing to purchase that debt. It is estimated that up to 95% of Japanese bonds are owned by the Japanese themselves (directly or through institutions). The rest is primarily in the steady hands of other central banks and a few funds with position mandates.

There is no country anywhere that can truly be said to owe more “to themselves” than Japan does. To sort out whether debt that we owe to ourselves is truly not a problem, let’s drop in at the home of the proverbial Mrs. Watanabe, who, it just so happens, is being paid a courtesy visit by Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda. Let’s listen in:

Kuroda [bowing]: Mrs. Watanabe, we are here today because we have a national crisis. Previous Japanese governments have run up a rather large debt, and we find ourselves in the unfortunate position of not being able to repay that debt unless we monetize it. But since we owe that money to ourselves, and since you are us, we thought we might ask if you, along with all your neighbors and friends, would be willing to forgo payment so that we can reduce the national debt. We realize this will make things more difficult for you in your remaining years, but it really is for the good of the nation.

Abe: Can we count on your support? And of course we would like you to vote for us in the next election.

Mrs. Watanabe: Honorable Prime Minister, my husband and I have worked very hard all our lives. We have done exactly as good Japanese citizens should do. We saved our money, invested in government bonds, and now we’re depending on them for our retirement. We need those bonds to be paid in full in order to have enough to buy our rice and miso soup and sake. In fact, listening to what you say, I think I need a cup of sake to calm me down. Pardon me for a moment.

[Mrs. Watanabe serves sake to her esteemed guests, takes a stiff gulp herself, then stands and draws a deep breath, bows, and looks the Prime Minister in the eye.] Let me be very clear. I fully expect to be able to cash in my bonds when I need the money. Further, I expect my pension to be paid in full in exactly the manner I was promised. If your administration cannot fulfill those promises without endangering my life, then I and my many friends will make sure that you are not allowed to continue in public office. Good day, gentlemen.

Now I know that is not the way the conversation would actually go. Mrs. Watanabe is a very polite Japanese lady who would never speak so directly to her Prime Minister. Nevertheless, I suspect my version of the conversation has captured the gist of what she was actually thinking.

And of course Abe-sama and Kuroda-sama know better than to ever have that conversation, because that is essentially the reaction they would expect to get from their citizens. In fact, a survey conducted a few years ago confirmed that less than 13% of Japanese citizens would be willing to sacrifice for the good of the nation when it came to their government bonds. So much for Japanese solidarity.

So Abe has had to choose between Disaster A and Disaster B. Rather than suffer a deflationary collapse, Disaster A, he has chosen Disaster B, the monetization of his debt. Which is precisely what Professors Krugman and Bernanke have suggested that Japan should do, although under the guise of quantitative easing, with the aim of creating inflation. So now Japan is experimenting with the most monumental quantitative easing ever undertaken by any developed country in the history of the world.

So how’s that quantitative easing thingy working out for Japan? Inflation should be going through the roof by now, right? Well, not so much.

Japan's annual core consumer inflation ground to a halt in February, the first time it has stopped rising in nearly two years, keeping the central bank under pressure to expand monetary stimulus later this year. Other data published on Friday didn't offer much solace with household spending slumping [2.9% y-o-y, for 11 straight months of decline] even as job markets improved, underscoring the challenges premier Shinzo Abe faces in steering the economy toward a solid recovery.

While the Bank of Japan has stressed it will look through the effect of slumping oil prices, the soft data will keep it under pressure to expand stimulus to jump-start inflation toward its 2 percent target.” (Reuters, March 27)

Aside from not being able to generate inflation, the Japanese economy is doing as well as can be expected and better than it has in most of the past 25 years. But the Japanese government desperately needs 2% inflation and 2% real growth in order to be able to deal with its debt, if it is not to be forced into outright monetization.

So the economy is doing kind of all right, and Japanese quantitative easing has been a roaring success, right? Perhaps from the perspective of the Japanese elite, its politicians, and of course its economists, but not, perhaps, from the perspective of Mrs. Watanabe.

She has seen the purchasing power of her currency drop by 33% in the past few years. That massive hit on her spending power affects her directly when she goes to buy imported goods, and it affects her indirectly through the high cost of all the energy Japan must import. When your buying power is reduced in retirement – and Japan has a rapidly aging population – I don’t think you can call that a roaring success.

The truth is, the Japanese government is passing on the pain of 25 years of running up too much debt to Japanese savers and retirees. I think the value of the yen is likely to drop another 50% (at least) before Japan can allow the market to set interest rates. They are going to print more money than any of us can possibly imagine. (I have documented on numerous occasions why Japan cannot allow interest rates to rise. Higher rates would be an utter disaster for the country.)

Quantitative easing seems like a Free Lunch World to many politicians and even to many economists, who should know better. But it is not a free lunch for Mrs. Watanabe. It is her lunch, scarfed from her table. And it will not be a free lunch that’s served in Europe as Mario Draghi eases and European savers watch the yield of their bonds and the value of their currency erode.

There Ain’t No Such Thing as a Free Lunch

There ain’t no such thing as a free lunch (TANSTAAFL). Quantitative easing comes with a price. The question is, who will pay it? The unprecedented financial repression that we are seeing in the world has been foisting the cost of bailing out bankers and stock market investors onto the aching, sagging backs of savers and retirees. Some might consider that an acceptable outcome, given that the global financial system has recovered, after a fashion, from the Great Recession.

But Paul Krugman and his neo-Keynesian colleagues, including most central bankers, seem to think they’re living in a free-lunch world. They are either not aware or do not care who is picking up the check.

No matter how debt is reconciled, whether through the normal means of it being paid back or through some type of default, workout, or monetization, someone ends up paying. Oftentimes, there is simply no choice but to resort to some type of debt reconciliation. You can’t squeeze blood from a turnip, especially a Greek turnip. (Another pithy economic lesson I learned from my dad.)

Which leads us to a topic we will take up in a future letter if not next week: how much debt is too much, and how do we avoid getting to that point? Stay tuned.

(Trivia: The maxim “There ain’t no such thing as a free lunch” dates back to the 1930s. The phrase and its acronym are central to Robert Heinlein's 1966 science fiction novel The Moon Is a Harsh Mistress, which helped to popularize it. The free-market economist Milton Friedman also used the phrase as the title of a 1975 book, and it shows up in economics literature to describe opportunity cost.)

Home Gearing Up for SIC

Surprisingly, other than a few personal day trips here and there, I am home for the next month until I leave for San Diego for my Strategic Investment Conference. You really should consider coming, as this is the single best macroeconomic conference in the country. I say that without reservation. Find me a conference lineup that it is better at any price. If I listed just the people we have lined up to moderate the question-and-answer sessions, they would constitute a fabulous conference in their own right. I am simply thrilled by the massive intellectual firepower that is going to be in the room. Plus, we just finalized Peter Diamandis to speak Thursday night. My friends and Hall of Fame science fiction writers David Brin and Vernor Vinge, two of the best futurists on the planet, will be there to ask Peter questions and to push back, and they will all mingle with you before dinner. You really don’t want to miss it. The conference is April 29 through May 2. There are just a few places left.

It’s time to hit the send button. I am truly interested in your comments, positive or negative, on this letter in particular, as I hope to develop it into a longer piece on debt. I always read the comments you post beneath the letter on our website. Have a great week!

Your admittedly eccentric analyst,

John Mauldin

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US Dollar: American Phoenix

Outside the Box: US Dollar: American Phoenix

By John Mauldin

 “Just a little patience, yeah…”

– Guns N’ Roses

Lastweek the FOMC essentially removed forward guidance and placed all options back on the table, and at the end of the day they’ve opened the door for further tightening. As Yellen recently explained in advance, the removal of the word patience from the Fed’s guidance amounts to fair warning to the rest of the world’s central banks: an interest rate hike is on the horizon. Govern your actions accordingly. (My personal guess, for those interested, is September, with the Fed proceeding exceedingly slowly and cautiously thereafter.)

The bigger story here is the sustained strength of the US dollar, which has traded wildly in the FOMC’s wake. A correction to the one-way trading prior to the meeting was well overdue and could last some time, but then the dollar strength will resume. (Euro) Parity or Bust! My young colleague Worth Wray and I have been writing for some time about the risks this trend poses, to emerging markets in particular, and now it seems that nightmare could  happen sooner rather than later.

We’re already seeing profound FX pressures on countries like Russia, Brazil, Turkey, and South Africa, among many others; but, while clearly exacerbated by the strong dollar and/or weak commodity prices, recent stress in various emerging markets appears to have more to do with internal troubles than external shocks. Nevertheless, the dollar’s strength has not been fully absorbed by EM economies, so a BIG, broad-based, dollar-driven adjustment may be yet to come.

Until this Wednesday’s FOMC press conference with Janet Yellen, the growing consensus was that an eventual interest rate hike would lead to an even stronger USD. Now it seems most observers, including our own Jared Dillian, are doubting that a rate hike will come this summer… or anytime soon.

Worth and I have a different view. We believe that Federal Reserve Vice Chair Stanley Fischer has carefully laid out a framework for interpreting the FOMC’s opaque communications as the committee moves closer to a rate hike. In a speech last October, Fischer made it clear that the Fed would “recognize the effect of (its) actions abroad and … minimize the negative spillovers (those actions will likely have) on the global economy” by clearly communicating its policy intentions in advance. If you read between the lines, the only way the Fed can give foreign central banks the opportunity to prepare for the likely FX shock that would follow a rate hike is to send the message in a way that the market does not immediately understand as overtly hawkish. This week’s announcement makes perfect sense when looked at through that lens.

Translation: while the FOMC’s decision to hike interest rates remains data-dependent, the Fed has opened the door for further tightening as soon as June 2015. That could be terrible news for a number of emerging markets, but none of those countries can credibly complain that the Fed is responsible as capital flees their economies in search of safety and more-attractive risk-adjusted rates. Emerging markets are not a homogenous group, but even the best positioned countries like the Philippines are at risk in the event of a broad-based contagion. We’ve seen that dynamic play out repeatedly in the 1980s, the 1990s, and the 2000s. It may be time for another hurricane.

With our expectations on the table, Worth and I still have to ask… what if we’re wrong? What if the dollar doesn’t strengthen? We’ll consider that scenario in today’s OTB.

It’s a real pleasure for me to introduce today’s author, because this OTB is also the perfect opportunity for an announcement I’ve been wanting to make for some time: Jawad Mian has brought his excellent research service, Stray Reflections, to Mauldin Economics. You can learn more about his service here. His “transparent hedge fund” approach to investment research is unique, well-reasoned, and decidedly non-consensus. And his prose is unrivaled.

Today’s OTB is taken from Jawad’s top 10 investment themes. These are the themes around which he builds his portfolio. I agree with many of his ideas, but I offer up this particular piece as an example of one where I remain unconvinced, if not in outright disagreement. Yet… Jawad makes such a strong argument for the dollar’s weakening. We have exchanged emails and dueling notes of late (but in a very collegial fashion).

I have to admit, I am NEVER comfortable when this much of the crowd agrees with my view, as they seem to now. A serious correction of the recent trend in dollar strength is clearly due, but what if – as Jawad argues – we are seeing a major shift to an entirely new macro regime?

It’s worth noting that Jawad made this weaker dollar call several months ago. HSBC analysts and others are beginning to agree with him. The US dollar is the single most important factor in global macroeconomics; so do your homework, consider the antithesis to your closely held beliefs, and ignore Jawad’s thoughtful analysis at your own risk.

