Archives for April 2015

Why Markets Are Manic – The Fed Is Addicted To The “Easy Button”

Courtesy of David Stockman via Contra Corner 

Later this week another Fed meeting will pass with the policy rate still pinned to the zero bound. The month of May will make the 77th consecutive month of ZIRP—–an outcome that would have been utterly unimaginable even a decade ago; and most especially not with the unemployment rate at 5.5% and after 23 quarters had elapsed since the official end of the recession.

There never was an Armageddon-like crisis in 2008 that justified all this; it all happened because two emotionally unstable and misguided high officials—-Ben Bernanke and Hank Paulson—-panicked Washington into the utterly false fear that Great Depression 2.0 was at hand.

I debunked this urban legend by chapter and verse in The Great Deformation, but suffice it to say here that not withstanding all the crony capitalist larceny that this financial terrorism enabled, it is impossible with the stock market at 2100—-50% above its pre-crisis level—that there remains any justification for maintaining these “extraordinary policies” seven years later.

In fact, the Fed’s cowardly dithering for yet another meeting this week has precious little to do with the so-called Great Financial Crisis—-the ostensible reason why we ended up with perpetual free money subsidies for financial market speculators. Instead, it is a product of a policy ideology and insular culture that has been building at the Fed and most other major central banks for more than two decades.

Central bankers now have their big fat thumbs perpetually on the Easy Button because they are addicted to it. In the case of the Fed, it has been in a rate cutting or rate holding mode during 80% of the time since 1990. Stated differently, during 240 of the last 304 months, the Fed has been riding the Easy Button.

The Fed's Addiction To The 'Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 - Click to enlarge

The Fed’s Addiction To The ‘Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 – Click to enlarge

This is not just a case of an excess of zeal or too much of a good thing. In fact, the above chart constitutes just one more piece of evidence that world’s financial system is being destroyed by a few hundred central bankers and a couple of brigades of PhD’s and policy apparatchiks which populate their bounteous payrolls. Over the last two decades, this infinitesimal slice of mankind has engaged in a campaign of mission creep that dwarfs all prior aggrandizements of state power.

The result is that free market price discovery has been extinguished. The central nervous system of capitalism—-the markets for money, debt and other capital securities—-now goose-steps to the pegged prices and monumental liquidity infusions of the central bankers.

The truly diabolical aspect of this development is that central banks have seized an enormous aggregation of power that is utterly unaccountable. As a result, an increasingly threadbare ideology of self-justification goes unchallenged.

Moreover, this exemption from accountability insulates the actions and theories of central bankers in a manner that is different than all other institutions of the modern world. Namely, central banks are flat-out exempt from the discipline of both the market and the democratic process. Indeed, they are the most unaccountable concentrations of power since the era of absolute monarchy.

It is not hard to understand why this astonishing coup d’état has been so easily achieved. It suits the politicians just fine because the resulting massive monetization of the public debt has enabled nearly pain-free fiscal profligacy. The ancient threat of rising interest rates “crowding out” private investment has been eliminated long ago, thereby making “kick the can” the fiscal policy of choice.

Likewise, the central bank coup has generated its own praetorian guard in the financial system. That is, a giant class of speculators now exists in the form of hedge funds, traders, money managers and investment bankers which would not have a fraction of their current girth in an honest, at-risk financial system.

Needless to say, this giant speculative class is showered with immense windfalls in the casino system that inexorably supplants traditional financial markets under a regime of modern Keynesian monetary policy. The speculative class, in turn, returns the favor in the form of political support for the so-called “independence” of the Fed and via embracing the self-justifying ideology of the central bank usurpers.

At its most protean level, this central bank ideology holds that capitalism is chronically prone to accidents and under-performance. Indeed, it is claimed to exhibit  a suicidal tendency for recession and depression absent the wise ministrations and counter-cyclical management skills of either the high priests or the monetary politburo——depending upon whether you prefer religious or secular metaphors—-who run the central banks.

This core central bankers’ proposition is absolute hogwash. Every one of the 10 business cycle downturns since 1950 have been caused by Washington, not the inherent tendencies of market capitalism.

Two were caused by abrupt but temporary economic cooling spells consequent to the end of an economic mobilization for war, as in the downturns after the Korean and Vietnam wars. The other eight cycles were caused by the Fed itself after it enabled a runaway increase in household and business credit that resulted in too much inventory accumulation and phony aggregate demand based on unsound credit extensions.

Later this week we will present chapter and verse with respect to these ten so-called business cycles, but the essence of the mater is this: When the war demobilizations were finished after the Korean and Vietnam downturns and after the Fed had brought to a halt the excessive credit growth rates it had first enabled during the other cycles, the nation’s capitalist economy recovered on its own.

In none of the cycles since 1950—including the so-called “deep” recessions of 1975, 1982 and 2008-2009—- was the US economy sliding into an economic black-hole that was self-feeding and irreversible save for the external intervention of the central bank.

In fact, all of these downturns were quite shallow—-once you set aside the inventory liquidation component, which is inherently self-limiting. To wit, when businesses over-invest in inventory owing to a central bank induced credit boom, they do not commit suicide in the process of adjusting their levels of raw, intermediate and finished goods. Instead, the heaviest portion of the inventory liquidation occurs quickly during the course of two or three quarters and then its done.

So the real measure of business cycle downturn is not the inventory fattened oscillations of the GDP number, but the change in real final sales.  In not one case since 1950—-not even the so-called Great Recession—has real final sales declined by more than 3%, and, on average, it dropped barely 1% over the ten post-1950 cycles.

There is no reason to believe that the US economy would not have “recovered” on its own after these shallow downturns in real final sales—-downturns which were caused by central bank induced credit booms in the first place. So all along, then, the Fed has been fighting a bogeyman.

More importantly, it has been claiming powers of economic recuperation that do not exist. In fact, the Fed’s historical “counter-cycle” stimulus measures amounted to little more  than a cheap parlor trick. That is, slashing interest rates to induce a temporary spurt of credit growth that does not  actually generate sustainable gains in real wealth, but merely steals spending from the future by hocking balance sheets and imposing preemptive claims on future incomes.

In any event, by the time of the 2008 crisis the Fed’s cheap parlor trick was over and done because American households had reached a condition of “peak debt”. The proper measure of household leverage is the ratio of debt to wage and salary income because sooner or later debt will demand a normalize interest rate that reflects an economic return; and because the Keynesian focus on “disposable personal income” (DPI) as the denominator fails to recognize that 25% of the latter consists of transfer payments including Medicare and Medicaid, and that borrowing by transfer recipients doesn’t amount to a hill of beans in the scheme of things anyway. The preponderant share of the household debt of America is owed by wage and salary workers.

Needless to say, the true peak of household leverage was reached in 2008 after nearly tripling from the pre-1970 level. It has now begun to slowly retrace, but still has a long way to go. Other than the special case of the $1.3 trillion of student loans, which are really education stipends with a lifetime lien, and junk debt financed auto loans, there has been no expansion of household leverage during this cycle.


Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

As a matter of fundamental economics, therefore, when households don’t ratchet up their leverage ratios against income there is no Fed “stimulus”. The massive amounts of new cash that the Fed pumps into the financial system—-and the only thing it is really capable of doing is minting new cash out of thin air by depositing self-manufactured credit into the bank accounts of dealers selling securities to its open markets desk—-never leaves the canyons of Wall Street.

Instead, it ends-up bidding up the price of financial assets–that is, inflating financial bubbles. And this is exceedingly perverse because sooner or later financial bubbles burst when they reach utterly irrational levels and the last sucker is fleeced in the casino. Bursting bubbles, in turn, cause a sharp retrenchment of household and business confidence, resulting in lower spending and intense liquidation of excess inventories and labor accumulated by bullish businesses during the financial bubbles apex.

Needless to say, the central bankers and their Wall Street shills then say I told you so——claiming that the economy is now caught in a circular swirl toward the drain. It can only be “saved” if our indispensable central bankers have the “courage” to crank up the printing presses for another cycle of rinse and repeat.

By now this is getting tiresome as we tip-toe near the edge of the third central bank generated financial bust of this century. But there is absolutely no way of stopping the crash landing just ahead.

The fast money dealers and traders in the inner circle of the casino have now learned to hedge their speculations with downside insurance (i.e. S&P “puts” and like instruments) that is inherently dirt cheap owing to ZIRP and the Fed’s safety nets under the market. Accordingly, they will get out of harms’ way quickly when the break finally arrives, collect their hedging insurance gains and wait for a new round of bottom fishing 40-60% below today’s levels for the market averages and at even lower entry points for the momo names, ETF’s and sectors.

Once upon a time, the proprietors of the central bank might have taken preemptive action in the face of the absolutely lunatic speculation now evident in the stock and bond markets. Back in 1958, for example, Fed Chairman William McChesney Martin, actually began to raise interest rates and increase stock market margin requirements within six months of the recession’s end, arguing that its was the Fed’s job to lean against the wind, dampen speculation and take away the punch bowl before the gamblers got out of hand.

Needless to say, Martin grew up in the Roaring Twenties, experienced the 1929 crash first hand and ran the New York Stock Exchange during the dismal era of the 1930s when they were still trying to pick up the pieces. And on that score, even Alan Greenspan, as late as December 1996, worried in public about “irrational exuberance” and actually did make a tepid effort to raise rates and cool speculation in March 1997.

By contrast, the current Fed will complete another meeting this week without moving interest rates one iota off the zero bound. That will mark 77 straight months of ZIRP.  It will occur at a time when the S&P 500 is priced in the nose bleed section of history at 21X reported earnings; when the Russell 2000 is at 70X reported profits; and when margin debt is at an all-time high in absolute terms and near the 1929 peaks relative to GDP.


You might think they would know better by now, but that fails to appreciate the true evil of the central banks’ sweeping usurpation of power. Namely, that they are so caught up in their own self-justifying group think that they are utterly incapable of seeing the massive financial derangement all about them.

A few days ago, the Boston Fed published a note that starkly reflects the intellectual enfeeblement that exists inside the politburo. The note suggested that maybe QE is destined to become a permanent tool of policy because in a world of low-inflation ZIRP is not enough.

But the argument presented as to why the world needs to be afflicted permanently by QE was astonishing. Written by a PhD economist from Johns Hopkins, Michelle Barnes, it argued the following:

During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases.


How do you think the Fed stair-stepped the funds rate down from 8.0% to zero between 1990 and 2008? Well, it wasn’t purely by means of Alan Greenspan’s mumbling or Ben Bernanke’s scary stories to Congressmen in the aftermath of the Lehman meltdown. No, it was accomplished in the same way central banks have always manipulated and pegged interest rates at non-market clearing levels. Namely, by buying securities and expanding their balance sheets.

During the 18 years between 1990 and the eve of the financial crisis, the Fed expanded its balance sheet from $240 billion to $800 billion or by 7% annually. Obviously, that rate is far greater than the sustainable growth capacity of the US economy.

So there is no difference in the Fed’s fundamental policy tool—monetization of the public debt and other existing assets—- before and after QE. It is only a question of magnitude and the degree to which the resulting injections of fiat credit into the financial system falsify financial prices.

