Indeed, we’d argue that the Fed’s zero lower bound policies have dislodged credit risk as the primary concern for investors, only to replace it with a major technical headache: interest rate risk. Granted, rates could rise in an orderly fashion and drive spreads tighter from here - the ‘just right’ scenario that remains our base case. But there is the probability that Treasury yields do otherwise pose serious risks to the market, as we have started to observe in recent weeks. What’s more, the risks are in both directions.
Too low for too long …
If rates remain too low for too long, financial stability suffers as investors reach for yield, companies lever up, and lending standards decline. In early February, Federal Reserve Governor Jeremy Stein pointed out that many of these concerns are already visible in high yield where covenant-lite issuance has exploded, yields on triple-Cs are at all time lows, and CLOs have returned in force. Similarly, investment grade companies have been relevering at an alarming pace, banks are reportedly making ever dodgier C&I loans, and the mega-LBO is back.
What’s more, a look to Japan illustrates the dangers of allowing these imbalances to build. As JGB yields have started to rise after being depressed for so long, concerns have emerged about the health of the Japanese banks, which generally hold longer duration bonds in their security portfolios than their US peers—presumably a function of having to cope with low rates for so long. And a handful of major Japanese corporates have pulled new deals as rates have gapped higher as well, suggesting they too have become dependent on low rates.
Still, the greatest of financial stability risks is probably the least discussed among those that matter at the Fed: the deterioration in trading volumes.To the credit of the Street, trading in corporate bonds hasn’t declined much in outright terms. But the corporate bond markets have grown so rapidly as a result of the Fed’s zero lower bound policy that the sell-side’s ability to transfer risk just hasn’t been able to keep pace, which could potentially spell disaster if investors all choose to sell at once. One can clearly see this in the steady decline in market turnover over the last few years (Figure 9).
Finally, a less diverse investor base, or conversely one in which everyone is in the same trade, can also be seen as a financial stability concern and a direct byproduct of rates staying low for an extended period of time. To our minds, little diversity among investors raises the risk of overshooting in both directions: first as yields compress to abnormally low levels, and then as all investors race for the exit all at once.
As such, we suspect that the longer low rates persist, the worse the unwind of QE may be. And it may, in fact, already be too late.
… or too high too quickly
As events in the past two weeks have shown, credit markets appear vulnerable to a rise in rates that occurs too quickly or in a chaotic fashion. What’s more, there’s an air of inevitability to it all, suggesting that even though market participants can see what’s coming, there’s little that can be done.
Part of the problem is that investment grade credit has increasingly become more sensitive to total returns during the past five years as the AUM of mutual funds dedicated to bonds have rapidly grown. Using Fed data, we reckon that the percentage of the corporate bond market that mutual funds now own is roughly 17%, up from about 12% in 2007. Likewise, cumulative inflows into high yield mutual funds have been similarly impressive in the period after the great financial recession.
Yet the reliability and stickiness of mutual fund flows going forward is definitely a wildcard, to our minds. At the very least, it’s hard to envision that bond funds will continue to attract the same level of inflows that they’ve enjoyed since 2008 when faced with expected future total returns that are likely to be exceptionally low, if not negative. Indeed, in such an environment, there’s a very real possibility that fixed income funds experience outflows when retail investors fully appreciate the upside limitations in bonds as the economy recovers. In fact, some major funds are already seeing redemptions on the back of May’s performance.
To get an idea of how significant the retail flow situation might become, we find it instructive to look at credit ETFs as a guide. Assets under management at LQD - an unhedged IG ETF - have dropped by nearly 15% since mid-December, forcing the fund to sell roughly $3.9bn of corporate bonds through the redemption process. By comparison, if mutual funds were to experience an outflow of the same magnitude, they’d need to sell upwards of $100bn of corporate bonds.
To our minds, that amount of selling could be exceptionally disruptive to valuations if (1) it occurred over a relatively short time period, (2) institutional investors were unwilling to take the other side, and (3) the Street was unwilling to increase their inventory of bonds.
Moreover, to the extent that issuers sense demand may be waning for bonds, there’s a distinct possibility the pace of supply increases precisely at the same time that demand decreases. In the high yield markets, for instance, companies have become far more proactive at taking callable bonds out with make wholes in order to issue low coupon longer-dated debt. Similarly, we expect that a number of high grade issuers debating doing a liability management exercise, an acquisition, or simply prefinancing 2014 maturities, may be persuaded to come to market sooner rather than later as rates show signs of permanently moving higher.
Invariably, it’s the sort of dynamic that ends in tears.
RISK - In 1999 It was called the 'New Paradyn' - Today it is the 'New Normal'
It used to be called the "New Paradigm", it is now the "New Normal" - aside from that everything else is still the same, Ben Bernanke's aspirations to overturn math, economics and the business cycle notwithstanding. The only question is where on the red valuation line is the global market currently located, and how much longer can the central bankers reject the inevitable arrival of the first denial, then fear , then all other increasingly more unpleasant phases.
STATISM - Do you believe the Government or Your Lying Eyes?
For some, it’s hard to even fathom... as if the headlines were ripped from the Onion instead of Atlas Shrugged or 1984:
* NSA Is Wired Into Top Internet Companies’ Servers, Including Google and Facebook
* NSA reportedly collecting phone records of millions
* Former NSA head defends agency reportedly spying on millions of Americans
* US gov’t defends NSA surveillance, slams ‘reprehensible’ journalists
Even more, just within the last few weeks we’ve seen the Justice Department confiscating news reporter phone records... the IRS caught bullying political opposition groups... and now this.
It should be as plain as day at this point. Yet some people still have a hard time understanding that they’re living under an oppressive, destructive, unaccountable government.
Most other cultures get it. If you go to Argentina, Vietnam, Italy, or China,
people there have absolutely no trust or confidence in their governments.
It’s something that’s 'almost' uniquely American - a lifetime of steady, bombastic propaganda that inculcates a deep belief that our system is the ‘best’.
And, even in the face of such overwhelming evidence, it’s still hard for people to break from this programming and acknowledge that their government is just as corrupt as Mexico’s... albeit slightly more sophisticated.
The politicians running the nation are sociopathic criminals, plain and simple. If you or I were to tap people’s phones or hack their Facebook accounts, or use our authority to bully opposition groups, we would be tossed in the slammer in no time… and branded by the media as moral delinquents.
Yet politicians get away with it. They even have prominent members of the press championing their criminality, like this quote from Forbes today:
“this is in fact what governments are supposed to do so I’m at something of a loss in understanding why people seem to be getting so outraged about it.”
The simple reason is because the system is a total failure.
In the ‘free world’, society is based on a principle that a tiny elite should have the power to kill. To steal. To wage war. To debase the currency. To deprive certain people of freedom. All in their sole discretion. And for the good of everyone else.
We’re just supposed to trust them to be good guys and be proficient at their jobs. And in case they happen to completely screw it up and wreck the nation, they get a pass.
It’s a completely absurd. We’re ruled by criminals, plain and simple.
This is a hard lesson for an entire society to learn, but perhaps the most important.
Unfortunately, the second lesson is even harder: that there’s absolutely nothing we can do about it.
We’ve also been led to believe that direct democracy and grassroots movements can be a force for change. Yet it rarely, if ever, happens.
Short of outright revolution, the system isn’t going to change. It has to completely crash... and hit rock bottom... before it can be rebuilt. And we’re still a loooong way off from that.
Like ancient Rome before, the Land of the Free can look forward to being governed by a long series of criminals in the foreseeable future, notwithstanding the occasional sage.
