This is a good book, it is not a great book like The Hedge Fund Mirage. Why?
There are a few reasons. First, the book on hedge funds contradicted the conventional wisdom. This book confirms the conventional wisdom that interest rates have to rise.
We all have to be wary of the conventional wisdom in economics. Economics is a social science, but I mean it not in the sense that we study society, but that economists toe the line as to what is acceptable to publish. This is guarded by peer review, which ensures that no new idea that might be correct gets published. (This is true of most of the “sciences” because many “scientists” are not neutral observers — they have axes to grind.)
This book assumes that the US will inflate its way out of this crisis. In the Great Depression, it did not work that way, though many thought it would.
The book correctly calls out all of the ways that Wall Street cheats individual bondholders, particularly structured notes, and the illiquidity of muni bonds.
He does not get how muni bond ladders are durable investments, being a good compromise on how to avoid interest rate risk. Further, he never mentions how the TRACE system of FINRA reports all trades. The system is not that opaque.
This is a good book, but not a great book. Yes, I think inflation is more likely than deflation, but I don’t think inflation is a slam-dunk. We haven’t had it yet amid many predictions for it.
Who would benefit from this book: It is a good book, though I doubt that the theory is certain. If you want to, you can buy it here: Bonds Are Not Forever: The Crisis Facing Fixed Income Investors.
Full disclosure: The publisher sent me the book after asking me if I wanted it.
If you enter Amazon through my site, and you buy anything, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.
Submitted by Andreas Marquart of The Ludwig von Mises Institute,
If one looks at the current paper money system and its negative social and social-political effects, the question must arise: where are the protests by the supporters and protectors of social justice? Why don’t we hear calls to protest from politicians and social commentators, from the heads of social welfare agencies and leading religious leaders, who all promote the general welfare as their mission?
Presumably, the answer is that many have only a weak understanding of the role of money in an economy with a division of labor, and for that reason, the consequences of today’s paper money system are being widely overlooked.
The current system of fractional reserve banking and central banking stands in stark opposition to a market economy monetary regime in which the market participants could decide themselves, without state pressure or coercion, what money they want to use, and in which it would not be possible for anyone to expand the money supply because they simply choose to do so.
The expansion of the money supply, made possible through central banks and fractional reserve banking, is in reality what allows inflation, and thus, declining income in real terms. In The Theory of Money and Credit Ludwig von Mises wrote:
The most important of the causes of a diminution in the value of money of which we have to take account is an increase in the stock of money while the demand for it remains the same, or falls off, or, if it increases, at least increases less than the stock. ... A lower subjective valuation of money is then passed on from person to person because those who come into possession of an additional quantity of money are inclined to consent to pay higher prices than before.
When there are price increases caused by an expansion of the money supply, the prices of various goods and services do not rise to the same degree, and do not rise at the same time. Mises explains the effects:
While the process is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices of the things they buy have not yet risen or have not risen to the same extent. On the other hand, there are people who are in the unhappy situation of selling commodities and services whose prices have not yet risen or not in the same degree as the prices of the goods they must buy for their daily consumption.
Indeed, in the case of the price of a worker’s labor (i.e., his or her wages) increasing at a slower rate than the price of bread or rent, we see how this shift in the relationship between income and assets can impoverish many workers and consumers.
An inflationary money supply can cause impoverishment and income inequality in a variety of ways:
1. The Cantillon Effect
The uneven distribution of price inflation is known as the Cantillon effect. Those who receive the newly created money first (primarily the state and the banks, but also some large companies) are the beneficiaries of easy money. They can make purchases with the new money at goods prices that are still unchanged. Those who obtain the newly created money only later, or do not receive any of it, are harmed (wage-earners and salaried employees, retirees). They can only buy goods at prices which have, in the meantime, risen.2. Asset Price Inflation
Investors with greater assets can better spread their investments and assets and are thus in a position to invest in tangible assets such as stocks, real estate, and precious metals. When the prices of those assets rise due to an expansion of the money supply, the holders of those assets may benefit as their assets gain in value. Those holding assets become more wealthy while people with fewer assets or no assets either profit little or cannot profit at all from the price increases.
3. The Credit Market Amplifies the Effects
The effects of asset price inflation can be amplified by the credit market. Those who have a higher income can carry higher credit in contrast to those with lower income, by acquiring real estate, for example, or other assets. If real estate prices rise due to an expansion of the money supply, they may profit from those price increases and the gap between rich and poor grows even faster.4. Boom and Bust Cycles Create Unemployment
The direct cause of unemployment is the inflexibility of the labor market, caused by state interference and labor union pressures. An indirect cause of unemployment is the expansion of the paper money supply, which can lead to illusory economic booms that in turn lead to malinvestment. Especially in inflexible labor markets, when these malinvestments become evident in a down economy, it ultimately leads to higher and more lasting unemployment that is often most severely felt among the lowest-income households.The State Continues to Expand
Once the gap in income distribution and asset distribution has been opened, the supporters and protectors of social justice will more and more speak out, not knowing (or not saying) that it is the state itself with its monopolistic monetary system that is responsible for the conditions described.
It’s a perfidious “business model” in which the state creates social inequality through its monopolistic monetary system, splits society into poor and rich, and makes people dependent on welfare. It then intervenes in a regulatory and distributive manner, in order to justify its existence. The economist Roland Baader observed:
The political caste must prove its right to exist, by doing something. However, because everything it does, it does much worse, it has to constantly carry out reforms, i.e., it has to do something, because it did something already. It would not have to do something, had it not already done something. If only one knew what one could do to stop it from doing things.
The state even exploits the uncertainty in the population about the true reasons for the growing gap in income and asset distribution. For example, The Fourth Poverty and Wealth Report of the German Federal Government states that since 2002, there has been a clear majority among the German people in favor of carrying out measures to reduce differences in income.
The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies.
If those who claim to speak for social justice do nothing to protest this, their silence can only have two possible reasons. They either don’t understand how our monetary system functions, in which case, they should do their research and learn about it; or they do understand it and are cynically ignoring a major source of poverty because they may in fact be benefiting from the paper money system themselves.
We recently questioned whether things were falling apart in US-Asia relations...as the Trans-Pacific Partnership lies battered on the floor; this seemed to sum it up rather well...
Submitted by Jim Quinn of The Burning Platform blog,
I’m baffled by the storyline portrayed by the dying legacy media, sponsored by Wall Street and the CEO executive suites of mega-corps, and supported by the propaganda data agencies of the U.S. government. The BLS, BEA, CBO, CNBC, CNN, and a myriad of other government sponsored letters present supposedly accurate data that is designed to convince the ignorant masses everything is fine and their lives are improving.
For anyone willing to uncover the facts and think critically about the storyline being presented, an entirely different reality is revealed. The simple chart below obliterates the “official” storyline. Do you have the uncomfortable feeling that your financial situation has been declining for the first 13 years of the 21st Century?
Your beloved government puppets and their Wall Street puppeteers have used their control of the mainstream media to fully utilize Edward Bernays’ propaganda techniques to convince you that your household income has actually risen by 28% since 2000. There is a reason the government run public schools don’t teach children about inflation. They might figure out how badly they are getting screwed by their owners.
In reality, even using the heavily manipulated CPI numbers issued by the BLS, REAL median household income in the United States has FALLEN by 7% since 2000. Most households in the U.S. have less annual income than they did 13 years ago.
But it gets better. Median REAL household income is down 8% since the peak in 2008. Now for the government statistic reality check. According to the government and their media mouthpieces, the economy bottomed in 2009, with 10.3% unemployment and GDP bottoming at $14.34 trillion. Since the “official” end of the recession in 2009, the unemployment rate has plummeted to 7.0% and GDP has surged to $16.9 trillion.
If this government reported data is true, how could REAL median household income still be 4% lower than at the END of the recession in 2009? If all these jobs were created and the economy has truly grown by 18%, REAL median household income must be higher than it was in 2009. But it’s not.
Do you still believe the storyline? Do you still believe in the American Dream of a better tomorrow? If you do, you’d have to be asleep.
Luckily for the ruling class, they have successfully “educated” the masses to not understand inflation or revolution would be on the horizon.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford
With all the excitement about Japan's soaring stock market (if plunging wages), crashing non-digital currency (leading to soaring energy prices), recent passage of an arbitrary secrecy bill ("Designed by Kafka & Inspired By Hitler"), and ongoing territorial spat with China, it is almost as if the Abe administration is desperately doing everything in its power, including some of the most ridiculous decisions taken by a government in recent history, to hide some key development behind the scenes. Such as this one perhaps: NHK reported today that TEPCO said radiation levels are extremely high in an area near a ventilation pipe at the crippled Fukushima Daiichi nuclear power plant. TEPCO found radiation of 25 sieverts an hour on a duct, which connects reactor buildings and the 120-meter-tall ventilation pipe.
