Archives for April 2015

One Bubble at a Time: 3D-Printing Stocks Implode

By Wolf Richter at Testosteronepit (see also

3D printing popped on the scene a few years ago, and soon it was everywhere. The media were raving about it. Companies were formed and attracted VC money, and the hype bloomed, and soon IPOs of even the tiniest outfits flew off the shelf in the US and Europe. Valuations soared, and everyone was in heaven. Even The Economist jumped on the bandwagon with its article, “A Third Industrial Revolution.” A new world had begun.

But not everyone was a true believer. Among these unwelcome detractors and party poopers was Terry Gou, founder and president of Foxconn, one of world’s largest electronics manufacturing companies. It makes the iPhone and other gadgets. In June 2013, when the Taiwanese media pushed him on 3D printing, he retorted, “3D printing is a gimmick” with no “real commercial value.”

Foxconn has been using 3D printing for nearly 30 years, he said. But the technology wasn’t suitable for mass production. You could print a phone, he said, but it would be a useless phone because the technology could not assemble electronic components. That process still required humans or specialized machines.

The modernization of 3D printing didn’t mean “the advent of a third industrial revolution,” he said, debunking The Economist. It was just one of many useful technologies.

His insights were too mundane for the money that went looking for a spiritual place to go. Terry Gou, ultimate industry insider, was ignored (even though I wrote about it at the time, ha!). And valuations skyrocketed.

But at the end of 2013, the phenomenal bubble began to hiss hot air. And since then, it has been tough.

On Wednesday, Stratasys (SSYS), the largest player in the space, warned on revenues and earnings, after having already warned three months ago. For the year, it now expects revenues of $800 million to $860 million. Analysts expected $943 million. Its loss, stuffed with all kinds of write-offs, could reach $245 million, or $4.79 per share. It would be twice as large as its loss in 2013 and 10 times larger than its loss in 2012.

It blamed the “decline in relevant capital spending… particularly in North America”; “a slower than expected channel ramp up” in Asia; and the usual suspects, such as the strong dollar.

Its flagship product, MakerBot – “leading the next industrial revolution,” the company said not long ago – is in deep trouble. Sales plunged 18%. There will be an impairment charge of up to $200 million. Job cuts have already been launched. Capital expenditures and operating expenses will be slashed. Shares plunged 22% on Wednesday and another 6% today, to $37.45, down 73% from their peak at the end of December 2013.

The second largest player, 3D Systems (DDD), is facing a similar scenario. At its peak in early January 2014, the company was worth over $10 billion. Its shares traded at 72 times hoped-for forward earnings. Those hoped-for earnings have since crashed. While revenues increased by 27% to $654 million, profit slumped 73% to $11.6 million.

So it gets worse. On April 24, 3D Systems warned on its outlook, predicting a net loss “in the range of $0.13 per share to $0.15 per share.” The company was “surprised and disappointed by the abrupt interruption in customer demand late in the quarter.” It blamed “macroeconomic pressures,” the dollar, and among other culprits, “the aftershock of lower oil prices,” which “caused the majority of its aerospace, automotive and healthcare customers to curb new printer purchases during the quarter and curtail their materials and service purchases.” Its shares trade at $25.10, down 74% from their peak in early January 2014.

These top two guns are followed in the distance by a gaggle of tiny outfits in the US, Europe, and elsewhere.

There’s Materialise (MTLS). Revenues in 2014 grew 18% to €81 million. Net profits plunged 45% to €1.8 million, but at least it’s a profit. After it went public last summer in the US, its stock soared to a high of nearly $15 a share, then bunny-hopped down 50%.

Then there’s ExOne (XONE) with $44 million in revenues in 2014, up 10%, generating $22 million in red ink. Its shares topped out in August 2013 at $68.50 and have since crashed 80%.

Sweden-based Arcam (ARCM) saw revenues grow 70% to $40 million in 2014. It’s actually profitable. After a parabolic ascent, its shares peaked in November 2013 at 1,073 Swedish Krona but have since plunged 88%.

Germany’s SLM Solutions (XETRA: AM3D), which is into metals-based 3D printing, came in with €36 million in revenues, up 55%, but booked a $5 million net loss. Its shares peaked at €22 in July 2014 shortly after going public and have since dropped only 20% – “only” because that’s a miracle in this space.

Alphaform (ETR:ATF), a German prototyping service, with $30 million in sales and over $3 million in net losses, peaked at nearly €4 per share in Feb 2014 and has since dropped 36%.

Voxeljet (NYSE:VJET), with $20 million in revenues and $5 million in losses, spiked to $59 a share in November 2013, then plunged 86%.

They get smaller as you go, including such stalwarts as Graphene 3D Lab (GPHBF), with a great name, no sales, and only losses. It went public on a wing and a prayer last September while it still could as the bubble was already imploding. Shares made it up all the way to $2.12 but then quickly skittered down 71%.

You get the idea.

After having totally slept through the bubble, even Hewlett-Packard (HPQ) woke up and wants to muscle into the space with some 3D printing products of its own to goose its shares with the “third industrial revolution.” That should be fun.

Manias, like the 3D-printing stock bubble, do something funny to the human brain. Valuations don’t follow rational concepts. Instead, hocus-pocus prevails. New metrics are invented. Conversations over beer or cocktails go haywire. The media love to reproduce the hype without asking questions. Share prices are whipped up by Wall Street and the VC community because it makes them rich. But when these folks exit, the big wealth transfer begins, from those who’re bamboozled into buying the shares to those who dump them. Many billions of dollars have already been transferred. And the bloodletting doesn’t appear to be over.

Other companies too are struggling with crummy revenues and earnings. But heck, they’re redoubling their efforts to get their stocks up. Read… Record Financial Engineering Will Goose Stocks: Goldman

LinkedIn Mania Over? Shares Plunge 21% After Hours on Earnings Miss

Courtesy of Mish.

It's tough predicting the end to manias. Tonight I ponder a 21% plunge in extended hours trading in LinkedIn. Is the mania over?

Please consider LinkedIn Plunges as Second-Quarter Forecast Misses Estimates.

LinkedIn Corp.’s shares plunged as much as 27 percent after the company delivered quarterly revenue that missed analysts’ estimates for the first time, shaking confidence in a historically stable business plan.

The professional-networking website also forecast sales that missed projections for the second quarter and cut its guidance for annual revenue, citing the strong U.S. dollar and slower-than-predicted growth.

“This is an extraordinary miss for a company that has by and large avoided any major blowups since going public,” said Paul Sweeney, an analyst at Bloomberg Intelligence.

Since its debut as a public company in 2011, LinkedIn has steadily surpassed estimates for sales until now. The company, with its mix of job-related tools for consumers and businesses, has been expanding its offerings every year under Chief Executive Officer Jeff Weiner, through acquisitions and rapid hiring. Those efforts aren’t translating to as much revenue growth as expected, Sweeney said.

Second-quarter revenue will be $670 million to $675 million, the company said Thursday. Analysts had predicted $718.3 million, on average, according to data compiled by Bloomberg. LinkedIn also trimmed its forecast for annual revenue to $2.9 billion, from $2.93 billion to $2.95 billion.

The company’s shares fell 21 percent in extended trading, after dropping 2 percent to close at $252.13. The stock had gained 9.7 percent this year.

Profit excluding some items was $73 million, or 57 cents a share, matching analysts' predictions. LinkedIn’s net loss widened to $42.5 million, or 34 cents a share, from $13.4 million, or 11 cents.

Mania in Pictures

Blame Game

LinkedIn blamed the plunge on strength in the US dollar. It generates 39% of its revenue outside the US.

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Do You Want to Know a Secret?

Courtesy of Tim Knight from Slope of Hope

I hate tech bubbles.

No, that's not the secret. Everyone knows that. The secret I am referring to is a company named, literally, Secret. And the existence of this company, as well as the easy $6 million its co-founders pocketed when they shuttered the place, is absolutely symptomatic of this bubble-of-bubbles we are living in (the third one of the past fifteen years, incredibly).

I didn't even know Secret existed, because I'm too old to spend my time worrying about every new little app that comes along that lets teenagers engage in cyber-bullying and exchange  dick pics. It's just not my cup of tea. But I happened to stumble across this article yesterday, which was headlined:


Now a startup shutting down isn't any bigger news than someone finishing a satisfying lunch somewhere, but the "Ferrari" mention intrigued me, so I read further.

Turns out a chap named David Byttow (whose profile picture looks exactly like the sort of person who would do such a thing) started the company way, way, way back in October 2013. He was able to get $35 million – – that's $35,000,000 – – in funding for his app. The elevator pitch for this thing was: "Share anonymously with friends, co-workers and people nearby. Find out what your friends are really thinking and feeling."


I dunno, but when I want to know what my friends are thinking and feeling………I ask them. But, then again, I didn't raise $35 million, so who am I to judge?

The media had some pretty ugly things to say about Secret, but in the Silicon Valley, which is where I live, stupid apps getting tens of millions in funding with no prospect of profits is commonplace. What got my attention was that, as the app's popularity was cratering, the co-founders managed to raise more cash and – – astonishly – – pocket $6 million from selling a portion of their own holdings to these new investors.

During this time (when, in retrospect, it is obvious that the app was a flash in the pan, and users had lost interest), the message from the company was that it might "pivot", which is Silicon-Valley-speak for a product that has failed and, before it is carted off to its grave, will pretend to be something else., about which I wrote endlessly on Slope, "pivoted" several times before its $41 million was considered a lost cause.

So Byttow's syrupy post about closing the firm "with a heavy heart" doesn't really delve into the fact that, in exchange for 18 months of work that resulted in a completely failed endeavor, he and his buddy scored $6 million (out of which he bought himself a Ferrari), on top of whatever handsome salaries they felt they deserved.

So am I bitter about this? Well, no. Bitter isn't the right word. I'd say I'm simply…….pissed off. Because my own high-tech start-up, Prophet, is something I worked thirteen years to build, and when I finally sold it (for all of $8 million), it was a growing, profitable firm with happy employees, fantastic products, and a very satisfied buyer. Its products are in use to this day, ten years hence. Prophet, you see, wasn't an overly-funded clown-show where we blew through the cash and just decided we were all fuck-ups and might as well close the place down swiftly. Oh, and pocket the cash.

The quantity of these dim-witted, overly-funded outfits that are going to enter bankruptcy is going to explode over the next few years (Clinkle is bound to be a likely contender…….) In the meantime, keep our anti-nausea medication handy.

The New New New Normal – US wages rising

The New New New Normal – US wages rising

Courtesy of Joshua Brown, the Reformed Broker

This morning the markets are shocked thanks to a year-over-year gain in US salaries and wages of 2.6%. The ten-year Treasury yield is now up almost 10% over the last four days.

I was at a BlackRock iShares conference last week where Morgan Stanley’s economist Ellen Zentner predicted almost this exact number and reaction:

Bonds are selling off hard on the news and stocks don’t know whether to laugh or cry.

Here’s the chart via Quartz:


Josh here – obviously this stands in sharp contrast to the malaise depicted in Q1’s abysmal GDP release. Now of course, there’s no reason to believe that this is the start of a more meaningful trend. Every economist will tell you that the hallmark of the post-crisis period is the “growth scare” where it looks momentarily like we’re breaking into escape velocity. All big bets on this sort of thing have ended in tears so far.

Employment Compensation Costs (Wages and Benefits) Jump in First Quarter

Courtesy of Mish.

A BLS report out today shows Compensation Costs up 0.7% December 2014-March 2015 and 2.6% over the year ending March.

Civilian Workers

Compensation costs for civilian workers increased 0.7 percent, seasonally adjusted, for the 3-month
period ending March 2015, the U.S. Bureau of Labor Statistics reported today. Wages and salaries
(which make up about 70 percent of compensation costs) increased 0.7 percent, and benefits (which
make up the remaining 30 percent of compensation) increased 0.6 percent.

