en More Flash Crashes To Come As Shadow Banking Liquidity Collapses <div>Remember the algo-ignited, six sigma anomaly that sent 10-year yields down 30 bps in seemingly no time flat on the morning of October 15? Well despite the CFTC’s contention that it was “just a high volume day” without “any break in liquidity,” the Center for Financial Stability is out with a new report which cites the Treasury flash crash as a glaring example of what happens when an increasingly illiquid market collides head-on with “herding investment behavior.”&nbsp;</div> <div>From the CFS:&nbsp;</div> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <div><em>On October 15, the deepest and most liquid market in the world demonstrated a six standard deviation move in less than two hours, a move that happens once in 506,797,346 days! It is impossible to suggest that this supersized move in the US Treasury market was due to downward assessment of economic expectations. Economic expectations shift weekly – if not daily. Clearly, a shift in the structure of the US Treasury market and substantial reduction of private sector market makers is at the core of recent complications. Similarly, this issue extends well beyond simply the sovereign debt market for US securities, as a result of the interconnectedness among markets and the unique role for Treasury debt as benchmark securities. To be sure, a sustained “flash crash” in the world’s leading fixed income market could readily unleash a pronounced slowdown of the global economy, or worse.&nbsp;</em></div> </blockquote> <div>Put simply, excessive (and incessant) Fed meddling has fundamentally altered the market structure, creating all types of strangeness (the 2-, 5-, and 10-year all special for example) and in the process of sucking collateral from the system, the central bank has made things far more precarious. Recall what Bloomberg had to say about this back in October:&nbsp;</div> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <div><em>The amount of U.S. debt available to trade at one time without moving prices as of October has plunged 48 percent to $150 million since April, according to JPMorgan Chase &amp; Co.</em></div> </blockquote> <div>As the CFS report goes on to point out, the lack of liquidity in the market is readily observable by way of data on various shadow banking conduits. Incredibly, liquidity has plummeted by nearly half since the eve of the crisis:&nbsp;</div> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <div><em>...the reduction of market finance is excessively steep. The CFS measure of market finance is down a stunning 46% in real terms since its peak in March 2008! This phenomenon starves financial markets from needed liquidity and is detrimental to future growth by exposing the economy to potentially unnecessary shocks.</em></div> </blockquote> <div><img src="" width="506" height="356" /></div> <div>Even more alarming is the following table which shows that shadow banking has contracted for 82 consecutive months...</div> <div><img src="" width="596" height="250" /></div> <div> <div>...and here’s Bloomberg again, with DB’s take:&nbsp;</div> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <div><em>A Deutsche Bank index that gauges liquidity by the three-month average size of daily dealer transactions in Treasuries relative to the variability of the 10-year note yield during that period is down to a reading of about 25, from over 500 in 2005. The current level is close to the low of about 19 at the depth of the financial crisis in 2009.</em></div> </blockquote> <div>The problem isn’t confined to government debt. CFS also notes that the veritable dearth of liquidity in the secondary market for corporate paper (presumably related to regulation ostensibly aimed at eradicating prop trading) could lead to an “accident”:&nbsp;</div> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <div><em>...a recent report by BlackRock highlights how “the secondary trading environment for corporate bonds today is broken.” Data suggest that diminished corporate bond liquidity is in part due to limited participation by market makers. For example, debt holdings by primary dealers are down by 80 percent since a peak in October 2013. These examples signal that the probability of an accident is high and the stage is set for an adverse event meeting with an outsized impact on markets and possibly economies.&nbsp;</em></div> </blockquote> <div> <p>We predicted this 18 months ago, when <a href="">we warned</a> that “the slightest gust of wind, or rather volatility, threatens to shut down the secondary corporate bond market, which already is running on fumes.”</p> <p>Of course the last thing you would want to see in this type of environment is a scenario wherein non-human actors are all programmed to move in exactly the same direction at exactly the same time, thus exacerbating the already amplified (thanks to the illiquidity issue) impact of a market-moving event. Thanks to the rise of the machines (a fifth of electronically executed Treasury trades will be executed by robots this year), we have precisely that, as even the zen masters at Bridgewater are starting an artificial intelligence unit. As we <a href="">noted previously</a>, “it seems that everyone has forgotten [what happens] when all the machines chase down the same rabbit holes?”</p> <div>Perhaps the ultimate irony in the whole thing is that a Fed policy (i.e. QE) designed explicitly to stamp out tail risk (i.e. a three standard deviation move), is beginning to create six standard deviation moves in the space of just hours. Throw in the unintended consequences of new regulations and a growing legion of lightning fast (if often hapless) robots and you’ve got the makings of a truly impressive meltdown.</div> </div> </div> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="483" height="346" alt="" src="" /> </div> </div> </div> Bank Index Blackrock Bond Bridgewater Deutsche Bank fixed Global Economy JPMorgan Chase Meltdown Prop Trading Shadow Banking Sovereign Debt Volatility Sun, 01 Mar 2015 23:15:00 +0000 Tyler Durden 502685 at Artist's Impression Of Obama's Middle East Policy <p>Tick... Tock...</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="455" /></a></p> <p>&nbsp;</p> <p><a href=""><em>Source: Townhall</em></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="639" height="485" alt="" src="" /> </div> </div> </div> Middle East Sun, 01 Mar 2015 22:30:51 +0000 Tyler Durden 502681 at The $100 Trillion Reason the Fed is Terrified of Deflation <p><span style="font-size: 10pt; line-height: 1.3em;">Over the last few months, Yellen repeatedly stated that lower oil prices were </span><em style="font-size: 10pt; line-height: 1.3em;">&ldquo;positive&rdquo;</em><span style="font-size: 10pt; line-height: 1.3em;"> for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation </span><strong style="font-size: 10pt; line-height: 1.3em;"><em>NOT</em></strong><span style="font-size: 10pt; line-height: 1.3em;"> DE-flation that was great for the economy.</span></p> <p>&nbsp;</p> <p>And yet, repeatedly, <strong><u>the head of the Fed admitted, in public, that deflation can in fact be positive.</u></strong></p> <p>&nbsp;</p> <p>How can deflation be both positive for the economy at the same time that the economy needs MORE inflation?</p> <p>&nbsp;</p> <p>The answer is easy&hellip; Yellen doesn&rsquo;t care about the economy. She cares about the US&rsquo;s massive debt load AKA the <strong>BOND BUBBLE</strong>.</p> <p>&nbsp;</p> <p>Yellen knows deflation is actually very good for consumers. Who doesn&rsquo;t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper.</p> <p>&nbsp;</p> <p>However, <strong>DEBT DEFLATION</strong> is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. <strong>With the US sporting a Debt to GDP ratio of over 100%... and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the <u>very last thing</u> the Fed wants is even a WHIFF of debt deflation to hit the bond markets.</strong></p> <p>&nbsp;</p> <p>This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must &ldquo;inflate or die.&rdquo; It will willingly sacrifice the economy, and Americans&rsquo; quality of life in order to stop the bond bubble from popping.</p> <p>&nbsp;</p> <p>This is also why the Fed happily talks about stocks all the time; it&rsquo;s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts <strong><u>entire countries will go bust.</u></strong></p> <p>&nbsp;</p> <p>This is why the Fed NEEDS interest rates to be as low as possible&hellip; any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed<strong>, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.</strong></p> <p>&nbsp;</p> <p>If you&rsquo;ve ever wondered how the Fed can claim inflation is a good thing&hellip; now you know. Inflation is bad for all of us&hellip; but it allows the US Government to spend money it doesn&rsquo;t have without going bankrupt&hellip; YET.</p> <p>&nbsp;</p> <p>However, this won&rsquo;t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.</p> <p>&nbsp;</p> <p>If you&rsquo;ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report <strong><em>Financial Crisis &quot;Round Two&quot; Survival Guide </em></strong>that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.</p> <p>&nbsp;</p> <p>You can pick up a FREE copy at:</p> <p><a href=""></a></p> <p>&nbsp;</p> <p>Best Regards</p> <p>Phoenix Capital Research</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> Bond Fail Too Big To Fail Sun, 01 Mar 2015 21:58:42 +0000 Phoenix Capital Research 502684 at World's Largest Container-Shipper Warns Global Trade Is Slowing Down <p>While it will hardly come as a surprise to many, especially those who have followed the <a href="">historic collapse of the Baltic Dry index </a>to levels which, all else equal, signify a global depression of epic proportions...