US Election Anxiety & ECB Mutiny Spark Small Cap Stocks & Dollar Selling

It appears the excitment of US midterm election sparked a "sell-everything-American" strategy today as stocks, bonds, WTI crude, the dollar, Treasuries, and credit all sold off to a lesser or greater amount. Trannies started off liking weak oil prices but faded as WTI could not bounce off multi-year lows but stocks were jolted lower (before v-shape recovering to VWAP) by Mutiny at the ECB (and desk chatter that – as we have warned – QE is not coming). The decouplings continue as high yield presses to 2-week lows and Nikkei futures diverge from USDJPY. The dollar weakened back to unch on the week after Draghi but commodities saw no gains from that as gold, silver, and copper slipped. WTI dropped to as low as $75.85 at 3-year lows. VIX – helped by numeous CBOE 'breaks' today – jerked back below 15 (after trading above 16 briefly).

 

On the day, Trannies and The Dow ended just green as broader indices closed red unable to recover Draghi's Mutiny drop…

 

and from yesterday's Saudi headlines…

 

VIX was jerked lower after CBOE broke a few times and Draghi's slam down sparked ucnertainty

 

Credit markets are flashing red again…

 

Either 30Y yields are 30bps rich or the S&P is 100 points expensive… you decide

 

On the day, Treasuries close mixed 30Y -2bps, 5Y +1bps with the flattening curve continuing oin the week…

 

The dollar lost notable ground on the day as EUR strengthened post Draghi…

 

Commodities slipped lower despite the USD weakness with oil the biggest loser once again…

 

Crude appears at a key support level here

 

Charts: Bloomberg

Bonus Chart: NKY and USDJPy decoupled…




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Only A Few Years Left Until The Nikkei Hits Dylan Grice’s Price Target Of 63,000,000

Back in May 2011, long before the second and far more disastrous reign of Abe, and even longer before Japan unleashed the most insane episode of Banzainomics, pardon QE11 (or thereabouts), we predicted what the BOJ would do up to and including its recent QE tack-on to its ludicrous debt monetization program in “Japan Resumes Hyprintspeed Part 1: A Look At The BOJ’s Current, And Future, Quantitative Easing.” Specifically we said:

… as the past 30 years have shown, the country at this point has no other choice but to take the same toxic medicine which merely removes the symptoms briefly, while making the underlying problems far worse.  Also, with the Fed threatening to end QE2 in precisely two months, someone out there has to be dumping hundreds of billions in infinitely dilutable 1 and 0s into primary dealer prop desks.

Since then we have had not only Operation Twist and QE3, but also the most aggressive central bank monetary expansion in modern history in Japan also known as Abenomics. And, in fact, when the BOJ’s QE 11 (or thereabouts) proved to be too weak, Kuroda unleashed even more of the same, further solidifying the conclusion: for Japan at this point, it’s game over.

But even before our forecast of Japan’s endgame, one strategist was laying out precisely what would happen in Japan with uncanny accuracy, if a few years early. That person is, of course, SocGen’s Dylan Grice.

And since he has been right until now, here is how we forecasts Abe’s doomed experiment will end, and why the Nikkei hitting 63,000,000 in 11 years is anything but the Hollywood ending Abe is looking for.

From Dylan Grice, formerly of SocGen

Nikkei 63,000,000? A cheap way to buy Japanese inflation risk (15/10/2010)

Japan is no Zimbabwe. Neither was Israel, yet from 1972 to 1987 its inflation averaged nearly 85%. As its CPI rose nearly 10,000 times, its stock market rose by a factor of 6,500 … Regular readers know that I don’t generally make forecasts, but that every now and then I do go out on a limb. This is one of those occasions. Mapping Israel’s experience onto Japan would take the Nikkei from its current 9,600 to 63,000,000. This is our 15-year price target.