Compensation costs for civilian workers increased 2.6 percent for the 12-month period ending
March 2015, rising from the March 2014 increase in compensation costs of 1.8 percent. Wages and
salaries increased 2.6 percent for the 12-month period ending March 2015, which was higher than the
1.6-percent increase in March 2014. Benefit costs increased 2.7 percent for the 12-month period ending March 2015, compared with a 2.1-percent increase for the 12-month period ending March 2014.

Private Industry Workers

Compensation costs for private industry workers increased 2.8 percent over the year, higher than the
March 2014 increase of 1.7 percent. Wages and salaries increased 2.8 percent for the current 12-monthperiod ending March 2015, also higher than the March 2014 increase of 1.7 percent. The cost of benefits rose 2.6 percent for the 12-month period ending March 2015, which was higher than March 2014, when the increase was 1.8 percent.

Private Industry Compensation Percent Change From Year Ago

click on chart for sharper image

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The Street loses faith in Twitter

Due to an accidental early post on the company's website on Monday, picked up by a company called Selerity, Twitter started tanking before officially announcing its earnings miss (Nasdaq Takes Blame for Twitter’s Earnings Leak). 

The Street loses faith in Twitter

Courtesy of 

Twitter’s the ultimate “belief” story – you either think it will be one of the most import and influential media platforms on earth or you don’t.

If you are a believer, then you accept the lumpiness inherent in a fledgling ad model that hasn’t yet been proven and the nonstop impossible comparisons to the honor student in the family, Facebook. If you are not a believer, then there’s really nothing to talk about. The company is obscenely expensive given its relatively meager financials and the wobbly appearance of its management and monetization strategy.

Analysts weighed in on Twitter’s messy, awful Q1 earnings report this morning. Even the biggest bulls are dejected and lowering price targets. Costolo and Co certainly aren’t making it easy for the faithful.

First, here’s Bob Peck from SunTrust, who cannily downgraded the stock the day before the miss:

Peck’s Points.1) Twitter reported a difficult quarter missing on core Ad revenues and lowering guidance for the full year which we believe will likely make investors put Twitter back in the “prove it” category. 2)Headwinds Twitter is facing are significant (both on users and products) and potentially multi-quarter in nature and investors will need to see that the company can overcome them. The report touched on several of the issues we discussed in our downgrade note.We are still long-term believers in the opportunity in front of Twitter, but believe the short-term headwinds will weigh on results and investor sentiment and increase the focus on execution. We maintain our Neutral rating with a $45 target (reduced from $50) based on35x EV/EBITDA and 9x EV/Revs on our updated 2016 estimates.

Here’s Mark May at Citi, who carries a Neutral rating and a 44 target:

Unlike Q4 when user growth disappointed but advertiser demand and monetization over-delivered, in Q1 user growth improved but advertiser demand and monetization disappointed – and, as a result, Twitter missed its revenue guidance. Moreover, commentary about Q2 suggests continued near-term headwinds and limited visibility to address the factors impacting current results. While mgmt. is actively pursuing initiatives to improve user growth, the effectiveness of its ad products, and overall monetization, we continue to believe that many of the bull case assumptions are priced in even at after-market levels. We need to gain more confidence in these user and monetization growth initiatives before getting constructive.

Stifel hates the stock and reiterated its Sell rating while slashing the target from 38 to 36…

Twitter missed consensus revenue expectations by roughly 5% and lowered its full-year revenue outlook by 5% and adj. EBITDA guidance by 7%. Monthly active user additions were in-line with expectations largely shaped by positive commentary during 4Q earnings. However, 2Q:15 MAUs are off to a “slow start” and the inclusion of SMS-only users in MAU disclosures going forward could mask Twitter’s true organic user growth. Twitter’s direct response sales capabilities are expected to benefit from the announced acquisition of TellApart and partnership with Google’s DoubleClick platform but it’s unclear to what degree these initiatives can help Twitter mitigate the ad business deceleration implied by management’s updated guidance. We lower our price target to $36 and maintain our Sell rating.

… but Pacific Crest is keeping the faith. They acknowledge the revenue / user guidance “change-up pitch” but see the future as too bright, even as their target comes down 11 bucks to 52:

Too Many Catalysts to Capitulate

Whether the issue is growing pains or poor execution, the story will likely remain choppy. A big part of our bullish thesis was around Twitter continuing to drive near-term upside with new advertising products, especially app install ads. Clearly, these have started slower, and user growth continues to be a challenge. However, we think revenue can reaccelerate in 2H, and MAUs continue the slow chug higher with two new Google deals, video (feed, Periscope and Vine) and a fuller suite for direct-response advertisers (app installs, retargeting, network).

I own some stock and bought the aftermarket plunge last night. My best guess is the risk is lower rather than higher in the short term barring any extraordinary event. The stock probably spends the next 90 days until its next report in the penalty box, why would any institutional investor step up for the name now? And that fantastic stair-step pattern it spent the last five months building has been ruined in 3 seconds, which certainly keeps the momentum crowd away as well.


Punk Q1 GDP Wasn’t Surprising: It Extends A 60-Year Trend Of Exploding Money And Imploding Growth

Courtesy of David Stockman of Contra Corner 

During the heyday of post-war prosperity between 1953 and 1971, real final sales – a better measure of economic growth than GDP because it filters out inventory fluctuations – grew at a 3.6%  annual rate. That is exactly double the 1.8% CAGR recorded for 2000-2014.

And after yesterday’s punk GDP report in which growth stayed above the flat-line by a hair only due to a massive inventory build, the contrast is even more dramatic. Real final sales actually declined by 0.5% during Q1 and, more importantly, reflected a mere 1.1.% annual growth rate since the pre-crisis peak in the winter of 2007-2008.

The long and short of it, therefore, is that there has been a dramatic downshift in the trend rate of economic growth during an era in which central bank intervention and stimulus has been immeasurably enlarged. In this regard, the size of the Fed’s balance sheet is the telltale measure of its policy intrusion. That’s because the only mechanism by which the Fed can actually impact the real economy is through open market purchases of treasury bills, bonds and other existing securities for the purpose of raising their price and lowering their interest rate or yield. And it doesn’t matter whether the Fed is buying short term T-bills to peg the federal funds rate or 10-year notes to drive down long-term interest rates and flatten the yield curve.

Thus, the old-fashioned business of pegging the Federal funds rate and the new-fangled intrusion of massive bond buying under QE are all the same maneuver. They both involve expansion of the central bank balance sheet and, therefore, the systematic injection of fraud into the financial system.

That is to say, growth on the asset side of the Fed’s balance sheet involves the acquisition of financial claims that arise from the utilization of real labor and capital resources. This happens, for example, when the Fed buys treasury notes that were issued to fund the purchase of concrete and bulldozer operators under the highway program or when new homes embodying carpenters’ wages and lumber are financed with Fannie Mae guaranteed mortgages purchased by the Fed.

That contrasts with the liability side of the Fed’s balance sheet, which expands dollar for dollar with the asset side, but represents nothing more than bottled monetary air confected from its digital printing press. Stated differently, the Fed’s fundamental tool of open market purchases of public debt and other securities, and thereby the expansion of its balance sheet, embodies the exchange of claims based on something for credits made from nothing.

The Fed’s current $4.5 trillion balance sheet, in fact, could be expanded to sport liabilities of $10 trillion or even $100 trillion by a few keystrokes on the Fed’s computers—–if the open market desk could find enough public debt, private debt, equities and even seashells to buy and stash on the asset side. But questions of practicality or likelihood aside, the basic principle is that the liability side of the Fed’s balance sheets represents spending power made out of nothing. Accordingly, the greater the size of the Fed’s balance sheet, the greater is the amount of fraud released into the financial system and the more intrusive is its deforming and distorting impact on the capital and money markets and ultimately the real main street economy.

Self-evidently, the Fed’s 5X balance sheet expansion since December 2008, which has resulted in 77 straight months of zero money market interest rates, has massively subsidized carry trade speculators. The latter use this free short-term money to fund (i.e.”carry”) their stock, bond and other asset positions, and thereby bid the market for these assets to higher and higher levels. So doing, they are not bringing new savings into the investment market and thereby augmenting honest demand for stocks, but are merely enlarging their bids with zero cost credit made from nothing.

Needless to say, there has been a sweeping change of monetary regime since the golden era of growth and prosperity in the 1950s and 1960s. During the former period, the Fed was run by the sobered survivors of the Great Crash of 1929 and the traumatic depression which followed. They deeply feared financial speculation, and most especially this was true for the Fed’s leader during this period, William McChesney Martin.

Accordingly, during the entire period between the end of the Korean War in 1953 and Nixon’s striking down of the Bretton Woods system in 1971, the Fed’s balance sheet grew by just $42 billion or 5.7% per year. And after adjusting for GDP deflator growth during the same 18-year interval, the constant dollar size of the Fed’s balance sheet grew at 3.0% per year. In point of fact, this means that the Fed’s real dollar balance sheet grew more slowly than the real economy during this 18-year period—-that is, at just 0.8X the growth rate of real final sales (3.6% per year).

By contrast, the Fed’s balance sheet soared by $4 trillion—–100X more—-during 2000-2014 or by 17% annually. That amounted to a 15% CAGR after adjusting for the 1.9% per year rise in the GDP deflator. In sum, during the current century to date, the constant dollar growth rate of the Fed’s balance sheet represents 8.3X the growth rate of real final sales (1.8% per year).

In metaphorical terms, the central bank was using a pop-gun during the 1953-1971 era versus a nuclear weapon since the year 2000.  Yet not only has the reported trend rate of real growth fallen by 50% since the era of William McChesney Martin, but the periodic economic setbacks (i.e. recessions) were also much shallower back then.

To wit, there were four recessions certified by the National Bureau of Economic Research (NBER) during the earlier period, but only the 1957-1958 downturn, when real final sales dropped by 2.4%, was serious. Overall, however, the average real sales decline during the four recessions of the golden growth era averaged just 1.0%.

The implication is straight-forward. The nation’s capitalist economy exhibited no suicidal tendency toward deep plunges and depressionary spirals during Fed’s “light touch” policy regime over 1953-1971. In fact, the officially designated recessions were primarily short-lived inventory corrections that reflected the wind-down of a war economy in two of the four cases, and mild cutback of credit growth in the other two.

In any event, the Fed’s mild tweaking of money market rates during that era was more than enough to keep the economy moving steadily higher—-and even that was not really necessary as I will demonstrate in a subsequent post. As shown in the graph below, the dips in activity were shallow and short-lived and the real economy nearly doubled in size during the period.

By contrast, during the most recent 14-year period not only has the trend rate of growth dropped by half, but one of the two recessions was quite deep by historical standards. Between the Q4 2007 peak and the Great Recession bottom (Q2 2009), real final sales declined by 3%—–the deepest drop of all post-war business cycles.

In light of this evidence, it goes without saying that the Great Moderation ballyhooed by Bernanke and the Greenspan Fed in the early years of this century was just self-serving poppycock. In the process of its massive financial intrusion and manipulation of virtually all interest rates and financial market prices, the Fed has not eliminated the business cycle at all.

And despite all its prodigious money printing, the thing that really matters—-the trend rate of real economic growth—-has fallen sharply, but relative to its post war average. In fact, the 1.8% real growth rate during the last 14 years is well less than the 2.9% growth rate achieved during the Great Depression years between the 1929 crash and the war economy triggered by Pearl Harbor.

And even then, the historically tepid rate of real final sales growth since the turn of the century may not capture the whole story. The reason is that the national income and products accounts (NIPA) have serious quality and conceptual defects and these factors have intensified over time.

Real final sales, for example, include the national defense spending accounts of NIPA, which currently amount to $750 billion. But defense spending generates pure economic waste—even if it does arguably provide for the intangible good called “national security”. That’s relevant because between 1953 and 1971 there was zero real growth in the defense component of GDP.

By contrast, between 2000 and 2014, the real defense spending component grew by 37%.  So the quality and sustainability of the 3.6% real final sales growth number for 1953-1971 was far better than the 1.8% rate posted during the most recent 14 years. The latter period was inflated by wasteful defense outlays, reflecting the Bush wars of invasion and occupation that are now being rolled-back owing to the abysmal failure of these imperial adventures and to the belated fiscal constraints of the sequester.

