The Importance of Buying Lots of Time

By: Brad Thomas at:

Early in 2012 I noted how cheap Royal Dutch Shell (RDSA) appeared. Certainly the stock looked cheap, though when trading options I need more than just a cheap stock.

Importantly, in this instance the availability of ultra-long term December 2016 expiration options (trading on the Amsterdam exchange) also seemed cheap, which is what I require, so I bought some options. What follows is the story of that adventure. I think it’s illustrative of the importance of buying yourself time, ensuring you stick with your trading plan and trade methodically.

In early April 2012 RDSA was trading at €26.1, a mega cap stock (once the largest stock in the world by market cap) trading for a price to book ratio of 1.25x, P/Sales ratio of 0.45x, a forward P/E of about 8x, and sporting a dividend yield of about 5% – that seemed cheap, very cheap! I certainly didn’t think that there could be much in the way of downside in that stock! Well, I was right but I certainly wasn’t expecting it to be more or less unchanged 2 years later!

RDSA Chart 1

At the start of April 2012 the December 2016 €28 strike was trading at €2.0. This equated to an implied volatility of about 20%. Like I said, I thought that was cheap, but little did I know at the time that implied volatility would drop even further to a record low of 15% some two years later!

Anyway, on the 13 April 2012 I bought 50 options on RDSA with December 2016 expiration and €28 strike at €2.0 – which equated to €10,000 (the vertical green line on the graph below). This option had some 5 years to expiration, so I had a lot of time. I thought that RDSA would be materially higher after just 2 years, but to be safe rather than sorry I bought the option with the most time to let this trade “work”. Normally when I trade, if I can go further out I will, and with RDSA being so liquid the opportunity existed.

RDSA Chart 2

Well, how wrong was I? Some 18 months after buying the option, it was worth half the value I paid for it, even though the price of RDSA was more or less unchanged at that time! This certainly wasn’t amusing.

However, all was not lost. At the start of 2014 the option still had 24 months to run and I was still “confident” in my hunch that RDSA would trade materially higher in the not too distant future.

Fast forward to the 22nd of May 2014 (two years after buying the option) and it was trading at €2.27. Also, there were December 2018 expiration options available. To “buy myself more time” I decided to sell the December 2016 expiration, €28 strike call options at €2.27 (netting some €11,350). I then put all the proceeds of this sale into the December 2018 expiration €30 strike call options at €1.82. I was able to buy 62 contracts (an increase from 50).

RDSA Chart 3

On Friday this option closed at €2.49, which with 62 contracts equals €15,438 (about a 50% return). Let’s not count our chicks before they’re hatched, because this trade isn’t over. If I want to see this trade through then I guess I have to wait until the end of 2018, and goodness knows what will happen between now and then.

The moral of the story is this: things rarely turn out the way you expect, but as long as you have time on your side you can be pleasantly surprised by how lucky you can get.


– Brad

PS: In the Capex Assymetric Trader alert service, I share similar trading ideas on a weekly basis. Try the service out by SIGNING UP at an introductory offer of just $7.


“Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes

via Zero Hedge Capitalist Exploits

Ukrainian Journalist: “Let’s Borrow From The US Constitution; They’re Not Using It Anymore”

Submitted by Simon Black of Sovereign Man blog,

In the fall of 1239 AD, Batu Khan and his Golden Horde were making great progress in their rapid advance into Europe.

The Mongol Empire was in the midst of global conquest, and Batu’s army had been devastating cities across the Russian plain.

He stopped briefly after taking Chernihiv (in northern Ukraine) and sent his cousin Mongke with a vanguard force to probe Kiev, the capital of Kievan Rus.

At the time, Kievan Rus was one of the greatest powers in Europe, forming a loose federation of Slavic principalities that stretched from the Black Sea to the White Sea.

Kiev had been founded nearly eight centuries before, and by 1239 it was a grand capital with some 50,000 inhabitants. Mongke was quite taken with it. And, not wanting to destroy it, he sent an emissary to discuss terms for their surrender.