I was in Switzerland for the last week, meeting clients and speaking in Zürich. I kept asking the question, “Where is Draghi going to get €60 trillion in European bonds, month after month?” He is reportedly already behind the curve for this month’s purchases. I get no satisfactory (to me) answer. Maybe he does, but he wants to buy more than governments are issuing, and no pension company or insurance company is going to be able to sell him their bonds if they have a positive yield. Maybe he gets creative in what he buys. I will write more about this over the next weekend, but we are in the Twilight Zone for bonds. French yields are negative out to five years, and to get 1.5% you have to buy a 50-year French bond? Can anyone do that and seriously be considered a prudent fiduciary? Have you looked at France’s balance sheet and total commitments, not to mention the country’s politics? And don’t even get me started on the rest of Europe. Half of Northern Europe’s debt has negative yields.

I had the very real privilege of having dinner with William White, former chief economist of the Bank of International Settlements and currently consultant to seemingly everyone. He will be at my conference this year as the final speaker, and it will be a very impactful speech. On several occasions during dinner, I got him to agree to say in public what he said in private Tuesday night. I have long been a fan of his candor and style, and that evening I felt like a student. He is now my favorite (ex) central banker.

I want to thank so many of you who wrote to me expressing your condolences about my Mother. It meant a lot. Truly.

My sister flew in from Victoria Island, where she lives with her sons. I cornered her the first night she was there and told her that her other brother wanted us to sing at the graveside the lullabies that mother sang to us as children when she put us to bed (and which we all vividly remember). I tried to convey the clear impression that I thought it was a bad idea, but I was amazed that she agreed with him. “I think it is a marvelous idea, and mother would agree. You will do it.” How can you tell your little sister no when she looks at you that way? So, there I was, singing in the rain, or trying to. I don’t think I actually made it to the end of “Tura Lura Lural.” In the moment it was much more than an old Irish lullaby.

Your doing a lot of pondering analyst,

John Mauldin, Editor

US Dollar: American Phoenix

By Jawad Mian

A New Religion

Divergent monetary policy, interest rate differentials, and growth trajectories favor the US over Europe and Japan. This has become the key investment theme for global investors. Foreign flows into US financial assets hit a record last year while traders’ speculative long positions in the dollar reached a new all-time high. It is believed the US dollar has begun a multi-year mega-uptrend. The faith in broad-based dollar strength is supported by (1) decent US growth, (2) higher yields than those of its main trading partners, (3) external balances that are in good shape, (4) cheap currency valuation on a real effective exchange- rate basis, and (5) deliberate devaluations in the rest of the world. Based on AKSIA’s Hedge Fund Manager Survey, 86% of the 187 managers polled expect the US dollar to be the top performing currency in 2015. So today, the dollar index is up 23% from its 2011 low, which, ironically enough, coincided with the S&P rating downgrade of US credit. But can this strength endure, as it did in the 1980s and 1990s?

Those two late-20th century upward moves in the dollar came in times of robust US growth and relatively tight monetary policy. The rally was further bolstered by risk aversion flows given periodic waves of uncertainty around the world.

We are skeptical of the consensus mindset and don’t think that the US dollar can appreciate significantly over the next five years. We view the dollar’s recent strong run-up as a cyclical phenomenon—not a secular upturn—and suspect it offers a great opportunity for investors to diversify outside of the dollar. While we believe that the US economy can withstand short-term rates above zero at this point, the anomalous divergence between payrolls growth and inflation expectations complicates the way forward. The global macro environment today is beset with deflationary tendencies. Based on our best judgment, monetary policy is unlikely to tighten at the pace it did during the previous cyclical dollar bull markets of the early 1980s and late 1990s. Measures of long-run inflation expectations based on the CPI swaps market have fallen below levels that preceded QE2, QE3, and Operation Twist. If deflation expectations accelerate, or in the event of any negative growth surprises, we believe the Fed will be forced to adopt a more relaxed attitude toward policy normalization than is currently anticipated.

Investors have also greatly overestimated the resilience of the US recovery, especially when we consider the prospect that we may have seen “peak payrolls” in November. Over the coming year, we think the labor market will be demonstrably weaker than indicated by the unemployment rate, as the pace of job growth stalls. It certainly looks like US GDP peaked in Q3 2014 on a sequential basis. According to BCA Research, the biggest boost from the most cyclical parts of the economy—housing and consumer durables—is already behind us. The labor market usually peaks 7 months in advance of a recession. Based on the Fed’s models, a large appreciation of the dollar is estimated to cut GDP growth by around 0.5% over the following year. We think the Fed’s priority of containing any unwarranted rise in bond yields may be displaced by its monitoring the rise of the dollar. We also observe that a positive co- movement has developed between the trade- weighted dollar and US stocks, which suggests that the dollar may not be the usual safe haven if equity markets slide.

American Hustle

One of the less-cited factors for dollar strength is the improvement in the US current account. The chief benefit of QE was the cheapening of the dollar to its lowest level in the postwar era. It was among several factors that led to a decline in the current account deficit from a peak of 6% of GDP in 2006 to about 2% of GDP in 2014. It was partly the reduction in the current account deficit that led to fewer US dollars being available in the global market, thus swelling the dollar’s value. The “short squeeze” on two-thirds of the $11 trillion cross-border loans that are denominated in dollars reversed institutional investment flows back into the US, according to Morgan Stanley. The last time the US had a current account surplus was in 1991, when the trade-weighted dollar was nearly 40% stronger than it is today. So the fact that even with the dollar’s major undervaluation since 2011, the US has been unable to return to a surplus suggests that the current account deficit is really structural in nature. We think the dollar is now vulnerable to a rewidening of the current account deficit on the back of stronger household consumption.

The temporary fillip to the current account from the shale oil boom, weak import demand, and lower interest rates should reverse in the next five years. The US trade deficit is already back to the record lows seen before the financial crisis in 2008, if we exclude oil. Even with the drop in oil prices, US terms of trade will benefit less, due to much lower sensitivity relative to history. It is for this reason that we believe the US will struggle to attract the same amount of external capital as it has in the past.

The Most Important Chart

By reviewing past tightening cycles, we observe that exchange rates can follow many paths that do not always correspond to the predictions from monetary policy actions. For instance, the Fed’s last tightening cycle began in mid-2004, when the unemployment rate had fallen to 5.5% and other labor market metrics were significantly stronger than they are now. The US dollar fell in the following six months, and by the time of the last rate hike during the summer of 2006, the dollar was at about the same level as when the liftoff began. Over an extended period of time, rising US interest rates are not necessarily accompanied by a rising foreign exchange value of the US dollar. Fed rate hiking since the early 1970s has actually been, on average, consistent with the dollar getting weaker, not stronger.

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Important Disclosures

Time to Eliminate Pilots in Aircrafts: Post Pilot Era Coming Up

Courtesy of Mish.

Instead of new rules making sure two people are in the cockpit at all times, how about a rule that says no one is cockpit? This is precisely how I felt after 911 and even more so after the disappearance of Malaysia Flight 370 on March 8.

The tragedy of Germanwings Flight 9525 in which a mentally ill co-pilot deliberately flew the plane into a mountain killing all 150 on board is icing cake.

And it's not just two deliberate crashes either. Please consider The Mystery of Flight 9525: a Locked Door, a Silent Pilot and a Secret History of Illness.

Just under 40 minutes into their journey, the plane’s 27-year-old co-pilot, Andreas Lubitz, turned the Airbus A320 into a missile, guiding it into the southern Alps after locking its captain, Patrick Sonderheimer, out of the cockpit.

In the doomed flight’s final minutes, Sonderheimer attempted to force his way through the security door that separates the passengers from the pilots. At one stage he reportedly tried to use an axe. Recordings obtained by crash investigators capture him attempting to remonstrate with Lubitz – whose breathing, according to the microphones in the cockpit, remained sure and steady as the plane made its rapid descent. It was only in the final seconds that there was the sound of screams. Experts said death would have been instant.

As the New York Times revealed early on Thursday, French time, the voice recorder confirmed that Lubitz had locked the captain out of the flight deck and set the plane on its descent.

In November 2013, a flight between Mozambique and Angola crashed in Namibia, killing 33 people. Initial investigations suggested the accident was deliberately caused by the captain shortly after his co-pilot had left the flight deck.

In October 1999, an EgyptAir Boeing 767 went into a rapid descent 30 minutes after taking off from New York, killing 217 people. An investigation suggested that the crash was caused deliberately by the relief first officer, although the evidence was not conclusive.

And in December 1997, more than 100 people were killed when a Boeing 737 flying from Indonesia to Singapore crashed; the pilot, who was said to be suffering from “multiple work-related difficulties”, was suspected of switching off the flight recorders and intentionally putting the plane into a dive.

In an interview with the bestselling German tabloid Bild, the 26-year-old flight attendant, known only as Maria W, said that they had separated “because it became increasingly clear that he had a problem”. She said that he was plagued by nightmares and would wake up and scream “we’re going down”.

Last year he told her: “One day I’m going to do something that will change the whole system, and everyone will know my name and remember.”

A debate now rages about the extent to which companies and regulators can monitor a person’s mental health, especially if they perform a job that carries responsibility for the lives of others. The UN world aviation body has stressed that all pilots must have regular mental and physical checkups. But psychological assessments can be fallible. “If someone dissimulates – that is, they don’t want other people to notice – it’s very, very difficult,” Reiner Kemmler, a psychologist who specialises in training pilots, told Deutschlandfunk public radio.

Debate over Mental Illness

Continue Here


In the News, 3-29-15 (a.m.)

From around the Web:

Business Insider presents the 10 things in tech you need to know today. Company mentioned include Apple, Google, Amazon, Yahoo, Facebook and Uber.

Alasdair Macleod at GoldMoney argues "though the Fed would deny it, it is clear from the minutes of the last Federal Open Market Committee (FOMC) meeting that a rise in interest rates has been put off indefinitely" in Central Banks Are Paralyzed At The Zero Bound. Macleod continues,

"The Fed Funds Rate, which is the interest rate the Fed targets to set all other rates, has now been less than 0.25% for six and a quarter years, gradually declining from roughly 0.15% to about 0.10% today. It was set at a target range of between zero and 0.25% in December 2008… If normalisation is the result of economic recovery we will be familiar with the playbook. Demand for money in the economy picks up, and instead of pyramiding bank credit on reserves held at the Fed, the Fed feeds back the excess reserves to the banks by selling government securities into the markets. The bear market in government bonds should be manageable because of underlying pension and insurance company demand coupled with a diminishing budget deficit. This is the long-understood theory behind withdrawing from deficit financing." (Continue)

Effective Fed Funds Rate

Forbes explains: Why Oil Could Be Facing A 20-Year Bear Market.

In the past, the usual “oil crisis” was caused by self-serving news items of an oil shortage, causing soaring prices. Just 2-3 years ago, the fear mongers said that the world had “seen peak oil,” meaning that oil production would be on a long term decline and there would be big shortages. Instead, oil production is now at a high

The current crisis is one of plunging oil prices and a glut as far as the eye can see. (Read more)

Share Ferro at Business Insider writes that there is no shortage in oil storage capacity, and it's unlikely that there will be, in Sorry, but there was never an oil storage crisis:

Crude oil storage inventories in the US are at their highest levels in decades. Is that going to cause the price of West Texas Intermediate crude to crash?

Probably not, according to Robert Rapier of Energy Trends Insider.

In fact, we're not even close.

