Jul 092014
 
 July 9, 2014  Posted by at 6:07 pm Finance Tagged with: , , ,
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Harris & Ewing Controlled demolition, Washington DC Sep 17 1935

Irwin Kellner at MarketWatch phrases it in these colorful words: … what do you think will happen to stocks when the Fed decides to take away the punch bowl and raise rates? I don’t know, but if I were you, I would not walk under any open windows down on Wall Street.

In these words, he expresses what increasing numbers of writers and analysts point to: that the exuberant market confidence we’ve seen is dwindling, and nervousness takes over. And when people get nervous over the spoils of free money that nobody’s ever in their lives worked a single inch for, that could easily spread and catch on like wildfire. When fundamentals are long gone, and thereby so are real asset valuations, the herd mentality that exists inside all of us can take over with little constraint.

It’s interesting to see how this mind- and moodshift takes place in the main media, who until very recently said nary a word about the flipside of the Fed’s easy money, and now start to form a choir. Of course they always operate this way, none of them want to be caught being the sole voice out; the curse of the mass media. The Automatic Earth, Zero Hedge and other peripheral media don’t have that same problem. But that also means that we are the ones for you to follow, not the major news- and/or investor media; they’ll always be late by definition (and then claim they knew all along). They’re as driven by herd behavior as the stock markets themselves are.

Here’s a sample from the past day, starting with Dave Weidner at MarketWatch:

Dow 17,000 Is On The Wrong Side Of History

… more than any modern bull market, this one stands alone in that it’s squarely out of step with economic growth. It’s being driven higher by just a few wealthy participants and traders who have tacitly, perhaps even unknowingly, agreed to drive prices higher. The main reason for that is two-fold. First, low interest rates have made other investments unattractive. The 10-year U.S. Treasury is yielding only 2.62%. Inflation is running at an annual rate of 2%. That makes corporate bonds, certificates of deposit (which yield less than T-bills) and other fixed-income products largely a losing proposition. Those who have been buying bonds have been doing so for safety.

Second, the investing public isn’t really buying stocks. [..] ownership by households is shrinking, at 45%, down from more than 65% in 2002. [..] … stocks have become more attractive not because of a surging economy or strengthening corporate profits, but because they are the last-place finishers in an ugly contest.

Even Bloomberg cautiously joins the chorus, a major step for them:

Concern Over ‘Severe’ Pullback Sends US Stocks Lower

U.S. shares extended a selloff [yesterday], with the Nasdaq Composite Index sliding the most in two months, as Raymond James & Associates said equities are vulnerable to losses and Citigroup Inc. cited investor concerns for a “severe” pullback.

[..] “Many investors wonder if the ride is over,” Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., said in a report today. “As stock indices hit new highs, there are those that fear further gains, given defensive positioning, but more worry about buying in now just in time for a severe pullback.” [..] “I do think we are vulnerable to a 10% to 12% decline in the weeks ahead, albeit within the construct of a secular bull market that has years left to run,” Jeffrey Saut, chief investment strategist at Raymond James wrote …

BusinessWeek focuses on the specifics of the bond trade:

Wall Street’s Worst-Case Scenario: A Run on Bonds

All it takes is a few mouse clicks to buy shares in the Scout Unconstrained Bond Fund, an exchange-traded fund that tracks a concoction of debt tied to the government, financial firms, mortgage pools, and other entities. And all it takes is a few mouse clicks to sell—something that has begun to worry Wall Street. Since the financial crisis, $900 billion has flowed into bond mutual funds and ETFs such as Scout Unconstrained, bringing the industry’s total holdings to $3 trillion. Fund investors who sell shares get their money back almost immediately, as if they were making a withdrawal from a money-market fund. The bonds that the funds own are far less liquid [..]

If too many people decide to get out of bond funds at the same time, the wave of selling could lead buyers to sit on their hands, bringing the system to a halt. [..] The Fed’s low-interest-rate policy reduced the yields on safe, short-term vehicles such as money-market funds, savings accounts, and CDs, and led investors to seek higher returns from bond funds, including ones that invest in risky high-yield debt and other speculative issues. Unlike money-market funds and CDs, though, bonds lose value when rates rise …

[..] … the riskier the bond, the more vulnerable it is to rising rates. Wall Street firms are warning clients that if fund investors who view bonds as safe are hit with sudden losses, there could be something akin to a run on the bond market. The worry isn’t only that investors’ bottom lines would take a hit. It’s that a mass selloff could swamp the market, with demands for redemptions forcing fund managers to unload their bonds at rock-bottom prices. The ensuing losses would encourage even more investors to redeem, perpetuating the downward spiral.

The fear of a mass selloff happening and catching you, as an investor, off guard. It’s starting to keep them up at night. Not in the least because, while they may have had a great time profit wise riding the free credit wave, they’ve known in the back of their heads the whole way, that something wasn’t right. They simply don’t care what it all does to their societies, and now they risk missing out altogether on precisely that. Example: ZIRP hasn’t built growth. What a surprise.

Central Banks Seeking to Spur Supply Side Miracle Come Up Short

Central bankers’ experiment with zero interest rates is falling short on the supply side of their economies. Productivity and labor-force growth are failing to accelerate despite policies Bank of England Governor Mark Carney said should deliver the economic growth needed to generate “supply-side improvement.” [..] The argument of policy makers was that a by-product of promoting demand would be an expansion in their economies’ capacity.

The theory went that if low interest rates boosted growth then that would encourage the corporate investment needed to lift productivity or the hiring necessary to draw disgruntled jobless back into labor markets or turn part-time positions into full-time ones. [..] a slide in supply has “depressed activity enormously relative to its pre-financial crisis trajectory,” say the JPMorgan economists.

According to Irwin Kellner, whom I quoted above, stocks are the new bubble.