  • Despite the Japanese government paying a mere 1.5% on its bonds, interest payments amount to a hair-raising 27% of tax revenues. Including rolled government bills (which Japan’s MoF defines as debt service) takes the share to an eyebrow-singeing 57% (see chart below).
  • Any meaningful repricing of Japanese sovereign risk would push yields to a level the government would be unable to pay. Moreover, since the domestic financial system is loaded up to the eyeballs with JGBs (first chart inside), a crisis of confidence there would soon transmit itself beyond the public sector.
  • So the path of least political resistance will presumably be to keep yields at levels which the Japanese government can afford to pay, and to stabilise JGBs at levels which won’t blow up the financial system. This will involve the BoJ buying any/all bonds the market can no longer absorb, probably under the intellectual camouflage of “a quantitative easing program” aimed at breaking Japan’s deflationary psychology. Economists might applaud such a step as finally showing the BoJ was ‚getting serious about Japan’s problems?. In fact, it will be the opening chapter of a long period of inflation instability.

It is often pointed out that in Japan’s aging population there is no constituency for inflation, which is why there is insufficient pressure on the BoJ to monetise. However, the same demographic dynamic ensures there is no political constituency for reductions in health expenditures. Yet Japan’s tax revenues currently don’t even cover debt service and social security, persistent and growing fiscal burdens. Therefore, once the BoJ is forced into monetisation of government deficits, even if only with the initial intention of stabilising government finances in the short term, it will prove difficult to stop. When it becomes the largest holder and most regular buyer of JGBs, Japan will be on its inflationary trajectory.

It is said that where democracies are developed and institutions robust, hyperinflations don’t take hold. In the 1970s, for example, while developed economies exhibited a degree of the political breakdown that usually fosters high inflation, their experience was relatively mild in comparison to the more pathological inflations seen in politically malfunctioning economies such as Zimbabwe or Weimar Germany. Problematic 1970s inflation in the developed economies was controlled before it became too problematic … except in Israel, which saw its problematic 1970s inflation explode into a hyperinflationary 500% by the mid 1980s.

Think about that for a moment. Japan is an advanced economy, a developed democracy and certainly no Zimbabwe. But Israel was all of those things too. It simply found itself politically committed to a level of expenditure – military and social – which it couldn’t fund. Instead of taking the politically unpalatable course of cutting that expenditure, it resorted to the tried-and-tested tactic of buying time with printed money. Between 1972 and 1987 Israel’s CPI rose by a factor of nearly 10,000. Inflation averaged around 84% and peaked at an annualised 500% in early 1985.

In real terms equity prices fell (chart above), failing to keep pace with the rise in the CPI. But in nominal terms they exploded rising by a factor of around 6,500 over the period, in keeping with experiences of nominal share indices in Argentina, Brazil or Weimar Germany during their inflationary crises. A couple of clients have told me they think the trigger for a forced BoJ monetisation of the government’s balance sheet can only occur when Japan starts running current account deficits, pointing out that sovereign defaults have only occurred in current account deficit economies. So long as Japan maintains its current account surplus it  will be safe. But I’m still not convinced why this must necessarily be the case just because it has been in the past. Current account deficits would be critical for government funding if the swing government bond investors were from overseas, which they nearly always are. But in Japan today they’re not. The households effectively are. Why should the current account deficit even be relevant to what is effectively an internal issue?

Reinhart and Rogoff say that one of the tell-tale early signs that governments are struggling to maintain market confidence is when debt maturities decline. This is what is happening in Japan today. And the BoJ announced last week (to loud acclaim) that it was going to adopt a more Anglo-Saxon style of quantitative easing. The process is arguably underway. My concern is that once the door to QE has been passed through, it slams shut behind.

The truth is we can’t know when this will happen. We suspect only that the writing is on the wall, and the further out we look, the bigger and bolder that writing becomes. But if Japan was to follow a similar trajectory to Israel’s, the Nikkei would trade at around 63,000,000 (63 million) by 2025. How much do you think 15y 40,000 strike call options would cost? I’m not sure either (though I’m sure I could get interested parties a quote), but call options are generally cheap, and ‚melt-up? calls especially so, and I’d be surprised if you couldn’t buy that risk for a few basis points a year. Is there a cheaper way to hedge Japan’s coming inflation?




