en Our Current Illusion Of Prosperity <p><a href=""><em>Submitted by Frank Hollenbeck via The Mises Institute</em></a>,</p> <p>President Obama and Fed Chair Janet Yellen have been crowing about improving economic conditions in the US. Unemployment is down to 5.5 percent and growth in <a href="" target="_blank">2014 hit 2.2 percent</a>.</p> <p>Journalists and economists point to this improvement as proof that quantitative easing was effective.</p> <h4><u>Pile on More Debt</u></h4> <p>Unfortunately, this latest boom is artificial and has been built by adding <a href=";noredirect=1" target="_blank">debt on top of debt</a>. Total household debt increased 2.5 percent in 2014 &mdash; the highest level since 2010. Mortgage loans increased 1.5 percent, student loans 6.6 percent while auto loans increased a hefty 9.6 percent. The improving auto sales are built mostly on a bubble of sub-prime borrowers. Auto sales have been brisk because of a surge in loans to individuals with credit scores below 620. Since 2010, such loans have increased over 100 percent and have <a href="" target="_blank">gone from 20 percent of originations in 2009 to 27 percent in 2013</a>. Yet, auto loans to individuals with <a href="" target="_blank">strong credit scores</a>, <a href="" target="_blank">above 760</a>, have barely budged over the last year.</p> <p><a href="" target="_blank">Subprime consumer</a> borrowing climbed $189 billion in the first eleven months of 2014. Excluding home mortgages, this accounted for 41 percent of total consumer lending. This is exactly the kind of lending that got us into trouble less than a decade ago, and for many consumers, this will <a href="" target="_blank">only end in tears</a>.</p> <p><strong>But we need to ask ourselves: is the current boom built on sound foundations? In other words, do we have sharp increases in productivity or real wage growth?</strong></p> <p><a href="" target="_blank">Productivity</a> increased less than 1 percent on average in the last three years and real wages have flat lined or declined for decades. <a href="" target="_blank">From mid-2007 to mid-2014</a>, real wages declined 4.9 percent for workers with a high school degree, dropped 2.5 percent for workers with a college degree and rose just 0.2 percent for workers with an advanced degree.</p> <p><strong>Is the boom being built on broad base investment in plant and equipment? The current average age of working plants and <a href="" target="_blank">equipment</a> in the US is one of <a href="" target="_blank">the oldest on record</a>.</strong></p> <p>Meanwhile, it is now clear that the shale boom was an illusion of prosperity. Oil prices have dipped below $50 with some analysts calling for $20 oil by the end of the year. This is a drop from over $100 from last year. Many shale outfits need oil above $65 just to <a href="" target="_blank">break even</a>. <a href="" target="_blank">Massive layoffs</a> in the energy sector are now a certainty. Few realize that most of the gains in employment in the US since 2008 have been in <a href="" target="_blank">shale states</a>. Yet the carnage is not over. Induced by low interest, <a href="" target="_blank">investment banks</a> loaned over 1 trillion dollars to the energy industry. The impact on the financial sector is still to be felt.</p> <h4><u>There Has Not Been a True Home Price Correction</u></h4> <p>The same is true about current <a href="" target="_blank">increases in housing prices</a> and construction costs. Following the financial crisis of 2008, real estate prices <a href="">should have dropped much more</a> than they did relative to other prices. The new reality between supply and demand would have led to a price correction similar to the ones we see in oil prices today or to high-flying internet stocks after the dot-com bubble burst. Housing should then have remained in a slump possibly for a decade or more, until the overhang of empty residential and commercial real estate had been cleared off.</p> <p>Today, housing is back, with price increases at bubble-era levels and construction activity is picking up. The improvement is being driven by professional investors stretching for yield in the buy-to-rent market and by historically low long-term mortgage rates of below 4 percent. Yet, the overhang of <a href="" target="_blank">empty commercial properties</a> from the previous boom has not disappeared. It has just been left in limbo, because of the &ldquo;extend and pretend&rdquo; strategy of banks made possible by the central bank&rsquo;s massive printing over the last six years. The number of <a href="" target="_blank">vacant units</a> (table 7) in the US still stands at over 18 million units &mdash; a level reached back in 2008&ndash;2009. As of 2014, the number of units held off the market was still at <a href="" target="_blank">a record level of over 7 million units</a>.</p> <h4><u>Will Easy Money Fix Everything?</u></h4> <p>Current policy coming from the Fed seems to be geared to <strong>create a never-ending series of booms and busts, with the hope that the busts can be shortened with more debt and easy money.</strong></p> <p>Yet one major driver behind the financial crisis in 2008 was too much debt - much of which led to taxpayer-funded bailouts. In spite of this, the best the Fed can come up with now is to lower interest rates to boost demand to induce households and governments to borrow even more.</p> <p>Interfering with interest rates, however, is by far the <em>most</em> damaging policy. The economy is not a car, and interest rates are not the gas pedal. Interest <a href="">rates play a critical role in aligning output with society&rsquo;s demand across time</a>. <strong>Fiddling with them only creates an ever-growing misalignment between demand and supply across time requiring an ever larger and more painful adjustment.</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="240" height="180" alt="" src="" /> </div> </div> </div> Auto Sales Commercial Real Estate Consumer lending Housing Prices Janet Yellen Mises Institute Mortgage Loans President Obama Quantitative Easing Real estate Reality Student Loans Unemployment Thu, 02 Apr 2015 02:25:50 +0000 Tyler Durden 504150 at What Happens After A Mega Corporation Raises Its Workers' Wages <p>Earlier today, <a href="">McDonalds announced </a>that it would become the latest company to raise hourly pay for 90,000 workers by more than 10% and add benefits such as paid vacation for its restaurant workers. Specifically, <a href="">starting in July</a>, MCD will pay at least $1 per hour more than the local legal minimum wage for employees at the roughly 1,500 restaurants it owns in the U.S. The increase will lift the average hourly rate for its U.S. restaurant employees to $9.90 on July 1 and more than $10 by the end of 2016, from $9.01 currently. Finally, McDonald’s also will enable workers after a year of employment to accrue up to five days of paid time-off annually.</p> <p>With this announcement, McDonalds joins the following companies which have likewise raised minimum wages in recent months:</p> <ul> <li>WalMart</li> <li>Aetna</li> <li>Gap</li> <li>Ikea</li> <li>Target</li> <li>TJ Maxx</li> </ul> <p>Surely this is great news for the workers of these above companies, as some of the massive wealth accrued by corporate shareholders may be finally trickling down to the lowliest of employees, right? As it turns out, the answer is far from clear.</p> <p>As the <a href="">following WSJ story released overnight</a>, here is what happens when mega-corporations such as WalMart and McDonalds, whose specialty are commoditized products and services and have razor thin margins, yet which try to give an appearance of doing the right thing, raise minimum wages. They start flexing their muscles, and in the process trample all over the companies that comprise their own cost overhead: their suppliers and vendors. </p> <p>Take the case of WalMart: the world's biggest retailer "<strong>is increasing the pressure on suppliers to cut the cost of their products, in an effort to regain the mantle of low-price leader and turn around its sluggish U.S. sales</strong>."</p> <p>What WalMart is doing is borderline illegal: it is explicitly telling its vendors "this is what you will do with your excess cash." Of course, we say borderline because WMT's action is perfectly legal in the confines of the pure law. However, in the context of an economy that is sputtering, WMT's vendors have no choice but to comply or risk losing what is certainly their largest revenue stream and risk bankruptcy. </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The retailing behemoth says it has been telling suppliers to forgo investments in joint marketing with the retailer <strong>and plow the savings into lower prices instead. </strong>Makers of branded consumer products from diapers to yogurt typically earmark a portion of their budgets for marketing with Wal-Mart, spending on things like eye-catching product displays and online advertisements.</p> <p>&nbsp;</p> <p>Wal-Mart has long had a reputation for pressing its suppliers to cut costs to help lower prices, but the retailer’s new leadership has embraced the concept with fresh vigor. Wal-Mart’s price advantage against its competitors has been eroded, and it has steadily been losing market share in the U.S. since the recession ended, while rivals including Kroger Co. and Costco Wholesale Corp. gained share, according to data from the consultancy Kantar Retail.</p> <p>&nbsp;</p> <p>The new dictate on prices is creating tension with companies that supply the hundreds of thousands of products on Wal-Mart’s shelves.</p> </blockquote> <p>The irony is that while WMT (or MCD or GAP or Target) boosts the living standards of its employees by the smallest of fractions, it cripples the cost and wage structure of the entire ecosystem of vendors that feed into it, and what takes place is a veritable avalanche effect where a few cent increase for the lowest paid megacorp employees results in a tidal wave of layoffs for said megacorp's vendors.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The zeal on pricing is part of a push by new Chief Executive Doug McMillon and U.S. head Greg Foran to turn around Wal-Mart’s core domestic business, which booked $288 billion in sales in the year ended Jan. 31, 60% of the company’s total. While U.S. sales were up 3% last year, the growth was a scant 0.5% excluding newly opened stores, and the division’s profit fell. </p> <p>&nbsp;</p> <p>Messrs. Foran and McMillon laid out the pricing message during a private meeting with suppliers in February. They want suppliers to operate with the same everyday low cost model that Wal-Mart employs from top to bottom. </p> <p>&nbsp;</p> <p>“They kept pushing, ‘We’re going back to basics, it’s all about low pricing,’ ” said one supplier who attended the meeting.</p> </blockquote> <p>And a quick lesson in corporate double speak: where the new CEO says:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>“We want to get back to a point where we are playing offense with price because of the way we go to market,” Mr. McMillon said, according to a transcript. <strong>“Our pricing strategy is aimed at one objective, and that is building trust.”