http://www.zerohedge.com/fullrss2.xml/feeds/comments/default en Rise In Traveling Hookers, Depressed Gambling, Booze Sales Bode Poorly For US Economy http://www.zerohedge.com/news/2015-04-19/rise-traveling-hookers-depressed-gambling-booze-sales-bode-poorly-us-economy <p>Retail sales <a href="http://www.zerohedge.com/news/2015-03-12/retail-sales-crumble-suffer-worst-run-lehman">rounded out</a> their worst 3-month run since Lehman last month and even as April’s print showed the biggest sequential rise in nearly a year, sales still <a href="http://www.zerohedge.com/news/2015-04-14/retail-sales-misses-4th-month-row-first-time-lehman">missed expectations</a> affording us the opportunity to point out yet another “since Lehman” moment as retail sales haven’t missed for four consecutive months since the end of 2008. This really shouldn’t come as a surprise to those who are paying attention because as we’re fond of pointing out, America’s “non-supervisory” employees (who make up more than three quarters of the workforce) are <a href="http://www.zerohedge.com/news/2015-04-03/great-news-wage-growth-america-has-never-been-higher-your-boss">suffering from</a> declining wage growth and with wage growth now an <a href="http://www.zerohedge.com/news/2015-03-21/near-perfect-correlation-between-wages-and-spending-bodes-poorly-economy">almost perfect</a> predictor of consumer spending, one would expect retail sales to take a hit.&nbsp;</p> <p>Of course this trend doesn’t just affect the Best Buys and Gaps of the world, it also takes its toll on hookers, liquor stores, drug dealers, and casinos and <strong>when sex, drugs, and gambling aren’t selling you can go ahead and kiss your “recovery” hopes goodbye.</strong>&nbsp;</p> <p>With that in mind we present the following chart which shows that Andrew Zatlin’s Vice Index nearly printed in contraction territory in March and at 100, the index is dangerously close to indicating that America’s spending on “the fun stuff” (to quote Zatlin) looks set to fall.&nbsp;</p> <p><img src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/ViceIndex.jpg" width="498" height="257" /></p> <p>Here’s some color from <a href="http://www.financialsense.com/contributors/andrew-zaitlin/vice-spending-slows-unless-you-ve-got-herb">Zatlin</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em><strong>Vice spending leads the way, both in terms of inclination and ability to spend.</strong> If luxury good spending is sensitive to shifts in the economic winds, vice is even more so. One thing that sets it apart from other types of consumer spending (besides being frequently illegal) is that it’s typically a cash-based transaction. You can’t buy pot with a credit card (not yet anyhow). Another distinguishing factor is that vices are not cheap. A prostitute costs almost two days of after-tax wages. Gambling in Vegas is potentially more. The consumer’s stack of money has to be a certain height before they can get on that ride. The vice economy lives and dies according to cash flow; by how much money is burning a hole in the consumer’s pocket…</em></p> <p>&nbsp;</p> <p><em>The Moneyball Economics Vice Index is the first index that quantifies these forms of spending. It has been shown to accurately lead consumer spending by at least two months. <strong>Right now, it is showing evidence of subdued consumer spending over the past few months.</strong></em></p> <p>&nbsp;</p> <p><em>In fact, the Index just slipped to 100. A figure below 100 means that consumer spending is actually contracting. No doubt a lot of the recent sluggishness is weather related, but the trend is undeniable:<strong> consumers are spending less on the fun stuff, and that means more belt-tightening is about to occur.</strong></em></p> </blockquote> <p>And if you really want to know how bad it is out there, look no further than the traveling hooker indicator:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>When Van Halen goes on tour, it’s to greet the fans and boost the paycheck. Similarly, when an escort goes on tour, it’s to press the flesh and get some money. Except, in the business of vice, escorts go touring because the local waters have been fished out.</em></p> <p>&nbsp;</p> <p><em>There are several key selling points in the Hookernomics business model which traveling escorts hope to capitalize on:</em></p> <ul> <li><em style="font-size: 1em; line-height: 1.3em;">Novelty: “New and Improved” is a standard consumer lure, and it fits the escorting business as much as the toothpaste business.</em></li> <li><em style="font-size: 1em; line-height: 1.3em;">Limited Availability: An escort who announces that they are “visiting and in town for just a few days” is straightforward Sales 101. Create a sense of urgency and exclusiveness.</em></li> </ul> <p><strong><em>Tours are an expensive proposition (ahem) for an escort and a general pain in the ass. Travel time, hotels, transportation fees, dining out – costs add up fast. Also the tour is financially risky. There’s no guarantees of profit, which means that the alternative – staying put and fishing local waters – must be even worse. Simply put, escorts go on tour when the phones aren’t ringing enough.</em></strong></p> </blockquote> <p>As Zatlin goes on to note, it’s not just prostitution that’s slowing. Spending on gambling and alcohol fell in February as well and if you’re inclined to agree with the notion that trends in cash-based businesses are a good leading indicator when it comes to assessing where consumer spending (and thus the US economy) is headed going forward, you should expect the string of retail sales misses to continue. </p> <p>Of course the punchline to the whole thing is that just like weakness in the “real” economy, depressed hooker, booze, and gambling sales are also blamed, at least in part, on the weather.&nbsp;</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>There’s a theme here. Prostitution slowed in February. Gambling slowed in February. Even drinking alcohol slowed down. According to GuestMetrics (which tracks 10,000 restaurants and bars) boozing at bars was up in January and then contracted in February. The common denominator: bad weather.</em></p> </blockquote> <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="489" height="274" alt="" src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/HookerTeaser.png?1429482763" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/rise-traveling-hookers-depressed-gambling-booze-sales-bode-poorly-us-economy#comments Gambling Lehman Mon, 20 Apr 2015 00:45:00 +0000 Tyler Durden 505011 at http://www.zerohedge.com What Happens When A Russian Surface-To-Air Missile Launch Goes Horribly Wrong http://www.zerohedge.com/news/2015-04-19/what-happens-when-russian-surface-air-missile-launch-goes-horribly-wrong <p>Shortly after Russia <a href="http://www.zerohedge.com/news/2015-04-13/proxy-war-escalates-russia-lifts-ban-selling-anti-aircraft-missiles-iran">announced early last week </a>that it would take advantage of the lifting of the Iran sanctions and proceed to deliver an unknown number of S-300 "defensive" surface-to-air missiles, <a href="http://in.sputniknews.com/russia/20150414/1014117037.html">the Kremlin </a>sought to reassure Israeli Prime Minister Benjamin Netanyahu that any deliveries of these to Iran will not threaten Israel's security. </p> <p>Judging by the following video which captures what happens when a launch of a S-300 SAM goes horribly wrong (and the immediate stunned aftermath), he may very well be right. </p> <p><iframe src="https://www.youtube.com/embed/FoM5a6v6410" width="560" height="315" frameborder="0"></iframe></p> <p>That, or the Russian troops were simply showcasing what will happen one day when no amount of Mario Draghi threats can push the EURUSD higher any longer.