500 Years Of Dutch Bond Yields

Day after day we are told that stocks are the place to be and that bonds are a disastrous bet as “rates must rise” but it appears that, increasingly, the world’s developed (and debt-laden) economies are turning Japanese (with German 2Y rates at 2bps for example). But, for some context as to how low rates really are, Deutsche’s Jim Reid unveils 500 years of Dutch (European) interest rates… and we have never been lower. 

 

 

As Macronomics reminds us,

When somebody has too much debt and cannot reimburse it, how do you bail him out? Obviously by restructuring his debts, which imply losses for his creditors.

 

But when one lends him more money in order for him to pay back what he owes, he is not bailing him out but rather pushing him in a bigger hole! The game until now has been to “print” more money and to add more debt on the shoulders on the indebted ones, to gain some time in the hope that growth will resume and reduce de facto the weight of the existing debt burden and the additional new debt issued to support the initial debt troubles.

 

This is a big misunderstanding of debt dynamics and its effects on the economy. When debt becomes too big, which it is now the case in many parts of Europe, the servicing drains all the available cash flows and reduces the growth potential.”

*  *  *

So, are bonds wrong? Or do they see a world where growth is permanently stifled by the drag of interest expense?




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Why Is It So Hard to Understand Government Shouldn’t Force Employers to Purchase Birth Control or Permit Guns on Premises?

america!The (leftie) internet went bonkers yesterday over
the Supreme Court’s Hobby Lobby  decision,
a narrow ruling that only let “closely held” corporations whose
owners had a religious objection to paying for certain kind of
contraceptives (abortifacients) off the hook from Obamacare’s
“contraceptive mandate.”  Employees, of course, would still be
free to purchase supplemental insurance to cover birth control and
to see their doctor to get a prescription for birth control. They
can’t purchase birth control over the counter but that’s not
because of the Supreme Court or employers with objections—it’s
because the federal government
prohibits
the sale of birth control over the counter.

Nevertheless for a certain kind of spouter of partisan talking
points, the Supreme Court ruling—that the government could not, in
fact, bully people into doing something if those people have
religious objections—was more evidence of the “war on women”
Democrats plan to keep running on.

Meanwhile in Georgia, a new gun bill that permits lawfully
licensed residents to carry their firearms into a wide range of
“public accommodations” (like bars) and actual government buildings

goes into effect today
. Opponents of the bill, generally
liberals, tend to be the same people who opposed the Hobby
Lobby
ruling, while conservatives who applauded the Hobby
Lobby
ruling for protecting religious liberty applaud
Georgia’s law for protecting their Second Amendment rights.

Libertarians have to laugh or they’d cry. The partisan break on
Hobby Lobby and Georgia’s gun law doesn’t make sense if
principles mattered. After all, if an employer has a right not to
be coerced by the government to purchase something for an employee,
that same employer ought to have a right not to be coerced by the
government to permit something on his property. Whether the
specific objections are religious shouldn’t even matter—either you
have a right to run your workplace and business as you please or it
belongs to the government.  For too many partisan ideologues,
liberal and conservative, the latter applies. Their political
preferences trump any lip service to principles.

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Ukraine: Fighting Resumes as President Vows to ‘Liberate Our Lands’

Early today Ukrainian President
Petro Poroshenko declared the end of a ceasefire with the
separatist militias in the nation’s east.

Alleging that the militants “defiantly violated the ceasefire
regime more than 100 times” over the last 10 days, Poroshenko
stated
his plan going forward:

We will attack and liberate our land. Termination of ceasefire
is our response to terrorists, insurgents, marauders, everyone who
tortures civilians, paralyzes the economy of the region, disrupts
payments of salaries, pensions, scholarships, blasts the railroad,
destroys the water pipes and deprives people of normal peaceful
life.

Today’s operation includes airstrikes and artillery fire “at the
strategic points of the terrorists,” a military official
said
.

The Ukrainian president also criticized Russia’s efforts to
de-escalate the situation as merely “symbolic. … We haven’t seen
tangible measures on de-escalation of the situation and enhancement
of control over the border.”

Indeed, some separatists openly say they
themselves are Chechen mercenaries on orders from Russia. Likewise,
the militants increasing firepower, such as several tanks that
crossed the border from Russia in June, leave little doubt about
who is fanning the flames. Despite the armistice, “27 Ukrainian
servicemen had been killed and 69 wounded” in the last week and a
half,
reports
Reuters.

