Archives for September 2015

CPI and HICP Deflation in Spain Accelerates

Courtesy of Mish.

After a brief 0.1% rise in inflation in June and July, Spain's National Statistics Institute (INE) estimates the CPI stands at ?0.9% in September, five tenths lower than that registered in August.

The above is a "flash" reading.

The INE reports Spain's HICP (Harmonised Index of Consumer Prices) a measure that normalizes Spain with the rest of Europe "stands at ?1.2% [year-over-year]. If confirmed, the annual change of the HICP would have decreased seven tenths as compared to the previous month.".

Spain is Europe's fastest growing economy, but ECB president Mario Draghi is hell-bent on putting an end to deflation.

Of course, we are talking about price deflation, not monetary deflation, not asset bubble deflation, not credit deflation. Central banks and economists alike would be best off not caring one bit about routine price deflation.

Mike "Mish" Shedlock

 

Phil’s Stock World Weekly Trading Webinar – 9-29-15

Watch Phil's Weekly Trading Webinar (9-29-15); over at YouTube, you can subscribe to the PSW channel. 

Major topics include: the Nasdaq chart, 5% rule, Japan's debt (250% of GDP), market's bounce, gold, money supplies, government shutdowns (are the republicans that crazy?), S&P, socialism, capitalism, end of the month market & LL, AAPL, MU trades. 

Content time spots 

  • 1:49 Nasdaq chart & 5% Rule
  • 4:30 Fibonacci – progressions and growth, in nature, include contractions.  Stocks act like living things – growing and contracting and growing again. The 5% rule is based on the principles of nature and psychology (our desire to round numbers). Traders behave according to natural tendendies, so stocks do too. Discussion of the big charts, Nasdaq chart analysis. 
  • 12:00 The problem with the stimulus which has pushed stocks higher over the recent years. How the Fed increases its balance sheet. The Fed's big balance sheet is going to have to be unwound at some point. 
  • 17:00 Are we in the "end game" like Japan? Japan is in debt by 250% of its GDP. Fooling people. You can fool some of the people all of the time. But you can't fool most of the people all of the time. 
  • 20:30 Nasdaq 100 chart shows weak bounce line this morning.
  • 24:50 S&P Chart: weak bounce line.
  • 29:00 Gold and printing more money. Phil likes gold because they keep printing more money into circulation. So the amount of money goes up but the amount of gold does not. 
  • 37:00 Money supply has tripled: the amount of money in circulation has increased 200% since the financial crisis. But the turnover ratio–the velocity of money–has steadily declined. Rich people now get more money directly, with less circulation through the economy. Directly or after circulating, money ends up with the banks. Policies, like QE, which hand money directly to rich people decrease the velocity of money. Anything the puts more money into circulation is good for gold and silver. 
  • 46:20 Government shutdowns. There's a bill going to House for funding till December. Are the republicans crazy enough to let the government shut down?
  • 48:45 Nasdaq and S&P 500: favorites shorts. Some companies are still very over-priced. 
  • 53:00 America is getting better. We need wages to rise, but we're in an anti-worker environment. We need projects to put people to work on things that need to get done anyway, such as infrastructure improvements. Discussion of Keynes. 
  • 58:00 Think or Swim
  • 58:20 What's shortable? 
  • 59:00 Phil should be in charge of the country for a while. Give him one month, then Bernie Sanders can take over. Discussion about new ideas for government. 
  • 1:03:10 Nasdaq, DJIA, S&P stocks. Stock propping–for example, if you can hold up a large key stock like AAPL, you can make an index look good while most stocks are suffering. This can force buys on weaker stocks via the ETFs. Thus, at the end of a rally, the big key stocks will do well until the propping game is over. It's not a real market. Who's manipulating it? Goldman Sachs, JP Morgan, anyone with a 99% success rate in trading.
  • 1:09:26 Jefferson said we need to have a revolution on a regular basis. Politics. The Constitution started off with good intentions. 
  • 1:11:22  Phil on Socialism and Capitalism. Socialism, the "society first" mindset, let us evolve as a species. Socialism holds that people are more important than corporations. Capitalism didn't used to be a bad word, but it is now for a lot of people. Capitalism just meant that profits dictated decisions. Capitalism became popular after we overthrew the monarchs. But people didn't think we'd have new monarchy of people that are so rich that they can write laws… Politicians are not that expensive to bribe. Republicans will never have a Bernie Sanders. 
  • 1:16:15 End of the month market–can stocks be propped up? Tomorrow should have higher volume. 
  • 1:17:15 LL position, puts, trade ideas.
  • 1:23:15 SQQQ, AAPL, Micron (MU) trade ideas. 

 

Following In Ancient Rome’s Footsteps: Moral Decay, Rising Wealth Inequality

 

Picture via Pixabay.

Courtesy of Charles Hugh-Smith, Of Two Minds

There are many reasons why Imperial Rome declined, but two primary causes that get relatively little attention are moral decay and soaring wealth inequality. The two are of course intimately connected: once the morals of the ruling Elites degrade, what's mine is mine and what's yours is mine, too.

I've previously covered two other key characteristics of an empire in terminal decline: complacency and intellectual sclerosis, what I have termed a failure of imagination.

Michael Grant described these causes of decline in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:

There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.

This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.

This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.

A lengthier book by Adrian Goldsworthy How Rome Fell: Death of a Superpower addresses the same issues from a slightly different perspective.

Glenn Stehle, commenting on 9/16/15 on a thread in the excellent website peakoilbarrel.com (operated by the estimable Ron Patterson) made a number of excellent points that I am taking the liberty of excerpting: (with thanks to correspondent Paul S.)

The set of values developed by the early Romans called mos maiorum, Peter Turchin explains in War and Peace and War: The Rise and Fall of Empires, was gradually replaced by one of personal greed and pursuit of self-interest.

“Probably the most important value was virtus (virtue), which derived from the word vir (man) and embodied all the qualities of a true man as a member of society,” explains Turchin.

“Virtus included the ability to distinguish between good and evil and to act in ways that promoted good, and especially the common good. Unlike Greeks, Romans did not stress individual prowess, as exhibited by Homeric heroes or Olympic champions. The ideal of hero was one whose courage, wisdom, and self-sacrifice saved his country in time of peril,” Turchin adds.

And as Turchin goes on to explain:

"Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, as mentioned previously, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen….

The wealthy classes were also the first to volunteer extra taxes when they were needed… A graduated scale was used in which the senators paid the most, followed by the knights, and then other citizens. In addition, officers and centurions (but not common soldiers!) served without pay, saving the state 20 percent of the legion’s payroll….

The richest 1 percent of the Romans during the early Republic was only 10 to 20 times as wealthy as an average Roman citizen."

Now compare that to the situation in Late Antiquity when

"an average Roman noble of senatorial class had property valued in the neighborhood of 20,000 Roman pounds of gold. There was no “middle class” comparable to the small landholders of the third century B.C.; the huge majority of the population was made up of landless peasants working land that belonged to nobles. These peasants had hardly any property at all, but if we estimate it (very generously) at one tenth of a pound of gold, the wealth differential would be 200,000! Inequality grew both as a result of the rich getting richer (late imperial senators were 100 times wealthier than their Republican predecessors) and those of the middling wealth becoming poor."

Do you see any similarities with the present-day realities depicted in these charts?

And how many congresspeople served in combat in Iraq or Afghanistan?

 

What if a Tumor Stole Your Memories? Then Years Later, Surgery Restored Those Memories?

Courtesy of Mish.

I just received a fascinating email today from Demetri Kofinas, Executive Producer of Offline Productions.

Because of a brain tumor, Kofinas went years not knowing what he was saying, where he had been, or what he was doing. For example, he might have said Barack Obama in a sentence when he really meant American actor and filmmaker Denzel Washington.

The condition grew worse over time. New York state and Boston the city could easily be the same, or even reversed on a map. He lost most of his friends as it appeared to them he was on some wildly powerful drugs.

He could not remember anything he was doing or even why he was there. The memories were stored somewhere in his brain, but he could not process information correctly at the moment, nor retrieve those memories later.

Following brain surgery, he was immediately coherent. Over the next few weeks and months all his lost memories came back.

For the whole story, please see Demetri Kofinas' article A tumor stole every memory I had. This is what happened when it all came back.

Those living in New York, may wish to see Twelfth Night, Offline Productions' rendition of a Shakespearean classic.

Mike "Mish" Shedlock

 

Chicago PMI Unexpectedly Dives to Negative Territory; Production at Lowest Since July 2009; Emanuel’s Tax Hikes Will Make Matters Worse

Courtesy of Mish.

The Chicago PMI is in negative territory, plunging to 48.7 from a prior reading of 54.4 and a Bloomberg Consensus Estimate of 53.6.

Giant swings are common enough for the Chicago PMI which collapsed nearly 6 points in September to a sub-50 reading of 48.7. This indicates slight monthly contraction in the Chicago region’s composite activity.

New orders are below 50 as are backlog orders, the latter for an 8th straight month. Chicago-area businesses can’t rely on backlogs as much to keep up production which is also under 50 and at a 6-year low. Contraction in prices is deepening.

Recent History Of This Indicator

The Chicago PMI is expected to slow to 53.6 in September from 54.4 in August when delays in shipments gave the index a lift.

Production Plummets to Lowest Since July 2009 

Digging into to the Chicago PMI report we note Production Plummets to Lowest Since July 2009.

The Chicago Business Barometer declined 5.7 points to 48.7 in September as Production growth collapsed and New Orders fell sharply. The drop in the Barometer to below 50 was its fifth time in contraction this year and comes amid downgrades to global economic growth and intense volatility in financial markets which have slowed activity in some industries. The latest decline followed two months of moderate expansion, and while growth in Q3 accelerated a little from Q2, the speed of the September descent is a source of concern.

Three of the five components of the Barometer were in contraction in September with only Employment and Supplier Deliveries above the 50 neutral level. Production led the decline with a sharp double-digit drop that placed it at the lowest since July 2009. New Orders also fell significantly and both key activity measures are running well below their historical averages.