Putting this number in context the estimated radiation level is the highest ever detected outside reactor buildings. People exposed to this level of radiation would die within 20 minutes.
The exhaust pipe in question was used to release radioactive gases following the outbreak of the accident 2 years ago.
TEPCO says radioactive substances could remain inside the pipes. Given TEPCO's safety record, they could also leak outside of the pipes. And given the company's "credibility" the world would be sure to learn about this... anywhere between 2 and 3 years after the fact.
In the meantime, we urge Japan to follow the bouncing, and so pleasantly distracting, Topix and Nikkei 225 balls, while sticking its head in the glow in the dark sand and completely ignore the radioactive monster in the closet.
Submitted by Michael Krieger of Liberty Blitzkrieg blog,
I’ve always wondered what would happen once private equity players decided enough was enough and foreign oligarchs finished their real estate money laundering transactions. Well, we might be about to find out.
According to RealtyTrac, foreclosures for homes worth $5 million or more are up 61% this year despite the fact that overall foreclosures are down 23%. The question is, does this merely represent holdouts from the prior housing bubble, or is it a sign of things to come? Only time will tell. From CBS:
Foreclosures in the ultra-high-end housing market — homes worth $5 million or more — have skyrocketed 61 percent over last year.
That growth bucks the trend: Overall foreclosures are down 23 percent, according to a new report from Irvine, Calif.-based real estate information site RealtyTrac.
Until lately, that is. “Recently, we’ve been hearing from agents that they’re starting to see the high-end properties go to foreclosure and there turned out to be some data to support this notion that high-end holdouts are finally moving through the foreclosure process,” he said.
It may be a sign that lenders are now financially stable enough to start moving on ultra-high-end delinquencies and take the substantial losses these multi-million dollar homes represent.
Florida and California account for more than half the total number of multi-million dollar foreclosures . The Miami-Fort Lauderdale area had the largest number of foreclosures at 47, followed by the Los Angeles-Long Beach area with 35, but the trends are very different. Miami saw a 488 percent increase in foreclosures, while L.A. only saw a 3 percent increase.
Those two cities are followed by Atlanta, Orlando and the New York City and northern New Jersey area.
Full article here.
Judging by HuffPo's latest polls, the current administration is going to need a bigger boat (of vote-garnering transfer payments) to stand a chance in 2014... or, of course, we see another epic fail in January when the debt-ceiling debacle rears its (mostly ignored by the stock market) head and once again the Republicans are painted into an awkwardly responsible corner. One thing is clear, the voters are becoming less 'entrenched' in their faith in hope-and-change (or more distracted from their dismal reality).
Chart: Huffington Post
However, since the Fed is truly in charge and since Washington merely does the bidding of Wall Street and corporate lobbyists, all this chart shows is that the public's attention has once again been successfully diverted from the most important matters at hand, and a new, periodic scapegoat has been found.
And always remember, as we previously discussed in detail, their is only on game in town... lobbying...
Submitted by Anthony Mirhaydari via The Burning Platform blog,
They say those who forget the lessons of history are doomed to repeat them.
As a student of market history, I’ve seen that maxim made true time and again. The cycle swings fear back to greed. The overcautious become the overzealous. And at the top, the story is always the same: Too much credit, too much speculation, the suspension of disbelief, and the spread of the idea that this time is different.
It doesn’t matter whether it was the expansion of railroads heading into the crash of 1893 or the excitement over the consolidation of the steel industry in 1901 or the mixing of speculation and banking heading into 1907. Or whether it involves an epic expansion of mortgage credit, IPO activity, or central-bank stimulus. What can’t continue forever ultimately won’t.
The weaknesses of the human heart and mind means the swings will always exist. Our rudimentary understanding of the forces of economics, which in turn, reflect ultimately reflect the fallacies of people making investing, purchasing, and saving decisions, means policymakers will never defeat the vagaries of the business cycle.
So no, this time isn’t different. The specifics may have changed, but the themes remain the same.
In fact, the stock market is right now tracing out a pattern eerily similar to the lead up to the infamous 1929 market crash. The pattern, illustrated by Tom McClellan of the McClellan Market Report, and brought to his attention by well-known chart diviner Tom Demark, is shown below.
Excuse me for throwing some cold water on the fever dream Wall Street has descended into over the last few months, an apparent climax that has bullish sentiment at record highs, margin debt at record highs, bears capitulating left and right, and a market that is increasingly dependent on brokerage credit, Federal Reserve stimulus, and a fantasy that corporate profitability will never again come under pressure.
On a pure price-analogue basis, it’s time to start worrying.
Fundamentally, it’s time to start worrying too. With GDP growth petering out (Macroeconomic Advisors is projecting fourth-quarter growth of just 1.2%), Americans abandoning the labor force at a frightening pace, businesses still withholding capital spending, and personal-consumption expenditures growing at levels associated with recent recessions, we’ve past the point of diminishing marginal returns to the Fed’s cheap-money morphine.
All we’re doing now is pushing on the proverbial string. Trillions in unused bank reserves are piling up. The housing market has stalled after the “taper tantrum” earlier this year caused mortgage rates to shoot from 3.4% to 4.6% between May and August. The Treasury market is getting distorted as the Fed effectively monetizes a growing share of the national debt. Emerging-market economies are increasingly vulnerable to a currency crisis once the taper finally starts.
The Fed knows it. But they’re trapped between these risks and giving the market — the one bright spot in the post-2009 recovery — serious liquidity withdrawals.
But the specifics of the run up to the 1929 crash provide true bone-chilling context for what’s happening now.
The Bernanke-led Fed’s enthusiasm for avoiding the mistakes that worsened the Great Depression—- a mistimed tightening of monetary conditions — has led him to repeat the mistakes that caused it in the first place: Namely, continuing to lower interest rates via Treasury bond purchases well into an economic expansion and bull market justified by low-to-no inflation.
(Side note here: As economist Murray Rothbard of the Austrian School wrote in America’s Great Depression, prices dropped then, as now, because of gains in productivity and efficiency.)
Here’s the kicker: The Fed (mainly the New York Fed under Benjamin Strong) was knee deep in quantitative easing in the late 1920s, expanding the money supply and lowering interest rates via direct bond purchases. Wall Street then, as now, was euphoric.
It ended badly.
Fed policymakers felt like heroes as they violated that central tenant of central banking as outlined in 1873 by Economist editor Walter Bagehot in his famous Lombard Street: That they should lend freely to solvent banks, at a punitive interest rate in exchange for good quality collateral. Central-bank stimulus should only be a stopgap measure used to stem panics, a lender of last resort; not act as a vehicle of economic deliverance via the printing press.
It’s being violated again now as the mistakes of history are repeated once more. Bernanke will be around to see the results of his mistakes and his misguided justification that quantitative easing is working because stock prices are higher, ignoring evidence that the “wealth effect” isn’t working.
Strong died in 1928, missing the hangover his obsession with low interest rates and credit expansion caused after bragging, in 1927, that his policies would give “a little coup de whisky to the stock market.”
“We need some recognition that we’re doing a service to the community. But we can’t do it for free. And we can’t do it at a loss. No other business would do that,” exclaims the president of the California Medical Association, as The Washington Examiner reports, independent insurance brokers estimate 70% of California's 104,000 licensed doctors are boycotting the exchange. “The Covered California board says we have plenty of doctors, and they allege they have 85 percent of doctors participating, but they’ve shown no numbers," and if a large number of doctors either balk at participating in the exchange or retire, the state’s medical system could be overwhelmed. “Enrollment doesn’t mean access, because there aren’t enough doctors to take the low rates of Medicaid,” warns one health director. “There aren’t enough primary care physicians, period.”
An estimated seven out of every 10 physicians in deep-blue California are rebelling against the state's Obamacare health insurance exchange and won't participate, the head of the state's largest medical association said.
“It doesn't surprise me that there's a high rate of nonparticipation,” said Dr. Richard Thorp, president of the California Medical Association.
California offers one of the lowest government reimbursement rates in the country -- 30 percent lower than federal Medicare payments. And reimbursement rates for some procedures are even lower.
“Some physicians have been put in the network and they were included basically without their permission,” Lisa Folberg said. She is a CMA’s vice president of medical and regulatory Policy.