Needless to say, the sweeping deformations that have now accumulated in the financial systems of the world owing to this kind of heavy-handed central bank market manipulation have reached an acute stage. Every day there is more evidence that we are approaching a blow-off top—-evidenced once again last night by the Shanghai stock market’s explosive rise on the news that the government is looking for newer and even more ingenious ways to keep it $28 trillion credit bubble expanding.

^SSEA Chart

^SSEA data by YCharts

But the table below is surely the smoking gun. It shows that central bank financial repression has totally deformed the US corporate sector as represented by the S&P 500. The rewards for speculation—-including speculation in the C-suite via rampant financial engineering—-have now become so powerful and insidious that big business is consuming its cash flow and balance sheet borrowing capacity in a mindless pursuit of M&A deals and cash disgorgement to the casino in the form of share buybacks and dividends.

During 2014 virtually 100% of S&P 500s reported profits of $1 trillion were disgorged as shareholder distributions to meet the clamoring demand from the casino and the sheer greed of top executives determined to pocket maximum possible stock option winnings before the system blows.

Even Goldman has warned that this form of slow financial liquidation will not have a happy ending. As shown in one of its tables below, the S&P 500 companies have devoted $4.2 trillion to financial engineering—-M&A, stock buybacks and dividends—-during the last four years (including estimates for 2015) or almost 60% of their cash dispositions during that period.

That amounts to 160 percent of their gross CapEx during this four year period and the emphasis is on “gross”. The fact is, the S&P 500 companies’ CapEx barely equals current year depreciation. So in truth, the 500 largest US based companies are spending virtually nothing on plant and equipment expansion versus more than $4 trillion on financial engineering.

Likewise, total spending for the S&P companies on research and development over this same four year period is just $930 billion or only 22% of the outlays for financial engineering. In all, it is hard to imagine a set of figures which embodies a more perverse campaign of eating the seed corn of the US business economy.

In short, there is a reason that honest price discovery is essential to capitalist prosperity. It is the miraculous mechanism by which capital is raised from savers and investors and efficiently allocated among producers, entrepreneurs and genuine market-rate borrowers.

What the central banks have generated, instead, is a casino that is blindly impelled to churn the secondary capital markets and inflate the price of existing assets to higher and higher levels—-until they ultimately roll-over under their own weight. That is, the central banks have fostered an unstable and destructive system of speculative finance that everywhere and always is the enemy of genuine capitalist prosperity.

The Easy Button addiction of our central bankers is thus not just another large public policy problem. It is the very economic and social scourge of our times.

The Third and Final Transformation of Monetary Policy

Thoughts from the Frontline: The Third and Final Transformation of Monetary Policy

By John Mauldin

The law of unintended consequences is becoming ever more prominent in the economic sphere, as the world becomes exponentially more complex with every passing year. Just as a network grows in complexity and value as the number of connections in that network grows, the global economy becomes more complex, interesting, and hard to manage as the number of individuals, businesses, governmental bodies, and other institutions swells, all of them interconnected by contracts and security instruments, as well as by financial and information flows.

It is hubris to presume, as current economic thinking does, that the entire economic world can be managed by manipulating one (albeit major) subset of that network without incurring unintended consequences for the other parts of the network. To be sure, unintended consequences can be positive or neutral or negative. This letter you are reading, which I’ve been writing for over 15 years and which reaches far more people than I would have ever dreamed possible, is partially the result of a serendipitous unintended consequence.

But as every programmer knows, messing with a tiny bit of the code in a very complex program can have significant ramifications, perhaps to the point of crashing the program. I have a new Microsoft Surface Pro 3 tablet that I’m trying to get used to, but somehow my heretofore reliable Mozilla Firefox browser isn’t playing nice with this computer. I’m sure it’s a simple bug or incompatibility somewhere, but my team and I have not been able to isolate it.

However, that’s a relatively minor problem compared to the unintended consequences that spill from quantitative easing, ZIRP, and other central bank shenanigans. We have discussed the problem of how the Federal Reserve has pushed dollars on the rest of the world and is playing havoc with dollar inflows and outflows from emerging markets. More than one EM central banker is complaining aggressively.

My good friend Dr. Woody Brock makes the case that an unintended consequence of QE is that the Federal Reserve’s normal transmission of monetary policy through periodic changes in the fed funds rate has been vitiated. He contends that soon we will no longer care about the fed funds rate and will be focused on other sets of rates.

This is an important issue and one that is not well understood. Woody has given me permission to reproduce his quarterly profile. For Woody, this is actually a fairly short piece; but as usual with Woody’s work, you will probably want to read it twice.

Woody is one of the most brilliant economists I know, and I make a point of spending time with him as our schedules permit. We are making plans to get together at his Massachusetts retreat in August. He is restructuring his business in order to spend more time writing and less time traveling, and he intends to lower the price of his subscription. It will still be pricey for the average reader, but for funds and institutions it should be a staple. You can find his website at or email him at

Before we go to Woody’s letter, if you’re going to be at my conference this coming week, you’ve already made arrangements. I know a lot of people wanted to go but just couldn’t work it into their schedules. I won’t say it’s the next best thing to being there, but you can follow me on Twitter, where my team and I will be sending out real-time tweets about the important ideas and concepts we are hearing, not just from the speeches but from all the conversations that spring up during the day and late into the evening. If you’re curious as to who will be there, here’s a page with the speakers. If you’re at the conference, look me up.

The Fed Funds Rate: R.I.P.?? The Third and Final Transformation of Monetary Policy

By Woody Brock, Ph.D.
Strategic Economic Decisions, Inc.

The policy announcements of the US Federal Reserve Board are dissected and analyzed more closely than any other global financial variable. Indeed, during the past thirty years, Fed?Watching became a veritable industry, with all eyes on the funds rate. Within a few years, this term will rarely appear in print. For the Fed will now be targeting two new variables in place of the funds rate. One result is that forecasting Fed policy will be more demanding.

To make sense of this observation, a bit of history is in order. During the last nine years, US monetary policy has been transformed in three ways. To date, only the first two have been widely discussed and are now well understood. The third development is only now underway, and is not well understood at all. To review:

First, the Fed lowered its overnight Fed funds rate to essentially zero, not only during the Global Financial Crisis of 2008–2009, but throughout nearly six years of economic recovery thereafter. The average level of the funds rate at the current stage of recovery was about 4% during the past dozen business cycles. It was never 0% as it is in this cycle. In past essays, we have argued that this overutilization of “ultra?easy monetary policy” reflected the failure of the government to utilize fiscal policy correctly (profitable infrastructure spending with a high jobs multiplier), and to introduce long?overdue incentive structure reforms. It was thus left to monetary policy to pick up the pieces after the global crisis of 2008. This development was true in most other G?7 nations, not just in the US.

Second, the Fed inaugurated its policy of Quantitative Easing whereby it increased the size of its balance sheet five?fold from $900 billion to $4,500 billion. Such an expansion would have been inconceivable to Fed watchers during the decades prior to the Global Financial Crisis. In the US, QE is now dormant, and the only remaining question (answered below) is how and when the Fed will shrink its bloated balance sheet back to more normal levels.

Third, the way in which the Fed conducts standard monetary policy (periodic changes in the funds rate) is currently undergoing a complete makeover. In particular, the traditional tool of changing the funds rate via Open Market operations carried out by the desk of the New York Fed no longer works. For as will be seen, the vast expansion of the size of its balance sheet (bank reserves in particular) has rendered traditional policy unworkable. From now on, therefore, the Fed will conduct monetary policy via two new tools that were not even on the drawing board of the Fed prior to 2008.

Summary: In this PROFILE, we explain in Part A why traditional (non?QE) monetary policy has been vitiated by QE. In Parts B and C respectively, we discuss the two new tools that will be used in the future to conduct standard (non?QE) monetary policy: what exactly are these tools, and how do they work? In Part D, we discuss why these new tools will not be required by the European Central Bank, which has a different institutional structure than the US Fed. Finally, in Part E, we turn to QE and discuss when and how the Fed will shrink its balance sheet back to a more traditional size in the years ahead.

In this write?up, we largely rely on the remarks set forth in a recent paper by Fed Vice Chairman Stanley Fischer, formerly chief economist of the IMF, Governor of the Central Bank of Israel, and professor of economics at MIT. We also benefitted from clarifications by Professor Benjamin Friedman at Harvard University.

Part A: So Long to Setting the Funds Rate via Open Market Operations

Prior to the financial crisis, bank reserve balances with the Fed averaged about $25 billion. With such a low level of reserves, a level controlled solely by the Fed, minor variations in the amount of reserves via Fed open market sales/purchases of securities sufficed to move the Fed funds rate up or down as desired. Analytically, the market for bank reserves (Fed funds) consisted of a demand curve for bank reserves reflecting the nation’s demand for loans, and a supply curve reflecting the supply of reserves by the Fed. The so?called Fed funds rate is the point of intersection of these two curves (the interest rate). If the Fed targeted, say a 2% funds rate, it achieved and maintained this rate by shifting the supply curve left or right by adding to/subtracting from the quantity of reserves. As the Fed was a true monopolist in the creation/extinction of reserves, it could always target and sustain any funds rate it chose.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

There’s No Inflation? Rents Rise 4.3% Year to Year But They Don’t Count

Courtesy of Lee Adler of the Wall Street Examiner

Median market rent for US rental housing units rose 4.3% year over year in the first quarter of 2015, according to data released today by the US Census Bureau. All of the gain came in the latest quarter, as rents were nearly flat for the previous three quarters. The first quarter increase compares with an increase of +2.7% in the first quarter of 2014, suggesting some acceleration in rent inflation. Stair step increases are typical of the pattern of the trend of rent increases over the long haul.

Owners Equivalent Rent vs. Market Rent- Click to enlarge

Owners Equivalent Rent vs. Market Rent- Click to enlarge

Since 2000, the compound annual growth rate of rent has been +3.5%. Rents have increased by 76% over that period. In contrast, the BLS imputes the housing component of CPI using an artificial construct called owner’s equivalent rent (OER). This rose by 2.7% over the past 12 months. It has risen by only 43% since 2000. Owner’s equivalent rent accounts for a 24% weight of the total CPI. An additional rent component known as Rent of Primary Residence accounts for 7% of total CPI. That was imputed at a growth rate of 3.5% over the past year. The weighted average of the two rent components of CPI was 2.9% for 31% weighting in the total CPI. This compares with actual rent increases of 4.3% as reported by the Census Bureau. That rate is consistent with the rate of rent inflation indicated in several private surveys.

Over the past 15 years, the use of this methodology has reduced CPI by an average of 0.3% per year.

CPI was never intended to be a measure of overall inflation, per se. Its purpose was for indexing government contracts, salaries, and benefits, and for use by businesses for the same purpose. The government uses OER instead of actual rents or actual home sale prices along with hedonic substitution (substituting lower quality items when prices rise) to reduce the cost of CPI escalators in government contracts, wages, and benefit programs.