Say Hello To US Economy’s Newest Bubble

When good news is good news, and bad news is good news, it’s time to take some money off the table. Call it irrational exuberance, part two. Like old man river, the stock market just keeps rolling along. Last week it was Dow 17,000. Will this week see the market go even higher? Before you jump on the bulls’ bandwagon, let me call to your attention a couple of salient statistics. At today’s level, the Dow industrials are up 5% since the beginning of this year. This is on top of a 35% leap in 2013.

And in case you are keeping score, the Dow is now a whopping 155% above its low back in March 2009. All that said, there are a number of warning signs out there that suggest the party may soon be over. For one thing the economy has not grown anywhere near as much as stocks over the past 5-1/3 years; neither have corporate profits. Additionally, price-to-earnings ratios are well above average. Robert Shiller, the noted Yale professor, economist and author, thinks that the market today is about at the valuation it was running at in 2008, just before stocks plunged.

In the past, the stock market has managed to avoid such excesses by dropping in price. A decline of 10% (a.k.a. a correction) used to occur about once every 12 months. This bull market has managed to avoid a correction for 33 months — far longer than average. And correction or no, the current bull market is the fourth-longest since the Crash of 1929.

[..] … bond buyers are concerned about the longevity of the economic recovery. In the face of all these warning signs, the stock market continues to work its way higher. Stocks are being supported by a lack of alternatives to low-interest bonds and bills. The Federal Reserve is keeping rates low in order to support the economy. In the process, it is inflating stock prices, thus creating a bubble. So let me ask you, what do you think will happen to stocks when the Fed decides to take away the punch bowl and raise rates? I don’t know, but if I were you, I would not walk under any open windows down on Wall Street.

While Reuters thinks stocks are the new subprime:

Scoping The New Subprime As Watchdogs Cry ‘Bubble’

As global watchdogs warn that euphoric financial markets are divorced from economic reality and acting out some reprise of the credit bubble and bust of the past decade, fears of another subprime timebomb are inevitable. But even if you believe another crisis is brewing, it’s most likely not where it was last time. At least not in U.S. securitised mortgages [..] … sales of private U.S. mortgage-backed securities have dwindled to just $600 million so far this year – a mere sliver of the record $726 billion of new bonds in 2005. For what it’s worth, new U.S. bonds backed by subprime mortgages have all but vanished. Bonds backed by subprime U.S. auto-loans have taken up some of the running, but not on anything like the same scale.

Yet in its latest annual report the Bank for International Settlements seemed pretty convinced global debt markets are once again in risky territory and heading for a fall. The BIS focused mainly on fresh accumulation of new corporate and sovereign debt by asset managers rather than banks and scratched its head about the coincidence of sub-par economic activity and record low default rates that in turn depress borrowing rates and credit spreads ever lower nearly everywhere. [..] … if all this was simply due to zero official rates, it could all suddenly go into reverse when they rise. “It is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally …

Even banks don’t fully believe the hype – which saved their lives and behinds – anymore:

Bankers Warn Over Rising US Business Lending

US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery. Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth. [..] “The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out.” He added: “They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company. Traditionally banks have been very cautious of that.”

At NotQuant (h/t Durden), there is even the fear that the Fed will try its hand at controlled demolition. Which of course, if true, has 0% chance of succeeding, and 100% of veering out of control, since central bankers overestimate their powers in crazy ways – at least in their public appearances -.

Is The Fed Going To Attempt A Controlled Collapse?

As most Fed watchers know, last week was interesting because Janet Yellen, speaking at IMF came out and said something quite surprising. In a nutshell, she said “It’s not the Fed’s job to pop bubbles”. While many market participants immediately took this to mean, “To the moon, Alice!” and started buying equities hand over fist, there’s another possible explanation for Mrs. Yellen’s proclamation of unwillingness: The Fed could be preparing to do exactly what it said it wouldn’t. In [its] recently released Annual Report, the BIS made a rather ominous recommendation to it’s member banks: Pop this bubble now. Their specific language wasn’t quite so direct, but the message was just as clear.

The risk of normalising too late and too gradually should not be underestimated… The trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on. Few are ready to curb financial booms that make everyone feel illusively richer…

… there are a couple of fascinating things to note about this recommendation. First, for anyone who thinks that the concept of intentionally crashing the stock market is the stuff of conspiracy theorists, that notion is now dead and buried. It’s extremely clear from the BIS’ language, that the concept of initiating a collapse is openly discussed as a policy measure: “bring forward the downward leg of the cycle”. [..] The age of Fed-glasnost is apparently coming to an end. So indulge us for a moment as we present another possibility: Yellen is going to orchestrate a controlled collapse. Or, at least one which we hope is controlled.

Sorry, guys, but it’s out of the Fed’s hands. There are too many zombies walking the streets out there, and too much complacency, too much belief in the Fed’s – and ECB’s, and BOE’s – omnipotence. While they can lead on the way up, they’ll be absolutely irrelevant on the way down. The Fed itself has indicated that without QE 1,2,3, stock markets would be 50+% lower. So what do you think will happen when the herd mentality takes over the financial system as it shrinks? You think people will listen to Yellen and Draghi and risk losing their shirts and their homes and their livelihoods? I think not.

But still, many will be caught standing in those open windows in Wall Street anyway, because such is the spirit of the herd: it leaves many victims behind in its wake. When the wildebeest do their epic proverbial crossing of the Zambezi river every year, most of the casualties are not due to crocodiles, but to being trampled by their own herd.

Dow 17,000 Is On The Wrong Side Of History (MarketWatch)

Today’s bull market is the fourth biggest since the 1929 crash after stocks have nearly tripled since the financial-crisis low set in early 2009. But more than any modern bull market, this one stands alone in that it’s squarely out of step with economic growth. It’s being driven higher by just a few wealthy participants and traders who have tacitly, perhaps even unknowingly, agreed to drive prices higher. The main reason for that is two-fold. First, low interest rates have made other investments unattractive. The 10-year U.S. Treasury is yielding only 2.62%. Inflation is running at an annual rate of 2%. That makes corporate bonds, certificates of deposit (which yield less than T-bills) and other fixed-income products largely a losing proposition. Those who have been buying bonds have been doing so for safety.