</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="798" height="585" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/SAM%20oops.jpg?1429488123" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/what-happens-when-russian-surface-air-missile-launch-goes-horribly-wrong#comments Iran Mon, 20 Apr 2015 00:10:45 +0000 Tyler Durden 505012 at http://www.zerohedge.com Forget The Snow, It's The Drought That Is Crushing The US Economy http://www.zerohedge.com/news/2015-04-19/forget-snow-its-drought-crushing-us-economy <p>With all eyes and talking heads focused on the &#39;weather&#39;, it seems cold, wet, snowy, and frigid are the most GDP-destructive adjectives. However, <a href="http://www.bloomberg.com/news/articles/2015-04-16/the-drought-s-latest-victim-out-west-is-the-housing-market">as Bloomberg reports,</a> the <strong>drought out West is starting to infiltrate U.S. housing data</strong>, according to the chief economist of a homebuilders&#39; group, and weakening a major part of the nation&#39;s economy.</p> <p>&nbsp;</p> <p><a href="http://www.bloomberg.com/news/articles/2015-04-16/the-drought-s-latest-victim-out-west-is-the-housing-market"><em>As Bloomeberg reports,</em></a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><u><strong>Housing starts in the West fell for a third straight month, dropping by 19 percent in March to an annualized rate of 201,000 for the weakest since May. </strong></u>Construction rebounded from harsh winter weather in other parts of the country, such as the Northeast, where they jumped a record 115 percent, and the Midwest.</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_drought.jpg"><img height="302" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_drought_0.jpg" width="600" /></a></p> <p>&nbsp;</p> <p><strong>The weakness in the West might reflect the record-setting drought, which may be discouraging companies from building or taking out permits for new construction</strong>, said David Crowe, chief economist at the National Association of Home Builders in Washington. Uncertainty surrounding local water policy and the ability to obtain water connections for new homes or apartment buildings could be holding some builders back, he said.</p> <p>&nbsp;</p> <p><strong>&quot;Until it&#39;s clear what restrictions mean for new building, it&#39;s wise for builders to be hesitant,&quot; </strong>Crowe said. &quot;This is more serious than just a temporary dry period. This is a new regime that says it&#39;s going to be harder to obtain additional water usage.&quot;</p> </blockquote> <p>And it&#39;s not just California...</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><u><strong>About 21 percent of the contiguous U.S. fell in the &quot;moderate&quot; to &quot;extreme&quot; drought categories at the end of March</strong></u>, according to the Palmer Drought Index, which dates back to the beginning of the 20th century.</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_drought1.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_drought1_0.jpg" style="width: 600px; height: 428px;" /></a></p> <p>&nbsp;</p> <p>States such as California, Nevada and Wyoming were experiencing extreme drought in some or all of their boundaries last month, according to the National Climatic Data Center.</p> </blockquote> <p>Of course, this weakness is transitory - just like the multi-decade drought that is being forecast; but analysts are ever full of hope:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>&quot;When it comes to new-home construction, the stage is set for strength in the second quarter,&quot; </strong>Patrick Newport and Stephanie Karol, U.S. economists at IHS Global Insight, wrote in a note to clients.</p> </blockquote> <p>Tomorrow... just you wait...</p> <p><iframe frameborder="0" height="360" src="https://www.youtube.com/embed/Yop62wQH498" width="480"></iframe></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="686" height="489" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150419_drought1.jpg?1429474567" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/forget-snow-its-drought-crushing-us-economy#comments Housing Starts Sun, 19 Apr 2015 23:45:14 +0000 Tyler Durden 505007 at http://www.zerohedge.com Is The Credibility Bubble Bursting? http://www.zerohedge.com/news/2015-04-19/credibility-bubble-bursting <p><a href="http://dollarcollapse.com/currency-war-2/is-the-credibility-bubble-bursting/"><em>Submitted by John Rubino via Dollar Collapse blog</em></a>,</p> <p>In a fiat currency system, <strong>perception is, by definition, everything</strong>. Paper money has no intrinsic value. So the people saving it and accepting it in exchange aren&rsquo;t expressing faith in the money itself but in the competence and honesty &mdash; and power &mdash; of the institutions managing it.<strong> Let that faith erode and those slips of colored paper and ephemeral computer bits revert to their intrinsic value.</strong></p> <p><u><strong>And on the credibility front, the trends aren&rsquo;t encouraging.</strong></u> Consider the coverage of this weekend&rsquo;s Washington DC meetings of the International Monetary Fund and World Bank, two global financial institutions that the US dominates. From the New York Times:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><span style="text-decoration: underline;"><strong><a href="http://www.nytimes.com/2015/04/18/business/international/at-global-economic-gathering-concerns-that-us-is-ceding-its-leadership-role.html" target="_blank">At global economic gathering, concerns that US is ceding its leadership role</a></strong></span></p> </blockquote> <p>This article is available only to subscribers, but a similar one from India&rsquo;s Business Standard makes many of the same points:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><span style="text-decoration: underline;"><strong><a href="http://www.business-standard.com/article/international/us-primacy-seen-ebbing-at-global-meet-115041800726_1.html" target="_blank">US primacy seen ebbing at global meet</a></strong></span></p> <p>&nbsp;</p> <p>As world leaders converge here for their semiannual trek to the capital of what is still the world&rsquo;s most powerful economy, concern is rising in many quarters that the United States is retreating from global economic leadership just when it is needed most.</p> <p>&nbsp;</p> <p>The spring meetings of the International Monetary Fund and World Bank have filled Washington with motorcades and traffic jams and loaded the schedules of President Obama and Treasury Secretary Jacob J Lew. But they have also highlighted what some in Washington and around the world see as a United States government so bitterly divided that it is on the verge of ceding the global economic stage it built at the end of World War II and has largely directed ever since.</p> <p>&nbsp;</p> <p>&ldquo;It&rsquo;s almost handing over legitimacy to the rising powers,&rdquo; Arvind Subramanian, the chief economic adviser to the government of India, said of the United States in an interview. &ldquo;People can&rsquo;t be too public about these things, but I would argue this is the single most important issue of these spring meetings.&rdquo;</p> <p>&nbsp;</p> <p>Other officials attending the meetings this week, speaking on the condition of anonymity, agreed that the role of the United States around the world was at the top of their concerns.</p> <p>&nbsp;</p> <p>Washington&rsquo;s retreat is not so much by intent, Mr. Subramanian said, but a result of dysfunction and a lack of resources to project economic power the way it once did. Because of tight budgets and competing financial demands, the United States is less able to maintain its economic power, and because of political infighting, it has been unable to formally share it either.</p> <p>&nbsp;</p> <p>Experts say that is giving rise to a more chaotic global shift, especially toward China, which even Obama administration officials worry is extending its economic influence in Asia and elsewhere without following the higher standards for environmental protection, worker rights and business transparency that have become the norms among Western institutions.