This has saved the US Government countless billions since 1982 when the BLS last included housing prices in CPI. Perhaps there are many who would applaud these tactics, unless you are on the receiving end and seeing the purchasing power of your social security check constantly being eaten away along with seeing the income on your savings smashed to near zero. For middle class elderly, these tricks and ZIRP have been remorseless and brutal.

Conomists’ use of CPI as a measure of total inflation is fraudulent. The price of a pound of steak is the price of steak, not hamburger. The price of housing is what it sells for, not what an owner thinks it would rent for. CPI measures only a narrowly defined, hedonically suppressed, narrow basket of consumption items. It excludes the actual prices of housing and other assets which people purchase.

The Fed compounds the error of using fake data to understate inflation by relying on an even narrower and more suppressed measure of inflation, the PCE deflator. Neither of these measures account in any way for the inflation of asset prices, and PCE understates inflation even more than CPI. These measures ignore asset inflation completely, and deliberately understate those elements of the indexes which might at least partially represent asset price increases accurately.

CPI vs. PCE - Click to enlarge

CPI vs. PCE – Click to enlarge

Some observers worry about the Fed being behind the curve for tightening monetary policy. Based on the use of these indexes as proxies for inflation the Fed can say, “Curve? What curve?”

Here’s a video I did last year explaining the fraud.

Sing LA LA LA and Pretend Housing Doesn’t Count – That’s How Conomists Ignore Inflation

Census Bureau Press Release

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

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Ladies and Gentlemen, the Stock Market is (still) Shrinking

Ladies and Gentlemen, the Stock Market is (still) Shrinking

Courtesy of 

When I give talks to groups of investors or my fellow advisors, one of the concepts I tend to hit on is the fact that there is “a shortage of stocks” right now. This line always draws a good laugh, but then my shtick is that I don’t smile. Then I dazzle motherf***ers with my charts depicting buyback activity versus net flows or new IPO listings. And the laughter dies down a bit.

I first began talking about this in 2013 and the trend has gotten even more pronounced, see here.

We live in an age where people are making it into their 90’s – which means a thirty year retirement period* over which to incur living expenses. When your grandparents’ generation was the predominant force in the investment markets, people were dropping dead at 65, three days after their retirement party, and bonds actually earned interest. Now a large portion of the Boomer generation is hanging on for decades longer and bonds yield nothing. So there is a great deal of demand for quality stocks. At the same time, public companies are pulling more and more of their shares off of the markets, leading to a scarcity!

It’s a bizarre concept to wrap your head around, but it goes a great deal toward explaining what’s been going on in the post-crisis period.

Edward Luce writes the following about buybacks at Financial Times this week:

In theory companies are meant to raise money from the stock market to invest in their future growth. Exactly the reverse is taking place. Last year, the volume of buybacks was $550bn, according to Bloomberg, while the amount of new money coming into the market, mostly into mutual and exchange traded funds, was just $85bn. During 2015 the trend has increased sharply. Not only have buybacks jumped: they hit a record $104bn in February. But investors have actually been withdrawing money from the market.

With an assist from the Fed’s endless money spout and a boardroom fear of the near-Biblical powers of the activist hedge funds, we’ve basically repurposed the stock market away from its original intention. Won’t go on forever, but for now, it’s undeniable.


US Share Buybacks Loot the Future (Financial Times)


Netflix: Burn It and They Will Come

Netflix: Burn It and They Will Come

Courtesy of Wade at Investing Caffeine

Baseball Field Morgue

In the successful, but fictional movie, Fields of Dreams, an Iowa farmer played by actor Kevin Costner is told by voices to build a field for baseball playing ghosts. After the baseball diamond is completed, the team of Chicago White Sox ghosts, including Shoeless Joe Jackson, come to play.

Well, in the case of the internet streaming giant Netflix Inc (NFLX), instead of chasing ghosts, the company continues to chase the ghosts of profitability. Netflix’s share price has already soared +63% this year as the company continues to burn hundreds of millions in cash, while aggressively building out its international streaming footprint. Unlike Kevin Costner, Netflix investors are likely to eventually get spooked by the by the stratospheric valuation and bleeding cash.

At Sidoxia, we may be a dying breed, but our primary focus is on finding market leading franchises that are growing cash flows at reasonable valuations. In sticking with my nostalgic movie quoting, I believe as Cuba Gooding Jr. does in the classic movie, Jerry Maguire, “Show me the money!” Unfortunately for Netflix, right now the only money to be shown is the money getting burned.

Burn It and They Will Come

Money Burning

In a little over three years, Netflix has burned over -$350 million in cash, added $2 billion in debt, and spent approximately -$11 billion on streaming content (about -$4.6 billion alone in the last 12 months). As the hemorrhaging of cash accelerates (-$163 million in the recent quarter), investors with valuation dementia have bid up Netflix shares to a head-scratching 350x’s estimated earnings this year and a still mind-boggling valuation of 158x’s 2016 Wall Street earnings estimates of $3.53 per share. Of course the questionable valuation built on accounting smoke and mirrors looks even more absurd, if you base it on free cash flow…because Netflix has none. What makes the Netflix story even scarier is that on top of the rising $2.4 billion in debt anchored on their balance sheet, Netflix also has commitments to purchase an additional $9.8 billion in streaming content in the coming years.

For the time being, investors are enamored with Netflix’s growing revenues and subscribers. I’ve seen this movie before (no pun intended), in the late 1990s when investors would buy growth with reckless neglect of valuation. For those of you who missed it, the ending wasn’t pretty. What’s causing the financial stress at Netflix? It’s fairly simple. Beyond the spending like drunken sailors on U.S. television and movie content (third party and original), the company is expanding aggressively internationally.

The open check book writing began in 2010 when Netflix started their international expansion in Canada. Since then, the company has launched their service in Latin America, the United Kingdom, Ireland, Finland, Denmark, Sweden Norway, Netherlands, Germany, Austria, Switzerland, France, Belgium, Luxembourg, Australia, and New Zealand.

With all this international expansion behind Netflix, investors should surely be able to breathe a sigh of relief by now…right? Wrong. David Wells, Netflix’s CFO had this to say in the company’s recent investor conference call. Not only have international losses worsened by 86% in the recent quarter, “You should expect those losses to trend upward and into 2016.” Excellent, so the horrific losses should only deteriorate for another year or so…yay.

While Netflix is burning hundreds of millions in cash, the well documented streaming competition is only getting worse. This begs the question, what is Netflix’s real competitive advantage? I certainly don’t believe it is the company’s ability to borrow billions of dollars and write billions in content checks – we are seeing plenty of competitors repeating the same activity. Here is a partial list of the ever-expanding streaming and cord-cutting competitive offerings:

  • Amazon Prime Instant Video (AMZN)
  • Apple TV (AAPL)
  • Hulu
  • Sony Vue
  • HBO Now
  • Sling TV (through Dish Network – DISH)
  • CBS Streaming
  • YouTube (GOOG)
  • Nickelodeon Streaming

Sadly for Netflix, this more challenging competitive environment is creating a content bidding war, which is squeezing Netflix’s margins. But wait, say the Netflix bulls. I should focus my attention on the company’s expanding domestic streaming margins. This is true, if you carelessly ignore the accounting gimmicks that Netflix CFO David Wells freely acknowledges. On the recent investor call, here is Wells’s description of the company’s expense diversion trickery by geography:

“So by growing faster internationally, and putting that [content expense] allocation more towards international, it’s going to provide some relief to those global originals, and the global projects that we do have, that are allocated to the U.S.”

In other words, Wells admits shoving a lot of domestic content costs into the international segment to make domestic profit margins look better (higher).  Longer term, perhaps this allocation could make some sense, but for now I’m not convinced viewers in Luxembourg are watching Orange is the New Black and House of Cards like they are in the U.S.

Technology: Amazon Doing the Heavy Lifting

If check writing and accounting diversions aren’t a competitive advantage, does Netflix have a technology advantage? That’s tough to believe when Netflix effectively outsources all their distribution technology to Inc (AMZN).

Here’s how Netflix describes their technology relationship with Amazon:

“We run the vast majority of our computing on [Amazon Web Services] AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted. While the retail side of Amazon competes with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service.”

Call me naïve, but something tells me Amazon could be stealing some secret pointers and best practices from Netflix’s operations and applying them to their Amazon Prime Instant Video offering. Nah, probably not. Like Netflix said, Amazon wouldn’t steal anything to gain a competitive advantage…never.

Regardless, the real question surrounding Netflix should focus on whether a $35 billion valuation should be awarded to a money losing content portal that distributes content through Amazon? For comparison purposes, Netflix is currently valued at 20% more than Viacom Inc (VIA), the owner of valuable franchises and brands like Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, VH1, Spike, and more. Viacom, which was spun off from CBS 44 years ago, actually generated about $2.5 billion in cash last year and paid out about a half billion dollars in dividends. Quite a stark contrast compared to a company accelerating its cash losses.

I openly admit Netflix is a wonderful service, and I have been a loyal, longtime subscriber myself. But a good service does not necessarily equate to a good stock. And despite being short the stock, Sidoxia is actually long the company’s bonds. It’s certainly possible (and likely) Netflix’s stock will underperform from today’s nosebleed valuation, but under almost any scenario I can imagine, I have a difficult time foreseeing an outcome in which Netflix would go bankrupt by 2021. Bond investors currently agree, which explains why my Netflix bonds are trading at a 5% premium to par.

Netflix stockholders, and crazy disciples like Mark Cuban, on the other hand, may have more to worry about in the coming quarters. CEO Reed Hastings is sticking to his “burn it and they will come” strategy at all costs, but if profits and cash don’t begin to pile up quickly, then Netflix’s “Field of Dreams” will turn into a “Field of Nightmares.”

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), AAPL, GOOGL, AMZN, long Netflix bond position, long Dish Corp bond, and a short position in NFLX, but at the time of publishing, SCM had no direct position in VIA, TWX, SNE, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Richmond Fed Manufacturing Index Negative Second Month

Courtesy of Mish.

The Fed manufacturing surveys continue to disappoint. Today, the Richmond Fed reading came in at -3 matching the lowest guess on Bloomberg.

The headline index is in the minus column for the second month in a row, at minus 3 vs March’s minus 8. New orders are in the negative column for the 3rd month in a row, at minus 6, while backlog orders, at minus 8, continue to extend their long negative streak. Shipments are negative, at minus 6, and capacity utilization is negative, at minus 4.

Yet despite the weakness in orders and despite the weakness in shipments, employment in this report, as it curiously has been in other manufacturing reports as well, is up, to plus 7 vs plus 6 in March. This must reflect confidence that ongoing weakness is only temporary and that order and shipment momentum is certain to build.

Other details include depressed price readings, consistent with other reports as well. The manufacturing sector is being held down by weak exports and trouble in the oil & gas sector, but it’s not keeping firms from hiring.

Misplaced Confidence?

The Richmond Fed reports Manufacturing Sector Activity Remained Soft; Employment and Wages Grew Mildly

Overall, manufacturing conditions remained soft in April. The composite index for manufacturing moved to a reading of -3 following last month’s reading of -8. The index for shipments and the index for new orders gained seven points in April, although both indicators finished at only -6. Manufacturing employment grew mildly this month. The indicator gained one point, ending at a reading of 7.