</strong></p> </blockquote> <p>... what he means is that "<em><strong>our strategy is to remind our vendors that we call all the shots and since we can't cut prices any more, they will have to do it.</strong></em>"</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Messrs. Foran and McMillon laid out the pricing message during a private meeting with suppliers in February. They want suppliers to operate with the same everyday low cost model that Wal-Mart employs from top to bottom. </p> <p>&nbsp;</p> <p><strong>“They kept pushing, ‘We’re going back to basics, it’s all about low pricing,</strong>’ ” said one supplier who attended the meeting.</p> </blockquote> <p>Which is another way of saying "deflation" in compensation, also synonymous for "<em>lower wages for everyone else.</em>" Because now that each of WalMart's suppliers is forced by WMT management to cut <em>their </em>costs and to be "price competitive", they will either <em>reduce </em>wages of its own workers or, comparably, force their own suppliers to reduce pricing, and so on, until ultimatly the entire economy is gripped in wage deflation.</p> <p>Which also means that Obama, who has decided to join the Fed in micro-managing the economy by diktat, will have no choice but to issue more executive orders, to undo the aftermath of this previous short-sighted commands. Perhaps he will start be realizing that it is not minimum wage that he should be focusing on but <a href="">maximum hours as explained before</a>:</p> <p><a href=""><img src="" width="600" height="595" /></a></p> <p>Although when faced with what now appears certain sliding wages across a deflating US economy, not even Obama will be able to come up with mutually offsetting executive orders fast enough to fix what is now a runaway train on a collision course. </p> <p>In fact, the only winner here, once again, will be the banks who will continue to fabricate, spin and perpetuate the lie that the only thing that can fix the next wave of declining wages is, as always, QE - <em>QE whose only intention and purpose is to steal from the poor and middle class and give to the 0.01%.</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="550" height="410" alt="" src="" /> </div> </div> </div> Market Share McDonalds Recession Thu, 02 Apr 2015 01:48:16 +0000 Tyler Durden 504154 at The Fed's Big Problem: "De-Risking A Bull Market Is Very Different From De-Risking A Bear Market" <p><a href=""><em>Submitted by Ben Hunt via Salient Partners&#39; Epsilon Theory blog</em></a>,</p> <p><section class="post-body text"><br /> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb; min-height:90px;"> <p><strong><img alt="" class="alignnone size-full wp-image-1101" height="257" src="" style="display: block; margin-right: 20px; float: left;" width="257" /></strong></p> <p>&nbsp;</p> <p><strong><b>Do, or do not. There is no try.&rdquo;</b></strong></p> <p><i>&ndash; Yoda, &ldquo;Star Wars: Episode V - The Empire Strikes Back&rdquo; (1980)</i></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>I see it all perfectly; there are two possible situations - one can either do this or that. My honest opinion and my friendly advice is this: do it or do not do it - you will regret both.</strong><br />&ndash; <em>Soren Kierkegaard, &quot;Either/Or: A Fragment of Life&quot; (1843)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>The only victories which leave no regret are those which are gained over ignorance. </strong><br />&ndash; <em>Napoleon Bonaparte (1769 - 1821)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>Maybe all one can do is hope to end up with the right regrets.</strong><br />&ndash; <em>Arthur Miller, &quot;The Ride Down Mt. Morgan&quot; (1991)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>Of all the words of mice and men, the saddest are, &quot;It might have been.&quot;</strong><br />&ndash; <em>Kurt Vonnegut, &quot;Cat&#39;s Cradle&quot; (1963)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>One can&#39;t reason away regret - it&#39;s a bit like falling in love, falling to regret.</strong><br />&ndash; <em>Graham Greene, &quot;The Human Factor&quot; (1978)</em></p> </div> <div align="right"> <div align="left" style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb; min-height:90px;"> <p><strong><img alt="" class="alignnone size-full wp-image-1101" height="268" src="" style="display: block; margin-right: 20px; float: right;" width="233" /></strong><strong><b>I bet there&#39;s rich folks eatin&#39;</b></strong><br /><strong><b>In a fancy dining car.<br />They&#39;re probably drinkin&#39; coffee<br />And smokin&#39; big cigars.<br />Well I know I had it comin&#39;.<br />I know I can&#39;t be free.<br />But those people keep-a-movin&#39;<br />And that&#39;s what tortures me.</b></strong></p> <p><i>&ndash; Johnny Cash, &ldquo;Folsom Prison Blues&rdquo; (1955)</i></p> <p>&nbsp;</p> </div> </div> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb; min-height:90px;"> <p><strong><img alt="" class="alignnone size-full wp-image-1101" height="268" src="" style="display: block; margin-right: 20px; float: left;" width="185" /></strong><strong><b>Regrets...I&#39;ve had a few.<br />But then again, too few to mention.</b></strong></p> <p><i>&ndash; Paul Anka, Frank Sinatra &ldquo;My Way&rdquo; (1969)</i></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>The Moving Finger writes; and, having writ,<br />Moves on: nor all thy Piety nor Wit<br />Shall lure it back to cancel half a Line,<br />Nor all thy Tears wash out a Word of it.</strong><br />&ndash; <em>Omar Khayyam, &quot;Rubaiyat&quot; (1048 - 1141)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>You can tell it any way you want but that&#39;s the way it is. I should of done it and I didn&#39;t. And some part of me has never quit wishin&#39; I could go back. And I can&#39;t. I didn&#39;t know you could steal your own life. And I didn&#39;t know that it would bring you no more benefit than about anything else you might steal. I think I done the best with it I knew how but it still wasn&#39;t mine. It never has been.&quot;</strong><br />&ndash; <em>Cormac McCarthy, &quot;No Country for Old Men&quot; (2005)</em></p> </div> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb; min-height:205px;"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse:collapse;"> <tbody> <tr> <td style="padding:10px;"> <p style="padding:0; margin:0;"><strong>Jesse:</strong></p> </td> <td style="padding:10px;"> <p style="padding:0; margin:0;">Yeah, right, well, great. So listen, so here&#39;s the deal. This is what we should do. You should get off the train with me here in Vienna, and come check out the capital.</p> </td> </tr> <tr style="background-color:#e5e5e5;"> <td style="padding:10px;" width="166"> <p><strong>Celine:</strong></p> </td> <td style="padding:10px;" width="426"> <p style="padding:0; margin:0;">What?</p> </td> </tr> <tr> <td style="padding:10px;"> <p style="padding:0; margin:0;"><strong><strong>Jesse</strong>:</strong></p> </td> <td style="padding:10px;"> <p style="padding:0; margin:0;">Come on. It&#39;ll be fun. Come on.</p> </td> </tr> <tr style="background-color:#e5e5e5;"> <td style="padding:10px;"> <p><strong><strong>Celine</strong>:</strong></p> </td> <td style="padding:10px;"> <p style="padding:0; margin:0;">What would we do?</p> </td> </tr> <tr> <td style="padding:10px;"> <p style="padding:0; margin:0;"><strong><strong>Jesse</strong>:</strong></p> </td> <td style="padding:10px;"> <p style="padding:0; margin:0;">Umm, I don&#39;t know. All I know is I have to catch an Austrian Airlines flight tomorrow morning at 9:30 and I don&#39;t really have enough money for a hotel, so I was just going to walk around, and it would be a lot more fun if you came with me. And if I turn out to be some kind of psycho, you know, you just get on the next train.<br />Alright, alright. Think of it like this: jump ahead, ten, twenty years, okay, and you&#39;re married. Only your marriage doesn&#39;t have that same energy that it used to have, y&#39;know. You start to blame your husband. You start to think about all those guys you&#39;ve met in your life and what might have happened if you&#39;d picked up with one of them, right? Well, I&#39;m one of those guys. That&#39;s me, y&#39;know, so think of this as time travel, from then, to now, to find out what you&#39;re missing out on. See, what this really could be is a gigantic favor to both you and your future husband to find out that you&#39;re not missing out on anything. I&#39;m just as big a loser as he is, totally unmotivated, totally boring, and, uh, you made the right choice, and you&#39;re really happy.</p> </td> </tr> <tr style="background-color:#e5e5e5;"> <td style="padding:10px;"> <p><strong><strong>Celine</strong>:</strong></p> </td> <td style="padding:10px;"> <p style="padding:0; margin:0;">Let me get my bag.</p> </td> </tr> </tbody> </table> <p>&ndash; <em>Richard Linklater, &quot;Before Sunrise&quot; (1995)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>For it falls out<br />That what we have we prize not to the worth<br />Whiles we enjoy it, but being lacked and lost,<br />Why, then we rack the value, then we find<br />The virtue that possession would not show us<br />While it was ours.</strong><br />&ndash; <em>William Shakespeare, &quot;Much Ado About Nothing&quot; (1612)</em></p> </div> <div align="left"> <div style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb;"> <p><strong>When to the sessions of sweet silence thought<br />I summon up rememberence of things past,<br />I sigh the lack of many a thing I sought,<br />And with old woes new wail my dear time&#39;s waste:</strong><br />&ndash; <em>William Shakespeare, &quot;Sonnet 30&quot; (1609)</em></p> </div> <div align="right"> <div align="left" style="margin-bottom:14px; border:dashed 1px #858585; padding:20px 20px 5px 20px; background-color:#fbfbfb; min-height:90px;"> <p><strong><img alt="" class="alignnone size-full wp-image-1101" height="268" src="" style="display: block; margin-right: 20px; float: right;" width="199" /></strong><strong><b>No, I don&#39;t have a gun.</b></strong></p> <p><i>&ndash; Nirvana, &ldquo;Come As You Are&rdquo; (1992)</i></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> </div> </div> </div> <p>I spend a lot of my time speaking with investors and financial advisors of all stripes and sizes, and here&rsquo;s what I&rsquo;m hearing, loud and clear. <b>There&rsquo;s a massive disconnect between advisors and investors today, and it&rsquo;s reflected in both declining investment activity as well as a general fatigue with the advisor-investor conversation.</b> I mean &ldquo;advisor-investor conversation&rdquo; in the broadest possible context, a context that should be recognizable to everyone reading this note. It&rsquo;s the conversation of a financial advisor with an individual investor client. It&rsquo;s the conversation of a consultant with an institutional investor client. It&rsquo;s the conversation of a CIO with a Board of Directors. <b>It&rsquo;s the conversation of many of us with ourselves. </b>The wariness and weariness associated with this conversation runs in both directions, by the way.