Moreover, comparability issues go far beyond the dubious economic value of defense spending. During recent decades massive credit expansion and increasingly overt government fiddling with its own economic statistics has created further disconnects.

For example, the figures for real final sales and the other GDP components depend upon the measures of inflation the Commerce Department uses to compute real output and spending.  Yet during the years since 1980, the Washington statistical agencies have fiddled so heavily with the inflation indices that it is virtually certain that today’s deflators capture far less of the cumulative increase in the price level than they did a half-century ago. That means, of course, that they tend to overstate real growth relative to earlier periods.

Here is just one example. Since the 1980s, fully 24% of the CPI has been accounted for by “owners equivalent rent”(OER). The latter is a purely theoretical “price” that 78 million homeowners would purportedly pay for their lodging costs if they rented their own homes to themselves!

And how does the BLS arrive at this big chunk of the inflation index? Why, by asking a few thousand people each month what they think they might charge if they were renting out their castle to a stranger.

You can’t make this stuff up. Its what they do all day inside Washington’s statistical agency puzzle palaces. But even then, this whole “imputed homeowners rent” gambit—-which is a completely made-up number but accounts for $1.5 trillion of the current GDP total—-could be worked around by using the government’s index of rental price inflation. The latter is obtained via the standard surveys by which the BLS collects prices for apples, hamburger and ladies handbags.

Not surprisingly, during the last 14 years this market based index of shelter costs, as reflected in the residential housing rental sector, has risen at a 3.5% annual rate or by one full percentage point per annum faster than the made-up OER. This means that the OER understates the cumulative 14-year rise in shelter prices by 30%.

Also, not surprisingly, the rental price index accounts for only 6% of the weight in the CPI or just one-fourth of the weight of the OER. Thus, were the BLS to use the market price of shelter rather than its whacky OER confection, the annual CPI gain since the year 2000 would be 2.5%, not the 2.2% figure reported.

Owner's Equivalent Rent Vs. Actual Rent - Click to enlarge


Owner’s Equivalent Rent Vs. Actual Rent – Click to enlarge


Needless to say, there is a lot more where that came from. The most notorious of these downward biases, of course, is the “hedonic” adjustment factor which purports to adjust for quality improvements in products and services. It doesn’t take much examination, however, to see that hedonics amounts to a bunch of bureaucratic guestimates and arbitrary theories that systematically bias the rate of inflation downward.

The fact is, within the multi-thousand item basket of products and services included in the CPI, and in the deflators which are derived from it, there is a constant flux of both quality improvements and quality deteriorations, and a continuous blizzard of subtle changes in product function, size and specifications that cannot possibly be accurately captured by the crude instrument of the Census Bureau/BLS surveys and the tinkerings upon the resulting raw data by in-house civil service theoreticians.

The truth of the matter is that the BLS has been under constant pressure from the top of the Washington hierarchy to dilute the inflation numbers ever since social security and other cash pension programs were put on annual COLA adjustments during the inflation-ridden 1970s. Thus, during 2015 upwards of $1.3 trillion of transfer payments will receive CPI-based COLA adjustments. After 15 years, the cumulative difference between an inflation rate of 2.5% versus 2.2%, per the above example, would amount to $100 billion per year.

So you better believe that the statistical agency bureaucrats troll the data for ways to “disappear” small bits of real world inflation wherever the chance presents itself. The most blatant and telling example is evident in the manner in which they have tortured new car prices.

According to the BLS index, new car prices have risen by only 1% since 1997! That’s right, back when Bill Clinton was being sworn in for his second term, the new car price index stood at 145 and according to the BLS, its just 147 today.

Well, now. According to readily available public information, the average new car price in 1997 was $17,000 compared to about $33,000 today.  Most assuredly, the average worker needing a car to get to his job and to transport his family to Wal-Mart would recognize the real world gain of 95% during the last two decades, not the BLS fiction of 1%. Just because today’s new cars have eight air bags, navigation systems and run-flat tires—- it doesn’t mean that new car price inflation has vanished. This is hedonics gone haywire.

In fact, it gets even worse. Not only is the CPI artificially suppressed, but then when it gets translated into the NIPA accounts in the form of the GDP deflator, the government statistical wizards gut the index even more. Thus, for the 15 years ending in the just reported data for Q1 2015, the GDP deflator is alleged to have risen by only 1.9% annually—-or by 25% less than the reported CPI, as adjusted only for the dopey OER distortion.

At the end of the day, there is every reason to believe that inflation has averaged between 2.5-3.0% since the turn of the century. Accordingly, real final sales, which hit another air pocket in Q1, have actually been struggling to stay above the 1% annual growth marker since the turn of the century when deflated by a more realistic index of cumulative price gains.

The obvious question from all of the above thus recurs.  And when the cycles have gotten deeper? And especially, when financial markets have self-evidently become unstable and bubble-prone owing to massive central bank intrusion in financial market price discovery?

Actually, there is an even more pointed question in the face of  still another repudiation embodied in today’s GDP release of the “escape velocity” promise that was the basis for $3.5 trillion of fraudulent bond-buying by the Fed over the past six years. Namely, is there any justification for the FOMC’s intrusion in the financial markets at all? Does market capitalism really have a death wish and therefore need for an external agency of the state to smooth its cyclical undulations least it tumble down an economic black hole?

Well, actually, it is all about a wish. That is, the Fed and all other central banks have a power wish; a rank ambition to operate as masters of the financial universe—-unrestrained by either political authority or the discipline of honest free markets.

So motivated, they have bamboozled the political class and the public alike into the false belief that they are the indispensable element—the very mainspring—-of modern economic life. Without their expert ministrations, they claim, we would be faced with a Hobbesian world in which economic life would be poor, nasty, brutish and short.

Not true!  On the one hand, market capitalism can function without state management of the business cycle. On the other, it desperately requires honest money and capital markets where savers are rewarded, gamblers disciplined and entrepreneurs are allocated capital for productive investment based on criteria of efficiency and risk-adjusted returns.

Such a world existed before 1914. During the prior 50 years real living standards rose at the highest compound rate for an equivalent duration in recorded history(@4%)—-and without any help from a central bank whatsoever.

There is no reason that benign era could not be revived under Carter Glass’ original design of the Fed as a “bankers bank”. The latter was given a narrow mandate to operate a passive discount window at which it would liquefy sound collateral at a penalty spread above the free market rate for short-term money.

Under that arrangement, the FOMC would be abolished and the destructive fraud of massive bond-buying with credits made from nothing would be eliminated.

The Fed would have no need for economists, Keynesian policy apparatchiks or Yellen and her power-drunk band of money printers.  A few green eyeshade loan officers randomly picked from the community banks of America could more than adequately perform the task of examining self-liquidating collateral (i.e. loans against finished inventory and receivables) brought to the discount window by true commercial depository lenders.

In future installments we will delve deeper into the foundational myth that the Fed has deployed in justifying its sweeping seizure of power. Namely, that market capitalism would have crashed over and over during the last 60 years without its interventions.

That proposition, however, is not even remotely true.

Picture via Pixabay. 

Initial Unemployment Claims Plunge to 262,000 – Lowest Since April 2000; What’s Going On?

Courtesy of Mish.

Initial unemployment claims plunged to 262,000 today bettering the Bloomberg Consensus.

The Fed is ready now to pull the trigger at anytime and today’s jobless claims data may have their finger a little itchy. Initial claims, not skewed by special factors, plunged 34,000 in the April 25 week to 262,000 which is the lowest level since all the way back to April 2000. The 4-week average is down 1,250 to a 283,750 level which is just below a month-ago and points to improvement for the April employment report.

Continuing claims, where reporting lags by a week, are also at or near 15-year lows. In data for the April 18 week, continuing claims fell 74,000 to 2.253 million with the 4-week average down 18,000 to 2.291 million. The unemployment rate for insured workers is at 1.7 percent.

The Labor Department says there are no special factors in today’s report though adjusting for weekly data surrounding Easter, which fell late in April last year, is always tricky. Still, on its face, today’s report speaks to solid improvement in the labor market and to a big bounce back for the April employment report.

Initial Unemployment Claims

Initial Unemployment Claims 4 Week Moving Average

Initial claims are in the basket of leading indicators. Blue boxes show four occasions where claims turned up strong and no recession occurred. Red boxes show four occasions where claims turned up and a recession followed later. The purple boxes show two occasions where claims bottomed just as recession started.

I suspect the next turn higher, whenever it occurs, is likely to be significant. There will not be much of a warning. Other data suggests a recession may have already started.

Explaining the Low Numbers

Reader Tim pinged me with this thought on the numbers. …

Continue Here

SA Headline Initial Claims Data Finally Catches Up to Long String of Record Lows in Actual Data

Courtesy of Lee Adler of the Wall Street Examiner

The headline, fictional, seasonally adjusted (SA) number of initial unemployment claims for last week came in at 262,000, smashing the Wall Street conomist crowd consensus guess of 290,000. This finally called attention to the fact that claims have been at or near record lows for the past 19 months. But financial journalists make no effort to check the actual numbers and they have not been aware of the record lows due to their reliance exclusively on abstract impressionist, seasonally adjusted data. Behind the headline numbers, claims have been making record lows, below the lowest levels reached at the top of the housing bubble, in most weeks since September 2013.

Meanwhile, the number of states reporting a trend of increasing claims has been growing. That fact, and the financial media headline writers' sudden revelation that claims are at record lows, could mean that the days of those record low national readings are approaching an end.

Most people are aware that the big problem is that the vast majority of new jobs are low wage jobs. Employers are retaining workers in high skill occupations like financial rocket scientists, and pharmaceutical TV commercial copywriters, where they cannot find workers with the needed skills.

The Department of Labor also reports actual, unmanipulated numbers. This week it said, “The advance number of actual initial claims under state programs, unadjusted, totaled 250,815 in the week ending April 25, a decrease of 28,982 (or -10.4 percent) from the previous week. The seasonal factors had expected an increase of 3,253 (or 1.2 percent) from the previous week. There were 318,127 initial claims in the comparable week in 2014. ”

If you have been around this website much, you have heard this before, so I apologize for repeating it. But this is a perfect opportunity to make the point that the “seasonal factors” really are pretty stupid sometimes. The fictitious numbers they produce are misleading often enough to render the whole concept of seasonally adjusted data virtually useless if you are interested in seeing when the trend is beginning to turn. The SA data rings false alarms seemingly with every other release.  The media uses SA data to the exclusion of actual data because that’s what it has always done and because it’s what “everybody” else does. There’s no other reason for it.

Meanwhile readers of a few publications like this one are well aware that claims have been stretched to record lows for a long time.

Initial Claims and Annual Rate of Change- Click to enlarge

Initial Claims and Annual Rate of Change- Click to enlarge

In terms of the trend over the longer term, actual claims were 21.1% lower than the same week a year ago. Since 2010 the annual change rate has mostly fluctuated between -5% and -15%, with just a few times between -20% and -25%, mostly in the past 6 months. The current number is within that outlying group. In each case previously this was sharply reversed in ensuing weeks, but the usual range of change has stayed intact. There’s no sign of trend change.

On the basis of the week to week change it was a much stronger than normal reading for this week of April. This week is a swing week with both up and down weeks in the prior 10 years.  The actual decline of 29,000 (rounded) compared with the 10 year average decrease for that week of 1,000 (rounded). Claims increased by 20,000 in the comparable week last year. Perhaps tellingly, the strongest 4th week of April of the past 10 years was in 2007, a few months before the onset of mass layoffs tied to the housing crash and financial crisis.

There were 1,787 claims per million of nonfarm payroll employees in the current week. This was a record low, below the April 2007 level of 1,965 record low for the last week of April, which occurred well after the peak of the housing bubble but before the carnage of mass layoffs that was to begin later that year.