Second, the investing public isn’t really buying stocks. A study by the Pew Research Center, published in May, found stock ownership by households is shrinking, at 45%, down from more than 65% in 2002. Even with the Dow Jones Industrial Average reaching the 17,000 milestone, investors are leaving stock mutual funds, not buying them. This series of circumstances is unique. Unlike central bankers’ response to the Great Depression, the Federal Reserve has embraced Keynesian economics and flooded the economy with dollars on a scale never seen before. The Fed’s balance sheet has more than quadrupled to $4.3 trillion since 2008.

In short, stocks have become more attractive not because of a surging economy or strengthening corporate profits, but because they are the last-place finishers in an ugly contest. That’s a significant difference with boom markets of the past. For instance, between 1935 and 1937, the stock market lagged an economic recovery. U.S. gross domestic product rose 10.8% in 1934 and 8.9% in 1935. But stocks only took off in that last year, eventually logging a 132% increase until 1937. In that last year, economic growth was robust, but it came crashing down in 1938. GDP contracted 3.3%, and deflation added to woes, with prices falling 2.8%.

Read more …

Concern Over ‘Severe’ Pullback Sends US Stocks Lower (Bloomberg)

U.S. shares extended a selloff [yesterday], with the Nasdaq Composite Index sliding the most in two months, as Raymond James & Associates said equities are vulnerable to losses and Citigroup Inc. cited investor concerns for a “severe” pullback. Twitter Inc. and Pandora Media Inc., which trade at more than 150 times earnings, plunged at least 7% to pace a Dow Jones gauge of Internet shares to the biggest drop since May. The Nasdaq Biotechnology Index headed for its steepest two-day slide since April. Goldman Sachs Group Inc. and JPMorgan Chase & Co. sank more than 1.6% to lead bank shares lower. Alcoa Inc., the largest American aluminum producer, rose 1.3% in late trading after reporting earnings that topped estimates.

[..] “Many investors wonder if the ride is over,” Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., said in a report today. “As stock indices hit new highs, there are those that fear further gains, given defensive positioning, but more worry about buying in now just in time for a severe pullback.” [..] “I do think we are vulnerable to a 10% to 12% decline in the weeks ahead, albeit within the construct of a secular bull market that has years left to run,” Jeffrey Saut, chief investment strategist at Raymond James wrote in a post on the firm’s website.

Read more …

Wall Street’s Worst-Case Scenario: A Run on Bonds (BW)

All it takes is a few mouse clicks to buy shares in the Scout Unconstrained Bond Fund, an exchange-traded fund that tracks a concoction of debt tied to the government, financial firms, mortgage pools, and other entities. And all it takes is a few mouse clicks to sell—something that has begun to worry Wall Street. Since the financial crisis, $900 billion has flowed into bond mutual funds and ETFs such as Scout Unconstrained, bringing the industry’s total holdings to $3 trillion. Fund investors who sell shares get their money back almost immediately, as if they were making a withdrawal from a money-market fund. The bonds that the funds own are far less liquid, often trading in telephone conversations or e-mails between brokers, away from exchanges.

If too many people decide to get out of bond funds at the same time, the wave of selling could lead buyers to sit on their hands, bringing the system to a halt. In the aftermath of the financial crisis, the Federal Reserve has kept short-term interest rates near zero to spur borrowing and boost economic activity. The unemployment rate has fallen to 6.3%, below the Fed’s target of 6.5%, and the central bank is curtailing its easy-money policies, reducing the amount of bonds it buys each month and getting closer to raising its benchmark interest rate. Economists surveyed by Bloomberg say rates could rise as soon as the end of this year.

The Fed’s low-interest-rate policy reduced the yields on safe, short-term vehicles such as money-market funds, savings accounts, and CDs, and led investors to seek higher returns from bond funds, including ones that invest in risky high-yield debt and other speculative issues. Unlike money-market funds and CDs, though, bonds lose value when rates rise, depressing the prices of bond mutual funds and ETFs. And the riskier the bond, the more vulnerable it is to rising rates. Wall Street firms are warning clients that if fund investors who view bonds as safe are hit with sudden losses, there could be something akin to a run on the bond market. The worry isn’t only that investors’ bottom lines would take a hit. It’s that a mass selloff could swamp the market, with demands for redemptions forcing fund managers to unload their bonds at rock-bottom prices. The ensuing losses would encourage even more investors to redeem, perpetuating the downward spiral.

Read more …

ZIRP doesn’t build growth. What a surprise.

Central Banks Seeking to Spur Supply Side Miracle Come Up Short (Bloomberg)

Central bankers’ experiment with zero interest rates is falling short on the supply side of their economies. Productivity and labor-force growth are failing to accelerate despite policies Bank of England Governor Mark Carney said should deliver the economic growth needed to generate “supply-side improvement.” “Weaker supply-side performance may dampen the enthusiasm of developed-market central banks to experiment with their growth/inflation trade-off to elicit strong supply,” JPMorgan Chase & Co. economists led by Bruce Kasman said in a July 4 report. The argument of policy makers was that a by-product of promoting demand would be an expansion in their economies’ capacity.

The theory went that if low interest rates boosted growth then that would encourage the corporate investment needed to lift productivity or the hiring necessary to draw disgruntled jobless back into labor markets or turn part-time positions into full-time ones. “Central banks can affect people’s decisions about how much to work and firms’ decisions about how much to invest,” Carney said in December. Doing so should help damp inflation, handing the monetary authorities even more time to focus on aiding growth. The problem is that if the supply-side doesn’t improve, then prices risk accelerating at a weaker level of expansion, requiring earlier interest-rate increases. The plan doesn’t seem to be working and a slide in supply has “depressed activity enormously relative to its pre-financial crisis trajectory,” say the JPMorgan economists.