</p> <p>Advisors continue to preach the faith of diversification, and investors continue to genuflect in its general direction. But the sermon isn&rsquo;t connecting. Investors continue to express their nervousness with the market and dissatisfaction with their portfolio performance, and advisors continue to nod their heads and say they understand. It reminds me of Jason Headley&rsquo;s brilliant short film, &ldquo;<a href="">It&rsquo;s Not About the Nail</a>&rdquo;, with the advisor reprising Headley&rsquo;s role. Yes, the advisor is listening. But most find it impossible to get past what they believe is the obvious answer to the obvious problem. Got a headache? Take the nail out of your head. Nervous about the market? Diversify your portfolio. But there are headaches and then there are headaches. There is nervousness and then there is nervousness. It&rsquo;s not about the nail, and the sooner advisors realize this, the sooner they will find a way to reconnect with their clients. Even if it&rsquo;s just a conversation with yourself.</p> <div align="center"><img src="" /></div> <p><u>Investors aren&rsquo;t asking for diversification, which isn&rsquo;t that surprising after 6 years of a bull market. Investors never ask for diversification after 6 years of a bull market. They only ask for it after the Fall, as a door-closing exercise when the horse has already left the burning barn. <b>What&rsquo;s surprising is that investors are asking for de-risking, similar in some respects to diversification but different in crucial ways. </b>What&rsquo;s surprising is that investors are asking for de-risking rather than re-risking, which is what you&rsquo;d typically expect at this stage of such a powerful bull market.</u></p> <p>Investors are asking for de-risking because this is the most mistrusted bull market in recorded history, a market that seemingly everyone wants to fade rather than press. Why? <a href="">Because no one thinks this market is real.</a> Everyone believes that it&rsquo;s a by-product of outrageously extraordinary monetary policy actions rather than the by-product of fundamental economic growth and productivity, and what the Fed giveth &hellip; the Fed can taketh away.&nbsp;</p> <p>This is a big problem for the Fed, as their efforts to force greater risk-taking in markets through LSAP and QE (and thus more productive risk-taking, or at least inflation, in the real economy) have failed to take hold in investor hearts and minds. Yes, we&rsquo;re fully invested, but only because we have to be. To paraphrase the old saying about beauty, risk-taking is only skin deep for today&rsquo;s investor, but risk-aversion goes clear to the bone.</p> <p>It&rsquo;s also the root of our current advisor-investor malaise. De-risking a bull market is a very different animal than de-risking a bear market. And neither is the same as diversification.</p> <p>Let&rsquo;s take that second point first.</p> <p>Here&rsquo;s a simple representation of what diversification looks like, <i>from a risk/reward perspective.</i></p> <div align="center"><i><img height="365" src="" width="534" /></i></div> <div align="center"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b> </b>For illustrative purposes only.</font></div> <p>The gold ball is whatever your portfolio looks like today from a historical risk/reward perspective, and the goal of diversification is to move your portfolio up and to the left of the risk/reward trade-off line that runs diagonally through the current portfolio position. Diversification is all about increasing the risk/reward balance, about getting more reward per unit of risk in your portfolio, and the goodness or poorness of your diversification effort is defined by how far you move your portfolio away from that diagonal line. In fact, as the graph below shows, each of the Good Diversification outcomes are equally good from a risk/reward balance perspective because they are equally distant from the original risk/reward balance line, and vice versa for the Poor Diversification outcomes.</p> <div align="center"><img height="365" src="" width="534" /></div> <div align="center"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For illustrative purposes only.</font></div> <p>Diversification does NOT mean getting more reward out of your portfolio <i>per se</i>, which means that some Poor Diversification changes to your portfolio will outperform some Good Diversification changes to your portfolio over time (albeit with a much bumpier ride).</p> <div align="center"><img height="339" src="" width="535" /></div> <div align="center"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For illustrative purposes only.</font></div> <p>It&rsquo;s an absolute myth to say that any well-diversified portfolio will outperform all poorly diversified portfolios over time. But it&rsquo;s an absolute truth to say that any well-diversified portfolio will outperform all poorly diversified portfolios over time <i>on a risk-adjusted basis.</i> If an investor is thinking predominantly in terms of risk and reward, then greater diversification is the slam-dunk portfolio recommendation. This is the central insight of Harry Markowitz and his modern portfolio theory contemporaries, and I&rsquo;m sure I don&rsquo;t need to belabor that for anyone reading this note.</p> <p><b>The problem is that investors are not only risk/reward maximizers, they are also regret minimizers (see Epsilon Theory notes &ldquo;<a href="">Why Take a Chance</a>&rdquo; and &ldquo;<a href="">The Koan of Donald Rumsfeld</a>&rdquo; for more, or read anything by Daniel Kahneman).</b> The <i>meaning</i> of &ldquo;risk&rdquo; must be understood as not only as the other side of the reward coin, but also as the co-pilot of behavioral regret. That&rsquo;s a mixed metaphor, and it&rsquo;s intentional. The human animal holds two very different meanings for risk in its brain simultaneously. One notion of risk, as part and parcel of expected investment returns and the path those returns are likely to take, is captured well by the concept of volatility and the toolkit of modern economic theory. The other, as part and parcel of the psychological utility associated with both realized and foregone investment returns, is captured well by the concepts of <a href="">evolutionary biology</a> and the toolkit of modern game theory.</p> <p><b>The problem is that diversification can only be understood as an exercise in risk/reward maximization, has next to nothing to say about regret minimization, and thus fails to connect with investors who are consumed by concerns of regret minimization. </b>This fundamental miscommunication is almost always present in any advisor-investor conversation, but it is particularly pernicious during periods of global debt deleveraging as we saw in the 1870&rsquo;s, the 1930&rsquo;s, and today. Why? Because the political consequences of that deleveraging create investment uncertainty in the technical, game theoretic sense, an uncertainty which is reflected in reduced investor confidence in the efficacy of fundamental market and macroeconomic factors to drive market outcomes. In other words, the rules of the investment game change when politicians attempt to maintain the status quo &ndash; i.e., their power &ndash; when caught in the hurricane of a global debt crisis. That&rsquo;s what happened in the 1870&rsquo;s. That&rsquo;s what happened in the 1930&rsquo;s. And it&rsquo;s darn sure happening today. We all feel it. We all feel like <a href="">we&rsquo;ve entered some Brave New World where the old market moorings make little sense</a>, and that&rsquo;s what&rsquo;s driving the acute anxiety expressed today by investors both large and small. Recommending old-school diversification techniques as a cure-all for this psychological pain isn&rsquo;t necessarily wrong. It probably won&rsquo;t do any harm. But it&rsquo;s not doing anyone much good, either. It&rsquo;s not about the nail.</p> <p>On the other hand, the concept of de-risking has a lot of meaning within the context of regret minimization, which makes it a good framework for exploring a more psychologically satisfactory set of portfolio allocation recommendations. But to develop that framework, we need to ask what drives investment regret. And just as we talk about different notions of volatility-based portfolio constructions under different market regimes, so do we need to talk about different notions of regret-based portfolio constructions under different market regimes.</p> <p>Okay, that last paragraph was a bit of a mouthful. Let me skip the academic-ese and get straight to the point. <b>In a bear market, regret minimization is driven by existential concerns. In a bull market, regret minimization is driven by peer comparisons. </b></p> <p>In a bear market your primary regret &ndash; the thing you must avoid at all costs &ndash; is ruin, and that provokes a very direct, very physical reaction. You can&rsquo;t sleep. And that&rsquo;s why Rule #1 of de-risking in a bear market is so simple: sell until you can sleep at night. Go to cash. Here&rsquo;s what de-risking in a bear market looks like, <i>as drawn in risk/reward space.</i></p> <div align="center"><i><img height="378" src="" width="536" /></i></div> <div align="center"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For illustrative purposes only.</font></div> <p>Again, the gold ball is whatever your portfolio looks like today from a historical risk/reward perspective. De-risking means moving your portfolio to the left, i.e. a lower degree of risk. The question is how much reward you are forced to sacrifice for that move to the left. Perfect De-Risking sacrifices zero performance. Good luck with that if you are reducing your gross exposure. Average De-Risking is typically accomplished by selling down your portfolio in a pro rata fashion across all of your holdings, and that&rsquo;s a simple, effective strategy. Good De-Risking and Poor De-Risking are the result of active choices in selling down some portion of your portfolio more than another portion of your portfolio, or &ndash; if you don&rsquo;t want to go to cash &ndash; replacing something in your portfolio that&rsquo;s relatively volatile with something that&rsquo;s relatively less volatile.</p> <p>In a bull market, on the other hand, your primary regret is looking or feeling stupid, and that provokes a very conflicted, very psychological reaction. You want to de-risk because you don&rsquo;t understand this market, and you&rsquo;re scared of what will happen when the policy ground shifts. But you&rsquo;re equally scared of being tagged with the worst possible insults you can suffer in our business: &ldquo;you&rsquo;re a panicker&rdquo; &hellip; &ldquo;you missed the greatest bull market of this or any other generation&rdquo;. Again, maybe this is a conversation you&rsquo;re having with yourself (frankly, that&rsquo;s the most difficult and conflicted conversation most of us will ever have). And so you do nothing. You avoid making a decision, which means you also avoid the advisor-investor conversation. Ultimately everyone, advisor and investor alike, looks to blame someone else for their own feelings of unease. No one&rsquo;s happy, even as the good times roll.