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City of Ferguson Charges Vice More Than $1,200 for Open Records Request, Turns Over Just Seven Emails

Vice
reports
:

Blow, man, blow!In the wake of the shooting death of Michael
Brown, police officers in Ferguson, Missouri feared that people in
the community were “gunning” for them, and officers were having a
“rough” time dealing with the news media, according to an email
written by Assistant Police Chief Al Eickhoff.

Eickhoff’s email was one of only seven internal emails the City of
Ferguson turned over to VICE News in response to an open-records
request filed in late September for records pertaining to Brown’s
death and the protests that immediately followed. For those seven
emails, the City of Ferguson charged VICE News a fee of more than
$1,200.

The city clerk told Vice that there were so few
messages because a server outage had interrupted the local
government’s email service.

Vice isn’t the only organization to face
remarkably high fees
for Ferguson record requests. A little
over a month ago, the Associated Press
described
several similar cases:

Nixonstalgia! Catch it!“The first line of defense is to make the
requester go away,” said Rick Blum, who coordinates the Sunshine in
Government Initiative, a coalition of media groups that advocates
for open government. He said charging hefty fees “to simply cut and
paste is a popular tactic.”

The Washington Post was told it would need to pay $200 at minimum
for its requests, including city officials’ emails since Aug. 9
discussing Brown’s shooting, citizen complaints against Ferguson
officers and Wilson’s personnel file. The website Buzzfeed
requested in part emails and memos among city officials about
Ferguson’s traffic-citation policies and changes to local
elections, but was told it would cost unspecified thousands of
dollars to fulfill.

Inquiries about Ferguson’s public records requests were referred to
the city’s attorney, Stephanie Karr, who declined to respond to
repeated interview requests from the AP since earlier this month.
Through a spokesman late Monday, Karr said Missouri law can require
fees but she didn’t address why charges specific to the AP’s
request were nearly tenfold the lowest salary in the city clerk’s
office. Karr said searching emails for key words constitutes “extra
computer programming” that can bring added costs.

The search requested by Vice took a city
contractor five hours to complete. That “extra computer
programming” must be pretty pricey.

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Will a GOP-Led Congress Finally Audit the Fed?

While former-Rep. Ron Paul’s
showdowns with Ben Bernanke
recede into yesteryear, his calls
to “Audit the Fed” may once again reverberate through the halls of
Congress.

Republicans are increasingly
likely
 to take back the Senate today, which could
put congressional focus back on the Federal Reserve’s


shadowy shenanigans
, The Wall
Street Journal 
claims:

Financial executives say a GOP-led Senate would ratchet up
congressional scrutiny of the central bank’s interest-rate policies
as well as its regulatory duties as overseer of the nation’s
largest financial firms.

“If the Republicans take control of the Senate and thus have
control of both the House and the Senate—two words for the Federal
Reserve: Watch out,” said Camden Fine, president of the Independent
Community Bankers of America.

Fed Chairwoman Janet Yellen may have put the (perhaps
temporary
) kibosh on quantitative easing, but that’s not enough
for critics of the central bank:

Many Republicans want Fed officials to move quickly now to raise
interest rates from near zero and shrink the central bank’s balance
sheet, which has climbed to near $4.5 trillion.

Scrutiny of the Fed’s monetary policies and regulatory
activities has sometimes been a bipartisan affair. This past year,
the chairman of the House Financial Services Committee, Rep. Jeb
Hensarling (R-Tex.), held 11 hearings looking into the Fed’s
activities. In a few weeks, Sen. Sherrod Brown (D-Ohio) will

preside
over a Senate Banking Subcommittee on Financial
Institutions and Consumer Protection hearing on an unsettling
report
of impropriety in the relationship between the Fed and
Goldman Sachs. And the Federal Reserve
Transparency Act
 passed in the House of Representatives
with overwhelming bipartisan support back in September. But for
reasons unknown, Senate Majority Leader Harry Reid (D-Nev.) has
kept this latest “Audit the Fed” proposal off the floor.

Perhaps the fed audit legislation put forward by Sen. Rand Paul
(R-Ky.) will have more luck after today. That bill has support from
other Senate Republicans, including Sen. Mitch McConnell (R-Ky.),
who will probably become Senate majority leader if the GOP wins the
chamber—and if McConnell wins his own re-election.