Manufacturers looked for better business conditions in the next six months. Survey participants expected faster growth in shipments and in the volume of new orders in the six months ahead. Producers also looked for increased capacity utilization and anticipated rising backlogs. Expectations were for somewhat longer vendor lead times.

Survey participants planned more hiring, along with moderate growth in wages and a pickup in the average workweek during the next six months.

It’s important to note that a single firm hiring one person will counterbalance another firm firing 50. It’s entirely possible employment is not as strong as it looks (not that 7 is a particularly strong number in the first pace).

Finally, I suspect confidence is on the high side looking ahead. Given strength in the US dollar and a clearly slowing China, I see no reason to believe there is going to be a big second quarter recovery, or if there is one, that it will last.

This isn’t all due to the weather.

Mike “Mish” Shedlock

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Deconstructing and Debunking Shadowstats

Courtesy of Mish.

An interesting article came my way today courtesy of a friend “BC”. The article is Deconstructing ShadowStats. Why is it so Loved by its Followers but Scorned by Economists? by Ed Dolan.

Mish readers likely know that I believe inflation to be understated, and that I also believe Williams’ ShadowStats is wildly on the high side. For example, please consider GDP, Real GDP, and Shadowstats “Theater of the Absurd” GDP.

I have also mentioned food inflation on many occasions. While food prices (especially beef) did jump in the last year or so, I recently bought chicken breasts for $.99 a pound and very lean center cut pork chops for $2.49. Sale prices on center cut pork chops have generally ranged from $1.79 to $2.49 for 15 years! Not on sale, I have seen them as high as $5.49.

So I buy pork chops on sale, and freeze them. Same with chicken and beef. While non-sale prices have gone up more, ShadowStats calculations seem absurd.

Want to combat food inflation? Buy a big freezer, buy food on sale, and freeze it.

I never dove in into Williams’ numbers to see where he may have gone wrong. Ed Dolan just did that, with convincing tables, graphs, and commentary.

Here is a snip.

A can of tomato sauce that cost $.25 at Piggly Wiggly in 1982 cost $.79 at my local market in early 2015. Starting from the 1982 price, the CPI predicts that it should cost $.61 in 2015 while ShadowStats predicts that it should cost $2.64. Starting from the 2015 price and working backwards, the CPI predicts that it should have cost $.32 in 1982 while ShadowStats predicts that is should have cost $.08. Based on these calculations, we see that the CPI underestimates inflation, as measured by the Tomato Sauce Index: The ratio of the 2015 predicted price of $.61 to the 2015 actual price, $.79, is .77, an underestimate of 23 percent. The ratio of the ShadowStats prediction to the actual price is 3.32, an overstatement of 223 percent. For tuna, both indexes overestimate inflation, the CPI by 34 percent and ShadowStats by 478 percent, and so on.

Has Williams Simply Made a Mistake?

The fact that the ShadowStats inflation rate fails every crosscheck makes one wonder whether Williams has simply made some kind of mistake in his calculations. I believe that he has done just that. The mistake, I think, can be found in a table given in a post that represents Williams’ most complete explanation of his methodology.

… Williams’ use of a running total of inflation differentials to compute a “cumulative inflation shortfall” of 5.1 percentage points exaggerates the true impact of the methodological changes made by the BLS. A better way to estimate the cumulative inflation shortfall would be to look at the differences between CPI-U-RS and CPI-U before 1983, the year when the BLS implemented the first of the changes that it incorporates in the CPI-U-RS series. That approach is not quite as precise when we use real-world numbers, as Williams does in his original table. As explained earlier, the actual data include statistical noise caused by changes in weighting and in relative price changes among sectors. However, we can approximate the true inflation shortfall by averaging the numbers for 1981 and 1982 from Williams’ table, giving an estimate of -0.45 percentage points….

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Why the Fed Will Crash the Economy If It Hikes Rates: In Three Charts

Courtesy of Pam Martens.

Consumer Confidence Chart Versus Labor Force Participation Rate

By Pam Martens and Russ Martens: April 28, 2015

If you’ve been scratching your head since the middle of last year as consumer confidence surveys depicted an optimistic, eager to spend consumer while other hard economic data was showing a sputtering economy, we’re here to put your mind to rest. You’re not crazy. The U.S. economy is dramatically diverging from where most consumers think it is and we have three charts to prove it.

Most Americans have never heard of the Labor Force Participation Rate. Consumers judge the availability of jobs, or lack of them, by the Unemployment Rate that is fed to them in newspaper headlines and TV sound bites monthly. The Unemployment Rate has been coming down nicely and fueling positive vibes among consumers.

Unfortunately, the Labor Force Participation Rate, which measures the number of people who are either employed or actively looking for a job has been hitting historic low numbers, suggesting far more slack in the labor market than captured by the official Unemployment Rate.

On February 4, Jim Clifton, Chairman and CEO of Gallup, told a stunned interviewer at CNBC that he was concerned he might “suddenly disappear” and not make it home that evening if he disputed the reliability of what the U.S. government is reporting as unemployed workers. Clifton’s concerns are essentially based on the fact that consumer confidence and Fed jawboning on when it’s going to hike interest rates to slow down this “strong” U.S. economy before it overheats is about all the U.S. has left in its monetary arsenal.

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Valuations: Maybe I am Crazy

Courtesy of Mish.

Relative vs. Absolute Value

As I watch valuations on stocks soar higher and higher into the stratosphere, I keep asking “where is the value?”

The problem for most is confusing “relative” value vs. absolute value. Stocks may be “cheap vs. bonds” but what does that matter if bonds are ridiculously overpriced?

Fair Value Has Three Digits

John Hussman has an interesting post this week entitled Fair Value on the S&P 500 Has Three Digits.

The last time I quoted Hussman, a manager for a prominent investment firm emailed something on the lines of “Mish, please do yourself a favor and stop referring to Hussman“.

Actually, that was likely be good advice. The problem I have with the advice is simple: I happen to agree with Hussman.

Right, wrong, or in between, I say what I believe. I do not say things I disagree with to get blog traffic up, investments up, or page hits up. I say what I believe, and I suspect it has cost me traffic. I upset Republicans and Democrats, equity bulls and bears, and US treasury bulls and bears.

Things are so crazy I have been accused of being a flaming Obama liberal as well as being in Bush’s pocket. Truth be known, I never voted or Obama or Bush, and I have never missed voting in a national election since I was 18. Of course, some people think I am crazy to vote at all and that comment has come up when I mention that I vote.

Life would be so much simpler for me if I was obnoxiously one sided, if I never offended anyone ever, or if I purposely offended everyone all the time.

There’s value in being universally despised, value in being hated by half the people all the time, or in never saying anything to offend anyone (being universally liked). Traffic-wise, those three models make perfect sense.

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What Makes Brussels More Equal Than Others

Courtesy of The Automatic Earth.

Harris&Ewing Ford Motor Co. New medical center parking garage, Washington, DC 1938

Dutch daily Algemeen Dagblad ran a little article recently that we’re surprised no other news organization picked up. It concerned a proposal in the European Parliament in which the parliamentarians got to vote on raising their own paycheck (always a good idea). The best thing about the story is that not everyone voted in favor.

Most did though. It much amused me to see that apparently it was Angela Merkel’s party, the German Christian Democrats, which was behind the proposal. Initially, they had even wanted double what they actually got. Here’s some numbers and details – and please forgive me for not being a math wizard -.

A Member of the European Parliament (MEP), according to the article, receives the following for their valiant and entirely selfless efforts at public service:

• Salary: €8000+
• Expenses: €4300
• A per diem allowance of €300 for every day a meeting is attended.

Per year that adds up to: €147.600 + €30,000 if 100 meetings are attended. Let’s say €180,000.

On top of that, the Parliament pays into MEPs pension funds, but we’ll leave that alone for now.

There are 751 MEPs, so total ‘salary’ costs are €135,180,000. But that’s just the start.

And we’re not yet adding translation costs, which apparently can add up to over €120,000 per day (!), or perhaps some €30-40 million per year.

Nor are we taking into account the estimated at least €200 million per year it takes to have the entire Parliament (MEPs, assistants, translators, employees, in total about 4000 people) move between Brussels and Strasbourg every month, an oddity that springs from a drawn-out power poker play between Germany and France. Do note: the constant move costs way more than all 751 MEP’s base salary + expenses.

No, the proposal discussed, concerns the added expense accounts MEPs receive for their assistants. At present, the amount involved is over €21,000 per month, and according to the people who receive it – and vote on raising it -, that’s not enough.

Typically, says the Dutch paper, an MEP has 3 assistants, all of whom get paid €2500 a month. They’re also in a special low Brussels income tax bracket. This means each MEP receives €252.000 per year in ‘assistant costs’, and spends €90,000 in salary costs, leaving €162,000 for food and lodging. Since there are 751 MEPs, the total adds up to €15,771,000 per month or €189,252,000 per year.

And they want more.

The original proposal called for another €3000 per month. Because some MEPs protested against this, it was reduced to €1500. Or €18,000 per year per MEP, times 751, a cool €13,518,000. Just in extra costs they voted in all by themselves.

There are many many stories about people living the high life once they get voted into the Brussels/Strasbourg traveling circus. The majority have lucrative jobs at home. They stay in swanky hotels. They collect per diems for meetings they don’t actually attend. They lay the basis for lucrative corporate careers after they exit the Parliament. It’s democracy in theory but not in practice.

Brussels/Strasbourg is no stranger to corruption, or whatever word you would want to to use to describe what goes on. Still, there are lots of MEPs who are completely on the up and up, and many who even pay back a lot of their ‘compensation’ into either the Parliament itself or into their own – national – part coffers, because they say the payments are exorbitant. But they don’t speak up. At least not outside of the confines of the Parliament itself.

But these are also – all of them put together – the people who uphold the EU policies versus Greece, where there are really many children who are hungry, and seniors who can’t get proper health care. Faced with a situation like that, one would think a proper parliament of a proper union wouldn’t dare raise its own expenses – which have to be paid by member countries’ taxpayers – before and until all children in the union are properly fed, and all grandmas properly taken care off by qualified medical personnel.

One would think. These are also the people responsible for the EU support that allows the Kiev army’s mass killings of its own people. And for the continuation of the anti-Russia and anti-Putin stance that’s become so popular across the western world. They may not be the daily executives of the circus, but they still are the responsible at the end of the day.

They are also the people who voted to cut down the budget for the Mediterranean refugee patrol missions, money saved that, if you want to take a cynical enough view, was freed to raise their own stipends. As thousands drown.

And so again we would like to raise that question: why would anyone, any country, want to have these people take their decisions for them? What would make you think when you live in Greece that these traveling circus clowns would be better at protecting and defending your interests than your own people, who live where you live, who see what you see on a daily basis?

It’s fine, and it’s perhaps even logical, at first glance, for Greeks and Italians to want to remain part of the euro. But when you look closer, you can’t avoid the notion that by being part of the euro, you give up the autonomy you also crave. And that the price you pay for being a part of the euro, and of the EU, makes you a serf to greater and richer interests that care about you about as much as they care about flies on their walls.