At the last bubble peak in 2006, claims began to increase late in that year. The housing bubble had already peaked a few months earlier but the stock market continued on its merry way for 9 more months, not finally ending its run until September 2007. A clear breakout in the number of claims toward the end of 2006 gave plenty of advance warning that all was not well, before stock investors got a clue. Conversely, at the 2000 top, claims had given little advance warning. They began to break out concurrently with the top in stock prices through midyear 2000. We cannot know in the current case whether claims will begin to weaken before stock prices turn down, but it should at least be concurrent with the turn in stock prices. Whether it is a leading indicator or not, it is still worth watching for any signs of change.

We have noted before in these updates that the oil price collapse may be analogous to the housing bubble peak in 2006.

The impact of the oil price collapse started to show up in state claims data in the November-January period. While most states show the level of initial claims well below the levels of a year ago, in the oil producing states of Texas, North Dakota, and Louisiana, claims have been above year ago levels since the turn of the year. North Dakota and Louisiana claims first increased above the year ago level in November. Texas reversed in late January. Another oil producing state, Oklahoma, joined the wake subsequently. In the most current state data, for the April 18 week, claims in these states were well above year ago levels. Texas was up 27% (vs. 17% in the previous week), Louisiana +43% (vs. +24%), and North Dakota +89% (vs. +69%).  Oklahoma was up by 36% (vs. +27%).

With its huge and widely diversified economy, Texas could be the harbinger of things to come for the entire nation as the ripple effects of the oil collapse and the disappearance of those $85,000 per year jobs spread through the US economy.

In the April 18 week, 14 states had more claims than in the same week in 2014. That has down from 22 the prior week. This number fluctuates widely week to week with many states near even. But the trend is clear. At the end of 2014 only 8 were up year to year. At the end of the third quarter of 2014 there were just 5. This is akin to a stock market advance-decline line in a negative divergence from an advance in the market averages. It may be a warning sign of deterioration that is not apparent in the topline numbers.

I track the daily real time Federal Withholding Tax data in the Wall Street Examiner Professional Edition. The year to year growth rate in withholding taxes in real time is running slightly above 5% in nominal terms. This is down from a peak of over 8% in February, but it remains a strong number that supports the likelihood of a solid gain in payrolls for April.

The claims data will continue to encourage the Fed to engage in the charade of pretending to raise interest rates sooner rather than later.

Initial Claims Inverted and Stock Prices- Click to enlarge

Initial Claims Inverted and Stock Prices- Click to enlarge

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

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

Picture via Pixabay. 

What’s Really Behind the Flash Crash Trader Prosecution?

Courtesy of Pam Martens.

Loretta Lynch Is Sworn In on Monday, April 27, 2015 as U.S. Attorney General; She'll Now Be Responsible for the Flash Crash Case

Loretta Lynch Is Sworn In on Monday, April 27, 2015 as U.S. Attorney General; She’ll Now Be Responsible for the Flash Crash Case

The Justice Department’s case against the 36 year old lone bedroom trader in the U.K., Navinder Singh Sarao, has now been thoroughly discredited by every Wall Street veteran who has studied it, most pointing out that what Sarao did is happening every second that Wall Street is open for business. Business writers at the New York Times, Financial Times, Newsweek, and Bloomberg View have given the charges an unequivocal thumbs down.

The Justice Department’s complaint itself is unusual. It consists of a one page complaint cover sheet followed not by a detailed breakdown of the counts but by an affidavit from an FBI agent. The case is filed in the Federal District Court in the Northern District of Illinois but no U.S. Attorney or Assistant U.S. Attorney from that district has signed this complaint. The names listed at the top of the first page, more as a reference since they have not signed any part of this complaint, are Department of Justice Fraud Section Assistant Chief Brent S. Wible and Fraud Section Trial Attorney Michael T. O’Neill. Both show phone numbers with the 202 area code, meaning this case came out of the Washington, D.C. office of the Justice Department, not the Northern District of Illinois where the futures market that Sarao is charged with manipulating is located.

The case is based largely on analysis from an unnamed “consulting group” and a “professor and academic researcher who studies and has written extensively on financial markets and algorithmic trading.” Given the public drubbing of this case, that professor is now likely climbing deeper into his hole of anonymity.

Add all of the above to the fact that the case is coming out of the blue, five long years after the Flash Crash of May 6, 2010, and after regulators had already fingered mutual fund company Waddell & Reed as the key culprit in their lengthy report of 2010, and you are left with the highly intriguing question as to what the real motivation is for the Justice Department to go out on such a precarious limb with this case.

Four schools of thought come readily to mind. First is that the Justice Department wants to frighten off the tens of thousands of solo day traders who are jazzing up pre-packaged software and periodically beating the Wall Street big boys at their own game of spoofing and layering. Next is that Sarao may be some kind of genius trader or software developer and Wall Street wants him extradited to deploy his talents on this side of the pond. Third, there may be more to the FBI’s case than we know: for example, why was a mega global bank like Credit Suisse financing Sarao’s trading. Was there more to this relationship than is presently known? And, finally, elements of all three of the above scenarios may be in play. We’ll look at each of the first three elements separately.

Continue Here


When The Herd Turns

Courtesy of Charles Hugh-Smith of OfTwoMinds

A funny thing happens when the stock market herd turns–all the usual central bank tricks no longer push the markets higher.
Though the mainstream financial media reports on central bank policy as if the policies move the markets, the actual mechanism is not policies per se but their effect on the belief structure of market participants.
If market participants believe the markets are going higher, for whatever reason, they will buy more stocks to reap the anticipated gains.
If market participants believe the top is in and markets will decline, they will sell, i.e. liquidate positions rather than build them. This is called distribution, as the smart money distributes stocks to the greater fools who have yet to get the memo that the top is in and from now on, stocks will only lose value.
What causes the herd to turn? The process is not entirely mechanical or predictable. Those in the front of the herd tend to lead those following, and so we look to the leading stocks, sectors and players for clues as to what the herd will do.
When the leaders of the stock rally dwindle to a few names, that is evidence that the herd is losing its momentum and confidence.
When those leaders no longer make new highs but instead notch lower highs despite good news, that is further evidence that the herd's direction is becoming increasingly uncertain.
When the herd's leading edge veers first one way and then the other, this lack of coherence is also evidence that the herd's leaders are no longer confident in which direction to take.
The herd is all about following the pack in front. The animals just behind the leaders have no way to know what the animals in the rear of the herd are doing; they only know what the leaders are doing, and the herd instinct is to not leave the safety of numbers.
So when the leaders turn, the herd follows. The leaders might sense danger ahead, or see obstacles to avoid. Which way to go? A handful of those in the front decide for all those behind, and that decision is ultimately based on avoiding risk.
Once the herd has turned, all attempts to reverse the change in direction fail as the momentum cannot be stopped.
When the leaders realize that further market gains are increasingly unlikely and fraught with risk, they will exit. The herd following them will also exit, as the selling of the leaders will eventually push markets down despite central bank purchases.
To the leaders who are selling, central banks are simply large-scale chumps, snapping up shares right when those buying stocks are about to stampede over the cliff. Central banks buying equities give sellers more opportunities to distribute to greater fools; they can't change the direction of the herd.
The ultimate hubris of central banks was their supreme belief in their own powers to direct the herd. As long as the herd was stampeding in one direction, the central banks could imagine that their shouted orders were directing the herd.
But once the herd turns, the futility of those orders will be revealed. Once market participants realize the top is in and the only possible result from here on is a loss, the herd will turn and follow the leaders who are selling.


Daily News

European Markets Are Having a Bad Day (Bloomberg)

U.S. GDP disappointed this morning, adding fuel to a European market sell-off that had already been underway for much of the day.

German 10-year bonds have tanked.

'Hawkish' Hilsenrath Confirms Fed Not Worried About Q1 Growth, Rate Hikes Coming (ZeroHedge)

At a stunning pace of 608 words in just 4 minutes, The Wall Street Journal's Fed-Whisperer, Jon Hilsenrath, has proclaimed his "common knowledge" meme for today's FOMC statement. Confirming that officials "aren’t at this point alarmed about the first quarter slowdown," and in fact stating they are confident of spending picking up due to consumer sentiment (which just fell)… which leaves them signalling no shift in policy stance -i.e. rate hikes are coming whether the economy can handle it or not…

Greece's Prime Minister Alexis Tsipras speaks a plenary session of the Parliament in AthensMajority of Financial Pros Now Say Greece Is Headed for Euro Exit (Bloomberg)

Greece, mired in a protracted financial crisis and at loggerheads with its bailout stewards, will leave the euro, according to the majority of investors, analysts, and traders in a Bloomberg survey.

A 30% Return In 3 Days? Why Not? An Introduction To Vale S.A. (SeekingAlpha)

Vale S.A. (NYSE:VALE) has been on quite a tear lately (from under $6 to almost $8/share) and since I cover Freeport-McMoRan (NYSE:FCX) regularly and BHP Billiton (NYSE:BHP) on occasion, I thought it was time to start researching VALE. While part of this article will be designed as an introduction to the company for new investors and a guide to what an analyst looks at when opening up coverage, there will also be a fun comparison for shareholders with the slides at the end.

`Panicky Exit' by Fed Seen as Risk to Markets Even Amid 0.2% GDP (Bloomberg)

If you are the type who enjoys stories along the lines of "Here's the One Chart You Need to See Before the Fed Decision," then by all means take a gander below because it's arguably the One Chart You Need to See Before the Fed Decision.

Today Is The 23rd Anniversary of the Rodney King Riots. Obama Is Right, Not Much Has Changed (MarketWatch)

Speaking from the White House on Tuesday, President Obama told reporters that the tensions between Baltimore residents and local police were "not new, and we shouldn't pretend that it's new."

Gross Sees No Liquidity in Bonds as Small Trades Move Market (Bloomberg)

Bill Gross, the bond manager who joined Janus Capital Group Inc. last year, said there’s “no liquidity in bond markets,” with small trades pushing around prices in the world’s biggest debt market.

“Treasury bonds move 2-3 ticks on even small trades,” Gross wrote in a Twitter message on Tuesday. A tick is an incremental move in bond prices.

What time is the Fed decision? (MotherJones)

The Federal Reserve will release its policy statement at 2 p.m. on Wednesday, and with a rate hike already ruled out, analysts will be looking for clues about when the central bank will raise interest rates.

There won’t be new economic forecasts or a press conference so the Fed’s six-paragraph statement will be all for investors to focus on.

Greek Prime Minister Alexis TsiprasGreece Deal Targeted by Sunday as Tsipras Pushes for Progress (Bloomberg)

Greece and its euro-area partners are stepping up talks in a bid to break an impasse over bailout aid as early as next week, even as the country’s government sent conflicting signals over its willingness to agree on long-stalled reforms.

With Greece facing a cash crunch as early as next week, both sides in a meeting of euro-area officials agreed to pursue intensive negotiations beginning on Thursday with the target of a preliminary deal by May 3, according to two people with knowledge of the talks. The aim would be for finance ministers to sign off on the accord by their next scheduled meeting on May 11, the officials said, asking not to be named because the talks are private.

KapStone Versus Packaging Corp. Of America: Why Pay More For Less? (SeekingAkpha)

The packaging industry isn't exactly something that investors look at and feel excited about but, unlike social media or recreational technology products companies, these types of businesses are ones that provide a great deal of certainty because they operate in a line of business that is necessary for modern society. For this reason and this reason alone, it makes sense for investors to take a look at companies like Packaging Corporation of America (NYSE:PKG) and KapStone Paper and Packaging Corp. (NYSE:KS), both of which have demonstrated the ability to not just survive but to thrive in what has historically been a low-margin business.

PKG Revenue (Annual) Chart

ECB President Mario DraghiGreek Banks Get More Funds as ECB Weighs Collateral Discount (Bloomberg)

The European Central Bank raised the amount of emergency liquidity available to Greek banks, while signaling that access to such funds may become more difficult if bailout talks remain deadlocked.