Russia blames the U.S. for the renewed combat. “The change in
Kiev’s position … could not have come about without influence
from abroad,” the nation’s foreign ministry insists.

A Pentagon press release yesterday suggested that more U.S.
troops
may be sent to NATO countries near Ukraine in response
to the unresolved crisis.

Although the White House has not yet commented on today’s
developments, Secretary of State John Kerry last Thursday
threatened
that Russia had only “hours, literally” to
demonstrate that it would rein in the separatists. However, the
U.S. has implemented no new sanctions or taken other actions since
then.

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LA Schools Realize Giving Every Kid an iPad Was a Costly Disaster, Will Give Every Kid a Laptop Instead

iPadThe Los Angeles Unified School District’s
plan to give every child an iPad—at a cost of $1 billion to
taxpayers—drew universal criticism after numerous problems arose.
For one thing, when the devices were broken, lost, or stolen, it
wasn’t clear whether parents, the schools, or the kids themselves
were responsible. Tech-savy students easily broke through the
firewalls administrators had installed to keep them from using the
devices to visit social media websites. This prompted some schools
to prohibit the use of the iPads at home, when students are away
from teacher supervision, even though one of the major intended
functions of the iPad program was to give kids a homework aid.

The entire thing was an unmitigated disaster—a clear example of
real life trumping the good intentions of bureaucrats

But LAUSD has clearly learned its lesson, right?
Wrong
:

Los Angeles school district officials have allowed a group of
high schools to choose from among six different laptop computers
for their students — a marked contrast to last year’s decision to
give every pupil an iPad.

Contracts that will come under final review by the Board of
Education on Tuesday would authorize the purchase of one of six
devices for each of the 27 high schools at a cost not to exceed $40
million.

This story in the Los Angeles Times
highlights
that the new approach emphasizes choosing the
devices that are right for each school, rather than expecting an
iPad to be the answer to every kid’s educational needs. Still, it’s
an awfully expensive plan, given that most of the options actually
cost more than the iPad:

The initial money to pay for the technology is coming from
voter-approved bonds. Officials have not yet identified funding to
sustain the $1-billion-plus effort. Three of the laptops being
tried in the high schools are likely to cost more than the iPads. A
different style of laptop, called a Chromebook, would cost
less.

Teachers and students at the high schools sent delegations to
try out devices and meet with vendors at district headquarters.

It wasn’t a perfect process. The curriculum, for example, was
hard to assess in a process akin to speed dating, said one
participant.

If I were an LA public school student, I would be pretty excited
to get an iPad or a Chromebook or whatever. But if I were an LA
voter, I would be skeptical that such things serve a worthwhile
educational purpose and are a good use of my tax dollars.

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Fooling All The Experts With Seasonal Adjustments, All Of The Time

Reading the economists’ comments in response to today’s ISM report (which, incidentally, missed expectations) one would think that the US has practically entered a second golden age. Here is a sample:

  • Manufacturing index “has now stabilized at a level reflecting a solid pace of expansion,” Thomas Simons, economist at Jefferies, writes in note
  • June data consistent with Barclays estimate of 2Q GDP growth rate of 4%, according to note from Cooper Howes, economist at firm.
  • June’s reading of 55.3 “has to be viewed as a good result, even if it was lower than expectations,” Rob Carnell, economist at ING, writes in note
  • ISM index shows factories humming along in Q2, according to UBS
  • And especially this one from TD Securities: Increase in new orders, as tracked by ISM factory report, is “especially encouraging as it augurs very well for future manufacturing sector activity”

So what exactly are all these “experts” looking at to be so convinced, once again, that the “imminent” economic surge that thay have all been predicting for so long, incorrectly, is finally here.

The answer – the all import New Orders index – the key driver of the headline ISM print and the one most important sub-headline index.  And if we were also simply looking at the reported number of 58.9, which printed at the highest level since December, we too would assume that the US economy is finally rebounding.

Alas, here lies the rub: what none of the abovementioned experts realize is that for some inexplicable reason, the ISM survey is, just like the vast majority of all other economic indicators, also seasonally adjusted.

Recall that it was ISM’s seasonal adjustment SNAFU last month, when it used the wrong “adjustment factor”, that caused the reported number to become a humiliating farce after the ISM had to revise it not once but twice with what ultimately ended up being a “factor” leading to a far higher, and consensus expectation-beating, headline ISM print of 55.4.