</p> </blockquote> <p>And check out this exchange on CNBC&rsquo;s Fast Money traders roundtable:</p> <p><iframe allowfullscreen="true" bgcolor="#131313" height="298" src="http://player.theplatform.com/p/gZWlPC/cnbc_global?playertype=synd&amp;byGuid=3000372147&amp;size=530_298" type="application/x-shockwave-flash" width="530"></iframe></p> <p><strong>Suddenly it&rsquo;s okay, even on CNBC, to question not just Fed policy but the character of its chairmen.</strong></p> <p>What&rsquo;s important here isn&rsquo;t the sentiment but the source. Peter Schiff or Gerald Celente can point out America&rsquo;s moral and technical dysfunction all day long, but by now they&rsquo;re mostly just preaching to the choir. The New York Times and CNBC, however, are virtual branches of the US government, trading in access to the folks running the big institutions and profiting from the latter&rsquo;s machinations. <u><strong>If the government loses them, it loses everything.</strong></u></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="565" height="621" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150419_cred.jpg?1429473027" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/credibility-bubble-bursting#comments China India International Monetary Fund New York Times Obama Administration Peter Schiff President Obama Transparency World Bank Sun, 19 Apr 2015 23:10:36 +0000 Tyler Durden 505006 at http://www.zerohedge.com You Think Your Job Is Bad http://www.zerohedge.com/news/2015-04-19/you-think-your-job-bad <p>Meet Zhang Shuang - <em>Cliff-Cleaning Litter-Collector...</em></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff8.jpg"><img height="800" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff8.jpg" width="533" /></a></p> <p>&nbsp;</p> <p>Cleaner Zhang Shuang collects litter dropped by tourists on the cliff of Laojun Mountain, 2,000 meters above sea level, in Luoyang, Central China&rsquo;s Hunan province.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff1.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff1.jpg" style="width: 600px; height: 454px;" /></a></p> <p>&nbsp;</p> <p>&nbsp;<strong>Zhang Shuang risks his life to abseil down the cliff every three to five days for the past eight years as a cleaner.</strong> He calls for tourists to stop littering and polluting the environment.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff4.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff4_0.jpg" style="width: 600px; height: 400px;" /></a></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff2.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff2_0.jpg" style="width: 600px; height: 453px;" /></a></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff9.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff9_0.jpg" style="width: 600px; height: 400px;" /></a></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff10.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_cliff10_0.jpg" style="width: 600px; height: 400px;" /></a></p> <p>&nbsp;</p> <p>...And all that for less than US minimum wage?</p> <p>&nbsp;</p> <p><a href="http://en.people.cn/n/2015/0418/c90882-8880240.html"><em>Source: English.People.CN</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="533" height="800" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150419_cliff8.jpg?1429467462" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/you-think-your-job-bad#comments China Sun, 19 Apr 2015 22:35:18 +0000 Tyler Durden 505004 at http://www.zerohedge.com Money Printing And The Bane Of Financial Engineering - How The Biggest LBO In History Blew-Up http://www.zerohedge.com/news/2015-04-19/money-printing-and-bane-financial-engineering-how-biggest-lbo-history-blew <p><a href="http://davidstockmanscontracorner.com/money-printing-and-the-bane-of-financial-engineering-how-the-biggest-lbo-in-history-blew-up/"><em>Submitted by David Stockman via Contra Corner blog</em></a>,</p> <p><strong>Financial engineering is one of the worst ills perpetuated by the Fed&rsquo;s regime of cheap debt and money market subsidies for speculation. </strong>And these deformations are turbo-charged by the tax code which creates a powerful bias toward loading capital structures with tax deductible debt, and to delivering returns as lightly taxed capital gains rather than ordinary income. &nbsp;In fact, <strong>stock buybacks and LBOs are the bastard offspring of the IRS and Federal Reserve.</strong></p> <p>Indeed, it would be safe to say that <strong>in an honest free market with a neutral tax regime, LBOs in particular would be as rare as a white buffalo.</strong> That&rsquo;s because they inherently cause waste, inefficiency and malinvestment&mdash;&ndash;the opposite of market driven results.&nbsp; These deadweight losses to society are, in turn, the product of a symbiotic arrangement of convenience between an avaristic breed of money&nbsp;manger&mdash;&mdash;private equity funds&mdash;&ndash;and institutional investors, such as pension funds and insurance companies, which have a desperate need for yield in a financial system where returns on conventional fixed income securities are systematically repressed by the central bank.</p> <p><strong>Private equity managers are tax-enabled speculators</strong>. Their winnings come in the form of a 20% carried interest on the thin slice of equity at the bottom of an LBO capital structure. This 20% share of the return earned by the limited partners (LPs), who actually put up the money and bear the extreme risk of being pinned under a mountain of debt, might arguably be considered generous. But&nbsp;there is no way that it should be considered a capital gain. It is nothing more than the service fee earned for managing other people&rsquo;s money.</p> <p>Needless to say, the taxation once over lightly of carried interest winnings as capital gains creates a humungous incentive to swing for the fences, thereby exacerbating the inherent risk asymmetry of the LBO business model. <strong>In short, carried interest driven private equity managers loose nothing on bad bets&mdash;&mdash;100% of the losses go to the LPs.&nbsp; But 16% of what are often massive upsides in winning deals go to the titans of private equity on a&nbsp;tax free basis&nbsp;(i.e. 80% of 20%).</strong></p> <p>The fact is, there are a few thousand private equity partners who have captured hundreds of billions in winnings from this arrangement during the past 2-3 decades. And they have done so notwithstanding the fact that they have created hundreds of billions of financial losses&mdash;-some of them spectacular as in the TXU case described below&mdash;-in the process of harvesting their loot.</p> <p>How can this be?&nbsp;<u><em><strong> Call it asymmetrical averaging</strong></em>.</u>&nbsp; That is, due to their high leverage LBO&rsquo;s inherently created spectacular wins but only humdrum losses at the equity investor level. In the case of a $1 billion deal funded with $200 million of equity and $800 million of debt, for example, a doubling of the value of the LBO company over say&nbsp;five years results in a distribution of $800 million to the debt investors and $1.2 billion to the equity investors. The private equity managers, in turn, take 20% or $200 million of the billion gain.</p> <p><strong>Needless to say, everyone is happy.</strong> The LPs made 4X their money ($800 million of profit)&nbsp;even after paying the carried interest, and the private equity managers walked off with $160 million of&nbsp;after-tax gains&nbsp;for investing, well, nothing!</p> <p>At the same time, consider what happens when a deal comes a cropper. Say after 5 years, the value of the LBO company has been cut by 50% to $500 million. In that event, the LP&rsquo;s lose their entire $200 million investment, the junior debt investors or junk bonds lose $300 million and the private equity managers loose nothing except some face.</p> <p><strong>But the key thing is they do not lose their business in the big leagues of private equity finance just because one deal blows up or even several deals. </strong>Indeed, institutional investors expect LBOs to blow up because they are playing a game of averaging up to a higher yield.