This one story about what MEPs vote themselves is but one example. Why not send us an example of where and how you feel Brussels protects your interests better than your own governments? We’re really curious to know. Because we don’t see it.

Japan Hits The Easy Money Wall. We May Be Next

Courtesy of John Rubino.

Japan, whose monetary policy is by far the world’s most expansive, just reported retail sales that soared on the wings of all that newly-created currency. Just kidding. Retail sales tanked:

Japan Retail Sales Slump Flashes Warning Signal for Kuroda

(Bloomberg) – Japan’s retail sales fell in March the most since 1998, cutting against central bank chief Haruhiko Kuroda’s view that cheaper energy will give a boost to the world’s third-biggest economy.

Sales dropped 9.7 percent from a year earlier, when there was a run-up in purchases ahead of an April sales-tax increase, according to trade ministry data released Tuesday. Sales sank 1.9 percent from the previous month, compared with a gain of 0.6 percent forecast by economists in a Bloomberg survey.

The weak reading on consumer spending comes ahead of this week’s Bank of Japan policy decision and economic outlook that could highlight waning momentum in inflation. Kuroda has said cheaper oil may crimp price gains in the near term, while eventually fueling growth and inflationary pressures.

“It’s becoming clear that Japan’s recovery is very sluggish,” said Kiichi Murashima, an economist at Citigroup Inc. “With a tight labor market and better consumer sentiment, we don’t have to change the view that spending will pick up gradually. But uncertainties are growing about the strength of the economy and that’s worrisome for the BOJ.”

Marcel Thieliant at Capital Economics and Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities Co. were the only two economists among 34 respondents in a Bloomberg survey that forecast the BOJ will expand unprecedented monetary easing at Thursday’s meeting. Murashima sees the BOJ adding to easing in July, while a majority of economists surveyed forecast a boost by the end of October.

Inflation Outlook
The yen was little changed at 119.08 per dollar, bringing its drop to 8.6 percent since Kuroda led a divided policy board on Oct. 31 to increase the pace of the BOJ’s asset purchases. The Topix index of shares advanced 0.7 percent.

Kuroda has repeatedly said the central bank will continue to apply stimulus until consumer price gains are stable around its 2 percent target. The BOJ’s main gauge showed inflation slowing to zero in February, weighed down by oil price declines of more than 40 percent in the past year.

The BOJ in January lowered its outlook for core inflation to 1 percent from 1.7 percent for this fiscal year through March 2016, the second cut under Kuroda’s governorship since March 2013.

The central bank appears to be wavering in its commitment to stimulus, Kozo Yamamoto, an adviser to Prime Minister Shinzo Abe and advocate of reflationary policies, said in an interview.

Without aggressive new measures by the BOJ to spur prices, Yamamoto said he will start agitating for legislation to enshrine the 2 percent inflation target.

Because current developed-world economic policies are experimental pretty much across the board (zero and now negative interest rates, the war on cash, massive deficits, even more massive unfunded liabilities and derivatives books) the data now coming in have theoretical as well as practical implications. They answer questions about limits; that is, about what happens when certain policy tools are taken to their logical extremes. How negative can interest rates go, for instance, before they stop inducing consumers to borrow? How much debt can a system take on before new debt stops generating growth? And how much currency can be pumped into an economy before people stop treating it like money?

Economists don’t know the answer to these questions (though some of the really bold and/or delusional ones think they do). So what happens this year and next will define a whole generation of economic theory. And while it’s too soon to say anything with certainty, the early results are discouraging for Keynesians who believe that the problem is too little debt and insufficiently negative interest rates.

Japan has been creating new currency on a scale that, relative to the size of its economy, dwarfs the Fed’s recent QE program. A bunch of its bonds trade with negative interest rates and its government continues to run huge deficits. And despite all this, its people will buy less stuff this year than last while inflation drifts towards zero. Limits, in short, are starting to appear.

The Bank of Japan is meeting next week under growing pressure to up the ante with even more money creation and lower interest rates. If it agrees, we’ll get some really good data. Stay tuned.

Visit John's Dollar Collapse blog here.

Picture via Pixabay.

Money managers say “Whatever” on the upcoming rate hike

This is surprising: Only 5% of the money managers polled by Barrons call themselves bearish. Implicit in the results is the general acceptance (80%) that the Fed's actions will determine which way the indexes move in the six months post-hike. ~ Ilene

Money managers say “Whatever” on the upcoming rate hike

Courtesy of 

Peter Boockvar shares an interesting insight from this weekend’s Barron’s Big Money Poll:

If you haven’t seen it yet, the past weekend’s Barron’s Magazine published its Big Money Poll of US money managers. Of those polled, 45% were bullish, 50% were neutral and just 5% were bearish…

One last data point that I found interesting in the poll was the question “Will the stock market rise or fall in the first 6 months after the Fed first raises rates?” Only 25% thought it would fall and a large 55% said it would rally. The balance of 20% thought the rate hike would have ‘no effect on stocks.’ Thus an amazing 75% of money managers aren’t bothered at all about a rate hike. Historically speaking the market does not get hurt in the early parts of a rate hike cycle so there is plenty of precedence for this thought but we’re not in your normal cycle so those surveyed are just guessing, as we all are to an extent.


Peter Boockvar
Managing Director, Chief Market Analyst
The Lindsey Group LLC

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The Consensus (TRB)

Charlatans exist because people crave certainty

Charlatans exist because people crave certainty

Courtesy of 

I have a whole chapter in my book, Clash of the Financial Pundits, that explains why we’re so easily lulled into stupidity by economic or market commentators. It boils down to the fact that the world is an uncertain place, so we inherently gravitate toward those who provide us with certainty. It’s how organized religions were first formed and how leaders throughout history have been chosen. Frequently wrong, never in doubt is good enough when those around you are desperate for an easy answer.

In finance, the more certain a speaker is, the more likely it is that their audience will come to believe in what they’re hearing as though it’s guaranteed. Some market commentators use this power for self-enrichment or abuse. I see it online every day and in my email inbox. I see it on TV and hear it on the radio.

In the wake of a letter from Columbia University’s faculty complaining about Dr. Oz and the discredit he is to the medical profession, Dr. Saurabh Jha writes the following at Quartz:

One might counter that Oz is using his position to misinform people. Specifically, he is misinforming people about alternative and holistic medicine, and a lot of lucrative nutritional supplements. But people don’t listen to Dr. Oz to be “informed.” People aren’t interested in numbers, uncertainty, the idea that more research is needed, or that science is a provisional assumption. People want certitude and solutions. This is why chicanery is fertile. God may be dead, but prophets are still alive and kicking.

Economists have figured this out. They have stopped saying, “On the one hand, QE could save the economy; on the other hand, QE could ruin the future.” People are tired of uncertainty. So now one-handed economists swagger with unprecedented certainty. They have, however, bifurcated into two camps—the Democrat economists and the Republican economists. The two hands remain.

Oz is a product of the masses. He exists because of our love for the circus, and our frustration with uncertainty. Uncertainty is the DNA of science. He exists because science can’t cure our existential angst. If Oz didn’t exist, he would have been invented. If he were not at Columbia, he would have been at Stanford.

Josh here – There are many parallels between what Dr. Oz is for the health care profession and what some popular market pundits are for the investing industry. People who pound their fists on the table about markets or claim to reliably predict the economic future are every bit as damaging to the American public as the charlatan doctor who makes outrageous medical claims.


Dr. Oz is popular because the truth is boring (Quartz)

Read also:

Clash of the Financial Pundits (Amazon)

Lord of The Rates Part IV – Consumer Rates

Lord of The Rates Part IV – Consumer Rates

By The Banker 

nazgulI’ve reviewed in recent columns what I believe happens when interest rates rise this Summer, in particular what happens to real estate when the FOMC raises the Fed funds rate, Aka “The One Rate To Rule Them All.”

“…Nine for consumers doomed to die

One for the Yellen on her dark throne

In the land of FOMC where the money’s born…”

While rate hikes generally hurt, I don’t expect this rate hike to change much for consumer interest rates.

Consumers already face a very wide range of interest rates, from 2% Prime auto-loans, to mid-range consumer debt at less than 10%, to the mid-20 % for credit card debt, even to stunning 100%+ annual rates for payday loans.

Just as the humans of Middle Earth experienced vastly different Rates of Power, so too do we humans of this Era already face vastly different rates.

I’ll review these different ends of the consumer-borrowing spectrum in turn.s

Cheap Prime rates disappear

The very cheapest consumer loans may jump a bit this Summer.

Locking in cheap student loans, mortgages, and auto-loans in this Era left us feeling like the Dúnedain, noble and heroic borrowers.

Credit Unions that offered 1.9% auto loans probably stop doing so immediately following the jump in rates. Historically low rates spurred auto purchases, making us Riders of Rohan, racing across the plain on our fresh swift horses.

In addition, low rates like my 15-year mortgage at 2.75% probably cease being available. In retrospect, those rates will mark a low-tick of the interest rate market.

For a high credit borrower collateralized by a car or home, however, we’re probably only looking at a 1 to 2% jump after rates rise.

Uncollateralized personal loans for high credit borrowers – like you can see on a crowd-sourced lending site like – currently run in the 6 to 8% range. Those rates likely jump a bit as well following the Fed funds hike this Summer.


Credit cards

Moving a bit higher on the consumer interest rate scale, I doubt credit card rates move much at all.

Your basic credit card rate balance already charges substantially high rates. The national average credit card rate on balances runs around 15% right now, which is high enough to leave your finances feeling as woozy as King Théoden under the influence of Wormtongue.

And that’s just the average. The highest rate you will see quoted nationally is 29.9%, although penalties and fees can push effective rates higher than that. As long as they can limit defaults, banks don’t really need to raise credit card rates above 15% to 29% to stay profitable, when the Fed funds rate rises.

What about those seemingly attractive 0% interest balance transfer requests that come in the mail? Will those go away when rates rise? I doubt it.

0% balance transfers

Credit cards offers to consolidate balances at 0% for 6-12 months probably continue even after rates start to rise, because these aren’t really 0% loans.

In the fine print of most of these so-called 0% offers is the requirement that you pay an upfront 3% ‘consolidation fee’ for the privilege of a supposed 0% balance transfer. When you translate the 3% fee into an annual rate, you get something not at all close to the advertised “0% loan.”

How is this not really a 0% loan, but instead is a nasty trick perpetuated by a Saruman-like wizard, in the service of the Dark Lord? Let me explain.


If you transfer a high interest $10,000 credit card balance on which you had been paying, say, 18% per year, it is true you would cease having to pay $150 in monthly interest on your balance.

You would instead pay an upfront 3% fee of $300 (on the $10,000 balance in this example). Even if you paid off that loan after six months – before the 0% rate goes away – you’ve already paid an effective 6% annual rate. Credit card banks will happily take that initial 6% rate when they know they’ll most likely have you paying something like the old 18% on the balance, when the six months is over. Since you’re really paying at least 6% rather than 0%, I think banks will find it worth their while to continue those supposed 0% balance transfers.