Even if no legislation actually passes, the heightened attention
on the Fed’s activities could still be beneficial:

A slate of hostile congressional hearings questioning the Fed’s
every move and movement of legislation would…force the Fed to
play more defense.

For their part, Fed officials oppose congressional audits and
other external meddling in their affairs, arguing that the bank’s
political independence is actually a feature and not a bug. In her
confirmation hearings Yellen said, “I would be very concerned about
legislation that would subject the Federal Reserve to short-term
political pressures that could interfere with that
independence.”

In any event, we’ll soon find out whether the GOP is doing more
than its usual
blustering
 at fiscal irresponsibility.

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White House to Loser Dems: ¯_(ツ)_/¯, Guam Legalizes Medical Marijuana, Detainee Brought to U.S. for Trial: P.M. Links

  • "Let me be clear: I didn't do it."Whatever odd reasons might
    cause the Democrats to lose big in today’s election, the White
    House wants to make clear that it’s most assuredly
    not because of them
    .
  • Citizens of Guam today voted to
    legalize medical marijuana
    there. They are the first U.S.
    territory to do so.
  • A Russian member of the Taliban
    captured in Afghanistan
    is the first detainee to be brought to
    the United States to stand trial.
  • Mexican police have captured the fugitive ex-mayor blamed for
    the
    disappearance of 43 student teachers
    that are believed to have
    been murdered.
  • Supreme Court justices appear sympathetic that
    whistleblower protections
    should apply to an air marshal who
    exposed to the media a lack of security on certain long-distance
    flights.
  • Reminder: After polls close today, we will be using our
    Reason 24/7 newsfeed and our
    Reason 24/7 Twitter
    account to help folks keep track of pivotal midterm election
    results.

Follow Reason and Reason
24/7
 on Twitter, and like us on Facebook.  You
can also get the top stories mailed to you—
sign up
here.
 Have a news tip? Send it to us!

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Meet the New, Big-Spending GOP Senators! Same as the Old, Big-Spending GOP Senators?

If election prognosticators are correct,
the Republican Party is likely to take control of the Senate.

So how is that likely to influence federal policy on spending,
debt, and cronyism?

One way to get an indication is to look at the Republican
senatorial challengers who if successful today would flip a
Democratic Senate seat to the GOP. I looked at the candidates’
campaign sites to see where they line up when it comes to reducing
the size, scope, and spending of the federal government.

If the following people win—and stay true to their campaign
promises—there is no reason to believe a GOP Senate will cut
spending or shrink the government.

Meet your potential new bosses, then. Same as the old ones.

Dan Sullivan,
Alaska:
 Sullivan’s campaign site makes
it clear that he would be a typical Alaskan politician in
Washington when it comes to seeking to tap federal taxpayers to
fund largesse back in the state. He touts his opposition
to Obamacare and makes the standard call to rein in
spending, reform the tax code, and cut red tape. However, he
doesn’t offer any details and his focus on delivering pork to
Alaska undermines his professed concern about Washington’s
spending-driven debt problem.

Tom Cotton,
Arkansas:
 
The section of Cotton’s
campaign site that offers the clearest view of his policy stances
is the 
one that
attempts to rebut
 his opponent’s claims and
criticisms. Unfortunately, the section largely amounts to Cotton
pointing out the various instances in which he indeed supported
federal spending. From farm subsidies to entitlements, Cotton makes
it clear that he is—contra his opponent’s claims—a supporter of
government programs. Interestingly, his latest campaign video
concludes with a call for “less government and more freedom.” It’s
hard to reconcile that stated aim with the message conveyed by his
website.

Cory Gardner,
Colorado:
 
Gardner’s
site
 touts his “4-corners” plan for Colorado, which
turns out to be a smorgasbord of contradictions. For instance,
Gardner says that he supports “flatter and fairer” federal tax
codes; however, his support for numerous tax breaks for various
special interests undermines that claim. On education, Gardner says
“keep Congress out of the classroom” while simultaneously stating
his support for various federal education programs. Gardner notes
his support for a balanced-budget amendment but he offers no
details on what he would cut to achieve balance. His claim that he
has “has fought to reduce [the $17 trillion plus national debt] by
examining waste, fraud, and abuse in all sectors of government” is
as vacuous as it is unfeasible. When it comes to the real driver of
the national debt—old-age entitlement programs—Gardner states that
he wishes to “strengthen Medicare and Social Security.”