</p> <p><a href=""><img src="" width="503" height="364" /></a></p> <p>&nbsp;</p> <p>... and which led South Korea’s Hyundai Heavy Industries, the world’s largest shipbuilder, to <a href="">report a $3 billion loss in 2014</a>, the recent comments of the CEO of the world's largest container-shipping group, Maersk Line, should put things into perspective, especially for those who say that the Baltic Dry is no longer indicative of anything but massively dry-bulk ship overbuilding and excess supply (some 8 years after the past cyclical peak). </p> <p>Unfortunately, as Søren Skou, Maerk's CEO, <strong>admitted when he warned that global trade growth could slow this year from recent 4% growth ratnes, as Chinese, Brazilian and Russian economies disappoint, </strong>the Baltic Dry is still not only relevant and accurate but telling the real story of global growth, or lack thereof. </p> <p>As the <a href="">FT reports</a>, container demand rose by about 4% in both 2013 and 2014 and Maersk Line, the Danish group that ships about 15% of the world’s seaborne freight, expects it to increase 3 to 5% this year. Actually make it 3%. Or lower.&nbsp; </p> <p>“I’m personally more towards the low end of that,” Søren Skou, Maersk Line’s chief executive, told the Financial Times. “Growth from a historical perspective is quite sluggish. It has a huge impact for us as an industry.” </p> <p>Furthermore, in the ongoing debate whether the collapse in crude prices is due to excess supply or a global contraction, this is what the world's biggest shipper thinks: Mr Skou called the halving of oil prices in the past year “a net positive for container growth” <strong>but nonetheless said the opposing forces were potentially greater. <br /></strong></p> <p>In other words, yes supply isn't helping, but it <strong><em>is the lack of global demand that is pushing equilibrium levels lower, aka global deflation.</em></strong></p> <p>“The economies in Europe are still very sluggish. Brazil, Russia and China: <strong>those three economies used to drive a lot of growth, and right now we are not really seeing that to the same extent</strong>. <strong>The only real bright spot is the US, and even the US is good but not great,” </strong>he added.</p> <p>Well, yes, because as even economists finally figured out, it is once again snowing in the winter.</p> <blockquote class="twitter-tweet" lang="en"><p>February Chicago PMI plunges to 45.8, its lowest reading since July 2009. Bad weather and West Coast labor strife are cited.</p> <p>— Joseph A. LaVorgna (@Lavorgnanomics) <a href="">February 27, 2015</a></p></blockquote> <script src="//"></script><p>Back to the Maersk CEO whose comments are seen as a good indicator of global trade as it carries goods and products between Asia, Europe, the US, Africa and Latin America: we learn that following what was supposedly the "hottest year on record" it snowed pretty much everywhere too, and what we, and Goldman, both said about the world being in contraction now is validated when looking at trade volumes:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>He said that it was always hard to interpret the first quarter because of the Chinese new year but added: “To my mind volumes were sluggish. <strong>There is nothing in container volume numbers that suggest that the global economy is just on the verge of starting a new growth trend.”</strong></p> </blockquote> <p>Why is 4% growth (and certainly lower) important? Because just like 7% is roughly the growth number that China needs to hit every year to avoid social "disturbance", anything below this and suddenly you are talking mass corporate bankrutpcies due to oversupply, and a race to the pricing bottom by companies all of which are massively levered (in fact, as we have shown on numerous occasions, corporate leverage is the highest in history once more):</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>"Before if you acquired too much capacity you could kind of work your way out of it. In a 4 per cent environment capacity decisions take on a different perspective if you get it wrong. The good old days aren’t coming back,” he added.</p> </blockquote> <p>And yet the biggest paradox, or perhaps most logical outcome, of all this is that just as margins are about to be squeezed across the entire global supply chain, the healthier companies are now rushing to do what the oil driller are doing, and overproduce, in the process pushing prices even lower in hopes of putting marginal companies, and those which don't have access to cheap and easy funds, out of business. Call it the Amazon effect, only here one is dealing with net debt leverage of 3x, 4x or higher. To wit:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Despite the warning, Maersk is about to order new ships for the first time since 2011 when it bought 20 Triple Es, then the world’s largest vessels capable of transporting the equivalent of 18,000 20-foot containers.</p> <p>&nbsp;</p> <p>Mr Skou said a decision would be made between April and June with the likelihood that more Triple Es would be ordered, possibly slightly modified to take up to 20,000 containers. <strong>Maersk has said it needs the new ships to help it maintain its market leadership up until the end of the decade.</strong></p> </blockquote> <p>So with global demand lower as a result of slowing trade, and with Maersk about to boost ship supply even more, the result will be an even more aggressive drop in cargo and haulage prices as the deflationary wave hits yet another industry, in the process forcing seaborne transportation to be the latest to succumb to deflation, which for the highly levered sector means even more defaults are imminent now that China no longer is <a href="">pumping nearly $4 trilion </a>in total new credit every year.&nbsp; </p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="480" height="357" alt="" src="" /> </div> </div> </div> Baltic Dry Brazil Chicago PMI China Corporate Leverage Crude Global Economy Sun, 01 Mar 2015 21:48:24 +0000 Tyler Durden 502683 at How Our Crazy Money System Works <p><a href=""><em>Submitted by Bill Bonner vai Acting-Man blog</em></a>,</p> <h3><u><strong>Squirrelly and Subtle</strong></u></h3> <p>Yes, we were in London, taking care of business. Now, we&rsquo;re back in Buenos Aires. We&rsquo;ve tried medication. We&rsquo;ve tried prayer. We&rsquo;ve tried heavy drinking &ndash; all in an effort to understand how our crazy money system works. And where it leads.</p> <p>You&rsquo;d think it would be easy. It&rsquo;s just Central Banking 101, no? <strong>Well, no. It is squirrelly&hellip; and diabolically subtle. We doubt anyone understands it &ndash; especially those who are supposed to control it.</strong></p> <p><strong>The basic unit for the system is a kind of money the world has never had before: the post-1971 fiat dollar. It&rsquo;s paper money &ndash; worth as much as people think it is worth &hellip; and managed by people who think it should be worth less as time goes by.</strong></p> <p style="text-align: center;"><img alt="one-69528_640" class="aligncenter wp-image-36057" height="399" src="" width="600" /></p> <p style="text-align: center;">Photo via Pixabay</p> <p>&nbsp;</p> <h3><u><strong>What a Business!</strong></u></h3> <p><strong>Who are these people? Who do they work for? You might say they are &ldquo;public servants.&rdquo; But that implies they are working on the public&rsquo;s behalf. Nooooo sireee&hellip;</strong></p> <p><strong>They are employees of a banking cartel that is owned by private banks.</strong> These banks have a license to lend money into existence, earning interest on their loans.</p> <p>It is no surprise that their share of US corporate profits has risen fourfold since President Nixon ended the quasi-gold standard Bretton Woods system. What a business! Their cost of goods sold is next to nothing. A few strokes on a keyboard and millions&hellip; billions&hellip; heck, trillions&hellip; of dollars are created.</p> <p><strong>As our friend and economist Richard Duncan points out in his book&nbsp;<em>The New Depression</em>, the amount of liquid reserves banks have to hold against their loans is now so small they provide &ldquo;next to no constraint&rdquo; on the amount of credit the system can create.</strong></p> <p>Banks just have to maintain a certain &ldquo;capital adequacy ratio.&rdquo; This restricts their lending to a multiple of their equity capital (money provided by their shareholders). Of course, money is valuable only as long as there is not too much of it. The market can absorb a little counterfeited money. But there&rsquo;s a limit. And that limit has been greatly increased, thanks to:</p> <ol> <li>1) A worldwide overcapacity of output, financed by previous lending</li> <li>2) A huge glut of cheap labor, also largely brought forth by the credit expansion of the last 30 years</li> </ol> <p><strong>Without these unique circumstances, central banks&rsquo; irresponsible policies &ndash; ZIRP and QE &ndash; would probably have caused inflation to rise to the double-digit range already &hellip; maybe higher.