The Governing Council lifted the cap on Emergency Liquidity Assistance by 1.4 billion euros ($1.5 billion) to 76.9 billion euros on Wednesday, people familiar with the decision said. That follows an increase of about 1.5 billion euros last week. An ECB spokesman declined to comment.

Think a good man is hard to find now? Try France after World War I (Qz)

A good man, it seems, is often hard to find.

But amid a widespread conversation about declining marriage rates in the US and much of the developed world, it’s worth pointing out that despite appearances, a male-female imbalance isn’t really what’s going on.

German Bunds Are Tanking After Big Investors Say to Get Out (Bloomberg)

Investors gave the clearest sign yet they’re losing patience with the record-low yields on euro-area government bonds in a selloff that spared no market.

Yields on Germany’s bunds surged the most in two years as traders shunned an auction of the nation’s debt. Bond titan Jeffrey Gundlach of DoubleLine Capital egged on the declines, saying he’s considering making an amplified bet against the securities. His comments echoed Janus Capital’s Bill Gross, who once managed the world’s largest bond fund. He said bunds were the “short of a lifetime.”

Thursday, Oct. 9, 2014 file photoThe Supreme Court Spends An Impossibly Ghoulish Hour Discussing How States Should Kill People (ThinkProgress)

The drug midazolam may or may not be effective in preventing death row inmates from experiencing the excruciating pain caused by the other drugs Oklahoma wants to use to execute three inmates. This pain, which Justice Elena Kagan likens to the sensation of being burnt alive, would violate the Constitution’s prohibition on cruel and unusual punishment under any plausible interpretation of the Eighth Amendment. The issue in Glossip v. Gross, which the justices heard on Wednesday, is whether very high doses of midazolam dull the pain of execution sufficiently to render Oklahoma’s methods constitutional.

Bernanke Joins Pimco; Second Consulting Job in Two Weeks (Bloomberg)

Former Federal Reserve Chairman Ben S. Bernanke is joining Pacific Investment Management Co. as a senior adviser, his second consulting agreement with a top money manager in as many weeks.

Greek Deposits Now Lowest Since 2005; One Third Of Bank Assets Now ECB-Funded (ZeroHedge)

As a refresher, here’s the latest on Greece. Greek PM Alexis Tsipras is scrambling to “reshuffle” his negotiating team after embattled FinMin Yanis Varoufakis’ “lecturing” finally pushed EU officials over the edge in Riga last Friday. A government decree to sweep excess cash reserves from local municipalities has unsurprisingly proven to be quite controversial, leaving the government short some €400 million for pensions and salaries. Athens is still playing the Russia/Gazprom pivot card in a pitiable effort to demonstrate that Greece still has one last trick up its negotiating sleeve, and anarchists are attacking Varoufakis at dinner. You can’t make this stuff up. 

Manny Pacquiao V Chris AlgieriTale of the Trunks: Pac-Man Bout Cements Political Clout (Bloomberg)

Manny “Pac-Man” Pacquiao’s boxing shorts tell a story of their own.

From boasting just one advertiser at the start of his professional career, his trunks will generate about $2.5 million in the bout with Floyd Mayweather this weekend, according to sports analyst Ronnie Nathanielsz. “Look at the shorts, and you will realize how influential he has become.”

 In this Oct. 30, 2012 file photo, a parking lot full of yellow cabs in Hoboken, N.J.  is flooded as a result of Superstorm Sandy. Big Insurance Companies Are Warning The U.S. To Prepare For Climate Change (ThinkProgress)

A coalition of big insurance companies, consumer groups, and environmental advocates are urging the United States to overhaul its disaster policies in the face of increasingly extreme weather due to human-caused climate change.

According to a report released Tuesday by the SmarterSafer coalition, the U.S. needs to increase how much it spends on pre-disaster mitigation efforts and infrastructure protection. That way, it asserts, the U.S. can stop wasting so much money on cleaning up after a disaster happens.

<p>Can't this guy keep climbing higher?</p> Photographer: David Paul Morris/BloombergApple, Goldman and the Fear of Falling (Bloomberg)

By every measure that counts, Apple had an extraordinary quarter. It’s currently the best performing technology bellwether, and tech is arguably the hottest place for investors to be right now. Apple’s revenue and growth trounce those of other hardware makers like Dell and Hewlett-Packard. And it’s wildly profitable, all while growing at breakneck speed.

U.S. Fed Chair Janet YellenFed Still Open to Second-Half Rate Rise Despite Slowing Economy (Bloomberg)

Federal Reserve policy makers left open the possibility of raising interest rates in the second half of this year by playing down the significance of the economy’s slowdown to a near-standstill in the first quarter.

In a statement issued Wednesday after a two-day meeting, Chair Janet Yellen and her colleagues blamed the winter slump partly on “transitory factors” and reiterated their belief that growth will pick up to a “moderate pace.”

The 7 most bizarre foreign military uniforms (WeAreTheMigthy)

Sure, each nation has its own style. But some militaries have introduced dress uniforms so surprising, they’d stop you in your tracks if you saw them in person.

Baidu Founder Robin LiBaidu Profit Beats Estimates as Smartphone Users Boost Sales (Bloomberg)

Baidu Inc. reported profit that beat analysts’ estimates as the additions of mapping and shopping services helped attract more of the 557 million Chinese accessing the Internet through their devices.

Net income fell 3.4 percent to 2.45 billion yuan ($395 million) in the quarter ended March, the Beijing-based company said in a statement. That compares with the 2.34 billion-yuan average of 13 analysts’ estimates compiled by Bloomberg.

janet yellenHere comes the Fed … (BusinessInsider)

At 2:00 pm ET, the Fed will release its latest policy statement, in which it is widely expected to keep interest rates unchanged.

The big part of the statement, however, will be the Fed's language on the economic outlook, which will be closely watched by markets after the worse-than-expected GDP report we got this morning that showed the US economy grew at just a 0.2% rate in the first quarter.

Markets Are Making Big Moves all Over the Place Today (Bloomberg)

Whether it is currencies, stocks or bonds, markets have been making significant moves all over the place today.

Starting with currencies, there has been a major move higher in the euro against the U.S. dollar, strengthening to its highest level since the first week in March.

Apple Said to Have Found Defect in Watch Part, WSJ Reports (Bloomberg)

Apple Inc. is said to have found a defect in a key component of its watch during production, forcing the company to limit supply of the new device, the Wall Street Journal reported, citing anonymous sources.

These Titans of Oil Are Experts at Making Bold Predictions* (Bloomberg)

Nobody saw it coming.

Oil prices had been sliding, but on Oct. 1, the future still looked bright. For the next three months, oil would average $97 a barrel, according to a Bloomberg survey of 36 analysts. The first quarter of 2015 would be even better. The most pessimistic among them called for $91 a barrel. 

America's Risky Recovery? (SeekingAlpha)

The United States' economy is approaching full employment and may already be there. But America's favorable employment trend is accompanied by a substantial increase in financial-sector risks, owing to the excessively easy monetary policy that was used to achieve the current economic recovery.

China's Three Richest Casino Moguls Have Lost $22 Billion in Just the Last Year (Bloomberg)

The fortunes of China's three richest casino owners have fallen by $22 billion in the past 12 months as a government crackdown is leading wealthy Chinese to curtail conspicuous consumption. U.S. billionaires Sheldon Adelson and Steve Wynn have lost more than 20 percent of their net worth since last April while Lui Chee Woo, the Chinese owner of Galaxy Entertainment Group Ltd.  has lost almost 40 percent, according to the Bloomberg Billionaires Index. The Shenzhen Composite Index has more than doubled in that time.

We Thought Our Pay Would Be Higher, Wall Streeters Say in Poll (Bloomberg)

Ask Main Street about Wall Street and you probably won’t hear this: Banker pay is surprisingly low. But that’s what financial professionals say.

Asked whether they earn more or less than they expected when they decided to pursue a finance career, 48 percent of respondents in the Bloomberg Markets Global Poll say compensation is less or much less than they had hoped for. Just 14 percent say their pay exceeds expectations. A third say they earn about what they thought they would.

Asian Stocks Trim April Surge on Fed as Bonds Slip; Kiwi Tumbles (Bloomberg)

Asian stocks fell, paring the regional index’s biggest monthly advance since 2013, after the Federal Reserve downplayed signs of weak U.S. growth and kept open the prospect of interest-rate increases this year. Asian bonds followed a global rout, and New Zealand’s dollar slid.

Why U.S. stocks are near highs even as fund investors flee (MarketWatch)

Thanks to stubborn fund managers and record corporate buybacks, U.S. stocks remain near all-time highs even as money continues to trickle out of U.S. shares and into international equities.

Lisa MurkowskiIn Pitch to End Crude Export Ban, Drillers Promise Cheaper Fuel (Bloomberg)

The oil industry has a new sales pitch for you: Support efforts to lift the 40-year-old ban on U.S. crude oil exports, and reap the reward of cheaper gasoline.

If you’re dubious, you’re not the only one. And that’s the challenge for critics of the export ban, who know they won’t get anywhere unless they can persuade consumers to come on board.

Fed Cites Weather, “Transitory” Factors in FOMC Statement; No Hat Tricks; What About Consumer Sentiment?

Courtesy of Mish.

Don't worry. The First Quarter GDP Disaster, released this morning is transitory.

How do I know? The Fed says so.

Here is the FOMC Statement from today. Emphasis mine.

Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. 

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

No Hat Trick of Dissent

There were no dissents. My, how things change. At the December meeting there was a Rare Hat Trick of Dissent

But this time, the rationale for opposition changed. Dallas Fed leader Richard Fisher cast a no vote because he believes economic data suggests rate rises will need to come sooner than his colleagues currently expect. Philadelphia Fed chief Charles Plosser remains uncomfortable with language in the Fed statement that suggests the outlook for rate increases is to some degree driven by a calendar date, rather than by the economy’s performance.

Meanwhile, Narayana Kocherlakota of the Minneapolis Fed continues to believe it’s a mistake for the Fed to contemplate interest rate increases at a time when inflation is falling so far short of the central bank’s official 2% goal.

Continue Here


Apple Warns Of “Material Financial Damage” If Its $171 Billion In Offshore Cash Is Jeopardized

Courtesy of ZeroHedge. View original post here.

Despite the fact that Apple beat on both the top and bottom line on Monday on the back of better-than-expected iPhone sales (thank you China), and despite a near $20 billion increase in the company's massive cash pile which now stands at around $193 billion, shares have languised this week, falling around 5% post-earnings. 

Now, we have a possible explanation for the weakness. As FT reports, the company's 10Q contains a warning that Apple could face "material" financial damage in the event the European Commission forces Ireland to reclaim a decade's worth of tax advantages that have accrued to the company under a tax deal that may have accorded it a "selective" advantage. Here's more: 

Apple has warned investors that it could face “material” financial penalties from the European Commission’s investigation into its tax deals with Ireland — the first time it has disclosed the potential consequences of the probe.

Under US securities rules, a material event is usually defined as 5 per cent of a company’s average pre-tax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5bn, according to FT calculations.

The warning came in Apple’s regular 10-Q filing to the Securities and Exchange Commission on Tuesday, a day after it reported first-quarter revenues of $58bn and net income of $13.6bn.

Brussels has the power to order Dublin to reclaim 10 years of tax advantages granted to Apple if it finds that deals struck in 1991 and 2007 were unlawful.

Both the Irish government and Apple have consistently denied any wrongdoing and declined to comment on the size of any fine. However, some Brussels officials suggest any ruling could set a new record for a state-aid investigation penalty by comfortably topping €1bn.

Apple said in the filing: “If the European Commission were to conclude against Ireland, it could require Ireland to recover from the company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.”

Just how "material" is this "material" event for the maker of the newest, easily breakable wearable that's guaranteed to get you ridiculed by colleagues? Have a look at the following chart which shows onshore versus offshore cash and decide for yourself…


The Real Financial Crisis That Is Looming

Courtesy of Lance Roberts via STA Wealth Management

There is a financial crisis on the horizon. It is a crisis that all the Central Bank interventions in the world cannot cure. It is a financial crisis that will continue to change the economic landscape of America for decades to come.

