The Disturbing Reasons Why The Bank Of Japan Stunned Everyone With Negative Rates

As we noted earlier, in a paradoxical U-turn, one which caught everyone by surprise as a result of Kuroda’s own promise just one week ago not to engage in NIRP


… and two months after the ECB’s December 3 disappointing announcement led to a historic surge in the EUR, today countless macro hedge funds have been left reeling with huge losses once again, as many had recently turned bullish on the Yen…

… only to be eviscerated by the BOJ’s negative rates announcement.

So what happened? Reuters has one amusing take, one which we doubt many macro HFs will find quite entertaining:

Bank of Japan Governor Haruhiko Kuroda used classic shock tactics on Friday to push through his latest unconventional monetary policy of negative rates: deny, then strike.

The paradox, of course, is that by “striking”, Kuroda slammed precisely those who were meant to benefit the most from the BOJ’s action: financial institutions. To be sure, it is not just hedge funds who will be left reeling but Japanese banks themselves, because as a result of negative rates, their NIM will go even further negative and lead to even more pronounced losses, something European banks have discovered the hard way over the past year and a half.

There are other problems with the BOJ’s seemingly chaotic, if not panicked, decision: as Reuters adds, “a razor-thin 5-4 vote underscores the difficulty Kuroda had in winning enough board backing for his shock tactic, and illustrates the doubts among board members about the governor’s line that by sticking to a 2 percent inflation goal the BOJ can make people believe prices will rise.”

In a note released this morning, Goldman itself warns that it has “concerns” about Kuroda’s act:

… we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years.


Of interest to us was the growth and inflation forecasts in the Outlook for Economic Activity and Prices (Outlook Report) also released on January 29. As we expected, the BOJ cut the FY2016 core CPI outlook to +0.8%, from +1.4% in October, but other growth rate and price outlooks were largely unchanged. The future benefits of changing to this historical policy regime (i.e., introducing a negative interest rate) were hardly factored in by the Policy Board despite the above explanation of the policy transmission channels made by Governor Kuroda.


In our view, this suggests that the BOJ intended to affect the expectations of forex market participants with a bold and surprising announcement. As we mentioned above, Governor Kuroda had continuously rejected the possibility of cutting interest rates in the Diet and other public forums until only recently. Governor Kuroda may have spotted a chance to surprise at the January 29 MPM having seen a substantial decline in market expectations for an interest rate cut as a result of this. He declared that the BOJ is prepared to lower the interest rate further into negative territory if it decided this was necessary, and introduced examples of countries with large negative interest rates such as Switzerland (-0.75%) and Sweden (-1.1%). We believe this was also intended to keep expectations alive in the forex market going forward.

Translated, this means that just like China’s central bank, which in recent weeks has been panicking over how to scare currency speculators away from shorting its currency too far, and thus unleashing a surge in capital outflows (which as we wrote yesterday are estimated to have hit a near record $185 billion in January), the BOJ is likewise scrambling to prevent aggressive shorting of the JPY, and now that it has unleashed NIRP will use it as the “backstop bazooka” that can be used at any given moment when the USDJPY gets too low, spooking speculators and other hedge funds who have ironically been the biggest beneficiaries from BOJ policies.

But how did Draghi get the idea to engage in NIRP specifically as the? Reuters writes that it all started precisely a week ago: on Jan. 21, a day before flying out for the annual World Economic Forum in Davos, Kuroda told Japan’s parliament he was not considering negative interest rates. But he quietly told his staff to come up with several options in case the BOJ eased.

Of course, our staff knew that several central banks have adopted negative interest rates, so they’ve been analyzing the step for some time,” Kuroda said at a news conference on Friday. “They raised it as one of the options, which we discussed at today’s meeting.”


By the time Kuroda returned from Davos, BOJ staff were ready to propose negative rates, taking a leaf from the European Central Bank’s book. “The ECB showed that combining QE and negative interest rates can work,” one BOJ official said. “It was just a question of overcoming some technical difficulties.”