</strong></p> <p><a href="" target="_blank"><img alt="Loans vs. bank reserves" class="aligncenter wp-image-36056" height="399" src="" width="600" /></a></p> <p>Proof of Richard Duncan&rsquo;s contention: prior to the crisis, a negligible amount of bank reserves &ldquo;supported&rdquo; trillions of dollars in outstanding bank credit. QED, reserves actually don&rsquo;t matter anymore in the &ldquo;fractionally reserved&rdquo; system. However, it is still necessary to understand the money multiplier theory in order to fully grasp how the system works &ndash; click to enlarge.</p> <p>&nbsp;</p> <h3><u><strong>Free Money for Governments</strong></u></h3> <p><strong>The authorities must feel like a college student who has found his professor&rsquo;s exam questions. He knows he&rsquo;s going to get away with something&hellip;</strong></p> <p>And since there are about 1 billion people who live on $1 or less per day, central bankers expect to get away with a lot more. Not only that, but also they&rsquo;re lauded as heroes for it.</p> <p>And now there&rsquo;s no further need to worry about how much governments borrow. Central banks buy governments&rsquo; bonds&hellip; hold them on their balance sheets&hellip; return the interest payments&hellip; and the whole thing will be forgotten. And when those bonds expire, central banks can use the repaid principal to buy more government debt!</p> <p><strong>In effect, today&rsquo;s raft of central bankers is doing something previous central bankers could only dream of doing: printing money without causing inflation.</strong> Politicians, too, are enjoying this once-in-a-lifetime opportunity for recklessness. They will be able to do what none could do before: borrow money without paying it back. We have not seen it in the press yet, but it should be coming soon. Commentators and kibitzers are bound to urge Germany to lighten up:</p> <p><strong><em>&ldquo;Why should Greece have to repay those loans, anyway? Where did the money come from? It didn&rsquo;t come from German taxpayers. It came from nowhere, like all the rest of the world&rsquo;s money. And so what if it isn&rsquo;t repaid? What difference will it make? None.&rdquo;</em></strong></p> <p>&nbsp;</p> <p><img alt="FedPrinting" class="aligncenter wp-image-36054" height="392" src="" width="600" /></p> <p>Unfortunately, it <em>will</em> make a difference:<strong> Even though most of the money was created <em>ex nihilo</em>, Greece&rsquo;s liabilities are offset by assets someone owns. That &ldquo;someone&rdquo;, quite involuntarily, are the taxpayers in other euro nations.</strong> The above cartoon illustrates quite nicely how &ldquo;helpful&rdquo; money printing is to the economy.</p> <p>&nbsp;</p> <h3><u><strong>Nirvana for Public Finance</strong></u></h3> <p>Duncan, whose analysis of liquidity levels at&nbsp;<a href="">Macro Watch</a>&nbsp;helps us understand the effects of QE, believes central banks should &ndash; and will &ndash; buy 100% of government bond issuance&hellip; and then simply set fire to them. Too much government debt? Problem solved&hellip;</p> <p><strong>Hallelujah! Hallelujah! Nirvana for public finance has arrived. Heaven has come for politicians. </strong>Who says there is no such thing as a free lunch? We doubt that either the public or Congress has fully come to terms with this. We&rsquo;ve just realized it ourselves. But eventually they&rsquo;ll start lining up.</p> <p><strong>Budget restraint will be yesterday&rsquo;s worry. </strong>Government debt will be written off and forgotten. The feds will be eating breakfast, lunch and dinner on money that never existed&hellip; and never will be paid back. But wait? Is that too good to be true?</p> <p>&nbsp;</p> <p><img alt="GermanyHyperChart" class="aligncenter wp-image-36055 size-full" src="" style="width: 600px; height: 750px;" /></p> <p>&nbsp;</p> <p><u><strong>Yes, it is too good to be true. If central banks really were to set fire to all government debt, this would happen. The illusion that money is &ldquo;backed&rdquo; by something with value, however ephemeral, would be irrevocably shattered.</strong></u></p> <p>&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="584" height="380" alt="" src="" /> </div> </div> </div> Bond Central Banks Free Money Germany Greece None Sun, 01 Mar 2015 21:00:59 +0000 Tyler Durden 502680 at PIIGS Go To War: Spain, Portugal Slam Tsipras' Accusations Of "Conspiracy Plot" To Overthrow Greek Government <p>Just when things seemingly couldn't get any stranger in Europe, we open a whole-new bizarro chapter. </p> <p>Back on February 1, when the negotiations, or rather posturing, surrounding the Greek bailout extension was at its peak, <a href="">we reported something peculiar:</a> of all the countries in Europe, it was none other than France, seemingly tired of walking in Germany's shadow, that announced it was "prepared to support Greece" in its debt negotiations.&nbsp; "France is more than prepared to support Greece," French finmin Sapin said, adding that Greece’s efforts to renegotiate were "legitimate." Sapin urged a "new contract between Greece and its partners."</p> <p>Of course, this quickly led nowhere because as everyone knows, France is irrelevant in Europe and only Germany's opinion matters: Germany, which only agreed to a Greek bailout extension, when all of Syriza's demands were crushed, and the Tsipras government is not merely a shell of its pre-election promises, and in many ways, just a continuation of the previous Samaras regime. As such, the Frencsh support of a Greek debt writedown, understandable since it is none other than France whose socialists will one day sooner or later require a comparable debt negotiation, was duly noted... and promptly ignored: </p> <p>However, what was even more peculiar is that it was the financial peers of Greece, the other insolvent PIIGS, particularly Spain and Portugal, who exist only thanks to the goodwill of the ECB buying up their bonds (or else watch as their economies implodes overnight once the "sex and drugs"-boosting facade of their GDP is stripped away) that took a far more hard-line approach toward Greece, and in fact were just as harsh on the Greek debt renegotiation proposal as Germany itself. </p> <p>Yesterday Tsipras made clear his displeasure with the betrayal of what were formerly his socio-economic insolvent equals quite well-known, when he accused Spain and Portugal on Saturday of <strong>"leading a <span style="text-decoration: underline;">conservative conspiracy</span> to topple his anti-austerity government, saying they feared their own radical forces before elections this year."</strong> </p> <p>As <a href="">Reuters reports</a>, in a speech to his Syriza party, <strong>Tsipras turned on Madrid and Lisbon, accusing them of taking a hard line in negotiations which led to the euro zone extending the bailout programme last week for four months</strong>. </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>"We found opposing us an axis of powers ... led by the governments of Spain and Portugal which for obvious political reasons attempted to lead the entire negotiations to the brink," said Tsipras, who won an election on Jan. 25.</p> <p>&nbsp;</p> <p><strong>"Their plan was and is to wear down, topple or bring our government to unconditional surrender before our work begins to bear fruit and before the Greek example affects other countries," he said, adding: "And mainly before the elections in Spain.</strong>"</p> </blockquote> <p>This is not surprising: <a href="">after all as previously reported</a>, Spain's new anti-establishment Podemos movement has topped some opinion polls, making it a serious threat to the conservative People's Party of Prime Minister Mariano Rajoy in an election which must be held by the end of this year.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Rajoy went to Athens less than a fortnight before the Greek election to warn voters against believing the "impossible" promises of Syriza</strong>. His appeal fell on deaf ears and voters swept the previous conservative premier from power. </p> <p>&nbsp;</p> <p>Portugal will also have elections after the summer but no anti-austerity force as potent as Syriza or Podemos has so far emerged there. In an interview published before Tsipras made his speech, Prime Minister Pedro Passos Coelho denied that Portugal had taken a hard line in negotiations on the Greek deal at the Eurogroup of euro zone finance ministers. </p> <p>&nbsp;</p> <p>"There may have been a political intention to create this idea, but it is not true," he told the Expresso weekly newspaper. </p> <p>&nbsp;</p> <p>Passos Coelho aligned himself with euro zone governments which have called for policies to promote economic growth but without trying to walk away from austerity as in Greece.&nbsp; <strong>"We were on the same side as the French government, with the Italian and Irish governments. I think it's bad to stigmatize southern European countries," </strong>he said.</p> </blockquote> <p>It's bad, but the very next day both Spain and Portugal rushed to cry in Brussels, <strong>when both nations demanded that the EU "arbitrate" and respond to Tsipras' allegations, in the process essentially validating his accusations. </strong> The same EU which orchestrated the entire farce to begin with.</p> <p>As Bloomberg reports, "<strong>Pedro Passos Coelho and Mariano Rajoy request response from EU after Greek premier Alexis Tsipras said that the two southern European countries were trying to cause the downfall of his government during recent talks</strong>, a spokesperson for Rajoy, who asked not to be named citing govt policy, says by phone." Portugal, Spain sent a letter on the matter to the European Council and the European Commission</p> <p>To be sure, none of this will result in either government retracting its statements (especially since Greece now only has rhetorical "conquests" to fall back on having given up all leverage to German by admitting it is unable to quit the Eurozone, i.e., the biggest trump card, and bluff, it may have had), but it will lead to even more animosity, only no longer between the European "North" and "South", but among the Peripheral nations themselves, as the political bickering redirects anger from Merkel and the ECB, and toward other Mediterranean countries. Perhaps just as Merkel wanted from the beginning.