Economist’s Comment

Chief Economist of MNI Indicators Philip Uglow said, “While activity between Q2 and Q3 actually picked up, the scale of the downturn in September following the recent global financial fallout is concerning. Disinflationary pressures intensified and output was down very sharply. We await the October data to better judge whether this was a knee jerk reaction and there is a bounceback, or whether it represents a more fundamental slowdown.“

Get Me the Hell Out of Here

There is no need to wait to October to understand the trend. A fundamental slowdown is pretty obvious. Illinois and Chicago in particular have huge issues.

Illinois manufacturers are voting with their feet. As noted on August 13, in Get Me the Hell Out of Here

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Germany Now Faced With Thousands Of Aging Wind Farms

Courtesy of Gaurav Agnihotri at OilPrice.com

(As cross posted at Zero Hedge here.)

Germany has long been a pioneer in the field of renewable energy, generating a record 78 percent of its power consumption from renewables in July of this year. In fact, Germany is one of the very few countries in the world that is actually struggling with too much renewable energy. The latest testimony to this fact is the new issue of decommissioning its old wind farms.

2011 was a turning point for the European giant as it started moving away from nuclear energy (post Japan’s Fukushima nuclear disaster) and began to replace it with renewables. However, wind energy made its foray in Germany well before 2011. Germany started building wind turbines in the mid-1990s and now there are almost 25,000 wind turbines in the country.

However, the problem now is that a large number of the 25,000 odd turbines have become too old. Close to 7,000 of those turbines will complete more than 15 years of operation by next year. Although these turbines can continue running, with some minor repairs and modifications, the question is whether it makes any economic sense to maintain them?

GermanyRenewable

(Click Image To Enlarge)

Image source: TriplePundit.com

Efficiency is the key

Beyond a period of 20 years, the guaranteed tariffs that are set for wind power are terminated, thereby making them unprofitable. “Today, there are entirely different technologies than there were a decade ago. The performance of the turbines have multiplied, the turbines are also more efficient than before”, said Dirk Briese of market research company called Wind- Research. It therefore makes sense to replace old turbines with newer ones. However, it is not very easy to dismantle an existing turbine and, while there are companies like PSM that specialize in dismantling of wind turbines, the costs of decommissioning can run upwards of $33,500 per turbine.

Decommissioning wind turbines: a growing problem?

The process of decommissioning a wind farm is a complicated one as it requires at least two 150 ton cranes which are used to dismantle the turbines, tower houses, rotor blades and other related equipment and parts. In fact, offshore wind decommissioning is even more intricate and expensive, as the availability of shipping vessels, cost of shipping the components back on shore and cost of removing steel pillars form seabed need to be considered too.

Wind farm decommissioning is indeed going to be a universal problem, especially for countries like the United States where a large number of wind projects are being developed. The U.S. has more than 48,000 utility operated wind turbines and more than 18 million American homes are powered every single year by the country’s installed wind capacity. Even corporations such as Yahoo!, Google, Microsoft, IKEA, Mars, Walmart and Amazon have invested in the U.S. wind energy sector.

TotalUSInstalled

(Click Image To Enlarge)

Total US installed wind capacity as of 4Q 2014
Image Source: Awea.org

The numbers above suggest that the U.S. is going to face a similar problem that Germany is now facing may be in the next 8- 10 years when its oldest wind farms become outdated. However, a lot depends upon the efficiency and technology of turbines that are in use. Even if around 30 percent of U.S. wind turbines need decommissioning in the next five to ten years, the total decommissioning costs could reach up to $1 billion (when we consider a decommissioning rate of $55,000 and above per turbine).

What can be done with the decommissioned wind turbines?

A previous study that was commissioned by Scottish National Heritage (SNH) forecasted that there would be a need to ‘recycle’ approximately 225,000 tons of rotor blades by the year 2034. Something similar is happening in Germany, where the rotor blades are ‘reprocessed’ in industrial scale factories and then shredded and mixed with other waste. The final product is then used in cement manufacturing facilities as fuel.

Moreover, the second hand market for the discarded wind farms is flourishing in Asia, Russia, Eastern Europe and Latin America where the components can be re-used in applications such as building community wind farms. The issue of wind turbine decommissioning must be viewed more as an opportunity than a threat, as the wind decommissioning market (for both offshore and onshore) is growing at a rapid pace. The question is whether the global wind industry is prepared to seize this opportunity.

Is Stock Investing for Suckers?

Courtesy of Pam Martens.

Nasdaq Index Chart Since 1988

Nasdaq Index Chart Since 1988

On March 10, 2000 the Nasdaq stock market, which is supposed to hold the technology and startup companies that will keep America globally competitive in the future, closed at a high of 5,048.62. Yesterday, more than 15 years later, it closed at 4,517.32, a decline of 10.5 percent from its level of March 2000.

To fully grasp the unprecedented nature of the Nasdaq bubble of 2000, one has to look at where the three big stocks are today that made that 5,000 mark possible 15 years ago. Just three stocks, Microsoft, Cisco, and Intel, were valued at a market cap of $1.89 trillion in 2000. As of yesterday’s close, those three stocks had a combined market cap of $616.137 billion – a shrinkage of 67 percent after more than 15 years.

Much of the hype, as well as the money, that surrounded Microsoft, Cisco and Intel in early 2000, has moved to Apple today, which also trades on the Nasdaq. As of yesterday’s close, Apple commands a market value of $621.9 billion.

Back on March 19, 2000 the Silicon Valley Business Journal reported that one analyst was predicting Cisco was headed toward a market cap of $1 trillion. (Its market cap at yesterday’s close was $129.7 billion, down 80 percent from 2000.)

The article noted that “Thirty-seven investment banks recommend either a ‘buy’ or a ‘strong buy.’ None recommend a ‘sell’ or even a ‘hold.’ ”

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ECB Will Boost QE By 120% To €2.4 Trillion, S&P Predicts

Courtesy of ZeroHedge. View original post here.

Earlier this month, when we previewed the September ECB meeting and subsequent Draghi presser, we noted that the “the deflationary boogeyman still lurks” in Europe and as Richard Breslow wrote that morning, “the five year/five year inflation gauge that Draghi has said the ECB watches very carefully remains at very depressed levels [with] no sign from the swaps market that inflation is expected to hit target as far as the eye can see.”

Breslow continued, “say what you will about the market being wrong, but the market has had a better track record on predictions than many central bankers.”

Well, sure enough, on Wednesday we learned that less than a week after the Krugman “success” story that is Japan stumbled back into deflation…

inflation has officially turned negative (again) in Europe where consensus hopes for an unchanged print were once again disappointed when the September CPI print came in negative on the back of a drop in commodity prices, confirming the latest inflationary impulse from the March launch of QE is officially over.

The message being sent here is fairly straightforward, but for what it's worth, here's a bit of color from Bloomberg:

The euro area’s inflation rate unexpectedly turned negative in September for the first time in six months, adding pressure on the European Central Bank to bolster stimulus.

Consumer prices in the 19-nation currency bloc fell 0.1 percent from a year earlier, according to a preliminary report published by the European Union’s statistics office in Luxembourg on Wednesday. Economists predicted an inflation rate of zero, according to the median estimate of 38 analysts in a Bloomberg survey. Unemployment in the region remained unchanged in August at 11 percent, Eurostat said in a separate release.

Data “was broadly driven by the energy component,” said Giada Giani, an economist at Citigroup Inc. in London. “There are very little inflationary pressures even aside from the oil-price shock. It should be bottom for the year.”

Brent oil has plunged by a quarter since the end of June amid speculation a global glut will be prolonged. Oil is poised for its lowest quarterly average price since the start of 2009.

Energy prices fell 8.9 percent in September from the previous year, Eurostat said. Core inflation, which strips out volatile elements such as food and energy, remained unchanged at 0.9 percent.

The setback comes as the euro area’s recovery shows signs of strengthening. Economic confidence unexpectedly increased in September to the highest in more than four years as sentiment in the industrial and services sectors improved. A gauge of economic activity points to a 0.4 percent rate of expansion in the third quarter amid rising orders and backlogs of work.

Even so, unemployment is only falling slowly from the 12.1 percent peak reached in 2013. The region’s jobless rate fell less than initially reported in July and remained unchanged in August, according to Eurostat’s report.

Wages will only increase at a moderate pace amid weak growth and a gradual decline in unemployment, said Michael Schubert, an economist at Commerzbank AG in Frankfurt. That argues against noticeably stronger underlying price pressure.  

In other words, the promise of €1.1 trillion in asset purchases (i.e. money printing) has not only failed to engineer a robust recovery complete with the promised dramatic declines in unemployment and/or dramatic increases in wages, it hasn't even managed to keep Europe out of deflation. The most hilariously absurd thing about it all is that it is indeed unconventional monetary policy that has helped to keep otherwise bankrupt US drillers in business thus perpetuating the very same low crude prices that everyone now blames for the disinflationary impulse. 

Of course these are post-crisis central bankers we're talking about here, which menas that when a lot of Keynesian cowbell doesn't work, the only cure for the deflationary fever must be more Keynesian cowbell which explains why Japan is about to double down on Abenomics (from JPM: economist Masaaki Kanno says in report that Bank of Japan will announce additional easing on Oct. 30), and why the ECB will almost invariably expand PSPP. Indeed, S&P is now out calling for ECB Q€ to last for nearly two years longer than originally planned and for the size of the program to be expanded to a Dr. Evil-ish €2,400,000,000,000. Here are the main points via Bloomberg:

  • CB will extend its QE program beyond Sept. 2016, most likely until mid-2018, and it could reach EUR2.4t, S&P says in report.
  • Expected amount is more than twice the original EUR1.1t commitment
  • As EM currencies have declined, the euro has begun to appreciate again, complicating the ECB’s QE program

Note the last bullet there. This has become a self-perpetuating nightmare. Global QE is forestalling the creative destruction that in normal times serves to purge speculative exccess and correct capital misallocation, contributing the very same global deflationary supply glut that's tanking commodity currencies. The resultant pressure on EM FX then leads to relative strength for DM crosses jeopardizing inflation targets and leading to still more advanced economy QE. Of course when one DM central bank eases, the immediate effect is to trigger easing by a neighbor. The best example of this is probably the ECB-SNB-Riksbank connection and it means that this a never-ending Keynesian insanity loop, and in case the self-feeding dynamic wasn't strong enough as it is, when the EM meltdown finally filters back into DM markets, the attendant turmoil will also be used to justify more easing. 