No, I am not talking about the next Lehman event or the next financial market meltdown. Although something akin to both will happen in the not-so-distant future. It is the lack of financial stability of the current, and next, generation that will shape the American landscape in the future.

The nonprofit National Institute on Retirement Security released a study in March stating that nearly 40 million working-age households (about 45 percent of the U.S. total) have no retirement savings at all. And those that do have retirement savings don't have enough. As I discussed recently, the Federal Reserve's 2013 Survey of consumer finances found that the mean holdings for families with retirement accounts was only $201,000.


Such levels of financial "savings" are hardly sufficient to support individuals through retirement. This is particularly the case as life expectancy has grown, and healthcare costs skyrocket in the latter stages of life due historically high levels of obesity and poor physical health. The lack of financial stability will ultimately shift almost entirely onto the already grossly underfunded welfare system.

A recent article by Kelley Holland via CNBC addresses this issue:

"Part of the problem with the 4 percent rule is that it was developed in the 1990s, when interest rates were significantly higher. Retirees with their savings in safe instruments such as bonds and annuities were getting more income than retirees today do with similar assets.

Another problem, though one with a positive side as well, is that life expectancies have increased. Americans are living longer after they stop working, which means their savings have to last longer. A man reaching age 65 in 1970 could expect to live 13 more years, but by 2011 that figure was 18 years. A woman's life expectancy at age 65 rose from 17 years in 1970 to 20 years in 2011 (the most recent year for which such data is available from the Centers for Disease Control).

Research published in 2013 by Michael Finke of Texas Tech University, Wade Pfau of The American College, and David Blanchett of Morningstar Investment Management found that using historical interest rate averages, a retiree drawing down savings for a 30-year retirement using the 4 percent rule had only a 6 percent chance of running out. But using interest rate levels from January 2013, when their research was published, the authors found that retirees' savings would grow so slowly that the chance of failure rose to 57 percent."

However, that is for those with financial assets heading into retirement. After two major bear markets since the turn of the century, weak employment and wage growth, and an inability to expand debt levels, the majority of American families are financially barren. Here are some recent statistics:

47% of US households save NOTHING from current incomes.

American families in the middle 20% of the income scale earn less money and have a lower net worth than in 2007.

More than 50% of the children in US public schools come from low-income households.

65% of children live in households on Federal aid programs.

62% of Americans currently live paycheck to paycheck.

53% of wage earners make less than $30,000 per year.

The wealthiest 5% of Americans have 24 times the wealth of the average household in 2013, up significantly from 16.5 times in 2007.

Over 100 million Americans are enrolled in at least one welfare program run by the federal government. This figure does NOT include the 64 million in Social Security or 54 million in Medicare. 

It is important to remember that the total population in the US is currently around 320 million. In other words, more than 1:3 individuals in the United States is currently being supported by some form of government assistance. This is at a time when roughly 70 cents of every tax dollar is absorbed by government welfare programs and interest service on $18 Trillion in debt.

Here is the problem with all of this. Despite Central Bank's best efforts globally to stoke economic growth by pushing asset prices higher, the effect is nearly entirely mitigated when only a very small percentage of the population actually benefit from rising asset prices. The problem for the Federal Reserve is in an economy that is roughly 70% based on consumption, when the vast majority of American's are living paycheck-to-paycheck, the aggregate end demand is not sufficient to push economic growth higher.

While monetary policies increased the wealth of those that already have wealth, the Fed has been misguided in believing that the "trickle down" effect would be enough to stimulate the entire economy. It hasn't. The sad reality is that these policies have only acted as a transfer of wealth from the middle class to the wealthy and created one of the largest "wealth gaps" in human history.

The real problem for the economy, wage growth and the future of the economy is clearly seen in the employment-to-population ratio of 16-54-year-olds. This is the group that SHOULD be working and saving for their retirement years.


With 54% of this prime working age-group sitting outside of the labor force, it is not surprising that in a recent poll 78% of women in the U.S. want a "man with a J.O.B."

The current economic expansion is already pushing one of the longest post-WWII expansions on record which has been supported by repeated artificial interventions rather than stable organic economic growth. While the financial markets have soared higher in recent years, it has bypassed a large portion of Americans NOT because they were afraid to invest, but because they have NO CAPITAL to invest with.

The real crisis that is to come will be during the next economic recession. While the decline in asset prices, which are normally associated with recessions, will have the majority of its impact at the upper end of the income scale, it will be the job losses through the economy that will further damage and already ill-equipped population in their prime saving and retirement years.

With consumers again heavily leveraged with sub-prime auto loans, mortgages, and student debt, the reduction in employment will further damage what remains of personal savings and consumption ability. That downturn will increase the strain on an already burdened government welfare system as an insufficient number of individuals paying into the scheme is being absorbed by a swelling pool of aging baby-boomers.

At some point, the realization of the real American crisis will be realized. It isn't a crash in the financial markets that is the real problem, but the ongoing structural shift in the economy that is depressing the living standards of the average American family. There has indeed been a redistribution of wealth in America since the turn of the century. Unfortunately, it has been in the wrong direction as the U.S. has created its own class of royalty and serfdom.

For many, retirement years will not be golden. They will simply be more years of working to make ends meet as the commercials of "old people on sailboats," promoted by Wall Street, will become a point of outrage. While the media continues to focus on surging asset prices as a sign of economic health, the reality is far different.

The real financial crisis in the future won't be the "breadlines" of the 30's, but rather the number of individuals collecting benefit checks and the dilemma of how to pay for it all.


When Exactly Will The Fed Launch QE4?

Courtesy of Bill Bonner via Acting-Man

Money From Nowhere

On Friday, the S&P 500 and the Nasdaq closed at record highs. It’s the first time both indexes have done so since December 31, 1999. Why such optimism? High profits, you say. But where do profits come from?

Households have less money to spend than they did 15 years ago. And companies cannot make money just by selling things to each other. The only explanation is that customers – including the US government – continue to borrow and spend.

Corporations borrow money to buy their own shares. Consumers borrow to buy products. Either way, the money comes “out of nowhere” and falls on balance sheets like manna from heaven.


The great money temple, from whence fresh pronouncements shall issue today. How long before it floods us with fresh money again?

Photo credit: Susan Candelario

The Limits of Debt

US households appeared to reach “peak debt” in 2007. Now, the corporate and government sectors – not to mention students and auto buyers – are pulling up to their maximum debt limits, too.

Household debt

Credit to US households and non-profits stood at $13.384 trillion as of March 18 2015 – still below the 2007 peak and declining in relative terms – click to enlarge.

“Everybody – including every corporation and government – has a capacity limit for debt,” says Swiss money manager Felix Zulauf. “Once they reach capacity, they stop buying. Then the additional sales turn to additional inventories, employees turn to jobless statistics, and profits turn to losses.”

Maybe the cycle will reverse soon. Maybe it won’t. But US corporate profits – already at record highs – can’t go much higher unless: (a) wages rise, (b) consumer borrowing rises or (c) government borrowing rises. None of which looks likely.

And without the hope of higher earnings in the future, why pay so much for stocks today? The S&P 500 is trading at 27 times the average inflation-adjusted earnings of the previous 10 years. Only twice in history have S&P 500 earnings, measured this way, been so pricey: at the peak of the dot-com bubble and right before the 1929 crash.

Ah, you might say, but this doesn’t account for central banks’ ultra-low interest rate policies. Without the supposedly “safe” income that bonds throw off, what’s an investor to do but reach for dividends and capital gains in the stock market?

But stocks are supposed to look ahead. You don’t buy a stock in anticipation of getting back the same thing you paid. You buy hoping to get more. And if prices have gone up because interest rates have gone down, what will they do now that interest rates are already down near all-time lows?

How much lower can interest rates go? (We’ll leave that question for tomorrow – I think you’ll be surprised.) In the meantime, let’s keep our eye on the US stock market. Why are stocks – and assets generally – so richly valued?


As of April 1, the CAPE (a.k.a. PE-10 or Shiller P/E) stood at 26.8 (chart by Doug Short/Advisorperspectives). Only the 1929 and 2000 mania peaks are still topping the levels of today – click to enlarge.

Here Comes QE4

“Nowhere” has provided a lot of money …

No one earned it. No one saved it. But here’s our prediction: Someone will miss it when it is gone! If the US money supply were a deck of cards, Uncle Sam has been slipping in extra aces for the last 44 years.

Between 1980 and 2008 these aces were in the form of current account deficits. The US bought more from overseas than it sold abroad, and financed the difference on credit. Fiat dollars went to overseas suppliers. Their central banks took the cash and sent much of it back to the US, where it was used to buy stocks and bonds.

From roughly 1990 to 2008, the flow of dollars into US financial markets from trade surplus countries (where exports exceeded imports) averaged about $400 billion a year.

According to the author of The New Depression, Richard Duncan, this money was an important source of the Nasdaq bubble at the end of the last century… and the sub-prime mortgage bubble at the start of this one. When those bubbles popped, the Fed came up with another source of liquidity – QE.

Take QE plus the amount of dollars accumulated overseas as foreign exchange reserves, subtract Washington’s borrowing (which drains liquidity), and you have what Duncan calls the “Liquidity Gauge.” Follow the gauge, he says, and you will know how loaded this deck really is.

For example, in 2013, low government borrowing combined with QE led to near record levels of liquidity. The S&P 500 reflected this with a 30% gain. What’s in store in 2015?

It doesn’t look good. Washington’s budget deficits are estimated to stay at about $500 billion a year until 2020. This will absorb a lot of liquidity to pay zombies. Also, the Fed has put its QE program on pause. If it stays that way, some liquidity would seep in from European and Japanese QE programs. But it would be fairly modest.

The only major source of liquidity would be from dollar foreign exchange reserves overseas. But world trade has slowed, greatly reducing those reserves. The result? Negative net liquidity for the next five years.

The bad news begins in the third quarter, says Duncan. Because income tax returns are due in the second quarter, it always brings in tax revenue to the US government. This reduces Washington’s need to borrow… leaving liquidity available to the stock and bond markets.

But in the third quarter, net liquidity is likely to turn negative. And the stock market is likely to correct. What then? The Fed will panic and announce QE4… and other measures. More on those tomorrow …

*  *  *

debt monetization

Although this chart is slightly dated (it shows foreign central bank monetization of US treasury and agency debt until December 2012), it illustrates that FCBs are an important factor in the liquidity game. The chart depicts a large portion of the recycling of the US current account deficit by mercantilist nations, which are usually blowing up their domestic money supply in the process. In the past two years, this has slowed down considerably though, as the US trade deficit has declined (chart by Michael Pollaro) – click to enlarge.

Government Stats Both Hide and Reveal Situation Fraught With Peril

Courtesy of Lee Adler of the Wall Street Examiner

Don’t ask me how they come up with this stuff. Like GDP growth of 0.2%. Here we go again with the usual headline seasonally adjusted (SA) nonsense. They take a couple dozen fictional seasonally adjusted components for quarterly change, from an admittedly limited sample that they warn will be updated and revised, and then they crunch them altogether with an arcane formula and annualize both the sampling error and component by component seasonal adjustment errors. In other words they multiply the sum of the component errors times 4.

It just makes no sense. The WSJ has graphic that shows prima facie that the quarterly numbers are all over the place while the year to year change has been reasonably steady, showing a clear trend with minor oscillation along the way over the past 5 years.


Source: U.S. GDP Expands at 0.2% Pace in First Quarter – WSJ

Real time Federal withholding tax collections suggest that the actual growth in the economy was greater than this annualized SA GDP number would indicate. The year to year gain in average daily withholding taxes collected in Q1 was +4.6% on a nominal basis. Adjusting for wage and salary inflation that equates with a real gain of around 2.5%-3%. That supports the year to year growth of GDP of 3%. That annual growth rate was the fastest since +3.1% in Q4 of 2013, and the second fastest since 2011. There’s nothing in the data to suggest a real slowdown in the first quarter as the headlines suggest.