&nbsp; So in the case of four $1 billion deals in which they invested $200 million in each, they could actually have two wipeouts, one&nbsp;10% return deal and one home run of the type described above.</p> <p>In that event, they would recover $1.25 billion on $800 million or a 56% gain over five years. That computes to 10% per annum&nbsp;after fees&mdash;&mdash;-far more than available on risk free government bonds or even corporates.</p> <p><strong>This all sounds like financial magic, but it&rsquo;s really a financial deformation. </strong>Without the Fed-driven quest for yield and the tax deductibility of debt, there would be no multi-trillion junk bond market. And without junk bonds to absorb the losses from LBOs which blow-up, the returns to LPs would be dramatically lower and more reflective of the actual risk being incurred.</p> <p>It goes without saying, of course,&nbsp;that the anomaly of massive carried interest&nbsp;windfalls to the private equity&nbsp;titans exists only due to tax and capital market deformations.<strong>&nbsp;Yes, there&nbsp;is a myth that says LBOs exploit the inefficiency of the public equity market and that, under the&nbsp;pressure of heavy debt obligations and equity-incentivized management teams, they are able to wring costs and&nbsp;efficiencies out of company operations.&nbsp;But that is self-serving propaganda.</strong></p> <p>Private equity exists because institutional investors are receiving <em><strong>falsely inflated returns</strong> </em>from their LP investments in the so-called alternative asset space. The only excess returns which occur there are the result of tax subsidies and central banks financial repression of interest rates.</p> <p><strong>Accordingly, the averaging-up of home runs and busted deals in the private equity business does not reflect real economic gains on a net basis</strong>; and the losses that occur in the busted deals have no economic purpose&mdash;- unlike say losses in a venture capital deal when a promising idea simply fails to pan out.</p> <p>What&nbsp;busted LBOs&nbsp;do, instead,&nbsp;is generate huge transactions costs in the so-called work-out space where legions of lawyers, bankers, accountants, consultants and speculators make a killing on the carcass of busted deals. But these are dead weight losses to society that would not occur in an honest free market because the cratered deals would not have been done in the first place.</p> <p><strong>This is all by way of saying that&nbsp;the greatest busted LBO of all-time,&nbsp;and the wasted economic resources which it generated during&nbsp;its prolonged&nbsp;bankruptcy, workout and recapitalization process&nbsp;is nearing its baleful conclusion right now. Namely, the TXU fiasco, which was the largest LBO in history at $47 billion.</strong></p> <p>Based on current indications, it appears that investors in the $40 billion of debt which went into the deal will recover about 40 cents on the dollar. <em><strong>So investment losses will be in the range of $24 billion plus several billions more of transactions costs consumed in the bankruptcy.</strong></em> All of this represents capital wasted and malinvested owing to&nbsp;falsification of debt prices by the central bank and the deep bias of the tax code toward debt and speculative capital gains.</p> <p>Even when LBOs avoid the fate of TXU&mdash;&mdash;-harm is still done. That&rsquo;s because the capital structure of most&nbsp;businesses needs to have the flexibility that is inherent in equity securities. Namely, the ability to vary the current return to investors based on short-term business conditions, competitive opportunities/threats and cash flow timing issues.</p> <p>By contrast, heavily leveraged LBO&rsquo;s&nbsp;transform managers and executives into&nbsp;slaves to the bi-annual coupon payment to junk bonds&nbsp;and monthly loan service to the senior lenders.&nbsp;Through a process both&nbsp;overt and subtle,&nbsp;cash flows are systematically under-applied&nbsp;to business development, staffing and capital improvements in favor of&nbsp;meeting interest obligations&nbsp;and&nbsp;paying down&nbsp;principal.</p> <p><strong>Stated differently, cash disposition in the context of LBOs is not a market driven process that adds to economic efficiency and productivity; it is an artificial&nbsp;byproduct of tax and central bank distortions of the free market.</strong></p> <p>In sum, the LBO variant of financial engineering generates large market inefficiencies when it works; huge transaction costs and&nbsp;waste when they blow-up; and&nbsp;endless windfalls to the practitioners on both sides of the life cycle.&nbsp; That is, the private equity mavens who harvest the carried interest&nbsp;windfalls from averaging up the homeruns and busted deals in a private equity portfolio, and the vulture investors who work the bankruptcy process and feast off the carcass.</p> <p>The excerpt below from <em><strong>The Great Deformation</strong> </em>underscores<u><strong> how the TXU deal blew-up and why it would never have happened in an honest free market.</strong></u></p> <p><a href="http://www.amazon.com/gp/product/1586489127/ref=as_li_tf_il?ie=UTF8&amp;camp=211189&amp;creative=373489&amp;creativeASIN=1586489127&amp;link_code=as3&amp;tag=davistoccontc-20"><em><strong>From The Great Deformation</strong></em></a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>The wildest speculators in Leo Melamed&rsquo;s pork-belly rings at the Chicago Merc could never have dreamed up a commodity trade as fantastical as that underlying the $47 billion LBO of TXU Corporation. It was basically a bet on a truly aberrational price gap between cheap coal and expensive natural gas&mdash;a &ldquo;fuels arb&rdquo;&mdash;that couldn&rsquo;t possibly last. So the largest LBO in history was the ultimate folly of bubble finance.</p> <p>&nbsp;</p> <p><img alt="" border="0" height="1" src="http://ir-na.amazon-adsystem.com/e/ir?t=davistoccontc-20&amp;l=as2&amp;o=1&amp;a=1586489127" style="border: none !important; margin-left: 6px !important;" width="1" /></p> <p>THE TEXAS GAS BUBBLE MASSACRE</p> <p>&nbsp;</p> <p>Electric power utilities are normally stable generators of cash flow, plodding along a tepid path of growth. But TXU&rsquo;s financial results in the year before its February 2007 buyout deal had been mercurial, making its initially&nbsp;benign leverage ratios an illusion. Thus, TXU had posted about $11 billion of revenue and $4.5 billion of operating income prior to the buyout, but by fiscal 2011 the company&rsquo;s sales were down by 35 percent, to $7 billion, and operating income was just $960 million. Its bottom line had plummeted by nearly 80 percent from the pre-LBO level.</p> <p>&nbsp;</p> <p>Accordingly, the company&rsquo;s leverage ratio has become a horror show. Its fiscal 2011 debt stood at $36 billion and thereby amounted to nearly thirty&nbsp;eight times its reported operating income. In LBO land that ratio is beyond the pale&mdash;it&rsquo;s a veritable financial freak.</p> <p>&nbsp;</p> <p>How the largest LBO in history ended up this far off the deep end is a crucial question because it goes right to the heart of the great deformation of finance. The TXU deal is the financial &ldquo;Vietnam&rdquo; of the Greenspan bubble era, not some dismissible aberration from the main events. It was sponsored by the &ldquo;best and brightest&rdquo; in the private equity world including KKR, the founding fathers of LBOs, and David Bonderman&rsquo;s TPG, which was also a successful LBO pioneer of legendary rank.</p> <p>&nbsp;</p> <p>Since the equity portion of the financing at $8 billion was only 17 percent of the total capitalization, TXU&rsquo;s existing $12 billion of conventional utility debt had to be tripled, to $38 billion, in order to close the deal. Ac- cordingly, Wall Street had a money orgy coming and going. Fees on the new deal exceeded $1 billion, and at the LBO closing there was an epic $32 bil- lion payday for selling shareholders, including the hedge funds which had front-run the deal.