Summing it all up in one horrifying image…

 

Food Stamp Growth Outpaces Illinois Job Creation 5-4 During Recovery

Courtesy of Mish.

Congratulations (of sorts) once again go to Illinois, the only state in the Midwest where SNAP (food stamp) growth outpaced job creation during the recovery. SNAP stands for Supplemental Nutrition Assistance Program, renamed from “food stamps” so as to not sound so derogatory.

What follows is a guest post from Michael Lucci, Vice President of Policy for the Illinois Policy Institute.

Illinois’ dismal business climate continues to inhibit jobs growth, especially in manufacturing, as the state put 25 people on food stamps for every factory job created during the recovery from the Great Recession. Illinois is the only state in the Midwest to have added more people to food-stamp rolls than to employment rolls during the recovery from the Great Recession. Job losses from the Great Recession occurred from January 2008 to January 2010, and since then, states have had five-and-a-half years of recovery.

During the recovery from the Great Recession, the Land of Lincoln, alone in the Midwest, had more people enter the food-stamps program than start jobs. Food-stamps growth in Illinois has outpaced jobs creation by a 5-4 margin.

In every other Midwestern state, jobs growth has dramatically outpaced food-stamps growth during the recovery. In fact, in every other state in the region, jobs growth dwarfs food-stamps growth. But during the recovery, Illinois put more people on food stamps than every other Midwestern state combined.

Manufacturing has borne the brunt of Illinois’ policy failures. From the state’s broken workers’ compensation system, to the highest property taxes in the region, to the lack of a Right-to-Work law while surrounding states enact Right to Work, Illinois has the worst policy environment in the Midwest for manufacturers.

The result for Illinois factory workers? The Land of Lincoln has put 25 people on food stamps for every manufacturing job created during the recession recovery.

And the recovery that Illinois’ manufacturers have experienced has been especially anemic. After losing 117,000 manufacturing jobs during the recession, Illinois has only regained 17,400 of those factory jobs since January 2010. Meanwhile, the other Great Lakes states have pulled far ahead of Illinois during the recovery. Michigan has added 135,600 manufacturing jobs, Indiana has added 80,400, Ohio has added 74,500 and Wisconsin has added 48,700.

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Donald Trump Proves What’s Wrong with Bankruptcy Laws in America

 

Donald Trump Proves What’s Wrong with Bankruptcy Laws in America

Courtesy of Robert Reich

On the opening day of Trump Plaza in Atlantic City in 1984, Donald Trump stood in a dark topcoat on the casino floor celebrating his new investment as the “finest building in the city and possibly the nation.” 

Thirty years later, the Trump Plaza folded, leaving some 1,000 employees without jobs. Trump, meanwhile, was on Twitter claiming he had “nothing to do with Atlantic City,” and praising himself for his “great timing” in getting out of the investment.

As I show in my new book, “Saving Capitalism: For the Many, Not the Few,” people with lots of money can easily avoid the consequences of bad bets and big losses by cashing out at the first sign of trouble. Bankruptcy laws protect them. But workers who move to a place like Atlantic City for a job, invest in a home there, and build their skills have no such protection. Jobs vanish, skills are suddenly irrelevant and home values plummet. They’re stuck with the mess.

Bankruptcy was designed so people could start over. But these days, the only ones starting over are big corporations, wealthy moguls and Wall Street bankers, who have had enough political clout to shape bankruptcy laws (like many other laws) to their needs.

One of the most basic of all economic issues is what to do when someone can’t pay what they owe. The U.S. Constitution (Article I, Section 8, Clause 4) authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States,” and Congress has done so repeatedly.

In the last few decades, these changes have reflected the demands of giant corporations, Wall Street banks, big developers and major credit card companies who wanted to make it harder for average people to declare bankruptcy but easier for themselves to do the same.

The granddaddy of all failures to repay what was owed occurred in September 2008 when Lehman Brothers went into the largest bankruptcy in history, with more than $691 billion of assets and far more in liabilities. 

Some commentators (including yours truly) urged then that the rest of Wall Street be forced to grapple with their problems in bankruptcy as well. But Lehman’s bankruptcy so shook the Street that Henry Paulson, Jr., George W. Bush’s outgoing secretary of the treasury, and, before that, head of Goldman Sachs, persuaded Congress to authorize several hundred billion dollars of funding to protect the other big banks from going bankrupt.

Paulson didn’t explicitly state that big banks were too big to fail. They were, rather, too big to be reorganized under bankruptcy—which would, in Paulson’s view, have threatened the entire financial system.

The real burden of Wall Street’s near meltdown fell on homeowners. As home prices plummeted, many found themselves owing more on their mortgages than their homes were worth, and unable to refinance. Yet chapter 13 of the bankruptcy code (whose drafting was largely the work of the financial industry) prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence.

When the financial crisis hit, some members of Congress, led by Illinois Sen. Dick Durbin, tried to amend the code to allow distressed homeowners to use bankruptcy. That would have given them a powerful bargaining chip for preventing the banks and others servicing their loans from foreclosing on their homes. If the creditors and homeowners couldn’t come to an agreement, the homeowner’s case would go to a bankruptcy judge who presumably would reduce the amount to be repaid rather than automatically force people out of their homes.

The bill passed the House, but when in late April 2009 Durbin offered his amendment in the Senate, the financial industry—among the largest donors to both parties—argued it would greatly increase the cost of home loans. (No convincing evidence showed this to be the case.) The bill garnered only 45 Senate votes even though Democrats were in the majority. As a result, distressed homeowners had no bargaining power. Subsequently, more than 5 million lost their homes.

Another group of debtors who can’t use bankruptcy to renegotiate their loans are former students laden with student debt. Student loans are now about 10 percent of all debt in the United States, second only to mortgages and higher than auto loans and credit card debt. But the bankruptcy code doesn’t allow student debts to be worked out under its protection.

If graduates can’t meet their payments, lenders can garnish their paychecks. If still behind on student loan payments by the time they retire, lenders can even garnish their Social Security checks. The only way graduates can reduce their student debt burdens, according to a provision enacted at the behest of the student loan industry, is to prove that repayment would impose an “undue hardship” on them and their dependents. This is a stricter standard than bankruptcy courts apply to gamblers trying to reduce their gambling debts.

Congress and its banking patrons fear that if graduates could declare bankruptcy on their debts, they might never repay them. But a better alternative would be to allow former students to use bankruptcy where the terms of the loans are obviously unreasonable (such as double-digit interest rates), or if the schools they owed money to had very low post-graduation employment rates.

State and federal lawmakers once sought to protect vulnerable borrowers by setting limits on the interest that could be demanded by creditors. But in recent years, under political pressure from big banks like Citigroup, many state legislatures have repealed those limits. It’s not unusual for borrowers who want an advance on an upcoming paycheck to now pay annualized rate of 300 percent or more.

Such legal changes helped swell profits at Citigroup, whose former OneMain Financial unit was one of the leading payday lenders. “There was simply no need to change the law,” Rick Glazier, a North Carolina Democratic legislator who opposed raising interest rate limits there, told the New York Times. “It was one of the most brazen efforts by a special interest group to increase its own profits that I have ever seen.”

It’s not just changes in the bankruptcy code and interest-rate regulations that benefit the wealthy. Real estate developers like Trump have also benefited from a welter of special subsidies and tax breaks squeezed out of pliant local legislators.

Trump has the unique distinction of being the first developer in New York to receive a public subsidy for commercial projects under programs initially reserved for improving slum neighborhoods. Referring to how he managed to win a 40-year tax abatement for rebuilding a crumbling hotel at Grand Central Station—a deal that in the first decade cost taxpayers $60 million—Trump quipped, “Someone said, ‘How come you got 40 years?’ I said, ‘Because I didn’t ask for 50.’”

Trump’s success at getting such deals is better explained by a 1980s study by Newsday, showing Trump had donated more than anyone else to members of the New York City Board of Estimate, which at the time approved all land-use development.

Trump sparred with Jeb Bush in the second GOP debate last Wednesday night over Trump’s alleged lobbying for casino gambling in Florida. “You wanted it and you didn’t get it because I was opposed to casino gambling before, during and after,”Bush charged. “I’m not going to be bought by anybody.” Trump responded: “I promise if I wanted it, I would have gotten it.”

Indeed, Trump is a poster child for how big money buys the laws it wants. “As a businessman and a very substantial donor to very important people, when you give, they do whatever the hell you want them to do,” Trump told the Wall Street Journal. “As a businessman, I need that.”

The prevailing myth that America has a “free market” existing outside and apart from government prevents us from understanding that the very rules by which the market runs—from the federal bankruptcy code to state usury laws to local tax abatements—are made by lawmakers.

And the real issue is whose interests those lawmakers are pursuing. Are they working for the vast majority of Americans, who are getting nowhere economically and whose political voices are barely even heard these days? Or are they beholden to those at the top—CEOs of the biggest corporations and Wall Street banks, hedge-fund and private-equity moguls and billionaires—who now own more of the nation’s wealth than the robber barons of the Gilded Age of the late 19th century, and are using some of that wealth to further rig the rules to their benefit?

We don’t need Donald Trump to give us the answer.

 [This article, which appeared in the September 28 edition of Politico Magazine, is drawn from my new book “Saving Capitalism: For the Many, Not the Few.”]

Trump Tower picture via Pixabay

Addendum:

NN writes in the comments:

Reich doesn't mention the FIVE times that weasel has ruined the lives of thousands of employees and investors in order to welsh on lenders and slither out of his many screw ups.  Read about it here.

If the public is stupid enough, and they are, to elect this glorified trust fund moron, like Joe Namath, I GUARANTEE the following history making headline:  US defaults on bond debt.

This Is “Getting Really Ugly, Really Fast”: Two Thirds Of Recent Graduates Say US College Education Is A Ripoff

Courtesy of ZeroHedge. View original post here.

If there was any question about whether college students in the US were getting wise to the fact that their degrees may not be worth the $35K (on average) they’re paying for them, that question was answered earlier this year with one hilarious graduation cap:

Yes, “Game of Loans,” and as the student debt bubble balloons into the trillions, the federal government has come to realize that, to quote Bill Ackman, there’s “no way” students are ever going to pay back all of this debt, which is why the Obama administration is promoting (and we mean explicitly promoting) IBR programs that in many cases ensure former students will have at least a portion of their student debt forgiven thereby guaranteeing taxpayer losses on government higher education loans will run into the tens and probably hundreds of billions of dollars. 