Rapier writes that "oil producers could continue to add a million barrels a week (which is about the average over the past year) for nearly four years before crude oil storage is actually full." …

"We are currently in the season when refinery utilization is lowest. Refiners take equipment offline in fall and spring to do maintenance, so they use less crude oil at this time of year. This maintenance usually peaks in March, and then crude oil demand picks back up as refiners gear up for the summer driving season.  The difference in refinery demand between this time of year and summer is generally around a million barrels per day, so even if nothing else changes that storage build should start to flatten. (Continue)

From Harvard Businss Review: The Real Leadership Lessons of Steve Jobs

His saga is the entrepreneurial creation myth writ large: Steve Jobs cofounded Apple in his parents’ garage in 1976, was ousted in 1985, returned to rescue it from near bankruptcy in 1997, and by the time he died, in October 2011, had built it into the world’s most valuable company. Along the way he helped to transform seven industries: personal computing, animated movies, music, phones, tablet computing, retail stores, and digital publishing. He thus belongs in the pantheon of America’s great innovators, along with Thomas Edison, Henry Ford, and Walt Disney. None of these men was a saint, but long after their personalities are forgotten, history will remember how they applied imagination to technology and business.

“The people who are crazy enough to think they can change the world are the ones who do.”
—Apple’s “Think Different” commercial, 1997



Doug Gollan at Forbes explains How The Internet Created The Superstar Travel Agent.

The Internet, experts said, was going to kill travel agents. In the nineties, airline and hotel executives gleefully dreamed of cutting out the middleman, saving on commissions, and creating direct relationships with their customers. Instead they got OTAs (online travel agents), whose dominance has led to even higher mass travel distribution costs. Hotel companies are fighting that by offering guests incentives to book directly on their websites. (Continue)

In Strong Dollar, Weakened WorldMark Whitehouse writes at Bloomberg View, 

Back when the U.S. Federal Reserve was doing whatever it could to keep credit flowing, companies and governments in emerging markets went on a borrowing spree in dollars. Now, with the Fed changing course and the U.S. currency rising, all that dollar-denominated debt is becoming one of the weakest links in the global financial system. (Full Article)

Time to ask for that pay raise you still haven't gotten? The Economist writes, American firms are having to get back into the habit of granting pay risesExcerpt:

Carmaking is not the only industry where there is upward pressure on pay. In February Walmart, known for its stingy wages and lack of unions, said it would pay junior staff at least $9 per hour, which is above the federal minimum wage of $7.25. That will affect 500,000 staff and cost $1 billion, equivalent to 6% of net profits. This week Target, another retailer, was reported to have raised its minimum pay to $9 an hour. It so far refuses to confirm this.

The Federal Reserve and many economists may be perplexed as to why hourly wage rises across the economy remain subdued, at just 2% year-on-year in February, even as the unemployment rate has reached a low of 5.5%. But to many bosses it is clear which way the wind is blowing.

From the Huffington Post: New Jersey's Six Flags Great Adventure To Cut 18,000 Trees To Go Solar — A theme park plans to cut down more than 18,000 trees for the construction of what it says will be the largest solar farm in New Jersey.


This undated photo courtesy of Six Flags Great Adventure shows the Green Lantern stand-Up coaster at Six Flags Great Adventure in Jackson, N.J. (AP Photo/Six Flags Great Adventure) | AP

Bill Bonner at the Acting-Man blog writes in The American Dream Part 2 – We Now Live In A "Pimpocracy":

Today, we continue mouth wide open (Part 1 here) … staggered by the shabby immensity of it … a tear forming in the corner of our eye.

Yes, we are looking at how the US economy, money and government have changed since President Nixon ended the gold-backed monetary system in 1971. It is not pretty.

We already know about the money. Since 1971, it’s been a credit-based, not a gold-based, system. The pre-1971 economy had three key characteristics:

1) It was healthy – Industry made things and sold them at a profit

2) It was fair – Financial progress was fairly evenly distributed.

3) It was solvent – The US was a creditor, not a debtor, nation.


                                            Cartoon by David Horsey

(Continue here.)

Oil Companies Reap Large Gains After Cashing In Hedging Bets (WSJ): "Rocked by months of plunging crude prices, oil producers are harvesting financial bets to raise, for some, much-needed cash…" 

Woe Betide the Value Investor: "Research Affiliates is a value shop in the tradition of Ben Graham’s investment philosophy. As investors, we sell the popular securities that have become overpriced and we bargain-hunt for assets that have fallen out of favor. Today, however, we must acknowledge an inconvenient truth. The excess return earned by the average value mutual fund investor has been meaningfully negative."

Neil DeGrasse Tyson Has Some Choice Words For Anyone Who Votes For A Climate Denier Via ThinkProgress:

“I don’t blame the politicians for a damn thing because we vote for the politicians,” he said. “I blame the electorate.” (More.)

Neil deGrasse Tyson speaks on stage at the National Geographic Channel 2015 Winter TCA on Wednesday, Jan. 7, 2015, in Pasadena, Calif.

9 basic concepts Americans fail to grasp by Alex Henderson via Salon:

To hear the far-right ideologues of Fox News and AM talk radio tell it, life in Europe is hell on Earth. Taxes are high, sexual promiscuity prevails, universal healthcare doesn’t work, and millions of people don’t even speak English as their primary language! Those who run around screaming about “American exceptionalism” often condemn countries like France, Norway and Switzerland to justify their jingoism. Sadly, the U.S.’ economic deterioration means that many Americans simply cannot afford a trip abroad to see how those countries function for themselves. And often, lack of foreign travel means accepting clichés about the rest of the world over the reality. And that lack of worldliness clouds many Americans’ views on everything from economics to sex to religion.

Here are nine things Americans can learn from the rest of the world….

(Read them here)

Profit warnings are piling up, as Market Watch reports:  

The strong dollar appears to be wreaking more havoc on companies’ outlooks than the bad weather did last year.

The pace of first-quarter profit warnings from S&P 500 companies is running slightly ahead of the pace of set at the same time a year ago, and well ahead of the five-year average, according to data provided by FactSet senior earnings analyst John Butters. (More..)

The coldest place on Earth just got warmer, Antarctica Recorded Its Hottest Temperature Ever This Week


According to the weather blog Weather Underground, on Tuesday, March 24, the temperature in Antarctica rose to 63.5°F (17.5C) — a record for the polar continent. Part of a longer heat wave, the record high came just a day after the previous record was set at 63.3°F. (Full article, Picture credit: SHUTTERSTOCK)

Share of consumer spending on health hits another record (Market Watch)

The percentage of money U.S. consumers spend on health care rose in 2014 for the third straight year to another record high, according to one government measure.

Some 20.6% of total consumer spending in 2014 was devoted to health care, including prescription and over-the-counter drugs, annual figures from the Commerce Department report on personal expenditures show. That’s up from 20.4% in 2013.

Health-care expenses has been rising for decades regardless of government efforts to control costs. The percentage of consumer spending on health care rose from 15% in 1990, topping 20% for the first time in 2009. (Full Article)

Consumer spending healthcare

The Rise of the Tech Model May Soon Make You Obsolete (Institutional Investor) — Machine learning, artificial intellegence and other technological advances are transforming how pensions, endowments, sovereign funds and institution manage their assets.

Five Conspiracy Theories That Ted Cruz Actually Believes (Think Progress) — The following list is updated from a 2013 ThinkProgress post responding to reports that Sen. Ted Cruz (R-TX) was considering a presidential run…



The Fed Has Not Learnt From The Crisis

Courtesy of Steve Keen at

image002The Financial Crisis of 2007 was the nearest thing to a “Near Death Experience” that the Federal Reserve could have had. One ordinarily expects someone who has such an experience—exuberance behind the wheel that causes an almost fatal crash, a binge drinking escapade that ends up in the intensive care ward—to learn from it, and change their behaviour in some profound way that makes a repeat event impossible.

Not so the Federal Reserve. Though the event itself gets some mention in Yellen’s speech yesterday (“Normalizing Monetary Policy: Prospects and Perspectives”, San Francisco March 27, 2015), the analysis in that speech shows that the Fed has learnt nothing of substance from the crisis. If anything, the thinking has gone backwards. The Fed is the speed driver who will floor the accelerator before the next bend, just as he did before the crash; it is the binge drinker who will empty the bottle of whiskey at next year’s New Year’s Eve, just as she did before she woke up in intensive care on New Year’s Day.

So why hasn’t The Fed learnt? Largely because of a lack of intellectual courage. As it prepares to manage the post-crisis economy, The Fed has made no acknowledgement of the fact that it didn’t see the crisis itself coming. Of course, the cause of a financial crisis is far less obvious than the cause of a crash or a hangover: there are no skidmarks, no empty bottle to link effect to cause. But the fact that The Fed was caught completely unawares by the crisis should have led to some recognition that maybe, just maybe, its model of the economy was at fault.

Far from it. Instead, if anything is more visible in Yellen’s technical speech than it was in Bernanke’s before the crisis, it’s the inappropriate model that blinded The Fed—and the economics profession in general—to the dangers before 2007. In fact, that model is so visible that its key word—“equilibrium”—turns up in a word cloud of Yellen’s speech—see Figure 1. “Equilibrium” is the 17th most frequent word in the document, and the only significant words that appear more frequently are “Inflation” and “Monetary”.

In contrast, “Crisis” gets a mere 6 mentions, and household debt gets only one.

Figure 1: Word cloud (courtesy of of Yellen’s speech “Normalizing Monetary Policy

Read the rest here. 

Can the Eurozone Survive? Not in Its Current Form Says PIMCO; Mish Response

Courtesy of Mish.

Echoing statements I have made many times, PIMCO says the single currency area must become a “United States of Europe” in order to secure its future.

Please consider Eurozone can’t survive in current form, says PIMCO.

The eurozone is “untenable” in its current form and cannot survive unless countries are prepared to cede sovereignty and become a “United States of Europe”, the manager of the world’s biggest bond fund has warned.

The Pacific Investment Management Company (PIMCO) said that while the bloc was likely to stay together in the medium term, with Greece remaining in the eurozone, the single currency could not survive if countries did not move closer together.

Persistently weak growth in the eurozone had led to voter unrest and the rise of populist parties such as Podemos in Spain, Syriza in Greece, and Front National in France, said PIMCO managing directors Andrew Bosomworth and Mike Amey.

“The lesson from history is that the status quo we have now is not a tenable structure,” said Mr Bosomworth. “There’s no historical precedent that this sort of structure, which is centralised monetary policy, decentralised fiscal policy, can last over multiple decades.”

PIMCO said the rise of populist parties demonstrated how uneasy some people had become about the euro.

“[Persistently low growth] manifests itself in a lack of support in the common currency, so then it leads to the rise to power of political parties that want to end it,” said Mr Bosomworth.

PIMCO said the rise of populist parties demonstrated how uneasy some people had become about the euro.

“[Persistently low growth] manifests itself in a lack of support in the common currency, so then it leads to the rise to power of political parties that want to end it,” said Mr Bosomworth.

Nothing New 

I certainly agree the eurozone cannot survive unless it becomes the “United States of Europe”.

There is absolutely nothing new in this announcement other than who said it. I have been talking about this for years….

Continue Here

The American Dream Part 2 – We Now Live In A “Pimpocracy”

Courtesy of Bill Bonner at Acting-Man blog

Shabby Immensity

Today, we continue mouth wide open (Part 1 here) … staggered by the shabby immensity of it … a tear forming in the corner of our eye.

Yes, we are looking at how the US economy, money and government have changed since President Nixon ended the gold-backed monetary system in 1971. It is not pretty.

We already know about the money. Since 1971, it’s been a credit-based, not a gold-based, system. The pre-1971 economy had three key characteristics:

1) It was healthy – Industry made things and sold them at a profit

2) It was fair – Financial progress was fairly evenly distributed.

3) It was solvent – The US was a creditor, not a debtor, nation.


Cartoon by David Horsey


Change in global share of manufacturing output, selected countries (via Vox EU)

Platitudes and Hypocrisies

Americans still say they believe in free markets, democracy and financial rectitude. But only as platitudes and hypocrisies. America’s industries have largely been shipped over to China and other lower-cost producers in the emerging world.