Which at least superficially makes sense: one can be wrong, but if the right intentions are good – it can be excused. But the punchline that should leave everyone speechless is that it wasn’t even the right intention. Instead, it was this:

People close to Kuroda say that Davos – where he mingled with central bankers such as ECB President Mario Draghi and leading company executives – likely prompted him to pull the trigger. “Davos is really important. Many central bank governors change their perception of things there,” said one central bank policymaker who has regular interaction with Kuroda.

It was peer pressure by other central banks that forced Kuroda to act!

Actually, it’s even worse than that, because that is just half of the story. Here is the other half, again thanks to Reuters:

When stocks are falling this much, it’s hard to justify not acting,” said one of the individuals, who has occasional contact with Kuroda.

And there you have it: stocks are dropping, so central banks must intervene, just as they have done from day one. Just as Draghi did most recently on December 4 when asked if his speech was meant to talk up markets: recall the exchange: “was today’s speech deliberately designed to try offset some of the reaction yesterday?” to which Draghi’s response was legendary: “Not really… well, of course.

This was followed by loud laughter, and why not: Draghi had succeeded in pushing stocks higher, if only for the time being.

Just like Kuroda has done today. Alas, just like in December, the laughter won’t last. First, as MarketWatch notes, “The move does speak to a certain degree of desperation.”

Finally, there’s this disturbing bit from Goldman’s take of the BOJ’s decision:

Regarding the Introduction of Supplementary Measures for Quantitative and Qualitative Monetary Easing announced at the December 2015 MPM, we believe the BOJ thinks that JGB purchases will have reached their technical limit in quantitative terms eventually, and it is highly likely it was a last-ditch measure to somehow maintain the current pace of purchases for some time. If not, we would have expected the BOJ not to introduce a negative interest rate this time either and to have opted instead to further increase JGB purchases.

And when none other than Goldman Sachs says the Bank of Japan engaged in a “last-ditch measure” it may be time to panic.

via Zero Hedge Tyler Durden

The Podcast Awakens: The best kept secret in finance

This week I’ve been down in Southern Chile with the Board of Directors of our agricultural company.

It’s summertime right now, and the weather is absolutely gorgeous.

Last night, after a long day visiting one of the farms I had a chance to sit down with Tim Price to share a bottle of our very own Sovereign Valley wine and record a podcast.

It’s been about two months now since the last episode, so I invite you to listen to our comeback with the Podcast Awakens.

Over the course of a few glasses we dive into discussion about oil prices, financial markets, and an entire investment class that most people haven’t even heard of. One that’s likely to do VERY well this year.

We invite you to clink glasses with us and listen in as we share the best kept secret in finance.

from Sovereign Man

Latest Twist In The Stock Market’s Wild 2016 Ride

Via Dana Lyons Tumblr,

The Dow Jones Industrial Average just alternated 1% moves up and down for 4 days in a row – just the 17th such stretch in the last 70 years.

The stock market’s wild ride to begin the year continues, with the latest twist reminiscent of a roller coaster. Over the past 4 days, the Dow Jones Industrial Average (DJIA) has moved at least 1%, with each day alternating up and down. Since 1900, this is the 68th such streak and just the 17th in the past 70 years (actually, today narrowly missed making it 5 days in a row which would have been just the 3rd occurrence in the last 84 years).

Now, with most studies that we undertake, we’re at least hopeful of finding some kind of an edge in guiding our investment decisions. After all, this effort is not merely an academic exercise – we are trying to make some money. However, concerning the phenomenon that is the subject of this post, we did not realistically expect to find anything too instructive in navigating the market going forward. That said, there are a few interesting tidbits contained herein.

First of all, let’s look at a chart of all of the occurrences since 1900.