But that’s not the worst consumer loan ever.

The Nazgûl of Lending

Payday loans – the Nazgûl of consumer lending – obviously can’t go higher from here. These loans, higher than 100% annually, prey from above on the finances of the people below. These are shrieking nails-on-chalkboard black-winged creatures.

Even Yellen in the land of FOMC cannot push these rates higher.

I just looked up a payday lender online and found I could borrow $500 for 30 days, and owe $629.92 at the end of the month. That’s a 315% annual borrowing rate.

The good news? (He said, ironically.) That rate is not going up this Summer, either.

Please Éowyn, or somebody, put a sword through the crown of these undead creatures.

Please see related posts:

Lord of the Rates Part I – One Rate To Rule Them All

Lord of the Rates Part II – On The FOMC ‘Printing Money’

Lord of the Rates Part III – The Mortgage and Real Estate Market

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Sad News For Greece? Will Greece Kiss Troika’s Ass?

Courtesy of Mish.

I am convinced the best thing for Greece is to tell the troika where to go. And recent events (at least until today) suggested Greece would do just that.

On the other hand, extreme sentiment is usually wrong. It may not be, it just usually is. So please consider the British betting site, William Hill.

Sentiment is so lopsided that the British betting site William Hill No Longer Accepts Bets On Greece.

No player seems interested in betting that Greece remains in the euro zone until the end of the year.

Greek Capitulation?

Wow. Zero bets is mathematically as lopsided as it gets.

Meanwhile, please consider Tsipras Reshuffles Negotiating Team to Sideline Varoufakis.

Greece’s outspoken finance minister Yanis Varoufakis has been sidelined after three months of fruitless talks with international creditors to unlock €7.2bn in bailout funds, heartening investors and sparking a rally on the Athens stock market.

Eurozone officials said they were encouraged by the move by Alexis Tsipras, Greece’s prime minister, to overhaul his bailout negotiating team in the wake of an acrimonious meeting of eurozone finance ministers in Riga last week.

The shake-up comes as Athens faces questions over whether it can meet this month’s wage and pension bill of nearly €2bn as well as a €750m loan repayment due to the International Monetary Fund on May 12.

The Athens stock market rose nearly 4.4 per cent on the news and borrowing costs on Greece’s July 2017 bonds were down almost 4 percentage points from Friday’s close to 21 per cent. Yields on Greece’s benchmark 10-year bonds were down a full percentage point at 11.4 per cent.

The socialist opposition Pasok party said the government was “emasculating Mr Varoufakis . . . and attempting to send a message to the Europeans and the IMF indicating political will for an agreement”.

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AAPL Beats Expectations As China Becomes Dominant iPhone Market; Cash Jumps But So Does Debt

Courtesy of ZeroHedge. View original post here.

Moments ago AAPL reported Q2 earnings for the quarter ended March 31, 2015 which saw AAPL beat soundly on the top and bottom line as as result of a jump in iPhone sales, even as iPad and Mac sales came in below the expectation. EPS was $2.33 vs consensus $2.16, while revenues came in at $58.0 billion, $2 billion higher than the $56.0 billion expected.

While as expected AAPL had little to say about the Apple Watch launch, merely noting that it is aiming to reach a supply-demand balance for the product by quarter end, the breakdown by legacy product line reveals that it is still all about the iPhone, whose sales came in at 61.2 million above the 58.1 million expected, driven by a jump in Chinese demand, with iPad sales being cannibalized, while Mac sales dipped to 4.6 million, below expectations and the lowest since Q3 2014.

The result was a top-line number that once again beat expectations, coming in at $58 billion for the March 31 quarter.

But while AAPL certainly boosted sales volumes, one may wonder if it didn't take too much of a margin hit, with the average iPhone ASP of $658.5 coming well below the $687 expected.

As some had expected, the ongoing surge in AAPL sales is courtesy of China, where as the CFO reported, the iPhone outsold the US, while total China revenue was greater than all of Europe for the first time ever.

And while everyone is commenting on the surge of total AAPL cash to over $193 billion, a jump of $15.5 billion…

… what most are forgetting is that AAPL increasingly has a lot of debt, some $44 billion to be specific since it does not want to repatriate the bulk of its offshore cash, which means that its cash net of debt rose more modestly, from $142 billion to $150 billion.

As long as AAPL continues to be shareholder friendly, don't expect the net cash number to rise much more than its current level.

But while the operations were impressive if China and iPhone centric, what everyone is focusing on is the AAPL news that it once again expanded its buyback program en route to hitting the Goldman forecast of a record $900 billion in 2015 for the entire S&P500, by announcing it would boost its buyback authorization by more than 50%, from $90 billion to $140 billion.

The full announcement:

Apple today announced that its Board of Directors has authorized an increase of more than 50 percent to the Company’s program to return capital to shareholders. Under the expanded program, Apple plans to utilize a cumulative total of $200 billion of cash by the end of March 2017.

As part of the revised program, the Board has increased its share repurchase authorization to $140 billion from the $90 billion level announced last year. In addition, the Company expects to continue to net-share-settle vesting restricted stock units.

The Board has also approved an increase of 11 percent to the Company’s quarterly dividend, and has declared a dividend of $.52 per share, payable on May 14, 2015 to shareholders of record as of the close of business on May 11, 2015.

From the inception of its capital return program in August 2012 through March 2015, Apple has returned over $112 billion to shareholders, including $80 billion in share repurchases.

To assist in funding the program, the Company plans to continue to access the domestic and international debt markets. The management team and the Board will continue to review each element of the capital return program regularly and plan to provide an update on the program on an annual basis.

Yet it will, because as a result of its cash being landlocked in foreign countries, mostly China, the company's debt has increased from $16.7 billion a year ago to $43.9 billion this quarter and is now rising at an aggressive clip.

6th Straight Negative New Orders Reading for Dallas Fed Manufacturing Survey

Courtesy of Mish.

New orders in the Dallas Fed manufacturing survey came in negative for the sixth straight month today.

Weakness was expected due to collapse in oil prices, but the business activity range number was lower than any Bloomberg Consensus estimate.

Bloomberg Consensus

Texas Manufacturing Weakens Again

The Dallas Fed reports Texas Manufacturing Activity Weakens Again

Texas factory activity declined in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, posted a second negative reading in a row, coming in at -4.7.

Other measures of current manufacturing activity also reflected continued contraction in April. The new orders index edged up but remained negative at -14. The growth rate of orders index held steady at -15.5, posting its sixth consecutive negative reading. The capacity utilization index pushed further negative to -10.4, its lowest level since August 2009, and the shipments index edged up but stayed below zero at -5.6.

Perceptions of broader business conditions remained quite pessimistic for a fourth month in a row. The general business activity index stayed negative but ticked up to -16 in April, while the company outlook index moved down to -7.8, reaching its lowest reading in nearly two and a half years.

Dallas Fed Results

click on chart for sharper image

Weakness remains nearly everywhere one looks. The one bright spot had been the monthly jobs report, at least until last month. That “weather” report comes out Friday. …

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Can Consumers Carry US Econ While Business Prepares For A Storm?

Courtesy of Lee Adler of the Wall Street Examiner

Real Core Durable Good Orders (all orders except transportation equipment and defense capital goods) rose by 1.5% year to year in March. That was the actual, not seasonally adjusted number (NSA), but adjusted for inflation.

On a month to month basis, the number was so-so. Orders rose by 12.8%. That compares with the average March gain of +12.5% for the past 10 years. It is also greater than the March 2014 gain of +12.2%.

When we break down the components on a “real” inflation adjusted basis, which gives us an idea of the actual volume of new orders, the picture becomes more problematic.

The headline seasonally adjusted (SA) number for total new durable goods orders rose by 4% month to month. As the SA number so often does, this clearly overstated the actual increase in business. The media was loaded for bear however, quick to point out that non-defense non-aircraft capital goods orders fell by 0.5% on a seasonally adjusted month to month basis. That probably overstated any weakness in the broader economy, but there is a very real conflict in terms of the actual volume of orders which we see in the inflation adjusted actual NSA data.

A more comprehensive measure than the narrow non-defense non-aircraft capital goods includes consumer durables, whereas capital goods do not. It is uptrending weakly in the short run but downtrending in the long run as the US economy gets hollowed out.

Real Core Durable Goods- Click to enlarge

Real Core Durable Goods- Click to enlarge

Cutting through the mainstream media propaganda confusion, misreporting, and misinterpretation, here’s the takeaway. Real core durable goods are still growing at a very slow pace. They have reached the limit of the long term downtrend. A technical analyst would say that they have reached long term resistance. A technical chart trader might institute a pilot short position at this point, expecting this measure to roll over as time and trend suggest.

Another takeaway is that the trend decelerated sharply over the last 5 years in which either QE or ZIRP, or both, have been in force. They have had no effect in boosting this broad measure of the economy, with a growth rate no greater than that of the recovery of 2003-2006.

The real core capital goods story is far different. This narrower measure is a proxy for business investment and confidence in the economic outlook. Real core capital goods ex aircraft and defense has gotten slammed over the past 12 months, down by 5.2% in spite of the fact that big business can borrow and invest in capital goods at zero interest cost.

Real Core Capital Goods- Click to enlarge

Real Core Capital Goods- Click to enlarge

March is always a very strong month in this measure. March was up 14.6% month to month, but that compares with the 10 year average of +18.1% and the March 2014 increase of 20.3%. The current reading is a sharp deceleration of the trend. Like the broader measure which includes consumer durables, the capital goods measure is also in a long term downtrend.

Mainstream pundits like to repeat the mantra that consumers drive the US economy. Comparing these two measures suggests that the conventional wisdom is about to be put to the test. While consumers continue to spend, business has apparently already battened down the hatches for a storm. The question becomes whether the consumer will cave, or business will come around to a more optimistic view.

I’ll go with the conventional wisdom, “The trend is your friend.” The consumer has been carrying the load with little increase in real purchasing power for a long time.

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

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Paul Volcker Invests in Foreign Banks as He Lectures on U.S. Bank Reform

Courtesy of Pam Martens.

Paul Volcker (right) Hobnobbing at a Group of 30 Event

Paul Volcker (right) Hobnobbing at a Group of 30 Event

Last Monday, former Fed Chairman Paul Volcker held a press conference at the National Press Club to release his nonprofit’s plan for reforming U.S. bank regulation. Volcker’s plan includes elevating the Federal Reserve to even greater heights as a super regulator of a consolidated system. That’s exactly the opposite of what Congress has in mind as it holds hearings on fatal conflicts of interests between the Fed and Wall Street.

At the press conference, Volcker delivered a thoroughly discredited statement suggesting some deep-pocketed backers are putting words in his mouth. Volcker said: “The Federal Reserve is the best-equipped, the most independent and most respected financial agency of the United States government.”