Nations rise and fall. This cycle is inevitable. And history shows that the world’s most dominant nation typically has a long, grinding decline. It’s going to take a while.
That’s why, instead of trying to change the system, it’s so important to invest time, energy, and capital in the things that set up you and your family for maximum freedom and prosperity.
You can’t stop a speeding train by standing in front of it. You just want to make sure you’re not on it as it heads towards the cliff.
The disclosures involving this (and the prior) administration's Big Brother surveillance state, which would make Nixon blush with envy are now coming fast and furious (one wonders - why now: even that bastion of liberalism the NY Times, has turned against Obama). Although while the Guardian's overnight news that Verizon (and most certainly AT&T as well among others) was cooperating with the NSA on spying on US citizens, so far at least the internet seemed, if only to the great unwashed masses, immune. That is no longer the case following news from the WaPo exposing PRISM, a highly classified program, which has not been disclosed publicly before. "Its establishment in 2007 and six years of exponential growth took place beneath the surface of a roiling debate over the boundaries of surveillance and privacy." What PRISM does is to allow the NSA and the FBI to tap directly "into the central servers of nine leading U.S. Internet companies, extracting audio, video, photographs, e-mails, documents and connection logs that enable analysts to track a person’s movements and contacts over time."
The secrecy is so deep we expect even the president himself may not know about it (but he does):
The highly classified program, code-named PRISM, has not been disclosed publicly before. Its establishment in 2007 and six years of exponential growth took place beneath the surface of a roiling debate over the boundaries of surveillance and privacy. Even late last year, when critics of the foreign intelligence statute argued for changes, the only members of Congress who know about PRISM were bound by oaths of office to hold their tongues.
Of course, PRISM is from the government, and it is here to help you. But the question is why are some of the biggest private companies explicitly collaborating with what is now the biggest exposed spying operation in history, companies which include such household names as Microsoft Yahoo, Google, Facebook, PalTalk, AOL, Skype, YouTube, and Apple. Yes, everyone's beloved Apple was added in October 2012: the NSA knows all about your music playlist, not to mention has a database of all your iMessages.
In other words, all those newly minted people known as corporations are in on it, but not: dear debt serf. It's a small club, and there is a multimillion liquid net-worth cutoff... and you are not in it. From WaPo:
An internal presentation on the Silicon Valley operation, intended for senior analysts in the NSA’s Signals Intelligence Directorate, described the new tool as the most prolific contributor to the President’s Daily Brief, which cited PRISM data in 1,477 articles last year. According to the briefing slides, obtained by The Washington Post, “NSA reporting increasingly relies on PRISM” as its leading source of raw material, accounting for nearly 1 in 7 intelligence reports.
That is a remarkable figure in an agency that measures annual intake in the trillions of communications. It is all the more striking because the NSA, whose lawful mission is foreign intelligence, is reaching deep inside the machinery of American companies that host hundreds of millions of American-held accounts on American soil.
The technology companies, which participate knowingly in PRISM operations, include most of the dominant global players of Silicon Valley. They are listed on a roster that bears their logos in order of entry into the program: “Microsoft, Yahoo, Google, Facebook, PalTalk, AOL, Skype, YouTube, Apple.” PalTalk, although much smaller, has hosted significant traffic during the Arab Spring and in the ongoing Syrian civil war.
the PRISM program appears more nearly to resemble the most controversial of the warrantless surveillance orders issued by President George W. Bush after the al-Qaeda attacks of Sept. 11, 2001. Its history, in which President Obama presided over “exponential growth” in a program that candidate Obama criticized, shows how fundamentally surveillance law and practice have shifted away from individual suspicion in favor of systematic, mass collection techniques.
Spying on US citizens is "incidental"... kinda like killing thousands of women and children in drone raids is "collateral damage":
Even when the system works just as advertised, with no American singled out for targeting, the NSA routinely collects a great deal of American content. That is described as “incidental,” and it is inherent in contact chaining, one of the basic tools of the trade. To collect on a suspected spy or foreign terrorist means, at minimum, that everyone in the suspect’s inbox or outbox is swept in. Intelligence analysts are typically taught to chain through contacts two “hops” out from their target, which increases “incidental collection” exponentially. The same math explains the aphorism, from the John Guare play, that no one is more than “six degrees of separation” from any other person.
This is how the big corporations sleep at night:
Formally, in exchange for immunity from lawsuits, companies like Yahoo and AOL are obliged to accept a “directive” from the attorney general and the director of national intelligence to open their servers to the FBI’s Data Intercept Technology Unit, which handles liaison to U.S. companies from the NSA. In 2008, Congress gave the Justice Department authority to for a secret order from the Foreign Surveillance Intelligence Court to compel a reluctant company “to comply.”
In practice, there is room for a company to maneuver, delay or resist. When a clandestine intelligence program meets a highly regulated industry, said a lawyer with experience in bridging the gaps, neither side wants to risk a public fight. The engineering problems are so immense, in systems of such complexity and frequent change, that the FBI and NSA would be hard pressed to build in back doors without active help from each company.
Some "do lots of evil" by their customers. They just don't disclose it:
“Google cares deeply about the security of our users’ data,” a company spokesman said. “We disclose user data to government in accordance with the law, and we review all such requests carefully. From time to time, people allege that we have created a government ‘back door’ into our systems, but Google does not have a ‘back door’ for the government to access private user data.”
Time to kill that Facebook profile... or be accidentally killed for being "of a terroristy persuasion" based on some NSA algo:
There has been “continued exponential growth in tasking to Facebook and Skype,” according to the 41 PRISM slides. With a few clicks and an affirmation that the subject is believed to be engaged in terrorism, espionage or nuclear proliferation, an analyst obtains full access to Facebook’s “extensive search and surveillance capabilities against the variety of online social networking services.”
And some more charts:
Introducing the program
A slide briefing analysts at the National Security Agency about the program touts its effectiveness and features the logos of the companies involved.
Monitoring a target's communication
This diagram shows how the bulk of the world’s electronic communications move through companies based in the United States.
Providers and data
The PRISM program collects a wide range of data from the nine companies, although the details vary by provider.
In retrospect, it is sad what a farce this country has become: artificial market, centrally-planned economy, pervasive spying on the people, a tax collector that target political enemies, an administration that openly lies under oath...
If we didn't know better we would say this was 1955 Stalingrad, although Stalingrad at the height of totalitarianism was for amateurs. This is next level shit: "Firsthand experience with these systems, and horror at their capabilities, is what drove a career intelligence officer to provide PowerPoint slides about PRISM and supporting materials to The Washington Post in order to expose what he believes to be a gross intrusion on privacy. “They quite literally can watch your ideas form as you type,” the officer said."
Suddenly embroiled in too many scandals to even list, and humiliated by a publicly-exposed (because everyone knew about the NSA superspy ambitions before, but with one major difference: it was a conspiracy theory.... now it is a conspiracy fact) surveillance scandal that makes Tricky Dick look like an amateur, earlier today, as expected, Obama came out and publicly declared "I am not a hacker" and mumbled something about "security", "privacy" and "inconvenience." He went on to explain how the government "welcomes the debate" of all three in the aftermath of the public disclosure that every form of electronic communication is intercepted and stored by the US government (now that said interception is no longer secret, of course) but more importantly how it is only the government, which is naturally here to help, that should be the ultimate arbiter in deciding what is best for all.