Read more …

Stocks are the new bubble.

Say Hello To US Economy’s Newest Bubble (MarketWatch)

When good news is good news, and bad news is good news, it’s time to take some money off the table. Call it irrational exuberance, part two. Like old man river, the stock market just keeps rolling along. Last week it was Dow 17,000. Will this week see the market go even higher? Before you jump on the bulls’ bandwagon, let me call to your attention a couple of salient statistics. At today’s level, the Dow industrials are up 5% since the beginning of this year. This is on top of a 35% leap in 2013. And in case you are keeping score, the Dow is now a whopping 155% above its low back in March 2009. All that said, there are a number of warning signs out there that suggest the party may soon be over. For one thing the economy has not grown anywhere near as much as stocks over the past 5-1/3 years; neither have corporate profits.

Additionally, price-to-earnings ratios are well above average. Robert Shiller, the noted Yale professor, economist and author, thinks that the market today is about at the valuation it was running at in 2008, just before stocks plunged. In the past, the stock market has managed to avoid such excesses by dropping in price. A decline of 10% (a.k.a. a correction) used to occur about once every 12 months. This bull market has managed to avoid a correction for 33 months — far longer than average. And correction or no, the current bull market is the fourth-longest since the Crash of 1929. If you don’t have angst yet, here is another bit of history to chew on: Stocks usually take a header late in the third quarter, as well as in October. Indeed, some of the market’s biggest declines have occurred during this period.

Here is another tidbit: Bond prices are up — the yield on the bellwether 10-year Treasury note, at 2.61% Monday night, is down from over 3% at the end of last year. This suggests that bond buyers are concerned about the longevity of the economic recovery. In the face of all these warning signs, the stock market continues to work its way higher. Stocks are being supported by a lack of alternatives to low-interest bonds and bills. The Federal Reserve is keeping rates low in order to support the economy. In the process, it is inflating stock prices, thus creating a bubble. So let me ask you, what do you think will happen to stocks when the Fed decides to take away the punch bowl and raise rates? I don’t know, but if I were you, I would not walk under any open windows down on Wall Street.

Read more …

Stocks are the new subprime.

Scoping The New Subprime As Watchdogs Cry ‘Bubble’ (Reuters)

As global watchdogs warn that euphoric financial markets are divorced from economic reality and acting out some reprise of the credit bubble and bust of the past decade, fears of another subprime timebomb are inevitable. But even if you believe another crisis is brewing, it’s most likely not where it was last time. At least not in U.S. securitised mortgages – the heart of systemic blowout that nearly brought down the global banking system in 2008. A mix of tighter regulation, stricter underwriting standards and the lowest new mortgage applications in almost 20 years means sales of private U.S. mortgage-backed securities have dwindled to just $600 million (350 million pounds) so far this year – a mere sliver of the record $726 billion of new bonds in 2005. For what it’s worth, new U.S. bonds backed by subprime mortgages chave all but vanished. Bonds backed by subprime U.S. auto-loans have taken up some of the running, but not on anything like the same scale.

Yet in its latest annual report the Bank for International Settlements, the Basel-based forum for the world’s major central banks, seemed pretty convinced global debt markets are once again in risky territory and heading for a fall. The BIS focused mainly on fresh accumulation of new corporate and sovereign debt by asset managers rather than banks and scratched its head about the coincidence of sub-par economic activity and record low default rates that in turn depress borrowing rates and credit spreads ever lower nearly everywhere. ‘Exuberant’ equity and real estate and rock-bottom financial volatility merely fed off that picture, it said. And it added that if all this was simply due to zero official rates, it could all suddenly go into reverse when they rise. “It is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” the report mused.

Read more …

No doubt.

Is The Fed Going To Attempt A Controlled Collapse? (NotQuant)

As most Fed watchers know, last week was interesting because Janet Yellen, speaking at IMF came out and said something quite surprising. In a nutshell, she said “It’s not the Fed’s job to pop bubbles”. While many market participants immediately took this to mean, “To the moon, Alice!” and started buying equities hand over fist, there’s another possible explanation for Mrs. Yellen’s proclamation of unwillingness: The Fed could be preparing to do exactly what it said it wouldn’t. Here’s a quick re-cap of events: In the recently released Annual Report of the BIS: Bank for International Settlements (commonly thought of as the “central bank’s central bank”) the BIS made a rather ominous recommendation to it’s member banks: Pop this bubble now. Their specific language wasn’t quite so direct, but the message was just as clear.

The risk of normalising too late and too gradually should not be underestimated… The trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on . Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms,” … “The road ahead may be a long one. All the more reason, then, to start the journey sooner rather than later.”

As we noted last week, there are a couple of fascinating things to note about this recommendation. First, for anyone who thinks that the concept of intentionally crashing the stock market is the stuff of conspiracy theorists, that notion is now dead and buried. It’s extremely clear from the BIS’ language, that the concept of initiating a collapse is openly discussed as a policy measure. This was a direct recommendation to bring on the crash – or as they say so colorfully, to “bring forward the downward leg of the cycle”. But what else is fascinating is that just days after the BIS report was released, Janet Yellen seemed to counter the BIS in her presentation to the IMF:

“At this point, it should be clear that I think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a ‘bubble’ and whether policymakers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.”