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="600" height="593" alt="" src="" /> </div> </div> </div> Eurozone France Germany Greece Newspaper None Portugal Reuters Sun, 01 Mar 2015 20:25:47 +0000 Tyler Durden 502682 at David Stockman Warns "It's One Of The Scariest Moments In History" <p>&quot;The Fed is out of control,&quot; exclaims David Stockman - perhaps best known for architecting Reagan&#39;s economic turnaround known as &#39;Morning in America&#39; - adding that &quot;<strong>people don&#39;t want to hear the reality and the truth that we&#39;re facing.</strong>&quot; <a href="">The following discussion, with Harry Dent,</a> outlines their perspectives on the looming collapse of free market prosperity and the desctruction of American wealth as policymakers &quot;take our economy in a direction that is dangerous, that is not sustainable, and is <strong>likely to fully undermine everything that&#39;s been built up and created by the American people over decades and decades</strong>.&quot; The Fed, Stockman concludes, &quot;is a rogue institution,&quot; and their actions have led us to &quot;one of the scariest moments in our history... <strong>it&#39;s a festering time-bomb and we&#39;re not sure when it will explode</strong>.&quot;</p> <p>&nbsp;</p> <p><a href="">Full Discussion</a>:</p> <p><iframe allowfullscreen="" allowtransparency="true" class="wistia_embed" frameborder="0" height="405" mozallowfullscreen="" msallowfullscreen="" name="wistia_embed" oallowfullscreen="" scrolling="no" src="//" webkitallowfullscreen="" width="720"></iframe></p> <p>&nbsp;</p> <p><a href=""><em>Full Transcript here.</em></a></p> <p><strong><em>Key Excerpts from the detailed interview:</em></strong></p> <p><u><strong>David Stockman:</strong></u> <strong>People don&#39;t want to hear the reality and the truth that we&#39;re facing.</strong> But I think there is an enormous appetite out in the country to get a different perspective than what you have from the media day in and day out, so I say <strong>the fed is out of control. Its balance sheet is exploded. It&#39;s printing money like never before.</strong></p> <p><strong>Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets.</strong> I said that as a result of this, Wall Street has become a huge casino which basically rewards gamblers, but it is not functioning as a capital raising, capital allocating instrument, which really is what the financial markets should do in a free market system. I warned about the size of the federal debt. I&#39;m an old budget director from the Reagan days. We had a trillion dollar national debt, a 3 trillion economy when I started. Today, it&#39;s 18 trillion. Eighteen fold gain in the last 35 years versus maybe a fourfold gain in the economy. So all of these trends are taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that&#39;s been built up and created by the American people over decades and decades.</p> <p>So people don&#39;t want to hear the warning. <strong>They don&#39;t want to hear the truth in the establishment, in Wall Street, in Washington, but I think out in the country they must.</strong></p> <p>*&nbsp; *&nbsp; *</p> <p><u><strong>David Stockman:</strong></u> Well it&#39;s obvious that <strong>Wall Street is addicted to cheap money and unlimited flow of new liquidity into the markets</strong>. Traders can then borrow money on an overnight basis for five basis points, which is nothing. Buy anything with a yield like a ten-year or five-year bond or speculate in stocks that they think might be going up or even get fancier and go into derivatives or commodity futures or whatever. And then capture the profit or the spread between the cheap money that the fed is putting into the overnight market and the yield or profit they&#39;re making on the asset, and they&#39;re leveraging way up.</p> <p>You know, 90 percent, 95 percent in many cases. So obviously, <strong>the whole financial market is dependent on this, but it comes at a cost. It is destroying savers in America. </strong>If you worked a lifetime and saved $100,000.00, you&#39;re making $400.00 a year in interest from a lifetime of savings. <strong>I think there will be a revolt sooner or later of the American public against this disastrous crushing of the saver in order to essentially accommodate Wall Street&#39;s appetite for liquidity.</strong></p> <p>*&nbsp; *&nbsp; *</p> <p><u><strong>David Stockman:</strong></u> Well you know,<strong> the problem is the fed, I&#39;ve described, is a rogue institution</strong>. It&#39;s operating beyond any of the legislative intent or statutory authority that&#39;s been given to them over the years. They have essentially become a national monetary planning agency that has decided they can drive the daily, weekly, monthly movement of the economy by manipulating interest rates and the yield curve by putting a put under the stock prices by essentially trying to drive the entire 18 trillion or 17 trillion US economy from Wall Street. <strong>That is fundamentally at variance with the requisites of a healthy capitalist economy. You need an honest financial market. Not a manipulated one.</strong></p> <p>You need price discovery by people that have their money at risk, not the central bank.</p> <p>Harry Dent: Actually, it&#39;s a centrally planned economy, isn&#39;t it?</p> <p>David Stockman: Right, exactly.</p> <p>*&nbsp; *&nbsp; *</p> <p><em>So David, do you think the republican congress can save us from this economic sundown that we&#39;ve been discussing today?</em></p> <p><u><strong>David Stockman:</strong></u> Well I would like to think so, and they talk a good game, but <strong>unfortunately when push comes to shove, they&#39;re in the consensus with everyone else in the beltway in Washington and are unwilling to take on the hard issues. </strong>We are borrowing still $600 billion in the last year, six years after allegedly the great recession ended, and we are setting ourselves up for trillion dollar deficits again, the next time the economy stumbles or we have a recession or some other dislocation. The fact is the fed is not abolished the business cycle. The fed has not made the world completely safe from these kinds of dislocations. So therefore,<strong> we need to look at what&#39;s driving this huge deficit, and the answer is big entitlements and big defense spending, and the republicans are unwilling to take on the Pentagon.</strong> They want more, and they&#39;re afraid to take on Social Security and the entitlements because they believe that is going to be problematic politically.</p> <p><strong>So therefore, nothing is being done about the structure of this deficit problem, and we&#39;re just basically stumbling our way into another huge crisis in ballooning national debt.</strong></p> <p>*&nbsp; *&nbsp; *</p> <p><u><strong>David Stockman:</strong></u> Well,<strong> it&#39;s one of the scariest moments I think in our history,</strong> but also we need to recognize we&#39;re in uncharted waters. <strong>No central bank has ever printed this much money this long, kept interest rates at zero, fueled so much speculation. Not just here, but worldwide. Not just in the normal stocks and bonds, but the whole shale boom, for instance, </strong>in the United States was massively funded by cheap debt based on oil prices that weren&#39;t sustainable, and now that&#39;s all coming unwound. We have never had deficits of ten percent of GDP back to back, or even still four or five percent four or five years into a recovery.</p> <p><strong>We have a runaway budget where the population is getting older and older, 10,000 people are retiring every day. Nothing is being done about Social Security. It&#39;s a festering time bomb, and we&#39;re not sure how it will explode, but we know it isn&#39;t sustainable. </strong>We have a Wall Street that is more addicted to pure overnight gambling and trading and speculation for the ultra short run that is driven by robo traders, the so-called HFT money, like never before. It&#39;s unstable. That&#39;s why we see things happen like the overnight 40 percent gain with the Swiss Franc when the Swiss National Bank pulled the pay.</p> <p>Forty percent overnight &ndash; not overnight, but in a couple of minutes or seconds when there were hundreds of billions of short positions in the Swiss Franc. All of these things have never existed simultaneously, not only in the United States, but worldwide. All the central banks are doing it. <strong>We&#39;re reaching the point where it&#39;s unsustainable, things are going to give and break, but the good thing is it&#39;s going to be more a disaster in the financial markets in my view, less some kind of Great Depression impact on Main Street. It will be difficult on Main Street, but Wall Street is in the gun sites of this disaster coming.</strong></p> <p>*&nbsp; *&nbsp; *</p> <p><u><strong>David Stockman:</strong></u> I agree. <strong>In the long run, we have to get off this debt addiction.</strong> We need to get back to sound finance both in government and households, but beginning<strong> between here and there is going to cause enormous pain for millions of households who have been herded into risky investments, junk bond funds, stock market funds, high flying biotech stocks and on and on because they were told it&#39;s the only place to be.