“They may be listed as actually participating, but not of their own volition,”
“This is a dirty little secret that is not really talked about as they promote Covered California,” Waters said. He called the exchange's doctors list a “shell game” because “the vast majority” of his doctors are not participating
“The Covered California board says we have plenty of doctors, and they allege they have 85 percent of doctors participating," notes Mazer. "But they’ve shown no numbers."
“Enrollment doesn’t mean access, because there aren’t enough doctors to take the low rates of Medicaid,” he said. “There aren’t enough primary care physicians, period.”
Briscoe professed not to be surprised by the refusal of doctors to participate in Covered California. “It rings true. I’ve been kind of wondering in my head, ‘How are they offering such low premiums?’ ”
Submitted by Chris Wood via Casey Research,
Does the FDA think you're too stupid to have access to your own genetic information?
It sure seems so.
The Food and Drug Administration, which bills itself as "the oldest comprehensive consumer protection agency in the US federal government," probably stirs up more emotion among citizens than any other federal agency (save perhaps for the IRS). For good reason. The range of activities into which the FDA is "mandated" to poke its supervisory fingers is vast and includes most prominently the regulation of most types of foods, dietary supplements, medical devices, human and veterinary drugs, vaccines and other biological products, and cosmetics.
And this time it's really gone too far.
On November 22, 2013, the FDA sent a warning letter to the well-known consumer genomics company 23andMe, ordering it to "immediately discontinue marketing" its only product.
For those of you who are not familiar with 23andMe, the company provides a "DNA Spit Kit" and "Personal Genome Service" (PGS) that supposedly reports on 240+ health conditions and traits and helps clients track their ancestral lineage. Basically, you send a saliva sample in via the "Spit Kit," and the company analyzes the sample using a DNA sequencing machine.
It doesn't give you a full readout of your genome, but tests for a custom panel of what are called single nucleotide polymorphisms in order to determine, for instance, if you're a carrier for certain disease-linked mutations like cystic fibrosis or sickle cell anemia. The panel also tests for the three most common BRCA1 and 2 mutations that are associated with breast cancer, among many other mutations associated with other diseases.
So what we're talking about here with 23andMe is information, not a medical device. It's your personal genetic information. And the FDA wants to put the kibosh on one of the only companies providing this service inexpensively—you get your Spit Kit and readout for just $99—to consumers.
This is really a first amendment issue, and the FDA should not be in the business of regulating freedom of speech and information. But considering what the FDA thinks of your intelligence, I'm not surprised they're trying to reach this far.
Consider some of the language from the FDA's warning letter to 23andMe.
"For instance, if the BRCA-related risk assessment for breast or ovarian cancer reports a false positive, it could lead a patient to undergo prophylactic surgery, chemoprevention, intensive screening, or other morbidity-inducing actions, while a false negative could result in a failure to recognize an actual risk that may exist."
Really? You think that if a woman receives news from a $99 test that she may be at a higher risk for breast cancer due to a genetic mutation that she's going to run out and somehow acquire chemo drugs and start dosing herself, or that she's going to go to some back-alley clinic to have her breasts lopped off? Not to be crude or make light of a very serious situation and condition, but the FDA's implication is insulting, to say the least.
What would actually happen in the real world is that she'd go to a doctor to get herself checked out, perhaps sooner rather than later, which isn't a bad thing even if the 23andMe test showed a false positive. Now, if the test showed a positive for the mutation and she is in fact positive—which would have to be confirmed by a separate test from a doctor anyway before a mastectomy—it is her right to undergo such surgery whether or not it is determined to be "medically necessary." This is precisely what Angelina Jolie recently did.
The false negative argument is maybe a little more plausible, but despite what the FDA might believe, people who are proactive enough about their genetic makeup to seek out a service like the PGS from 23andMe are smart. They know that no test is foolproof or 100% accurate. People receive false negative tests from federally regulated labs and physicians all the time. It's unfortunate, but that's the way these things work. You don't see anybody making a stink that these tests shouldn't be run just because there's a small chance of delivering a patient a false negative result.
In response to the FDA's warning letter, 23andMe has stopped all TV, radio, and online advertising for its PGS, although the service is still being sold on the website. The situation is still unfolding, so whether or not the FDA decides that the company is now in compliance because it's no longer "marketing" the PGS remains to be seen. It could determine that just having the website active is a form of "marketing," which could be the nail in the coffin for the company. We'll have to see. According to the FDA, 23andMe had 15 working days (starting November 22) to notify it of the specific actions the company has taken to address all of the issues raised in the letter.
As expected, an additional consequence of the FDA's warning letter is a class action lawsuit that was filed just five days after the letter was sent. The lawsuit alleges that the test results are "meaningless," and that 23andMe uses false and misleading advertising to promote its services to US consumers. The lawsuit seeks at least $5 million under various California state laws and estimates "tens or hundreds of thousands" of US customers are entitled to damages from the company.
Look, I get that many of you probably think the FDA had every right to do what it did. And I'll admit that its actions probably were legally justified, since 23andMe's advertising campaign did seem to market the PGS "for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease," which falls under the FDA's purview.
I also understand why detractors of consumer genomics companies think the FDA should shut down 23andMe and all its peers/competitors—because people engaging the services of these companies don't get the full picture, and what's going on is much more complex. Only part of a person's DNA is tested, and how to properly interpret the results is still uncertain, since many factors other than a mutation in isolation contribute to disease.
But when do we ever get the full picture? Even a readout of our entire genome is only a small part of the story. A key takeaway from what's known as the ENCODE Project is that much of what was previously thought of as "junk DNA" actually performs regulatory functions—which can be thought of as regions that act like switches attached to a particular gene that determine whether or not they'll be expressed. There are millions of such regions throughout the genome, and they're linked to each other (and to the protein-coding genes) in an extremely complicated hierarchical network.
What's more, the linear ordering of the genome provides a further source of confusion: the three-dimensional folding of the chromosomes inside the nucleus allows promoter regions to maintain a close connection to genes that apparently lie far away on the linear sequence. This explains why so much biochemical activity can be found even deep in the deserts of the alleged "junk DNA."
Many of these promoter regions manifest themselves in the cell as "functional RNA" molecules—types of RNA that are an end product in themselves, rather than merely an intermediate step on the way to becoming a protein, and that play a key role in switching genes on and off.
In truth, we never get the full story, no matter whom we turn to, and there's nothing wrong with bits and pieces of information to help us make decisions along the way (or just to satisfy our curious nature).
And that's really the whole point here. I don't really care if what the FDA did was technically legal or that some people think it makes sense in order to keep others from harming themselves in some way. What matters is that this ultimately boils down to information—personal genetic information. And whether 23andMe does a good job of providing that or not, it's our right to seek out such a service and use it if we so desire.
Read all about the latest news and best strategies relevant to investors in our free e-letter, Casey Daily Dispatch. Five days a week, it informs readers on breakthrough technologies… metals and mining… energy… big-picture investing and trends. Sign up here to get it free.
Chart Of The Day: US Labor Force Declines By 25,000 In Past Year Despite 2.4 Million Rise In Employable Americans
A few days ago, one of the winners of the 2013 Nobel prize for economics, Robert Shiller, warned that stocks are in a bubble, voicing what most people, except for conflicted asset managers for whom spinning the truth and increasing their AUM means a greater paycheck, and the monetary misfits in the Marriner Eccles building of course, know: that stocks are in a bubble. Today, it was the turn of the other Nobel prize winner, Eugene Fama, whose expertise in markets may be a tad more questionable (he still believes in efficient markets in a world in which the Fed exists), to warn about something else - the risk of global recession.
"There may come a point where the financial markets say none of their debt is credible anymore and they can't finance themselves," he told Reuters in the snow-covered Swedish capital, where he will receive his prize on Tuesday.
"If there is another recession, it is going to be worldwide."
Fama, who has been called the father of modern finance and shared the economics prize for research into market prices and asset bubbles, played down this week's strong U.S. labor market data.
"I am not reassured at all," he said.
The U.S. jobless rate fell to a five-year low of 7.0 percent in November, and employers hired more workers than expected.
"The jobs recovery has been awful. The only reason the unemployment rate is 7 percent, which is high by historical standards in the U.S., is that people gave up looking for jobs," he said.
"I just don't think we have come out of (recession) very well," he said.
But we sure have stayed in the depression quite well. And to illustrate just what Fama means, here is a chart showing the US labor force "change" between November of 2012, when the unemployment rate was 7.8%, and the just released November 2013 numbers, according to which unemployment fell to just 7.0%.