What Yellen seemed to be saying – quite possibly in direct response to the BIS’s recommendations — is that the Fed isn’t in the business of popping bubbles, nor does it see a reason to intervene in their development. So to summarize: The BIS publicly recommended popping the bubble now… and Yellen said no. So what’s going on? We could take all of this at face value if we chose: The BIS playing hawk, and the Fed playing dove. And that might well be the case — as to some extent Yellen is still something of an unknown entity. But there is one more twist to the puzzle: Yellen has openly stated that she would not be offering clear guidance to the market as her predecessor had advocated. The age of Fed-glastnost is apparently coming to an end. So indulge us for a moment as we present another possibility: Yellen is going to orchestrate a controlled collapse. Or, at least one which we hope is controlled.

Read more …

“Smoothing out the business cycle will in the short term dampen volatility, but as the market and the economy moves forward in time, the inefficient allocation of resources will increase the systemic risk” …

From Here To Eternity In The Age Of Low Interest Rates (Saxo Bank)

Eternity is here. Eternity in low interest rates for longer. Eternity in excess return from stock markets, eternity in no growth, eternity in low productivity, eternity in chasing yields. The chasing yield game now joined by central banks like the Swiss National Bank and recently also big investors like Pimco, who at the top of the market no longer sees the stock market in a bubble! The main common denominator is low interest rates – so where the market and Pimco mathematically correctly uses the low interest rates for longer as an input which produces a superior return, a few of us who were around in 1987,1992, 1998, 2000, and 2007/08 know that market tends to mean-revert. This concept that if we have a superior return over a longer period, it will need to be met by a negative performance to average “out” is dead now.

Stock Market Bubble: We have a generation of traders and investors who see any dip as a buying opportunity and policy makers who argue everything being equal, it’s better to have a stock market bubble than disorderly markets and depression. The illusion is almost perfect now – probably the best argued and most confidently performed illusion in my career. At least in those years I’ve already mentioned, there was a sense of urgency. The policy makers were less united and more independent thinking. It was simply pre-Greenspan and his belief in smoothing out business cycles. Smoothing out the business cycle will in the short term dampen volatility, but as the market and the economy moves forward in time, the inefficient allocation of resources will increase the systemic risk, but, similar to today, the system first stores the energy, then releases a clearing process. I am reminded of a classic mechanical resonance system.

Mechanical resonance is the tendency of a mechanical system to respond at greater amplitude when the frequency of its oscillations matches the system’s natural frequency of vibration (its resonance frequency or resonant frequency) than it does at other frequencies. It may cause violent swaying motions and even catastrophic failure in improperly constructed structures including bridges, buildings and airplanes—a phenomenon known as resonance disaster. The illustration of this being the Gertie Bridge – I am sure you can make the analogy – as the market makes higher and higher returns (amplitude) and gets confirmed over longer periods (frequency) it reaches an “eternity” or a new paradigm, or “this time its different”… The system self feeds into higher and higher returns and less and less volatility until the “energy is released” when the “load”/misallocation is too high for the system to carry.

Zero Bound Rates: We learn in economics that the marginal cost of capital is the true allocator of capital. Whoever can and will pay the highest marginal price of money gets it – in today’s world. However, EVERYONE and I mean everyone inside the 20% of the economy which is the listed companies and banks get whatever credit they want and need indiscriminately of their marginal cost and risk. The land of zero bound rates. To make the example even more clear, this afternoon I could go to my bank manager with a proposal to put 100 or even 1,000s of hot dog stands on the main street in Fredensborg(where I live) – my expected return will be infinite as long as the interest rate is zero!!!!!

To make the mistake, in my opinion, of thinking that ANY analysis can really be done when we are at zero percent is the vital flaw of Pimco, SNB, policy makers and the stock market, so I am not saying the Dow in 100.000 is not possible, neither will I second guess Pimco’s new found bullishness, I am merely applying history, maths, engineering and economics laws to the issue. It could be me who needs to be re-educated, but to be honest, and with no false modesty, I am yet to meet a single argument or belief which is not entirely driven by low interest rates as the driver of the markets.

Read more …

Free money to boost your share price.

Bankers Warn Over Rising US Business Lending (FT)

US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery. Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth. “Loan growth doesn’t seem to be driven by the underpinning of an economic recovery in terms of new warehouses and [capital expenditure],” said one senior corporate banking executive at a large US bank. “You don’t see the foundation, the real strong demand”. Total outstanding commercial and industrial (C & I) lending, which runs the gamut of loans to sectors from energy to healthcare and excludes consumer or real estate loans, rose to a record $1.7tn in May from a post-crisis trough of $1.2tn nearly four years ago, according to data from the Federal Reserve Bank of St Louis.

For the top 25 US commercial banks by assets, C & I lending grew by 10.5% in the quarter to June 25 from the previous quarter, according to annualised weekly data from the Federal Reserve. This type of lending is an important source of business for the largest US banks, representing about a fifth of all loans made by the likes of Bank of America, JPMorgan Chase and Wells Fargo, according to Citigroup research. While low interest rates have made business lending less lucrative, the relationships it forges open doors for the banks to sell other services such as treasury management, hedging and leasing. A second corporate banking executive at a large regional lender said: “The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out.” He added: “They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company. Traditionally banks have been very cautious of that.”

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They print it for free and then come buy America.

Chinese Cash Buyers Fuel $22 Billion in U.S. Home Sales (Bloomberg)

Buyers from Greater China, including people from Hong Kong and Taiwan, spent $22 billion on U.S. homes in the year through March, up 72% from the same period in 2013 and more than any other nationality, the National Association of Realtors said yesterday in its annual report on foreign home purchases. That’s 24 cents of every dollar spent by international homebuyers, according to the survey of 3,547 real estate agents. Chinese purchases of U.S. homes are likely to continue increasing as the country’s swelling ranks of affluent consumers seek refuge from pollution and political and economic uncertainty, according to Thilo Hanemann, who tracks cross-border investment for the New York-based Rhodium Group.