That didn’t “just happen.” The Fed’s EZ money financed it. American consumers borrowed to spend more than they could afford. Walmart met their desires (if not their needs) with “Everyday Low Prices,” courtesy of low-paid Chinese workers.

This sent US dollars to China. The Chinese used the profits to build even more, and better, factories. Pity the American businessman who tried to compete. He was overwhelmed. He had to pay wages 10 times higher than the Chinese. He also had to bow to regulations – tax, environment, labor, diverse bullying – that left him hobbled and fettered.

There’s not much left of America’s industrial economy. Seventy percent of the US economy is made up of consumer spending. Manufacturing has fallen to just 12% of the economy… down from 24% in 1971. And it’s now the main source of wealth in only seven states. The deindustrialization of the US is blamed for the slipping wages of low- and middle-class Americans. So is immigration. And robots.

“It’s not unfair,” say the people who caused it. “It’s just the free market.”

But the free market was one of the first casualties of the post-1971 fiat money period.


Manufacturing wages, US vs. China – China is catching up, but there is still a huge gap

Bubble Machine

In a free market, people earn money by working (income) or by saving and investing it (capital growth). But credit-based money needed neither work nor saving; you just had to know the right people. Private banks, aided and abetted by the Federal Reserve, could create as much credit money as they pleased and feed it to their cronies on Wall Street.

The new money was then transformed as miraculously as water into wine. For the privileged insiders it was almost free; the Fed made sure of that. But for consumers, it became a heavy burden of debt. And for the economy, it became an inflation mechanism for financial bubbles.

The most recent blew when the banking and mortgage industries (part owned by the feds by way of Fannie and Freddie) lent trillions of dollars to homebuyers, who ended up with debt they couldn’t afford for houses they didn’t need. In 1995, the subprime loan market was about $65 billion. By 2007, it had ballooned to $1.3 trillion – a 1,900% increase.

When the house of cards collapsed in 2008, the feds moved fast. Not to help the homeowners, but to bail out Wall Street – the most reckless risk-takers in subprime debt – and the most incompetent of the big automakers, too.


Fannie Mae, 1995 to 2015 – from major bubble enabler to life under conservatorship – click to enlarge.

The Death of Savings

Wages rise as workers become more productive. Increases in productivity require capital investment (in training, new technology, new materials, etc.). This makes new savings possible. These new savings become the source of new capital investment. But in the 1980s and 1990s, the US savings rate fell.

Why bother to save when you can get phony money from the Fed-controlled banks? Besides, the Fed made sure interest rates stayed ultra-low. This made credit more attractive, as the cost of carrying debt fell. It also made saving money less attractive, as interest rates on savings also fell.

Fewer savings led to less investment in the factories, warehouses, new companies and new technologies that produce real “breadwinner” jobs. Why bother taking the risk growing your business into new markets when you can just borrow from the Fed and buy your own shares? Why bother to start a new small business at all, when all the credit goes to big, entrenched ones?

For most working-class Americans, real earnings peaked in the mid-1970s. Since then, it has been downhill. The rich get richer. The poor and middle classes go further into debt to try to keep up. Since the credit crisis of 2008, nearly 100% of the asset price gains went to the top 10% of the population. This was no accident. The Fed put its credit machine to work for the rich – heating up asset prices, but leaving the rest of the economy cold.

Now the US is the world’s biggest debtor. Not relative to GDP. That title goes to Japan. But it is still a distinction worth noting: The US went from the world’s biggest credit to its biggest debt in little more than a single generation.

What to make of it? The natural process of history? A fluke? We don’t think so. It is the result of public policy decisions made by the hacks, hangers-on and has-beens who gain the most from them.

There were no popular debates. There were no votes. Small but powerful elites created the fiat dollar, the TARP, ZIRP and QE. They were also responsible for Washington’s spending, regulation and tax decisions. That these creations favored the same elites was more than a coincidence.

Savings rate

The personal savings rate has been in a secular downtrend since the mid 1970s – but that may be changing a bit in the post 2008 world – click to enlarge.

Welcome to the “Pimpocracy”

This will be more obvious when we take up Part III of this inquiry – on our new form of government. Our old friend Jim Davidson calls it a “pimpocracy.” At least streetwalkers give value for money, he says. The pimps don’t. They take advantage of the prostitutes… and the johns too.

Today, we simply note that cheap money has done what it always does: undermine the economy and the society that hosts it. It can even happen when you have a gold-backed monetary system.

The Roman Empire was an early victim. When it made a conquest, the easy money – the captured booty and slave labor – came back to Rome and raised prices. Slave labor reduced wages for free workers. And the stolen property competed with locally made goods. This weakened Rome’s domestic economy.

Spain repeated the trick in the 16th century. Gold came back from the New World in such quantities that Spaniards found they could live off the easy money. They found a mountain of silver at Potosí in Bolivia and put slaves to work, night and day, mining it. Prices rose sharply throughout Europe. And when the easy money came to an end, the Spanish economy collapsed. It didn’t recover until Spain joined the European Union in 1986.

Buffett buys Kraft Foods: A big bite


The Economist discusses the merits of Buffett's latest acquisition, Kraft Foods. 

Buffett buys Kraft Foods: A big bite 

Berkshire Hathaway’s latest big deal is quite a mouthful

WARREN BUFFETT says he likes to buy companies that are easy to understand and are performing well. His latest deal, the $50 billion acquisition of Kraft Foods that was announced on March 25th, passes only one of those tests. Most people can get their heads around the slices of processed cheese and hot dogs that Kraft churns out—indeed Mr Buffett, known to favour plain fare, would probably like to get his lips round them, too. But as a business, Kraft is a bit of a mess.

Last year its revenues were stagnant and its volumes and profits fell. Its chief executive left in December. It generates 98.5% of its sales in the mature markets of America and Canada, where, the suspicion is, a new generation of healthier eaters no longer aches to scoff a Kraft Macaroni & Cheese, followed by a plate of Jello and washed down by a Capri Sun drink.

Kraft’s predicament is in large part a result of its turbulent ownership over three decades, in turn a testament to the hyperactivity of Wall Street’s dealmakers. It has been the subject of seven big mergers or spin-offs since 1980, including an unhappy spell under the ownership of Philip Morris, a tobacco firm, between 1988 and 2007. Most recently Kraft was separated from its global snack brands in 2012, which were renamed Mondelez International.

Reflecting Kraft’s troubled past and iffy present performance, Mr Buffett is not buying it alone, nor managing it. Instead he is working with 3G Capital, a buy-out firm with Brazilian roots which is the closest thing the consumer-goods industry has to a miracle-worker. In 2013 Berkshire Hathaway, Mr Buffett’s investment vehicle, teamed up with 3G to buy Heinz, another food company, with each taking 50%.

Keep reading Buffett buys Kraft Foods: A big bite | The Economist.

Who Should-And Who Shouldn’t-Take Vitamin D

Are you supplementing with vitamin D? I have been; my levels are consistently low. In Who Should—And Who Shouldn’t—Take Vitamin D, Alice Park suggests that supplementing with more than 600 IUs is too much. Her argument makes sense: there isn't enough data to understand the effects of vitamin D (or specifically, trying to increase blood levels vitamin D) and the dangers of over-dosing are not clear. Not addressed, was the question of whether some people should take more D to make up for lack of sun exposure. 

Here's what experts say, based on the latest evidence…


Does your diet need a little extra D? For researchers, it’s one of nutrition’s most vexing questions. “It’s the wild, wild west,” says Dr. JoAnn Manson, chief of preventive medicine at Brigham and Women’s Hospital and professor of medicine at Harvard Medical School. “The issue has become murkier over time rather than clearer.” Research is mixed about whether doctors should routinely test for vitamin D levels, like they do for cholesterol, and whether people should be supplementing their diets with vitamin D pills.

Keep reading Who Should—And Who Shouldn’t—Take Vitamin D | TIME.

Wally Becomes Chief Economist for Dilbert, Predicts “Bubble in Monetary Policy”

Courtesy of Mish.

On the lighter side, in the March 28, 2015 Dilbert, Wally becomes the new chief economist.

Wally: "The exchange rate on derivatives will trigger a bubble in monetary policy and deflate the Yen."

I like the phrase "bubble in monetary policy". It aptly expresses precisely what has been happening globally.

Mike "Mish" Shedlock


The Beard Has Spoken

The Beard Has Spoken

I’ve written plenty about the markets over the past six months since I started growing the correction beard. But I regularly get questions related to one post or the other that I’ve already answered somewhere else. So I thought I’d try to write a more comprehensive view aggregating much of what I’ve written over that time so it’s all in one place. The underlined words and phrases below link to articles for further reading.

The stock market has done very well over the past six years. In fact, there are only a few other times in history where it’s seen a 200% rise in such short a time. This has led many to believe that investing in the stock market is an easy game when they should really be on guard against just this sort of hubris.

This may be the single greatest mistake investors make – extrapolating recent performance out into the future, especially after the sort of historic run we have seen lately. Momentum can be a powerful force and even an effective trading strategy on its own but in this case long-term investors are likely to be sorely disappointedStocks are just as overvalued today as they were in 2000. Why, then, should, investors expect a vastly different result?

You may counter this idea by saying, ‘forecasts like that aren’t usually worth much,’ but, in my humble opinion, everything is a forecast. Buying stocks today is making a forecast that they will generate an adequate return over the coming decade. If that’s what you’re doing, I challenge you to show me why your forecast is more valuable than mine. I’m sincerely curious. And please know that in making this forecast, I’m not trying to scare you. I’m trying to help you.

Like some very smart people I know, you may also try to justify the extreme overvaluation in the stock market right now by pointing to ultra-low interest rates. Rather than justifying high valuations, though, low-interest rates confirm the idea that equity returns will also be ultra-low going forward.

Because stock market valuations have remained so high for so long, it’s very tempting to believe “it’s different this time.” It’s not. The simple reason that valuations have been so high for so long is that over the past 25 years there has been unprecedented demand for equities from the baby boom generation. But this is coming to an end very quickly. Ultimately, this may prove to be one of the worst times in history to own equities.

Just for a minute, look at the markets like Warren Buffett does. 10-year treasury bonds currently offer a better prospective return over the coming decade than equities do (based on the most reliable models), a fairly rare occurrence. In the past, if you just sold stocks and bought bonds during these times you missed most of the major equity bear markets of the past half century (and did especially well last year).

I acknowledge, however, that the trend is still up for the major stock market indexes. So maybe you would prefer to stay involved until the trend changes. That’s absolutely valid so long as you have a plan. As we learned in the late 1990’s, an expensive market can get even more expensive though I believe we are unlikely to see another such blowoff this time around.

Why is that? Because bond market risk appetites have alreadysignaled a shift in investor sentiment that began last summer and stocks are historically very highly correlated. All sorts of demand sources for equities also seem to be drying up. In fact, it looks as ifeverything but the stock market has already peaked. This is probably why the smart money has begun to worry about the downside.

So I encourage you to have this conversation with your advisor. Take some time to understand the risks in relation to the potential rewards from being involved in equities right now and what that means to you. There’s wisdom in insecurity. And be aware of what this relationship ultimately costs you. In this new era of ultra-low returns it’s more important than ever to avoid the “new wolves of Wall Street.”


Why We Feel So Poor, In Two Charts

Courtesy of John Rubino.

Among the many things that mystify economists these days, the biggest might be the lingering perception, despite six years of ostensible recovery, that the average person is getting poorer rather than richer. Lots of culprits come in for blame, including the growing gap between the 1% and everyone else, negative interest rates (which starve savers and retirees of income) and the crappy nature of the new jobs being created in this recovery.