</p> <p>So what&rsquo;s to be done? Is it possible to both de-risk a portfolio and satisfy the regret minimization calculus of a bull market?</p> <p>Through the lens of regret minimization, here&rsquo;s what de-risking in a bull market looks like, again <i>as depicted in risk/reward space:</i></p> <div align="center"><i><img height="376" src="" width="533" /></i></div> <div align="center"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For illustrative purposes only.</font></div> <p>Essentially you&rsquo;ve taken all of the bear market de-risking arrows and moved them 45 degrees clockwise. What would be Perfect De-Risking in a bear market is only perceived as average in a bull market, and many outcomes that would be considered Good Diversification in pure risk/reward terms are seen as Poor De-Risking. I submit that this latter condition, what I&rsquo;ve marked with an asterisk in the graph above, is exactly what poisons so many advisor-investor conversations today. It&rsquo;s a portfolio adjustment that&rsquo;s up and to the left from the diagonal risk/reward balance line, so you&rsquo;re getting better risk-adjusted returns and Good Diversification &ndash; but it&rsquo;s utterly disappointing in a bull market as peer comparison regret minimization takes hold. It doesn&rsquo;t even serve as a Good De-Risking outcome as it would in a bear market.</p> <p>Now here&rsquo;s the good news. There are diversification outcomes that overlap with the bull market Good De-Risking outcomes, as shown in the graph below. In fact, it&rsquo;s ONLY diversification strategies that can get you into the bull market Good De-Risking area. That is, typical de-risking strategies look to cut exposure, not replace it with equivalent but uncorrelated exposure as diversification strategies do, and you&rsquo;re highly unlikely to improve the reward profile of your portfolio (moving up vertically from the horizontal line going through the gold ball) by reducing gross exposure. The trick to satisfying investors in a bull market is to increase reward AND reduce volatility. I never said this was easy.</p> <div align="center"><img height="387" src="" width="535" /></div> <div align="center"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For illustrative purposes only.</font></div> <p>The question is &hellip; what diversification strategies can move your portfolio into this promised land? Also (as if this weren&rsquo;t a challenging enough task already), what diversification strategies can work quickly enough to satisfy a de-risking calculus? Diversification can take a long time to prove itself, and that&rsquo;s rarely acceptable to investors who are seeking the immediate portfolio impact of de-risking, whether it&rsquo;s the bear market or bull market variety.</p> <p>What we need are diversification strategies that can act quickly. More to the point, we need strategies that can <i>react </i>quickly, all while maintaining a full head of steam with their gross exposure to non-correlated or negatively-correlated return streams. This is at the heart of what I&rsquo;ve been calling Adaptive Investing.</p> <p>Epsilon Theory isn&rsquo;t the right venue to make specific investment recommendations. But I&rsquo;ll make three general points.</p> <p>First, I&rsquo;d suggest looking at strategies that can go short. If you&rsquo;re de-risking a bull market, you need to make money when you&rsquo;re right, not just lose less money. Losing less money pays off over the long haul, but the long haul is problematic from a regret-based perspective, which tends to be quite path-sensitive. Short positions are, by definition, negatively correlated to the thing that they&rsquo;re short. They have a lot more oomph than the non-correlated or weakly-correlated exposures that are at the heart of most old-school diversification strategies, and that&rsquo;s really powerful in this framework. Of course, you&rsquo;ve got to be right about your shorts for this to work, which is why I&rsquo;m suggesting a look at strategies that CAN go short as an adaptation to changing circumstances, not necessarily strategies that ARE short as a matter of habit or requirement.</p> <p>Second, and relatedly, I&rsquo;d suggest looking at trend-following strategies, which keep you in assets that are working and get you out of assets that aren&rsquo;t (or better yet, allow you to go short the assets that aren&rsquo;t working). Trend-following strategies are inherently behaviorally-based, which is near and dear to the Epsilon Theory heart, and more importantly they embody the profound agnosticism that I think is absolutely critical to maintain when uncertainty rules the day and fundamental &ldquo;rules&rdquo; change on political whim. <b>Trend-following strategies are driven by the maxim that the market is always right, and that&rsquo;s never been more true &ndash; or more difficult to remember &ndash; than here in the Golden Age of the Central Banker. </b></p> <p>Third, these graphs of portfolio adjustments in risk/reward space are not hypothetical exercises. Take the historical risk/reward of your current portfolio, or some portion of that portfolio such as the real assets allocation, and just see what the impact of including one or more liquid alternative strategies would be over the past few years. <b>Check out what the impact on your portfolio would be since the Fed and the ECB embarked on divergent monetary policy courses late last summer, <a href="">creating an entirely different macroeconomic regime</a>. </b>Seriously, it&rsquo;s not a difficult exercise, and I think you&rsquo;ll be surprised at what, for example, a relatively small trend-following allocation can do to de-risk a portfolio while still preserving the regret-based logic of managing a portfolio in a bull market. For both advisors and investors, this is the time to engage in a conversation about de-risking and diversification, properly understood as creatures of regret minimization as well as risk/reward maximization, rather than to avoid the conversation. <b>As the old saying goes, risk happens fast. Well &hellip; so does regret.&nbsp;&nbsp;</b></p></div> </div> </div> </div> </div> </div> </div> </div> </div> <p></p></section></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="250" height="212" alt="" src="" /> </div> </div> </div> Bear Market Epsilon Johnny Cash Monetary Policy Napoleon Volatility Thu, 02 Apr 2015 01:15:21 +0000 Tyler Durden 504147 at Chinese Retail Investors Open Enough Brokerage Accounts In March For Every Man, Woman, and Child In LA <p>Last week we highlighted a Bloomberg chart which <a href="">showed</a> that more than a quarter of new investors in the “self-feeding, leverage-fueled <a href="">domestic frenzy</a>” that is China’s equity market have an elementary school level education or less. Bloomberg categorized nearly 6% of new Chinese stock investors as “illiterate.” If true, we imagine this doesn’t bode particularly well for a bubble that’s been inflated on the back of massive leverage (<strong>buying on margin accounts for a fifth of daily turnover and margin debt now sits at 1% of GDP</strong>). As a reminder, here’s the graphic:&nbsp;</p> <p><a href=""><img src="" width="555" height="324" /></a></p> <p>&nbsp;</p> <p>Now, thanks to the China Securities Depository and Clearing Co., we get a look at just how quickly the situation is escalating. <strong>Nearly 1.7 million new stock accounts were created last week…</strong></p> <p><a href=""><img src="" width="600" height="106" /></a></p> <p>...marking a 49% increase from the previous week…</p> <p><a href=""><img src="" width="600" height="102" /></a></p> <p>...which itself represented a 58% increase from the week before…</p> <p><a href=""><img src="" width="600" height="100" /></a></p> <p>Here’s more via <a href="">Bloomberg</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>To get a sense of the frenzy in China’s world-beating equity market, consider this: In a two-week span last month, the rally lured 2.8 million rookie stock pickers, almost the equivalent of Chicago’s entire population.</em></strong></p> <p>&nbsp;</p> <p><strong><em>The number of new equity accounts surged to a record during the two weeks ended March 27, five times the average of the past year, data from China Securities Depository and Clearing Co. showed on Tuesday. About 4 million were opened in </em></strong></p> <p><strong><em>March, enough for every person in Los Angeles. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.</em></strong></p> <p>&nbsp;</p> <p><em>Signs of inexperienced investors’ growing influence on the $6.5 trillion market have already shown up in the outperformance of China’s equivalent of penny stocks and a jump in share-price volatility to the highest level in five years. While fresh capital may feed market momentum as the government steps up efforts to support economic growth, foreign money managers have been selling shares on concern the gains are overdone.</em></p> <p>&nbsp;</p> <p><em>“A lot of speculative money has come into the market,” Michael Wang, a strategist at hedge fund Amiya Capital LLP, said by phone from London. The rally “is not fundamentally driven. It’s much more of a flow-driven phenomenon,” he said.</em></p> </blockquote> <p>* &nbsp;* &nbsp;*</p> <p>We certainly don’t see what could go wrong here. Last month alone, a new investor base the size of Los Angeles — many of whom may be only semi-literate — piled into Chinese equities which have nearly doubled in the space of 8 months on the back of margin debt that can now be measured as a percentage of GDP and volatility is at a 5-year high. Everything should be fine.&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="360" height="144" alt="" src="" /> </div> </div> </div> China Volatility Thu, 02 Apr 2015 00:40:00 +0000 Tyler Durden 504145 at 5 Charts Which Show That The Next Economic Crash Is Dead Ahead <p><a href=""><em>Submitted by Michael Snyder via The Economic Collapse blog</em></a>,</p> <p><strong>When an economic crisis is coming, there are usually certain indicators that appear in advance.&nbsp;</strong> For example, commodity prices usually start to plunge before a recession begins.&nbsp; And as you can see from the Bloomberg Commodity Index <a href="" target="_blank" title="which you can find right here">which you can find right here</a>, this has already been happening.&nbsp; In addition, I have <a href="" title="previously written">previously written</a> about how the U.S. dollar went on a great run just before the financial collapse of 2008.&nbsp; This is something that has also been happening over the past few months.&nbsp;<strong> Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in &ldquo;guesswork&rdquo;.&nbsp; But that is not the case at all.&nbsp;</strong> We can look back over history and see patterns that keep repeating.&nbsp; And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.</p> <p>For example, let&rsquo;s talk about the price of oil.&nbsp; There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period.&nbsp; One was just before the financial crisis in 2008, and the other has just happened&hellip;</p> <p><a href="" rel="attachment wp-att-8525"><img alt="Price Of Oil 2015" class="aligncenter size-large wp-image-8525" src="" style="width: 600px; height: 398px;" /></a></p> <p>As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace.&nbsp; In fact, almost half of all oil rigs in the U.S. <strong>have already shut down</strong>.&nbsp; The following commentary and chart come from <a href="" target="_blank" title="Wolf Richter">Wolf Richter</a>&hellip;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>In the latest week, drillers idled another 41 oil rigs, according to Baker Hughes. Only 825 rigs were still active, down 48.7% from October. In the 23 weeks since, drillers have idled 784 oil rigs, the steepest, deepest cliff-dive in the history of the data:</p> <p>&nbsp;</p> <p><a href="" rel="attachment wp-att-8523"><img alt="Fracking Bust 2015" class="aligncenter size-large wp-image-8523" src="" style="width: 600px; height: 428px;" /></a></p> </blockquote> <p>We are looking at a full-blown fracking bust, and this bust is already having a dramatic impact on the economies of states that are heavily dependent on the energy industry.</p> <p>For example, just check out the disturbing number&nbsp;<a href="" target="_blank" title="that just came out of Texas">that just came out of Texas</a>&hellip;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>The crash in oil prices is hammering the Texas economy.</p> <p>&nbsp;</p> <p>The latest manufacturing outlook index from the Dallas Fed plunged again in March, to -17.4 from -11.2 in February, indicating deteriorating business conditions in the state.</p> </blockquote> <p>Ouch.</p> <p><strong>But this pain is going to be felt far beyond Texas.&nbsp; In recent years, Wall Street banks have made a massive amount of money packaging up energy industry loans, bonds, etc. and selling them off to investors.</strong></p> <p>If that sounds similar to the kind of behavior that preceded the subprime mortgage meltdown, that is because it is.</p> <p>Now those loans, bonds, etc. are going bad as the fracking bust intensifies, and whoever is left holding all of this worthless paper at the end of the day is going to lose an extraordinary amount of money.&nbsp; Here is more&nbsp;<a href="" target="_blank" title="from Wolf Richter">from Wolf Richter</a>&hellip;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>It suited Wall Street just fine: according to Dealogic, banks extracted $31 billion in fees from the US oil and gas industry and its investors over the past five years by handling IPOs, spin-offs, &ldquo;leveraged-loan&rdquo; transactions, the sale of bonds and junk bonds, and M&amp;A.</p> <p>&nbsp;</p> <p>That&rsquo;s $6 billion in fees per year! Over the last four years, these banks made over $4 billion in fees on just &ldquo;leveraged loans.&rdquo; These loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.</p> <p>For Wall Street it doesn&rsquo;t matter what happens to these junk bonds and leveraged loans after they&rsquo;ve been moved on to mutual funds where they can decompose sight-unseen. And it doesn&rsquo;t matter to Wall Street what happens to leverage loans after they&rsquo;ve been repackaged into highly rated Collateralized Loan Obligations that are then sold to others.</p> </blockquote> <p>At the same time, we are also witnessing a slowdown in global trade.&nbsp; This usually happens when economic conditions are about to turn sour, and that is why it is so alarming that the total volume of global trade in January was down 1.4 percent from December.&nbsp; According to&nbsp;<a href="" target="_blank" title="Tyler Durden of Zero Hedge">Tyler Durden of Zero Hedge</a>, that was the largest drop since 2011&hellip;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Presenting the latest data from the CPB Netherlands Bureau for Economic Policy Analysis, according to which in January world trade by volume dropped by a whopping 1.4% from December: the biggest drop since 2011!</p> <p><a href="" rel="attachment wp-att-8521"><img alt="Global Trade Volume" class="aligncenter size-large wp-image-8521" src="" style="width: 599px; height: 385px;" /></a></p> </blockquote> <p><strong>We are seeing some troubling signs in the U.S. as well.</strong></p> <p>I shared the following chart&nbsp;<a href="" title="in a previous article">in a previous article</a>, but it bears repeating.&nbsp; It comes from Charles Hugh Smith, and it shows that new orders for consumer goods are falling at a rate not seen since the last recession&hellip;</p> <p><a href="" rel="attachment wp-att-8427"><img alt="Charles Hugh-Smith New Orders" class="aligncenter size-large wp-image-8427" src="" style="width: 600px; height: 398px;" /></a></p> <p><strong>Well, what about the stock market?&nbsp; It was up more than 200 points on Monday.&nbsp; Isn&rsquo;t that good news?</strong></p> <p>Yes, but the euphoria on Wall Street will not last for long.</p> <p>When corporate earnings per share either start flattening out or start to decline, that is a huge red flag.&nbsp; We saw this just prior to the stock market crash of 2008, and it is happening again right now.&nbsp; The following commentary and chart come&nbsp;<a href="" target="_blank" title="from Phoenix Capital Research">from Phoenix Capital Research</a>&hellip;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Take a look at the below chart showing current stock levels and changes in forward Earnings Per Share (EPS). Note, in particular how divergences between EPS and stocks tend to play out (hint look at 2007-2008).</p> <p>&nbsp;</p> <p><a href="" rel="attachment wp-att-8524"><img alt="Change In 12 Month EPS" class="aligncenter size-large wp-image-8524" src="" style="width: 599px; height: 385px;" /></a></p> <p>We all know what came next.</p> </blockquote> <p>And guess what?</p> <p>According to <a href="" target="_blank" title="CNBC">CNBC</a>, a lot of the &ldquo;smart money&rdquo; is pulling their money out of the stock market right now while the getting is good&hellip;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Recent market volatility has sent stock market investors rushing for the exits and into cash.</p> <p>&nbsp;</p> <p>Outflows from equity-based funds in 2015 have reached their highest level since 2009, thanks to a seesaw market that has come under pressure from weak economic data, a stronger dollar and the the prospect of monetary tightening.</p> <p>&nbsp;</p> <p>Funds that invest in stocks have seen $44 billion in outflows, or redemptions, year to date, according to Bank of America Merrill Lynch. Equity funds have seen outflows in five of the last six weeks, including $6.1 billion in just the last week.</p> </blockquote> <p>It doesn&rsquo;t matter if you are a millionaire &ldquo;on paper&rdquo; today.</p> <p>What matters is if the money is going to be there when you really need it.</p> <p><u><strong>At the moment, a whole lot of people have been lulled into a false sense of complacency by the soaring stock market and by the bubble of false economic stability that we have been enjoying.</strong></u></p> <p><u><strong>But under the surface, there is a whole lot of turmoil going on.</strong></u></p> <p>Those that are looking for the signs are going to see the next crisis approaching well in advance.</p> <p>Those that are not are going to get absolutely blindsided by what is coming.</p> <p><strong>Don&rsquo;t let that happen to you.</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="300" height="300" alt="" src="" /> </div> </div> </div> Bank of America Bank of America Collateralized Loan Obligations Dallas Fed ETC Market Crash Meltdown Merrill Merrill Lynch Netherlands Recession Smart Money Tyler Durden Volatility World Trade Thu, 02 Apr 2015 00:05:43 +0000 Tyler Durden 504149 at Clintons Unveil Official 2016 Hillary Campaign Button <p>Not an April Fool?</p> <p>&nbsp;</p> <p><a href=""><img src="" width="462" height="350" /></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="462" height="350" alt="" src="" /> </div> </div> </div> Wed, 01 Apr 2015 23:30:39 +0000 Tyler Durden 504140 at Grandson Of Oil Tycoon J. Paul Getty Found Dead, "Traumatic Injury To Rectal Area" Alleged Source Of Death <p>In a story which we initially thought was an early April fool's prank, but subsequently turned out to be all too real, and all too tragic, yesterday afternoon Andrew Rork Getty, the 47-year-old grandson of oil tycoon J. Paul Getty who once was the richest living man in the world and member of the <a href="">Getty trust</a>, was found dead at his Hollywood Hills home, the latest chapter in a saga involving the Getty family which has seen <a href="">kidnappings</a> (including a <a href="">tax-deductible ransom</a> payment), <a href="">mutilations</a>, drug use and now, allegedly, murder.</p> <p><img src="" width="500" height="321" /></p> <p><em>Andrew Getty (pictured), the grandson of oil baron&nbsp;J. Paul Getty</em></p> <p>How the billionaire heir of the Getty trust and son of Ann Getty and Gordon Getty (whom Forbes lists as the 869th richest person in the world and estimates that the Getty family is <a href="">currently $5 billion</a>) died is still murky. </p> <p><a href="">According to NBC</a>, a call came in from an unidentified woman at 2:18 p.m. who reported there was someone dead in the bathroom. A woman who was in the home was being questioned and was being cooperative, said Cmdr. Andy Smith, a Los Angeles police spokesman. </p> <p><iframe src="" width="500" height="360" frameborder="0" scrolling="no"></iframe></p> <p><iframe src="" width="500" height="360" frameborder="0" scrolling="no"></iframe></p> <p>&nbsp;</p> <p>When asked about the cause of death, Los Angeles County Coroner's Assistant Chief Ed Winter told reporters that Getty's death appeared to be "natural or an accident." Cmdr. Andy Smith, a Los Angeles police spokesman added that "<strong>At first glance, it does not appear to be a criminal type of act. </strong>But that could change." </p> <p style="text-align: left;"><img src="" width="499" height="385" /><em>&nbsp;</em></p> <p style="text-align: left;"><em>Above, Investigators gather outside Getty's home in the <br />Hollywood Hills on Tuesday</em></p> <p style="text-align: left;">&nbsp;</p> <p style="text-align: left;"><a href=""><img src="" width="500" height="374" /></a></p> <p style="text-align: left;"><em>The LA County Coroner's office says Getty had not been feeling </em><br /><em>well for months and had a doctor's appointment scheduled for </em><br /><em>the following day</em></p> <p>And here things get tabloidy, if not inaccurate: according to <a href="">Gawker</a>, Getty's ex-girlfriend, who called 911, apparently told the operator he had suffered a cardiac arrest, and TMZ's initial report contained a now-excised reference to a gunshot wound to the face. In an updated post, <a href="">TMZ reports </a>Getty's death involved a <strong>"traumatic injury to the rectal area" with "significant bleeding.