“A lot of people are trying to hedge against a generally bearish outlook for the Chinese economy,” Hanemann said in a telephone interview. “Buying real estate overseas has been in the past limited to a relatively small group of wealthy individuals and sometimes government officials. But it’s become a much bigger trend, involving affluent middle-class people.” Chinese buyers paid a median of $523,148 per transaction, compared with a U.S. median price of $199,575 for existing-home sales. While Canadians bought more houses than the Chinese, they spent less – a median of $212,500 per residence, for a total of $13.8 billion.

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More debt that will be interpreted as positive.

Consumer Credit in U.S. Jumps On Car Loans (Bloomberg)

Consumer borrowing in the U.S. surged again in May as Americans took out more loans to purchase cars. The $19.6 billion increase in credit followed a revised $26.1 billion gain in April, Federal Reserve figures showed today in Washington. Non-revolving lending, which includes auto and school loans, advanced by the most in a year. Stronger employment and stock-market gains this year are giving consumers the confidence to take on more debt. The figures coincide with robust auto sales and greater demand for furniture and appliances tied to the real-estate recovery, indicating the economy is rebounding from a first-quarter slump. “This says a lot about the confidence of consumers and bodes well in terms of future spending,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who projected a $20 billion increase in credit. “Their ability to take on more debt because of the firmer job market means this economy has some staying power.”

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True for many kinds of investments.

Just Try to Get Money Out of Junk Loans When Everyone Else Flees (Bloomberg)

Junk-loan funds harbor a significant, structural risk that’s been masked by a three-year rally: Managers may struggle to raise enough cash to meet investor redemptions if too many try to get out at once. While investors have plowed into the loan market by purchasing mutual-fund shares that trade daily, it typically takes more than two weeks for a money manager selling loans to get cash in exchange for the debt. The concern is that this discrepancy will make it difficult for fund investors to leave the $750 billion leveraged-loan market, where individuals have been playing a bigger role than ever. “Should investor flows reverse, the mismatch in bank-loan funds could pose a material risk,” Moody’s Investors Service analysts led by Stephen Tu wrote in a July 7 report.

“Methods to address sizable investor redemptions in bank loan funds are inadequate.” Speculative-grade loans have benefited from a drive toward higher-yielding assets spurred by the easy-money policies of central banks across the globe. They’ve gained about 19% since the end of 2011, luring individuals with the promise of floating-rate coupon payments as the economy has shown signs of improvement and the Federal Reserve winds down its unprecedented stimulus. Many have also come to view the risks associated with loans as comparable to those of junk bonds, but there are some fundamental differences between the two. Loans aren’t securities, which means the market isn’t overseen by the U.S. Securities and Exchange Commission. This dark corner still relies on lawyers and back-office clerks to scrutinize paper documents on each trade.

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All the way to nothing.

Is Germany Leading The Eurozone Toward The No-Growth Cliff? (The Tell)

Bye, bye German growth story. In less than a year, Germany — touted as Europe’s economic engine, the region’s powerhouse, etc. — could be heading toward the no-growth cliff and possibly dragging the euro zone down with it. Manufacturing is weak, it looks like unemployment is creeping up again and fresh data out on Tuesday show exports and imports unexpectedly fell in May. As icing on the cake, the OECD’s leading indicator for Germany fell for a third straight month, a sign of “growth losing momentum.” So should we be worried? You bet we should. According to Steen Jakobsen, chief economist at Saxo Bank, the weak German economy remains the biggest surprise in Europe at the moment. So much so, that by the first quarter of 2015, GDP growth will likely have fallen all the way to nothing.

“This will probably mean that we’ll see a correction in the stock market and higher unemployment,” he said. “If the economy slows to zero, it will weigh on euro-zone growth and the euro zone could also slip back to 0% growth.”

A no-growth quarter for Germany would be a drastic departure from the country’s economic performance this year. In the first three months of 2014, Germany’s economy expanded by 0.8%, marking the strongest quarterly output growth in three years. But it looks like second-quarter growth will land at a meager 0.1%. So what happened? According to Jakobsen, the answer can be found both globally and domestically. First, several Asian countries, led by China, have shifted their tactics from growth at all costs to quality growth. That essentially means lower GDP expansion, which will hurt countries partly dependent on exporting to China, such as Germany.

“Germany, like Australia, was riding the Asian tiger throughout the early parts of the crisis and now those early stages of strength will be replaced by weakness,” he said.

Secondly, Europe’s biggest economy has one of the most expensive energy policies in the world. The government has agreed to phase out nuclear power by 2022 in an effort to rely more on renewable energy — a great strategy from an environmental point of view, but an extremely expensive one.

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Germany’s a dangerous example, Rogoff.

The European Debt Wish (Kenneth Rogoff)

Eurozone leaders continue to debate how best to reinvigorate economic growth, with French and Italian leaders now arguing that the eurozone’s rigid “fiscal compact” should be loosened. Meanwhile, the leaders of the eurozone’s northern members countries continue to push for more serious implementation of structural reform. Ideally, both sides will get their way, but it is difficult to see an endgame that does not involve significant debt restructuring or rescheduling. The inability of Europe’s politicians to contemplate this scenario is placing a huge burden on the European Central Bank. Although there are many explanations for the eurozone’s lagging recovery, it is clear that the overhang of both public and private debt looms large. The gross debts of households and financial institutions are higher today as a share of national income than they were before the financial crisis. Nonfinancial corporate debt has fallen only slightly.

And government debt, of course, has risen sharply, owing to bank bailouts and a sharp, recession-fueled decline in tax revenues. Yes, Europe is also wrestling with an ageing population. Southern eurozone countries such as Italy and Spain have suffered from rising competition with China in textiles and light manufacturing industries. But just as the pre-crisis credit boom masked underlying structural problems, post-crisis credit constraints have greatly amplified the downturn. True, German growth owes much to the country’s willingness a decade ago to engage in painful economic reforms, especially of labour market rules. Today, Germany appears to have full employment and above-trend growth. German leaders believe, with some justification, that if France and Italy were to adopt similar reforms, the changes would work wonders for their economies’ long-term growth.