Real GDP and Federal Withholding Taxes - Click to enlarge

Real GDP and Federal Withholding Taxes – Click to enlarge

Lest you think that the GDP being on trend is somehow bullish, allow me to disabuse you of that notion. First, these numbers in no way justify the bubble in stocks. That’s purely a manifestation of central bank money printing. Stock prices have little to do with economic growth. They’ve been rising by orders of magnitude faster than the economy has grown. Conomists euphemize that as “appreciation,” or the more arcane “multiple expansion,” and justify it by the fact that competing fixed income yields are so low. That ignores the fact that fixed income is also in a central bank driven mania.

The concept that asset inflation isn’t inflation or is justified by low interest rates is insane. The high prices of stocks and bonds are nothing more than the inflation caused by money printing. Inflation hasn’t infected consumer prices because consumers have no more money with which to consume than they had 10 years ago. The printed money has not trickled down. It has pooled at the top where it started, with the dealers and speculators who funnel it into financial markets not into the productive parts of the economy.

To illustrate, since the March 2009 bottom the Fed’s balance sheet expanded by 456%. The S&P 500 rose by 165%, while GDP increased by only about 13%. Real average hourly earnings of production and nonsupervisory workers have only risen by a total of 1% over that time. The middle class has been shut out from any gain whatsoever. And it is arguable whether ZIRP and QE have boosted real GDP growth. There obviously isn’t any proportional correlation. The economy might have done just as well or even better had not these extreme policies induced such extreme distortions, like massive diversion of capital into financial engineering schemes.

Fed Assets, Stock Prices, GDP and Wages- Click to enlarge

Fed Assets, Stock Prices, GDP and Wages- Click to enlarge

The asset bubbles which form as a result of these processes periodically collapse, as the oil price bubble recently did, and that hammers consumption goods inflation. In actuality, ZIRP and QE have been deflationary for consumption goods. As these waves of liquidation sweep through the commodities. It’s likely that stock and bond prices will come back to earth as well, and that trillions in fictitious capital will be vaporized. Timing remains the issue.

The banksters and assorted other plutocrats who own the financial system and political institutions have done really well. As they have gradually bought the political process, they’ve been able to install their hand picked, inbred home grown flunkies in government and at the world’s central banks to do their bidding. The bosses have also been careful to ensure that the wealth doesn’t spread.

These forces are bad not just the financial markets, which will probably correct violently and remorselessly at some point. The are bad for society at large as well. If these trends continue, Baltimore might only be the tip of the iceberg.

Markets top out when the data is strong, not weak, because that’s when central banks pull the plug.If you are a bear on the market you would not want to argue that the economy is weak. Weak economic data is bullish because it encourages the central banks to print, and printing in the modern world has proven to inflate asset prices. Strong data is bearish because that’s what makes central bankers pull the punchbowl, something that they do only when forced to by the fear that allowing bubbles to inflate even more is worse than pricking them now.

My bet here would be that the Fed is well aware that the headline GDP number here is transitory, and that the economy is trundling along the same track it has been on for the past several years. That will keep things on track for incremental tightening to begin this year especially if stock prices break out to new highs in the weeks ahead.

The pooling of the liquidity they’ve created at the top of the structure has created enormous stresses, not just on the middle class, but on the foundation of the financial system. It will pressure the central bankers to begin to begin to siphon off some of this liquidity. Given the degree and scope of the asset bubble inflation and attendant maladjustments they have created, this process will be fraught with peril.

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

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Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details

Courtesy of Mish.

The first quarter real GDP estimate of 0.2% was released today. In spite of all the extremely week economic reports lately, economists still could not figure out GDP was going to be near zero. The Bloomberg Consensus estimate was for 1.0%.

Note the lowest estimate was 0.2%. No one predicted negative. Who was it that predicted 2.4%? What planet is that person on?

So what else is there to do but blame the weather?

Heavy weather and the strong dollar took their toll on first-quarter GDP which, at only plus 0.2 percent, came in at the very low end of the Econoday consensus. This compares with an already soft fourth quarter which is unrevised at plus 2.2 percent.

Exports were the heaviest drag on the first quarter reflecting the strong dollar’s effect on foreign demand. The heavy weather of the quarter contributed to an outright contraction in business spending (nonresidential fixed investment) and an abrupt slowing in consumer spending (personal consumption expenditures).

Price data, reflecting lower energy prices, are soft with the GDP price index at minus 0.1 percent vs the Econoday consensus for plus 0.5 percent. Prices were also soft in the fourth quarter at an unrevised plus 0.1 percent.

Details include an unwanted surge in inventories tied to lower demand and also possibly to shipment constraints tied to the quarter’s West Coast port strike. Imports, likely limited by the port strike, did pull down GDP but to a much lesser extent than the prior quarter (imports are a subtraction in the GDP calculation).

Federal Reserve policy makers, in this afternoon’s FOMC statement, may downplay first-quarter weakness as temporary. Nevertheless, the complete lack of punch underway in early second-quarter indicators, together with the softness of the fourth quarter when there were no special factors not to mention the lack of inflationary pressures in the economy, offer plenty of fuel for the doves at the Fed who want to hold off the first signals of a rate increase.


Gee, who could have predicted Exports would be the heaviest drag?

Let’s take a January 31, 2015 flashback look: Diving Into the GDP Report – Some Ominous Trends – Yellen Yap – Decoupling or Not?

Exports added 0.37 percentage points to fourth quarter GDP. But note the trend. Because of the rising US dollar, export growth is dwindling. Will exports add or subtract to GDP next quarter?

Continue Here

Welcome To The Currency War, Part 19: GDP Flat-Lines, Fed Rate Hike Evaporates

Courtesy of John Rubino.

As pretty much everyone is now aware, US Q1 growth was way below expectations. And the only reason it was even marginally positive was because businesses expanded their inventories at a record rate. Here’s a chart from Zero Hedge comparing the economy’s growth with that of inventories:

Inventory Q1 2015

In other words, if US businesses had just kept inventory levels stable in the first quarter, the economy would have contracted at a 2% rate.

Which once again takes us back to the observation that a strong currency slows down growth by making exports more expensive and therefore harder to sell. Nothing very deep or complicated here, but still apparently beyond the grasp of the economic forecasters who keep expecting an imminent rebound.

Going forward, two things are now virtually certain:

1) That massive inventory build will have to be reversed out in the coming year, which means lower demand for raw materials and, other things being equal, slower growth than would otherwise be the case.

2) The Fed will abandon its (always highly unlikely) promise/threat to raise interest rates in 2015. With growth trending towards zero and national elections coming up, no government in its right mind would tighten monetary policy. So either the dollar falls hard in anticipation (it’s down 1% this morning) or the US takes steps to bring it down.

What to make of all this flailing around? Simply put, the meta-trend towards ever-higher debt and ever less valuable fiat currencies remains in place. Various governments at various times will try to buck this trend, but the results are always and everywhere the same: A rising exchange rate threatens exports, slows growth and forces the errant county back onto the currency war battlefield.

It happened to Switzerland last year and now it’s happening to the US (and via the yuan/dollar peg, China). One more “unexpectedly” weak quarter and we’ll have no choice but to adopt the European negative interest rate, war-on-cash model. American savers will as a result find themselves in an even more uncomfortable spot, either forced to become hedge funds or watch their nest eggs keep shrinking.

Visit John’s Dollar Collapse blog here

The Financial Markets Now Control Everything

Courtesy of Charles Hugh-Smith of OfTwoMinds

The financial markets don't just dominate the economy–they now control everything. In 1999, the BBC broadcast a 4-part documentary by Adam Curtis, The Mayfair Set ( Episode 1: "Who Pays Wins" 58 minutes), that explored the way financial markets have come to dominate not just the economy but the political process and society.
In effect, politicians now look to the markets for policy guidance, and any market turbulence now causes governments to quickly amend their policies to "rescue" the all-important markets from instability. This is a global trend that has gathered momentum since the program was broadcast in 1999, as The Global Financial Meltdown of 2008-09 greatly reinforced the dominance of markets.
It's not just banks that have become too big to fail; the markets themselves are now too influential and big to fail.
Curtis focuses considerable attention on the way in which seemingly "good" financial entities such as pension funds actively enabled the "bad" corporate raiders of the 1980s by purchasing the high-yield junk bonds the raiders used to finance their asset-stripping ventures.
This increasing dependence of "good" entities on players making risky bets and manipulating markets has created perverse incentives to keep the financial bubble-blowing going with government backstops and changing the rules to mask systemic leverage and risk.
The government must prop up markets, not just to insure the cash keeps flowing into political campaign coffers, but to save pension funds and the "wealth effect" that is now the sole driver of "growth" (expanding consumption) other than debt.
To maintain the illusion of growth and rising wealth, the financial markets must continually reach greater extremes: extremes of debt, leverage, obscurity and valuations. These extremes destabilize markets, first beneath the surface and then all too visibly.
The technological advances of the past decade have enabled a host of financial schemes that together have the potential to destabilize the markets globally. Technology enables high-frequency (HFT) traders to only suffer one losing day per year, complex reverse-repo swaps/trades, huge derivative bets and shadow banking, where all the risks generated by these activities can pool up outside the view and control of regulators.
The entire economic and political structure is now dependent in one way or another on the continued expansion of financial markets.
This spells the end of the electoral-political control of the economy, as politicians of all stripes quickly abandon all their ideologies and policies and rush to "save" the markets from any turmoil, because that turmoil could destabilize not just the financial markets but the economy, pensions and ultimately the government's ability to finance its own profligate borrowing and spending.
Dependence on the markets is pushing central banks and states into ever-more extreme policies, even as the risks of complex swaps and trades is rising beneath the surface.
A case can be made that the technologically-enabled complexity of the shadow-banking markets is now beyond the control of the state or central bank, which leads to a sobering conclusion: the next crisis will not be controllable, and destabilized markets will not be "saved" by tricks such as lowering interest rates to zero and increasing liquidity.
The structural problem with everyone and everything now depending on the speculative returns of the financial markets is there can never be any market clearing event that exposes phantom collateral and forces the liquidation of bad debt and excess credit.

I explain the danger of continually 'saving" the markets from any market clearing event in The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009).
When a forest is never allowed to burn away the accumulation of dead branches and underbrush with a limited fire, the forest eventually catches fire anyway. The deadwood (of bad debt, excessive credit and leverage and phantom collateral) is now piled so high, the entire forest burns down to ashes.
This is the eventual cost of never allowing any clearing of financial deadwood because everyone is now so dependent on financial markets that the slightest swoon will bring down the entire system. This vulnerability only increases with every "save" and every new bubble.

All the "saves" have done is guarantee the financial system will burn down in a conflagration ignited by a seemingly trivial spark somewhere in the vast global system of phantom collateral

Daily News

Rand Paul Blames the Baltimore Riots on Absentee Fathers (MotherJones)

As one of a growing number of GOP 2016 wannabes, Sen. Rand Paul has tried to sell himself as the best Republican candidate to reach out to African-American voters. He's talked about the need for criminal justice reform. During the protests in Ferguson, Missouri, he called for demilitarizing police forces. Yet his response to the riots in Baltimore show that he has a long way to go. During an interview with conservative radio host Laura Ingraham on Tuesday, the Kentucky senator blamed the turmoil not on the police brutality that resulted in the death of Freddie Gray, but on absentee fathers and a breakdown in families.

Indonesia ExecutionsIndonesian Stocks Tumble Most Since 2013 Following Executions (Bloomberg)

Indonesian stocks fell the most since August 2013 as investors weighed falling corporate earnings and Australia’s warning that the execution of foreign nationals will damage relations.

RTX1AN9AGreek Finance Minister: I'm still in charge of talks (BusinessInsider)

Greece's Finance Minister Yanis Varoufakis said in a German newspaper interview on Wednesday that he was still responsible for debt talks with its euro zone partners and that both sides were a closer to a deal than many media believed.