</strong> If you put your money in a CD, you get no return. If you put your money in a safe bond, you get almost no return. Now when the big reset, as Harry calls it, happens, and<strong> the stock market drops by large magnitudes, 50 percent, more, those people who were herded into these risky investments late in life &ndash; Because remember, we have the baby boom, you know, heading towards their retirement homes, are going to be badly hurt at a time that they can&#39;t recover, and it will be a massive injustice that is being done by Washington and the fed to this current generation of middle class Americans. </strong>That will produce, in my view, a political reaction, a political revolt that will begin to say, <u><strong><em>&quot;What&#39;s wrong here? Who believed that printing money out of thin air can make a society wealthier? Why did we do that? Who believed that we can actually create jobs and new economic output on Main Street simply by having the fed press a button and create another billion dollars?&quot;</em></strong></u></p> <p>*&nbsp; *&nbsp; *</p> <p><strong><u>David Stockman:</u></strong> Yeah, I agree with that, and the point to remember is that <strong>massive money printing by central banks on a worldwide basis is inherently deflationary for two reasons. One, it fuels massive financial speculation. When we talk about speculation, we&#39;re talking about professional gamblers who borrow 95 cents and use that borrowed money that they pay practically nothing for to buy stocks or bonds or commodities or derivatives or biotech stocks and so forth as I indicated. All of that buying power is artificial. That is not coming from production today, real effort in the economy. That&#39;s coming from newly minted credit.</strong></p> <p>So it takes asset prices to unreasonable, unsustainable levels. They crash, and that creates a negative economic cycle. Secondly, massive money printing makes capital and debt too cheap to the real sector of the economy. So therefore, massive capital investments are made on the basis of cheap cost of capital, not on the basis of the likely return or sustainable return over time.</p> <p>*&nbsp; *&nbsp; *<br /><u><strong>David Stockman: </strong></u>Yeah, a famous American economist once said <strong>anything that&#39;s unsustainable tends to stop</strong>. My argument is that we&#39;re at the stop point. The fed has been printing money like there&#39;s no tomorrow really for 25 years since Greenspan took over in 1987. They are now at the point where their balance sheet has become so bloated, so enormous that even the people running the fed are confused about what to do.<strong> They&#39;ve painted themselves into a corner, and they&#39;re playing it by the day, and they&#39;re going to make a huge mistake. So the money printing thing is near an end.</strong></p> <p><strong>Secondly, our political system has become totally non-functional.</strong> We have a lame duck president who can accomplish nothing, a congress that is totally paralyzed, meaning that before 2017 at the earliest, nothing will be done about our fiscal and entitlement explosion. Finally, the American people have believed falsely that all of this is going to work out. It&#39;s not going to. <strong>When they find out that the adults so called in Washington had no clue what they were doing, there is going to be a collapse of confidence, and that will flow into the system as well.</strong></p> <p>*&nbsp; *&nbsp; *<br />So it seems like this bubble bursting is inevitable. How much time do we have? Is it years, months? How will we know? Are there some clues we can look into to make sure that we&#39;re prepared?</p> <p><u><strong>David Stockman:</strong></u> There&#39;s really no magic numbers here, but<strong> it&#39;s remarkable that these central bank driven bubbles tend to peak after about six years.</strong> The dot com bubble started really in mid-1994 with the famous Netscape IPO. It crashed in March 2000, six years. The housing bubble roughly started in 2002. It totally crashed in 2008. Six years. The meltdown on Wall Street bottomed in March 2009. Add six years. 2015. I think we&#39;re at the end of this bubble simply based on the fact that they can&#39;t expand forever. <strong>They reach an asymptotic peak, and then confidence is lost, a catalyst occurs, a black swan appears, the selling begins, and there&#39;s nothing under this market. There is no safety net under this market.</strong></p> <p>*&nbsp; *&nbsp; *<br />Is there anything that can save us?</p> <p><u><strong>David Stockman:</strong></u> Yes, there are, and<strong> in the short run, that will be painful.</strong> There will be <strong>great dislocations, both in the financial markets and the real economy.</strong> But in the long run, that&#39;s a good thing. We have become so dependent on government, we have come to believe that the Federal Reserve drives the economy hour by hour, day by day. None of that is historically true.<strong> Real wealth, real prosperity comes from the sweat and from the enterprise and from the invention of people on Main Street, not the politicians on Wall Street who are on the central bank. </strong>So I think the big inflection point that we&#39;re facing is when the big crash comes, on the other side, maybe we can get back to the private enterprise system and the kind of family self-reliance and thrift and prudence that our prosperity was built on 40 years ago.</p> <p>*&nbsp; *&nbsp; *</p> <p><u><strong>David Stockman: </strong></u>Well in The Great Deformation, I said<strong>, &quot;We&#39;re heading towards a day of reckoning. This isn&#39;t sustainable.&quot;</strong> It&#39;s happening in real time, and in the updates, what I try to do is focus on the catalyst events, the catalyzing forces that will warn us when we&#39;re really getting to the edge of the cliff.</p> <p>That is the central banks. Japan&#39;s central bank is out of control. I watch that. It&#39;s important to know what happens there because if the great money printing debt experience in Japan finally fails, it&#39;s going to be noted in markets all around the world. I watch the ECB, European Central Bank. It is divided between Germans who want to try to maintain some semblance of some money and the rest of Europe that would like to print and drown themselves in debt as far as the eye can see. It&#39;s important to watch China, which is a giant house of cards, that&#39;s on the verge of collapse, and that will ricochet around the world in terms of the countries that supply it. Australia, Korea, the so-called emerging markets, and what it&#39;ll do to the theory, which I think is false that China is the engine of growth in the world, it is not. <strong>It is the biggest speculative disaster in human history.</strong></p> <p>*&nbsp; *&nbsp; *<br /><u><strong>David Stockman:</strong></u> Well,<strong> the crisis is unfolding by the day. It is not too late to start preparing right noW. Now is the time to begin to save if you can and minimize your outlays for unnecessary luxuries. This is going to be a devastating crisis, and people will be happy down the road if they take the steps to prepare today.</strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="363" height="291" alt="" src="" /> </div> </div> </div> Australia Black Swan Bond Central Banks China European Central Bank Federal Reserve Gambling Great Depression HFT Housing Bubble Japan Main Street Meltdown National Debt None Reality Recession recovery Swiss Franc Swiss National Bank Yield Curve Sun, 01 Mar 2015 19:30:55 +0000 Tyler Durden 502679 at "We Are Failing To Deliver On Our Obligations As Americans" <p><a href=""><em>Submitted by Thad Beversdorf via First Rebuttal blog</em></a>,</p> <p><u><strong>I&rsquo;m Bedazzled by the Bewilderment Surrounding the Fed&rsquo;s Behaviour... So I&rsquo;ve De-engineered to the Bare Basics... and Oh Boy!</strong></u></p> <p><span style="color: #000000;">According to former Fed Chair Ben Bernanke in an&nbsp;excerpt from a Nov. 3, 2009 Bloomberg article, the Fed strategy is that</span><span style="color: #000000;">&nbsp;<strong><em>&ldquo;..large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices&hellip;&rdquo;</em></strong>. &nbsp;Now as depicted in the following chart (by Gallup) we see that the top 5% own almost 75% of financial wealth (i.e. stocks) while the bottom 80% own less than 5% (these are 2010 figures and certainly things&nbsp;have gotten significantly worse over the past 4 years). &nbsp;</span></p> <p><a href=""><img alt="Screen Shot 2015-02-28 at 10.41.28 AM" class="alignnone size-full wp-image-1626" src="" style="width: 600px; height: 740px;" /></a></p> <p><strong>Rather than boosting economic growth through incentivizing capital expenditures as has been the way of monetary policies gone by, this new Fed strategy, to explicitly target higher stock prices, is meant to create enough excess wealth to those on top&nbsp;by way of&nbsp;stocks such that some of that wealth would then trickle down to the rest of America. &nbsp;</strong>The Fed has made this&nbsp;clear both verbally and by way of action, that is, by ensuring (manipulating) higher stock prices. &nbsp;The result is that low cost debt is being used to invest into a risk free stock market. &nbsp;To get an idea of how this works look at the following table which I pulled from a December 2014 report from <a href="" target="_blank"></a>,</p> <p><a href=""><img alt="Screen Shot 2015-02-28 at 10.48.59 AM" class="alignnone size-full wp-image-1627" src="" style="width: 600px; height: 239px;" /></a></p> <p><strong>So during 2014, these 10 companies spent roughly $150B on share buybacks and paid out $55B in dividends, leading to an average market cap increase of around 25% across the 10 firms.