Yet the PRISM-gate scandal which is sure to only get worse with time as Americans slowly realize they are living in a Orwellian police state, meant Obama would have to do more to appease a public so furious even the NYT issued a scathing editorial lamenting the obliteration of Obama's credibility. Sure enough, the president did. Reuters reports that the first course of action by the US government will be to... shoot the messenger.
Reuters reports that "President Barack Obama's administration is likely to open a criminal investigation into the leaking of highly classified documents that revealed the secret surveillance of Americans' telephone and email traffic, U.S. officials said on Friday."
And how did Reuters learn this: from "law enforcement and security officials who were not authorized to speak publicly."
The mimetic absurdity of the narrative is just too surreal to even contemplate for more than a minute before bursting out in laughter: the administration's plans to launch criminal charges against those who "leaked" its Nixonian espionage masterplan involving every US (and world) citizen using the Internet, revealed by another group of sources leaking in secret. Pure poetry.
Of course, this was inevitable - once you start down the path of a totalitarian surveillance superstate, you don't stop until all dissent is crushed: either peacefully through submission to debt serfdom, or, well, not so peacefully.
It was unclear on Friday whether a complaint had been submitted by the publicity-shy National Security Agency, which was most directly involved in the collection of trillions of telephone and email communications.
However, one U.S. official with knowledge of the situation said that given the extent and sensitivity of the recent leaks, federal law may compel officials to open an investigation.
A criminal probe would represent another turn in the Obama administration's battle against national security leaks. This effort has been under scrutiny lately because of a Justice Department investigation that has involved searches of the phone records of Associated Press journalists and a Fox News reporter.
But what's worst, is that it may all turn very personal against the same journalists who dared to divulge the NSA's spy-op:
Journalists involved in The Guardian and Washington Post articles have reported in depth on WikiLeaks, the website known for publishing secret U.S. government documents.
The Post report on the PRISM program was co-written by Laura Poitras, a filmmaker who has been working on a documentary on WikiLeaks, with the cooperation of its founder Julian Assange, and who last year made a short film about Bill Binney, a former NSA employee who became a whistleblowing critic of the agency.
Last year, the web magazine Salon published a lengthy article by the author of the Guardian report, Glenn Greenwald, accusing U.S. authorities of harassing Poitras when she left and re-entered the United States. Greenwald also has written frequently about Assange.
The Guardian and Post stories appeared in the same week that U.S. Army Private First Class Bradley Manning went on trial in Maryland accused of leaking hundreds of thousands of classified documents to WikiLeaks.
In an email to Reuters on Friday, Poitras rejected the notion that the trial had any impact on the timing of her story.
"I am fully aware we are living in a political climate where national security reporting is being targeted by the government, however, I don't think fear should stop us from reporting these stories," Poitras wrote.
"To suggest that the timing of the NSA PRISM story is linked in any way to other events or stories I'm following is simply wrong. Like any journalist, I have many contacts and follow multiple stories."
Kris Coratti, a Washington Post spokeswoman, said the timing of the paper's publication of Poitras' story had nothing to do with Manning's trial and that Assange had played no role in arranging or encouraging the story.
Greenwald did not respond to emailed requests for comment. The Guardian's editor-in-chief, Alan Rusbridger, declined to comment.
Needless to say, once political retribution for publicizing the nuances of the police state becomes a personal affair targeting the very journalists whose task is to provide much needed information, the first amendment is basically finished.
Alas, on the path to tyranny the loss of rights and privileges, let alone the occasional amendment written on a very old parchment and which nobody follows or cares about, is inevitable.
And it is up to the citizens of such a tyrannical government to reclaim their nation. Which they will... Just as soon as The Bachelorette/Big Brother (no pun intended)/X Factor is over and the next disability check clears.
As of this moment, Obama is making the case that the US government is not eavesdropping on phone calls. Specifically, he said "nobody is listening to your phone calls - they are just looking at phone numbers and duration of calls" and concluded that the NSA was only engaged in "modest encroachments." It was unclear if that clarification was meant to put to rest fears that Big Brother has made personal privacy a thing of the past. He further went on to add that the telephone surveillance program is fully vetted by Congress and supervised by the Federal Intelligence Surveillance Court (FISA). In other words: Obama is making the case that the NSA's Big Brother supervision is perfectly legal and not only that, there are checks and balances and neither the telephonic snooping nor the internet supervision is anything to be concerned about. There is one problem: Obama is lying.
Back in April 2009, three months into the Obama regime, none other than the NSA admitted it has overstepped its legal boundaries. As the NYT reported: "The National Security Agency intercepted private e-mail messages and phone calls of Americans in recent months on a scale that went beyond the broad legal limits established by Congress last year, government officials said in recent interviews. "
Several intelligence officials, as well as lawyers briefed about the matter, said the N.S.A. had been engaged in “overcollection” of domestic communications of Americans. They described the practice as significant and systemic, although one official said it was believed to have been unintentional.
The Justice Department, in response to inquiries from The New York Times, acknowledged Wednesday night that there had been problems with the N.S.A. surveillance operation, but said they had been resolved.
As part of a periodic review of the agency’s activities, the department “detected issues that raised concerns,” it said. Justice Department officials then “took comprehensive steps to correct the situation and bring the program into compliance” with the law and court orders, the statement said. It added that Attorney General Eric H. Holder Jr. went to the national security court to seek a renewal of the surveillance program only after new safeguards were put in place.
The same Eric Holder who is currently being investigated for perjury before congress. As for "compliance" 4 years later it seems nothing has changed.
As for Obama's clear conscience:
The legal and operational problems surrounding the N.S.A.’s surveillance activities have come under scrutiny from the Obama administration, Congressional intelligence committees and a secret national security court, said the intelligence officials, who spoke only on the condition of anonymity because N.S.A. activities are classified. Classified government briefings have been held in recent weeks in response to a brewing controversy that some officials worry could damage the credibility of legitimate intelligence-gathering efforts.
Well thank god the most transparent administration held classified briefings to discuss the biggest government espionage program ever conceived. One may have gotten ideas otherwise...
Finally, on Obama's pinky swear that it is only foreigners' emails and iMessages that are being intercepted, turns out he is lying here too:
In recent weeks, the eavesdropping agency notified members of the Congressional intelligence committees that it had encountered operational and legal problems in complying with the new wiretapping law, Congressional officials said.
Officials would not discuss details of the overcollection problem because it involves classified intelligence-gathering techniques. But the issue appears focused in part on technical problems in the N.S.A.’s ability at times to distinguish between communications inside the United States and those overseas as it uses its access to American telecommunications companies’ fiber-optic lines and its own spy satellites to intercept millions of calls and e-mail messages.
And so on.
In short: what difference does it make - it is only the stripping of the most fundamental privacy rights of US citizens! And how else can you build a totalitarian government if you don't give up some freedoms - good heavens, one can't ask the poor president to provide 100% security without experiencing some "inconvenience" and handing over a little privacy. Or a lot.
In the end, let's not forget what really matters: the NSA spying program is from the government, and it is here to help you.
* * *
Finally, here is Matt Damon explaining why he wouldn't work for the NSA:
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - June 2nd - June 8th
Both total new orders and new export orders decline
Output growth maintained, but at marginal rate
Purchasing activity falls for the first time in eight months
From HSBC's Hongbin Qu:
“The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions. With persisting external headwinds, Beijing needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labour market. The new leaders should strike a delicate balance between reform and growth.”