Assessing what role students have played in this is akin to asking what role potential homeowners played in the housing bubble. That is, the government has held up certain ideals (i.e. the right to homeownership and the right to pursue post secondary education) as inalienable and so while there’s an extent to which people have to be accountable for the money they borrow, when you pitch these things as being on par with John Locke’s natural rights and then move to effectively subsidize them by either driving interest rates into the ground or passing out trillions in loans to students who you know have no hope of paying it all back, you create a scenario whereby borrowers can then claim they were misled, mistreated, and ultimately defrauded. 

That was the case with the housing bubble and, thanks to the fact that today’s college graduates are entering a job market that despite all the rosy rhetoric, is actually nothing more than a bartender creation machine, former students are now looking with disdain at the tens of thousands in student loans they must now figure out how to pay back while bringing in less than the median national yearly income which is itself largely insufficient when it comes to servicing large lines of credit.

It is with all of the above in mind that we bring you the following from WSJ who reports that two thirds of students who graduated in the last nine years and whose debt matches or exceeds the national average do not believe their degree was worth the cost. Here’s more:

Recent college graduates are significantly less likely to believe their education was worth the cost compared with older alumni and one of the main reasons is student debt, which is delaying millennials from buying homes and starting families and businesses.

The insight into the generational divide comes courtesy of the second annual Gallup-Purdue Index, which polled more than 30,000 college graduates during the first six months of this year.

Former Indiana Governor Mitch Daniels created the survey when he became president of Purdue University in 2013 in an effort to better understand the value of a college education from the people who should know best—alumni.

The steep decline in the perception of whether a degree was worth the cost startled Brandon Busteed, Gallup’s executive director for education and workforce development.

Overall, 52% of graduates of public schools “strongly agreed” that their education was worth the expense, compared with 47% of private-school graduates. Among graduates of private for-profit universities, just 26% felt the same.

About two-thirds of college students graduate with debt, with an average load of about $35,000.

According to the Index, only 33% of alumni who graduated between 2006 and 2015 with that amount of debt strongly agreed that their university education was worth the cost. 

On the one hand, this suggests that going forward, students may demand some combination of the following three things, i) lower tuition, ii) better coordination between those who design curriculums and employers, and hopefully iii) efforts to create a more robust jobs market characterized by rising wage growth and real opportunity for graduates. 

Unfortunately, the more likely outcome will be that demand for higher education will simply dry up, thereby creating an even larger divide between the skills set of America's youth and that of job seekers around the globe. But don't take our word for it, just ask Gallup’s executive director for education and workforce development Brandon Busteed who spoke to The Journal:

“When you look at recent graduates with student loans it gets really ugly, really fast. If alumni don’t feel they’re getting their money’s worth, we risk this tidal wave of demand for higher education crashing down.”

The Stunning “Explanation” An Insurance Company Just Used To Boost Health Premiums By 60%

Courtesy of ZeroHedge. View original post here.

It may not have been easy for Blue Cross Blue Shield to admit to their clients their premiums are set to rise by 60% due to Supreme Court-mandated tax known as "Obamacare" but it would have been the right thing.

Instead, in justifying the boost to the two-month medical premium from $867 to $1.365, the health insurer decided to use the following excuse: "With advances in medical technology, prescription drugs and ways to treat injuries and illnesses, Americans are living healthier lives. [i.e., living longer] Because of these changes, we must adjust your premium to stay in line with increased costs."

In other words, if you want lower costs, and avoiding 60% healthcare inflation, just do everything in your power to prevent Americans from "living healthier lives."

And just in case anyone is still confused why plunging gasoline prices simply refuse to translate into greater discretionary spending, please keep reading the above letter until you finally get.

Finally, for those who are likewise confused how companies like Valeant can boost the prices of their drugs anywhere between 90% and 2300% in 2-3 years, and get away with it without nobody noticing…

… also keep reading the above letter.

h/t @JeffreyTetrault

Panic Is Spreading, Part 1: Surge in Junk Bond Defaults Imminent

Courtesy of John Rubino.

One of the early signs that a cycle is about to turn down is disorder in junk bonds. That’s because the companies that issue such bonds are by definition financially and/or operationally weak and therefore ultra-sensitive to changes in their environment. A modest drop in, say, consumer spending or the price of wind turbines will hardly be noticed by an Apple or GE but might threaten the survival of those companies’ weakest competitors. And as credit bubbles inflate, the weak in every field tend to proliferate as overexcited bankers and bond funds offer them plenty of rope with which to hang themselves.

So when such bonds start falling — which is to say when their yields start rising — that’s a sign of broad-based trouble ahead. From Tuesday’s Wall Street Journal:

Today’s Big Number: 15.7% of high-yield bonds trading at distressed levels

The commodity -price crunch fueled by China’s economic slow-down is taking a toll on the bond market.

Bonds from debt-laden companies in the metals, mining and steel industries are driving up distress ratios, an indicator that a wave of debt defaults could be on the horizon.

As of mid-September, nearly 15.7% of the roughly 1,720 bonds rated below investment grade traded at distressed levels, the biggest share since 2011, according to Standard & Poor’s Ratings Services. Such bonds were trading with yields at least 10 percentage points over comparable U.S. Treasurys. Yields on bonds rise when prices fall.

Companies with distressed bonds may not be able to refinance or access other forms of capita, said Diane Vazza, an S&P managing director.

The numbers suggest that many companies could default in the next seven to nine months. “There’s a very strong correlation” between bonds that fall into the distressed category and defaults, she said.

It’s not surprising that the commodities crash would impact the bonds of coal and oil companies. The big question is whether the carnage spreads to other kinds of junk. And over the last couple of months it has. The chart below shows the price of a junk bond ETF that last week plunged through the lows of the August mini-panic.

Junk bonds Sept 29 2015

Wolf Richter and Zero Hedge just posted long, insightful pieces on this subject. See, respectively, This is When Bonds Go Kaboom! and BofA issues dramatic junk bond meltdown warning.

The short version of the story is that if things play out as they have in past down-cycles, junk defaults will spike from here and capital will flow out of this and other volatile markets and into the safest havens, which historically have been high-grade government bonds, the shares of rock-solid, non-cyclical companies, and, frequently, precious metals.

Governments, meanwhile, will respond with lower interest rates, big deficits and tax cuts. Which is where our story departs from the standard script: With money already extremely easy in most places and sovereign debt at record levels, the government response will have to be either non-traditional or numerically extreme. That is, negative interest rates and helicopter money. So today’s junk implosion differs from those of 1990, 2000 and 2007 not in itself but in the changes it might set off in the broader economy.

 

Visit John’s Dollar Collapse blog here

U.S. Stocks Facing Their Biggest Test In 8 Years?

 

U.S. Stocks Facing Their Biggest Test In 8 Years?

Courtesy of Dana Lyons

image

Broad-based Value Line Composite testing mega-critical level.

The Value Line Geometric Composite (VLG) is an unweighted average of roughly 1700 U.S. stocks. This makes it, in our view, the most accurate index in instructing investors of the true state of the U.S. stock “market”. And since studies have shown that some 70%-80% of stocks go the way of the market, the VLG is our main focus among all the indexes. That is why on August 28, we highlighted the significance of the area in the mid-430′s on the VLG chart where the index held during the late August mini-crash.

To reiterate the significance of the mid-430′s level, it marks a confluence of Fibonacci Retracement levels drawn from the important lows since 2009 to the April high. Specifically, we find these 3 levels all within close proximity:

  • The 23.6% Fibonacci Retracement of the 2009-2015 Rally ~436
  • The 38.2% Fibonacci Retracement of the 2011-2015 Rally ~436
  • The 61.8% Fibonacci Retracement of the Rally from the 2013 Breakout Point to the April High ~433
  • Additionally, the 1000-day simple moving average (approximately, the 200-week moving average) lies at 435.

We have mentioned before that we have increased confidence in the validity of a chart level when multiple analyses line up nearby there. That is certainly the case here. Furthermore, our confidence is heightened when the level is tested – and it holds – as the Value Line Composite did in late August, bottoming at 439 on August 25. That validates the level as important as prices have shown they “respect” the level. Furthermore, as we stated in the August 28 post:

It also presents us with a line in the sand, should the index eventually go on to “test” the 430′s level (a development that would not at all surprise us). We have a reference point to generally orient us bullishly should the level hold or quickly recover a break – and bearishly should the level fail.

That brings us to today’s Chart Of The Day and post. The mid-430′s level is back in full focus as the Value Line Geometric Composite is knee deep in re-test mode, closing at 432.32 today.

Here is a BIG picture view of the importance of this level on the chart as the VLG is testing it right now.

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Here’s a closer look:

 

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So we have touched on the analysis that makes this level so important. But why is it the biggest test in 8 years? First of all, it would establish an unambiguous lower low on the chart below last October’s lows. Furthermore, it would create a formidable resistance level here for any future rally attempts.

Secondly, a failure here would knock out the first major Fibonacci Retracement level of the post-2009 rally. And while it does not necessarily guarantee an end to the cyclical bull market, it certainly puts a significant dent in it.

On a shorter-term basis, the break of the 61.8% Fibonacci Retracement of the rally since the VLG’s 2013 breakout would be a serious indictment. It would leave the index open to possibly (or, likely) retracing the entire rally since the 2013 breakout. A breakout that cannot sustain enough momentum to avoid an entire retracement is a breakout that is not long for this world (no pun intended).

Lastly, the break of the 1000-day moving average would be an unwelcomed development as well. While moving averages are prone to whiplashes, the 1000-day does not see prices cross it too often. In fact, since 2000, the VLG has dropped below the 1000-day moving average on just 4 occasions. 2 of those led to cyclical bear markets, in 2000 and 2008. Again, such a cross below would not guarantee a cyclical bear market has begun. It may turn out to be a short-term whiplash, as in August 2004…or a slightly less-short-term whiplash, as in August 2011. However, the fact that this broad, unweighted index could drop below such a long-term moving average is indicative of real weakness and vulnerability among a great many stocks throughout the U.S. equity market.