Apparently Kiev’s Prince Mikhail had just watched the movie 300… because he put the Mongol emissary to death.

Now, if I could paraphrase the Princess Bride, history gives us a couple of very clear rules– (1) Never get involved in a land war in Asia; and (2) Never go in against a Sicilian when death is on the line.

But only slightly less well-known is this: (3) Never slight a guy named Batu Khan, especially when his army is called the ‘Golden Horde’.

Batu responded to Mikhail’s poor manners by laying waste to the city. Martin Dimnik’s work “The Dynasty of Chernigov” describes the carnage in gruesome detail, saying that people “drowned in a pool of blood.”

To their credit, though, the Kievans fought bravely. They lacked the Mongolian weaponry and tactics, but they fought with sticks and knives… hand to hand, house to house, man to man.

Resistance is in their DNA. So it’s no surprise that, several centuries later, people were out in the streets fighting against their own government. Sticks and knives, once again, againt tanks and automatic weapons.

This time they won. Sort of.

Every 10-15 years this place has a major revolution. And each time it’s precipitated by one basic principle: money.

All people really want is to be in a place where they can improve their lives… where their children can have a brighter future than they did.

The system in Ukraine did not provide those conditions. It was designed for a tiny political and banking elite to enrich themselves at the expense of everyone else.

This revolution was borne from economic frustration, plain and simple.

Yet each time this happened in the past, all they really did was change the players… not the game. They just ended up with a different set of criminals in charge.

This time around there seems to be serious effort to at least change the rules.

UkraineNewspaper1 Ukrainian journalist: Lets borrow from the US Constitution, theyre not using it anymore

Many are talking about major revisions to the Constitution (leading one local journalist to ask– “Why don’t we use the American Constitution? It was written by really smart guys, it has worked for over 200 years, and they’re not using it anymore…”)

He’s right. Much of the West, in fact, has descended into the same extractive system as Ukraine.

There’s a tiny elite showering itself with free money and political favors at the expense of everyone else.

Dow 17,000 means that a handful of people at the top are making boatloads of money thanks to quantitative easing, some upper-middle class are doing fairly well, and the average guy pays higher prices for food, fuel, education, medical care, etc.

It’s not just the US. France, for example, is simply not a place where you can work hard and expect to improve your life anymore. In Greece and Spain, half of the nations’ young men are broke and unemployed.

And along they way, they have all set aside civil liberties and turned into vast police states.

Ukraine may be in the midst of turmoil right now, but they at least hit the big giant reset button and are looking to build something new.

The West, meanwhile, continues down its path of more debt, more money printing, more regulations, and less freedom. How long can this really go on without consequence?

via Zero Hedge Tyler Durden

(In)Dependence Day 2014: Freedom From Pain, Or Freedom From Dysfunction?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Having surrendered our independence for the quick, easy fix, we will inevitably surrender our health, liberty and freedom.

As we celebrate the declaration of political independence from Empire today, a question arises: how independent are we today in our day-to-day lives? The flip side of independence is dependence: not just on Empire, but on painkillers, central banks, government intervention, silence, complicity.

Dependence limits freedom. The dependent person, household or nation cannot truly be free; their actions and choices are severely limited, and the deeper their dependence, the greater the erosion of their will to become less dependent.

People speak of the cost of independence and liberty in militaristic terms. But in day-to-day life, independence boils down to not being dependent on systems you have no control over.

Independence isn't taken from us; we surrender it. We surrender it for all kinds of reasons; it's often easier to accept dependence than struggle to maintain our independence.

Our culture has developed a self-destructive response to pain: we want any sort of pain, physical, spiritual, financial, to go away immediately and magically. We don't care about the mechanism, just make it go away.

But pain is not just a random event: it's a message that we need to listen to. Pain communicates that something is damaged, dysfunctional, not working or in conflict. Pain tells us we need to understand the sources of the pain and seek a systemic solution.