Volcker’s views on financial reform must be seen against the backdrop of Volcker’s myriad conflicts and ties with the global ruling elite. His non-profit organization, The Volcker Alliance, has multiplied its income by a factor of 30 in one year. From 2012 to 2013, The Volcker Alliance went from $500,000 in contributions to over $15 million. It fails to list its donors on its public IRS 990 tax form. And then there is the matter of Volcker’s personal investments in unseemly foreign bank deals alongside global banks that are serially charged with breaking the law.

In December of last year, Simon Clark of the Wall Street Journal reported that Volcker had just completed his third investment stake in a foreign bank. Clark wrote that Volcker is well known for taming inflation in the 1980s (as Fed Chairman) but “Less well known is the 87-year-old former Fed chairman’s penchant for investing in banks around the world.”

According to Clark, since 1999, Volcker has invested in three separate foreign bank deals put together by private equity firm, Ripplewood. The most recent deal is for a stake in Latvia’s Citadele Bank. Earlier deals include the 1999 takeover of the Long-Term Credit Bank of Japan (now known as Shinsei Bank) and the 2006 investment in Egypt’s Commercial International Bank.

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The 10th Man: Pascal’s Wager

The 10th Man: Pascal’s Wager

By Jared Dillian

Do you believe in God? Stay with me.

I’m an armchair philosopher, and I’ve always wished I’d had the opportunity to be a philosophy major, because I can navel gaze with the best of them. But since then, I’ve come to know some actual philosophy professors, and as it turns out, they tend to not get along with other philosophy professors, which makes departmental politics a little toxic.

I can’t remember exactly when it was that I learned about Pascal’s Wager. 17th-century French philosopher Blaise Pascal postulated that it is rational behavior to believe in God.

Why believe in something for which there is no evidence? The answer lies in decision theory.

If you believe in God and you’re right, you go to heaven. Let’s call this “infinite gain.”

If you believe in God and you’re wrong, the only thing you lose is whatever time you spent in church and/or money you donated. It’s a finite loss.

If you don’t believe in God and you’re right, there is no God, you get to be smug. That is a finite gain.

If you don’t believe in God and you’re wrong, you go to hell. Let’s call this infinite loss.

Here it is in table format:

I think most people who understand decision theory will recognize this immediately. So yes, it is indeed rational—meaning in our best interest—to believe in God.

As it turns out, Pascal’s Wager is all over the place in markets.

Best example: Japan in 2012.

There’s this new prime minister, Abe, and this new Bank of Japan governor, Kuroda. They’re going to do this thing called Abenomics. They say they want to print trillions of yen to buy all kinds of assets, which is going to reflate the markets and devalue the currency.

Now ever since the crash of the early 1990s, Japan has had numerous plans to get out of deflation. Japan being Japan, not much changes there, and they end up just getting bogged down in bureaucracy. This has happened at least a dozen times in the last 20 years. So why believe them this time?

Table again:

Boy, did some people have to learn this the hard way. For the record, I’m still long the WisdomTree Japan Hedged Equity Fund (DXJ) and short the yen (JPY) 2.5 years later. I’m still in the trade because it’s the only trade in the markets that literally has infinite upside.

The people who were yelling at me that Japan was going to zero have a lot in common with the very vocal atheists you see on Facebook. They have an overwhelming desire to be right all the time. I don’t care if I’m right—I just want to make money!

The Nikkei went from 40,000 to 8,000. If it goes from 8,000 to 7,000, I make 12.5%. If it goes from 8,000 to 20,000 (which it just did), that’s a 150% gain. But some people like to say, “I told you so.” It’s worth more to them than money.

I will also point out that if you’re short, the most you can make is 100%, but if you’re long, there’s no limit to how much you can make. It’s hard work being a short investor. I wouldn’t run a dedicated short fund no matter how much you paid me. I’d rather pump gas.

Belief and the Black Box

I don’t think anybody really understands China. I think even the people who say they understand China don’t understand China.

How can you understand China? It’s a black box spitting out bogus economic statistics. 7% GDP? We all know they were in recession.

Two things you need to know about China:

  1. They are very capitalist. Way more than us. It’s the new land of opportunity. There are surveys showing this.
  2. They really want someone to organize society. The Chinese people just aren’t into spontaneous order.

This is a new thing in the 21st century. We’re learning that it’s possible to be capitalist in the context of a command-and-control government.

Now, as recently as 2008, I believed this would never work. Capitalism, I thought, was incompatible with planning. The Chinese went and borrowed a ton of money to build ghost cities they plan to move 300 million people into. If we tried this here in America, it would be a disaster. We can’t even build a subway line on Second Avenue.

So back in March 2013, that 60 Minutes piece on China’s ghost cities got investors really nervous—and ever since then, people have been waiting for the debt bomb to blow up.

But as I said, it’s a black box.

Everyone knows what happened next: the fake economic data started getting worse, commodities markets crashed, and people were speculating that China pulled forward demand for things like steel and iron ore 50 years.

But then, abruptly:

The market went up 20% in a matter of weeks. And then, in unison, the financial media said: It’s a bubble!

I found that odd. Usually when something goes up 20%, it’s not a bubble, especially in the context of the longer-term chart.

So remember, nobody understands China. It’s a black box. There’s no way to tell if it’s a bubble or not.

Pascal’s Wager again:

Needless to say, I’m long China A-shares, through the Market Vectors ChinaAMC A-Share ETF (PEK).

In general, there is more money to be made believing in things than not believing in things.

But aren’t we taught to be skeptical? What about Enron? Or Lehman?

There’s a time for that too, but trades like that always seem to happen in bear markets (because in bull markets, nobody asks the hard questions). So it’s situational.

I hate China. Absolutely hate it. I think it’s smoke and mirrors. It’s all going to blow up someday. But I look at the chart, and I change my mind.

China is fixed.

They’re going to pull it off.

Bull market again.

I love China.

I will believe pretty much whatever you want me to believe as long as I think I can make money off it.

Jared Dillian
Jared Dillian

The article The 10th Man: Pascal’s Wager was originally published at
Picture source: Pixabay.

The End Is Near, Part 1: The “War On Cash”

Courtesy of John Rubino.

As the saying goes, you can know a person by the quality of his or her enemies. This is also true of societies, where moral evolution can be traced by simply listing the things on which they declare war. Not so long ago, for instance, the world’s good guys — the US, Europe’s democracies and a few others — fought existential battles against fascism and communism. Then they went after poverty and discrimination. They were, at least in terms of their ideals, on the side of personal freedom and opportunity and against institutionalized control.

But then came the war on drugs, in which the US imprisoned millions of non-violent people guilty only of voluntary transaction. Not long after that we declared war on “terror,” using the enemies created by our own incompetent foreign policy as an excuse for a vast expansion of surveillance and police militarization.

And now, seemingly out of nowhere, comes a new enemy: cash. Around the world, governments and banks are making it harder to save and transact with paper and coin. The ultimate goal seems to be the elimination of private tools of commerce, in favor of transparent (to governments and banks) plastic, checks and online payment systems. The following excerpts are from longer articles that should be read in their entirety:

The Death of Cash

(Bloomberg) – Could negative interest rates create an existential crisis for money itself?

JPMorgan Chase recently sent a letter to some of its large depositors telling them it didn’t want their stinking money anymore. Well, not in those words. The bank coined a euphemism: Beginning on May 1, it said, it will charge certain customers a “balance sheet utilization fee” of 1 percent a year on deposits in excess of the money they need for their operations. That amounts to a negative interest rate on deposits. The targeted customers—mostly other financial institutions—are already snatching their money out of the bank. Which is exactly what Chief Executive Officer Jamie Dimon wants. The goal is to shed $100 billion in deposits, and he’s about 20 percent of the way there so far.

Pause for a second and marvel at how strange this is. Banks have always paid interest to depositors. We’ve entered a new era of surplus in which banks—some, anyway—are deigning to accept money only if customers are willing to pay for the privilege. Nick Bunker, a policy analyst at the Washington Center for Equitable Growth, was so dazzled by interest rates’ falling into negative territory that he headlined his analysis after a Doors song, Break on Through (to the Other Side).

Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.

The idea of abolishing or even constraining physical bank notes is anathema to a lot of people. If there’s one thing that militias and Tea Partiers hate more than “fiat money” that’s not backed by gold, it’s fiat money that exists only in electronic form, where it can be easily tracked and controlled by the government. “The anonymity of paper money is liberating,” says Stephen Cecchetti, a professor at Brandeis International Business School and former economic adviser to the Bank for International Settlements in Basel, Switzerland. “The bottom line is, you have to decide how you want to run your society.”

As long as paper money is available as an alternative for customers who want to withdraw their deposits, there’s a limit to how low central banks can push rates. At some point it becomes cost-effective to rent a warehouse for your billions in cash and hire armed guards to protect it. We may be seeing glimmerings of that in Switzerland, which has a 1,000 Swiss franc note ($1,040) that’s useful for large transactions. The number of the big bills in circulation usually peaks at yearend and then shrinks about 6 percent in the first two months of the new year, but this year, with negative rates a reality, the number instead rose 1 percent through February, according to data released on April 21.

Bank notes, as an alternate storehouse of value, are a constraint on central banks’ power. “We view this constraint as undesirable,” Citigroup Global Chief Economist Willem Buiter and a colleague, economist Ebrahim Rahbari, wrote in an April 8 research piece. They laid out three ways that central banks could foil cash hoarders: One, abolish paper money. Two, tax paper money. Three, sever the link between paper money and central bank reserves.

Abolishing paper money and forcing people to use electronic accounts could free central banks to lower interest rates as much as they feel necessary while crimping the underground economy, Buiter and Rahbari write: “In our view, the net benefit to society from giving up the anonymity of currency holdings is likely to be positive (including for tax compliance).” Taxing cash, an idea that goes back to German economist Silvio Gesell in 1916, is probably unworkable, the economists conclude: You’d have to stamp bills to show tax had been paid on them. The third idea involves declaring that all wages and prices are set in terms of the official reserve currency—and that paper money is a depreciating asset, almost like a weak foreign currency. That approach, the Citi economists write, “is both practical and likely to be effective.” Last year, Harvard University economist Kenneth Rogoff wrote a paper favoring exploration of “a more proactive strategy for phasing out the use of paper currency.”

Pushing back against the cash-abolition camp is a group of people who want to make cash more convenient, even for large transactions. Cecchetti and co-author Kermit Schoenholtz, of New York University’s Stern School of Business, suggest a “cash reserve account” that would keep people from having to pay for things by sending cash in armored trucks. During the day, funds in the account would be payable just like money in a checking account. But every night they’d be swept into cash held in a vault, sparing the money from the negative interest rate that would apply to money in an ordinary checking account. In a way, physical cash would take on a role similar to that played by gold in an earlier era of banking.

The “War on Cash” Migrates to Switzerland

(Acting Man’s Pater Tenebrarum) – The war on cash is proliferating globally. It appears that the private members of the world’s banking cartels are increasingly joining the fun, even if it means trampling on the rights of their customers.

We just come across a small article in the local European press (courtesy of Dan Popescu), in which a Swiss pension fund manager discusses his plight with the SNB’s bizarre negative interest rate policy. In Switzerland this policy has long ago led to negative deposit rates at the commercial banks as well. The difference to other jurisdictions is however that negative interest rates have become so pronounced, that it is by now worth it to simply withdraw one’s cash and put it into an insured vault.