The last time we saw such an important test by this index was 8 years ago. After holding a key level (near 440 – almost the same level as today!) in an August 2007 selloff, the VLG was back testing the level again in November. Similar to today’s set of circumstances, that level marked several major Fibonacci Retracement levels from key points in the 2002-2007 cyclical bull market:

  • The 23.6% Fibonacci Retracement of the 2002-2007 Rally ~440
  • The 38.2% Fibonacci Retracement of the 2004-2007 Rally ~442
  • The 61.8% Fibonacci Retracement of the 2006-2007 Rally ~440

In 2007, the VLG struggled with the test, giving way immediately before rallying back up above the 440 level for a few weeks. However, that proved short-lived as the index eventually dropped below that level in early January…for good.

 

image

Does the 2007 failure guarantee that this similar setup will also fail? Obviously not – and we are not trying to suggest that. However, we do view this area as being of the utmost importance for the U.S. stock market. A successful hold here and the prospects for resuming the bull market are improved significantly. A failure would open the downside in the VLG to the next key Fibonacci cluster near 380, or another 12% lower. Additionally, the sustainability of the post-2009 bull market would be cast in further doubt.

We don’t label many spots on U.S. equity charts as “make or break” for the broad market. However, the mid-430′s area on the Value Line Geometric Composite is as critical a level as we can give you in any index or security. The VLG’s grade on this test – pass or fail – could very well go a long way in determining whether the bulls or bears have the upper hand in the longer-term.

______

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

 

The Anatomy Of A Retesting Of The Low

Courtesy of Eric Bush at Gavekal Capital

The S&P 500 is now only about 1% off its 8/25 low. Have the market internals deteriorated as much as the headline price index has? Lets take a quick tour through our chart library to find out.

On 8/25, 17% of US stocks were trading below its 200-day moving average. As of yesterday, this series has dropped back to 19% after increasing to 33% on 9/17. Unfortunately, we haven’t seen a trend shift in momentum yet. Through yesterday, 33% of US stocks had its 50-day moving average trading above its 200-day moving average. On 8/25, 51% of stocks had its 50-day moving average trading above its 200-day moving average

JPEG 1

Large declines in stocks are ticking up again but still below the 8/25 level. The number of stocks with a one-day 5% decline was 83 yesterday. On 8/25, there were 150 US stocks that declined by at least 5%. It’s hard to imagine that we went through a period in 2008 where we regularly were seeing 200-500 US stocks decline by 5% in a day.

JPEG 2

The median stock performance over the past year is unchanged. Over the past 200-day, the median stock performance YTD is -8%. This is the same level as it was on 8/25 and is the worst YTD performance since 2009.

JPEG 5

JPEG 3

83% of US stocks are at least in a correction over the past 200 days. On 8/25, this spiked to 90%. The number of US stocks in a bear market has increased. 48% of US stocks are now in a bear market over the past 200 days compared to 43% on 8/25. While this has been painful for investors, far fewer stocks are in bear market today than were in a bear market in 2011 and 2008.

JPEG 6 - Copy

JPEG 9

Finally, in a positive sign the number of stocks making new 200-day lows remains below the 8/25 high. On 8/25, 39% of US stocks were making new 200-day lows while “only” 31% made new 200-day lows yesterday. This will be an important internal indicator to keep an eye on as new highs in 200-day lows tend to mark the emotional peak in a market downturn. For example, on 8/8/2011 54% of US stocks made 200-day lows. The ultimate price bottom was on 10/3/2011 when 44% of US stocks made new 200-day lows. In 2008, an unbelievable 80% of US stocks made a new 200-day low on 10/9/2008. The eventual price bottom wasn’t until 3/9/2009 when only 35% of stocks made a new 200-day low.

JPEG 7

All in all, the market internals haven’t been quite as bad as the recent price action. Negative momentum hasn’t accelerated, the number of large declines are fewer than they were on 8/25 and most encouragingly, the percentage of stocks making new 200-day lows are less than they were about a month ago. On the flip side, the most concerning internal data is the fact that more stocks are in a bear market today than they were on the 8/25 low. It’s too early to tell if we have seen the ultimate price low for this correction but we believe that tracking new 200-day lows should be a helpful sign post for investors.

Spain’s Secessionist Party Leaders to be Charged with “Act of Disobedience”

Courtesy of Mish.

In the wake of a parliament-majority win by independence parties in last Sunday’s Catalonia region election, the strike-down of dissent by Madrid continues.

The Financial Times reports Secessionist Party Leaders to Appear in Court Over Role in Breakaway Vote.

Catalan president Artur Mas will have to appear as a formal suspect in court next month over his role in organising a non-binding independence vote last year that was fiercely opposed by Spain.

Tuesday’s announcement comes just two days after a closely watched election in the Spanish region that saw Mr Mas and other pro-independence leaders win a majority of seats in the Catalan parliament.

The two secessionist parties, Mr Mas’s Junts pel Si and the far-left CUP, argue the result gives them the mandate to break Catalonia out of Spain in the next 18 months.

The judicial move against the Catalan president is likely to further inflame tensions between the Spanish government and the regional government — and was immediately denounced by Catalan leaders as a political stunt.

Mr Mas and his colleagues are under investigation for committing an act of disobedience, which under Spanish law carries a sentence of up to 12 months in jail.

The news sparked sharp criticism from political leaders in Catalonia, many of whom accused the Spanish government of using the judicial system for political purposes.

Apart from the Catalan president, Irene Rigau, a regional minister, and Joana Ortega, the former vice-president of Catalonia, will also appear in court. All three have been declared formal suspects, a status that means they are just short of being formally charged.

Contamination

Spain’s justice minister Rafael Catalá said that the decision to declare Mr. Mas a formal suspect had been taken after, not before, Sunday’s regional election, in an effort not to “contaminate” the democratic process.

If “contaminate” means “to not provide an even bigger majority for the secessionists”, I can accept the justice minister’s statement.

Big independence battles are just around the bend. Catalonia has about 16 per cent of the Spanish population and about 20 percent of the national economy….

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Striking Weakness in Home Prices

Courtesy of Mish.

For the third month in a row, the Case-Shiller 20-city seasonally adjusted home price index declined. Last month was revised lower. Economists were surprised.

The Bloomberg Econoday Consensus was for a month-over-month rise of 0.1%, instead prices declined by -0.2%.

Case-Shiller is reporting what is becoming striking weakness in home prices, at -0.2 percent in July for the adjusted 20-city index which, after a downward revision to June, is the third straight 2 tenths decline. Twelve of 20 cities show contraction in the month with the deepest for a third straight month in a row coming from Chicago at minus 1.2 percent. Year-on-year readings are all still positive led by San Francisco at plus 10.4 percent with Washington DC at the bottom at 1.7 percent.

Year-on-year, the 20-city index, whether adjusted or unadjusted, is at plus 5.0 percent vs 4.9 percent in July. The unadjusted month-to-month index, reflecting summer strength in home sales, was up 0.6 percent in August for however the weakest reading since the winter weather of February.

This report is very closely watched and offsets last week's gain for FHFA prices which are trending slightly higher than Case-Shiller. Home sales have been mixed this year with existing homes showing strength through most of the year but weakness in the latest report and vice versa for new homes which had been weak but have since popped higher. Lack of home-price appreciation is a negative for household wealth and spending and may be another symptom of general price weakness.

Case Shiller 20-City Index

Year-over-year comparisons have held stable at 5% in spite of month-over-month declining prices because of easy comparisons. Year-over-year comparisons will be increasingly difficult in the upcoming months.

Mike "Mish" Shedlock

 

As Glencore Is Compared to the Fall of Lehman, It Shows Up in Kids’ 529 College Plans

Courtesy of Pam Martens.

Glencore's Lomas Bayas Copper Mine in Chile

Glencore’s Lomas Bayas Copper Mine in Chile

Stocks were variously spiking and tanking from moment to moment in early morning trade and much of the problem resides in one eight letter word – Glencore. The Switzerland-based industrial metals producer and commodity trading firm has lost over 75 percent of its share value this year, dumping 29 percent of that just yesterday. Two of the major credit ratings agencies, Moody’s and Standard & Poor’s, have stated they may downgrade the debt of the company. Credit markets have effectively made those rating outlooks moot and already started trading the debt as junk. The Lehman Brothers’ analogy is being made by market pundits.

As if all of this weren’t causing enough market angst, yesterday UK investment firm Investec issued a research report on Glencore, suggesting that shareholders could be wiped out if low raw material prices persist. The report stated: “In effect, debt becomes 100% of enterprise value and the company is solely working to repay debt obligations.”

The market has watched the cost of buying Credit Default Swaps (CDS) on Glencore debt jump dramatically and the added worry is just which financial institutions are on the hook to pay on those bets. That same kind of opacity persisted during the Lehman debacle, leading to credit markets seizing up.

Against this backdrop, the last place one would expect to find shares of Glencore is in college savings plans known as 529 plans. But according to a report from Morningstar, as of June 30, 2015, six VA CollegeAmerica 529 funds were holding a total of 179 million shares of the American Depository Receipts (ADRs) of Glencore (symbol: GLCNF). While the stakes represent a small percentage of the total assets in each fund, one has to wonder why the shares were not sold as the stock went into a nosedive beginning in December of last year.

Mutual funds report their portfolio holdings on a delayed basis so the 529 plans may have since sold their shares. But as of June 30, 2015, Morningstar reports that 179 million shares were still in the portfolios and that one of the 529 plans, the VA CollegeAmerica EuroPacific Growth Fund had increased its stake by 47.56 percent.


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India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues

Courtesy of ZeroHedge. View original post here.

Late last month, we asked how long it would be before the RBI hit back in the wake of China’s yuan deval.

The Indian government’s chief economic advisor Arvind Subramanian had just told ET Now television that India may need to "respond" to China’s monetary policy stance, and also hinted at further export weakness. It wasn’t hard to read between the lines: more shots were about to the be fired in the ongoing global currency wars.

Reinforcing that contention was the following from Deutsche Bank:

India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports. 

Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view. 

Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.

And here's what Citi had to offer:

The likelihood of a rate cut at the RBI policy review on September 29 has risen given the downside surprise from July CPI inflation and the disinflationary impulse from the continued slide in commodity prices. But market pricing does not seem too far from that outcome. 1y ND-OIS is pricing in about 80% probability of a 25bp rate cut in September (and unchanged rates thereafter). 