While the back up in interest rates over the last few weeks has been heralded by those with a bias for these things as some indication of growth expectations improving - confirming the equity exuberance they stand on as sensible; it appears, if one actually takes a look a little deeper into market movements, that in fact this is 'all' about 'Taper' concerns and nothing to do with growth. The driver of this reasoning is straightforward. If the move higher in rates were really about perceived improvement in the growth outlook, we would expect credit markets to rally - as they have during all prior periods of rate spikes. This time is different as they sold off together. Simply put, this is not a growth-driven rate reversion, it is short-term fears (and JGB VaR shock driven concerns) of a Fed worried about bubbles and taking its foot off the throttle modestly.
The past three weeks have seen intraday spread moves correlate extremely closely with rates - suggesting Fed Taper concerns - not growth at all - as the flow may slow.
17 - Credit Contraction II
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
CANARIES - Problems Erupting Everywhere (Signs of Implosion)
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Just look at what is happening in Europe. The eurozone is now in the midst of the longest recession that it has ever experienced. Just look at what is happening over in Asia. Economic growth in India is the lowest that it has been in a decade and the Japanese financial system is beginning to spin wildly out of control.
One of the only places on the entire planet where serious economic problems have not already erupted is in the United States, and that is only because we have "kicked the can down the road" by recklessly printing money and by borrowing money at an unprecedented rate. Unfortunately, the "sugar high" produced by those foolish measures is starting to wear off. We are going to experience a massive amount of economic pain along with the rest of the world - it is just a matter of time.
But for the moment, there are a lot of skeptics out there. For the moment, there are a lot of people that are declaring that the problems of the past have been fixed and that we are heading for incredibly bright economic times ahead. Unfortunately, those people appear to be purposely ignoring the economic horror that is breaking out all over the globe.
The following are 18 signs that massive economic problems are erupting all over the planet...
#1 The eurozone is now in the midst of its longest recession ever. Economic activity in the eurozone has declined for six quarters in a row.
"I've sent CVs everywhere, I come to the unemployment agency every day, for 3 or 4 hours to look for work as a truck driver and there's never anything," said 42-year old Djamel Sami, who has been unemployed for a year, leaving a job agency in Paris.
#7 Unemployment in the eurozone as a whole has just hit a brand new all-time record high of 12.2 percent.
#8 Youth unemployment continues to soar to unprecedented heights in Europe. The following is from an article that was recently posted on the website of the Guardian that detailed how bad things are getting in some of the worst countries...
In Greece, 62.5% of young people are out of work, in Spain it's 56.4%, then Portugal with 42.5%, and then Italy with 40.5%.
#9 Youth unemployment is being partially blamed for the worst rioting that Sweden has seen in many years. The following is how the Daily Mail described the riots...
Sweden is reeling after a third night of rioting in largely run-down immigrant areas of the capital Stockholm.
In the last 48 hours violence has spread to at least ten suburbs with mobs of youths torching hundreds of cars and clashing with police.
It is Sweden's worst disorder in years and has shocked the country and provoked a debate on how Sweden is coping with youth unemployment and an influx of immigrants.
#10 An astounding 10 percent of all banking deposits were pulled out of banks in Cyprus during the month of April alone.
#12 Suddenly Australia is experiencing some tremendous economic challenges. The following quotes are from a recent Zero Hedge article...
-“We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
-“By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
-“Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
#13 The financial system in Japan is beginning to spin wildly out of control. The Japanese stock market has now declined about 15 percent from the peak, and many believe that the yen will continue to get weaker and that interest rates in Japan will start to rise significantly.
#14 Global cash flow is declining at a rate not seen since the last recession. This indicates that we could be headed for a global credit crunch.
#15 Real wages continue to decline in the United States. Even though we are being told that the U.S. is experiencing an "economy recovery", real weekly earnings have declined from $297.79 in 2010 to $295.49 in 2011 to $294.83 in 2012. (The preceding calculation is based on 1982-1984 dollars)
#16 Wall Street is buzzing about the fact that "the Hindenburg Omen" appeared at the end of last week. So exactly what is "the Hindenburg Omen"? The following are the criteria that are used to determine whether it has appeared or not...
1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. The smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
3. That the NYSE 10 Week moving average is rising.
4. That the McClellan Oscillator ( a market breadth indicator used to evaluate the rate of money entering or leaving the market and interpretively indicate overbought or oversold conditions of the market)is negative on that same day.
5. That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs).
When the Hindenburg Omen makes an appearance, it supposedly means that the U.S. stock market is likely to experience a serious decline within the next 40 days.
#17 As I wrote about the other day, the SentimenTrader Smart/Dumb Money Index is now the lowest that it has been in more than two years. That means that lots of "smart money" has been getting out of the market and lots of "dumb money" has been pouring in.
#18 Margin debt on the New York Stock Exchange has set a new all-time high. The following is from a recent Market Oracle article...
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Whenever margin debt spikes like this, a stock market crash almost always follows. If you doubt this, just check out the chart in this article.
Wall Street has had a good couple of years, but it has been a "false prosperity" that has been pumped up by reckless money printing by the Federal Reserve. Just like all of the other stock market bubbles that we have seen in recent years, this one is going to burst too. And as Marc Faber recently pointed out, this bubble has been particularly beneficial to the wealthy...
The Fed has been flooding the system with money. The problem is the money doesn't flow into the system evenly. It doesn't increase economic activity and asset prices in concert.
Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market - things like stocks, bonds, art, wine, jewelry, and luxury real estate.
Money-printing boosts the economy of the people closest to the money flow. But it doesn't help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins.
The fact that the U.S. stock market has set new all-time record high after new all-time record high in recent months means very little. At this point, the stock market has become completely divorced from economic reality. When this current bubble bursts, the adjustment is going to be very painful. Wall Street will likely whine and complain and ask for more bailouts, but they may find that authorities are not nearly as sympathetic this time.
Much of the rest of the world is already experiencing the next major wave of the economic collapse. Reckless money printing by the Fed and reckless borrowing and spending by the federal government may have delayed the inevitable in the United States for a little while, but those measures have also made our long-term problems even worse.
There was one piece of advice that Ben Bernanke included in his commencement speech to students at Princeton recently that I thought was particularly ironic...
"Don't be afraid to let the drama play out."
Will he take his own advice when the next great financial crisis strikes the United States?
That seems very unlikely. Unfortunately, things are not going to be so easy to fix this next time.
What happened back in 2008 was just a preview. What is coming next is going to absolutely shock the world.
On Friday, we learned that China's official manufacturing PMI unexpectedly climbed to 50.8 in May. However, China's unofficial HSBC PMI fell to 49.6 from 50.4 a month ago.
PMI numbers from South Korea, Taiwan, and Vietnam all deteriorated, raising some skepticism about the official Chinese numbers.
Meanwhile every major region in Europe reported significant improvement.
PMI: At the beginning of each month, Markit, HSBC, RBC, JP Morgan, and several other major data gathering institutions publish the latest local readings of the manufacturing purchasing managers index (PMI) for countries around the world. PMI is one of the best leading indicators of the economy. Each reading is based on surveys of hundreds of companies. Read more about it at Markit. These are not the most closely followed data points. However, the power of the insights is unparalleled. Jim O'Neill, the former Goldman Sachs economist, believes the PMI numbers are among the most reliable economic indicators in the world. BlackRock's Russ Koesterich thinks it's one of the most underrated indicators.
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
CENTRAL BANKERS - Simply Are Not Going to Tell You (Assuming they Know?)
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
...we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.
“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.
I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.
BEGIINING TO GET IT!!