But one that doesn’t get much mention is the changing nature of the bills we’re paying. It seems that Americans are spending a lot more on health care, which leaves less for everything else. Here’s an excerpt from a MarketWatch report of a couple of weeks back, with two charts that tell the tale:

Share of consumer spending on health hits another record

The percentage of money U.S. consumers spend on health care rose in 2014 for the third straight year to another record high, according to one government measure.

Some 20.6% of total consumer spending in 2014 was devoted to health care, including prescription and over-the-counter drugs, annual figures from the Commerce Department report on personal expenditures show. That’s up from 20.4% in 2013.

Health-care expenses has been rising for decades regardless of government efforts to control costs. The percentage of consumer spending on health care rose from 15% in 1990, topping 20% for the first time in 2009.

Consumer spending healthcare

With the health-care pie continuing to expand, consumers are paying the same or less as percentage of their spending on most other goods and services compared to 10 years ago.

Americans spend a smaller share of their money on cars and clothing, among other things. The percentage of money they spend on housing and going out to eat is basically unchanged over the longer run.

Not surprisingly, the only other major category to show a sustained increase in spending over the past 25 years is education. The share of money Americans spend on college has climbed to 1.59% from 0.9% in 1990.

Consumer spending habits

————– End of Excerpt ————-

What this means is that we’re spending more on two big categories — health care and education — that don’t make us feel richer. Health care, of course, is just maintenance. It’s like changing a car’s oil or fixing a broken transmission, which only restores the status quo rather than enhancing it. Education, meanwhile, is just school. When we’re in college, we don’t feel richer if tuition goes up. So to the extent that those things are getting more expensive, and fun things like eating in restaurants and buying new shoes become less frequent as a result, we feel poorer — or at least less free to indulge ourselves.

This is the opposite of what technology in particular and progress in general were supposed to bring about. As a society advances, it should get better at producing life’s necessities, freeing up capital for life’s joys and making most people feel both richer and more free. As John Maynard Keynes famously predicted in his 1930 essay “Economic Possibilities for our Grandchildren”, another century of capital accumulation and advancing science would make it possible for most people to satisfy their basic needs with minimal effort and then go off and have fun. Wrote the economist/poet:

For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.

We’re fifteen years short of the century that Keynes predicted it would take, but the goal seems to be receding rather than approaching. That’s frustrating for all the people who have to work harder than ever just to feed their families. And if it goes on much longer the result will be a very vigorous search for culprits — which will be entertaining, even if it doesn’t pay the doctor’s bills.

Visit John's Dollar Collapse blog here >


Patriot Act Vote Coming Up: Google joins Apple, Others Requesting Spying Controls

Courtesy of Mish.

The Patriot act expires in June, and anyone in their right mind would wish the entire concept to go away entirely. NSA Spying has a 100% perfect track record of failure.

Sadly, the answer to the question Would NSA Data Surveillance End With Patriot Act? is a resounding "No".

The National Security Agency would lose its legal justification for collecting data on Americans' phone and email activity if Congress does not reauthorize the Patriot Act by June 1, but privacy advocates are skeptical about whether that would mean the end of the controversial surveillance program.

President Barack Obama has called on Congress to pass a bill that would end the bulk surveillance program while keeping certain spying powers intact for national security reasons. The clock is ticking, however, as the NSA loses its legal authority for domestic surveillance provided by Section 215 of the Patriot Act in June. If Congress does not renew that provision then the Obama administration will not push to continue the program, although its absence would damage America’s national security, says Ned Price, a spokesman for the National Security Council.

“If Section 215 sunsets, we will not continue the bulk telephony metadata program,” Price tells U.S. News. “Allowing Section 215 to sunset would result in the loss, going forward, of a critical national security tool that is used in a variety of additional contexts that do not involve the collection of bulk data.”

 The NSA, however, could invoke other legal powers to continue the data collection program without Section 215 of the Patriot Act, says Harley Geiger, senior counsel for the Center for Democracy and Technology advocacy group. The government has also conducted bulk collection of email metadata in the past using Section 214 of the Patriot Act, for instance, which is also called the Foreign Intelligence Surveillance Act “pen trap statute,” Geiger says.

“The FISA pen trap statute does not have a sunset and would not be affected by a sunset of Section 215,” he says. “For these and other reasons, we believe that legislation to end bulk collection would be more effective than merely letting Section 215 sunset. However, we believe Congress should sunset Section 215 if effective reform is not possible.”

Passing surveillance reform may be difficult in a Congress controlled by Republicans, considering it failed last year while Democrats controlled the Senate. Senate Majority Leader Mitch McConnell of Kentucky is among the Republicans who say the NSA powers are necessary to ensure national security.

I will vote for the Freedom Act as long as it doesn’t include reauthorization of the Patriot Act,” Paul told U.S. News recently, adding that he will not vote to reauthorize Section 215.

Paul told U.S. News he will also partner with Sen. Ron Wyden, D-Ore., on a bill to amend the Patriot Act when it comes up for reauthorization.

A bill introduced on Tuesday by Reps. Thomas Massie, R-Ky., and Mark Pocan, D-Wis., would abolish legal powers for surveillance programs, including the entire Patriot Act and the FISA Amendment Act of 2008.

Google joins Apple, Others Requesting Spying Controls

CNET reports Google joins Apple, others in calling for spying controls, as Patriot Act vote nears. …

Continue Here


5 Things To Ponder: Random Musings

Courtesy of Lance Roberts via STA Wealth Management

This weekend's reading list is a bit of a hodge-podge of reads on a variety of different topics. However, before we get into it I wanted to address an interesting statement by the Atlanta Federal Reserve President Dennis Lockhart who Thursday:

"Atlanta Federal Reserve Bank president Dennis Lockhart said on Thursday there was little risk of a misstep that would force the Fed to lower rates once it begins raising them.

The economy is in solid shape to weather the upcoming turn to tightening monetary policy Lockhart, said at an investment education conference in Detroit.

"'Conditions are pretty solid,' said Lockhart, who regards an initial rate hike at the June, July or September Fed meetings as a high probability. 'I take the decision pretty seriously,' Lockhart said. 'Once we start, I want to be able to move deliberately towards higher rates.'"

This is a pretty common meme among the majority of economists as of late, and particularly surprising coming from the Atlanta Fed President considering:

  1.  The U.S. is currently more than 6-years into an economic recovery (long by historic standards), and;
  2.  The Atlanta Fed's own GDPNow forecast is pegging a near 0% growth rate for the first quarter.

But let's take a look at the decline in durable goods orders this week. Paul McCulley, the former legendary economist and fund manager at PIMCO, viewed durable goods a bit differently than the mainstream analysis generally given. He preferred the year-over-year trend of the 3-month moving average of core CAPEX orders as an indicator of broader economic activity over the next few quarters. If you are currently "bullish" on the direction of the US economy, you may want to take a closer look at the chart below.


Secondly, core CAPEX has been negative on a monthly basis for 6-consecutive months. Since 1992, there have only been 5-instances where core CAPEX orders have been negative for 4-or more consecutive months. The first three instances were leading indicators of future recessions. In 2012, there were 6-consecutive months of decline as the economy got very close to a recession but was saved by Central Bank interventions and the warmest winter in 65-year. The latest core CAPEX decline capped a second 6-month period as it appears that Q1 GDP will ring in close to zero.


I am not suggesting that the economy is about to slip into an immediate recession. However, I am suggesting that underlying economic strength in the U.S. is likely much weaker than headline statistics suggest.

Furthermore, as discussed Wednesday, the deterioration in underlying price momentum in the market is also raising other warning flags. To wit:

"…the price of the market currently remains in a positive trend but the underlying momentum and strength measures are showing signs of a negative divergence. This suggests that while market prices are trending higher, the risks of a correction are currently rising as the 'supports' weaken.

The negative divergence of the markets from economic strength and momentum are simply warning signs and do not currently suggest becoming grossly underweight equity exposure. However, warning signs exist for a reason, and much like Wyle E. Coyote chasing the Roadrunner, not paying attention to the signs has tended to have rather severe consequences."

So, with that being said, let's get to our weekend reading list.

1) The Meaning Of Liquidity by Howard Marks via Oaktree Capital

"Sometimes people think of liquidity as the quality of something being readily saleable or marketable. For this, the key question is whether it’s registered, publicly listed and legal for sale to the public. "Marketable securities" are liquid in this sense; you can buy or sell them in the public markets. "Non- marketable" securities include things like private placements and interests in private partnerships, whose salability is restricted and can require the qualification of buyers, documentation, and perhaps a time delay.

But the more important definition of liquidity is this one from Investopedia: 'The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.' (Emphasis added) Thus the key criterion isn’t 'can you sell it?' It’s 'can you sell it at a price equal or close to the last price?' Most liquid assets are registered and/or listed; that can be a necessary but not sufficient condition. For them to be truly liquid in this latter sense, one has to be able to move them promptly and without the imposition of a material discount. "

Read Also: Bond Market Fears Liquidity Crunch Repeat by David Oakely via FT

2) There Is No Bubble In The Bond Market by Brad DeLong

"When we call something a "bubble" we attach a number of meaning-tags to it. Here are three:

  • Bubbles are collective irrationality.
  • Bubbles pop.
  • Owning bubbly assets entails large long- and fat-tailed risks.

Safe bond prices are certainly elevated?—?more than elevated: absurd. The Federal Reserve has squeezed the term premium by shrinking the supply of long-term bonds and put the underlying fundamental future short rate to which the term previous applied on a very low path.

But does holding bonds entail accepting large long- and fat-tailed risks? Only if you must sell your bonds in the future. If you have the option to hold them to maturity, your risks are bounded and very small. What you are complaining about is not risk, but rather lousy expected return. And even if you cannot hold them to maturity, the fact that others can hold them to maturity provides a pool of demand that limits how far bond prices can crash."

Read Also: A Bond Bubble Is Very Different From A Stock Bubble by Cullen Roche via Pragmatic Capitalist

And Read: Student Loan Forgiveness Is A Non-Solution via The Libertennial

3) The Current Boom Will Turn To Bust by Henry Blodget via Business Insider

"Bubbles" are rare, extreme events in which investment activity and valuations temporarily deviate wildly from historical trends — and then crash back down to the trend line in a colossal collapse.

"Booms," meanwhile, are far more common. They also see ever-increasing investment activity and valuations, and they also end in mean-reversion ("busts.") But the magnitude of the dime-a-dozen boom-bust cycle is nothing like the peak and valley that you experience in a bubble."


But Also Read: This Is Nothing Like The Market Back In 2000 by Brett Arends via MarketWatch

4) Gundlach – Don't Bet On Higher Rates by Robert Huebscher via Advisor Perspectives

"Gundlach reiterated his belief that raising rates would be a mistake due to the weak global economy and low inflation. Even if the Fed were to take that step, he said, it would eventually be forced to reverse and lower rates, as several European countries have had to do after attempting premature rate increases.

'I’m afraid that the Fed is intent on being a blockhead and raising interest rates against this backdrop,' he said, 'and further strengthening the dollar, weakening the economy, weakening corporate earnings, and basically having to reverse policy.'

Demographic problems and the growth of the federal deficit will push rates higher, he believes, but that might not occur for another five years. Gundlach also boldly predicted an inglorious fate for Detroit’s automakers."

Read Also: Why Yellen & The Feds Are Bubble Blind by David Stockman via David Stockman's Contra Corner

5) Here's Why We "Appreciate" Home Sales by Lee Adler via Wall Street Examiner

"The problem is that ZIRP suppresses inventory. Owners who would ordinarily cash out at a certain point in their lives, don’t, because the opportunity cost is too high. Their house is worth more to them as an asset, than cash would be, so they hold on to their properties rather than liquidate. As a result, listing inventory stays near record lows. Low inventories mean that prices will continue to “appreciate” even though demand remains modest."