So while the writing was on the wall for a rate cut, the degree to which the RBI is concerned was apparently lost on most economists and while RBI Governor Raghuram Rajan has a reputation for keeping forecasters guessing, it's nevertheless notable that only 1 out of 52 had predicted the 50bps cut that came on Tuesday. As noted earlier this morning, here's what happened after the announcement: 

The announcement catalyzed a dramatic move in the all important USDJPY, which after sliding to a low of 119.250 overnight just after the RBI surprise announcement, started its usual dramatic levitation to the 120 "tractor" point, and around 5am Eastern, the latest central bank intervention to stabilize the market selloff succeeded, with the key carry pair trading within a fraction of the magical support level that is so instrumental to keep stocks bid.

Apparently, the global rout in commodity prices has given Rajan more room to ease via imported deflation. Here's Goldman's summary:

The Reserve Bank of India (RBI) cut the policy repo rate by 50bps to 6.75%. This was ahead of market expectations of a 25bps cut, and our expectation of a hold. The Cash Reserve Ratio (CRR) remains at 4.00%.

The RBI reduced its GDP growth target to 7.4% from 7.6% for FY16. It mentioned that underlying activity remains weak on account of a sustained decline in exports, rainfall deficiency, and weaker than expected momentum in industrial production and investment activity.

The RBI released its CPI forecasts for FY17, and suggests a declining path for inflation. While the CPI forecast for January, 2016 is at 5.8%, only a shade lower than its August projection of 6%, the CPI forecast for early 2017 has been given as 4.8%. This suggests that the RBI expects inflationary pressures to continue to come off over the next 18 months, despite GDP growth accelerating from 7.4% in FY16 to 8% by Q4, FY17. The basis for the larger-than-expected rate cut seems to be this decline in the new CPI forecast for FY17.

In justifying its aggressive rate cut, the RBI mentioned a number of reasons. According to the RBI, despite the monsoon deficiency, food inflation pressures have been contained due to resolute actions by the government to manage supply. The RBI think that, looking forward, subdued international food price inflation should continue to put downward pressure on domestic food prices. Finally, given weakness in global activity, and still-low industrial capacity utilization, ‘more domestic demand is needed to substitute for weakening global demand’. The RBI has reduced its assumption for oil prices to US$50 a barrel instead of US$ 60-63 in its April projections.

The aggressive rate cut by the RBI has come as a big surprise to us. We think that there was a clear change in the RBI’s stance, from the hitherto hawkish tone on inflation. While meeting the January, 2016 inflation target of 6% was not in doubt, we think that the RBI’s inflation projections for FY17 are optimistic, given risks to food prices, an impending civil service wage hike, high inflation expectations, and a narrowing output gap. The language was also markedly different from the August policy statement, where the RBI was awaiting greater transmission of its front-loaded past actions. Despite no further transmission having occurred, the RBI has ‘front-loaded’ policy action by reducing the policy rate by a further 50bps. Since the market was pricing in 25bps of rate cuts, we think the RBI’s action is essentially to get ahead of market expectations, and use the window available before the Fed starts hiking rates. While the language is dovish, given the aggressive front-loading, and the optimistic inflation projections, there would need to be very significant downside surprises on headline inflation from its projections for the RBI to cut rates again, in our view.

In other words, Goldman seems to think that the RBI may now be out of ammunition unless inflation surprises markedly to the downside. As Bloomberg notes, we'll now see whether the central bank can succeed in fixing a transmission mechanims that seems to be impaired by banks' concerns over souring loans. Of course the other thing to note here is that India is a major emerging economy and Rajan's move to lean dovish means that if the FOMC does hike, the policy divergence between the Fed and the RBI will be that much greater, which could accelerate capital outflows.

In any event, another day, another rate cut as the global currency wars continue unabated. We'll close with something Rajan said last month as it seems particularly amusing in light of today's move:

"Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading."

 

Carl Icahn Says Market “Way Overpriced”, Warns “God Knows Where This Is Going”

Courtesy of ZeroHedge. View original post here.

To be sure, no one ever accused Carl Icahn of being shy and earlier this year he had a very candid sitdown with Larry Fink at whom Icahn leveled quite a bit of sharp (if good natured) criticism related to BlackRock’s role in creating the conditions that could end up conspiring to cause a meltdown in illiquid corporate credit markets. Still, talking one’s book speaking one’s mind is one thing, while making a video that might as well be called “The Sky Is Falling” is another and amusingly that is precisely what Carl Icahn has done. 

Over the course of 15 minutes, Icahn lays out his concerns about many of the issues we’ve been warning about for years and while none of what he says will come as a surprise (especially to those who frequent these pages), the video, called “Danger Ahead”, is probably worth your time as it does a fairly good job of summarizing how the various risk factors work to reinforce one another on the way to setting the stage for a meltdown. Here’s a list of Icahn’s concerns:

  • Low rates and asset bubbles: Fed policy in the wake of the dot com collapse helped fuel the housing bubble and given what we know about how monetary policy is affecting the financial cycle (i.e. creating larger and larger booms and busts) we might fairly say that the Fed has become the bubble blower extraordinaire. See the price tag attached to Picasso’s Women of Algiers (Version O) for proof of this.
  • Herding behavior: The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost. 
  • Financial engineering: Icahn is supposedly concerned about the myopia displayed by corporate management teams who are of course issuing massive amounts of debt to fund EPS-inflating buybacks as well as M&A. We have of course been warning about debt fueled buybacks all year and make no mistake, there’s something a bit ironic about Carl Icahn criticizing companies for short-term thinking and buybacks as he hasn’t exactly been quiet about his opinion with regard to Apple’s buyback program (he does add that healthy companies with lots of cash should repurchases shares). 
  • Fake earnings: Companies are being deceptive about their bottom lines.
  • Ineffective leadership: Congress has demonstrated a remarkable inability to do what it was elected to do (i.e. legislate). To fix this we need someone in The White House who can help break intractable legislative stalemates. 
  • Corporate taxes are too high: Inversions are costing the US jobs.

Here’s more from Reuters:

Billionaire investor activist Carl Icahn ramped up criticism of the U.S. Federal Reserve, warning about the unintended consequences of ultra low interest rates on the economy and financial markets.

"They don't understand the treacherous path they are going down," Icahn said in an interview with Reuters, in which he also declared his support for Donald Trump as a candidate to be the next U.S. president.

"God knows where this is going. It's very dangerous and could be disastrous," said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008.

Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year.

In a video entitled "Danger Ahead" and released on Tuesday, Icahn said the Fed's rate policy had enabled U.S. chief executives – many of whom he describes as "nice but mediocre guys" – to pursue "financial engineering" that he said has exacerbated an already wide gap between rich and poor in America.

Icahn, who slammed money managers who benefit from the so-called "carried interest" loophole under which their earnings are taxed as capital gains rather than ordinary wage income, also endorsed Donald Trump's presidential bid.

[…]

"Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things … They are going in and they are buying back stock or even worse, making stupid takeovers," said Icahn, adding some recent acquisitions have been done at a too high a price.

[…]

"It's like a movie theater and somebody yells fire. There is only one little exit door," he said. "The exit door is fine when things are OK but when they yell fire, they can't get through the exit door … and there's nobody to buy those junk bonds."

Ultimately what Icahn has done is put the pieces together for anyone who might be struggling to understand how it all fits together and how the multiple dynamics at play serve to feed off one another to pyramid risk on top of risk. Put differently: one more very "serious" person is now shouting about any and all of the things Zero Hedge readers have been keenly aware of for years.

Full video below.

Question to Millennials: Why Are You Not Mad as Hell Yet?

Courtesy of Mish.

Millennials, why are you not angry about …

  1. Having to pay Social Security when it won’t be there for you.
  2. Paying exorbitant taxes for public pension handouts and boomer retirements at age 50 for which you receive negative benefits.
  3. Obamacare for which you overpay to support the obese and the nicotine addicts.
  4. Enormous student debt burdens for which you received little benefit.

I ask this in response to an email I received from Rich Renza who writes …

Hello Mish

I’d like to introduce myself as a school teacher and an avid reader of your blog since 2006. I have never left a comment, but I have been reading Global Economic Analysis on a daily basis since I stumbled upon it shortly after selling a condo here in South Florida. Your analysis of the real estate bubble was spot on and aside from your astute analysis, I appreciated how you took complex economic topics and made them much easier to comprehend. Your blog was quickly added to my favorites on my home and school computer and even though I do not have a strong background in economics, it became a daily read.

As a history and mathematics teacher, I took an interest in your coverage of many topics that potentially affected my students. When you wrote about trends that I felt that I could discuss with my (8th grade) students I did. My class has enjoyed spirited discussions on the cost of college tuition, oil prices, the negative impact of the Federal Reserve and the advent of self-driving cars, thanks to your blog.

I took special notice of your blogs regarding issues that Millennials were facing, such as stagnant wages, student loan debt and delayed family formation. Since I began teaching in 2001, I’ve worked with several thousand students and have witnessed my high school graduates attempt to deal with these challenges. Through the classroom, my impact is limited only to the students that I personally come in contact with.

This motivated me to write an e-book that focuses on Social Security from the perspective of younger Americans. During my research, I often cited your posts on employment, Millennial trends, housing statistics and autonomous vehicles to support my key arguments.

As you know, most Millennials do not believe that they will receive any benefits from Social Security when they retire. Many are confused and disgusted that they are being taxed into a program that will not serve them. My belief is that all Americans deserve the right to choose to opt-out of participation in the Social Security program by discontinuing their payroll tax contributions, if they so desire.

I have created a site and blog, Take Back Your Six Percent to organize young Americans to pressure politicians to allow them the right to opt-out. My e-book, “How Are You Not Angry Yet” is about How Social Security is Destroying the Futures, Finances and Hopes of Generations X, Y and Z and How We Can Put an End To it. It breaks down the complex topic of Social Security in a slightly humorous way that most readers can easily understand.

The bottom line is that your blog, in part, inspired my e-book. Your work motivated me to write even when I worked a second job at night to supplement my teaching income. The amount of effort and detail that you put into each post raised the expectations that I had for my own work. I can honestly say that you inspired me to do better in my life. Thank you for that.