* * *
... And Now
EDITORS NOTE: The tone of the problems is now worse than above, more concern is being expressed, yet we are told everything is all right by those who didn't see the Financial Crisis coming (or would tell us then either)
"[M]y reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit....Even if we stipulate that low interest rates are part of the reason for, say, a worrisome boom in one segment of credit markets, they are unlikely to be the whole story....One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability/"
"a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant, pointing to the elevated issuance of bonds by lower-credit-quality firms or of bonds with fewer restrictions on collateral and payment terms (socalled covenant-lite bonds). One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability."
There are potential risks associated with current policy. The Fed’s securities purchases have reduced mortgage yields and, to a lesser extent, Treasury yields. Current low bond yields are disruptive to management of fixed-income portfolios, retirement funds, consumer savings, and retirement planning. They may encourage unsophisticated investors to take on undue risk to achieve better returns. MBS purchases account for over 70% of gross issuance, causing price distortion and volatility in the MBS market. Fixed-income investors worry that attractive mortgage-backed securities are in very tight supply. Higher premium coupons carry too much exposure to prepayments, potentially led by new government support programs for housing. Many are concerned about the Fed’s significant presence in the market. They have underweighted MBS in favor of corporate, municipal, and emerging-market bonds. There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.
Further, current policy has created systemic financial risks and potential structural problems for banks. Net interest margins are very compressed, making favorable earnings trends difficult and encouraging banks to take on more risk. The Fed’s aggressive purchases of 15-year and 30-year MBS have depressed yields for the “bread and butter” investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk. Finally, the regressive nature of the artificially compressed savings yields creates pent-up demand within bank deposit portfolios; these deposits may be at risk once yields begin to rise and competitive pressures increase.
Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.
Risk assets extended their rally as further monetary easing helped market participants tune out signs of a global growth slowdown. The spate of negative economic news between mid-March and mid-April did little to interrupt the rise of equity prices in advanced economies. The growth jitters left more of a dent on commodity prices while emerging market equities continued to underperform.
This new phase of monetary policy accommodation in the major currency areas spilled over to financial markets around the world. The prospect of low yields in core bond markets contributed to investors searching for yield in lower-rated European bonds and emerging market paper as well as in corporate debt. This drove spreads even lower while issuance in riskier credit market segments strengthened. Abundant liquidity and low volatility fostered an environment favouring risk-taking and carry trade activity.
... equity markets were quick to shrug off the uncertainty and extended their gains as investors expected poor fundamentals to be followed by further policy easing.
The S&P 500 posted several all-time highs in rapid succession, first on 11 April and again throughout May. Similarly, European bourses held up well in the face of negative economic news and political uncertainty.
Throughout this period, the Japanese equity market continued its relentless ascent, fuelled by the prospect of massive monetary stimulus. The rapid gains left equity valuations vulnerable to changes in market sentiment...
Larry Fink, May 2013 CNBC interview: "It just doesn't matter"
TECHNICALS & MARKET ANALYTICS
PATTERNS - The Bond "Scare" We Warned of BUT Only a Corrective / Consolidation
History may not repeat but it certainly rhymes and when it comes to the animal spirits of human fear and greed, nowhere is that more evident than the 'surveys' of confidence that US citizens have undertaken for thelast 30 years. As the following two charts show, while many are exuberant at the rise in confidence of late, it is a pattern we have seen play out twice before - and both previous times - it did not end well...
via Citi FX Technicals (charts recreated via Bloomberg),
The consumer confidence chart may remain an important factor in this equation
Chart of consumer confidence remains amazingly cyclical
Very clear trend so far of lower highs and lower lows. Since the all-time high in May 2000 at 144.70 we have been in a clear downtrend
Data on this indicator only goes back to Feb 1967 and prior to the all-time high in 2000 the peak had been 142.30 in October 1968 (right at the start of the lost 16 year period from 1966-1982)
LET US BE CLEAR there is no certainty at this point that a high has been posted in this move...but there are good reasons to suspect that it may have been (or at least that we are very close to that dynamic). If the chart above is consistent then the peak may well come from either the May or the June number.
The top of this channel comes in at 76.30 with the May number coming in at 76.20.
As can be seen above there has been a very close correlation in time frame in the 1998-2000; 2005-2007 and 2011-2013 moves. That would suggest that the peak in this number would likely be somewhere around present levels and in the May-July period (June would be an exact equal timeframe, to the other two moves)
Why might this be important???
One of the things that has performed better now than the 1970’s period and the early 1990’s period is the equity market. Or has it?
The post housing collapse rally in the equity market did not quite regain the 1973 high before a renewed 18 month fall of 27% whereas this market did regain the high. However it took twice as long (4 years instead of 2) as well as QE 1, 2 and 3 with massive fiscal stimulus to achieve those heady heights. Is that really a better performance???
By February 1994 when Greenspan tightened the S&P 500 had overcome the July 1990 peak by 79%. Admittedly this was after a much shallower fall of around 10 %, but from a wealth effect perspective provided a far bigger relative new high than today.
In addition when we look at the chart below we cannot help be a little cautious (Albeit recognizing that this is an environment where you have to be a skeptical participant on the move to new highs)
We are getting “relative triple divergence” between consumer confidence and the equity market. As the S&P has hit a high, higher high and now 3rd higher high consumer confidence has hit a high, lower high and lower high again. This suggests a larger disconnect between the level of “feel good” at the consumer level and the elevated level of the Equity market in an economy that is about 70% consumer driven.
EARNINGS ESTIMATES - PE Expansion Hides Risk and is itself Unjustified
When stock prices rise faster than earnings, you are witnessing something called earnings multiple expansion. In other words, stocks are getting more expensive. Earnings multiples have expanded and contracted since the beginning of the stock market. Unfortunately, if you have been a stock market bear lately banking on falling earnings growth expectations, then your prediction has only been half right.
In a new report, FactSet's John Butters takes a brief look at evolving Q2 earnings expectations, which have only been coming down for months.
"The Q2 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) has dropped 3.4% (to $26.52 from $27.45) since March 31," writes Butters.
This has occurred as stocks have only been going up. And according to Butters, this dynamic is not that unusual:
Is it unusual for the earnings estimate for the index to decline and the value of the index to increase during the first two months of a quarter?
In recent quarters, it has not been unusual for the value of the index to increase at the same time analysts are trimming earnings estimates for the same quarter. In fact, it has occurred in 9 of the past 20 quarters (including Q2 2013). During these nine quarters, the average decrease in the bottom-up EPS during the first two months of the quarters has been 4.7%, while the average increase in the value of the index during the first two months of the quarter has been 6.8%.
Some warn that this trend of stock prices rallying with no earnings growth is getting dangerous for investors. But for now, it'll continue to make the bears look like fools. Here's the chart from FactSet's John Butters:
In a world in which glaringly misreporting factual news no longer generates much more than a shrug, the latest lie reported so often by the mainstream media and various 'expert' pundits it has almost become "the truth", is that that the key missing link to a global recovery - free cash flow, and its derivative, capital expenditures - are now once more rising. After all, corporations can not grow revenue (as confirmed by the most recent reported quarterly earnings) without investing in themselves, and they can't spend for maintenance or growth unless they generate Free Cash Flow: this is simple finance 101. So in order to put this pervasive lie to rest, we present the following chart showing free cash flow and Capex in the developed "G-4" region as a % of world GDP, which have now round-tripped back to 2010 levels, and ask a simple question: what growth?
The 126.1 tons of Chinese gold imports in April, was only the second highest ever, and just shy of the all time record high of 223.5 tons imported in March.