As you can see, in the early part of the 20th century, it was not all that uncommon to see these 4-day streaks of alternating 1% up and down moves in the DJIA. In fact, during the epic 1929-1932 bear market, these events were so prevalent that the chart markers cover the entire DJIA line over that period. Now, as we mentioned in yesterday’s post, also on the extreme January volatility, it is common to see elevated volatility near the depths of a bear market. However, the frequency of the events in the 1930′s is still pretty eye-opening to look at.

Since 1946, however, there have been just 17 of these streaks now. In fact, the DJIA went from 1946 to 1973 without recording a single instance of these streaks. Similarly, another long drought in signals took place from 1980 to 2002. What makes these streaks so interesting is that they each skipped over the entirety of respective secular bull markets (from 1949-1966 and 1982-2000). Indeed, like yesterday’s post, these bouts of volatility tended to be products of secular bear markets, with this one being even more skewed. Consider the following:

Every one of the DJIA’s 68 streaks of 4 straight alternating 1% up and down moves occurred within the confines of a secular bear market.

Again, as we mentioned in yesterday’s post, we still consider the market to be in the post-2000 secular bear market (though, that is surely not the popular stance). Thus, we would include the 3 occurrences since 2010 in the secular bear category. Technically, the only ones that did not occur within a secular bear were 2 occurrences in April 1929. However, those did occur close enough to the onset of the crash later that year that we’ll include them with the secular bear events.

One more thing to note is that, like we mentioned before, it is more common to see elevated volatility after considerable market weakness. Although, it certainly can appear after just a short, but sharp decline, as in our present case. That said, we take a bit more interest in those streaks that occurred after relatively small declines as extreme volatility is less typical at those times. Our current streak has the DJIA just under 13% from its 52-week high. Thus, we looked at all instances occurring within 13% of the DJIA’s 52-week high.

There have been 16 streaks now meeting this condition, with half of those occurring since 1973. Again, we’re not placing a whole lot of confidence in prior events serving as a guide to our present circumstances. However, the performance of the DJIA following the 15 previous occurrences is somewhat interesting at least.


In the short-term, the DJIA showed a tendency to bounce, in particular over the following 2 weeks. 12 of the 15 occurrences saw higher prices (1 was unchanged), with the median return at +2.7%. In the longer-term, it was a different story, however. 1 year later, 10 of the 15 were lower. The 2/2/2015 event has yet to record a 1-year return, but barring just about the biggest 3-day rally ever, by next Tuesday it will be 11 out of 15 that were lower 1 year later.

One more time, we do not put a ton of stock in these results. They surely will not dictate much of our thinking in terms of executing our investment approach. However, again, perhaps the most relevant takeaway is that bad stuff tends to happen in bad markets. This includes volatility spikes. Thus, the presence of this recent 4-day roller coaster is perhaps a clue that our present market landscape is not a healthy one.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

via Zero Hedge Tyler Durden

Houston PD Releases Highly Redacted Use of Force Policy to Black Lives Matter, Says It Was AG Decision

As part of its efforts to support police reform, activists associated with Black Lives Matter have been collecting use of force policies from around the country, and posting them online as part of the broader Campaign Zero effort.

However, one particular use of force policy, from the HPD, came highly redacted when it was requested by Deray McKesson, a prominent Black Lives Matter activist. When the Houston Press requested the same document, they received a copy that wasn’t.

A spokesperson for the HPD, Victor Senties, told the Press the redactions were to protect officer safety and police tactics. Among the redactions were that officers are required to carry batons when responding to disturbance calls and when working major events, that cops must get immediate medical attention to victims they’ve pepper sprayed and call a supervisor immediately, and that cops are prohibited from firing warning shoots or shooting at fleeing or suicidal suspects who don’t pose an imminent threat to anyone other than themselves.

The Press reached out to HPD for comment, and was told that all record requests go through the Office of the Attorney General (OAG), and that decision was therefore made by them. “I’m not going to speak to the policy and explain what’s redacted and what’s not redacted,” Senties told the Press. “It goes up to the AG. They’re ones who make those determinations.”