There are many sources of physical and mental pain, and they cannot be lumped into one category. But in all cases, there are systems and there are sources of the pain, and since life, ecosystems, economies and organisms are complex interactive systems of systems, there is often not one source but multiple layers of interacting sources.

Consider the common ailment of back pain. I've suffered from it, as have many people. While there are many potential sources and causes, we're designed to prefer the easiest, quickest fix, which is generally a painkiller pill.

The quick fix does not address the source or solve the underlying problem: it simply makes the symptoms go away. It eliminates the message that something's wrong and needs to be addressed in a fundamental way.

A great many back problems arise from lack of fitness, poor habits and being overweight. In many cases, the long-term solution requires a complete revamping of habits, diet, fitness, and a reworking of our understanding of the mind/body system.

This is a lot more trouble than taking a pill, so many of us resist changing all these major systems that affect each other within the overall system of our well-being.

But eliminating the message and the symptoms doesn't fix anything. What it does do is make us dependent on the fix. A dose of highly addictive heroin is called a fix for good reason: like any other painkiller, the addict depends on it to fix the pain and the symptoms that are shouting that something's terribly wrong.

This is why I call the Federal Reserve's interventions monetary heroin: the global financial meltdown caused pain, and rather than deal with the sources of financial dysfunction, the Fed chose the highly addictive fix of zero interest rates, unlimited credit and easy money.

Every month, the Fed mainlines this fix into the financial system to make the pain go away: the pain that's telling us the system is broken, dysfunctional, destructive.

And so now we're hooked, dependent: whether we understand it or not, we have surrendered our independence and our ability to learn from pain and directly address the sources of the dysfunction.

Free money, in all its guises–welfare, corporate welfare, subsidies, tax breaks, bribes–is the easy fix, the easy pill that makes the symptoms go away.

What happens to systems that ignore symptoms? They break. Whatever is causing the pain continues unaddressed, and so it gets worse. Making the symptoms go away doesn't fix the underlying causes; in a terrible irony, it enables the problem to spread and grow even more destructive.

Becoming dependent on the fixes issued by the Federal Reserve and the central state does not solve the problems causing the pain; it simply makes us dependent on the quick, easy opiate.

Having surrendered our independence for the quick, easy financial fix, we will inevitably surrender our health, liberty and independence. Our democracy has already been gutted by the financial fix, and our claims of independence ring hollow.

Do we want to be free from political and financial pain, or free from systemic dysfunction? To truly be free, we must first free ourselves from dysfunction and the siren-song of dependence on the quick, easy and oh-so addictive fix.

via Zero Hedge Tyler Durden

“Making Investment Decisions Based On Fundamentals Is No Longer A Viable Philosophy”

Yet another in a long stream of relatively esteemed hedge fund managers has decided enough-is-enough and is shuttering his firm. The reason? Same as the rest… As WSJ reports, Steve Eisman, who emerged as one of the stars of the financial crisis with a winning bet against mortgages, has wound up his fund because he believes that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."

As WSJ reports,

Steve Eisman, who emerged as one of the stars of the financial crisis with a winning bet against mortgages, is shuttering his hedge-fund firm, according to people familiar with the matter.



While Emrys gained 3.6% and 10.8% in 2012 and 2013, respectively, its performance lagged behind that of the bull market. It was down this year, one of the people said.

Mr. Eisman's profile grew at the hedge-fund where he previously worked, FrontPoint Partners, which was once owned by Morgan Stanley and where he had managed more than $1 billion. Besides his bet against mortgages, he was known for shorting, or betting against, for-profit education companies and lobbying against the industry in Washington. He was featured in the best-selling book about the financial crisis, "The Big Short."



In a May regulatory filing, the firm wrote it believed that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."