But what really happened in June? For the answer we need a refresher of just how the ISM survey results in reported numbers.

What the ISM does is ask respondents to comment on how they are seeing any given query category as performing in the current month. The response options are simple: better, same, or worse.

The ISM then takes the percentage of “better” responses and adds half the percentage of “same” (ignoring the worse answers) for any of the following categories:

  • New Orders (58.9 in June)
  • Production (60.0)
  • Employment (52.8)
  • Delivery Time (51.9)
  • Inventories (53.0)

Then it simply takes the equal-weighted average of these 5 series and gets the final number (in the case of June 55.3 down from May’s adjusted 55.4).

However, before the final tabulation, the ISM also applies a little-known seasonal adjustment factor to the actual unadjusted survey reponse result before getting a seasonally adjusted number that feeds into the above calculation. Why a survey needs to be seasonally adjusted – considering it merely captures sentiment which already reflects the periodicity of the seasons when it is, well, experienced – is beyond the scope of this article, and/or logic.

What adds to the confusion is that for some unknown reason, in June of 2013 the seasonal adjustment factor (1.051) actually subtracted from the unadjusted number (converting 54.5 into 51.9), while in June of 2014 the factor (0.976) managed to add to the unadjusted number of 57.5, making it appear the abovementioned highest for 2014 print of 58.9. Was June of 2014 more “seasonal” than the June from a year earlier?

This is shown in actual practice below:

What the table above shows is the survey responses (courtesy of Stone McCarthy) for the all important New Orders data. The cell highlighted in green, namely the 58.9 June New Orders print, is what the “experts” are looking at. The cells shaded in red is what is relevant: namely what the people are really saying about the economy as it is right now, not adjusted for some arbitrarily assigned fudge factor.

According to the actual data, when it comes to “New Orders” the number of respondents who responded “Better” dropped to 30%, below the 35% in May, far below the 37% in April, and in fact, the lowest since January when the economy was crashing under the weight of “harsh weather.” Furthermore, while the number of respondents saying the economy is doing the “Same” rose to 55%, or the highest sinec 2012, those responding “Worse” rose once again to 15, higher than April, and the highest since the “weather impacted” February.

Visually, here is the difference between the Unadjusted and Seasonally Adjusted New Orders survey.

In summary: the actual, and unreported, New Orders number dropped from 60.5 in May to 57.5 in June, which also was the weakest print since January… some improving trend. Compare that to the seasonally adjusted New Orders number of 58.9, the highest of 2014. That’s right: thanks to seasonal adjustments what was otherwise a downward sloping trendline, and a print that was the weakest in 5 months, magically was transformed to the best print of the year!

And that is how you fool all of the experts all of the time with something as simple as a completely unnecessary seasonal adjustment factor, which leads everyone to believe that the economy is soaring. Well, it is… on a seasonally adjusted basis, the same seasons that everyone says to ignore when they lead to a -2.9% GDP print!

In reality, the US economy, as represented by actual New Orders surveys, is the weakest it has been since January. And to think- very soon everyone will be shocked, shocked, that Q2 GDP (and Q3, and Q4 and so on) was not nearly as wonderful as everyone had prayed it would be.




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Homely Metaphor for Your Responsibility to Get Vaccinated

MeaslesThe Centers for Disease Control
is reporting 539 cases of
measles in 17 different outbreaks
around the country, the
highest rate since 2000. The agency notes, “Measles spreads through
the air by breathing, coughing or sneezing. It is so contagious
that any child who is exposed to it and is not immune will probably
get the disease.”

So far no one has died, but
ten patients
have required hospitalization. Yet another study
shows that immunization for measles is
not associated
with a higher risk for autism. 

Over at the New York Times, physician Pauline Chen

offers
this relevant wisdom from her daughter:

One of my 11-year-old twin daughters recently came home from
school distraught. When I asked why, she lifted her foot.

There was dog poop on her sneakers.

She watched as I flicked away the doggy detritus with a twig,
then scrubbed the sole of her shoe with an old brush and hot water.
“We don’t like to pick up Buddy’s poop, either,” I could hear her
telling her sister, “but we do it because it’s gross to leave it on
the sidewalk.”