</p> <p>&nbsp;</p> <p>At the time, the reckless wager embodied in the TXU buyout was rationalized as nothing special. The purchase price at 8.5 times EBITDA was purportedly in line with the 7.9X average for publicly traded utilities. Yet when the onion was peeled back by a year or two it became clear that the buyout was being set up at a lunatic multiple: an astonishing 18X the company&rsquo;s EBITDA in 2004.</p> <p>&nbsp;</p> <p>This jarring difference reflected the fact that TXU&rsquo;s income was temporarily and drastically inflated by a utility deregulation bubble floating on top of a natural gas bubble. Under the Texas deregulation scheme, wholesale electric power prices were set by the marginal cost of supply, which was natural gas fired power plants. But TXU generated most of its power from lignite coal and uranium, so when natural gas prices soared its own fuel costs remained at rock bottom. The company&rsquo;s revenue margin over the cost of fuel, therefore, also soared, rising from 38 percent in 2004 to nearly 60 percent in 2006. The gain was pure profit.</p> <p>&nbsp;</p> <p>If deregulation meant a permanent increase in TXU&rsquo;s profit margins, of course, the heady February 2007 LBO valuation of its current cash flow might have made sense. The underlying reality, however, was that the price of wholesale electric power in Texas at the moment had been inflated by a humongous natural gas price bubble which flared-up in the wake of Hurricane Katrina&rsquo;s August 2005 disruption of offshore gas production.</p> <p>&nbsp;</p> <p>Natural gas prices had soared to the unheard of range of $10 and $15 per thousand cubic feet (Mcf ), compared to a band of $2&ndash;$5 per Mcf that had prevailed for years. So TXU&rsquo;s fulsome cash flow was running on the afterburners, as it were, of one of the greatest commodity bubbles of recent times.</p> <p>&nbsp;</p> <p>At the same time that TXU was booking revenues of 13.7 cents per Kwh based on natural gas prices, the fuels cost at its base-load nuke plants was 0.4 cents per kWh and just 1.2 cents in its lignite coal plants. Thus, at the coincident peaks of the Greenspan credit bubble and the natural gas price bubble in February 2007, TXU was selling electric power at 12X and 36X the cost of its lignite- and uranium-based power, respectively.</p> <p>&nbsp;</p> <p>These markups were off-the-charts crazy. Even after absorption of modest fixed operating costs (labor and maintenance) at its power plants and&nbsp;corporate overhead, the profits were staggering. It was only a matter of time, therefore, until the natural gas bubble ruptured and TXU&rsquo;s power margins came crashing back to earth.</p> <p>&nbsp;</p> <p>HOW THE FED HELPED BUSHWHACK TXU</p> <p>&nbsp;</p> <p>As it happened, the Fed&rsquo;s rock-bottom interest rates were contagious and fueled a boom in debt-financed gas drilling that soon caused supplies to soar and natural gas prices to plummet. In this manner, the power plant &ldquo;fuels arb&rdquo; was flattened and with it the company&rsquo;s financial results. The Fed thus unintentionally bushwhacked the largest LBO in history. So doing, it demonstrated just how badly the nation&rsquo;s central bank had mangled the free market.</p> <p>&nbsp;</p> <p>When Bernanke slashed interest rates to nearly zero, it triggered a Wall Street scramble for &ldquo;yield&rdquo; products to peddle to desperate investors&mdash;at the very time that the natural gas patch was swarming with drillers willing to issue just such high yielding securities. The natural gas price bubble had encouraged a drilling boom based on horizontal wells and chemical flooding of gas reservoirs. This &ldquo;fracking&rdquo; process can liberate prodigious amounts of natural gas that otherwise would remain trapped in low-porosity shale reservoirs, but it also slurps capital in vast amounts: fracked wells generate bountiful gas output during their first few months of production but then peter out rapidly. Thus, the whole secret of the so-called fracking revolution was to drill, drill, and keep drilling.</p> <p>&nbsp;</p> <p>The tens of billions of fresh cash required for the shale-fracking play was not a problem for the fast-money dealers of Wall Street, who had just the answer: namely, high-yielding natural gas investments called VPPs (vol ume production payments). These were another form of opaque off-balance sheet debt. In this case investors provided up-front funding for gas wells in return for a fat yield and a collateral claim on the gas.</p> <p>&nbsp;</p> <p>Accordingly, a flood of Wall Street money found its way to red-hot shale gas drillers like XTO, which was soon swallowed whole by ExxonMobil, and to the kingpin of the shale-fracking play, Chesapeake Energy. Its balance sheet grew explosively between 2003 and 2011, with proven reserves rising from 2 trillion cubic feet to 20 trillion and total assets climbing from $4 billion to $40 billion.</p> <p>&nbsp;</p> <p>It was virtually limitless Wall Street drilling money that accounted for this pell-mell expansion. During this same eight-year period, Chesapeake&rsquo;s outstanding level of &ldquo;high yield&rdquo; borrowings&mdash;bonds, preferreds, and VPPs&mdash; rose by 10X.</p> <p>&nbsp;</p> <p>This debt-driven explosion of reserves, production, and injected storage eventually left giant drillers like Chesapeake gasping for solvency; massive new gas supplies caused prices to steadily weaken and then crash. By the spring of 2012, natural gas was trading at a price so devastatingly low ($2.50 per Mcf ) that even the monster of the gas patch, ExxonMobil, cried uncle. &ldquo;We are losing our shirts&rdquo; complained its CEO, Rex Tillerson.</p> <p>&nbsp;</p> <p>With little prospect that natural gas will revive anytime soon, TXU&rsquo;s revenues and operating income will remain in the sub-basement. The $36 billion of LBO debt raised at the top of the Greenspan bubble is therefore almost certain to default (note: it did!)&nbsp;owing, ironically, to the aftershocks of the even larger debt bubble which fueled the fracking binge.</p> <p>&nbsp;</p> <p>The larger point is that artificially cheap debt causes profound distortions, dislocations, and malinvestments as it wends its way through the real economy. In this case underpriced debt</p> <p>&nbsp;</p> <p>fostered a giant, uneconomic LBO and also massive overinvestment in natural gas fracking. <em><strong>When the collision of the two finally brings about the thundering collapse of the largest LBO in history, there should be no doubt that it was fostered by the foolish money printers in the Eccles Building and the LBO funds who took the bait.</strong></em></p> </blockquote> <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="271" height="284" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150419_LBO.jpg?1429464550" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/money-printing-and-bane-financial-engineering-how-biggest-lbo-history-blew#comments 8.5% Bond Central Banks Chesapeake Energy default Federal Reserve fixed High Yield Institutional Investors Insurance Companies KKR LBO Natural Gas Private Equity Reality Rex Tillerson The Onion Uranium Sun, 19 Apr 2015 22:00:35 +0000 Tyler Durden 505000 at http://www.zerohedge.com Draghi Tells Euro Shorts To "Make His Day", Again http://www.zerohedge.com/news/2015-04-19/draghi-tells-euro-shorts-make-his-day-again <p>With a “defiant” Syriza <a href="http://www.zerohedge.com/news/2015-04-19/despite-urges-and-threats-greece-remains-defiant-wont-budge-red-lines-even-russia-de">determined to hold onto</a> any shred of dignity and legitimacy that may remain in the wake of months of painful negotiations with its creditors and with a €5 billion <a href="http://www.zerohedge.com/news/2015-04-18/greek-white-knight-emerges-putin-give-athens-%E2%82%AC5-billion-advance-gas-pipeline-fees">advance from Russia</a> (a large chunk of which will promptly be paid to the IMF which use it to bailout Ukraine which will hand it right back to Russia) shaping up to be the last lifeline for Greece before Athens is reduced to issuing IOUs to pay pensions and salaries, the focus is beginning to shift away from Grexit and towards contagion risk.