As today's chart of the day shows, while the civilian noninstitutional population (i.e. employable Americans over the age of 16) grew by 2.4 million in the past year (from 244.2 million to 246.6 million), the US labor force somehow, very mysteriously, declined.
The traditionally quiet period for markets in December is turning out to be not-so-quiet, thanks to a key meeting of the U.S. Federal Reserve starting December 17. The meeting will decide on whether a reduction in quantitative easing (QE) is necessary. Consequently, every economic data point up to the meeting is being analysed and over-analysed. But it does appear that the Fed seems committed to so-called tapering at some point soon and the odds are 50:50 that it'll pull the trigger in December.
A few weeks ago, I was asked for my 2014 global outlook by a large precious metals website and I told the editor that while tapering will be a key theme, Japan is likely to prove equally important if not more so. The editor was taken aback by this and I can understand why. But let me explain...
The Fed has been flagging tapering for some time and markets appear to have gotten used to the fact that it'll happen soon. In May, when Bernanke first hinted of tapering, markets freaked out as they assumed a rise in interest rates would come simultaneously. Since then, the Fed has been at pains to say that interest rates will stay low for several years to come while a wind down in QE occurs. Markets appear to have bought this line. They may continue to buy the line through 2014 and even 2015.
While the U.S. cuts back on stimulus, Japan is likely to move in the opposite direction, increasing its own stimulus very soon. That'll be on top of Japan's existing QE which is the equivalent of 3x that of the U.S. when compared to GDP. The reason for even more QE is that the grand experiment known as Abenomics, almost one year old, has been a failure. It hasn't lifted key components such as core inflation, wages or business spending.
Increased Japanese QE will mean a lower yen, potentially much lower. If right, that'll have significant consequences. Among other things, it'll increase the risks of exporting rivals fighting back by depreciating their own currencies and embracing a currency/trade war. Second, it's likely to raise the ire of exporting competitor, China, and raise already high tensions in the South China Sea. If more stimulus fails to lift the Japanese economy, Abe will be desperate to maintain his credibility and a fight with China could just suit his ends. Hence why Japan matters. Perhaps more than tapering.
To taper or not to taper?
It may be the time when the Fed stops with all the flirting and finally starts to cut bond purchases. Bond whiz, Bill Gross of Pimco, suggests there's a 50:50 chance, or even greater, of tapering this month. And he's probably right given the many hints from the Fed that it's ready to go down that path. If tapering does occur, markets will be assessing the potential time frame for a full wind-down of QE and the economic targets set by the Fed for that to happen.
To understand the potential consequences of tapering, let's do a quick recap of what QE is and what it's been trying to achieve. The Fed has put in place two key policies since the financial crisis:
- Lower short-term interest rates towards zero.
- Implement QE, involving the purchase of longer term bonds.
The Fed and other central banks have done this to achieve several ends:
- Suppress bond yields and thereby interest rates (check).
- Buying the bonds from banks and other institutions who can use that money to lend out and therefore stimulate the economy (hasn't happened).
- The printed money also helping banks to repair their balance sheets, devastated by 2008 (check, at least in the U.S.)
- Keeping short-term rates near zero means pitiful bank deposit rates and tempting depositors into higher yielding but higher risk investments (check).
- Rising asset prices inducing the wealth effect, where people feel wealthier and start to spend again (minimal success, but let's wait and see).
- Keeping interest rates below GDP rates, thereby reducing the developed world's large debt to GDP ratios (slow progress given sluggish GDP).
The Fed is now contemplating tapering as it sees a recovering economy and is worried about QE's stimulatory effects on asset prices. Tapering involves cutting back on the purchase of long-term bonds while keeping short-term interest rates near zero.
In essence, the Fed is saying: "Look everyone, we're going to keep short-term interest rates near zero for a very long time. We're resolute with this and hoping that cutting back on the buying of long-term bonds won't lead to a spike in long-term bond yields. Please, market, cooperate with us in achieving this aim."
The Fed knows markets largely control the long-term bond. It can't afford to lose control of the bond market as higher long-term bond yields would result in increased mortgage rates and rising government interest expenses. That outcome would be a disaster as consumers and governments simply wouldn't be able to cope with even a small spike in rates. And any hoped-for economic recovery would be over.
Key risks to the tapering strategy include a stronger-than-expected economic recovery or higher future inflation expectations, and the Fed moving too late to raise short-term rates. Alternatively, an economic recovery doesn't take place and more QE is needed to maintain current growth. Here, the Fed would lose immense credibility and may eventually lose control of the bond market as investors start to demand higher yields on government debt.
But these risks may not be short-term story if investors believe that tapering and rising rates don't go hand-in-hand.
Increased Japanese QE coming soon
On December 16 last year, Shinzo Abe came to power and promised the most audacious economic reforms in Japan since the 1930s in order to arrest a 23-year deflationary slump. Almost a year on, the reforms now known as Abenomics can be judged a failure. This failure may soon result in policies which could have a greater impact on markets in 2014 than the much talked about taper.
Initially Abenomics involved a strategy with the so-called three arrows. The first arrow was a dramatic expansion in the central bank's balance sheet to lift inflation to a 2% target rate. The second arrow involved a temporary fiscal support program. While the third was structural reform to the economy.
The first arrow came with much fanfare and resulted in a large depreciation of the yen. Yen devaluation wasn't a stated aim but was certainly a target given a lower currency is needed to lift inflation. The big problem is that inflation has risen for the wrong reasons via higher import costs. Core inflation is flat as wages have barely moved.
The second arrow was implemented while the third arrow largely hasn't been fired. The market has been disappointed with the latter as it knows economic reform is needed for stronger and sustainable growth. Abe has resisted change on this front given the entrenched interests against reform.
A fourth arrow has been fired, though, in the form of an increased consumption tax. The tax will increase from 5% to 8% in April next year. This is necessary to raise government revenues given Japan's unsustainable budgetary position where government debt is 20x government revenues. The problem is that the tax will depress spending and cut GDP growth by an estimated 2% next year. To partially compensate for this, Abe has promised corporate tax relief and infrastructure spending of 5 trillion yen, equivalent to 1% of GDP. In other words, more stimulus to partially offset the impact from rising taxes.
Given the failure of Abenomics to lift core inflation or wages, you can soon expect even more stimulus on top of the 290 trillion yen already planned between now and end-2014. And this is likely to result in a much weaker yen, for the following reasons:
- To reach a targeted 2% annual inflation rate requires the yen to depreciate by around 15% per year. That translates into a +115 yen/dollar rate by the end of next year.
- If U.S. tapering occurs, that will widen the yield differentials between U.S. and Japanese bonds even further. Those yield differentials currently point to fair value of 115-120 yen/dollar rate.
- More QE should result in more money heading offshore and a subsequent weakening of the yen.
If a much lower yen is on the cards, it'll have the following consequences:
- Japan will export even more deflation to the world when it least needs it. By this I mean that a lower yen allows Japanese exporters to price their products more competitively vis-vis other exporters. This would raise already heightened global deflationary risks.
- It'll put other exporting powerhouses, such as Germany, China and South Korea, in a less competitive position, increasing the odds of a backlash via currency war. The yen at 115 or 120/dollar would change the ballgame and increase the risks of this occurring.
- Any currency war risks a trade war. Historically, trade wars reduce global trade, sometimes significantly.
- Putting China in a weakened exporting position will possibly increase tensions in the South China Sea. Tensions are already high and a lower yen won't help the cause.
- You don't have to have a wild imagination to see that if Japan's experiment doesn't help lift inflation and the economy, a desperate, nationalist Prime Minister may just be more inclined to take the fight up to China.
The above analysis could well turn out to be incorrect. Perhaps Japan holds off on stimulus. Or it increases QE but combines it with meaningful structural reform.
Maybe. Whichever way Asia Confidential looks at it though, a substantially lower yen would seem to be something you can almost take to the bank. And the implications of that being the case are worth thinking about as we head into 2014.
This post was originally published at Asia Confidential:
Authored by Yannos Papantoniou (Greece's Economy & Finance Minister 1994 to 2001), originally posted at Project Syndicate,
As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive?
While the eurozone’s northern members enjoy low borrowing costs and stable growth, its southern members face high borrowing costs, recession, and deep cuts in incomes and social spending. They have also suffered substantial output losses, and have far higher unemployment rates than their northern counterparts. Unemployment in the eurozone as a whole averages about 12%, compared to more than 25% in Spain and Greece (where youth unemployment now stands at 60%). Indeed, while aggregate per capita income in the eurozone remains at 2007 levels, Greece has been pushed back to 2000 levels, and Italy today finds itself somewhere in 1997.
Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses. Currency devaluation – which would boost the competitiveness of domestic industry by lowering export prices – obviously is not an option in a monetary union.
But Europe’s stronger economies have resisted pressure to undertake more expansionary fiscal policies, which would lift demand for its weaker economies’ exports. The European Central Bank did not follow the lead of other advanced-country central banks, such as the US Federal Reserve, in pursuing a more aggressive monetary policy to cut borrowing costs. And no financing has been offered for public-investment projects in the southern countries.
Moreover, fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms; improvements in competitiveness reflect wage and salary cuts, rather than productivity gains.
While these policies – or lack thereof – have impeded recovery in the southern countries, they have yielded reasonable growth and very low unemployment rates for the northern economies. In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors.
As Europe’s north-south divide widens, so will interest-rate differentials; as a result, conducting a single monetary policy will become increasingly difficult. In the recession-afflicted south, continued fiscal consolidation will demand new austerity measures – a prospect that citizens will reject. Such impasses will lead to social tension and political crisis, or to new requests for financial assistance, which the northern countries are certain to resist. Either way, financial and political instability could lead to the common currency’s collapse.
As long as the eurozone establishes a kind of wary equilibrium, with the weaker economies stabilizing at low growth rates, current policies are unlikely to change. Incremental intergovernmental solutions will continue to prevail, and Europe’s economy will soldier on, steadily losing ground to the US and emerging economies like China and India.
For now, Germany is satisfied with the status quo, enjoying stable growth and retaining control over domestic economic policy, while the ECB’s limited powers and strict mandate to maintain price stability ease fears of inflation.
But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? The answer depends on how Germans perceive their long-term interests, and on the choices of Chancellor Angela Merkel. Her recent election to a third term offers room for bolder policy choices, while forcing her to focus more on her legacy – specifically, whether she wishes to be associated with the euro’s collapse or with its revival.
Two outcomes now seem possible. One scenario is that the economic and political crisis in the southern countries spreads, inciting fears in Germany that the country faces a long-term threat. This could drive Germany to withdraw from the eurozone and form a smaller currency union with other northern countries.
The second possibility is that the crisis remains relatively contained, leading Germany to pursue closer economic and fiscal union. This would entail the mutualization of some national debt and the transfer of economic-policy sovereignty to supranational European institutions.
Of course, such a move would carry considerable political costs in Germany, where many taxpayers recoil at the notion of assuming the debts of the fiscally profligate southern countries, without considering how much Germany would benefit from a stable and dynamic monetary union. But a new grand coalition between Merkel and the Social Democrats could be sufficient to make this shift possible.
Even so, there could be victims. Indeed, the continued failure of smaller countries like Greece and Cyprus to fulfill their commitments reinforces the impression that they will forever be dependent on financial assistance. The exit of one or two of these “undisciplined” countries could be a requirement for the German public to agree to such a policy shift.
Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity, more demand stimulus, greater investment support, deeper reforms, and meaningful progress toward economic and political union. One hopes that modest recovery in the south, aided by strong German leadership in the north, will steer Europe in the right direction.
Actively Monitor 401k Designations
The stock market is so corrupt, such a gamed enterprise it is comical and is no place for 401k type investors to have their life savings and only retirement funds at risk with the lunatics and absolute corruption of the US stock market.
I am an experienced market participant so I know all the tricks from the inside, and even I am fooled by Wall Street shenanigans from time to time, and I have seen it all and have historical data and sophisticated tools that the mom and pop investor has absolutely no ability to access.
Take my advice and put your incredible gains - you have probably through dumb luck actually performed better than most hedge funds - but take these massive gains and park your capital in a nice and safe money market fund or cash equivalent instrument depending upon your company`s plan options.
Predictable Risk Aversion & Jobs Report
The recent trend has been to sell off the market before the job`s report, this is ultra-conservative smart money wanting to get out before the jobs number as the market sold off for five days, and as soon as the number comes out and there are no extreme deviations with market implications, to jump right back into the market, the exact same pattern happened last month the week before the release of the jobs number, the same thing happened this past week in markets. The takeaway -- Markets are somewhat Predictable – think of valuation levels in terms of Predictable Market Timing Strategy.
A Good Enough Level as Any for Exit to Safety
Accordingly take this opportunity of the rally to exit current market holdings and change your monthly 401k contributions which are going into bond and equity funds to now go into cash equivalents. This means all of your Retirement Accounts from IRAs to 401ks are effectively in Cash! These instruments aren`t going to pay you anything literally, and yes you are going to be losing value due to the effects of inflation, but you cannot look at investing in that manner given the current market valuations, your first priority since these are for most of you - your only retirement savings – that Return Of Capital is your real true concern at this point.
Furthermore, given these valuations in financial assets and the bubbly market forces that have enabled considerably favorable scenarios to take place: From low-interest rates, 85 Billion of Monthly QE Injections, Bond Purchases by the Federal Reserve, Large Stock Buybacks, Lack of Investment Options in Emerging Markets; the associated risks are too great to take a chance on given these are your retirement funds. Put simply the risk versus the reward in financial markets is too great for these funds.
Same Market Forces Exist for Pushing Markets Higher
Yes the stock market via many models will continue to rise into the new year if recent patterns continue as fund managers like to push up markets the first four months of the new year to make their numbers, and with even a slight taper there is still going to be at least 60 Billion of Fed Liquidity injected into stock and bond assets each month, so there is more impetus for markets to go higher versus any natural selling pressure.
401k Concerns Different from Big Banks & Players
However, this is not your primary concern because you don`t know when to get out, and the insiders do, and the big players will decide when the party is over, and let me remind you that professional, large players can hedge entire portfolios for as cheap as 5%, something that mom and pop investors just will not be able to accomplish given their limited resources.
Do These Valuation Levels Compare Favorably to Entry & Exit Points over last 15 Years?
Your primary concern as a 401k Investor should be: Are these valuation levels where I feel comfortable for the long haul holding given the history of the stock and bond markets over the last 15 years? Moreover, in looking back I would guess that most of your 401k has been halved or worse several times over the last 15 years, and some of you have been completely wiped out with many companies going out of business or on the verge of going out of business like Blackberry or JCPenny.
Multiple Expansion Means Not Cheap
Let me reiterate these are not valuations built on outstanding earnings, these are valuations built pure and simple on “multiple expansion” which is a euphemism for QE Injections into stock markets via Asset Purchases; these are valuation levels that will not hold up over time.
So sure the stock market can go up another 11% early next year before the full taper, and eventual stock re-pricing occurs, but the rewards of another 11% upside to your portfolio – I mean life savings – isn`t worth the potential of a 25% or more haircut – meaning no return of your capital – if and when the big boys decide to front run the exodus, which they can do at any time, and you will be the last to realize that no one is coming to buy this latest dip in markets.
Even Sharks Get Eaten Alive in Financial Markets
Wall Street skewers even some of the most sophisticated investors at the drop of a hat, i.e., look at how the big banks and hedge funds made John Paulson liquidate some of his gold holdings in late June of this year during a shorting attack on Gold, and as soon as they covered these short positions Gold went right back up to where it was before the short shark attack at the 1400 level. Gold is retesting these Paulsen Liquidation levels once again in another concerted Gold Shorting attack and even the experts don`t have any real notion of how low Gold can fall if certain technical support levels fail.
Don`t Fall in Love with Market Exposure
This is just an example to show how one never gets wedded to positions, lines have to be drawn, risk parameters have to be established, and cost benefit analysis has to be modeled even for 401k investors, and the future risks just don`t justify having your retirement savings in equities or bonds at these levels of valuations.
Safety Concerns & Valid Risk Assessment Means Leaving Potential Profits on the Table
Sophisticated investors can have a better feel for when to get out based upon their vast inside knowledge, market experience and key technical levels but a mom and pop investor who occasionally checks their portfolio once a month at best has no chance of perfectly timing the inevitable market exodus.
401k Folks Need To Be Out of Market Before Big Whales Start Exiting
The really big players will know when to get out because they are the ones moving the market with their selling, no need to market time when you are big enough to actually move the market, these guys never lose, trust me when they decide to sell, they have puts and derivatives in place to capture immense profit on their exodus of positions.
Therefore, not only does the 401k investor get hit by the big guys exiting large positions in the market, but these guys are shorting the market at the same time, causing selloffs to the market and the 401k investor`s retirement portfolio to be exacerbated and magnified on the way down.