Reason filed an open records request for any records related to a request made by Deray McKesson to the Houston Police Department for the use of policy, including any correspondence between HPD and OAG or OAG and McKesson, since McKesson said he had never received a letter from OAG explaining the redaction decisions, which would have been standard operating procedure.

Today, the OAG told Reason that while they have requests from McKesson during the relevant time period, none involve HPD. Senties reiterated to Reason that all requests for records go through the attorney general, and that HPD open records division receives up to 800 requests a month. According to McKesson, HPD responded to his request with the heavily redacted copy just a week after he made it. OAG responded to our request for relevant records in a little over 24 hours. 

In the meantime, a Texas assistant attorney general offered the most likely explanation—that the HPD may have already had a previous determination from OAG about how to redact the use of force document. In that case, they would have been able to use the previous ruling and redact the document the same way for Mckesson. That doesn’t explain how the Press received a different copy, but those are questions for HPD, not OAG, to answer.

We’re awaiting a call from the HPD open records division for an explanation of discrepancies—if that happens, it will appear in a future post.

from Hit & Run

FBI to Muslim Immigrants: Snoop for Us or Get Deported

They've sure got some strange names over there in the Congo.Those who have followed the frustrating stories about the secretive operations of the federally controlled “no-fly” lists may have read about the accusations that some individuals who were on the list were told they would be removed if they served the government as informants. Those who followed the scandal over the New York Police Department secretly snooping on Muslim schools and mosques (not just in New York but New Jersey) may also have read about their reliance on paid informants who sometimes tried to actually bait people into saying inflammatory things. And those who have closely followed cases where the FBi has busted up potential terror plots here within the United States have noticed that these often seem to be rather not-very-smart (or even mentally troubled) individuals who were being fed plans, ideas, and even being provided fake bombs and weapons by undercover FBI agents.

The post-Sept. 11 need to track down potential terrorist threats within the United States has created incentives where the determinant of “success” is that terror plots are actually stopped. This has created some pretty twisted mentalities among officials to find those successes even if they aren’t out there (and can cause them to miss the ones that actually are). And the victims of these twisted incentives can be anybody a federal official thinks might possibly be able to help them find these plots, even if these people don’t know any (or if there aren’t even any plots). It is dangerous to be the reason why a government official can’t sit in front of a congressional hearing to say that their agency has stopped X terrorist attacks on U.S. soil.

As such, BuzzFeed reporters Talal Ansari and Siraj Datoo have a new lengthy investigation that shows how the FBI is interfering and threatening the immigration efforts of Muslims who want to remain as residents in the United States unless they serve as informants. If they don’t have any useful information, the message is clear: They better go find some:

When he got the last call to come meet with the FBI agents, A.M. allowed himself an uncharacteristic bit of optimism. An immigrant from Pakistan, he had spent the last seven years trying to get a green card, a process that had so far included a series of interviews, three encounters with the FBI, and unexplained bureaucratic delays. Maybe this meeting would bring some resolution?

But when the 37-year-old software programmer arrived at the Homeland Security offices in Dallas that day in August 2014, the conversation quickly swerved. One of the two agents placed a piece of paper on the table and told him to write down the names of all the people he knew who he thought were terrorists.

Bewildered, he said he didn’t know any terrorists. He said he didn’t know about any suspicious activity at all. “We think you do,” the agents replied.

A.M. was quickly becoming alarmed. (Like almost all other immigrants interviewed for this story, he said he did not feel safe allowing his name to be published. A.M. are his initials.) He was a family man, with a highly skilled 9-to-5 job. He had lived in America for nearly two decades. He went to college in America. Why would the FBI see him as a link to terrorism? And weren’t they supposed to be discussing his green card application?

As it turned out, that’s precisely what they were discussing. “We know about your immigration problems,” he recalls one of the agents telling him. “And we can help you with that.” If, they said, he agreed to start making secret reports on his community, his friends, even his family.