</strong>"</p> <p>Additionally, the <a href="">LA Times </a>reports that Getty had sought a restraining order against the woman as recently as two weeks ago. TMZ provides further unverified details:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Our sources say Andrew and his ex-girlfriend have a storied history with the LAPD. Cops have been to his residence 31 times, mostly for domestic disturbances. Our sources say they have both frequently been under the influence of drugs during the police visits. </p> <p>&nbsp;</p> <p>We're told the drugs cops found in the past were prescriptions. </p> <p>&nbsp;</p> <p>As for their relationship, we're told he has a restraining order against her and she has been placed under a 5150 psychiatric hold in the past, after injuring cops when they responded to the house. We're also told she's allegedly broken into Andrew's house on numerous occasions.</p> </blockquote> <p>A subsequent report by the <a href="">LA Times </a>gave the TMZ report credibility when it reported that "a law enforcement source told The Times that Getty was found naked from the waist down in the bathroom of his Hollywood Hills estate Tuesday <strong>and appeared to have suffered from some type of blunt-force trauma. </strong>It's unclear whether the injury was caused by a fall or something else."</p> <p>So to summarize the initial patchwork of facts and evidence, the heir to the man who was once the world's richest died from what appear to be "natural causes", and it wasn't a "criminal act", but it did involves "blunt force trauma", most likely to the rectal area. </p> <p>In retrospect it is not surprising that “the family has requested that members of the media and the public respect its privacy during this extremely difficult time,” a spokesman told the LA Times.</p> <p>What is most surprising is that this latest incident to plague the J. Paul Getty descendants may not be the most lurid. </p> <p><img src="" width="500" height="282" /></p> <p>As <a href="">Forbes recalls</a>, "in 1973, another grandson of J. Paul was kidnapped by Italian gangsters who asked for $17 million in ransom and threatened to send a severed finger as proof. “I have 14 other grandchildren,” Getty told his son, who was pleading for the money, “if I pay one penny now, then I’ll have 14 kidnapped grandchildren.” As the negotiations dragged on, an Italian media organization received a lock of hair and J. Paul III’s ear in the mail. Getty eventually coughed up $3.4 million to buy his grandson’s freedom. Years later, J. Paul III suffered a stroke after heavy drug use in New York which left him paralyzed and practically blind for the rest of his life. Andrew Getty’s father, Gordon, also made headlines for all the wrong reasons when it was revealed that the opera enthusiast and San Francisco socialite had kept a second family secret for a decade."</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="634" height="474" alt="" src="" /> </div> </div> </div> headlines NBC Wed, 01 Apr 2015 23:21:24 +0000 Tyler Durden 504107 at The Committee To Destroy The World <p><em>From <a href="">Michael Lewitt</a>, author of <a href="">The Credit Strategist</a></em></p> <p><strong>The Committee To Destroy The World</strong></p> <p><a href=""><img src="" width="600" height="400" /></a></p> <p><strong><br /></strong></p> <p>Last month, the world mourned the death of beloved actor Leonard Nimoy. Mr. Nimoy, of course, was renowned for his portrayal of the iconic character Mr. Spock on the 1960s television series Star Trek. One of the most memorable Star Trek inventions was the transporter that allowed human beings to be beamed through space and time like light and energy. Investors expecting central bankers to solve the world’s economic problems might as well believe that Janet Yellen is capable of beaming them straight into the Marriner S. Eccles Building in Washington, D.C. Their failure to acknowledge that the Fed is failing to generate sustainable economic growth while contributing to income inequality and crushing debt burdens is inexplicable. Central banks that purport to be promoting financial stability are actually undermining it – with the able assistance of regulators who have drained liquidity from the world’s most important markets.</p> <p>Negative interest rates on $3 trillion of European debt are an obvious sign of policy failure, yet the policy elite stands mute. Actually that’s not correct – the cognoscenti is cheering on Mario Draghi as he destroys the European bond markets just as they celebrated Janet Yellen’s demolition of the Treasury market. Negative interest rates are not some curiosity; they represent a symptom of policy failure and a violation of the very tenets of capitalist economics. The same is true of persistent near-zero interest rates in the United States and Japan. Zero gravity renders it impossible for fiduciaries to generate positive returns for their clients, insurance companies to issue policies, and savers to entrust their money to banks. They are a byproduct of failed economic policies, not some clever device to defeat deflation and stimulate economic growth. They are mathematically doomed to fail regardless of what economists, who are merely failed monetary philosophers practicing a soft social science, purport to tell us. The fact that European and American central banks are following the path of Japan with virtually no objection represents one of the most profound intellectual failures in the history of economic policy history. While the global economy is facing a solvency problem linked to excessive debt accumulation, the world’s central banks are pursuing policies designed for a liquidity problem. That is like treating cancer with a Tylenol. The only solutions in this known universe for a solvency problem are inflation, currency devaluation or default. Maybe Spock has a different solution but he’s been beamed up to a better place and is no longer on call to save us. Since none of these real-world solutions are politically palatable - no leader on today’s world stage has the courage to propose them and would be voted out of office by selfish and short-sighted constituents if he/she did - central banks are left offering huge doses of debt since equity can’t be conjured out of thin air. But all of this debt is just exacerbating the solvency problem and failing to solve the liquidity problem, pushing global markets closer to the brink.</p> <p><strong>The global financial system no longer possesses the productive capacity to generate enough income to sustain current asset values. </strong>The markets refuse to acknowledge this reality, but they will. In a presentation to the Global Interdependence Center on March 23, 2015 in Paris, France, Christopher Whalen, Senior Managing Director and Head of Research at Kroll Bond Rating Agency, gave an unusually frank assessment of the current state of the global economy. Mr. Whalen, one of the best bank analysts on Wall Street, argued that global banks face trillions of bad off-balance sheet debts that must eventually be resolved (i.e. written off) and are dragging on economic growth. These debts include everything from loans by German banks to Greece to home equity loans in the U.S. for homes that are underwater on their first mortgage. Banks and governments refuse to restructure (i.e. write off) these bad debts because doing so would trigger capital losses for banks and governments. As Mr. Whalen explains, “the Fed and ECB have decided to address the issue of debt by slowly confiscating value from investors via negative rates, this because the fiscal authorities in the respective industrial nations cannot or will not address the problem directly.” But in addition to avoiding the bad debt problem, these policies are causing further economic damage by depressing growth and starving savers. Per Mr. Whalen: “ZIRP and QE as practiced by the Fed and ECB are not boosting, but instead depressing, private sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world.” ZIRP has reduced the cost of funds for the $15 trillion U.S. banking system from roughly $500 billion to only $50 billion annually, depriving savers of $450 billion of annual interest income. Zero interest rates are deflationary and sluggish national income growth renders it impossible to validate and sustain the current level of inflated asset prices. This means that any movement away from these policies, as the Fed now appears to be preparing, portends lower asset prices.</p> <p><strong>Investors are continuing to cling for dear life to stocks and bonds trading at unsustainable valuations and denominated in deteriorating fiat currencies</strong>. While it may appear rational to do so in a world in which professional investors are judged based on their relative performance and would rather fail conventionally than succeed unconventionally, true fiduciaries should protect their clients now from the steamroller that is about to run them over. Central banks have destroyed bonds as instruments of prudent investment and forced fiduciaries to buy assets that are going to generate negative real returns. While Mr. Whalen speaks of the trillions of bad debts that are suffocating growth, even the trillions of nominally money-good debts have been placed at risk by the current policy regime. The only reason the system is not yet in crisis is that interest rates are artificially depressed. Low rates have reduced the cost of debt service to manageable levels but done nothing to improve the productive capacity of companies or economies. But time is running out; the U.S. and Europe may be emulating Japan, but they are not Japan. While low interest rates were intended to buy time for fiscal policy makers to implement pro-growth policies and raise incomes needed to service and retire rising debt burdens, nothing of the sort has occurred. As a result, the global economy’s capacity to service its existing debt as well as its future promises is reaching its limits.</p> <p>This leaves currency devaluation, inflation or default as the only possible resolutions to the end of the Debt Supercycle that began 30 years ago. All three are similar in kind because they deprive lenders of repayment of their loans in constant dollars. But that is the nature of debt in human economies; debts are rarely repaid in full in real terms. Human economies pay it forward and time erodes the value of money. Einstein famously said, “The only reason for time is so that everything doesn’t happen at once.” The same is true about debt. Debt was created because everything in economies can’t happen at once; in order to sustain ourselves, some future wealth must be brought forward into the present. In order to do that, we create money that doesn’t yet exist in the form of debt. We then hope to earn that money in the future through our economic activities and eventually repay it. Hyman Minsky taught us that “[c]apitalism is unstable because it is a financial and accumulating system with yesterdays, todays, and tomorrows.” Debt seeks to bridge that instability through the form of contracts that ultimately rely on the good will of those who sign them. <strong>In that light, we can see the real tragedy of negative interest rates: they not only have the perverse effect of reversing the flow of time, but they demonstrate that borrowers are not acting with the good faith incentives normally associated with someone who needs money</strong>. Rather than paying forward, <strong>borrowers are paying backwards because they are effectively trying to return something they don’t want. Such an arrangement renders it impossible for an economy to grow</strong>. By destroying the temporal and moral structure of money, negative interest rates destroy the economy. <strong>When tomorrow cannot be paid, the current regime must fail. The only question to be determined is the form that failure will assume. This may sound like philosophy but it is cold, hard reality.