Yes these guys don`t play fair 401k investor – this is not a safe place or good spot to have your life savings at risk with these sharks playing in your fresh water pond. Salt be damned, your portfolio will see more red in your quarterly statement than you could possibly imagine in such a short amount of time – financial markets often take the escalator up, and the freight elevator down!
Hardest Lesson to Learn – Risk Mitigation Strategy
So sure the market could potentially go up another 11% the first half of the year but just juxtapose this upside scenario versus all the time your 401k has become a 201k over the last 15 years, your AIG and Citi stake has been completely wiped out, and these were legitimate fortune 500 companies not some risky penny stocks.
Markets are corrupt, markets are corrupt, markets are corrupt – this is the first lesson to take to heart as a market participant Mr. and Mrs. 401k Investor – Caveat emptor – protect yourself at all times!
Rest of the World
- Ghana Farms Miss Out on Oil-Fueled Middle Class Food Demand http://t.co/IwEsoXVy20 Middle classes introduce changes into societies $$ $SPY Dec 07, 2013
- Are the Baltic Dry Index Telling Us to Expect a Stronger Economic Activity? http://t.co/aqnFaUuGkg Could be, but only in exports $$ Dec 07, 2013
- Yuan Passes Euro as 2nd-Most Used Trade-Finance Currency http://t.co/yeNQzNYLWD If China’s banks were exposed 2 market, would b impressed $$ Dec 07, 2013
- Big Oil to Get Brazil-Like Terms in Plan to End Mexico Monopoly http://t.co/SWqSEyVnU0 Maybe Mexico can gain the technical help it needs $$ Dec 07, 2013
- Panasonic in Deal Talks With Auto Parts Makers for Expansion http://t.co/vjECK9hnD5 Desperation drives the company 2 seek more markets $$ Dec 07, 2013
- Pirates Wielding Grenades Spur Japan to Ease Samurai-Era Gun Ban http://t.co/jsOtaI0J7c Force must b opposed by force; no other way $$ $SPY Dec 07, 2013
- Rich Kazakhs Revive Polygamy as Women Seek Poverty Escape http://t.co/vTn2h9eSZx Young Kazakh women would rather b second wives than poor $$ Dec 07, 2013
- Iran Wants US Companies to Develop Oil Fields http://t.co/E1NUUEo5t4 The Great Satan is quite useful under the right conditions $$ $SPY $TLT Dec 07, 2013
- China Cinda Attracts $65B in Orders for Up to $2.5B IPO http://t.co/6i5nvsWhSD Those are bubbly conditions; 2 much $$ 2 put 2 work $SPY $TLT Dec 07, 2013
- Wrong: OECD Warns Riksbank Against Obsessing Over Record Debt http://t.co/fYu3CcY31M OECD should learn excessive debt harms $$ $TLT $SPY Dec 07, 2013
- Banks in Safest Euro Nation See Credit Drought as Finns Save http://t.co/HZ6IDctQzk Many want to save; few want to borrow. Rational $$ Dec 07, 2013
- Spain Credit Falls to ’05 Shadow After Price Collapse http://t.co/y9VUnLcszp Even that is too much credit. Wait 4 hard money buyers $$ Dec 06, 2013
- China Bans Financial Companies From Bitcoin Transactions http://t.co/i8yhbAcKAW Wealthy Chinese want to get value out of China $$ $SPY $TLT Dec 06, 2013
- “Wealthy Chinese could use it to funnel flight capital out of China” — David_Merkel http://t.co/XRD6rOfsGg How Bitcoin functions in China $$ Dec 02, 2013
- China’s Largest Bitcoin Exchange Seeks Recognition for Currency http://t.co/hNtBu9e2MU Communist Party will eventually ban Bitcoin $$ $SPY Dec 02, 2013
- Obamacare’s New Goal: Stay Alive Until 2015 http://t.co/tJpT20oW6K The idea is 2 survive until 2015, so the law can’t b destroyed in 2017 $$ Dec 07, 2013
- How Much More Will Smokers Pay for Obamacare? http://t.co/Rd3eWeVynR Answer: not much more & no, it will have little effect on quitting $$ Dec 04, 2013
- Obamacare Website Repair Goals Reached, Administration Says http://t.co/PfJ5tgLrSu Big Problem: the insurers are not getting the data $$ Dec 03, 2013
- Deep Inside The Hot Mess Called Obamacare: It’s Time For Honesty http://t.co/uY6P8JnakO Sophomoric, doing a dumb thing, calling it wise $$ Dec 01, 2013
- Obamacare Payment System to Insurers Changed in Setback http://t.co/0d26PCyQh6 Complex law, difficult to change w/o affecting other parts $$ Nov 30, 2013
- Inside the Company That Bungled Obamacare http://t.co/EbcR6VQ3rs B wary of companies that grow 2 fast w/shaky revenue recognition $$ $GIB Nov 30, 2013
- Change Illinois’ pension benefits to match the Social Security system http://t.co/LuA3nkw50C The bill passed will harm Illinois long-run $$ Dec 07, 2013
- The Best and Worst Run States in America: A Survey of All 50 « http://t.co/Kq5ElC567u You might be surprised by the rankings $$ $SPY $TLT Dec 07, 2013
- Pension Threats in Illinois, Detroit Rattle Government Workers http://t.co/t2rqvoK3cl If the local government can’t pay, it won’t $$ Dec 07, 2013
- Pension Threats in Illinois, Detroit Rattle Government Workers http://t.co/Hd0Wr0TL0b Blame Union strategy of extracting pension gains $$ Dec 06, 2013
- Illinois Passes Pension Overhaul http://t.co/8svwzeiTuK Fake overhaul that leaves Illinois taxpayers worse off, will go to court & die $$ Dec 05, 2013
- Detroit Retirees Got Extra Interest After Guaranteed 7.9% http://t.co/WmvpH4PHWI What Detroit did w/”excess” pension earnings was evil $$ Dec 03, 2013
- Illinois Legislative Leaders Try to Sell Pension Agreement http://t.co/vU1O1qKSO6 Dreamland vs Hard Choices. So far Dreamland is winning $$ Nov 30, 2013
US Politics & Policy
- Gun Patents Set 35-Year Record as Limits on Sales Fail http://t.co/lZKuBqkheu When GOP has Presidency sales will fall $$ Dec 07, 2013
- What You Don’t Know About Mortgages http://t.co/dmKPgFMAqL! Mortgage documents don’t reflect the full cost of getting the mortgage $$ $TLT Dec 07, 2013
- Obama war chiefs widen drone death zones http://t.co/E47ZKFgBex If we want to make the US odious to the rest of the world, use drones $$ Dec 07, 2013
- Paul Krugman Consigns To Hell An Economic Slump Of His Own Devise http://t.co/qgrKFSBG8W We have 2 turn the lights off near Krugman $$ Dec 07, 2013
- The Fed Must Inflate http://t.co/nBKutizEDw I think this is the most likely conclusion, but not certain $$ Dec 07, 2013
- Is the Fed increasingly monetizing government debt? http://t.co/1I3twSCfaY Yes, Fed is monetizing government debt, get ready 4 inflation $$ Dec 07, 2013
- Angry Self-Insured Voters Dim Democratic Takeover Plans http://t.co/MMjVZi16LU Many feel robbed by the loss of choice in healthcare $$ $SPY Dec 06, 2013
- Henninger: Obama’s Red-Line Presidency http://t.co/tOjc5UV88s What doe the US stand for? What will we defend? Who r our allies? Confusing $$ Dec 06, 2013
- “You can’t regulate what you don’t understand. The SEC looked in on it several times, with more…” — David_Merkel http://t.co/g9jqwD0En1 $$ Dec 03, 2013
- Uninsured-Driver Dilemma http://t.co/DSBWcNLyMk Have Assurant track non-payment at the insurers, & inform the MVAs of lapsation $$ $AIZ Dec 03, 2013
- Magic Johnson, Tom Hanks Join Obama on Cash-Grabbing Trip http://t.co/z2AOd9C8yC Cash works in the short run, voters decide the long run $$ Dec 03, 2013
- Why FDIC is Running Out of Time for Resolution Planning http://t.co/5PTdNU6LPb As w/all complex laws, things move slowly, no surprise. $$ Dec 07, 2013
- Why Capital Is Key Battleground in GSE Reform Debate http://t.co/21pFcfRhfU Appropriate capital 4 new system:a political &technical issue $$ Dec 07, 2013
- Penny Pricing for US Stocks Said to Get Scrutinized http://t.co/grStNTieJR I don’t think this is a big problem, helps small investors $$ Dec 07, 2013
- Examiners-in-Residence Should Be Pulled Out of Megabanks: OCC Report http://t.co/QGyvc9RkDz Familiarity breeds acquiescence, not contempt $$ Dec 07, 2013
- Buyers Give Up Their Names to Seal Merger Deals http://t.co/zmAgQ2J5Zo Who cares what a bank is named, so long as you have control? $$ $FXF Dec 07, 2013
- Volcker Rule to Force Banks to Comply With Five Regimes http://t.co/7H0s7dhCnm Recipe 4 disaster. When many r responsible, no one is $$ Dec 07, 2013