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Lip service.

Republican Bill Seeks Monetary Policy Limits for Fed (Bloomberg)

House Republicans proposed legislation to limit how the Federal Reserve makes monetary policy, a week before Chair Janet Yellen is scheduled to deliver her semiannual testimony to lawmakers. The draft bill announced today in Washington would require the policy-setting Federal Open Market Committee to describe a strategy or rule for how it would adjust interest rates. Currently, the Fed doesn’t bind itself to a formula, preferring flexibility in an economy that continues to elude their forecasts of where it is headed.

“It’s broadly consistent with Republicans’ continued anger with the Fed and seems to reflect a continuing concern that it’s time for the Fed to get further down the exit path and start raising rates,” said Sarah Binder, a senior fellow in governance studies at the Brookings Institution in Washington who specializes in studying Congress’s relationship with the central bank. While it has little chance of passing in a Senate controlled by Democrats, the bill signals Republican interest in a more constrained and transparent Fed as it closes one of the most expansive periods in its 100-year history. Policy makers have kept the benchmark interest rate near zero for five years and used bond purchases to hold down long-term borrowing costs, expanding their balance sheet to a record $4.38 trillion in the process.

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Doug Casey: “America Has Ceased to Exist” (Reason)

“America, is a marvelous idea, a unique idea, fantastic idea, I’m extremely pro-American. But America has ceased to exist,” declares Doug Casey, an economist and author of his most recent book, Right on the Money. He has also produced a new documentary called Meltdown America which predicts the economic and political unraveling of the U.S. Casey recently sat down with Reason TV’s Nick Gillespie to discuss the political, social, and economic challenges the US must conquer as well as lessons we can learn from failed states.

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Citigroup To Pay $7 Billion To Resolve US Mortgage Probes (Reuters)

Citigroup Inc is close to paying about $7 billion to resolve a U.S. probe into whether it defrauded investors on billions of dollars worth of mortgage securities in the run-up to the financial crisis, a source familiar with the matter said on Tuesday. A majority of the settlement is expected to be in cash, but the figure also includes several billion dollars in help to struggling borrowers, the source said. An announcement of the settlement between the bank and the U.S. Department of Justice could come as early as next week, the source said.

A settlement of around $7 billion for Citigroup would be higher than analysts had expected based on the bank’s mortgage securities business. Some Wall Street analysts had previously estimated that Citigroup likely had about $3 billion of reserves set aside for a related settlement. U.S. authorities had demanded more than $10 billion last month, Reuters reported. Talks between U.S. authorities and Citigroup stalled last month after both sides stood far apart on a settlement figure and the Justice Department had prepared to sue the bank. The bank is scheduled to report second-quarter results on Monday. Analysts, on average, have estimated the company would earn $3.4 billion.

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Pope Cuts Vatican Bank Down To Size (FT)

The Institute for Religious Works, the official name of the scandal-prone Vatican bank, is set to be radically slimmed down as part of Pope Francis’s mission to refocus the Catholic Church to supporting the poor and needy, according to insiders. The overhaul, due to be unveiled this week alongside the publication of the bank’s annual report – only its second ever – is expected to strip the 127 year-old institution of most of its powers to manage assets. The bank, where decades of corruption and mismanagement did much to tarnish the image of the Vatican, will return to its original purpose of sending funds to missionaries and Church groups around the world.

By removing the asset management functions Vatican officials hope to cut out the source of the much of the scandal that has plagued the bank since the 1980s when Roberto Calvi, dubbed “God’s banker”, was found hanged under Blackfriars Bridge in London. Jean-Baptiste de Franssu, former chief executive of Investco Europe, is on the shortlist to be named the new head of the Vatican bank in an attempt to boost its reputation for financial discipline, according to a person familiar with the matter. “We cannot have any more scandal,” said a person close to the pope. The pontiff’s plan to slim down the bank comes after a series of revelations about mismanagement which insiders suggest may have been partly responsible – together with the mounting clerical sex abuse scandal – for the unprecedented decision of Pope Benedict to step down in February last year.

In January, Italian prosecutors charged Monsignor Nunzio Scarano, a top cleric employed by APSA, the administration of the patrimony of the Holy See, which looks after the Vatican’s vast real estate and sovereign bonds investment portfolio, for laundering fake donations through the IOR over several years. In May, the Vatican was forced to deny that Cardinal Tarcisio Bertone, who retired last year from the second most powerful position in the Vatican hierarchy under Pope Benedict, was under investigation by Vatican magistrates for approving €15m loan to the production company of a friend and member of Opus Dei.

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Tiny Houses Big With US Owners Seeking Economic Freedom (Bloomberg)

Doug Immel recently completed his custom-built dream home, sparing no expense on details like cherry-wood floors, cathedral ceilings and stained-glass windows — in just 164 square feet of living space including a loft. The 57-year-old schoolteacher’s tiny house near Providence, Rhode Island, cost $28,000 — a seventh of the median price of single-family residences in his state. “I wanted to have an edge against career vagaries,” said Immel, a former real estate appraiser. A dwelling with minimal financial burden “gives you a little attitude.” He invests the money he would have spent on a mortgage and related costs in a mutual fund, halving his retirement horizon to 10 years and maybe even as soon as three. “I am infinitely happier.”

Dramatic downsizing is gaining interest among Americans, gauging by increased sales of plans and ready-made homes and growing audiences for websites related to the niche. A+E Networks Corp. will air, beginning today, “Tiny House Nation” a series on FYI that “celebrates the exploding movement.” The pared-down lifestyle allows people to minimize expenses and gain economic freedom, said architect Jay Shafer in Cotati, California, who founded two micro building and design companies and is widely credited with popularizing the trend. “It shows people how little some need to be happy, and how simply they can live if they choose,” said Shafer, 49, who shares a 500-square foot home with his wife and two young children.

