Archive - Dec 20, 2013 - Story

It's no secret the US is facing a dilemma when it comes to its prison system. With the largest prison population and incarceration rate in the World, the US is facing severe overcrowding and more spending on prisons than education. What does the future hold for the US prison system?

"We simulated an adverse interest rate shock to estimate losses by bond funds from an instantaneous parallel shift in the yield curve of 100 basis points from current levels. We then compared the impact of such losses in today’s context to loss rates from a similar hypothetical scenario during the three previous periods of U.S. monetary policy tightening. Losses during each tightening cycle are calculated by averaging monthly estimated losses, where the Barclays Capital U.S. Aggregate Bond Index is used as a proxy for duration and mutual fund bond holdings are based on data from the Investment Company Institute. Figure 15 shows that losses could rise to nearly $200 billion, underscoring that current bond portfolios are vulnerable to a sudden, unanticipated rise in long-term rates."

Wondering what a 'market' looks like up, close, and personal in the seconds before, during, and after this week's "most important FOMC meeting ever." From SPY's 50-second lead on the news release to VIX's gap, and from crossed markets to e-mini futures leading the premature charge, Nanex's charts are a smorgasbord of SEC-inspiration...

34 years after Canada's Supreme Court upheld the country's anti-prositution laws, the highest court has struck down the nation's three prosititution-related laws in their entirety in a unanimous 9-0 ruling. Following the US' demand for minimum wage for strippers, AP reports Canada's ruling is a victory for sex workers seeking safer working conditions because it found the laws violated the charter guarantee to life, liberty, and security of the prison.

The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing.  When this news came out, it sent shockwaves through financial markets all over the planet.  But the truth is that not that much has really changed.  The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace.  It will just be slightly less than before.  However, this very well could represent a very important psychological turning point for investors.  It is a signal that "the party is starting to end" and that the great bull market of the past four years is drawing to a close.  So what is all of this going to mean for average Americans?  The following are 8 ways that "the taper" is going to affect you and your family...

Only 5% of hospitals in American saw year-over-year growth in overall admissions in November, according to Citi. This is the weakest inpatient admission rate on record and comes amid both doctor and patient uncertainty over the Obamacare changes. As Citi's Gary Taylor notes "the paralyzing effect of the impotent Obamacare rollout" and Medicare's new "two-midnight" rule will weigh notably on hospital earnings as doctor's employment and compensation modesl remain in flux. 13 days to go...

From the United States to Europe and Asia: The world's central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory. Jim Grant tells Germany's Finanz und Wirtschaft that he "fears that this journey will not end well." The sharply thinking Wall Street veteran doesn’t trust the theoretical models of the central banks and warns of irrational exuberance in the financial markets adding that "the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance."

While central bank intervention in the foreign exchange markets is nothing new, the last 4 years have seen unprecedented use of direct and indirect (jawboning) manipulation of exchange rates. As Goldman Sachs notes non-cooperative exchange-rate mechanics (i.e. currency wars) remains the new normal dynamic in world markets; and while some of the moves are generally consistent with cyclical (or structural conditions), efforts by central banks to 'manage' developed market rates in a low volatility range may come under further pressure with the Fed "tapering" as emerging market nations face money flow crises.

This past week the Federal Reserve began tapering their current large scale asset purchase (LSAP) program, more commonly referred to as Quantitative Easing (QE), by trimming $10 billion in bond purchases from the previous monthly totals.  This week's "Things To Ponder" is a diverse set of views on the potential effect of the taper on the financial markets and the impact to investors.  Regardless of your personal expectations as to the impact of the reduction of liquidity in the months ahead, it is always a good mental exercise to consider opposing viewpoints to balance your own views by eliminating confirmation bias.  Here are 5 disparate views on the effect, and potential outcome, of the Federal Reserve's latest move.

Treasury curve flattening continues to gather pace as 30Y bonds rallied their most in 8 months today (even as the shorter-end sold off modestly) but on the week the flattening is dramatic to say the least. Of course, all eyes were on stocks as the Dow and S&P leaked (post European close) to new highs (and the Russell gained back yesterday's losses and some to close the week's winner +3.5%). Gold (and silver) rallied on the day back over $1200 (but closes -3% on the week). VIX followed a similar pattern to yesterday with an early drop followed by a drift higher as it's clear managers are protecting into year-end. Quad witching and rebalancing provided some fireworks into the close as volume rose and stocks slid (as Nanex noted - something broke - lots of micro-crashes/rallies) as CBOE quotes stopped with 10 minutes to go.

It will likely come as no surprise that, despite a 'surging' economy (based on today's inventory-stacked GDP), that CEOs are less than upbeat about the future when one scratches below the surface of 5-second soundbites. As Bloomberg's Rich Yamarone notes, from the most recent quarter's earnings calls, two critical themes emerge as top of mind for CEOs - consumer-related companies remain skittish about the ability of households to spend without a heavily promotional environment and companies cited upcoming healthcare legislation as a hurdle to performance and profitability.

Yields for many staple crops (like wheat) essentially hit a wall about ten years ago. After decades of miraculous gains in the amount of tons, bushels, and kilograms per acre we have been able to extract from the Earth, productive capacity has largely plateaued. In other words, we have maxed out what we can pull out of the soil for now. And the amount of soil per person that’s in production is in serious decline. This spells out an obvious case for investing in agriculture… and even more specifically, to own farmland.

We suspect the word "but" will figure heavily in President Obama's news conference today (his last before hitting the Hawaiian tees) as he addresses all the wonderful things that are occurring in the US - and yet moar needs to be done... oh and have you signed up for Obamacare yet?

A century ago, politicians failed to understand that the financial panics of the 19th century were caused by collusion between government and the banking sector. Today, however, we do know better. We know that the Federal Reserve continues to strengthen the collusion between banks and politicians. We know that the Fed’s inflationary monetary policy continues to reap profits for Wall Street while impoverishing Main Street. And we know that the current monetary regime is teetering on a precipice. One hundred years is long enough. End the Fed.

Despite the absolute assurances (by your friendly local asset gatherer) that a taper would unleash hell in the bond markets, a decidedly one-sided market has seen a tremendous squeeze in the last 2 days. Echoing Operation Twist's effort, the term structure of Treasury yields has collapsed by 5 standard deviations to 3-month flats.