- Slate Writer Is Dead Wrong to Root Against Community Banks http://t.co/TAL566KB0n Getting banks is tough 4 neophytes like Matty Yglesias $$ Dec 06, 2013
- Private equity firms brace for ‘mafia’ style scrutiny http://t.co/dRaXIvfztv This looks a lot more difficult than the article indicates $$ Dec 03, 2013
- Fed Eyes Financial System’s Weak Link http://t.co/ShsZIBcWT4 Solution is simple; bifurcate repo acctg 4 statutory cash flow testing $$ $XLF Dec 03, 2013
- Creating a Black Swan http://t.co/wMnfc81Ai0 Attempts 2 explain how negative black swan events get created in financial markets $$ $SPY $TLT Nov 30, 2013
- The Black Swan http://t.co/IBQL7AG4XJ A good piece that explains positive & negative “Black Swan” events, & how 2 thus position for them $$ Nov 30, 2013
Companies & Industries
- Crude Oil Refiners Are In A Sweet Spot | Commodities http://t.co/HjtUJOe0gZ Because crude oil can’t b exported, refiners benefit $$ $SPY Dec 07, 2013
- Retailers Are in a Deflated Holiday Mood http://t.co/Rd7JLXlRj8 One reason why I rarely invest in retailers, aside from grocery $$ $SPY $TLT Dec 07, 2013
- Heavy Inventories Threaten to Squeeze Clothing Stores http://t.co/t542Zlltcf That said, clothing is dirt cheap, so why worry much? $$ $SPY Dec 07, 2013
- Hidden U-Haul Billionaire Emerges With Storage Empire http://t.co/YRE2pc6Tf4 Fascinating tale of how brothers rescued the family business $$ Dec 06, 2013
- UnitedHealth Projects 2014 Results Below Analysts’ Estimates http://t.co/c9fGK1QUzp Health Insurers take one for Obama’s errors $$ #FTL Dec 03, 2013
- Olin Corporation Common Stock up 9% today http://t.co/HwlrL4TD9z Something is happening w/OLN today. Anyone know what? FD: + $OLN $$ $SPY Dec 02, 2013
- Microsoft, Yahoo Upgrades Shows Snowden Won, Obama Failed http://t.co/sqzBmoIY8n Encryption keys double, squaring time needed to crack $$ Nov 30, 2013
- Fair-Weather Friends or Raining on Your Parade http://t.co/uVksfLp84u Good snarky post. Time to lighten up on property-centric reinsurers $$ Nov 30, 2013
- Gen Re’s Gilbert Says Fed Sets Up Stocks for a Decline http://t.co/o28udyUMGC The Fed will learn the limits of its power in a few years $$ Dec 07, 2013
- The Blessing of a Declining Stock Price http://t.co/Ta2eE12QW7 This is how I do it; I buy companies that have moved against me $$ $SPY $TLT Dec 07, 2013
- The Stock Market Is ‘Shrinking,’ Despite Record-High Indexes http://t.co/cj6YcrhBYL Interesting argument of stock scarcity pushing prices $$ Dec 07, 2013
- Buffett’s Alpha http://t.co/D3UrTxePlp Finally a paper from academics that gives Buffett the credit he deserves. Efficient markets? No. $$ Dec 07, 2013
- Gross to Run Pimco Unconstrained as Dialynas Takes Leave http://t.co/rgLxxVp3Xj Unconstrained is no guarantee of good performance $$ $TLT Dec 06, 2013
- “Quant” hedge funds: Computer says no http://t.co/ZCXplVsnnA Runs in cycles as more or less focus on anomalies in investing $$ $SPY $TLT Dec 01, 2013
- Don’t Ignore Doctor Copper http://t.co/JYw6XNcR5z Copper is indicating a punk economy $$ $SPY $TLT Dec 01, 2013
- Howard Marks: Too Cute for His own Good? http://t.co/BWZ2bDD0xP Unfair. Marks says that the opportunity set is small, get it? $$ $SPY $TLT Dec 01, 2013
- Fixing What’s Wrong With Economics 101 http://t.co/BR8Lt8Z19H We need 2 scrap neoclassical economics, and move economics away from math $$ Dec 07, 2013
- Madoff Behaved Like a Lunatic Over Fund Probe, Jury Told http://t.co/CUfV17a9tA Seems like Madoff employees kept their heads down $$ Dec 07, 2013
- CS50, a computer science course, breaks stereotypes and fills halls at Harvard http://t.co/wnc2WYQbpo Making IT relevant across cultures $$ Dec 01, 2013
- Caveat Emptor: Lovers of Latin Try to Sell a Dead Tongue http://t.co/d5YuHQQZtd Looks like wishful thinking 2me. Esperanto, anyone? $$ Nov 30, 2013
- Why Taylor Swift Is the Reigning Queen of Pop http://t.co/sTEJPtyp66 Swift’s popularity secret? My take:she appears more humble than most $$ Nov 30, 2013
- Build a Better Turkey Sandwich http://t.co/mM42sClsuL Thanksgiving keeps on giving in six inspired takes on the leftover-turkey sandwich $$ Nov 30, 2013
It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the "currency" after hating it at $200 only to love it at $1200 that Bitcoin... would promptly crash. And crash it did: overnight, following previously reported news that China's Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined "half-off" touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on "get rich quick" hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.
Which incidentally, like gold, is to be expected when one treats what is explicitly as a currency on its own merits in a world of dying fiat - with the appropriate much required patience - instead of as an asset, with delusions of grandure that some greater fool will pay more for it tomorrow than it is worth today. Sadly, in a world of HFT trading, patience is perhaps the most valuable commodity.
As for Bitcoin, while the bubble may or may not have burst, and is for now kept together with the help of the Winklevoss bros bid, all it would take is for another very vocal institutiona rejection be it in China or domestically, where its "honeypot" features are no longer of use to the Fed or other authorities, for the euphoria to disappear as quickly as it came...
Two day chart, showing the epic move from $1155 to $576 in hours:
And longer term chart showing the overnight action in its full glory:
Contrary to what many, including ourselves thought, the expected divergence of monetary policy between the Federal Reserve tapering on one hand, and the European Central Bank (and Bank of Japan) which likely to have to provide more monetary support next year on the other hand, has not spurred a US dollar rally against European currencies. There is little reason to expect this to change, from a technical point of view.
That said, the dollar's losses have not been broad based. Sterling and euro (and the Swiss franc and Danish krone) are where the greenback's losses have been concentrated. In part, the market appears to be taking the Fed's guidance seriously. Tapering is not tightening. The premium the US offers over Germany on 2-year money has been nearly halved over the past week to 9 bp. The nearly 20 bp discount of the US compared to the UK is near the largest since late 2011.
Yet, when it comes to the yen, it does not appear that interest rate differentials were the key driver. Normally, we find the exchange rate is more sensitive to long-term rate differentials. The US 10-year rate premium over Japan widen to new multi-year highs of almost 224 bp on December 5, even as the dollar was recording six-day lows against the yen. We suspect the pullback in Japanese equities (~4.5% fall Dec 3-5) was a more significant factor. The combination of the bounce in the dollar against the yen after the US employment data, the rally in US shares, and the strong close in the Nikkei, warns that last week's gap, found 15579 and 15661 will likely be tested early in the week ahead (pre-weekend close 15300) .
This suggests that the dollar will have another run at JPY103.75, high set in late May. Support has been established near in the JPY101.65-80 area.
The dollar's weakness against the European currencies does not appear exhausted. The only cautionary note from technical indicators is that the euro and Swiss franc are at the top of their Bollinger Bands, which are set +/- 2 standard deviations from the 20-day moving average. Although the returns (changes) in currency prices are not normally distributed, a break of the bands may still be seen as reflecting a stretched market. This should encourage buying on the next pullback.
The next technical target for the euro is $1.3800-30. A similar level for the dollar against the Swiss franc is found just below CHF0.8900. There is little chart-based support below there before CHF0.8500.