The FBI is not supposed to be doing this, BuzzFeed notes. Former Attorney General Alberto Gonzales forbid the practice of FBI agents offering immigration assistance in exchange for cooperation, and those policies are still officially in place. But in practice, immigration officials are dragging their feet on green cards, and then FBI is swooping in and using the situation to browbeat people into becoming informants.

A.M. kept insisting that he didn’t know anybody. They wanted him to wear a wire, go to his mosque, and try to get folks to talk about jihad. He refused. His work visa was revoked. He and his family were kicked out of the country after living here for 17 years.

Read more about his case and others here at BuzzFeed. Former FBI agent Michael German told BuzzFeed that this outcome is a result of the push for agents to develop and Muslim sources they could get their hands on: “Rather than use all their energy to focus on the very small number of terrorists, they try to find anybody that they have a lever over to compel them to be an informants.” And they don’t seem to care what happens to them if they prove to not be useful.

from Hit & Run

China’s Biggest Drop “Since Lehman” Is Worst.January.Ever

Thanks to BoJ’s global “float all boats” NIRP-tard-ness, Chinese stocks avoided the headline of “worst month in 21 years” by rallying above the crucial 2,667 level (for SHCOMP). However, January’s 23% pluinge is the worst month since October 2008 and is officially the worst start to a year in the history of Chinese stocks.


While Shanghia Composite was ugly, the higher beta Shenzhen and ChiNext indices were a disaster…


Making it the worst January ever…


So February is a buying opportunity?

via Zero Hedge Tyler Durden

6 Cities In Michigan Have Even Higher Levels Of Lead Than Flint

Submitted by Carey Wedler via,

As the nation rightly focuses on Flint’s ongoing water crisis, other cities in the state of Michigan face even higher levels of lead contamination. The alarming pervasiveness of potentially toxic drinking water extends across the United States.

The Detroit News reports that “Elevated blood-lead levels are seen in a higher percentage of children in parts of Grand Rapids, Jackson, Detroit, Saginaw, Muskegon, Holland and several other cities, proof that the scourge of lead has not been eradicated despite decades of public health campaigns and hundreds of millions of dollars spent to find and eliminate it.

Of over 7,000 children tested in the Highland Park and Hamtramck areas of Detroit in 2014, 13.5 percent tested positive for lead. Among four zip codes in Grand Rapids, one in ten children had lead in their blood. In Adrian and south-central Michigan, more than 12 percent of 640 children tested had positive results.

These overall numbers are higher than Flint’s, where Dr. Mona Hanna-Attisha found lead in up to 6.3 percent of children in the highest-risk areas; while The Guardian reported Dr. Hanna-Attisha has also said the rate is as high at 15 percent in certain “hot spots,” the size of those samples was not listed. Even so, the overall figures across Michigan are lower than in previous years. In 2012, children tested across Michigan had lead in their blood at a rate of 4.5 percent, about five times less than the rate ten years prior, which reached an alarming 25 percent. In spite of the decrease in recent years, however, thousands of children in Michigan are still affected.

In 2013, that level sank to 3.9 percent and fell again to 3.5 percent in 2014. But that is still 5,053 children under age 6 who tested positive in 2014,” the Detroit News explained. “Each had lead levels above 5 micrograms per deciliter. (Though no amount is considered safe, 5 micrograms is the threshold that experts say constitutes a ‘much higher’ level than most children.)” One Detroit zip code had a rate of 20.8 percent of children who tested positive in 2014, and 20.3 percent the following year.

The outrage in Flint is especially warranted because of the pronounced effects of lead on children. Lead, a known toxin, is associated with both physical and mental ailments, and according to one Detroit teacher, has harmed the cognitive abilities of students.