Instead, Emrys echoed what many stockpickers have said in recent years about larger factors affecting their ability to invest as they had historically. "While individual company analysis will always be important," it said, "the health, or the change in the health, of the financial system is the starting point of all analysis."

*  *  *

That about sums it up – there is no alpha; it's all beta (levered beta) and the smartest money knows how that ends…as we noted previously, no lesser manager than Baupost's Seth Klarman explained the mirage…

"Born Bulls"


In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.


If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stock probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town. The Fed will continue to hold interest rates extremely low, leaving investors no choice but to buy stocks it doesn’t matter that the S&P has almost tripled from its spring 2009 lows, or that the Fed has begun to taper purchases and interest rates have spiked. Indeed, the stock rally on December’s taper announcement is, for this contingent, confirmation of the strength of this bull market. The picture is unmistakably favorable. QE has worked. If the economy or markets should backslide, the Fed undoubtedly stands ready to once again ride to the rescue. The Bernanke/Yellen put is intact. For now, there are no bubbles, either in sight or over the horizon.


But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about. A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences. Even as the Fed begins to taper, the announced plan is so mild and contingent – one pundit called it “taper-lite” – that we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences. Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings? Pretty clearly, lower than otherwise. Yet Robert Schiller’s cyclically adjusted P/E valuation is over 25, a level exceeded only three times before – prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive.


A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.


There is a growing gap between the financial markets and the real economy.



Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…


The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.


But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.


Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.

via Zero Hedge Tyler Durden

June Full-Time Jobs Plunge By Over Half A Million, Part-Time Jobs Surge By 800K, Most Since 1993

Is this the reason for the blowout, on the surface, payroll number? In June the BLS reports that the number of full-time jobs tumbled by 523K to 118.2 million while part-time jobs soared by 799K to over 28 million!


Looking at the breakdown of full and part-time jobs so far in 2014, we find that 926K full-time jobs were added to the US economy. The offset: 646K part-time jobs.


Something tells us that the fact that the BLS just reported June part-time jobs rose by just shy of 800,000 the biggest monthly jump since 1993, will hardly get much airplay today. Because remember: when it comes to jobs, it is only the quantity that matters, never the quality.


… just in case there is any confusion why there is zero real wage growth (for two months in a row now), and why it will take a few more months before experts start tossing the word stagflation a little more casually.

Source: BLS

via Zero Hedge Tyler Durden

Excluding Oil, The US Trade Deficit Has Never Been Worse

Remember when in January 2010 Obama promised that he should double US exports in five years in a bid to collapse the US trade deficit? Not only that, but in his 2010 SOTU address, Obama doubled down by saying “It’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.”

Back then, Jennifer R. Psaki who was still a simple White House spokesperson, said that the White House “had been working for several months on a policy to increase exports. She said the plans included the creation of an export promotion cabinet and steps to help small and medium-size businesses tap markets in other countries. “

Well, it isn’t quite five years later (he still has six months), but we doubt that anyone would have expected what the outcome of Obama’s export boosting campaign would be. We show it below in the following chart which captures the US trade deficit, excluding oil.


What this chart shows is that when it comes to core manufacturing and service trade, that which excludes petroleum, the US trade deficit hit some $49 billion dollars in the month of May, the highest real trade deficit ever recorded!

In other words, far from doubling US exports, Obama is on pace to make the export segment of the US economy the weakest it has ever been, leading to millions of export-producing jobs gone for ever (but fear not, they will be promptly replaced by part-time jobs). It also means that the collapse in Q1 GDP, much of which was driven by tumbling net exports, will continue as America appear largely unable to pull itself out of its international trade funk, much less doubling its exports.

What’s perhaps just as bad, is that the chart above shows that global trade continues to collapse: just recall the near standstill in Chinese trade, both exports and imports, that took place earlier this year. We wonder: is the fact that the world is trading with each other at the slowest pace since the Lehman collapse also due to harsh winter weather?