Joni Ernst, Iowa: Ernst’s site makes it
clear that she would represent a near-complete change of pace from
retiring Sen. Tom Harkin, a progressive Democrat. Ernst says a lot
of the “right” things when it comes to free markets, taxes, and
regulations. On this issue of federal spending, however, the Ernst
campaign site is noticeably lacking in details. On federal
entitlements, Ernst promises to “protect Medicare and Social
Security”; she says she supports reforms that will “ensure the
long-term health of both programs for her daughters and
grandchildren and their generations.” That’s a politically
practical approach, but the reality is that her grandchildren are
going to take it on the chin unless Sen. Ernst and her colleagues
take the bolder approach of shrinking the entitlement welfare
state. In addition, her support for a balanced-budget amendment
while failing to explain what she would cut to achieve balance is
disappointing. Her support of the U.S. government’s costly global
military presence will also considerably complicate efforts to
eliminate deficit spending.

Bill Cassidy,
Louisiana:
 Cassidy’s campaign site calls for
“free-market health care solutions that give patients the power”
and says that “out-of-control spending” needs to be stopped. On
health care, Cassidy deserves credit for proposed reforms. However,
rather than a free-market for health care, Cassidy supports
adjustments to the federal government’s already oversized role. As
for how Cassidy would attack the spending that he says is out of
control, his website simply doesn’t say. He’s against earmarks, but
is he against federal grant and loan programs that are essentially
different means to the same end? Given his support for keeping
federal flood insurance premiums low in order to keep his
flood-prone constituents happy, the answer is probably
no.

Steve Daines,
Montana:
 
Daines’ campaign site calls
for “More Jobs, Less Government.” However, the slogan is curious
given that Daines doesn’t lay out a vision for less
government other than to tout his support for a balanced-budget
amendment and a promise to “stop Washington’s wasteful spending.”
To the contrary, Daines touts his commitment to spending
more taxpayer dollars on seniors, veterans, women, and Indian
tribes.

Thom Tillis, North
Carolina: 
Tillis’s campaign
site
 says that he “will work to shrink the size of
our federal government to its core Constitutional role so the
private sector can thrive.” Sounds good. He sounds the right notes
on issues such as repealing Obamacare, reining in federal
regulations, and ending the bailout mentality in Washington. His
site also says that “he believes we must restore the original
intention of the Constitution and redirect the federal government
toward the purposes our founding fathers intended.” That’s fine,
but it’s not clear what Tillis believes those purposes to
be. Does he think that the federal government’s overgrown system of
entitlement programs is in line with intentions of the
Constitution’s authors?  Or what about the vast military
empire that sprung up more than 150 years after the ink dried on
our founding document? We’ll have to wait and see.

Mike Rounds, South
Dakota:
 
Rounds’ site touts an
“approach to limited government [that] is most in line with South
Dakota values.” On the bright side, Rounds calls for local control
of education and the abolition of the U.S. Department of Education.
He also calls for deference to local units of government when it
comes to regulation. However, Rounds’ support for a balanced-budget
amendment typically lacks details on what he would cut in order to
achieve balance (he says he’s against tax increases, so the
balancing would have to come from spending cuts). Compounding the
lack of specifics is a promise to protect Medicare spending and a
disavowal of Paul Ryan’s proposed entitlement reforms. Rounds cites
the federal government’s unsustainable fiscal trajectory, which is
being driven by entitlement spending, but his overall stance would
indicate that he’s unprepared to do anything about it.

Shelley Capito, West
Virginia: 
Other than pledging to protect
the coal industry, Capito’s 
campaign site is
devoid of any information on her policy stances. 

The bottom line is that anyone who is hoping that a GOP
takeover will bring small government to town will be deeply
disappointed.