&nbsp;</p> <p><strong>The worry is that once Greece goes, both the credit market and periphery depositors will suddenly realize that the EMU is not “indissoluble,” but is in fact nothing more than a confederation of fixed exchange rates.</strong> This realization could (and to a certain extent <a href="http://www.zerohedge.com/news/2015-04-16/contagion-arrives-european-peripheral-bond-risk-soars">already has</a>) cause credit investors to begin pricing redenomination risk back into sovereign spreads and, far more importantly (because as UBS recently noted, bonds don’t cause breakups, <a href="http://www.zerohedge.com/news/2015-04-16/greece-may-pay-wages-and-pensions-ious">bank runs do</a>), <strong>may lead depositors to question the wisdom of holding their euros in bank accounts where they’re earning next to no interest and where, should some “accident” occur, they are subject to conversion into a national currency that would swiftly collapse against the euro once introduced.&nbsp;</strong></p> <p>And so, with every sell side European credit strategist trying to figure out what happens when €60 billion in monthly asset purchases by a central bank collide head on with an unprecedented sovereign default and with speculators’ net short position on the EUR now at levels last seen in 2012, it’s time to bring out the big guns with Mario Draghi staging a sequel to his now famous “whatever it takes” speech which came in the summer of 2012, when spreads were blowing out across the periphery and when euro net shorts looked a lot like they do today.&nbsp;</p> <p>While conceding that a Greek exit from the euro would put everyone in “uncharted waters,” Draghi says he has the tools to combat contagion and as for shorting the euro, well, perhaps the best way to sum up Draghi’s position is to quote Clint Eastwood: “go ahead, make my day.”&nbsp;</p> <p>Here’s more via <a href="http://www.ft.com/intl/cms/s/0/517ba66c-e5ef-11e4-ab4e-00144feab7de.html#axzz3Xhs7yLGr">FT</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>Mario Draghi said the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.</em></p> <p>&nbsp;</p> <p><em>The European Central Bank president called for the resumption of detailed discussions aimed at resolving the country’s debt woes and urged the Greek authorities to bring forward proposals that ensured fairness, growth, fiscal stability, financial stability.</em></p> <p><em>Asked about the risks of contagion from a new flare-up in Greece, he said: “we have enough instruments at this point in time&thinsp;.&thinsp;.&thinsp;.&thinsp;which although they have been designed for other purposes would certainly be used at a crisis time if needed”...</em></p> <p>&nbsp;</p> <p><em>However Mr Draghi added: <strong>“Having said that, we are certainly entering into uncharted waters if the crisis were to precipitate, and it is very premature to make any speculation about it.”</strong></em></p> <p>&nbsp;</p> <p><em>The ECB president was speaking following meetings in Washington that have been overshadowed by renewed fears about the risk of a Greek debt default and possible exit from the euro…</em></p> <p>&nbsp;</p> <p><strong><em>Expressing confidence in the euro’s continued stability, Mr Draghi said on Saturday it was “pointless” to go short on the single currency — challenging anyone who disagreed to do it.</em></strong></p> </blockquote> <p>So with the challenge thus issued, the question now is whether or not Draghi’s jawboning has a similar effect on the EUR this time around as it did back in 2012 when “whatever it takes” sent the single currency from 1.23 to 1.36 over the ensuing five months, something which isn’t necessarily desirable when you’re in the midst of global currency war and when you’re explicitly trying — as central bankers are prone to do — to stoke inflation. </p> <p>Of course, in a world where more QE cowbell is the answer to everything we suppose having an excuse to print still more euros would be just fine with everyone and as we outlined last week, it’s perfectly ok if the ECB runs out of EGBs and SSA debt to buy because the lower limit problem is just as good an excuse as any to <a href="http://www.zerohedge.com/news/2015-04-16/mario-draghi-collateral-scarcity-and-why-ecb-will-soon-buy-corporate-bonds">jump into corporate credit</a>&nbsp;and if that turns out to be insufficient, Draghi can always go full-Kuroda and throw the ECB balance sheet behind the DAX, the CAC, and the IBEX.&nbsp;</p> <p>Here's a look at the positioning around Draghi's "pointless" bet:</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/20150419_EUR.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/20150419_EUR_0.jpg" width="600" height="312" /></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="289" height="128" alt="" src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/DirtyHarryTeaster.png?1429473338" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/draghi-tells-euro-shorts-make-his-day-again#comments Creditors default European Central Bank fixed Greece Sovereign Default Ukraine Sun, 19 Apr 2015 21:15:28 +0000 Tyler Durden 505010 at http://www.zerohedge.com Direct Evidence For The Supercycle http://www.zerohedge.com/news/2015-04-19/direct-evidence-supercycle <p><a href="http://www.alhambrapartners.com/2015/04/16/direct-evidence-for-the-supercycle/"><em>Submitted by Jeffrey Snider via Alhambra Investment Partners</em></a>,</p> <p>When categorizing intuition about the real economy, it is often regarded as a combination of both structural and now cyclical problems. <strong>There was, as yet, no true recovery owing largely to factors that continue to linger beyond historical comparisons about what &ldquo;should&rdquo; have occurred in and after the Great Recession.</strong> Some economists refer to deleveraging especially of households as that primary structural problem, but it is first debatable whether deleveraging has even occurred and secondly that any such trends may more readily be attributed as symptoms of something else entirely.</p> <p>I think it is actually a mistake to try to separate these trends, as they amount to a large and <a href="http://www.alhambrapartners.com/2015/04/07/bernanke-supercycles/" target="_blank">overarching supercycle</a>. <strong>The lack of recovery in the US and the rest of the world is indistinguishable, in terms of causation, from any turn toward darker cyclicality in 2015; even including potential recession.</strong> The dominant feature of the supercycle has been <em>chronic</em> instability in economic form. Recession would just be the most severe of those kinds of expressions.</p> <p><strong>If there is indeed a supercycle at work, then it must be conveyed under some unifying format or system of conduct.</strong> Should it exist, we should be able to easily locate its source or main form of manifestation. And it think that is the case as the <a href="http://www.alhambrapartners.com/2015/04/15/what-end-the-dollar/" target="_blank">recent Chinese struggles</a> so helpfully illustrate. The supercycle is the rise and fall of the &ldquo;dollar.&rdquo;</p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-China-IP-Eurodollar-Shift.jpg"><img alt="ABOOK April 2015 China IP Eurodollar Shift" class="aligncenter size-full wp-image-29603" height="361" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-China-IP-Eurodollar-Shift.jpg" width="641" /></a></p> <p>I don&rsquo;t mean that in the respect of the dollar as the denomination of the world&rsquo;s reserve exchangeability, but <strong>rather in the exact methodology of how that has taken shape since the final end of the gold era in 1971</strong> (the gold era actually ended long before that, closing the &ldquo;gold window&rdquo; was just the last step in a process that actually dated to the 1950&rsquo;s). What took over has been expressed as the petrodollar standard, but that elevates the oil producing nations to what I think is an unearned pedestal &ndash; if there is a pedestal in this global financial arrangements it is not OPEC accounts it is the eurodollar banks, largely in London, that service them.