And the "slump" when observed year over year. Hmmm:
Bloomberg was right about one thing however:
“Some qualified banks used up their gold import quota in the first three months and weren’t able to get the paperwork done fast enough to bring in bullion in April,” said Tian Rui, vice president of the precious metals division at INTL FCStone Trading Co. “We might see higher imports in May because demand surged after the rout.”
In other words, look for the unslump in May when a surge in even more buying sends gross imports from Hong Kong to what may be new all time highs.
In the meantime, YTD imports of 500 tons are more than double the 240 tons imported over the same period last year: the same amount as held by the ECB.
China has now imported 1,333 tons of gold since January 2012, or 30% more than its official gold holdings, and is on a run rate to import 1500 tons in 2013 alone.
At least someone is taking advantage of all that levered ETF paper gold selling...
Zero hour — in the form of a precious metals default on the Comex, or maybe the London Bullion Market Association (LBMA) — is coming sooner or later.
“The odds of it happening are about 100%,” says Eric Sprott.
Mr. Sprott oversees $10 billion within the Canadian asset-management giant that bears his name. Among those assets is the Sprott Physical Gold Trust (NYSE:PHYS) — our recommended vehicle if you choose to keep a portion of your gold holdings in a brokerage account. To understand why it’s a certainty is to go deep down the rabbit hole… into the vaults of the world’s central banks. Sit tight…
12 Years and Counting: Demand Runs Away From Supply
We don’t want to make it sound more complicated than it is. At root, zero hour will come when everyone knows gold supply can no longer meet gold demand.
“When I look at the physical data that I can see in gold,” Sprott told us in a recent interview, “the gold market has not changed its supply fundamentals in 12 years. It’s flat.” Add up supply from new mines and recycled scrap gold — mostly old jewelry — and the World Gold Council reckons it’s rock-steady at about 3,700 tonnes (metric tons) per year.
And what about demand? Since gold began its bull run in 2000, scads of new demand sources have come into the picture.
Central banks, which were net sellers of gold in the ’80s and ’90s, became net buyers
Exchange-traded funds like GLD and trusts like PHYS didn’t even exist before 2004
Annual sales of gold coins by the U.S. and Canadian Mints have grown fourfold
Chinese consumption of gold has nearly quadrupled
Indian consumption (measured by imports) has grown 30% from an already high level.
“The mere combination of only five separate sources of demand,” Sprott writes in a recent white paper, “results in a 2,268-tonne net change in physical demand for gold over the past 12 years — meaning that there is roughly 2,268 tonnes of new annual demand today that didn’t exist 12 years ago,” when supply and demand were more or less in balance.
And those are only the official figures. “There are lots of other purchasers of gold that I don’t have records of,” he elaborated in our interview.
“So for example, when somebody physically buys a gold bar, whether it’s [hedge fund manager] David Einhorn or the University of Texas endowment or someone like that, there’s no place that I can go and see how many bars were purchased. There’s no public documentation if Russian billionaires are buying gold.” For every story that makes the news, like Einhorn or UT, there might be 10 purchases that occur sub rosa.
Summing up, nearly 2,300 tonnes (officially) of new demand each year are coming into a market where supply is still stuck at roughly 3,700 tonnes. “So where’s the gold coming from?” Mr. Sprott asks rhetorically. “Who’s supplying this gold?”
After a research project that’s gone on as long as the bull market in gold, he’s left with only one plausible explanation — the one that makes default on a major commodity exchange inevitable.
“The Western central banks,” he tells us, “are surreptitiously supplying gold by leasing theirs out.”
The Central Banks’ Shell Game in Gold: “It’s Here… No, It’s Here”
“Wait a minute,” you’re asking. “You just said central banks became net buyers of gold in the last decade.”
True… but all the buying has come from developing countries like Russia, China, India and Kazakhstan.
Meanwhile, the numbers from the big developed countries — the U.S. included — have been static.
Remember the main reason central banks are in business — to benefit their biggest and most powerful member banks.
And what’s beneficial to U.S. and European banks is gold leasing. Commercial and investment banks lease gold from a central bank at bargain rates — usually less than 1% a year. Then they sell that gold into the private market and plow the proceeds into… well, anything that yields more than 1%. It’s a sweet deal if you’re a banker.
“But then the gold is gone, right?” Yes. If the central bank wants its gold back from the commercial and investment banks, those banks would have to buy gold on the open market — driving up the price. That’s a bad deal if you’re a banker.
So usually, there’s a tacit understanding: Central banks don’t ask for their gold back, and the commercial and investment banks roll over their gold leases. As long as they’re earning more than 1%, the debt service is easy peasy.
But if a central bank asks for its gold back, it’s game over.
“They can get away with [the leasing],” Sprott explains, “because on their financial statements, the one line they have for gold says ‘gold and gold receivables.’ A receivable is not real gold, physical gold… and we don’t get a breakdown between the receivables and the physical. They’ve not provided that.”
Look below and you can see the guile central bankers use to concede their gold “holdings” is not limited to bars in a vault.
“It would not lend much credence to central bank credibility,” Sprott writes, “if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example.
“But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back.”
Add it all up and we’re getting much closer to zero hour.
Two weeks ago, with its current account getting crushed by relentless gold imports, India's finance minister Chidambaram literally begged the people to stop buying gold. Judging by the popular response, the ongoing physical shortage, and last night's increase in Indian gold import duties from 6% to 8%, appealing to people's feeling when it comes to the choice of fiat vs physical, has failed miserably. So the FinMin Chidambaram has decided to escalate. Per Reuters: "The Reserve Bank of India has advised banks against selling gold coins to retail customers, Finance Minister P. Chidambaram said on Thursday, a day after he raised gold import duty to try to ease pressure on India's bloated current account deficit." Well, if there ever was one sure way to send demand for any product through the roof (guns, ammo, etc), it is for the government to prohibit its outright sale. What follows next, almost without fail, is a panicked, chaotic buying scramble.
Gold imports by India, the world's biggest buyer of bullion, surged to
162 tonnes in May -- more than twice the monthly average in the record
year of 2011.
"I think the Reserve Bank has advised banks that they should not sell gold coins," said Chidambaram, while speaking at an event in Mumbai.
Chidambaram also urged banks to advise their customers not to invest in gold.
Why? If it is not clear by now, here is the explanation: there is simply not enough gold to satisfy demand at the current artificially downward-manipulated price, no matter what propaganda script is being spun on Verizon TV at any given moment. And with India's idiotic decree, even more gold will be purchased at these prices.
Dear India - here is a simple way to limit demand: price.
Petition the central banks to allow gold to price based on price discovery, or as it is also known supply and demand. Because if gold were to cost $2000,$5000, $10,000/oz then all problems resulting from excess demand would immediately disappear and India's current account would be back to normal.
Of course this will not happen, as the crumbling facade of the imploding fiath based regime would immediately peel away. So back to gold capital controls and other ad hoc made-up measures guaranteed to not only fail but push the price of physical gold much higher.
Those tens of thousands of outstanding delivery requests against JPM are finally starting to make their way through the pipeline: following the withdrawal of 28,380 ounces of gold after nearly one month of radiosilence out of the vault located below 1 CMP, today the CME reported that another 21k troy ounces of eligible gold were withdrawn from the bank (coupled with the reallocation of another 8.8K registered into eligible), taking the total to a fresh record low of 767,752 ounces.
Of course, with disclaimers such as this from the Comex...
The information in this report is taken from sources believed to be reliable; however,
the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness.
This report is produced for information purposes only.