</strong> &nbsp;It appears then that firms have been taking advantage of the low cost debt to borrow and buy back shares to increase market capital and pay out dividends which are typically reinvested directly&nbsp;back into the market.</p> <p>For instance, IBM has borrowed $33B since 2012 and has repurchased $37B worth of stock. &nbsp;Apple spent circa 9x the amount on share buybacks as they did on capital expenditures in 2014. &nbsp;The point here is that the Fed&rsquo;s&nbsp;policy strategy, as expressed by Bernanke above, of lowering borrowing costs and targeting higher stock prices to create wealth at the top was extremely successful. &nbsp;In fact, I doubt Bernanke ever dreamed how effective his wealth creation strategy would be.</p> <p><strong>However, the second part of the Fed&rsquo;s&nbsp;policy strategy was to have some of that extraordinary wealth trickle down to the 90%ers. &nbsp;Unfortunately this part of the strategy has failed miserably.</strong> &nbsp;Now as we&rsquo;ve discussed many time here on First Rebuttal, the second part of the strategy was inherently flawed in such a way so as to actually necessitate&nbsp;its failure. &nbsp;That is, by targeting (guaranteeing) higher stock prices you force CEO&rsquo;s and all other investors to push available capital that would otherwise have been reinvested back into the company and other economic investments to simply allocate&nbsp;directly into the market. &nbsp;Meaning no need or money left for hiring, and in fact, the layoffs continue along with the share buybacks.</p> <p><strong>Just how many layoffs are continuing is becoming difficult to ascertain. &nbsp;Ironically I found the following notice from the <a href="" target="_blank">BLS</a>&nbsp;in its last Layoff Report&hellip;</strong></p> <p><a href=""><img alt="Screen Shot 2015-02-28 at 11.44.38 AM" class="alignnone size-full wp-image-1628" src="" style="width: 600px; height: 180px;" /></a></p> <p><strong>But suffice it to say looking at the U6 figure we know hiring for real breadwinner jobs has been sparse at best (we&rsquo;ll take a detailed&nbsp;look shortly). </strong>&nbsp;So the result of not only targeting but guaranteeing an upward moving market, which the Fed has been very explicit about doing, has literally prevented the trickle down part of the trickle down strategy meaning all we&rsquo;ve attained is extreme wealth creation to those on top. &nbsp;And this seems to be recognized by essentially everyone.</p> <p>What becomes obvious in researching the topic of &lsquo;trickle down economics&rsquo; is that this is one subject that appears to have almost unanimous&nbsp;agreement amongst everyone outside of the political class. &nbsp;Left, Right, Gay, Straight, Religious, Atheist, you name it they agree on the subject unless they hold a political office. &nbsp;In fact, the resounding agreement is that&nbsp;this latest experiment has been a tremendous failure. &nbsp;That said,<strong> here we are in year 6 of the now completely failed experiment with no signs of changing course. </strong>&nbsp;Rather than allocating efforts to reshaping our economic growth strategy, all efforts seem to be focused on selling a false story of success to the American people.</p> <p><strong>So this brings us to the debate around whether the parabolic move in equity valuations is the same as last time, meaning the asset bubble the eventually burst in 2008. </strong>&nbsp;The &lsquo;secular bulls&rsquo; are screaming &ldquo;It is different this time!&rdquo;. &nbsp;And well I agree, things are very different this time around. &nbsp;But is that a good thing or a bad thing? &nbsp;Well let&rsquo;s take a stroll past all of the bullshit nonsense from both sides of the bull bear coin and just look at the very parameters that are time tested indications&nbsp;of growth and valuation.</p> <p><a href=""><img alt="Screen Shot 2015-02-27 at 7.40.01 PM" class="alignnone wp-image-1619" src="" style="width: 599px; height: 404px;" /></a></p> <p>So just on pure price level we see about a 25% increase between 2007 and today on the S&amp;P 500. &nbsp;That would suggest we have had material&nbsp;improvement today relative to 2007. &nbsp;Now let&rsquo;s have a look at some multiples to see how we feel about our growth prospects relative to 2007.</p> <p><a href=""><img alt="Market Valuation" class="alignnone wp-image-1608" src="" style="width: 600px; height: 371px;" /></a></p> <p>The chart depicts price to sales of S&amp;P 500 companies and the&nbsp;Adjusted Buffet Indicator. &nbsp;We are using price to sales because it is a much better long term gauge than price to earnings as earnings, especially given all of the share buybacks and reallocation of funds from capex to income, is easily manipulated in the short term. &nbsp;What we find in price to sales is that today&rsquo;s multiple is 30% higher than in 2007 (according to &nbsp;This suggests the market is pricing in some pretty heavy growth relative to the expected growth in 2007.</p> <p><strong>The Adjusted Buffet indicator is a gauge I developed to adjust out reported economic gains that are solely a function of consumption from debt rather than income.</strong> &nbsp;The idea being that debt consumption is actually a net negative to economic growth and therefore is nonsensical to include in growth measures. &nbsp;What we see is that apples to apples the Adjusted Buffet indicator has grown by 150% since 2007, suggesting that either the economy needs to accelerate significantly or market pricing needs to come down.</p> <p>And really this is the crux of the whole debate. &nbsp;<strong>Is the economy poised to accelerate or will the market revert back to historic norms through price collapse, as it did in 2008. &nbsp;So let&rsquo;s have a look at our growth prospects. </strong>&nbsp;&lsquo;Secular bulls&rsquo; are obviously claiming this time is very different from last time arguing that there will be no repricing as fundamentals actually do signal growth acceleration. &nbsp;Now that&rsquo;s what they&rsquo;re claiming but as we always do here at First Rebuttal, let&rsquo;s have our own look to validate or discredit those claims. &nbsp;Specifically, we are looking for signals of economic acceleration that would support the implied expectation of&nbsp;relatively higher future corporate cash flows.</p> <p><a href=""><img alt="GDP Growth" class="alignnone wp-image-1612" src="" style="width: 600px; height: 370px;" /></a></p> <p>The above chart is the official real average GDP growth over a 5 yr period ending in the subject year. &nbsp;The idea is to see if generally throughout the economy we see signals of stronger growth than we had in 2007. &nbsp;What we find is that economic growth&nbsp;is 24% lower than it was is 2007. &nbsp;So this does not support today&rsquo;s higher multiples. &nbsp;But let&rsquo;s keep going. <strong>&nbsp;The market is certainly pricing higher multiples today than 2007 and so surely we should&nbsp;find the growth source for these higher multiples if we just keep digging.</strong></p> <p><a href=""><img alt="Income" class="alignnone wp-image-1611" src="" style="width: 600px; height: 347px;" /></a></p> <p><strong>In the above chart, sourced from the <a href="" target="_blank">Federal Reserve</a>, we see a 10% reduction in cash inflows for the American consumer&nbsp;and we see a whopping 40% decline in net worth to the bottom 90% since 2007. </strong>&nbsp;Historically, 70% of economic growth has come directly by way of expenditures from the American consumer. &nbsp;One has to ask oneself, does a consumer with less cash inflow and significantly lower wealth, as absolutely evidenced in the above chart i.e. this is not arguable, lead to sustained higher expected expenditures and thus future corporate cash flows?? &nbsp;The market apparently thinks so, unless we can find another source for the market&rsquo;s growth expectations. &nbsp;So let&rsquo;s carry on&hellip;</p> <p><strong>Well consumer cash flows can increase via a rise in income&nbsp;or reduction in costs. </strong>&nbsp;Above is the income&nbsp;side which failed to show any rational expectation for signs of consumer expenditures&nbsp;growth but what about the cost side? &nbsp;Well let&rsquo;s take a look at consumers&rsquo; cost of goods&nbsp;and debt service relative to 2007 to see if we have freed up some cash on the consumer&rsquo;s cost side.</p> <p><img alt="Screen Shot 2015-02-27 at 1.33.16 PM" class="alignnone wp-image-1613" src="" style="width: 600px; height: 363px;" /></p> <p><strong>The deflator is a better measure of the bare necessities as these are generally domestic goods and services as opposed to imported e.g. food, rent, public transport, etc. </strong>&nbsp;And so we see that cost of goods and services&nbsp;on just the staples have moved up about 2% per year despite the CPI measurement of closer to 1% per year. &nbsp;And so it is clear from the above chart that we had no price relief since 2007 and as such still no logical expectation for increased consumer expenditures. &nbsp;But what about debt service? &nbsp;Interest rates are lower so perhaps the American consumer has freed up some cash flow due to lower rates?