When I handed her the shoe, cleaned and as good as new, she
beamed. “Thanks, Mom,” she said, lacing up. But after a few test
twirls in the yard, she stopped.

“Didn’t that dog’s owner know he would cause so much trouble for
other people?” she asked, brow furrowing. “He might have even
caused trouble for himself if he came back and stepped in it!”

At the tender age of 11, she had seen how one person’s bad
decision could negatively affect others.

The same lesson is playing out for patients and doctors across
the country, albeit under far graver circumstances.

This year, there has been a major resurgence
of measles
, a dangerous disease that for decades had been
virtually unknown in the United States. And it’s become clear that
measles has re-emerged as a public health issue in this country
because large numbers of individuals remain unvaccinated.

For more background, read Reason’s feature articles on
the
libertarian debate over mandatory vaccination
.

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The Sad Story of Obamacare: Reason’s In-Depth Treatment of the Health Care Fiasco That Won’t Go Away

ObamacareIt fills the headlines, it
chills the public, it elevates your premiums, and it dogs hopes for
decent health care coverage. That’s right, we’re talking about
Obamacare—the government scheme that refuses to die, despite every
sign that it’s doing itself in (and maybe taking us with it).
Reason writers look at the history of this policy monstrosity, the
laughable efforts by its promoters to make it palatable, and the
deep flaws in the way it has been crafted and implemented.

Even better, we look at alternative approaches and innovations
that promise better health care for the future. And we look at ways
of presenting those alternatives to a public that wants care, but
has certainly grown jaded about pie-in-the-sky promises.

Click here to visit with
the Sad Story of Obamacare
. You may want to bring flowers.

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Gene Healy on America’s Drawn Out Iraq Blunder

Now’s not the time to re-litigate the Iraq War, we’re told
— mostly by people whose bright idea it was in the first
place. If we “spend our time debating what happened 11 or 12 years
ago,” says former Vice President Dick Cheney, we’re “missing
the boat.” Contra Cheney, argues Gene Healy, it’s important to
examine our past mistakes, lest we get snookered into repeating
them. Going back 11 or 12 years isn’t enough — it’s past time to
reevaluate the Gulf War of 1991, the “famous victory” that helped
get us into this mess.

View this article.

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Senate Sex Trafficking Bill Criminalizes Online Publishers and Creates State-Accessible Sex Worker Registries

Last week, Senators  Mark Kirk (R-Ill.) and
Dianne Feinstein (D-Calif.)
introduced a bill aimed at cracking down on child sex
trafficking
that could ultimately harm web publishers, adult
entertainers, and free speech. The bill sets up onerous and
invasive new registry requirements for those who post and host
adult service advertisements. And it holds online publishers
criminally liable not only for illegal activity facilitated though
their ad sections but also for failing to keep—and make available
to attorneys general—proper records on all adults advertising legal
or illegal erotic services. 

The “Stop
Advertising Victis of Exploitation (SAVE) Act
“—crafted after a

related bill
that passed the House in May—makes it a federal
crime for any content platform to host an advertisement that
“facilitates or is designed to facilitate” sex acts with anyone
under 18 years old. At first blush, that may sound unobjectionable:
Of course it should be a crime to sell minors for sex.
But, of course, that already is a crime. This bil is about holding
web platforms (like Craigslist) criminally liable for
anything that criminals may post to them. 

“This is a major liability risk for operators of user-generated
content platforms, who host high volumes of content and have little
to no control over what users decide to upload,” notes
Emma Llansó
 at the Center for Democracy and Technology.
With penalties including up 10 years in prison on the line, sites
might decide just to prohibit ads of a sexual nature—including
personals, where many sexual services ads end up
running—altogether. 

The SAVE Act would also require all sites that host adult
advertising (whether paid or free/user-generated) to review ads
before publication, request a valid telephone number and credit
card number from each poster, “prohibit the use of euphemism and
codewords” in ads, and prohibit the use of prepaid debit cards or
cryptocurrencies in placing paid ads. For sites that run
paid adult advertisements, publishers would be responsible
for verifying the identity of every person who placed an adult ad
by obtaining a copy of a government-issued ID containing their
name, photo, and date of birth. The publisher would have to hold on
to these records for seven years and make them “available to the
(U.S.) Attorney General, any designee of the Attorney General, the
attorney general of a State, and any designee of the attorney
general of a State for inspection at all reasonable times.”