Yet while core trade is the worst ever, overall US trade is not all that bad. Why? Because of the shale revolution of course, and the fact that net US petroleum imports have plunged.


Note, the above chart does not imply the US is a net exporter of petroleum, especially considering the recent news surrounding the easing of the oil export ban. That simply won’t happen as was explained previously. What it does show is that oil imports as a percentage of the total US trade deficit continue to decline, even if the US still remains a net oil importer.  Which is curious because as Bloomberg reports, “the U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs…  U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids.”

So even with the world’s biggest crude production, the US still needs to import nearly $9 billion in petroleum goods every month? That is hardly enough to offset the massive loss of jobs experienced in other non-energy sectors of the economy which unlike oil, have never seen a worse trade deficit.

Furthermore, even as the energy sector soaks up some $200 billion in capex or some 20% of the total private fixed-structure spending, the US shale renaissance will only persist for another 5 or so years before the output rates peak and resume their downward direction:

U.S. oil output will surge to 13.1 million barrels a day in 2019 and plateau thereafter, according to the IEA, a Paris-based adviser to 29 nations. The country will lose its top-producer ranking at the start of the 2030s, the agency said in its World Energy Outlook in November.

Or sooner. Or later. The funny thing about petroleum production is how dependant on extraction technology it is. Still, while the shale revolution has been a blessing since the Lehman collapse, it may be on the verge of some serious disappointments: recall back in March when the Monterey Shale, whose reserves were said to account for two-thirds of all recoverable US shale oil resources, saw the EIA cuts these estimates by a whopping 96% overnight!

Furthermore, as we also reported back in March, the US may well have hit the tipping ROI point, as shale costs have exploded in recent months. In fact, the one thing that may be masking the increasing unprofitability of shale production in the US is that old standby: debt. Some of the choice fragments from the indepth look at the shale industry, from Shale Boom Goes Bust As Costs Soar:

The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”



In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter… companies including Forest Oil Corp. , Goodrich Petroleum Corp. and Quicksilver Resources Inc. racked up interest expense of more than 20 percent.


Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.

But one doesn’t need to look at the shale driller’s balance sheets to know that something is afoot: a quick glimpse at recent Bakken shale dynamics, shows that the well efficiency has topped out and the only offset is the exponentially rising number of wells: an exponential line which as the excerpt above shows is only sustainable courtesy of ZIRP and ultra cheap debt. If and when the Fed’s generosity ends, watch out as the shale day of reckoning finally arrives .

In any event, the above shale discussion is tangential – perhaps the US will uncover new technologies to tap even more oil, at lower prices and higher efficiencies. But probably not, as even the E&P industry is increasingly more focused on buybacks and cashing out here and now, than on capex and R&D spending.

Ironically, it is precisely the oil industry in general, and shale in particular, that Obama blasted as recently as 2011. As the NRO helps us recall, it was back in 2007, Obama said he wanted to free America from “the tyranny of oil.” In 2011, he called oil “yesterday’s energy.” He also decried the profits being made by the oil and gas sector and declared that it was time to repeal the tax preferences given to it (which cost taxpayers about $4 billion per year), calling them “oil-company giveaways.” How ironic is it, then, that it is precisely the oil companies which prevent the soaring US trade gap in all other goods and services to disintegrate the US economy completely.

In any event, in a world in which trade increasingly does not matter (because central banks supposedly can and will merely print “prosperity” to offset the lost wealth that comes with international trade and comparative advantage, a concept that has been around since the late 1700s), it is becoming clear that America has certainly adhered to the Fed’s mission of forcing capital misallocation worse than ever, by focusing not on being competitive in an increasingly more technological and sophisticated world, but merely pretending that an economy can achieve escape velocity almost exclusively through stock buybacks.

And yet somehow there are those who still vouch for 3% GDP growth any minute now, a renaissance in capital spending also any minute now, just, well, never now, and who believe that some 285K jobs can be created at a time when the US economy is freefalling and the M&A bubble is laying off tens of thousands every month left and right all in the name of the almighty EPS beat.