</p> <p><a href=""><img alt="Debt&amp;GDP" class="alignnone wp-image-1610" src="" style="width: 601px; height: 356px;" /></a></p> <p>Despite the decline in prime interest rates, <strong>average consumer credit rates saw only a 6% decline (from 14.5% to 13.7%, sourced from St. Louis Fed) vs an increase in consumer credit levels of around 30%, as depicted in the above chart.</strong> &nbsp;The implication is that the American consumer has increased their total debt service relative to 2007 meaning expected consumer expenditures should be lower than in 2007.&nbsp; This means that both the income and cost side of the American consumes&rsquo; cash flows provide an expectation of lowered consumer&nbsp;expenditures relative to 2007. &nbsp;Thus current market multiples should actually be lower not higher based on the American consumer&rsquo;s financial position. &nbsp;But the search must go on&hellip; we are nothing if not perseverant here at F.R. so let&rsquo;s keep on truck&rsquo;n.</p> <p>Ok,&nbsp;so what&nbsp;if&nbsp;consumer cash flows are down and have no signals of improving relative to 2007.&nbsp; This doesn&rsquo;t necessitate that multiples need&nbsp;actually be lower than in 2007. &nbsp;If each dollar is being used more effectively than in 2007 we could actually generate higher ultimate corporate cash flow&nbsp;growth than in 2007 and this could&nbsp;support higher market valuations. &nbsp;Let&rsquo;s take a look&hellip;</p> <p><a href=""><img alt="Resource Effectiveness" class="alignnone wp-image-1609" src="" style="width: 600px; height: 372px;" /></a></p> <p>The above chart depicts how effectively we are using both money supply and debt to generate economic growth relative to 2007. &nbsp;And we find that our effectiveness at using money supply has declined by about 25% while our ability to generate output growth from debt has plummeted by 75% since 2007. &nbsp;This actually tells us that even if cash flows were the same as in 2007 our overall growth would still be slower. &nbsp;Given the American consumer actually has less cash flow our reduced effectiveness will&nbsp;result in much lower expected&nbsp;growth than in 2007 and, as such, should result in&nbsp;lower market multiples based on the consumer and economic efficiency.</p> <p><strong>This is not looking promising for validating the higher market multiples but there could be one saving grace to all of this. </strong>&nbsp;Jobs are the key to every economy. &nbsp;The tighter the job market the greater the income distribution. &nbsp;The greater the income distribution the greater all of the above become. &nbsp;And so let&rsquo;s take a look at jobs today relative to 2007 to look for signs of a tighter job market.</p> <p><a href=""><img alt="Employment" class="alignnone wp-image-1607" src="" style="width: 600px; height: 385px;" /></a></p> <p><strong>Disappointingly&nbsp;we find that the job market is much looser than it was in 2007 with unemployed and underemployed 26% higher today. </strong>&nbsp;And so the likelihood of higher cash flows stemming from a tighter job market is essentially zero, especially given the continuing trend to trade away employees for share buybacks.</p> <p><u><strong>And so what we have done by way of the above analysis is provide the proof for the market&rsquo;s mispricing. </strong></u>&nbsp;Thing of it is, we already knew the market is mispriced. &nbsp;As discussed at the beginning of the&nbsp;article The Fed has told us several times that their mandate for the past 6 years has been to manipulate the market higher so that it creates wealth for those at the top in hopes that this wealth will trickle down onto the rest of America. &nbsp;Based on that declaration of price manipulation, we know the market is mispriced. &nbsp;There is nothing grey or convoluted about that. &nbsp;None of this has been done in secret. &nbsp;So why is it that these TV pundits and politicians spend so much time pitching that the market is fairly valued?? &nbsp;And<strong> how is it that those&nbsp;deemed market &lsquo;pros&rsquo; are buying into it??</strong></p> <p>Well perhaps it is not so much that these market pros are buying into it as they are trying to convince us that nothing needs to change. &nbsp;You see while the Fed&rsquo;s manipulation has not been done covertly <strong>the fact that it has failed to create any benefit to the bottom 90% of Americans is very much being kept a secret.</strong> &nbsp;Those on top for which the current Fed manipulation is creating extraordinary wealth absolutely do not want a change of policies. &nbsp;And why would they? &nbsp;They are earning incredible wealth while taking no risk.</p> <p><strong>This completely perverts the basis of capitalism which results in huge misallocations of resources.</strong> &nbsp;It is this very misallocation of resources that not only created the economic destruction we saw in the above charts but will continue to deepen the grave we are digging ourselves. &nbsp;What no one can say for certain is how long the Fed manipulation will&nbsp;last because we&rsquo;ve never been in a situation where the open mandate has been explicitly to push stock prices higher.</p> <p><u><strong><em>The hope was that the wealth would trickle down and improve the fundamentals enough to support the market valuation so that the Fed could quietly hand the market back over to fundamentals as the main pricing mechanism. &nbsp;Unfortunately what they&rsquo;ve now realized is that the fundamentals are not going to catch up to the market valuation. &nbsp;And so the Fed&nbsp;will have to either continue to manipulate the market or allow it to reprice materially downward.</em></strong></u></p> <p><strong>I expect the Fed has no idea what the next move will be. </strong>&nbsp;As I&rsquo;ve mentioned in the past the Fed can theoretically continue as long as USD strength holds up. &nbsp;If USD devalues significantly the Fed will have to step back and the market will reprice at that point. &nbsp;That said, there&nbsp;doesn&rsquo;t seem to be a near term concern for USD weakness. &nbsp;But you can see what an incredibly difficult conundrum the Fed has created for itself and for the nation.</p> <p>By implementing the wrong policies and then refusing to acknowledge it&nbsp;early on, the Fed has undoubtedly&nbsp;created irreparable&nbsp;destruction for all but the very top of the food chain. &nbsp;The destruction is already slowly playing out and that is clear when looking at&nbsp;income, net worth and consumer debt levels. &nbsp;And at some point, as we saw in 2008, an unimaginable amount of pain is going to hit home almost overnight. &nbsp;What more can anyone say about this.</p> <p><strong>The market is way out of whack and that will continue until it doesn&rsquo;t. &nbsp;In the meantime 90% of America will slowly degrade. &nbsp;How can any of this be considered a success as we hear so often from the market pros? </strong>&nbsp;The one thing that is clear in all of this mess is that our policymakers have failed miserably and so too then have our legislators for allowing this nonsense to continue. &nbsp;But worse is that we the people are failing as Americans. &nbsp;We have an obligation to those who came before us and did their job as Americans and to those who will come after deserving as many rights as were passed onto us.</p> <p><strong>But we are failing to deliver on our obligations as Americans, that is undeniable. </strong>&nbsp;We are allowing the political class to plunder our wealth, negate our freedoms and desecrate our Constitution. &nbsp;Sadly we have become the immoral populace our founding fathers warned all future generations not to become. &nbsp;As the &lsquo;Founding Father of Scholarship and Education&rsquo;, Noah Webster, put it in 1832,</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>&ldquo;<span style="color: #000000;">if the citizens neglect their duty and place unprincipled men in office, the government will soon be corrupted; laws will be made, not for the public good, so much as for selfish or local purposes; corrupt or incompetent men will be appointed to execute; the public revenues will be squandered on unworthy men; and the rights of the citizens will be violated or disregarded. If a republican government fails to secure public prosperity and happiness,&nbsp;</span>it must be because the citizens neglect the Divine commands and elect bad men to make and administer the laws&rdquo;</em></p> </blockquote> <p><strong>The duty and obligation is ours and so too then are the failures and successes of our society.</strong> &nbsp;Unfortunately ours will be the first generation to have failed at being American. &nbsp;Yet regrettably more unfortunate is that it will be the innocent&nbsp;generations yet to come that will bear the full costs of our failures. &nbsp;We are 15 years in to what is absolute denial regarding the competence of our nation&rsquo;s policymakers. &nbsp;Their failures in taking us to a false war in Iraq, in making a mockery of&nbsp;our rights as Americans and in destroying our&nbsp;economic opportunities are our failures. &nbsp;<strong>Yet here we sit, silent and indifferent to our own demise; so completely antithetical to the character of a true American.</strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="605" height="479" alt="" src="" /> </div> </div> </div> Apple Ben Bernanke Ben Bernanke BLS Borrowing Costs Capital Expenditures Consumer Credit CPI ETC Federal Reserve Gallup Iraq Money Supply None St Louis Fed St. Louis Fed Sun, 01 Mar 2015 18:45:37 +0000 Tyler Durden 502678 at "Spectacular Developments" In Austria: Bail-In Arrives After €7.6 Billion Bad Bank Capital Hole "Discovered" <p>Slowly, all the lies of the "recovery", all the skeletons in the closet, and all the bodies swept under the rug are emerging. </p> <p>Moments ago, <a href="">Austrian ORF reported</a> that there have been "<strong><em>spectacular developments</em></strong>" in the case of the Hypo Alpe Adria bad bank, also known as the Heta Asset Resolution, where an outside audit of Heta's balance sheet <strong>exposed a capital hole of up to 7.6 billion euros ($8.51 billion) which the government was not prepared to fill, the Austrian Financial Market Authority said</strong>.