The bill insists that information won’t be used against
registrants in criminal proceedings unrelated to sex trafficking.
But knowing how fond government and law enforcement officials are
of privacy and keeping promises, you can see why those advertising
adult services—many of which are for perfectly legal activities,
such as phone sex lines, dominatrix services, and stripping; many
of which aren’t—may be reluctant to hand over such information.

“An online identity verification requirement would
unquestionably have a chilling effect on adults’ willingness to
engage in communications about lawful goods and services and would
be a significant intrusion into their right to privacy,” writes
Llansó. 

Similar identification requirements in the Child Online
Protection Act led to that law being struck
down
 due, in part, to the burden these requirements place
on speakers, listeners, and hosts of protected speech. 

Illegal immigrants and others without government issued IDs
would be barred from legal advertising online, leaving them to rely
on more dangerous methods of finding clients. Those running
organized, professional sex trafficking organizations, however, are
probably savvy enough to get and submit decent fake IDs (or simply
turn to more underground methods of advertising online themselves).
 

As adult workers shy away from placing ads, online publishers
will lose money on one of the last classified sections that’s been
making any money. Meanwhile, they’ll face a minimum fine of
$250,000 for improper record-keeping and jail time if anything
illegal slips through. Ultimately nobody wins—except the
politicians who appear to be getting tough on the child
sex trafficking “epidemic”. On his Facebook page June 30, Sen. Kirk
posted

Every year, 100,000 children are at risk of being trafficked
against their will in the United States. Learn more to
help: http://ift.tt/TzV1qh #NotForSale

There’s not any way to refute Kirk’s “100,000 children” claim,
because Kirk doesn’t define what “at risk of” means. Theoretically,
all children in the United States are at risk of
being trafficked. Theoretically, I’m at risk of drowning in a
bucket or getting eaten by a cannibal.

None of these things, however, are terribly likely to happen. Or
even marginally likely to happen. The likelihood of a U.S. child
being kidnapped by a stranger for any reason is incredibly
small (about 100
children each year
, or 3 percent of all kidnapping cases).
 

But Sen. Kirk’s website is full of dubious
numbers
and scary sounding pronouncements. “Backpage.com sells
modern day slavery,” it proclaims. In one press release, Kirk
insists that 100 percent of “dates” set up through Backpage.com are
for prostitution, “often child prostitution.” The site intersperses
videos of sad-eyed children and forlorn teen girls with statistics
about adult prostitution and adult advertisements in general. And
though he touts the SAVE Act as a way to fight child sex slavery,
he mentions nothing about who the bill actually targets or how it
actually works.  

For a more detailed look at the SAVE Act’s flaws,
check out this analysis
from The Center for Democracy and
Technology. The
American Civil Liberties Union (ACLU) has
a thorough takedown
of the House version of this legislation. “Lawmaking is messy
stuff, and mistakes like this happen,” the ACLU offered charitably.
“Working to combat coerced or underage prostitution is incredibly
important; however, legislation must be carefully drafted to be
sure to protect our free speech rights online.” 

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Subrpime 2.0 Spreads To Cars: OCC Warns Of Auto-Loan Risks

It would appear that the exuberance over today’s better-than-expected car sales data should be tempered significantly. Confirming our warnings, as the Office of the Comptroller of the Currency (OCC) explains, across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. With average loan-to-value rates above 100%, they have an ominous warning: “risk in auto-lending is beginning to emerge.” We are sure this will be dismissed (just as the BIS’ warning has been), but with surging charge-offs and increased repackaging (CLOs), and banks holding a lot of this debt, this ‘bubble-financing’ has all the ingredients for subprime 2.0 contagion.

 

Auto-loans are surging… Subprime auto-loans were up 10-fold in 2013…

As OCC reports,

Auto lending remained a highly competitive product segment, as strong growth continued through the end of 2013.

Banks reported year-over-year growth of 11.3 percent in the third quarter of 2013 and 12.9 percent in the fourth quarter of 2013 (see figure 18). Banks continue to hold a sizable market share of outstanding loans of $250 billion, or 31 percent of the total auto lending market.

But risks are rising… Signs of Risk in Auto Lending Beginning to Emerge
 
Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident. Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing (see figure 26).

The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender types over the last year (see figure 27). These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.

*  *  *
Close your eyes and keep buying… the water is warm… Risk is “contained”




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