Emerging market (EM) assets – currencies, debt, and stocks – all had a pretty terrible month in May. Poor performance in emerging markets was so pronounced during the month of May alone that several Wall Street shops are now out with big calls declaring the "end of the bull market."
However, despite the wave of negative sentiment that has hit emerging markets, macro hedge funds were in there buying up EM last month. "Based on our exposure analysis, Macros bought EM exposure to the highest since October 2011, while maintaining their net long positions in [Europe, Australasia, and the Far East]," writes BofA Merrill Lynch analyst Stephen Suttmeier in the investment bank's latest Hedge Fund Monitor report. It looks like either the macro funds are taking a bath on their increased exposure to EM, or they see the latest movements in the market as a good buying opportunity.
2013 - STATISM
STATISM - Democracies Have A Bad History -> Imperialism
The United States is estimated to have anything from 700 military bases around the world to more than 1000. Hans-Hermann Hoppe asks "how can democracy be a stable equilibrium if it is possible that it be transformed democratically into a dictatorship, i.e., a system which is considered not stable?" Concluding it may be better to heed the advice of Erik von Kuehnelt-Leddihn and, instead of aiming to make the world safe for democracy, we try making it safe from democracy - everywhere, but most importantly in the United States.
"Democracy has nothing to do with freedom. Democracy is a soft variant of communism, and rarely in the history of ideas has it been taken for anything else."
On theoretical grounds: How can democracy be a stable equilibrium if it is possible that it be transformed democratically into a dictatorship, i.e., a system which is considered not stable? Answer: that makes no sense!
Moreover, empirically democracies are anything but stable. As indicated, in multi-cultural societies democracy regularly leads to the discrimination, oppression, or even expulsion and extermination of minorities — hardly a peaceful equilibrium. And in ethnically homogeneous societies, democracy regularly leads to class warfare, which leads to economic crisis, which leads to dictatorship. Think, for example, of post-Czarist Russia, post-World War I Italy, Weimar Germany, Spain, Portugal, and in more recent times Greece, Turkey, Guatemala, Argentina, Chile, and Pakistan.
Not only is this close correlation between democracy and dictatorship troublesome for democratic-peace theorists; worse, they must come to grips with the fact that the dictatorships emerging from crises of democracy are by no means always worse, from a classical liberal or libertarian view, than what would have resulted otherwise. Cases can be easily cited where dictatorships were preferable and an improvement. Think of Italy and Mussolini or Spain and Franco. In addition, how is one to square the starry-eyed advocacy of democracy with the fact that dictators, quite unlike kings who owe their rank to an accident of birth, are often favorites of the masses and in this sense highly democratic? Just think of Lenin or Stalin, who were certainly more democratic than Czar Nicholas II; or think of Hitler, who was definitely more democratic and a "man of the people" than Kaiser Wilhelm II or Kaiser Franz Joseph.
According to democratic-peace theorists, then, it would seem that we are supposed to war against foreign dictators, whether kings or demagogues, in order to install democracies, which then turn into (modern) dictatorships, until finally, one supposes, the United States itself has turned into a dictatorship, owing to the growth of internal state power which results from the endless "emergencies" engendered by foreign wars.
Better, I dare say, to heed the advice of Erik von Kuehnelt-Leddihn and, instead of aiming to make the world safe for democracy, we try making it safe from democracy — everywhere, but most importantly in the United States.
2012 - FINANCIAL REPRESSION
FINANCIAL REPRESSION - The $2.6T Money Market Fund Industry Now Under Attack
The SEC's plan calls for two alternative proposals that it said could be adopted alone or in combination.
FIRST: First piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value (NAV) - a move designed to reduce the risk of runs like those during the financial crisis.
The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not have to move to a floating NAV. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.
The industry has long fought against moving away from a stable share price, which it says is appealing to investors looking for a safe product.
SECOND: The second proposal, meanwhile, would give fund boards for institutional and retail funds the authority to impose so-called "liquidity fees and redemption gates" during times of stress.
That would give funds the power to stop an outflow of investor money, an idea that the SEC's two Republican commissioners last year said they might be able to support.
The first time we wrote about the Volcker-led Group of 30 recommendation to crush Money Markets in January 2010 by effectively imposing capital controls and fund "gates", whose purpose was simply to scare investors out of the $2.6 trillion liquidity pool and force said capital to reallocate into a much more "reflation friendly" asset classes such as stocks, many were concerned but few took it seriously. After all, such a coercive push into a "free" market at the time seemed incomprehensible (if, in reality, turned out to be just a few years ahead of its time).
Fast forward two years to July 2012 when the same proposal of "risk-mitigation" by allocating a portion of the balance to a "loss-absorption fund", which would "create a disincentive to redeem if the fund is likely to have losses" was not only re-espoused by Tim Geithner, and the NY Fed but the SEC put it to a vote and the proposal would have almost passed had it no been for a nay vote by Commissioner Luis Aguilar opposing Mary Schapiro in the last minute. Still, once more many largely unconcerned about the implications behind this urgent push to intervene and establish pseudo-capital controls in this major source of potential stock buying "dry powder."
A few months later, following the coercive bail-in of Cypriot deposits, and the new "blueprint" for Europe bank rescues, whereby the authorities have strongly hinted that no more than the insured limit should be kept as as a deposit at a bank and it is preferred that the balance is invested in stocks or some other ponzi-enabling instrument, many have finally started to wonder if indeed there isn't some overarching strategy to "tax" financial assets in a world slowly but surely going insolvent and where the much desired debt inflation is so slow to materialize (just as we predicted would happen in September of 2011 in The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis").
Today, with a brand new leader, Mary Jo White, now that the clueless and co-opted Mary Schapiro is long gone, the $2.6 trillion Money Market Fund industry is one step closer to finally being gated. But don't it call it that - the SEC prefers the term "protecting investors"
A portion of the $2.6 trillion money market fund industry would be required to fundamentally change how it prices its shares in an effort to reduce the risk of abrupt withdrawals, under a proposal released by U.S. regulators on Wednesday.
Funds could also charge withdrawal fees and delay return of funds to customers in times of financial distress, under the Securities and Exchange Commission's proposal.
The SEC plan comes after a long debate over whether changes made in 2010 were enough to avoid a repeat of a run on money market funds seen at the height of the financial crisis.
Naturally, those who see the writing on the wall - the MMF industry - is not happy:
The fund industry has warned that further major reforms could kill investor interest in money market funds.
Well, of course. After all this is the whole point. Recall what we said in July of 2012:
In a nutshell, money market funds (much more on this below), have always been one of the most hated liquidity intermediaries by the central planners: they don't go into stocks, they don't go into bonds, they just sit there, collecting no interest, but more importantly, are inert, and can not be incorporated into the rehypothecation architecture of shadow banking.
And perhaps that is precisely why the Fed is pulling the scab off an old sore. Recall that for the past year, our primary contention has been that the core reason for all developed world problems is the gradual disappearance of good collateral and money good assets.
Even if the MMF cash were to shift, preemptively, into bonds, or any other "safe" investments, the assets backing the cash can them enter the traditional-shadow liquidity system and buy time: the only real goal at this point. In the process, the cash itself would be "securitized" and provide at least a year or so in additional breathing room for a system that has essentially run out of good liquidity, and in Europe, out of any collateral.
Expect more and more efforts to disgorge the $2.7 trillion in money market funds as the world gets closer and closer to D-Day. And what happens with MMF, will then progress to all other real asset classes as the government truly spreads out its capital controls wings.