</p> <p><strong>Even that word, &ldquo;service&rdquo;, is quite misleading in terms of the modern &ldquo;dollar&rdquo; framework.</strong> In one sense, yes, eurodollar banks offer services but it is the measure of those services that proves this distinction. In global exchange there is no money, which would require service almost exclusively, nor even much of currency; there is only debt. To which the eurodollar system purposefully eschewed any sense of deposits, favoring instead just numbers on ledgers, preferably larger and larger. It was the birth, rise and eventual domination of the wholesale funding model, covering the entire world if only slowly at first.</p> <p><strong>The height of that system is explicitly evident in the Chinese figures shown above, and they are not limited to just industrial production.</strong> The apex of the eurodollar system took place around July 2007, and the fact that we can date that exactly tells you almost everything you need to know about economic insufficiency in the years following it.</p> <p><strong><em>There are so many misconceptions about the eurodollar system that it is actually unsurprising that this has gone unappreciated for so long; hell, even Alan Greenspan and Ben Bernanke are still clinging to some ghostly (and ghastly) &ldquo;global savings glut&rdquo; and they are supposed to be the smartest and most capable central planners around, given almost godly deference by everyone from the totality of the media to both parties of political authority to even the public that somehow has forgiven (or forgotten) the serial bubbles attached to it all. To uncover the eurodollar rise and now fall is to just recognize something hiding in plain sight.</em></strong></p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Overall.jpg"><img alt="ABOOK April 2015 TIC Net Overall" class="aligncenter size-full wp-image-29635" height="361" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Overall.jpg" width="641" /></a></p> <p><strong>The TIC data provided by the US Treasury, for example, actually shows us some of the internal function of the eurodollar system even though most convention about this &ldquo;flow&rdquo; is totally wrong. </strong>You hear it all the time about how the US merchandise trade deficit &ldquo;feeds&rdquo; this recycling of trade dollars into foreign buying of dollar-denominated assets. If that were true, then this process would not so neatly cleave right at August 2007, nor would it so snuggly fit the profiles of every &ldquo;dollar&rdquo; problem in finance that has occurred since.</p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Private.jpg"><img alt="ABOOK April 2015 TIC Net Private" class="aligncenter size-full wp-image-29634" height="361" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Private.jpg" width="641" /></a></p> <p><strong>That is the structural reality of this supercycle, in that the recurrence rate of &ldquo;dollar&rdquo; problems has far, far outpaced all expectations. </strong>That is especially true as it goes directly against the grain of conventionally-accepted notions of the healing and even booming economy. Supposedly, the global economy is getting much better and more firmly planted yet the incidence of &ldquo;dollar&rdquo; irregularities has increased in frequency and magnitude. That observation is most clearly demonstrated in the accumulations of &ldquo;dollar&rdquo; flow in the TIC series (immediately below).</p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Cumulative.jpg"><img alt="ABOOK April 2015 TIC Net Cumulative" class="aligncenter size-full wp-image-29633" height="341" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Cumulative.jpg" width="641" /></a></p> <p><strong>With that overriding framework in place, the various &ldquo;cyclical&rdquo; episodes make more sense.</strong> The greater the weakness in that overall systemic output, the more susceptible it is to smaller swings in sentiment or whatever. That isn&rsquo;t a factor of highly complex finance or computer simulations made out of ridiculous regressions, that is just common sense that cuts through all of those complexities that are in some ways nothing but redundant. The fact of the &ldquo;dollar&rdquo; system in 2015 is that it has ebbed substantially to a low point that makes dangerous instability the dominant feature.</p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-Repo-Dollar.jpg"><img alt="ABOOK April 2015 Repo Dollar" class="aligncenter size-full wp-image-29431" height="341" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-Repo-Dollar.jpg" width="577" /></a></p> <p>That is, after all, what the &ldquo;rising dollar&rdquo; has told us since late June. <strong>While economists talk about the &ldquo;strong dollar&rdquo; they do so and simply confirm how little they know about what they speak and write</strong> (a truly strong dollar applied to convertibility, and thus was a feature of <em>stability</em> in the US economy and financial system; what we have now even in the &ldquo;rising dollar&rdquo; is another form of instability). In the context of the eurodollar system, and how that is organized into the &ldquo;global dollar short&rdquo; (short referring to a synthetic short position on the &ldquo;dollar&rdquo;), the increase in the relative &ldquo;price&rdquo; is that synthetic short becoming more problematic and costly.</p> <p><strong>It needs to be pointed out that this is not a deficiency in terms of quantity,</strong> indeed <em>quantity</em> is a factor that doesn&rsquo;t much apply in this world and suggests pathology about the failure of <em>quantitative</em> easing to even so much as dent this crumbling inclination.<strong> Where there is a shortage is in the means of transference and the willingness to do so &ndash; flow. </strong>There are any number of elements by which that negative pressure can be expressed which further complicates direct interpretation, so it sometimes better left as a generic catch-all of &ldquo;bank balance sheet capacity&rdquo; with an eye toward rounding out those contours where it all possible.</p> <p><strong>The &ldquo;global dollar short&rdquo;, then, should be measured somewhere in terms of bank balance sheet <em>contraction</em> (reformulation or re-allocation might be more appropriate descriptions, but that does not rule out contraction altogether) and not just in the indirect notion of the hugely imbalanced and unstable &ldquo;dollar&rdquo; exchange.</strong> If you are short a stock, for example, and State Street (the largest bank that hypothecates shares) calls it back you have to buy the stock somewhere to cover your short; if State Street calls a lot of that same stock across the entire market, then the price of the stock shoots upward in a short squeeze. That is essentially what happened in the &ldquo;dollar&rdquo;, though we don&rsquo;t know <em>exactly</em> who is acting as State Street nor in what capacity are they &ldquo;calling in&rdquo; funding. The possibilities are enormous, including not just repo illiquidity but IR&rsquo;s and futures extensions.</p> <p>What TIC does is provide an estimate of banks&rsquo; reported dollar liabilities, which is not a comprehensive estimate but instead a partial window into that process. That the flows in this measure line up closely with observed disorder in the &ldquo;dollar&rdquo; world only suggests that it has some relevance to these features.</p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Cumulative-Bank-Liab.jpg"><img alt="ABOOK April 2015 TIC Net Cumulative Bank Liab" class="aligncenter size-full wp-image-29631" height="341" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Cumulative-Bank-Liab.jpg" width="641" /></a></p> <p>Since June 2014, the change in banks reporting of &ldquo;dollar&rdquo; liabilities has been one of the largest declines in the series, a fact that is actually repeating what happened in 2013 with the difference now of sinking so much further downward. The behavior of bank liabilities here, and of asset prices, generically, by extension, is tuned to central bank policy.