Read Also: The Fed's Artifical Steepening Of The Yield Curve by Jeffrey Snider via Alhambra Partners

Bonus Read: Barclay's Says Oil Bottom Not In


Barclays sees prices bottoming somewhere in the mid-$30s for West Texas Intermediate crude oil and in the low- to mid-$40s for Brent and expects "further widening in oil market contangos as more expensive storage needs to get incentivised." 

Over the last few months, the number of oil rigs in use in the US has collapsed, but Barclays doesn't think that enough production has yet come offline for this to impact production. Barclays writes that:

"The decline in US rig counts has been rapid and substantial (now down by almost 50% from its October 2014 high), but is unlikely to be an accurate signal of future production trends because usually when falling prices force rigs to decline it is those that are least productive that get cut first, while surviving rigs tend to be left on the most productive areas."

Bonus Video: Daniel Kahneman On The Riddle Of Experience And Memory

"Using examples from vacations to colonoscopies, Nobel laureate and founder of behavioral economics Daniel Kahneman reveals how our "experiencing selves" and our "remembering selves" perceive happiness differently. This new insight has profound implications for economics, public policy — and our own self-awareness."

Via Ted Talks

"Man looks in the abyss, there's nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss." – Lou Mannheim, Wall Street

Have A Great Weekend.

In the News, 3-27-15

From Bloomberg 

Economy in U.S. Grew 2.2% in Fourth Quarter on Consumer Spending — The U.S. economy expanded at 2.2 percent annualized pace in the fourth quarter, led by the biggest gain in consumer spending in eight years.

A Physicist Is Building a Time Machine to Reconnect With His Dead Father  — The hour is late.

His scientific papers were published years ago, filled with equations wrought by the energies of a younger man. But at 69, theoretical physicist Ron Mallett still goes to work every day to build a time machine based on his most elegant construct…

[Photo: American theoretical physicist Dr. Ronald Mallett pours dry ice into a ring laser at a laboratory at the University of Connecticut on March 23, 2015. Photographer: Scott Eisen/Bloomberg]

If getting trapped in a time warp doesn't scare you, how about pirates and bombs?

Add Bombs to Worries for Ships Dodging Pirates, Terror Off Yemen — When it comes to world trade, a 17-day shortcut trumps terror, piracy and now bombs.

Best Equity Mutual Fund

The Complete Bull Vs. Bear Debate on Whether Biotech Is in a Bubble — Which side are you on?

The battle as to whether or not we are in a Biotech bubble is raging on, and Credit Suisse analyst Ravi Mehrotra is laying out his thoughts on what is going to drive the sector moving forward. 

There has been much debate over whether we are in a Biotech bubble, especially since the Fed warned last year last the sector may be overstretched. Yet, these stocks are continuing to make new highs and are now up five years in a row, something that no other sector has ever done before

With the Biotech sector significantly outperforming other areas of the market, people are continuing to ask if the sector is in a bubble. 

Credit Suisse is out with a note this morning that takes a closer look at this debate. 

"We are in completely unprecedented times for the stock performance of the biotech sector," the note says, going on to point out that since the start of 2011 the NYSE Biotech Index has delivered 204 percent while the S&P 500 is up 64 percent in that time frame, and it's also up nearly 400 percent since the previous peak reached during the dotcom bubble of 1999 and 2000.

Google to Develop Robot Surgical Devices in Pact With J&J— Google Inc. is joining forces with Johnson & Johnson to develop a robotic-assisted surgical program, moving into a growing field of medicine as the search-engine giant expands its health-care investments.

Should You Let Google Be Your Bartender? — We test eight quick-search recipes.

Google knows everything, right? Right?  

Now when you type a cocktail's name into the search engine, you get a list of ingredients and a recipe in addition to your normal search results. That's fine and dandy—assuming the instructions are on point. Nobody should suffer a bad cocktail. I shudder at the thought.

ConocoPhillips Hires Scotiabank to Sell Some Canadian Assets — ConocoPhillips, the third-largest U.S. energy producer, has hired the Bank of Nova Scotia to advise on the sale of about 20 percent of its production in Western Canada outside of the oil sands, according to the bank’s website.

Cut Government Debt Creatively, Reinharts and Rogoff Advise in New Study — It's not just companies like Google and Facebook that need to tap creativity to thrive.

Governments laboring under sovereign debt burdens should do so too, suggests a new Harvard Kennedy School research paper by Carmen M. Reinhart, Vincent Reinhart and Kenneth Rogoff.

During the financial crisis, governments piled up so much debt that they're now forced to think outside the box about how to get rid of the burden. Really, they should have considered the broader swath of options all along, their research suggests.

Carnival Earnings Beat Estimates Amid Lower Fuel Costs — Carnival Corp., the world’s largest cruise-line operator, posted first-quarter earnings that beat analysts’ estimates, benefiting from lower fuel costs and higher passenger spending. The shares jumped.

SocGen Says Hogs Will Rally Even as Analysts Expect Bigger Herd — Hog futures are poised to rally in the second quarter as gains in demand mute the impact on prices of an expanding herd, which analysts predict will be the biggest since 2008, according to Societe Generale SA.

Brazil’s Real Leads Global Declines as 2015 Contraction Expected — Brazil’s real led global declines as concern the economy will contract this year overshadowed a report Friday that indicated growth in the fourth quarter.

It's Almost Impossible to Buy a House in Dallas

Last year, Rick Smith put his family’s house in suburban Dallas on the market, hoping to find a new home close to better schools and the city’s downtown. Selling the old house was a snap; buying a new one wasn’t. In January the family moved to a town home in a rental community, and quickly found they weren’t the only family forced into renting. “If you drive around our community, you’ll see moving boxes stacked up in the garages,” he said. “No one wants to unpack, because they think they’ll be moving again soon.” (Continue) 

[Photographer: Ben Torres/Bloomberg]

From around the web

Business Insider reports, Crude oil prices surge as Yemen descends into chaos.

"Crude oil prices were surging on Thursday after news broke that the Saudi Arabian air force is bombing Houthi rebels in the country.

Saudi Arabia says it will do "anything necessary" to defeat the rebels, but the group took over an airport on Wednesday, and the President reportedly fled the country by boat." …

Screen Shot 2015 03 26 at 3.28.02 PM

 (Continue here.)

From TechCrunch, Amazon Goes After Dropbox, Google, Microsoft With Unlimited Cloud Drive Storage:

“Most people have a lifetime of birthdays, vacations, holidays, and everyday moments stored across numerous devices. And, they don’t know how many gigabytes of storage they need to back all of them up,” said Josh Petersen, Director of Amazon Cloud Drive, in a statement. “With the two new plans we are introducing today, customers don’t need to worry about storage space–they now have an affordable, secure solution to store unlimited amounts of photos, videos, movies, music, and files in one convenient place.” (Read more)

Zero Hedge asks, "Did Saudi Arabia Just Suffer Its Largest Foreign Capital Flight In 15 Years?"

The last few days have been almost the worst for the Saudi Arabian stock market in 4 years. Between low oil prices, a new King's big social welfare budget, and now "war," it appears this year's dead cat bounce from last year's exuberance is dying rather rapidly. However, what is perhaps even more troublesome for The Kingdom than the net worth destruction and potential blowback from instigating war against the Houthis is the fact that this month saw the largest drop in foreign curreny reserves on record (over 15 years) for the Arab nation… somewhat suggesting capital flight on a scale never seen before in one of the richest states in the world.  

Saudi stocks plunging…

(More here.)

Companies in streaming music, video, news publishing, social networks/messaging, and dating apps have been using a "freemium model," which introduces the problem of converting "free users" to paying subscribers.  Business Insider discusses this business model in Streaming music companies have had uneven success shifting ad-supported listeners to paid accounts

Streaming music companies have had uneven success shifting ad-supported listeners to more valuable paid monthly subscriptions, and this has created a drag on the entire digital music industry.

Paid-music streaming services account for a smaller share of revenue — and audience pool — than ad-supported versions.

We think penetration of paid subscription tiers have failed to achieve massive scale because the free ad-supported versions of the leading services — including Pandora internet radio, iTunes Radio, iHeart Radio, and Spotify — already offer deep music libraries. (Full article.)

Ironically, to get the full report, you'll have to take a trial to BI Intelligence. Your Satisfaction Is Guaranteed. 

Forbes writes, The Best Management Article Of 2014. You may be surprised to learn what Harvard Business Review found to be the most compelling article in area of management last year. 

Harvard Business Review has announced that Bill Lazonick is the 2014 HBR McKinsey Award winner for the best HBR article in 2014 for his brilliant, hard-hitting piece, “Profits Without Prosperity” (September 2014 HBR). Lazonick is a professor of economics at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness. 

In the article, Lazonick described the horrifying impact of massive stock buybacks: net disinvestment, loss of shareholder value, crippled capacity to innovate, destruction of jobs, exploitation of workers, runaway executive compensation, windfall gains for activist insiders, rapidly increasing inequality and sustained economic stagnation. Lazonick’s article explained with quantitative detail why buybacks are an economic, social and moral disaster.

The article revealed for instance that share buybacks weren’t done for the most part when stock prices were low: astonishingly, most of the big purchases came when the stock price was high. Why? “Because stock-based instruments make up the majority of executives’ pay, and buybacks drive up short-term stock prices.” These firms are engaged, the article said, in “what is effectively stock-price manipulation.” In September 2014, The Economist called them the “corporate cocaine.”

(Read more.)

Zero Hedge writes, China's Stock Bubble Leaves BNP Speechless: "What Happens Next Is An Unknown-Unknown." 

Earlier this month, we identified the reason why Chinese stocks have continued to rise in the face of overwhelming evidence that the country’s economy is decelerating quickly. While the first part of the 8-month run can be plausibly attributed to PSL, the furious buying that began in late November looks to be at least partly attributable to the fact that thanks to tighter regulations on lending outside the traditional banking system, China’s $2 trillion shadow banking complex needed somewhere to put cash to work and that somewhere turns out to be the giant bubble that is the SHCOMP. (Continue.)

According to Business Insider, it will be Hard to Find Apple Watch at Launch:

If you're planning on buying an Apple Watch, you might want to seriously consider reserving the specific model you want, 9to5Mac's Mark Gurman reports.

The inventory at most Apple Stores throughout the country will be heavily restrained, and Apple will be giving priority to those that reserve their watches ahead of time. 

In fact, one person at an Apple flagship store reportedly told Gurman that employees are being told to act as if there are no watches available for walk-in purchases. (Continue.)

Reuters reports, Japan PM Abe to address joint session of Congress.  "Prime Minister Shinzo Abe will address a joint meeting of the U.S. Senate and House of Representatives on April 29, becoming the first Japanese leader to do so." Abe is expected to focus on joint responses to China's recent assertive moves in the region. 

[Studies] at the world-leading Minnesota Center for Twin and Family Research suggest that many of our traits are more than 50% inherited, including obedience to authority, vulnerability to stress, and risk-seeking. Researchers have even suggested that when it comes to issues such as religion and politics, our choices are much more determined by our genes than we think. (More.)

The Bottom’s Not In-Why This Market Is Dumber Than A Mule

The Bottom’s Not In——Why This Market Is Dumber Than A Mule

Courtesy of David Stockman

They were trying to put in a bottom—–again! The sell-off earlier this week amounted to the sixth sizeable “dip” since November 20—-so the market’s ingrained reflex was back at work all afternoon, trying to scoop up the “bargains”.

But the roundtrip to the flat-line shown below is not a classic “wall of worry” and its not a “bottom” that’s being put in. This market is dumber than a mule, and the nation’s central bank and its counterparts around the world have made it so.