Thank you for your time,

Continue Here

Fourth Turning: Crisis Of Trust, Part 3

Courtesy of Jim Quinn via The Burning Platform

In Part 1 of this article I discussed the catalyst spark which ignited this Fourth Turning and the seemingly delayed regeneracy. In Part 2 I pondered possible Grey Champion prophet generation leaders who could arise during the regeneracy. In Part 3 I will focus on the economic channel of distress which is likely to be the primary driving force in the next phase of this Crisis.

There are very few people left on this earth who lived through the last Fourth Turning (1929 – 1946). The passing of older generations is a key component in the recurring cycles which propel the world through the seemingly chaotic episodes that paint portraits on the canvas of history. The current alignment of generations is driving this Crisis and will continue to give impetus to the future direction of this Fourth Turning. The alignment during a Fourth Turning is always the same: Old Artists (Silent) die, Prophets (Boomers) enter elderhood, Nomads (Gen X) enter midlife, Heroes (Millennials) enter young adulthood—and a new generation of child Artists (Gen Y) is born. This is an era in which America’s institutional life is torn down and rebuilt from the ground up—always in response to a perceived threat to the nation’s very survival.

For those who understand the theory, there is the potential for impatience and anticipating dire circumstances before the mood of the country turns in response to the 2nd or 3rd perilous incident after the initial catalyst. Neil Howe anticipates the climax of this Crisis arriving in the 2022 to 2025 time frame, with the final resolution happening between 2026 and 2029. Any acceleration in these time frames would likely be catastrophic, bloody, and possibly tragic for mankind. As presented by Strauss and Howe, this Crisis will continue to be driven by the core elements of debt, civic decay, and global disorder, with the volcanic eruption traveling along channels of distress and aggravating problems ignored, neglected, or denied for the last thirty years. Let’s examine the channels of distress which will surely sway the direction of this Crisis.

Channels of Distress

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability –  problem areas where America will have neglected, denied, or delayed needed action.” – The Fourth Turning – Strauss & Howe

Economic distress

Despite incessant corporate fascist propaganda, disguised as positive government economic data, the economic distress for the majority of Americans and majority of the world is soul crushing. The nine charts in the visual below demolish any happy talk about a recovering economy and return to normalcy. They portray a crisis level economic condition. The financial stress on average American families is at punishing levels, masked by the prodigious amount of debt doled out by the government and their Wall Street co-conspirators.

Millennials are buried under $1.3 trillion of student loan debt, with $500 billion of it doled out by the Federal government since 2009 as a ploy to reduce the reported unemployment rate and artificially stimulate spending, to provide the appearance of economic recovery. The falsity of the supposed recovery is borne out in a labor participation rate that is the lowest since 1977, with participation amongst 25 to 54 year olds the lowest in history. With real median household incomes stuck at 1989 levels and far below 2007 peak levels, the stress on middle class families to just pay their monthly bills is intense.

The 2008 Wall Street created fraudulent subprime mortgage debacle which led to millions of foreclosures, non-existent wage growth, young families enslaved in student loan debt, and the Wall Street hedge fund engineered 30% increase in home prices, has resulted in home ownership falling to historic lows and still falling. This is the result of ownership policies, programs and schemes pushed by Democrat and Republican politicians and executed by greedy Wall Street institutions, generating hundreds of billions in fees, interest and profits.

Clearly there is no distress among the .1%, as they summer at their Hamptons beach estates gorging on caviar and toasting their financial brilliance (free Fed money) with $1,000 bottles of Dom Perignone, and bid NYC penthouse real estate prices to astronomical levels. But, as the government apparatchiks at the BLS, BEA, and Census Bureau have reported positive economic data month after month since 2009, the number of people on food stamps has grown from 34 million to 46 million over this same time frame. As the middle class and poor have gotten poorer, the .1% and particularly the .01% have accelerated their capture of the national wealth.

The distress of the lower classes is self-evident and confirmed by a poverty rate of 14.8%, up from 12.5% in 2007, while the middle class has borne the brunt of an Obamacare plan written by paid lobbyists for the health insurance industry, Big Pharma, and hospital corporations. The promised $2,500 per family savings have not materialized, as health insurance premiums have increased by double digits for the last five years and small businesses have stopped covering employees. In reality, since 2008, average family premiums have climbed a total of $4,865. Even the few million Americans added to the health insurance roles are stuck with limited choices and deductibles of $5,000. More people were kicked out of existing employer healthcare plans than were newly added.

The two charts which reveal the true level of economic distress are the Federal Debt and Money Printing charts. We’ve accumulated more debt as a nation in the last seven years ($8 trillion) than we did in the first 219 years of this once proud Republic. We continue to add $1.6 billion per day to our $18.3 trillion national debt. This doesn’t even take into consideration the $200 trillion of unfunded liabilities being left to future generations.

The Fed has printed $3.5 trillion out of thin air in the last six years while keeping interest rates anchored at 0% for their Wall Street owners, with the net impact of punishing senior citizens and other risk averse savers while further enriching their gambling casino owners who dictate the monetary policy for the world. As widowed grandmothers across the land have seen their life sustaining interest income evaporate, even the downwardly manipulated CPI has risen 14% since 2008. Using a real inflation measure, most Americans have seen their daily living expenses rise by more than 30% since 2008, but Yellen and her cronies yammer about deflationary fears.

Economic distress intensifies by the day for average American household as their real income has been falling for 15 years, while the cost of food, energy, healthcare, education, rent, housing, and vehicles have soared. Government imposed property taxes, sales taxes, income taxes, fees, and tolls have risen exponentially over this time frame as the parasite sucks the host dry. Millions of households have been lured into debt by the Wall Street debt machine and their corporate media mouthpieces as consumer debt has grown from $1.5 trillion to $3.4 trillion since 2000, and mortgage debt has grown from $6.5 trillion to $13.5 trillion.

The extreme distress felt by households has been caused by their foolish choice to try and maintain their lifestyles by replacing declining income with debt. They are now enslaved by the chains of $1.3 trillion in student loan debt, $1.1 trillion of auto loan debt, $1 trillion of credit card debt, and $13.5 trillion of mortgage loan debt. Has keeping up with the Joneses been worth it? The stress of meeting the monthly obligations with declining income has become unbearable for many.

income4

The continued decline in real household income reveals the falsity of the unemployment propaganda disguised as legitimate data. The decline in unemployment from 10% in 2009 to 5.1% today is a complete and utter lie. Since 2008 there are 4 million more Americans employed, while 15 million working age Americans have supposedly left the workforce, but the government expects us to believe the unemployment rate is lower today than it was in 2008. Using a consistent labor force participation rate of 66% (where it stayed from 2003 through 2008), the unemployment rate would be over 10%. Using the BLS methodology used prior to 1994, real unemployment exceeds 20%. Those figures support the declining household income story.

Everyone has heard the president boast about the 10 million jobs added since 2009. The politicians like to talk about quantity, but aren’t so keen on discussing quality. The chart below provides the facts regarding jobs added since the recession lows. The top four categories pay less than $10 per hour. This so called economic recovery is being driven by low paying, no benefits, services jobs. These facts also support the declining household income state of affairs.

With a true unemployment rate above 10% and most new jobs paying $10 an hour, it is understandable to an awake, non-delusional citizen why retail sales remain pathetic and national retailers have stopped expanding and begun closing outlets. This is just what the corporate fascist Deep State wants. They want the proletariat, reliant upon debt to sustain their materialistic driven lifestyles and the lower class peasants dependent upon the scraps handed to them by a government, reliant on central bankers to keep the house of cards from collapsing.

largest-sectors1

The American economy has been gutted. The financialization of our economy began around 1980 and accelerated after the passage of NAFTA in 1994 and the repeal of Glass Steagall in 1999. There has been a giant sucking sound of manufacturing jobs leaving the U.S., replaced by purveyors of paper, derivatives gamblers, and high frequency traders on Wall Street. Producing goods has been replaced by scamming muppets and peddling debt to the masses so they can consume.

We’ve been eating our seed corn for the last 35 years and there is nothing left to sow. We allowed American jobs and production to be replaced by cheap foreign labor and cheap foreign produced products, financed by consumer debt. We allowed mega-corporations and Wall Street banks to capture the economic system, financial markets, judicial, legislative, and executive branches, along with the mainstream media, thereby subjugating the best interests of the country to maximizing profits for the .1%.

fire employement manufacturing

The distress of the working middle class has been growing since the early 1970s after Nixon closed the gold window and allowed central bankers and politicians the freedom to print fiat and make unfunded promises to voters. From the end of World War II until 1971 the working class reaped the income gains as their standard of living steadily increased. Since 1971 the income growth of the working class has declined, while the income growth of the top 1% has soared. This was mainly driven by the .1% in the financial class who produced nothing but misery for the bottom 90%.

Unbridled greed and an unquenchable thirst for more and more are the hallmarks of the sociopathic oligarchs who are like blood sucking leeches on the dying carcass of a once great nation. Once the dollar was no longer backed by gold, the ultimate death of the American empire became a forgone conclusion. The weight of lies is wearing on the oligarchs. The Federal Reserve Chairwoman physically falters while spreading monetary falsehoods and the speaker of the house suddenly resigns as he knows the end is drawing near.

gold%20standard%20inequality_0.jpg

Every “solution” the ruling class has implemented since Wall Street blew up the global financial system in 2008 has been sold to the public as beneficial to the people on Main Street. It has slowly dawned on the inhabitants of Main Street that Bernanke, Yellen, Paulson, Geithner, Dodd, Frank, Obama and all D.C. politicians have screwed them. As Main Street’s distress has accelerated, the wealth of anyone associated with Wall Street has soared to obscene levels.

This distress is revealing itself in the poll numbers of Donald Trump and Bernie Sanders. The flaunting of their immense wealth, political influence, and smug superiority has angered a vast swath of the citizenry. The economic distress perpetrated upon the people by the moneyed interests will be the driving force behind the next phase of this Fourth Turning. The current state of affairs has been seen before, during the previous Fourth Turning about 80 years ago.