Funny: we said this 9 months before a capital control "disgorgement" struck in Cyprus. Fear not: it is coming to every other "taxable" financial asset. But whereas we thought the money market forced capital expropriation would be first, some places like Europe were so desperate they couldn't afford to wait that long.
So what proposals is the SEC planning on applying in order to enforce the capital reallocation pardon avoid investor losses? There are two, both perfect strawmen, and have been well-known since the first time we approached this topic three and a half years ago.
In a compromise move, the SEC's plan mostly focuses on prime funds for institutional investors, which are seen as more prone to runs because those investors are more sophisticated and more likely to pull large blocks of money first if there is a panic.
The SEC estimated that institutional funds represent 37 percent of the market with $1 trillion in assets.
We are not sure what is more amusing: that the SEC is so naive it thinks someone will actually believe it can prevent a capital run in a financial panic, or that its transparent attempt to spook money market investors away from their holdings now that the threat of imminent lock ups and gates looms over their heads is not what this is all about. We anticipate that the SEC will drop numerous analogies to Cyprus as a reminder that if something can be gated, it will be gated.
What is more important, is that unlike Schapiro's plan the current SEC proposal should have no difficulty in passing.
The initial industry reaction on Wednesday indicated the SEC's plan may not generate the same degree of opposition that the SEC faced last summer when then-SEC Chair Mary Schapiro called for what some consider stricter reforms.
Schapiro, who stepped down as SEC head last December, had advocated for a series of possible reforms, including capital buffers and redemption holdbacks, or a broader switch to a floating NAV - two ideas vehemently opposed by the industry.
She was unable to muster the votes needed to issue a proposal for comment after three of her fellow commissioners said they could not support her plan without additional study.
Schapiro's proposal was starkly different from what the SEC unveiled on Wednesday. This time, the SEC's plan contains some proposals that a few fund sponsors have previously said they could live with.
"It has been a journey to get to this point," said SEC Chair Mary Jo White, who took over the agency earlier this spring.
And if the industry is onboard, all the token SEC votes needed to enforce the plan will be in place.
At that point money markets will merely be the latest experiment in behavioral control: how to spook those with money in the multi-trillion industry enough to where they pull their cash and either spend it on trinkets, boosting inflation - a very welcome outcome for the Chairman - or merely investing it in the "stock market." Perhaps instead of a lock up, at times of crisis MMF investors will be given the opion of allocating funds to the Solyndra du jour (a la the Cyprus bank bailout) or lose all the money.
We are confident the central planners will find a way,
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS
2010 - EXTEN D & PRETEND
CORPORATOCRACY - CRONY CAPITALSIM
BILDERBERG MEETING - The Upper Crust
Defintion of Upper Crust: "A bunch of crumbs held together with a little dough!"
The only thing more ominous for the world than a Hindenburg Omen sighting is a Bilderberg Group meeting. The concentration of politicians and business leaders has meant the organisation, founded at the Bilderberg Hotel near Arnhem in 1954, has faced accusations of secrecy. Meetings take place behind closed doors, with a ban on journalists. We suspect the agenda (how the US and Europe can promote growth, the way 'big data' is changing 'almost everything', the challenges facing the continent of Africa, and the threat of cyber warfare) has been somewhat re-arranged as market volatility picks up and the status quo begins to quake once again. The annual gathering of the royalty, statesmen, and business leaders, conspiratorially believed to run the world (snubbing their Illuminati peers and Freemason fellows), will take place this week at the Grove Hotel in London, England. The Telegraph provides the full list of attendees below - for those autogrpah seekers - including Britain's George Osborne, US' Henry Kissinger, Peter Sutherland (the chairman of Goldman Sachs), the Fed's Kevin Warsh, Jeff Bezos?, Peter Thiel, Italy's Mario Monti, and Spain's de Guindos.
Bilderberg delegates in full
Chairman: Henri de Castries, Chairman and CEO, AXA Group
Paul M. Achleitner, Chairman of the Supervisory Board, Deutsche Bank AG
Josef Ackermann, Chairman of the Board, Zurich Insurance Group Ltd
Marcus Agius, Former Chairman, Barclays plc
Helen Alexander, Chairman, UBM plc
Roger C. Altman, Executive Chairman, Evercore Partners
Matti Apunen, Director, Finnish Business and Policy Forum EVA
Susan Athey, Professor of Economics, Stanford Graduate School of Business
Asli Aydintasbas, Columnist, Milliyet Newspaper
Ali Babacan, Turkish Deputy Prime Minister for Economic and Financial Affairs
Ed Balls, Shadow Chancellor of the Exchequer
Francisco Pinto Balsemão, Chairman and CEO, IMPRESA
Nicolas Barré, Managing Editor, Les Echos
José Manuel Barroso, President, European Commission
Nicolas Baverez, Partner, Gibson, Dunn & Crutcher LLP
Olivier de Bavinchove, Commander, Eurocorps
John Bell, Regius Professor of Medicine, University of Oxford
Franco Bernabè, Chairman and CEO, Telecom Italia S.p.A.
Jeff Bezos, Founder and CEO, Amazon.com
Carl Bildt, Swedish Minister for Foreign Affairs
Anders Borg, Swedish Minister for Finance
Jean François van Boxmeer, CEO, Heineken
Svein Richard Brandtzæg, President and CEO, Norsk Hydro ASA
Oscar Bronner, Publisher, Der Standard Medienwelt
Peter Carrington, Former Honorary Chairman, Bilderberg Meetings
Juan Luis Cebrián, Executive Chairman, Grupo PRISA
Edmund Clark, President and CEO, TD Bank Group
Kenneth Clarke, Cabinet Minister
Bjarne Corydon, Danish Minister of Finance
Sherard Cowper-Coles, Business Development Director, International, BAE Systems plc
Enrico Cucchiani, CEO, Intesa Sanpaolo SpA
Etienne Davignon, Belgian Minister of State; Former Chairman, Bilderberg Meetings
Ian Davis, Senior Partner Emeritus, McKinsey & Company
Robbert H. Dijkgraaf, Director and Leon Levy Professor, Institute for Advanced Study
Haluk Dinçer, President, Retail and Insurance Group, Sabanci Holding A.S.
Robert Dudley, Group Chief Executive, BP plc
Nicholas N. Eberstadt, Henry Wendt Chair in Political Economy, American Enterprise Institute
Espen Barth Eide, Norwegian Minister of Foreign Affairs
Börje Ekholm, President and CEO, Investor AB
Thomas Enders, CEO, EADS
J. Michael Evans, Vice Chairman, Goldman Sachs & Co.
THE pressure on tax-avoiders is mounting. In the latest episode Tim Cook, Apple’s boss, was called before a Senate subcommittee to explain why the tech giant had paid no tax on $74 billion of its profits over the past four years—though it has done nothing illegal. This comes at a time when America's corporate profits are at a record high, thanks to
the swift sacking of workers at the start of the recession,
lower interest expenses, and
the fact that cheap labour in emerging markets has eroded union power, allowing firms to move production offshore and defy demands for pay rises.
Meanwhile corporation tax, which makes up 10% of the taxman’s total haul (down from about a third in the 1950s) has plummeted. An increase in businesses structuring themselves as partnerships and "S" corporations, which subject profits to individual rather than corporate income tax, is in part to blame.
But tax havens are also culprits, as they lower their tax levels to lure in bigger firms.
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
CORRUPTION & MALFEASANCE
NATURE OF WORK
CATALYSTS - FEAR & GREED
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Tipping Points Life Cycle - Explained Click on image to enlarge
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