^SPX Chart

^SPX data by YCharts

The plain truth is that six years of torrential money printing and worldwide ZIRP have not happened with impunity. On the one hand, massive, sustained and universal financial repression caused an artificial growth and investment boom in much of the world, especially China and the EM, which has now run out of steam and is visibly and rapidly cooling.

There is probably no better proxy for the global investment boom than the spot price of iron ore because it captures China’s massive infrastructure construction spree and the waves of mining, shipbuilding, steel-making and construction materials spending that it set off all over the world. But this huge tidal wave has now crested, leaving behind the worst of both worlds——cooling demand and still expanding supply.

For the first time since around 1980, China’s steel consumption is projected to fall in 2015——with demand slumping from 830 million tons last year toward 800 million tons, and that is just the beginning as China’s credit-fueled construction frenzy finally comes to a halt. In fact, during the boom that took iron ore prices from a historic level of around $20-30 per ton to a peak of nearly $200 in 2011, China’s iron and steel capacity grew like topsy. Production capacity expanded from about 200 million tons at the turn of the century to upwards of 1.1 billion tons at present.

Yet this year’s decline of demand to around 800 million tons does not begin to reflect the coming adjustment. That’s because there is still a residual component of one-time demand in that number that is in no way sustainable. Even if the pace is slackening, the Chinese are still building high-rise apartments which will remain empty and airports, roads, rails and bridges that are hideously redundant. Eventually that will end because even the red capitalist rulers in Beijing are terrified of China’s towering mountain of debt——$28 trillion and still rising by hundreds of billions every month.

Yet underneath this one-time explosion of demand for steel, aluminum, copper, concrete and the rest of the materials slate is something called sell-through demand. The latter reflects the sustainable level of demand for replacement of long-lived assets like bridges and shorter-term durables like cars and appliances. In the case of steel, that sustainable “sell through” demand level could be as low as 500-600 million tons or hardly half of China’s steel production capacity.

The emerging global deflation has already brought the spot price of iron ore under $60 per ton—-or back to where the latest credit-fueled boom cycle commenced in March 2009.  The consequences of that are visible, among many other places, in Australia’s burgeoning depression and the slide of Brazil into its worst two-year economic slump since 1930-1931.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts

Yet there is still a long way to go because of the investment cycle time lag: New capacity to mine, transport and deliver water-borne iron ore is still surging because it was ordered years ago when the global boom appeared to be endless. So not only will iron ore prices continue to erode at the commodity level; their plunge is also a proxy for a similar excess downstream capacity to make steel and the coming flood of surplus or “dumped” supplies on the global market.

Today Bloomberg had an excellent update on the imports flooding into the US owing to the strong dollar and China’s rapidly weakening internal demand. From a level of less than 50 million tons annually two years go, the run-rate of China’s fire-sale steel exports is already above 100 million tons and heading much higher. As shown in the graph below, this has already caused the domestic steel industry utilization rate to plunge, eliciting a rising tide of lay-offs, plant closures and steel company profit warnings.

US Steel Capacity Utilization

And then the rolling adjustment will move downstream from steel to the fabrication and manufacturing industries. In short, there is an unprecedented global industrial deflation brewing that is the downside of the central bank driven boom. That is, we are now plunging into the crack-up phase of the great central bank monetary deformation. Indeed, the idea that the US is immune to this and that it has somehow decoupled from the global economy is downright farcical.

Perhaps that’s why yesterday’s extremely downbeat industrial order report came as such a shock to the talking heads. Self-evidently, they have been drinking the Fed’s Cool-Aid or they would have noticed long ago that we are not in any “recovery” worthy of the name. How could it be when real industrial orders are still 10% below their average pre-crisis level?

Real Durable Goods Orders Ex Aircraft and Defense - Click to enlarge


Real Durable Goods Orders Ex Aircraft and Defense 


Needless to say, there is plenty more evidence where that came from. In fact, the Atlanta Fed’s so-called “nowcast” of GDP is essentially a running tabulation of the “in-coming” data that eventually flows into the GDP report. With yesterday’s latest iteration of data, the outlook for Q1 is now down to 0.2%.


And this is why there is a big financial storm coming. The Fed and other central banks are now out of dry powder and credibility. The only thing happening at this point is a currency race to the bottom. They have no capacity whatsoever to arrest the epochal deflation that is gathering force all around the planet.

So here’s the buy the dip history during which the central banks destroyed price discovery, short sellers and economic sanity itself. They rendered the markets as dumb as a mule, capable of nothing more than reflexively buying the dips.

It will take awhile, but eventually the robo-traders will desist, the day-traders will be broke and the fast money will get short—–once it becomes clear that “escape velocity” was a myth, the global recession has arrived and the central banks are firing blanks.

Then the bottom will be in, albeit a long way down from here.

^SPX Chart

^SPX data by YCharts


Earnings “Beat the Street” Manipulation Underway as Profit Warnings Mount

Courtesy of Mish.

Of S&P 500 companies providing first-quarter outlooks, MarketWatch reports 84% have been negative as Profit Warnings Pile Up.

Ahead of the start of earnings reporting season, which unofficially kicks off when Alcoa Inc., reports results on April 8, about 84% of the companies that have provided first-quarter outlooks gave negative outlooks. That’s above the 81% that warned Q1 2014, and the five-year average of 68%.

I believe that yellow highlight I added should say Q3. More importantly, it would have been nice for MarketWatch to actually link to FactSet because it contains some interesting charts and analysis.

Earnings Insight

Let’s dive into the FactSet Earnings Insight Report for first quarter of 2015.

Key Metrics

  • Earnings Growth: For Q115, year-over-year earnings for the S&P 500 are projected to decline by 4.6%. If the index reports a year-over-year decline for the quarter, it will be the first time since Q 3 2012 (-1.0%).
  • Earnings Revisions: On December 31, the estimated earnings growth rate for Q1 2015 was 4.2%. All ten sectors have lower growth rates today (compared to December 31) due to downward revisions to earnings estimates, led by the Energy sector.
  • Earnings Guidance: For Q1 2015, 85 companies have issued negative EPS guidance and 16 companies have issued positive EPS guidance.
  • Valuation: The current 12-month forward P/E ratio is 16.7. This P/E ratio is above the 5-year (13.7) average and the 10-year (14.1) average for the index.
  • Earnings Scorecard: Of the 16 companies that have reported earnings to date for Q1 2015, 14 have reported earnings above the mean estimate and 10 have reported sales above the mean estimate.

Earnings vs. Price

Q1 2015 Earnings Season: By the Numbers Overview

Analysts and corporations continue to lower expectations for earnings for the S&P 500 for the first quarter. On a per-share basis, estimated earnings for the first quarter have fallen by 8.2% since December 31. This is the largest decline in the bottom-up EPS estimate for a quarter since Q1 2009.

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Misunderstanding “Peak Gold”; Gold About to Run Out?

Courtesy of Mish.

Is gold about to “run out”? The correct answer to that question is the likelihood of that happening is precisely 0%.

However, that is not the conclusion one would come to from the Zerohedge headline Peak Gold? Goldman Calculates There Is Only 20 Years Of Gold Supply Left.

Zerohedge supplied a couple of charts.

Peak Gold

Diamonds Aren’t Forever

Gold About to Run Out?

Zerohedge comments …

If the “known reserves” of gold plunge in the coming decade, no matter how many gold futures and GLD short sales are conducted by the BIS, the price will have to go up, and it will go up high enough to where a new surge of gold miners will come online and find thousands of new tons of gold reserves around the globe.

Unless they don’t, and Goldman is correct that “peak gold” may have arrived. This will be even more true if over the coming years the long overdue fiat economic panic finally washes over the globe, and a revulsion toward central bank policies forces a scramble into gold whose value (if not price since fiat currencies will be redundant) soars.

The answer is unclear, but what is certain is that like the price of oil over the past decade and until last fall when price discovery finally became somewhat credible, what happens in the physical realm has absolutely zero marginal impact on the price of commodity which has about 100 ounces in deliverable paper contracts for every ounce in underlying. It will be only after the gold price distortions via the derivative market are eliminated that such trivial price-formation forces as supply and demand are once again relevant.

Gold Not About to Run Out

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SNB Warns of “Temporary Deflation”, Promises Further “Unconventional Measures” Including Forex Interventions to Achieve “Stability”

Courtesy of Mish.

Unconventional Yields

Swiss Bonds are negative out to 10 years. They briefly went negative out to 15 years in the wake of the sudden removal of the Swiss National Bank peg to the euro back on January 13 as shown in the following chart.

Swiss 15-Year Bond Yield

Yield on 20-year Swiss bonds plunged to 0.10% on January 13 as well. Today, you can get 0.19% for 15 years or 0.31% for 20 years. That’s how crazy things are.

SNB Warns of “Temporary Deflation”

Please consider SNB Warns of ‘Difficult Times’ as Currency Move Hits Home

Switzerland is facing “difficult times” and a short period of deflation following January’s abrupt unwinding of a currency peg, one of the Swiss National Bank’s most senior policy makers said on Thursday night.

The comments from Fritz Zurbrugg, one of three permanent members of the SNB’s governing board, show the impact of the January 15 currency move on an economy often regarded as a safe harbour during the eurozone crisis. 

The Swiss franc has shot up in value since the removal of the peg that capped it at SFr1.20 per euro, making Swiss exports and Swiss holidays more expensive. A euro is now worth SFr1.05.

Mr Zurbrugg said that the fall in prices that Switzerland faces is “temporary” and would not threaten price stability in the medium term. “A damaging deflationary spiral is not expected.”

Swiss inflation is already in negative territory, with prices falling 0.8 per cent in February — worse than the 0.3 per cent fall in prices across the eurozone in the month….

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3 Things: No Money, Wall Street’s Big Scam, Bottom 80%

Courtesy of Lance Roberts via STA Wealth Management

Much of the commentary from the more liberal leaning media has continued to tout that the rise in asset markets over the last few years are clear evidence of economic prosperity in this country. However, is that really the case?

In order for rising asset prices to be reflective of overall economic prosperity, the "wealth" generated by those rising asset prices should impact a broad swath of the American populous. Let's take a look to see if that is the case.

"Mo Money" Or No Money

In September of last year, I discussed the Federal Reserve's 2013 Survey of household finances which showed a shocking decline in the median value of net worth of families across all age brackets.

While the mainstream media continues to tout that the economy is on the mend, real (inflation-adjusted) median net worth suggests that this is not the case overall.


However, Shane Ferro from Business Insider posted a stunning piece on what has happened to American families as asset prices have surged higher. To wit:

"Nearly half of American households don't save any of their money.

If it isn't obvious, this has a broad range of implications. People who don't save won't have any buffer should the economy turn, and they lose their jobs. Longer term, people who don't save won't have the capacity to retire. It's not good."


What is clear is that rising asset prices, which have been induced by the Federal Reserve's monetary policy and suppression of interest rates, has indeed benefitted those that have assets to invest.

The findings are strikingly similar to the U.S. Federal Reserve survey from last year.

"'Savings are depleted for many households after the recession,' it found. Among those who had savings prior to 2008, 57% said they'd used up some or all of their savings in the Great Recession and its aftermath. What's more, only 39% of respondents reported having a 'rainy day' fund adequate to cover three months of expenses and only 48% of respondents said that they could not completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money."

In other words, the rich have gotten richer as rising asset prices have been a major benefit to stock-option based executives who have raked in billions. However, for the majority of the working class, it has remained primarily a struggle to survive much less actually save.

401k Plans – Wall Street's Biggest Scam

Beginning in the 80's and 90's, Wall Street lobbied heavily to change the rules to allow companies to scrap pension plans in exchange for employee contribution plans known as 401k plans. Supposedly, this was to be a grand bargain for individuals to take control of their own financial futures.