</p> <p><img src="" width="450" height="300" /></p> <p>As a result, according to <a href="">Reuters</a>, the bad bank that was created in the aftermath of the Hypo collapse<strong>, is itself about to be unwound, as the bad bank itself goes bad!</strong></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong> "Austria's Financial Market Authority stepped in on Sunday to wind down "bad bank" Heta Asset Resolution and imposed a moratorium on debt repayments by the vehicle set up last year from the remnants of defunct lender Hypo Alpe Adria."</strong></p> </blockquote> <p>In short: Austria just cut off state support of what was until this moment a state-backed, wind-down vehicle and a key pillar of trust in what was already a shaky financial system.</p> <p>Not surprisingly, today's shock announcement comes a week after Austria's Standard reported that up to a five billion euro impairment at Heta would take place, a report which the Finance Ministry called <strong>"pure speculation" and noted that the Bank was in good health. </strong><a href=";tl=en&amp;js=y&amp;prev=_t&amp;hl=en&amp;ie=UTF-8&amp;;edit-text=">According to Standard</a>, among the reasons for the massive capital shortfall was the plunge in collateral as a result of the continuing crisis in South East Europe <a href=";tl=en&amp;js=y&amp;prev=_t&amp;hl=en&amp;ie=UTF-8&amp;;edit-text=">which meant that the value </a>of "real estate in South East Europe, shopping centers and tourism projects, deteriorated massively" driven <a href=";tl=en&amp;js=y&amp;prev=_t&amp;hl=en&amp;ie=UTF-8&amp;;edit-text=">largely by the appreciation of the Swiss Franc</a>. "<strong>As a result, the volume of bad loans has increased significantly."</strong></p> <p>Everyone was wondering who the first big casualty of the SNB's currency peg failure would be. We now know the answer. <strong><br /></strong></p> <p>Further <a href="">from Reuters</a>, the finance ministry confirmed this in a statement, adding Heta was not insolvent and that debt guarantees by Hypo's home province of Carinthia and the federal government were unaffected by the move.</p> <p>The problem is that going forward that nobody knows who insures what, what various other state and quasi-state guarantors suddenly unclear as to who is responsible for what: the province of Carinthia guarantees back €10.7 billion worth of Heta debt. The federal government backs a 1 billion euro bond issued in 2012 that the ministry said would be honored in full. </p> <p>As a result of the "sudden" capital deficiency, there will be a moratorium on repayment of principal and capital lasts until May 31, 2016, giving the FMA time to work out a detailed plan to ensure equal treatment of all creditors, the FMA said in a decree published on its website. </p> <p>Perhaps a badder bank to rescue the bad bank?</p> <p>According to Reuters calculations, More than 9.8 billion euros worth of debt is affected, including senior notes worth 450 million due on March 6 and 500 million on March 20.</p> <p>But the punchline, is that while the world was waiting for Greece to announce capital controls, or a bail-in over the past week, it was none other than one of the Europe's most pristeen credits (one which until recently was rated AAA/Aaa) that informed creditors a bail-in is imminent: "<strong>The finance ministry noted that creditors can be forced to contribute to the costs of winding down Heta - or "bailed in" - under new European legislation that Austria adopted this year so that taxpayers do not have to shoulder the entire burden.</strong>" </p> <p><a href="">Bloomberg confirms </a>that the ministry announced that under new EU rules means creditors can be forced to share losses.</p> <p>Of course, this being Austria, <a href="">and the Creditanstalt</a>, aka the bank which failed in 1931 under almost identical circumstances and set off the dominos that led to a global financial crisis which in turn bank fanned the flames of the Great Depression, also being Austrian, suddenly everyone is asking: "<em>what just happened and what happens next?</em>"</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="275" height="183" alt="" src="" /> </div> </div> </div> Bad Bank Bond Creditors Currency Peg Great Depression Greece None Real estate recovery Reuters Swiss Franc Sun, 01 Mar 2015 17:59:46 +0000 Tyler Durden 502677 at Meanwhile In California, Unambiguously Ungood... <p>Having <a href="">discovered this week what Americans are spending their "gas savings" on</a>, and noted that nationwide <a href="">gas prices are rising at the fastest pace in over a decade</a>; as AP reports, <strong>for Californians, it's considerably worse as gas prices have soared 60c to $3.23 per gallon in the last few weeks</strong>. Between refinery shutdowns (due to strikes and explosions) removing 17% of California's production, and the seasonal shift to the less-polluting summer blend of gas mandated in California, supply remains drastically short spiking prices 20-30c on Thursday alone as one gas station owner exclaimed, <strong>in 48 years "I've never seen anything like this kind of [price spike]."</strong> </p> <p>&nbsp;</p> <p>Nationwide, gas prices are rising at the fastest pace in over a decade...</p> <p><a href=""><img src="" width="600" height="304" /></a></p> <p>&nbsp;</p> <p><strong>But California is the hardest hit for now. </strong><em>(photo taken Friday in LA)</em><strong><br /></strong></p> <p><a href=""><img src="" width="600" height="486" /></a></p> <p>&nbsp;</p> <p> <a href=";soc_trk=ma">As AP reports,</a> gas prices are soaring in California in a classic example of supply and demand after an explosion stopped gasoline production at an Exxon Mobil refinery while another remains offline due to labor unrest...</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Average retail gas prices in the state have surged 25 cents a gallon in less than a week</strong>, from $2.98 per gallon for regular on Monday to $3.23 per gallon on Friday. That caps a run that saw the price of regular unleaded go<strong> up 60 cents per gallon since Jan. 30</strong> as refineries prepare to shift to a summer blend of fuels.</p> <p>&nbsp;</p> <p>In some areas of Southern California, gas station owners were forced to pass price hikes of 24 cents per gallon along to consumers on Thursday after seeing wholesale prices shoot up. Prices in Northern California lagged a day, but by Friday were also rising; an independent operator with a chain of gas stations around the <strong>San Francisco Bay area boosted prices 20 cents a gallon for regular on Friday, to $3.19</strong>.</p> <p>&nbsp;</p> <p>The situation underscores the frustrating complexity of the gasoline market in California, where state environmental regulations mandate a specialized blend of fuel that isn't used anywhere else in the U.S.</p> <p>&nbsp;</p> <p>Because of that, California is economically isolated and can't easily or quickly purchase fuel from outside the state in a crisis.</p> <p>&nbsp;</p> <p>Between the strike at the Martinez Tesoro refinery and the explosion at Exxon's Torrance refinery, <strong>the two facilities combined make up 17 percent of the state's crude oil processing capacity</strong>, said Gordon Schremp, a senior fuels specialist with the California Energy Commission.</p> <p>&nbsp;</p> <p><strong>"It takes a while to get some significant supplies from outside," </strong>Schremp said. "It's very normal that we'd see a significant price spike."</p> <p>&nbsp;</p> <p>...</p> <p>&nbsp;</p> <p>Gas station owners, meanwhile, chafed at having to pass the costs on to consumers. The profit margin for station owners was 18.5 cents per gallon in California on Friday, a break-even or money-losing proposition for many independent retailers, said Jeff Lenard, a spokesman for the National Association of Convenience Stores.</p> <p>&nbsp;</p> <p>In Torrance, station owner Frank Scotto was forced to increase his prices by 24 cents per gallon on Thursday. <span style="text-decoration: underline;"><strong>He hasn't seen such a spike since he went into the gas station business in 1967, he said.</strong></span></p> <p>&nbsp;</p> <p><span style="text-decoration: underline;"><strong>"I printed out the price change and I'm framing this thing because I've never seen this kind of thing in all my years,"</strong></span> said Scotto, who owns a Mobil and Exxon station.</p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p><a href="">As GasBuddy shows</a> - the California differential is extreme...</p> <p><a href=""><img src="" width="600" height="452" /></a></p> <p>&nbsp;</p> <p>*&nbsp; *&nbsp; *</p> <p>However, while the extreme price moves are hitting California for now, given RBOB's recent rise, <strong>nationwide gas prices look set to top $2.60 within a week...&nbsp;</strong></p> <p><a href=""><img src="" width="600" height="331" /></a></p> <p>Or as CNBC's Larry Kudlow would say: "<strong>Unambiguously ungood</strong>" for everyone.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="467" height="375" alt="" src="" /> </div> </div> </div> Crude Crude Oil Exxon Larry Kudlow Sun, 01 Mar 2015 17:24:17 +0000 Tyler Durden 502676 at