The US Dollar Index, which is heavily weighted toward the complex of European currencies, tested the 80.30 area which represents a 50% retracement of the rally from late October through the first part of November. The next retracement objective is near 79.90. A break of this area could signal a move to the year's recorded in February just below 79.00.
Sterling has been a bit disappointing after rising to new two-year highs at the start of last week near $1.6440, it has under-performed, but the advance does not seem to be over. Support is seen near $1.6260, which correspond to the Oct highs. We target the $1.6600-$1.6750 on the next leg up. That said, the recent highs in sterling were not confirmed by the RSI or the MACDs.
We have been frustrated by the Australian dollar. Last week, we suggested the Aussie was set to bounce. The bounce was muted and the Aussie fell to lows since early Sept before the US jobs data. It subsequently rallied and finished the North American session above the previous day's high, setting up a potential key reversal. Initial resistance is seen near $0.9140 and then $0.9200.
The US dollar extended its recent gains against the Canadian dollar to the CAD1.07 level. It was tested Wed-Fri last week and the greenback failed to close above it even once. The technical indicators are not suggesting an important high is in place, but a break of CAD1.06 will likely spur a bout of profit-taking.
The US dollar began last week by extending its gains against the Mexican peso. It reached almost MXN13.27 on Dec 3 before reversing lower and finished the week near 3-week lows, having tested the MXN12.90 area. Technical indicators warn of potential of additional dollar weakness in the period ahead that could extend to MXN12.80 or a bit lower.
Observations on speculative positioning in selected currency futures at the CME:
1. The mixed spot performance of the dollar is reflected in the speculative positions in the currency futures. On a net basis, speculators are long the euro, sterling, Swiss franc, and Mexican peso. They are short yen and the Australian and Canadian dollars. This is almost the opposite of earlier this year, though the speculative market was short yen then too.
2. Gross long currency positions were generally added to, except in the yen and Mexican peso. Almost a quarter of the peso longs were squeezed out (10.9k contracts), but in the three sessions after the reporting period ended, the peso has come back strongly. Gross short currency positions were more mixed, but the larger adjustments came from adding to shorts (especially the Canadian dollar, 17.2k contracts and Australian dollar 13.8k contracts).
3. Gross sterling longs saw the biggest increase, 17k contracts. The gross long sterling position is the largest of the currency futures we track. At 18.4k contracts it is nearly twice as large as the second place euros (9.3k contracts).
4. At 134.7k contracts, the gross short yen position is at a new five year high. The gross short Canadian dollar position (41.6k contracts) is the largest in six months.
5. The net euro position swung back to the long side (9.3k contracts) after briefly and shallowly (0.4k contracts) to the short side the previous week. The net position had been near 72k contracts in early Nov. The shift was more about longs liquidating than new shorts entering. From Oct 22 through end of November, the gross long position fell 55k contracts, while the gross shorts rose by about 15k contracts in roughly a slightly longer period. The price action since the reporting period ended suggest this position adjustment was being reversed.
The following was published at RealMoney, but I don’t know when, but I do know that this is the first draft, not the finished product — my editor did not want me to mention that I was unemployed.
“I always sell too soon.” – Baron Rothschild
In 2003, when I was briefly unemployed, I noticed that my personal account was starting to underperform. Partly to give myself more confidence at interviews, and partly to get rid of a distraction, I went over my portfolio to tune it up.
I started out by ranking my portfolio from top to bottom in terms of expected returns. Nothing complex – I just went my price targets and compared them to current prices. Highest percentages are at the top; lowest are at the bottom. My next step was to do the same for a list of replacement candidates. I then looked at the second list, and found that my top three replacement candidates beat the expected returns for the median company in my portfolio. I bought those three companies for my portfolio, and funded it by selling the four stocks in my portfolio with the lowest expected returns. At the same time, I added a small amount to two underperforming names in my portfolio. Here were my actions, and the results through 7/14/03, the date that I sold Pechiney:
|100%||Am Power Conversion||APCC|
|100%||Bank of Montreal||BMO|
With the exceptions of Pechiney and Nucor, I still hold positions in all of the purchases. When Pechiney hired the investment bankers, I tossed in the towel; I thought they were fighting for their cushy jobs, not enhancing shareholder value. I was surprised to see them sell out to Alcan. I sold Nucor in late 2003, over the rise in scrap steel prices; even though Nucor can raise its own prices, its profits will not increase as much as other steel firms. I also goofed in my evaluation of Adtran. It had much better prospects than I thought.
There were other companies on my purchase candidate list with expected returns that beat the expected returns of companies remaining in my portfolio, but did not beat the median expected return. I set the bar at the median in order to avoid excessive turnover.
The price return on the purchases versus the sales was better by more than I would ordinarily expect, and faster as well – I look for returns on my portfolio to beat the S&P 500. This series of trades certainly helped.Rebalancing
The two smaller purchases were done for a different reason than the other trades. PBR and DY were already in my portfolio, but had been performing badly. The weight that each had in my portfolio had shrunk to be the smallest in my portfolio. After a review of the fundamentals, I did what I call a rebalancing trade.
When I was interviewing managers at Provident Mutual, another question that we would ask managers is how they would rebalance positions in response to market movements. Many of them would do nothing; others had no fixed strategy. A few had really worked on this aspect of portfolio management, and to my surprise, their strategies on this topic were similar, even though other aspects of their portfolio management styles were different. One was value, one was growth, one was core, but they each had evidence that their approach improved their returns by a couple percent per year.
There is a growing academic literature on market microstructure; one thing it addresses is measurement of the total costs of trading. One of the costs of trading comes from whether a trade demands or supplies liquidity to the market. When a trader posts a limit order, he offers other market participants an option to exchange shares for liquidity at a known price. In offering liquidity, the trader hopes to get an execution at a favorable price.
The approach that the three managers use, and I employ in my personal account, is as follows:
- Define a series of fixed weights for the stocks in the portfolio.
- Do a rebalancing trade when any position gets more than 20% away from its target weight. Use this time as an opportunity to re-evaluate the thesis on the stock.
- If the rebalancing trade generates cash, invest the cash in the stocks that are the most below their target weights, to bring them up to target weight.
- If the rebalancing trade requires cash, generate the cash from stocks that are the most below their target weights, to bring them down to target weight.
This discipline forces you to buy low and sell high, and also, to reevaluate your holdings after significant relative market movement. This method works best with companies that possess low total leverage relative to others in their industries. This helps avoid the problem of averaging down to a huge loss. This also works best for diversified portfolios with 20-50 stocks, with reasonable even weights. In my portfolio, the weights range from 2 to 7.5%, with 33 companies altogether.
The 20% figure is arbitrary, but in my opinion, it strikes a balance between excessive trading, and capturing reasonable trading profits, by providing shares and liquidity to the market when it wants them. The incremental profits add up as companies and industries fall in and out of favor, and the rebalancing system buys low, and sells high.
Long DY, PBR, PCP (at that time, at present  I have no positions in companies mentioned)
Submitted by Michael Krieger of Liberty Blitzkrieg blog,
The drone issue is just another topic in which President Barrack Obama has proven himself to be a world-class liar and master of deception. Despite his claims that drone strikes do little damage to civilian populations, in July we discovered that “of the 746 people killed in drone strikes in Pakistan from 2006-2009, an incredible 20% were civilians and 94 (13% of the total) were children.”
I suppose that number just isn’t good enough, because The Pentagon has decided to change the rules of engagement when it comes to drone strikes, now making it easier to target civilians. From The Washington Times:
The Pentagon has loosened its guidelines on avoiding civilian casualties during drone strikes, modifying instructions from requiring military personnel to “ensure” civilians are not targeted to encouraging service members to “avoid targeting” civilians.
Hey cops, how about you “try to avoid” beating the shit out of people and violating their constitutional rights for no reason. Yeah, because that’ll work.
In addition, instructions now tell commanders that collateral damage “must not be excessive” in relation to mission goals, according to Public Intelligence, a nonprofit research group that analyzed the military’s directives on drone strikes.
Administration officials say the strikes are legal because the U.S. is at war with al Qaeda and its associates. They also insist there is a wide gap between the government’s civilian casualty count and those of human rights groups.
Right, we are at “war with al Qaeda,” when it is convenient to be at war with them. When it is convenient to be allies with al Qaeda, we will do that too.
Despite Mr. Obama’s pledge for more transparency on drone strikes, the administration “continues to answer legitimate questions and criticisms by saying, ‘We can’t really talk about this,’” said Naureen Shah, advocacy adviser at Amnesty International.
Can’t. Make. This. Stuff. Up.
Full article here.