"I set the tone. I'm still in charge of the negotiations with the Eurogroup," Varoufakis told the online edition of weeklyDie Zeit.

The Oil Rally Looks Doomed, in Five Charts (Bloomberg)

Oil has surged 20 percent this month to $57 a barrel as expanding violence in Yemen stoked concern that supplies could be disrupted.

The rally follows the biggest drop since 2008, with crude falling as low as $43.46 a barrel in March, as a price war broke out between OPEC producers and U.S. shale drillers. West Texas Intermediate oil, the U.S. benchmark, is now back up at close to a four-month high. Prices gained in each of the last six weeks, the longest stretch in more than a year.


The “straight” BUG: The BUG Investment Strategy with no leverage (LogicalInvest)

In a previous post we introduced our new investment strategy, the BUG. There has been a lot of interest but also some concerns when it comes to using leverage.

We are introducing a version of the BUG for non-leveraged accounts. Here are the statistics for the backtest for the last 5 years.


apbudBud Light Apologizes For Offensive New Slogan (ThinkProgress)

“The Perfect Beer For Removing ‘No’ From Your Vocabulary For The Night.”

The was the slogan printed on a bottle of Bud Light, a spokesman for the company confirmed to ThinkProgress.

Goldman Paid Bill Clinton $200K Before Lobbying Hillary On Export-Import Bank (ZeroHedge)

As documented here on several occasions of late, there are new questions surrounding charitable contributions to the Clinton Foundation. Most notably, a Reuters investigation revealed that the Clinton family charities may have suffered what we called a “Geithner moment” when they failed to report tens of millions in contributions from foreign governments on tax documents. The foundation will now refile five years worth of returns and hasn’t ruled out the possibility that it may need to amend returns dating back some 15 years. 

Marketing Company Tumbles After SEC Inquiry Into CEO's Expense Account (Bloomberg)

MDC Partners Inc. slumped the most in 13 years after the marketing firm said it is the subject of a U.S. Securities and Exchange Commission inquiry related to expenses incurred by its CEO as well as accounting, goodwill and trading of the company’s stock by third parties.

goproGoPro shares are ripping higher (BusinessInsider)

And now GoPro shares are ripping higher. 

After falling as much as 6% shortly after reporting first quarter earnings that beat on the top and bottom lines, shares of GoPro have reversed higher and were up as much as 7.8% near 5:50 pm ET. 

Why small-cap stocks may keep outperforming in 2015 (MarketWatch)

Gargantuan companies like Apple Inc. — the world’s biggest corporation by market capitalization — tend to draw all the attention.

But small-cap stocks have fared better than their larger counterparts so far this year, and a top strategist at one big bank offers several reasons why that trend may continue.

Even Financial Pros Choose Indexing for Retirement Savings (Bloomberg)

Planning for retirement? You're better off saving on fees in an index fund than trying to beat the markets.

That recommendation by legendary investor Jack Bogle is shared by 42 percent of financial professionals in the latest Bloomberg Markets Global Poll, who were asked about the most appropriate way for a midcareer person to invest for retirement. Only 18 percent said actively managed mutual funds were the best option, 17 percent recommended individual stocks and bonds, and 14 percent favored real estate.

Saudi Arabia’s King Salman Replaces Crown Prince, Foreign Minister (WSJ)

Saudi Arabia said Wednesday that King Salman bin Abdulaziz had replaced his crown prince and foreign minister, in a dramatic shuffling of his top officials.

Filipina death row prisoner Mary Jane Veloso seen in traditional dress to mark Kartini Day at Yogyakarta prison,  April 21, 2015.Indonesia executes 8 drug smugglers by firing squad (CNN)

Australia has recalled its ambassador to Indonesia for consultations after two Australians were among eight drug smugglers executed by firing squad early Wednesday.


Australian Prime Minister Tony Abbott called the executions "cruel and unnecessary" because both men, Andrew Chan and Myuran Sukumaran, had been "fully rehabilitated" during a decade in prison.

It’s Always a ‘Great Quarter, Guys!’ If You’re an Equity Analyst (Bloomberg)

Almost every quarter is a great quarter, guys.

The earnings conference call is a routine of corporate America. Companies post financial results, and financial analysts dial in to the conference call.

A shopping cart full of products is seen as a customer shops at a Wal-Mart store in Beijing, February 18, 2014. REUTERS/Kim Kyung-HoonWal-Mart to build 115 new China stores by 2017 in push to offset slowing growth (Reuters)

Giant U.S. retailer Wal-Mart Stores Inc (WMT.N) plans to expand its footprint in China by nearly a third by opening 115 new stores by 2017, the firm's chief executive said, in a renewed push to lure China's grocery shoppers despite slowing growth.

"Our aim is to become an integral part of China's economy," Chief Executive Doug McMillon said at a news conference in Beijing on Wednesday. "China is a top priority."

Time Warner, MasterCard, Fiat Chrysler, Lumber Liquidators earnings in focus (MarketWatch)

Among the companies whose shares are expected to see active trade in Wednesday’s session are Time Warner Inc., MasterCard Inc., Fiat Chrysler Automobiles NV, and Lumber Liquidators Holdings Inc.

Strong Franc Brings Bonanza to Swiss Shoppers Seeking Bargains (Bloomberg)

Fourteen weeks after the Swiss National Bank abolished its cap on the franc, shoppers are cashing in.

"I collect rare comics and often order them online as they are hard to find in stores," Raphael Gut, a 40-year-old web designer, said as he left a post office in central Zurich. "When the euro plunged, I was able to bid more in the auction for a piece I wanted for a long time."

3 of the Best Short-term Investments (MotleyFool)

Whether any investment is appropriate for your portfolio depends on your projected holding period. Money you can sock away for five to 10 years or longer is probably best allocated to stocks. But when it comes to short-term investments, stocks are not as ideal given the unpredictability of the market. The best short-term investments are instead those that put preserving capital ahead of growing it.

With this in mind, here are three ideal short-term investments.

New Maximum Yield Rotation Strategy backtest charts (LogicalInvest)

Here are two backtests charts of the new MYRS strategy with adaptive allocation. The annual return of the old and the new strategy is more or less the same. During low volatility markets, the return of the new strategy is probably slightly lower, however during difficult volatile years like 2014, the return of the new strategy is significantly higher and the drawdowns and the risk is reduced nearly by a factor of 2x. The slightly lower return is due to the fact that some time a part of your capital is invested in the Treasury hedge to reduce risk.

MYRSchart2 market rotation strategy Maximum Yield Rotation Strategy MDY

Baltimore Orioles to play in empty stadium on Wednesday (MarketWatch)

Baseball, a game steeped in tradition and statistics, is about to do something for the first time in its history.

When the Baltimore Orioles host the Chicago White Sox on Wednesday afternoon at Camden Yards, there will be no fans in attendance. This will be a first for an MLB game, though an Oakland A’s game once came close.

The Flash Crash Trader Has Strong Defense Witnesses

Courtesy of Pam Martens.

CME Group Executive Chairman Terry Duffy Disputes the Government's Case Against the Flash Crash Trader in an Interview with Maria Bartiromo

CME Group Executive Chairman Terry Duffy Disputes the Government’s Case Against the Flash Crash Trader in an Interview with Maria Bartiromo

Prosecutors from the U.S. Justice Department have already lost their case in the court of public opinion against Navinder Singh Sarao, the man they allege fueled the Flash Crash in the stock market on May 6, 2010, trading from his bedroom in his parents’ house in the U.K.

Yesterday, Terry Duffy, Executive Chairman of the CME Group and the man who sits atop the futures market in Chicago where the Justice Department alleges Sarao tricked the market into a collapse, threw cold water on hopes of building this case before a jury. Duffy told Maria Bartiromo the following in an interview on Fox Business News:

“They took Accenture to a penny [Accenture is a stock that trades in New York, not in the futures markets in Chicago]; noone’s talking about Accenture going to a penny that day…But yet they’re blaming the futures market and the futures market is the only one that gave the data to all the regulators the day of the event. We looked through all this data and it was talked about by the regulators and us that the futures market did not cause this. I testified in Washington, showed how we went down, stopped, with our functionality replenished liquidity and the market kept on trading. They tried to blame Waddell Reed for it now they’re going to blame Mr. Sarao for it…”

Sarao is charged by the Justice Department with inflicting carnage through the use of the E-mini, a futures contract based on the Standard and Poor’s 500 index. Chicago is one-hour behind New York. The crux of the Justice Department’s Flash Crash case against Sarao is this: “Between 12:33 p.m. and 1:45 p.m., Sarao placed 135 sell orders consisting of either 188 or 289 lots, for a total of 32,046 contracts. Sarao canceled 132 of these orders before they could be executed.”

Duffy is going to make an excellent witness for the defense. Two weeks after the Flash Crash, Duffy testified before the U.S. Senate that “Total volume in the June E-mini S&P futures on May 6th was 5.7 million contracts, with approximately 1.6 million or 28 per cent transacted during the period from 1 p.m. to 2 p.m. Central Time.” That means that between 2 p.m. and 3 p.m. New York time, 1.6 million E-mini contracts traded. Sarao’s contracts during that period represented a mere 2 percent of E-mini trades and the majority of his trades were cancelled.

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Biggest Inventory Build In History Prevents Total Collapse Of The US Economy

Courtesy of ZeroHedge. View original post here.

While we already observed that in Q1, US GDP rose by an appalling 0.2%, far, far below the consensus Wall Street estimate (in case you missed it, here again is the one thing every Wall Street economist desperately needs) and precisely in line with the Atlanta Fed forecast which we brought attention to in early March, confirming yet again that US stocks no longer reflect any fundamentals but merely Fed and global liquidity injections, there is something far more disturbing under the surface of today's GDP report.


Specifically, the $121.9 billion increase in private, mostly nonfarm, inventories in the first quarter.

Cutting to the punchline, this was the biggest inventory build in history.

Another punchline: in Q1 2015, the US economy rose by a paltry $6.3 billion in nominal terms to $17.710 trillion.

Here is how the total GDP growth compares to just the increase in inventories, which as we wrote earlier this week, is the primary reason why the world is now gripped in a global deflationary wave.

In other words, if US inventories, already at record high levels, and with the inventory to sales rising to great financial crisis levels, had not grown by $121.9 billion and merely remained flat, US Q1 GDP would not be 0.2%, but would be -2.6%.

Oh heck, just round it down to -3.0%

Which means that as this massive inventory overhang is eventually cleared out (once the US runs out of space to store all these widgets, gadgets and raw materials, here's looking at you Cushing) and there has been $1.1 trillion in consistent inventory build in the past 3 years, US GDP will be pressured even more with every passing quarter, or else the moment of deflationary rapture when everyone is forced to liquidate and/or dump this inventory at the same time, will result in a monetary supernova which will leave the Fed with no choice but to literally paradrop money on the continental US.

Costco vs. Walmart and Reader Responses Over Minimum Wage

Courtesy of Mish.

I received lots of emails and blog comments to my article Reader Question: Is the Minimum Wage Really a Maximum Wage?

In regards to living wage Tesla responded …

You clearly have never run a business. if your employees are not able to live , or more importantly , just having living problems in general : they are 1) not going to work hard for you sometimes 2) might steal from you 3) might destroy your business property or otherwise not protect it from other thieves.

Quite frankly, that is ridiculous. If you are concerned your employees will steal from you or destroy your property, you should not hire them in the first place.

And if someone is worth more than the minimum wage and you are afraid they will go elsewhere, then you pay more than the minimum wage.

Look at McDonalds’s or Walmart. Did they suffer massive theft or property destruction by employees?

Both recently raised their base pay scale. Why? Because they could not attract a good work force at the wage they were paying. This is how it should work, not by living wage nonsense. 

Carl responded …

Another important thing to remember about the minimum wage is that it removes from the workforce all those that are not worth the minimum wage. With a minimum wage, such persons automatically become government dependent.”

Yep, exactly.

Ron …

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