But then again, Obama still has 6 months to make good on his promise to “double US exports in 5 years.” We are confident that in retrospect, just like in all of his other public appearances, he will have spoken nothing but the truth…

via Zero Hedge Tyler Durden

Texas Celebrates Fourth of July By Ousting Corrupt UT Austin President

UTA major
shakeup is coming to the University of Texas at Austin. President
Bill Powers, who is believed to be involved in an admissions
scandal, was given an ultimatum: resign by the next regents’
meeting or be fired.

According to The Houston Chronicle, Powers has
not yet accepted
the offer:

UT System Chancellor Francisco
 asked Powers to resign before the regents meet
again July 10, or be fired at the meeting, the source said. Powers
told Cigarroa he will not resign, at least not under the terms that
the chancellor laid out Friday. Powers told Cigarroa he would be
open to discussing a timeline for his exit, the source said.

Powers’ ouster follows the opening of an investigation into UT
Law School. Numerous media outlets have reported that the law
school was admitting vast numbers of unqualified students who had
political connections. Powers was formerly dean of the law

The scandal may have remained unknown to the public if not for a
personal investigation undertaken by UT Regent Wallace Hall, who
filed numerous public records requests after coming across some
suspicious documents. Powers’ allies in the legislature retaliated
by attempting to impeach Hall, though the motion was tabled by a
legislative subcommittee.

The sudden downfall of Powers is a
stunning vindication
of the efforts of Hall and Texas’s Jon Cassidy, who provided an analysis of UT
admissions that corroborated Hall’s findings.

Thankfully, it looks like corrupt college administrators will no
longer be able to keep the extent of their wrongdoing a secret from
the public.

from Hit & Run

5 Things To Ponder: Under The Surface

Submitted by Lance Roberts of STA Wealth Management,

Alas, all good things must come to an end. As the kids summer vacation trip comes sadly to an end, it is only fitting that the final edition of "Thoughts From The Beach (TFTB)" would be this weekend's "5 Things To Ponder."

This week was very busy with economic data.  For the most part, the majority of the data came basically inline with expectations.  However, the internals of the various reports were much less encouraging. The most noteworthy report, and the least important from an investment standpoint, was the monthly employment report which came in at 288,000 jobs for the month. 

As with the bulk of other reports, the more important details were lost to the headlines.  The average number of hours worked made no gains, and hourly earnings growth remains muted. The bulk of the job creation remained focused in the lower wage paying areas of the economy such as retail and transportation.  Most importantly, full-time jobs fell by roughly 500k.

As I discussed in "Jobless Claims And The Issue Of Full Employment," there is only one analysis of employment that matters.  That is full-time jobs relative to the population. Full-time employment is what fosters household formation and long-term economic growth. As shown in the chart below, full-time employment relative to the working age population has remained primarily stagnant since the financial crisis and actually fell in the latest month. This is a key reason why economic growth continues to struggle.


However, I digress, and our plane is getting ready to board as we make our way back to reality.  Come Monday it is back to a dimly lit desk, stale coffee and the daily grind.  In the meantime, here is what I will be reading on the trip home.

1) The Next Financial Crisis Is Brewing Right Now by David Dayen via The Fiscal Times

"The Office of the Comptroller of the Currency (OCC), not typically seen as a strident regulator, is warning about risky lending as low interest rates drive a reach for higher yields. Both the OCC and the Federal Reserve have decried the slippage in underwriting standards on particular loan products. Fed Chair Janet Yellen cited 'pockets of increased risk-taking' in a speech yesterday. And the Bank for International Settlements (BIS), a consortium of the world’s central banks, cautioned this week about asset bubbles forming throughout the global economy."