This was a HUGE win for Wall Street as companies such as Vanguard, Fidelity and others gathered trillions of dollars in assets from company employees who contributed to those plans. It was also a win for companies which benefitted from the reduction in costly contributions required by pension plans which boosted net incomes and compensation to business owners and executives.

It all worked out great….right? Turns out, not so much for individuals.

According to a recent study, the results of shifting the responsibility of retirement savings, not to mention the risks of investing, to the individual has been grossly unsuccessful. To wit:

"$18,433 is the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute.

That's the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans' top financial worry, according to a recent Gallup poll.

But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.

"'In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die," said Teresa Ghilarducci, a labor economist at the New School for Social Research.'"

Of course, for those in the top-10% of wage earners – "it's all good."


The Problem For The Bottom 80%

One of the recent diatribes by the media was that falling gasoline prices would spur consumption. As I have repeatedly discussed, this is far from the truth as shifting spending from one area of the economy to another does NOT increase consumption but is rather like "rearranging deck chairs on the Titanic."

The only thing that ultimately increases consumption, or savings, is an increase in incomes. Unfortunately, for roughly 80% of American's, wage growth, and actual employment, have been an elusive reality.

When it comes to actual employment, it is hard to rationalize the mainstream media's obsession with the U-3 unemployment rate. Particularly, when it is clearly being obfuscated by the shrinkage of the labor force. As I wrote in August of 2013:

"While the Fed could certainly claim victory in achieving their 'full employment' target; the economic war will be have been soundly lost."

The Federal Reserve did ultimately achieve their target unemployment rate. However, as I have shown previously, when it comes to the primary 16-54 age group that should be working, it is hard to suggest that almost 95% of working age American's are gainfully employed.


Even more critical is the fact that for roughly 80% of American's that are working, wage growth has been non-existent. Tyler Durden at ZeroHedge wrote:

"The important math: production and non-supervisory employees, those not in leadership positions, represent 80% of the employed labor force. This is important when looking at the next chart which show the annual increases in hourly earnings just for production and nonsupervisory employees.

It is as this point that we ask that all economists avert their eyes, because it gets ugly:


As the BLS reports, not only is the annual wage growth of 80% of the work force not growing, but it is in fact collapsing to the lowest levels since the Lehman crisis!

But if the wages of the non-working supervisory 80% of the labor population are tumbling while all wages are flat that must mean that the wages of America's supervisors, aka "bosses" are…


The chart below shows what the implied annual change in supervisor hourly earnings has been since the start of the second Great Depression. Note the recent differences with the chart immediately above.


And there, ladies and gentlemen, is your soaring wage growth: all of it going straight into the pockets of those lucky 20% of America's workers who are there to give orders, to wear business suits, and to sound important.

Yes – wages are growing, for those who least need wage growth, the 'people in charge.'"

Despite many claims that the "economy" has recovered from the financial crisis, as evidenced by a surging stock market, a closer look at the majority of Americans suggests otherwise. The implications are important as the burdens on social welfare continue to swell, and the ability to pay for those entitlements becomes more questionable.

For Robots Only: Amazon Sponsored Contest; Soft Fingers Needed

Picture from Amazon Picking Challange

Courtesy of Mish.

Amazon is sponsoring a robot warehouse automation contest to see to who can pack the most boxes in the least amount of time without dropping any packages or crushing anything delicate such as cookies.

In the contest, in which human workers are not eligible to apply, the robots will have to work without any remote guidance from their creators.

Please consider the MIT Technology Review, Amazon Robot Contest May Accelerate Warehouse Automation.

Packets of Oreos, boxes of crayons, and squeaky dog toys will test the limits of robot vision and manipulation in a competition this May. Amazon is organizing the event to spur the development of more nimble-fingered product-packing machines.

Participating robots will earn points by locating products sitting somewhere on a stack of shelves, retrieving them safely, and then packing them into cardboard shipping boxes. Robots that accidentally crush a cookie or drop a toy will have points deducted. The people whose robots earn the most points will win $25,000.

Amazon has already automated some of the work done in its vast fulfillment centers. Robots in a few locations send shelves laden with products over to human workers who then grab and package them. These mobile robots, made by Kiva Systems, a company that Amazon bought in 2012 for $678 million, reduce the distance human workers have to walk in order to find products. However, no robot can yet pick and pack products with the speed and reliability of a human. Industrial robots that are already widespread in several industries are limited to extremely precise, repetitive work in highly controlled environments.

Pete Wurman, chief technology officer of Kiva Systems, says that about 30 teams from academic departments around the world will take part in the challenge, which will be held at the International Conference on Robotics and Automation in Seattle. In each round, robots will be told to pick and pack one of 25 different items from a stack of shelves resembling those found in Amazon’s warehouses. Some teams are developing their own robots, while others are adapting commercially available systems with their own grippers and software.

The challenge facing the robots in Amazon’s contest will be considerable. Humans have a remarkable ability to identify objects, figure out how to manipulate them, and then grasp them with just the right amount of force. This is especially hard for machines to do if an object is unfamiliar, awkwardly shaped, or sitting on a dark shelf with a bunch of other items. In the Amazon contest, the robots will have to work without any remote guidance from their creators.

“We tried to pick out a variety of different products that were representative of our catalogue and that pose different kinds of grasping challenges,” Wurman said. “Like plastic wrap; difficult-to-grab little dog toys; things you don’t want to crush, like the Oreos.”

While the Amazon challenge might seem simple, Saxena believes it could quickly make an impact in the real world. “If robots are able to handle even the light types of grasping tasks the contest proposes,” he says, “we could actually start to see a lot of robots helping people with different tasks.”

The preceding MIT review describes the 2015 ICRA Contest May 26-30 in Seattle.

2014 Participant Video

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Damn the Reports, Full Speed Ahead; Recession Overdue; Good Time to Normalize Rates?

Courtesy of Mish.

Here's one for the I'll believe it when I see it category: Fed Officials say Rate Hike Plan Intact Despite Weak U.S. Data.

In separate events in Frankfurt and Detroit, St. Louis Fed President James Bullard and Atlanta Fed President Dennis Lockhart said U.S. monetary policy might need to be adjusted in light of the economy's steady improvement since the 2007-2009 financial crisis.

"Now may be a good time to begin normalizing U.S. monetary policy so that it is set appropriately for an improving economy over the next two years," Bullard said at a conference in the German financial hub.

The challenge now, Lockhart said, is to sort out whether recent weakness in exports, manufacturing and capital investment indicate the start of an economic slowdown or other temporary factors such as the soaring value of the U.S. dollar.

Lockhart said he is confident for now that the weakness is "transitory," and still regards it as highly likely that the Fed will raise rates at either its June, July or September meetings.

"We're still on a solid track … The economy is throwing off some mixed signals at the moment and I think that is going to be passing or transitory," Lockhart said in an interview with CNBC from a Detroit investment conference.

"In the beginning when the dollar declined I was prepared to, to some extent, dismiss the influence of the dollar as being not great because our economy is not so export-dependent, but I'm upgrading it as a factor to watch," he said.

Totally Clueless

In simple terms, Lockhart may as well have said that he is "totally clueless."

We are going on 7 years of economic expansion.

The San Francisco Fed has an interesting report on the Duration and Timing of Recessions.

NBER records show that, over the period from the mid-1940s until 2007, the average recession lasted 10 months, while the average expansion lasted 57 months, giving us an average business cycle of 67 months or about 5 years and seven months. However, there has been considerable variation in the length of business cycle expansions and contractions in the past.

The shortest recession between the mid-1940s and 2007 lasted only six months, from January to July 1980. The two longest recessions during the period lasted 16 months each, one extending from November 1973 to March 1975, and the other from July 1981 to November 1982. In both of these periods there was a noticeable decline in real GDP.

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Following A 1-Week 17% Client-Muppeting, Goldman Removes Sandisk From Conviction Buy List

Courtesy of ZeroHedge. View original post here.


If you liked it at $83, you'll love it at $66… is apparently the message from Goldman Sachs as last week's transition of Sandisk to the company's "Conviction Buy" list has left clients with a Cramer-esque muppet-hole of around 17% (and rising). One wonders if it is still a conviction buy… or if Goldman should be convicted for selling it to clients…

Goldman on March 17th…

We add SanDisk to the CL given our increased confidence in 2015 S/D and attractive valuation (7% FCF yield) post the pull-back (-18% YTD vs. the SOX +2%).

We see a 34% total return (vs. the semi median of -3%) to our 12-month, $106 price target on:

1) Tight 2015 NAND S/D. Supply: 2H14 NAND SPE orders were very low, implying reasonable near-term supply. Demand: Our checks at MWC suggest the iPhone 6 has helped drive higher NAND per phone at other OEMs.

2) We expect gross margins to expand 400 bps by 4Q15 from the weaker yen, mix, and cost reductions.

3) There could be longer-term upside from SanDisk’s new hyper-scale all flash array product.



We remove SanDisk from the Conviction List post the negative preannouncement this morning.

Our positive call has clearly been wrong and the timing was particularly poor.

SanDisk negatively revised guidance for the second straight quarter, again due in part to company specific issues. We believe execution will need to improve for several quarters in order for the multiple to re-expand. In addition, the catalysts we identified (such as the May analyst day) no longer hold.

Since added to the Conviction List on 3/10/15, using the intraday price, SNDK is -17% (vs. the S&P +1%).

*  *  *


Three Triggers That Will Send Oil Crashing Again

Courtesy of Charles Kennedy of

Oil prices bounced back on March 24 on a sliding U.S. Dollar, and then again overnight on Middle East turmoil, but the pain may not be over yet.

Oil storage capacity continues to deplete. Storage levels at Cushing, Oklahoma, home to the crucial WTI benchmark, are at record levels. As of March 13, Cushing oil inventories hit 54.4 million barrels, the highest ever, according to the Energy Information Administration. That means that Cushing’s storage is now 77 percent full, up from just 27 percent in October 2014. The glut of oil has led to a flood of crude being diverted into storage tanks. As storage nears capacity, it becomes more likely that prices could drop significantly below current levels. That, of course, depends on if drillers cut back production enough to slow the storage build.


Yet another reason to suggest that oil prices could fall over the next two to three months is the annual planned maintenance that takes place at many U.S. refineries. Spring maintenance often leads to a significant volume of refining capacity temporarily closed down for several months. As that occurs, demand for domestic crude in the United States will decline, potentially pushing down prices. That also would force more output into storage, again exacerbating the shrinking ability for U.S. storage to handle more oil.

WTI could drop to $35 per barrel in the coming months, and Brent may fall to just $51.30 per barrel, according to projections from Facts Global Energy and Societe General.

The predictions echo those made by Goldman Sachs earlier this month, which forecasted oil prices declining to $40 per barrel. Goldman cited weak demand coming from Japan and Korea, which could rely more and more on LNG to offset oil in the electric power sector. Cutting even deeper into oil demand is the possibility that Japan will restart two nuclear reactors, easing the island-nation’s dependence on imported oil to meet power demands.

A renewed bout of weakness in the oil markets, notwithstanding this week’s price gains, was further backed up by comments from the Saudi Arabia’s OPEC governor Mohammed al-Madi, who said on March 22 that a return to $100 per barrel would be hard to reach. Saudi Arabia’s Oil Minister Ali al-Naimi reiterated that position, blaming non-OPEC producers for their unwillingness to cut back on production. He said that OPEC will not do it alone, and even revealed the fact that Saudi Arabia recently boosted its oil production to 10 million barrels per day. “The production of OPEC is 30 percent of the market, 70 percent from non-OPEC…everybody is supposed to participate if we want to improve prices,” al-Naimi said.

Read also: 8 Mega Trends by Oil & Energy Insider Analysts: 8 OIL & GAS INDUSTRY MEGA-TRENDS AND HOW TO PROFIT FROM THEM