</p> <p><a href="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Cumulative-Bank-Liab-Ups-Downs.jpg"><img alt="ABOOK April 2015 TIC Net Cumulative Bank Liab Ups Downs" class="aligncenter size-full wp-image-29630" height="681" src="http://www.alhambrapartners.com/wp-content/uploads/2015/04/ABOOK-April-2015-TIC-Net-Cumulative-Bank-Liab-Ups-Downs.jpg" width="705" /></a></p> <p><u><strong>What that shows is the fatal flaw, fatal conceit really, of what the Federal Reserve and its global counterparts have been trying to accomplish. </strong></u>They are still attempting to reconstruct the global financial arrangements, and thus the global economy, as it existed prior to August 2007. The decay, even mimicking almost entropy, of the eurodollar system ultimately means that is a futile effort; which is why there is this stop-go pattern in what banks are doing &ldquo;contracting&rdquo; and &ldquo;expanding&rdquo; into the &ldquo;global dollar short.&rdquo; The most that can be said of all the QE&rsquo;s and ZIRP, and the little other pieces along the way, is that they provide <em>temporary</em> cover from the direct effects of this supercycle.</p> <p><strong>Nothing is ever permanent with the QE&rsquo;s because they were doomed from the start.</strong> The &ldquo;dollar&rdquo; system can never be refined and remade to its prior station because it was irrevocably broken on August 9, 2007. So the mini-cycle swings in the QE&rsquo;s are not definitive of themselves because they operate <em>within</em> that governing dynamic, insufficient not in size or quantity but in conduct and even theory to break out of the downswing in the supercycle. <strong>All that QE&rsquo;s have done is to create reverberation within the downward channel</strong> which may, in the end, only exacerbate the degree of imbalance that weighs on the inevitable shift.</p> <p><strong>I have maintained since 2013 that there is an obvious asymmetry to these swings since that point, and this supercycle idea seems to offer correlation if not confirmation. The closer and more tightly wound on the downside of that supercycle, the more exaggeration there is to be in any seemingly minor shifts. </strong>That is observable not just via TIC &ldquo;flows&rdquo; but in repo mechanics and swap spreads, eurodollar futures and emerging market currencies. Again, there is not much of a mystery here, as any kind of decay is really the idea of greater and greater instability being carried out. The &ldquo;rising dollar&rdquo; is exactly that, and there is at least some direct evidence for it. Worse, economic accounts so far in late 2014 and now 2015 more than suggest that is true not just for the &ldquo;dollar&rdquo; supercycle but the actual real economic version that so clearly and globally accompanies it.</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="504" height="277" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150419_alh.jpg?1429466671" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/direct-evidence-supercycle#comments Alan Greenspan Ben Bernanke Ben Bernanke Cyclicality EuroDollar Federal Reserve Global Economy OPEC Quantitative Easing Reality Recession recovery State Street Trade Deficit Sun, 19 Apr 2015 20:30:37 +0000 Tyler Durden 505003 at http://www.zerohedge.com Well That Hasn't Happened Before - Exhibit 3 http://www.zerohedge.com/news/2015-04-19/well-hasnt-happened-exhibit-3 <p>We have never, ever, seen a larger <strong>Fed-fueled, mal-investment boom</strong> in private construction...</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_never.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04/20150419_never_0.jpg" width="600" height="303" /></a></p> <p>&nbsp;</p> <p>While some see new record highs in private construction spending as a signal that everything is 'normal' again, <strong>it is that 'normal' that we should be most afraid of</strong> as extremely cheap money in the form of loans backing this construction (which will never go down in value thanks to The Fed's omnipotence) will lead inevitably to a glut or over-supply... or, as we have seen recently, a collapse in credit will disable these highly-levered property speculators from rolling debt.</p> <p>The <strong>distorted picture</strong> being painted by 'unemployment trends' and constant reassurance by any and every talking head that - thanks to the stock market's renaissance - everything is set for escape velocity merely places the entrepreneur once again with misleading signals... either a) they do not invest due to uncertainty or b) they pile in speculatively and lose thanks to Fed promises.</p> <p>Be careful what you wish for... <strong>the last 2 times property construction rose at 50% YoY was the top...</strong></p> <p>&nbsp;</p> <p><em>Chart: Bloomberg</em></p> <p>*&nbsp; *&nbsp; *</p> <p><a href="http://www.zerohedge.com/news/2015-04-17/well-thats-never-happened-exhibit-1"><em>See Exhibit 1 here</em></a></p> <p><a href="http://www.zerohedge.com/news/2015-04-18/well-hasnt-happened-exhibit-2"><em>See Exhibit 2 here</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="961" height="485" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150419_never.jpg?1429464908" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/well-hasnt-happened-exhibit-3#comments B+ Renaissance Sun, 19 Apr 2015 19:45:05 +0000 Tyler Durden 505001 at http://www.zerohedge.com "Surviving Or Thriving" - What Canada's 40% Surge In Meat Prices Means For Ordinary People http://www.zerohedge.com/news/2015-04-19/what-canadas-40-surge-meat-prices-means-ordinary-people <p>On the surface, Canada's 1.2% inflation is negligible, and barely enough to keep up with the pace of overall growth as mandated by a few central bank academics. It is below the surface, however, that one finds the scary truth. Because when stripping away the sliding energy prices (which at the recent pace of short covering among oil speculators are about to surge) some scary numbers emerge, such as a 3.8% monthly jump in food prices, primarily as a result of a whopping 30-40% increase in select meat prices in the last 8 months.</p> <p>How do ordinary people - which excludes those who work in central banks and have taxpayers fund their everyday purchases, which allows them to fully ignore soaring food and rent costs - survive in an environment of soaring food prices? </p> <p>As the following brief documentary by CBC's The National reveals, food inflation means people have no choice but to eat "far less beef" than they used to, "or chicken." Others are ok with the runaway food inflation: "it doesn't matter to me, I buy the meat at the price it is and that's fine with me" say a gentleman who likely works for a hedge fund and BTFD for a living.&nbsp; </p> <p>It is not just meat: prices of Canadian fruits and vegetables have also surged, driven almost entirely by the plunge and the loss of purchasing power of the Canadian dollar. </p> <p>And, as a vendor of meat observes: "there doesn't seem to be an end to it."</p> <p>So soaring food prices, flat wages, tumbling currency, and a generally deteriorating standard of living. In short: something Japan's prime minister Abe would call a smashing success.</p> <p><em>Full CBC documentary below</em>:</p> <p><iframe src="https://www.youtube.com/embed/yXgGau7t5jw" width="560" height="315" frameborder="0"></iframe></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="685" height="517" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/canada%20meat.jpg?1429469424" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-19/what-canadas-40-surge-meat-prices-means-ordinary-people#comments Canadian Dollar Central Banks Purchasing Power Sun, 19 Apr 2015 19:00:29 +0000 Tyler Durden 505005 at http://www.zerohedge.com