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Fracking Fears Grow as Oklahoma Hit by More Earthquakes Than California (BBG)

Squinting into a laptop perched on the back of his pickup, Austin Holland searches for a signal from a coffee-can-sized sensor buried under the grassy prairie. Holland, Oklahoma’s seismology chief, is determined to find the cause of an unprecedented earthquake epidemic in the state. And he suspects pumping wastewater from oil and gas drilling back into the Earth has a lot to do with it. “If my research takes me to the point where we determine the safest thing to do is to shut down injection – and consequently production – in large portions of the state, then that’s what we have to do,” Holland said. “That’s for the politicians and the regulators to work out.” So far this year, Oklahoma has had more than twice the number of earthquakes as California, making it the most seismically active state in the continental U.S. As recently as 2003, Oklahoma was ranked 17th for earthquakes.

That shift has given rise to concern among communities and environmentalists that injecting vast amounts of wastewater back into the ground is contributing to the rise in Oklahoma’s quakes. The state pumps about 350,000 barrels of oil a day, making it the fifth largest producer in the U.S. The rise in earthquakes isn’t just happening in Oklahoma, challenging scientists and regulators across the country. The growth of seismic activity alongside oil production in fracking states from Colorado to Ohio has sparked a series of studies tying the temblors to drilling activity. Most seismologists around the country are convinced that wastewater injected back into the ground is jolting fault lines and triggering earthquakes. Between 2006 and 2012, the amount of wastewater disposed in Oklahoma wells jumped 24%, to more than 1 billion barrels annually, according to the Oklahoma Corporation Commission, which regulates the industry.

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Home Forums Debt Rattle Jul 9 2014: Don’t Go Walk Under Wall Street Windows

This topic contains 7 replies, has 7 voices, and was last updated by  Professorlocknload 2 years, 1 month ago.

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July 9, 2014 at 6:07 pm #13945

Raúl Ilargi Meijer

Harris & Ewing Controlled demolition, Washington DC Sep 17 1935 Irwin Kellner at MarketWatch phrases it in these colorful words: … what do you think
[See the full post at: Debt Rattle Jul 9 2014: Don’t Go Walk Under Wall Street Windows]

July 9, 2014 at 10:20 pm #13949

rapier

Asset prices are rising because of extravagant amounts of liquidity in the financial sphere. The Taper will this month leave the Treasury selling more bills and notes than the amount of QE but then in Aug and Sept there should be a positive balance again. After that again the QE liquidity will fail to meet all the Treasuries needs. Then we may begin to see something. You can talk about worry and fear till the end of time but those don’t move the markets, money does.

Then too the BOJ is still printing. At any rate I will bet that when a correction comes the Fed will throw the QE window open wide again. I suppose I could be wrong because after all such a move will prove they are weak. The ZH theory that they will risk a correction which could slip out of control is I am guessing wrong. Nobody in power has the balls anymore to take such a risk. Unless that is if they see more QE risks causing rates to rise, buy that seems impossible.

When the day comes, this cycle or the next or the one after that when interest rates rise no matter how much they print then you will know change has finally happened.

July 9, 2014 at 10:31 pm #13950

Gravity

Gravity is the first algorithm.
Un-first of His name.

Weight is coming.

July 9, 2014 at 10:48 pm #13951

Raleigh

Yellen: “In a nutshell, she said “It’s not the Fed’s job to pop bubbles”.

No, it’s her job to set them up in the first place, then engineer and steer them. If they look like they’re losing air, she rushes back in and blows harder.

Up, up and away in my beautiful balloon!

July 10, 2014 at 1:50 am #13952

Boogaloo

I think we need to at least consider the possibility that we might never see a correction or a crash in the stock market in nominal terms. In real terms, of course, it will definitely happen. It has to happen. But in nominal terms the market could go from here to infinity.

I do not expect the central banks to change course. If markets start to swoon, they will double down. They will keep pushing in this direction until they push everything over a cliff.

July 10, 2014 at 2:48 am #13953

Professorlocknload

The above scary headlines seem to come from MSM itself. What would a contrarian do?

And, no, I wouldn’t expect the Fed to throw it’s hands up and let all of it’s doings go up in smoke. To the contrary, we haven’t begun to imagine what these psychos are capable of.

We haven’t even progressed through the forced replacement of all autos with, say, over 20 k miles on the odometer. Or mandatory demolition of empty housing units older than 20 years. Or across the board $30k “Tax Rebates” or full interest deduction on charge card debt, or a repave of every road in the nation, and new bridges to boot. Or,,,,,,

What ever it takes to destroy all value left in the currency.

July 10, 2014 at 4:02 am #13954

V. Arnold

Some are getting *it*; tiny houses and debt free. Casey’s closing words that we’re going from a milk cow to a beef cow says it all.
I don’t think most people understand debt and especially credit. Neo-serfdom coming soon to the average Joe.

July 10, 2014 at 4:41 am #13955

Professorlocknload

“Policy makers have kept the benchmark interest rate near zero for five years and used bond purchases to hold down long-term borrowing costs, expanding their balance sheet to a record $4.38 trillion in the process.”

Why is it, $4.38 trillion sounds so insignificant in comparison to all debt, public and private, to include unfunded pension and entitlement liabilities and hundreds of $ trillions in assorted derivatives instruments? Does anyone but me find that $4.38 T number a joke? And certainly, it contributes to the reason the Fed will not be audited anytime soon.

And since when are Republicans any less spendthrift than Democrats? Oh, but I’m sure if one suggested Con-gress take the Fed’s place as creator of the currency, reds and blues alike would offer standing ovation.

Best get the QE Bazooka fired up, Janet. Or be roasted by your pals on Capital Hill. Of course, in the end, the Fed will take the hit, ironically, for falling behind in printing everything congress spends.

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