</strong></p> <p>&nbsp;</p> <p><strong>Beam Me Up, Janet!</strong></p> <p><img src="" width="501" height="401" /></p> <p>Another enduring image of Mr. Spock was watching him play three-dimensional chess, a game that demonstrated both his superior intellect and his ability to see the complexities of the universe in ways far beyond the limited abilities of mere mortals. Rather than think in only two dimensions, Spock was able to think in three (or even more). This is something that investors must be able to do in a digitalized world, particularly when currencies start to move as dramatically as they have since last summer. As a citizen of the 23rd century, Mr. Spock was able to envision a digital world that we are only beginning to experience.</p> <p>Today, we inhabit a world in which we are just beginning to deconstruct every conceivable kind of data into different combinations of 1s and 0s that can then be reconfigured and transmitted around the world in the blink of an eye. For example, Israeli cybersecurity company Cyactive, which was just acquired by PayPal, uses evolutionary biology algorithms in its cybersecurity business. Cyactive’s specific area of expertise is predicting malware before it hits a network based on the premise that malware behaves like a virus; it mutates as it spreads. Algorithms are a common digital language that can be applied across biological and non-biological systems. The possibilities are truly as limitless as the space explored by Spock and his fellow travelers.</p> <p>In the financial world, every stock, bond, loan, currency, commodity or derivative can be broken down into its constituent digital parts. Financial technology reveals the underlying reality that all financial instruments are merely different expressions of the same underlying economic information. For example, currencies and interest rates are different versions of the same underlying phenomenon – the cost of money. And while economists have taught us to think about the difference between “real” and “nominal” returns primarily in terms of inflation effects, inflation is inextricably linked to currency movements that affect the cost of money. With interest rates at or near zero and traditional inflation measures suppressed, currencies have picked up the mantle from interest rates for the transmission of real returns on capital. “Real” returns are intended to measure the return on capital in constant currencies, which today means adjusting them primarily for changes in the value of fiat currencies. <strong>Investors are playing on a multi-dimensional chessboard where the pieces are being moved around by increasingly desperate central bankers</strong>. When the currencies in which investments are denominated experience historic levels of volatility (i.e. the euro has dropped by 20% against the dollar since last July), a new dimension enters the investment landscape. <strong>The unstable currency regime has created a highly unstable investment environment that is placing capital at risk.</strong></p> <p>&nbsp;</p> <p><strong>The Cannibal Economy</strong></p> <p>While most investors choose to remain blissfully ignorant about the nominal value of their investments, the real value of what they own is deteriorating. One symptom of the continuing destruction of the economic base is the increasingly cannibalistic nature of economic activity in both the private and public sectors. Instead of investing in the future – or creating a future – public and private sector actors are borrowing from the future while devouring the present. Promises to pay future obligations in constant dollars are literally no longer worth the paper on which they are written because those promises of future payment are being actively debauched. Having mortgaged our future and limited our ability to engage in productive economic activity, public and private economic actors are now consuming themselves.</p> <p>Since 2009, companies in the S&amp;P 500 have spent more than $2 trillion repurchasing their own stock. <strong>These repurchases have accelerated as stock prices have risen, which means that corporations’ appetite to eat their own has increased as their stocks have grown more expensive</strong>. In 2014, members of the S&amp;P 500 bought back $550 billion of their own stock, according to data compiled by S&amp;P Dow Jones Indices. In contrast, investors in mutual funds and ETFs bought only $85 billion of equities last year. Companies announced another $104.3 billion in buybacks in February, the highest on record according to TrimTabs Investment Research. In many cases such as IBM and Herbalife, they borrowed a great deal of money at low Fed-subsidized rates to eat their own.</p> <p>The private sector is merely mimicking what the public sector has adopted as its formal economic policy. Since 2009, the Federal Reserve has purchased $4 trillion of Treasuries and agency securities that are currently sitting on its $4.7 trillion balance sheet. <strong>The European Central Bank has launched a $1 trillion bond purchase program while the Bank of Japan has gone farther and is buying gobs of stock and ETFs (which strikes me as wildly insane</strong>). So governments are also devouring themselves. In the latest version of this phenomenon, the oil market, where supply is outrunning demand, is now consuming itself as massive amounts of product are being bought into storage at what are believed to be low prices. It remains to be seen just how low those prices will prove to be after the final costs of storage and carry are calculated.</p> <p><strong>Any society that eats its own is doomed to perish. I am unaware of any race of cannibals that has thrived in the history of mankind. Eventually they run out of victims.</strong></p> <p>&nbsp;</p> <p><strong>The Fed and the U.S. Economy</strong></p> <p>Markets reacted with their usual irrational exuberance to what they interpreted as a dovish tone in the FOMC’s formal statement after its March 17-18 meeting as well as Janet Yellen’s remarks afterwards. Rather than dovish, however, I believe the Fed is extremely worried. As well it should be. The denizens of the Eccles Building have painted themselves – and the rest of the world – into a corner. The Fed finally acknowledged that the economy is weak and that it doesn’t expect it to strengthen quickly. This is something I have been warning about repeatedly. Neither an over-indebted U.S. economy nor an even more over-indebted global economy is in any position to reach so-called escape velocity. The only velocity that is increasing is the velocity of denial among Fed apologists and stock investors who are going to hit a brick wall at high speed in the not-too-distant future if they don’t snap out of it.</p> <p>After maintaining for months that the economy was improving, the Fed finally acknowledged that it is not. It now expects economic output to expand by between 2.3% and 2.7% in 2015, a downgrade from its December 2014 estimate of 2.6% to 3.0%. Even more important, it lowered its estimate of the non-accelerating inflation rate of unemployment (the unemployment rate below which inflation rises, also known as NAIRU) to 5.0% to 5.2% from 5.2% to 5.5%. This suggests that the Fed sees much more slack in the economy than before. While some might see this downgrade as giving the Fed more time before it needs to raise rates, a Fed that is concerned about low inflation should read it as a signal to accelerate its timetable in order to infuse some inflation into the economy with higher interest rates. But we all know that isn’t going to happen. Instead, the Fed lowered its forecast for the Fed Funds rate by 50 basis points across the board (0.675% by year-end 2015; 1.875% year end 2016; and 3.125% year end 2017). <strong>The economy looks increasingly exhausted.</strong></p> <p>The Fed has been consistent in its failure to forecast the economy with any accuracy, which is as much a commentary on forecasting as on the Fed’s abilities. Based on this track record and its outlook, it is hardly surprising that Mrs. Yellen &amp; Co. are reluctant to raise rates even in the face of rising risks to financial stability posed by interminable zero rates. <strong>Having explicitly targeted asset prices and the so-called “wealth effect” as its policy after the financial crisis, the Fed is terrified of what might happen when it reduces the massive subsidy it has provided to the economy (primarily the wealthy). </strong>The problem with this regime, however, is that <strong>targeting asset prices, particularly stock prices, is far beyond the Fed’s purview and leads to distorted markets, misallocated capital and dangerous long-term economic, social and political consequences</strong>. Why the denizens of the Eccles Building can’t figure that out is best explained by those who awarded them their advanced degrees.</p> <p>With the exception of jobs numbers, the string of disappointing economic data has been unrelenting in 2015. In fact, it would be difficult to point to any positive economic data other than employment data over the last three months. The Bloomberg Economic Surprise Index is at its lowest level since March 2009 and the Citi Surprise Index was recently at its lowest level since 2011. While factors like the West Coast port strike and arctic conditions in the northeast are no doubt having some impact, there is obviously a problem when economic data is flirting with levels last seen at the depths of the recession and the financial crisis. As the March Chicago PMI report stated, “While part of this decline may be attributable to the cold weather snap and strike action at west coast ports, the continued weakness in March points to a wider slowdown in business conditions.” I may have been an outlier when warning about a growth scare last November (just as I remain an outlier regarding the meaning of low oil prices for the U.S. economy), but I would rather be an outlier and correct than part of the consensus and wrong. There is something seriously awry in the U.S. economy. <strong>There is no self-sustaining economic recovery occurring. Instead, there is simply an inexorable build-up of debt that can never be repaid and that is sapping growth. </strong>The incessant flow of negative economic data is not an aberration – it is the new normal.</p> <p>On March 11, Bridgewater’s Ray Dalio warned the Fed that raising rates now risked a 1937-style stock market slump. Mr. Dalio is likely correct that higher rates will strengthen the dollar and contribute to deflationary pressures, but the Fed should not be worrying about the stock market. The policy of targeting asset prices that the Fed adopted after the financial crisis has been an abject failure. The so-called “wealth effect” that these policies were supposed to create only helped those who have wealth; it has damaged the 99% of those who don’t. <strong>Trillions of dollars of direct bond purchases plus trillions of dollars of further subsidies in the form of zero interest rates may have caused the stock market to triple since its March 2009 low, but they have left the U.S. deeply indebted and struggling to grow at 2%.