Having realized this, said pension fund manager, after calculating that he would save at least 25,000 CHF per year on every CHF 10 m. deposit by putting the cash into a vault, told his bank that he was about to make a rather big withdrawal very soon. After all, as a pension fund manager he has a fiduciary duty to his clients, and if he can save money based on a technicality, he has to do it.

A Legally Murky Situation – but Collectivism Wins Out
What happened next is truly stunning. Surely everybody is aware that Switzerland regularly makes it to the top three on the list of countries with the highest degree of economic freedom. At the same time, it has a central bank whose board members are wedded to Keynesian nostrums similar to those of other central banks. This is no wonder, as nowadays, economists are trained in an academic environment that is dripping with the most vicious statism imaginable. As a result, withdrawing one’s cash is evidently regarded as “interference with the SNB’s monetary policy goals”.

One large Swiss bank recently responded to a pension fund’s withdrawal request with a letter stating: “We are sorry, that within the time period specified, no solution corresponding to your expectations could be found.”

Although we all know that fractionally reserved banks literally don’t have the money their customers hold in demand deposits, the contract states clearly that customers may withdraw their funds at any time on demand. The maturity of sight deposits is precisely zero.

Some thoughts

  • A well-run economy operating without cash would require a trustworthy government. That is, the people who know where we are and what we’re buying and selling 24/7 would have to be decent, competent and honest. Otherwise we’re giving near-absolute power to folks who might use it for their own enrichment at our expense. Which is of course to state the blindingly obvious. The fact that power both corrupts and attracts the already corrupt means that the more power we hand the government, the further we push it towards absolute evil. A cashless society would pretty much guarantee a dictatorship in a single generation.
  • If a cashless society is a means to the end of total government control of interest rates, i.e., the price of money, then the resulting deeply-negative rates would distort the pricing signals that make capitalism work. The system would devolve into a centrally-planned malinvestment-fest resembling bigger, more chaotic versions of the past century’s collectivist experiments, all of which crashed and burned in short order.
  • An environment in which cash is illegal and interest rates are negative would be both insanely good and catastrophically bad for gold. Good because the removal of cash leaves only gold and silver as historically-trusted private stores of value. Terrified capital would pour into bullion, sending its relative price through the roof. But then of course it would become an overt (rather than a covert) target of the same forces that made cash illegal. When “the war on gold” begins, the world as we knew it will have already ended.

Visit John’s Dollar Collapse blog here

Failure to Communicate: Science

This is discouraging. There seems to be a prevailing attitude, even among very intelligent people (personal observation), that science is just another subject of equivalence to religion, or apparently astrology, in explaining life in the big universe. Or, subjects that are not within the realm of science are imagined to be a science based on a misunderstanding of what science is.  

This misunderstanding of science may reflect a failed education system, and unfortunately, we may be traveling backwards. The highest percent of non-skeptics were in the youngest age group where a majority of people think astrology is at least "sort of" scientific.

In China, in contrast, 92% of people polled said they do not believe "in horoscopes." The exact question the researchers asked may in part explain the discrepant results. And I wonder, did some Americans get Astrology confused with Astronomy? Also not good.

More and More Americans Think Astrology Is Science 

By  at MotherJones

"I believe in a lot of astrology." So commented pop megastar Katy Perry in a recentGQ interview. She also said she sees everything through a "spiritual lens"…and that she believes in aliens.

According to data from the National Science Foundation's just-released 2014 Science and Engineering Indicators study, Americans are moving in Perry's direction. In particular, the NSF reports that the percentage of Americans who think astrology is "not at all scientific" declined from 62 percent in 2010 to just 55 percent in 2012 (the last year for which data is available). As a result, NSF reports that Americans are apparently less skeptical of astrology than they have been at any time since 1983.

Picture via Geralt at Pixabay.

Our Financial Future: Infinite Greed Meets A Funny Thing Called Karma

Courtesy of Charles Hugh-Smith, OfTwoMinds

Those angered by the mere question of the viability of this predatory pillaging in the name of capitalism are incapable of even admitting this cultural crisis exists.

Somewhere along the line, we lost the ability to distinguish between earning a profit and maximizing private gain by any means, i.e. Infinite Greed. If you insist on making this distinction now, you anger a lot of people, as it blows the capitalist cover of Infinite Greed.
The distinction between earning a profit and maximizing private gain by any means angers not just the few benefiting from the useful delusion that Infinite Greed is simply profit on overdrive; it seems to anger everyone who believes the Status Quo of burning mountains of coal to power towel warmers, sitting in traffic burning petrol two hours a day and central banks enriching the already wealthy is not just sustainable but god-darned good.
If you make the distinction between earning a profit and maximizing private gain by any means, then you realize the status quo is neither sustainable nor good: it is unsustainable and evil. This angers everyone who has rationalized their investment in (and defense of) an evil system, because, well, it's hard to feel all warm and fuzzy about your choices if the phony facade falls and the evil of the system you've defended is starkly revealed.
Every enterprise must earn a profit to survive. A worker-owned collective must earn a profit, as it needs money to reinvest in the business and reward those who have invested their capital (human, social, financial, intellectual, etc.) in the enterprise.
If the collective can't reinvest in new plant and new workers as the old equipment fails and old workers retire, it will weaken and collapse. This is equally true of any business owned by the state (i.e. a socialist enterprise): if the state-owned enterprise doesn't earn a profit that can be reinvested in the business, it can only survive if it is subsidized by some other enterprise that is earning a profit.
But the system we inhabit now is not based on earning a profit; that's merely the public-relations propaganda used to cloak its real heart: Infinite Greed. Maximizing private gain by any means isn't about earning a profit; it's about strip-mining the planet and the labor and profit of others.
If I buy a political favor that essentially eliminates competition in my private fiefdom, that doesn't generate more goods and services; it's simply maximizing my private gain at the expense of everyone else in the system.
Goosing the stock market ever higher only solves one problem: the terrible prospect that the assets of the incredibly wealthy might reset lower. It doesn't make the system sustainable or less evil; indeed, it is the manifestation of the evil at the heart of the entire system. It's not about shiny capitalism for the masses, or earning a profit by producing more and better goods and services: it's about doing whatever it takes to maximize private gain.
The success of this vast defense of those maximizing their private gain at the expense of everyone else appears invulnerable to many. In a system where central banks can print infinite money to further expand the value of the Financial Aristocracy's assets, it certainly seems that there is no force in the Universe that could possibly reduce this mighty Empire that worships only one god, that of maximizing private gain by any means.
Let's say this system is sustainable: the system that enriches the few at the expense of the many, the system that strip-mines the planet to enable private jets and trillions of dollars of wealth to rest comfortably in tax havens, a system that pays Nobel-prize-winning shills to spew nonsensical defense of the patently indefensible: if this is sustainable, we must ask: at what cost?
Is feeding this machine cost-free? Are there no consequences? Can the Federal Reserve not just create money to further enrich the few, but eliminate all cost and consequence as well?
To everyone resigned to the permanence and invulnerability of this evil, and everyone angered by the idea that it might implode and deprive them of their share of the swag, I suggest we consider a funny thing called Karma, which is the simple idea that actions have consequences which cannot be shoved onto others forever.
A similar idea is reversal is the way of the Tao. What appears mighty and invulnerable melts into air, as extremes naturally cycle to the opposite state.
Our loss of the ability to distinguish between earning a profit and maximizing private gain by any means has triggered a cultural crisis, one that few are willing to recognize, much less discuss. All those angered by the mere question of the viability of this predatory pillaging in the name of capitalism are incapable of even admitting this cultural crisis exists. Their response to the question is to accuse anyone who dares question the morality and sustainability of the current system of desiring a financial Apocalypse.
The easily angered are again confusing two distinct concepts: wanting an Apocalypse is entirely different from seeing an Apocalypse on the horizon. A financial Apocalypse wouldn't even touch the assets of the many, because their financial wealth is near-zero. If the $20 trillion (or whatever the number is, nobody really knows) sitting in tax havens melted into air, who would even notice except the pillagers and those paid to defend them?
The cultural crisis angers people because it threatens to loosen their grasp on the few threads of security they believe are real. Those thin threads are illusory, and a crisis will eventually be resolved in one fashion or another–not necessarily in an Apocalypse, but in a fast-spreading recognition of the wrongness and unfairly distributed costs of supporting a system that is intrinsically evil and unsustainable.

Picture by Geralt at Pixabay. 

If Other Gold Miners Can Do What Newmont Just Did, Look Out

Courtesy of John Rubino.

The past few years have been brutal for the gold miners, most of which brought it on themselves by starting new, high-cost mines just in time for the metal’s price to crater. The resulting write-downs and operating losses have made this without question the most unloved sector in the whole market.

The consensus among analysts has been that most miners’ costs are so structurally sticky that only slight reductions will be possible, making the industry a financial basket case until gold starts rising again.

Then Newmont, the second biggest gold miner, reported its first quarter earnings. Among other startling numbers, its all-in sustaining costs to produce one ounce of gold fell nearly 18 percent to $849 and its earnings rose by either 50% or 89% year-over-year, depending on the definition of profit being used (analysts were predicting a slight earnings decline). Free cash flow, meanwhile, soared to $344 million from the year-earlier $52 million.

Over the next week or two these results will get a thorough exam from analysts, and if they hold up they’ll change the game for miners. Specifically, if it’s possible to take this much out of costs without resorting to scams like high-grading (where the miner uses up the best ore to goose near-term results at the cost of future earnings) or fiddling with the timing of revenues and expenses, then other miners may be able to generate some pleasant surprises in coming quarters as well. And suddenly this is a happy, outperforming industry.

One indicator that this may be the case is insider buying: From Acting Man’s Pater Tenebrarum:

Insider Buying by Gold Mining Executives Increases Further

In spite of the gold price weakening once again this week and coming dangerously close to breaking an important support zone, gold investors have actually reason to take heart. Readers may recall what we wrote in our most recent update on gold about gold mining margins:

“The market has not yet really given any credit to the fact that mining margins are improving due to strength in the real price of gold. Management boards of gold companies may be coming around to a different view though – after all, they are acutely aware that the real gold price is the only thing that counts with respect to their margins.”

As data from our friends at INK Research in Canada (a highly recommended service) show, gold mining managers are indeed “acutely aware” of their improving profit margins. Insiders of several major and mid tier gold mining companies have embarked on a buying spree. Here is Barrick Gold as an example:

Barrick insider buying
Recent insider activity at Barrick Gold: the green crosses denote purchases.

To put a few concrete numbers to this: On March 27, ABX chairman John L. Thornton bought 360,000 shares in the open market. In early March, four different board members acquired 23,200, 10,200, 3,200 and 30,750 shares respectively (amounts are rounded), also in the open market. It is nothing special when insiders are selling – it does however mean something when they are buying, especially when they are buying in size and seemingly without concern for short term price gyrations. Note here that the gold sector is really standing out in this respect. In most other market sectors, insiders are bailing out as fast as they can.

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