Kieya Morrison, a veteran kindergarten teacher, who now teaches preschool, described a recent student known to have elevated levels of blood in her system. The girl experienced difficulties grasping simple cognitive tasks, like differentiating between a triangle and a square. “She had cognitive problems. She had trouble processing things,” Morrison said. “She could not retain any of the information.” The University of Michigan recently found a link between lead in children and lower academic test scores.

Michigan’s lead problem “…is still an issue. It’s not going away,” said Dr. Eden Wells, chief medical executive of the Michigan Department of Health and Human Services.

In fact, lead levels are elevated across the United States. Anti-Media reported this week on Sebring, Ohio, where a similar lead crisis spawned official cover-ups. For years, discoveries of lead in public water supplies have made headlines, even if these finding were not national news. In 2008, the Los Angeles school district’s water supply was found to have levels of lead hundreds of times higher than the allowable. In 2015, officials could not guarantee they had adequately purified the water. In another example, in 2010, New York City tested 222 older homes known to have lead pipes, and found 14 percent had lead levels higher than the allowable limit.

Vox noted that in 2014, “Nine counties nationwide told the CDC that 10 percent or more of their lead poisoning tests came back positive. Four of them are in Louisiana, two in Alabama, and the rest scattered across West Virginia, Kentucky, Indiana, and Oklahoma.”

The problem extends beyond anecdotal cases or any specific region. As Huffington Post reports, millions of lead pipes — like the ones that contaminated the water in Flint — are still in service across the United States:

There are roughly 7.3 million lead service lines in the U.S., according to an estimate by the Environmental Protection Agency, down from 10.5 million in 1988. Service lines are the pipes connecting water mains to people’s houses. They’re mostly found in the Midwest and Northeast.”

Jerry Paulson, emeritus professor of pediatrics and environmental health at George Washington University, told the Detroit News how common the problem is:

“This is a situation that has the potential to occur in however many places around the country there are lead pipes, he explained. “Unless and until those pipes are removed, those communities are at some degree of risk.”

Paul Haan of the Healthy Homes Coalition of West Michigan, an organization that works to eliminate household hazards to improve children’s health, warns that the levels of lead in Michigan children’s blood continue to rise, citing weekly statewide reports from pediatricians. In spite of his efforts to help reduce contaminants, he pointed out a dismal flaw in the process:

The problem is,” he said, “we’re still using kids as lead detectors.”

via Zero Hedge Tyler Durden

Macro Hedge Funds Crushed Again

That giant sucking sound you hear is the P&L of macro/FX hedge funds as they look in dismay at their USDJPY exposure. Why? Because as the following chart from SocGen shows, net spec positioning in the JPY was has quietly risen to the highest it has been since 2012!

This what SocGen’s Kit Juckes said just last night:

USD/JPY hasn’t fallen as much as a blind correlations with equities might suggest. Or, if the causation goes the other way, the Nikkei is doing worse than it really ought to on the back of the move in USD/JPY to date. In part that reflects (probably prematurely) concern about the BoJ acting to stop the yen rallying further. It also reflects the shift in positioning. The market is turning net long yen, though I don’t think that is reflected in a short USD/JPY position as much as shorts in AUD/JPY, NZD/JPY. GBP/JPY and even EUR/JPY (Chart 2).

Well, Kit didn’t have much to wait: after last night’s NIRP shocker by the BOJ, explicitly denied by Kuroda just one week earlier, the USDJPY is soaring…

… and all those hedge funds who moved to long yen positions in recent months are getting a quick refresher in the lesson of “don’t fight the Bank of Japan”, even when it is sprawled out and about to lose all credibility.

via Zero Hedge Tyler Durden

Something’s Gone Horribly Awry

Submitted by MN Gordon via,

The S&P 500 has fallen 7.37 percent so far this year.  What to make of it…

Naturally, some people find falling stock prices to be unpleasant.  Others find them distressing.  Another way to look at falling stock prices, however, is like a high-fiber diet.  The effect is necessary to a healthy functioning system.