“It has always seemed strange to me…The things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success. And while men admire the quality of the first they love the produce of the second.” – John Steinbeck – Cannery Row     

The solution is not to let politicians redistribute the wealth from the rich to the poor. Crony capitalism must be replaced by true free market capitalism, practiced with integrity, fairness, principled conduct, intelligence, and high moral standards. Profits generated by corporations are not evil, but seeking profits at any cost to society is reckless, shortsighted and immoral. Capitalism without capital is destined for failure. When corporate CEOs, Wall Street bankers, and shady billionaires exercise undue influence over the financial, political and judicial systems, their short-term quarterly profit mindset and voracious appetite for riches override the best interests of the people and create a sick, warped, repressive society. Today our system is in the grasp of psychopaths whose hubris and myopic focus on enriching themselves will ultimately be their downfall.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/09-overflow/20150920_main.jpg

“This financial system is sick, and is unfortunately and at an increasing pace approaching terminal. I think the problem is due to a simple failure or ‘lack of character.’  It is an old story, and a perennial favorite of the madness of the dark powers of this world. Character provides stability and confidence. When character fails, there is uncertainty and fear. This passive-aggressive posture towards equities in general and risk in particular is because of the lack of reform to create a sustainable, stable recovery fueled by organic demand for growth based across a broader participation amongst the consumers. You cannot have it both ways.  You cannot subject the great part of a people to fear, repression, and enforced deprivation on one hand, and expect them to flourish and consume freely on the other.” – Jesse

In Part 4 I will assess the other channels of distress (social, cultural, technological, ecological, political, military) that are likely to burst forth with the molten ingredients of this Fourth Turning, and potential climaxes to this Winter of our discontent.

#1 Reason Stocks are Declining; Is Hillary to Blame for Biotech Smash?

 

#1 Reason Stocks are Declining; Is Hillary to Blame for Biotech Smash?

Courtesy of Mish.

In the wake of yet another big market selloff (biotechs down over 6% today), the Nasdaq 100 index down 2.87%, and the S&P down 2.56%, mainstream media parrots floated numerous reasons behind the selloff.

All of the parrots are wrong.

Lack of Inflation?

Bloomberg interviewed Jeff Korzenik, Fifth Third Bank's chief strategist in its piece What's Really Driving Today's Selloff in U.S. Stocks?

In the accompanying video, Korzenik blamed the Fed and a "lack of visible inflation".

In the same video segment, Jamie Dimon bragged about the strength of the US economy and the health of the US consumer. As long as a bubble is expanding, things always look good.

Of course the idea that inflation is a benefit to stocks and the economy is preposterous, but that's what puppets have been trained to believe, and say.  

China to Blame?

Reuters writer Noel Randewich says Wall Street Drops as Anxious Investors Eye China.

"U.S. stocks finished sharply lower on Monday and were on track for their worst quarter in four years as investors worried about the health of China's economy and its potential impact on the timing of a U.S. interest rate increase."

Is Hillary to Blame for Biotech Smash?

Reuters writers Ransdell Pierson and Bill Berkrot say Democrats Take Aim at Drug Prices, Prompting Sharp Drops in Biotech Stocks

 Democratic lawmakers on Monday attacked "massive" price increases of two heart drugs from Canada's Valeant Pharmaceuticals International Inc, fueling a rout in drugmaker shares on worries of a government and insurer clampdown on U.S. drug prices.

The Democratic House members also urged panel Chairman Jason Chaffetz, a Republican, to invite Valeant Chief Executive Michael Pearson to testify at a hearing next week. That would put him in the same hot seat as Martin Shkreli, chief executive officer of privately held Turing Pharmaceuticals, who had already been called to testify.

Tiny Turing has been widely criticized for a price hike of more than 5,000 percent for its Daraprim treatment for a dangerous parasitic infection.

Clinton on Monday called on Turing to roll back the $750 price to its original $13.50.

Clinton last week unveiled a plan that includes a $250 monthly cap on out-of-pocket costs for prescription drugs; it would allow the Medicare plan for the elderly to negotiate drug pricing, and permit Americans to buy drugs more cheaply from other countries.

"(Stock) selling hasn't really stopped since Hillary Clinton made her comments last week on Monday," said Jeff Jonas, a portfolio manager with Gabelli funds. "The Democratic committee members would certainly continue that trend that Hillary started."

Biotech Sector Daily

image: http://3.bp.blogspot.com/-eNJuJ44cngg/VgmyWyZxvyI/AAAAAAAAfq0/OCMMHILeKXI/s400/IBB%2BDaily.png

That looks pretty ominous. But let's put a proper perspective on things.

Biotech Sector Weekly

image: http://4.bp.blogspot.com/-Aq0amsfVpiM/Vgmy-ebsWlI/AAAAAAAAfq8/-GT8fr7kfko/s400/IBB%2BWeekly.png

History suggests the recent selloff is just a start of a correction. Charts like those above smack of bubbles, and bubbles typically do not deflate in an orderly manner.

#1 Reason Stocks are Declining

To paraphrase Bill "It's the economy, stupid" Clinton, I suggest "It's the valuations, stupid."

Valuations are well beyond absurd. Many biotechs won't ever make a dime. And it's not just biotechs. Most market segments have absurd valuations.

The market is starting to care, a reflection of a change in sentiment. Hillary's statements may have been a catalyst for a sentiment change, but most likely she merely goosed sentiment that had already changed.

Not to Blame 

  • China is not to blame.
  • Hillary is not to blame.
  • Fed hikes are not to blame.

To Blame

Rate hike discussion is not to blame.

However, the Fed itself is to blame for creating the loosey-goosey conditions that fostered a bubble in equities and junk bonds. 

The Fed will now have to deal with yet another asset bubble crash (they don't even see coming). Price deflation the Fed foolishly attempted to defeat, is now more likely than ever.

Price deflation never was, nor ever will be, an economic problem. Asset bubbles are always a problem. The Fed still has not figured this out. Thanks to group think, the Fed never will figure this out.

Bubble Debate

For more on bubble valuations and why I expect negative real returns for 7-10 years, please see Bubble Debate; Equity Allocations vs. Shiller PE; Simple World

Mike "Mish" Shedlock

 

Tick Tick Tick

 

Tick Tick Tick

Courtesy of James H. Kunstler

Did Charlie Rose look like a fucking idiot last night on 60-Minutes, or what, asking Vladimir Putin how he could know for sure that the US was behind the 2014 Ukraine coup against President Viktor Yanukovych? Maybe the idiots are the 60-Minutes producers and fluffers who are supposed to prep Charlie’s questions. Putin seemed startled and amused by this one on Ukraine: how could he know for sure?

Well, gosh, because Ukraine was virtually a province of Russia in one form or another for hundreds of years, and Russia has a potent intelligence service (formerly called the KGB) that had assets and connections threaded through Ukrainian society like the rhizomorphs of the fungus Armillaria solidipes through a conifer forest. Gosh, Charlie, it’s like asking Obama whether the NSA might know what’s going on in Texas.

And so there is Vladimir Putin, a former KGB officer, having to spell it out for the American clodhopper super-journalist. “We have thousands of contacts with them. We know who and where, and when they met with someone, and who worked with those who ousted Yanukovych, how they were supported, how much they were paid, how they were trained, where, in which country, and who those instructors were. We know everything.”

The only thing Vlad left out of course was the now-world-famous panicked yelp by Assistant Secretary of State Victoria Nuland crying, “Fuck the EU,” when events in Kiev started getting out of hand for US stage-managers. But he probably heard about that, too.

Charlie then voice-overed the following statement: “For the record, the US has denied any involvement in the removal of the Ukrainian leader.” Right. And your call is important to us. And your check is in the mail. And they hate us for our freedom.

This bit on Ukraine was only a little more appalling than Charlie’s earlier segment on Syria. Was Putin trying to rescue the Assad government? Charlie asked, in the context of President Obama’s statement years ago that “Assad has to go.”

Putin answered as if he were explaining something that should have been self-evident to a not-very-bright high school freshman: “To remove the legitimate government would create a situation which you can witness in other countries of the region, for instance Libya, where all the state institutions have disintegrated. We see a similar situation in Iraq. There’s no other solution to the Syrian crisis than strengthening the government structure.”

I guess Charlie and the 60-Minutes production crew hadn’t noticed what had gone on around the Middle East the past fifteen years with America’s program of toppling dictators into the maw of anarchy. Not such great outcomes.

Charlie persisted though, following his script: Was Putin trying to rescue Assad? Vlad had to lay it out for him as if he were introducing Charlie to the game of Animal Lotto: “What do you think about those who support the terrorist organizations only to oust Assad without thinking about what happens to the country after all the state institutions have been demolished…? Look at those who are in control of 60 percent of the territory of Syria.

Meaning ISIS. Al Nusra (formerly al Qaeda in Syria), i.e., groups internationally recognized as terrorist organizations.

Charlie Rose, 60-Minutes — and perhaps by extension US government agencies with an interest in propagandizing — seem to want to put over the story that Russia has involved itself in Syria only to aggrandize its role on in world affairs.

Forgive me for being so blunt, but what sort of stupid fucking idea is this? And are there any non-lobotomized adults left in the USA who can’t see straight through it? The truth is that American policy in Syria (plus Iraq, Libya, Ukraine, Somalia, Afghanistan) is an impressive record of failure in terms of the one basic aim that most rational people might agree upon: stabilizing the region in a way that does not leave Islamic jihadi maniacs in charge.

Okay, so now the Russians will do what they can to try to stabilize Syria. They’ve had their failures, too (famously, Afghanistan). But Russian territory adjoins the Islamic lands and they clearly have stake in containing the virus of Islamic extremism near their borders. Is that not obvious?

Charlie made one other extremely dumb statement — he seems to prefer making assertions to asking straight-up questions — to the effect that Russia was misbehaving by deploying troops on its border with Ukraine.

Putin again seemed astonished by this credulous idiocy. The US had troops and nuclear weapons all over Europe, he answered. Did Charlie think that meant the US was attempting to occupy the nations of Europe now? Was it “a crime” for Russia to defend its own border with a neighboring state (formerly a province) that, he implied, the US had deliberately destabilized?

The Putin segment was followed by a sickening session with Donald Trump, a man who now — after a month or so of public exposure — proves incapable of uttering a coherent idea. I wonder what Vladimir Putin makes of this incomparable buffoon. Perhaps that America has gotten what it deserves.