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94% of Teachers Rated ‘Effective’ in District Where Schools Got ‘F’ Grades

Bad TeacherIs anyone surprised that school district rating
systems for teacher performance are something of a joke? The
Mackinac Center for Public Policy reports that
the Flint Community School District in Michigan rated 94 percent of
its teachers—and 99 percent of its administrators—as “effective” at
their jobs, even though the district contains numerous “F”
schools.

According to Mackinac:

Even when student progress is adjusted for socioeconomic status,
the district’s performance is little better.According to ratings
which do adjust for student backgrounds compiled by the Mackinac
Center for Public Policy, seven Flint schools earned “F” grades, 12
got “C” grades and only one merited an “A” based on data from 2009
to 2012.The Mackinac Center’s high
school
 and elementary/middle
school
 report cards provide more detail.

There is an obvious discrepancy when many of the students in
these schools are deficient at reading and math, and yet the people
responsible for educating them are universally praised for their
efforts.

The problem: Michigan’s rating system for teacher and
administrators doesn’t track evaluations to student performance.
Two bills currently under consideration in the state senate would
fix that, however.

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Reporter Sharyl Attkisson Believes She’s on an Obama ‘Enemies List’

Former CBS investigative
reporter Sharyl Attkisson, who just released her book
Stonewalled: My Fight for Truth Against the Forces of
Obstruction, Intimidation, and Harassment in Obama
s
Washington
, has been
spilling the beans
on unsavory anti-media practices by the
Obama administration. In an interview yesterday Attkisson stated
her belief that the White House has put her “on a list” of
journalists that it targets.

From
The Hollywood Reporter
:

And why do you think they would target you as opposed to
more partisan voices, like Rush Limbaugh or Glenn
Beck?

The question carries the assumption that they haven’t targeted
others. I kind of assume I’m on a list. I don’t think I’m the only
one, along with James Rosen and the Associated Press, that garnered
special attention. There’s probably a list of people.

So an enemies list, like in the Nixon
administration?

I’ve been told there is such a list, yes.

And who do you suspect is on that list?

Well, there’s an internal email that indicated reporters who
were working with leakers in government agencies or perceived as
enemies of the White House are being targeted. So I think that’s
probably accurate — anybody that they perceive as harmful to their
agenda or working with leakers and whistle-blowers, which I did a
lot of.

Do you have sources who told you the names on that list?
Is Rush Limbaugh on that list, for example?

Another reporter told me — I can’t remember who — that they
thought he was on some sort of target list, but I don’t know that
to be the case. I have someone who told me the existence of a list
but not the names on it.

The Most Transparent Administration in History has repeatedly
shown that it doesn’t live up to that self-declared title.
Reporters get shut out of meetings without reason, at least one guy
has the job title “Freedom
of Information Request Act Denial Officer
,” the Columbia
Journalism Review

reports
that “the Obama administration has prosecuted more
people as whistleblowers under the 1917 Espionage Act than all
former presidents combined,” and in recent significant news, it was
revealed that the administration
regularly demands changes
to reports by the White House press
pool.

Nevertheless, each of Attkisson’s individual claims must be
greeted with skepticism. One of her most scandalous accusations is
that the White House bugged her computer. On Friday she released a
video that she suggests shows a hacker deleting text from a
document on her computer in real time. Computer security firm
Interhack Corp. questions Attkisson’s account and says it looks
nothing like a real hacking but more like a
stuck backspace key
.

Watch Reason TV’s interview with her on Benghazi, Fast and
Furious, and the decline of investigative journalism in
America.

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J.D. Tuccille on Prodding Politicians Beyond Election Day

Voting is important—to politicians,
because it gives them a sense of validation. Good-government types
like the whole balloting ritual, too, because they get warm fuzzies
from seeing others invest time and energy into the institution that
defines so much of their sense of self-worth. That’s why you’ll be
endlessly nagged—and even receive implied threats—to drive you to
punch your card, fill in the oval, or tap the screen for the
candidate who disgusts you least. But in terms of influencing
government officials, grimly performing what others insist is a
duty every couple of years and then (with good reason) bitching
about the outcome isn’t the last word in civic participation.

If you want to keep politicians on their toes, writes J.D.
Tuccille, you should “vote” to embarrass officials, free prisoners,
and carve out areas of life beyond state control.

View this article.

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