The simple fact is that stock prices, fueled by speculative liquidity, have long since outrun the real economy.  The disconnect between the two has been widely observable.  The economy’s lagged, incomes have stagnated, yet stocks have soared.

Thus the present, ever so slight reduction in liquidity, and the subsequent lowering of stock prices, is having a cleansing influence.  For it will serve to eliminate marginal businesses, and trim the fat from larger businesses.

Consequently, business owners, managers, and workers of marginal undertakings will have to redirect their efforts into something new…something that’s of greater value.  For example, Walmart recently announced it would be closing 269 stores and laying off 16,000 workers.   Obviously, we don’t wish any harm to hard working Walmart employees.  But we’re also confident many of these 16,000 people will now find a new, more meaningful, and more prosperous purpose in life.

Though it can be painful at times, eliminating and minimizing wasteful activities is how the world becomes more affluent.  On the other hand, propping up negligible endeavors with cheap credit ultimately subtracts wealth from the world.

Mean Reversion

How much more stocks will fall, no one really knows for sure.  Perhaps they’ve already fallen as far as they will.  But we wouldn’t bet our life savings on it.

This is merely conjecture, of course.  But we do recognize that even with the 7.37 percent drop year-to-date, the S&P 500’s Cyclically Adjusted Price Earning (CAPE) Ratio is 23.97.  We also recognize that the CAPE Ratio’s mean, going back to 1881, is 16.65.

On top of that, we understand that valuations always revert back to their mean eventually.  Similarly, we know that when reverting back to their mean, valuations often overshoot not only to the upside; but to the downside too.  This is how an average is formed.

Certainly, there are countless ways for valuations to come down.  One obvious way is for corporate earnings to increase.  Another way is for share prices to decrease.

From what we gather, fourth-quarter earnings for S&P 500 companies are expected to fall 6 percent year over year.  What’s more, this is the third consecutive quarter that earnings have fallen on an annual basis.  Thus, it seems likely, that for stock valuations to get anywhere near their historical average, share prices will need to go down much, much more.

These are some simple facts regarding stock valuations as we understand them.  Don’t listen to us, if you don’t agree with them.  For there’s plenty out there that we don’t agree with.

Something’s Gone Horribly Awry

For instance, we don’t agree with the illusion and degradation of prosperity that’s readily visible to us as we make our way through our daily rotes in downtown Los Angeles.  There are tall shiny buildings, sleek new cars, and chic restaurant fronts up 5th Street and Grand Avenue.  Then, several blocks down 5th Street, at San Pedro Street in Skid Row, there are sidewalk tents, concrete ruble, and multitudes of empty stomachs outside the collection of of rescue missions.

Clearly, something’s gone horribly awry.  Hard work, perseverance, and ingenuity likely have something to do with the shiny streets.  Conversely, sloth, drug abuse, and mental defectives likely have something to do with the blighted streets.  But we also have an inkling that 20 years of activist Fed policy has left its marks all over both.

No doubt, the collection of shiny skyscrapers has sprouted up over the years thanks to the fertilizer of cheap credit.  At the moment, Korean Air / Hanjin Group is financing construction of The Wilshire Grand Tower.  When it opens its doors in 2017, it will be the new tallest building in Los Angeles and the tallest building west of the Mississippi.  Our friend Pater Tenebrarum, of Acting Man, recently explained how the construction of marque skyscrapers coincide with the late stages of an artificial, central bank induced, boom.  The Wilshire Grand Tower will forever be a monument to ZIRP.

At the other extreme, it may be unclear upon first glance how the Fed’s artificially cheap credit has wrought abject poverty.  Ironically, John Maynard Keynes, the godfather of modern day economic intervention by governments, provided one of the better, succinct explanations of this hidden and insidious relationship.  Thus we’ll close with an excerpt of Keynes from The Economic Consequences of the Peace, written in 1919.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.  By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.  The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.


Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.  As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.


Lenin was certainly right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

via Zero Hedge Tyler Durden