</strong></p> <p>* * * </p> <p><em>Much more in the full letter: <a href="">pdf</a>.</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="600" height="400" alt="" src="" /> </div> </div> </div> Bank of Japan Bond Central Banks Chicago PMI default European Central Bank Fail Federal Reserve France Global Economy Greece Home Equity Hyman Minsky Insurance Companies Irrational Exuberance Janet Yellen Japan New Normal None Rating Agency Ray Dalio Reality Recession recovery TrimTabs Unemployment Volatility Washington D.C. Wed, 01 Apr 2015 23:01:07 +0000 Tyler Durden 504151 at “The Mother of All Bubbles” in Stocks and Bonds: Bank CEO <p>The first quarter was hot across the Eurozone. The euro has gotten purposefully crushed by the ECB’s currency war. QE, first promised then implemented, became all the rage. And stocks surged: the Stoxx Europe 600 was up 16%; Italy’s FTSE MIB index up 22%; and Germany’s DAX also up 22%, the sharpest quarterly gain since Q2 2003. Since January 2012, in a little over three years, the DAX has nearly doubled. Only Greece couldn’t get it together.</p> <p>And bonds have soared to ludicrous levels, with yields turning negative on €2.2 trillion in Eurozone government debt, <a href=""><span style="text-decoration: underline;"><span style="color: #0009c4;">according</span></span></a> to Societe Generale. German government debt is now sporting negative yields up to a 7.5-year maturity, while 10-year yield – at 0.14% as I’m writing this – is on its way to negative as well.</p> <p>So on March 31, Hans-Jörg Vetter, CEO of Landesbank Baden-Württemberg in Germany, spoke at the bank’s annual press conference – and fired a warning shot across the bow of investors.</p> <p>Publicly owned LBBW, a full-service and&nbsp;commercial bank, serves as the central bank for the savings banks in the states of Baden-Württemberg, Rhineland-Palatinate, und Saxony. With €266 billion in assets and over 11,000 employees, it is the largest such <em>Landesbank</em> in Germany. And it too was dutifully bailed out by taxpayers during the financial crisis.</p> <p>And so the press conference had the usual feel-good fare.</p> <p>“Over the past few years LBBW has gained a very good position to operate successfully on a sustained basis amid a difficult environment,” Vetter said in the bank’s <a href=""><span style="text-decoration: underline;"><span style="color: #0009c4;">press release</span></span></a>. “On this basis we are aiming for targeted and risk-conscious growth in our core business areas,” he said. There was a slight improvement in pre-tax profit to €477 million in 2014, from €473 million a year earlier. And for this year, he expected a “moderate” increase in pre-tax profit. He talked about how solid the bank was, and he talked about opening new offices…. It was that sort of press conference.</p> <p>But then, maybe he got off script. That’s when the mundane bank press conference, designed for the taxpayers who own the bank but don’t care and certainly wouldn’t pay attention to it, turned into something that the major German paper <a href=""><span style="text-decoration: underline;"><span style="color: #0009c4;">FAZ</span></span></a> decided to report.</p> <p>Banks, insurance companies and all kinds of funds were taking on huge risks to get through the zero- and negative-yield environment, Vetter said. Alas….</p> <p>“Risk is no longer priced in,” he said. And these investors aren’t paid for the risks they’re taking. This applies to all asset classes, he said. The stock and the bond markets, he said, are now both seeing “the mother of all bubbles.”</p> <p>This can’t go on forever. Or for very long. But he couldn’t see the future either and pin down a date, which is what everyone wants to know so that they can all get out in time. “I cannot tell you when it will rumble,” he said, “but eventually it will rumble again.”</p> <p>By “again” he meant the sort of thing that had taken the bank down last time, the Financial Crisis. It had been triggered by horrendous risk-taking, where risks hadn’t been priced into all kinds of securities. When those securities – mortgage-backed securities, for example, that were hiding the inherent risks under a triple-A rating – blew up, banks toppled.</p> <p>Yet the bailed-out bank would not again engage in such risky transactions and would rather endure lower returns, said Vetter, who was brought in as part of the bailout in 2009 to clean up the mess and put LBBW back on its feet.</p> <p>He warned that it’s hard for banks to make money by lending due to the combination of low interest rates and the effects of competition. There are too many banks in Germany and Europe, he said. They’re all going after medium-sized businesses, and prices for financings have become “critically low,” he said.</p> <p>At the same time, a whole new generation was growing up without the idea of earning interest on savings in the this zero-interest-rate or negative-interest-rate environment. Without that incentive of interest, they aren’t learning to save. And banks won’t be able to play their traditional&nbsp;role as an intermediary to plow those savings back into the economy as loans. So he warned, “I am afraid that we will become only gradually aware of the medium- and long-term consequences of this European debt financing.”</p> <p>We’ve been saying this – “the mother of all bubbles” – for a while, though we may not have used this exact technical term. And we’ve long lambasted this zero-interest-rate and negative-interest-rate environment. But he isn’t just some wayward blogger. He runs a big state-owned bank with responsibilities to taxpayers, a bank that had already taken too many risks that hadn’t been priced in, and when those risks began to exact their pound of flesh during the Financial Crisis, the bank cratered. </p> <p>Central banks have re-created that environment, and similar risks are building up. With terrible consequences that we will know only <em>afterwards</em>. But no top banker,&nbsp;and certainly not a top banker at a state-owned bank, has been allowed to say it publicly. It would be heresy against current central-bank dogma.</p> <p>This “mother of all bubbles” is front and center in the startup scene, where “valuations” have reached a state of delirium.&nbsp;Read… &nbsp;<a href=""><span style="text-decoration: underline;"><span style="color: #0009c4;">It’s Just a Question of Whose Capital Will Be Destroyed </span></span></a></p> Bond Central Banks Eurozone Germany Greece Insurance Companies Wed, 01 Apr 2015 22:51:22 +0000 testosteronepit 504153 at Companies Go All-In Before Rate Hike, Issue Record Debt In Q1 <p>It should come as no surprise that Q1 was a banner quarter for corporate debt issuance as struggling oil producers tapped HY markets to stay afloat, companies scrambled to max out the stock-buyback-via-balance-sheet re-leveraging play before a certain “diminutive” superwoman in the Eccles Building decides to do the unthinkable and actually hike rates, and there was M&amp;A. As we discussed last week, rising stock prices have tipped investors’ asset allocation towards equities even as money continues to flow into bonds, meaning that yet more money must be funneled into fixed income for rebalancing purposes, which ironically drives demand for the very same debt that US corporates are using to fund the very same buy backs that are driving equity outperformance in the first place. Put more simply: the <a href="">bubble machine</a> is in hyperdrive.</p> <p>Not only did Q1 mark a record quarter for issuance, March supply also hit a record at $143 billion, tying the total put up in May of 2008. Here’s more from BofAML:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em><strong>1Q set records for both supply and trading volumes in high grade, as new issue supply volumes reached $348bn,</strong> up from the previous record of $310bn in 1Q- 2014, whereas trading volumes averaged 15.6bn per day, up from the previous record of $14.3bn during the same quarter last year…</em></p> <p>&nbsp;</p> <p><em><strong>Issuance in March totaled $143bn and it tied with May 2008 and September of 2013 for the highest monthly supply on record </strong>going back to at least 1998. September of 2013 was the month when the record $49bn VZ deal was priced…</em></p> <p>&nbsp;</p> <p><em><strong>Supply in March was supported by low interest rates (encouraging opportunistic issuance on the supply side and supporting investor demand by diminishing interest rate risk concerns) and a busy M&amp;A-related calendar. </strong>Some of these trends will continue in April, although investors are becoming more concerned about the Fed hiking cycle…</em></p> </blockquote> <p><a href=""><img src="" width="355" height="286" /></a></p> <p><a href=""><img src="" width="347" height="277" /></a></p> <p>Meanwhile, non-dealers are net short HY for the first time in at least two years:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em><strong>Positioning for CDX HY turned negative </strong>for the first time since at least January 2013. Thus, CDX HY positioning fell to -$1.3bn, from $1.3bn in the prior week, marking a 2.6bn decline.</em></p> </blockquote> <p><a href=""><img src="" width="447" height="297" /></a></p> <p>Speaking of HY, we’ve noted on a number of occasions that QE may have inadvertently contributed to <a href="">disinflation</a> over the past several months as artificially suppressed borrowing costs and the now 5-year old hunt for yield have conspired to allow otherwise insolvent oil producers to keep producing amid the supply glut. As a reminder, here’s what the picture looks like in terms of HY carrying spreads of 1,000bps or more versus last year (note the dramatic increase in energy-related issues):</p> <p><a href=""><img src="" width="351" height="232" /></a></p> <p>And as UBS notes, QE has had a dramatic effect on HY issuance:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>For HY, the picture is crystal clear: In both periods, issuance was $130bn more than average, or about 50% greater than the average amount expected, over an 11 month period…</em></strong></p> <p>&nbsp;</p> <p><em>The main drivers were lower yields, sharp drops in yields (we find that the speed of yield changes plays a significant role in impacting issuance), and strong inflows…</em></p> </blockquote> <p><a href=""><img src="" width="600" height="240" /></a></p> <p>* &nbsp;* &nbsp;*</p> <p>With deeply indebted shale producers beginning to run into trouble as writedowns loom, and with the debt issuance bonanza threatened by an impending rate hike cycle which UBS has shown is likely to push spreads wider, we would say yet again that stock price appreciation driven by balance sheet leverage will continue only until it can no longer continue.&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="355" height="144" alt="" src="" /> </div> </div> </div> Borrowing Costs fixed Wed, 01 Apr 2015 22:30:00 +0000 Tyler Durden 504144 at