2) BIS Warns Of Destabilizing Low Interest Rates by Yves Smith via Naked Capitalism

"Frameworks that fail to get the financial cycle on the radar screen may inadvertently overreact to short-term developments in output and inflation, generating bigger problems down the road. More generally, asymmetrical policies over successive business and financial cycles can impart a serious bias over time and run the risk of entrenching instability in the economy. Policy does not lean against the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap. Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent. In this context, economists speak of "time inconsistency": taken in isolation, policy steps may look compelling but, as a sequence, they lead policymakers astray."

Also Read:  Yellen To The BIS by Sigmund Holmes

3) It's Time To End "Crapitalism" by John Stossel via Reason

"But it's crapitalism when politicians give your tax money and other special privileges to businesses that are 'most deserving of help.' Often those businesses turn out to be run by politicians' cronies.


Many government agencies feed this crony capitalism. When there is scandal, such as when the Energy Department lost $500 million on Solyndra, we sometimes hear about it. But often we don't. You probably didn't know about the department's other fat losses on businesses like Solar One, the Triad ethanol plant, FutureGen, the Clinch River Breeder Reactor, and so on.

The biggest funder of this crony capitalism is the Export-Import Bank."

4) Is The IMF Looking To Expropriate Funds? By Martin Armstrong Via Zero Hedge

"Now the June 2014 report has a new, far-reaching proposal. This shows how lawyers think in technical definitions of words. There is no actual default if they extend the maturity. You could buy 30-day paper in the middle of a crisis and suddenly find under the IMF that 30 day note is converted to 30 year bond at the same rate.


The huge national debts could be reduced also according to the IMF by just expropriating all private pension funds."

5) The Failure Of Macro Economics by John Cochrane via The Wall Street Journal

"When models don't yield the spending policies they want, some Keynesians abandon models—but not the spending.


Sclerotic growth trumps every other economic problem. Without strong growth, our children and grandchildren will not see the great rise in health and living standards…Without growth, our government's already questionable ability to pay for health care, retirement and its debt evaporate… Without growth, U.S. military strength and our influence abroad must fade…


The 'demand' side initially cited New Keynesian macroeconomic models. In this view, the economy requires a sharply negative real (after inflation) rate of interest. But inflation is only 2%, and the Federal Reserve cannot lower interest rates below zero. Thus the current negative 2% real rate is too high, inducing people to save too much and spend too little…If you look hard at New-Keynesian models, however, this diagnosis and these policy predictions are fragile…


Where, instead, are the problems? John Taylor, Stanford's Nick Bloom and Chicago Booth's Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago's Casey Mulligan deconstructs the unintended disincentives of social programs."


via Zero Hedge Tyler Durden

Costs? US Sales To Russia Hit Record High After Sanctions

While it is all too easy to show the massive outperformance of Russian stocks (even after Carney’s “sell” recommendation) as evidence that US sanctions were not ‘punishing’ as the mainstream media might suggest; this week’s release of trade data shows the utter farce that the so-called “costs” imposed on Putin actually are. As WSJ reports, despite all the scaremongery and sanctioning, US exports to Russia in May hit $1.2 billion – a record high (up 21% from pre-sanctions). That will certainly teach them!!



As WSJ reports,

U.S. efforts to penalize Russia for its actions in Ukraine appear to have done little to stem exports of U.S. goods to the country.


The U.S. announced targeted sanctions against several Russian companies and individuals in March, but U.S. trade data published Thursday shows exports to the country were the highest on record at $1.2 billion in May.


The sanctions, organized with Europe and other major industrialized nations over Moscow’s alleged actions to destabilize its former client state, sparked investor flight out of Russia, led the ruble to tumble and pushed the economy into a recession. Russian markets have since recovered somewhat, but investors have been wary of an escalation in the sanctions battle.


Demand for U.S. products apparently hasn’t been hit, however, and in fact jumped 21% from the previous month.

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So much for those sanctions – need moar targeted sectoral ones to really teach them a lesson (oh wait – what about the boomerang?)

via Zero Hedge Tyler Durden