Category: zerohedge

Submitted by Marc Faber via The Daily Reckoning blog,

As H.L. Mencken opined, 'The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, and intolerable.'

It is no wonder that, according to a Gallup Poll conducted in early October, a record-low 14% of Americans thought that the country was headed in the right direction, down from 30% in September. That's the biggest single-month drop in the poll since the shutdown of 1990. Some 78% think the country is on the wrong track.

Some readers will, of course, ask what this expose about the political future has to do with investments. It has nothing to do with what the stock market will do tomorrow, the day after tomorrow, or in the next three months. But it has a lot to do with the future of the US (and other Western democracies where socio-political conditions are hardly any better).

I have written about the consequences of a dysfunctional political system elsewhere. In May 2011 I explained how expansionary monetary policies had favoured what Joseph Stiglitz called 'the elite' at the expense of ordinary people by increasing the wealth and income of the 'one percent' far more than that of the majority of the American people.

click to enlarge

I also quoted at the time Alexander Fraser Tytler (1747-1813), who opined as follows: 'A democracy cannot exist as a permanent form of government. It can only exist until voters discover that they can vote themselves largesse from the Public Treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the Public Treasury with the result that a democracy always collapses over loose fiscal policy, always followed by dictatorship'.

Later, Alexis de Tocqueville observed: 'The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.'

To be fair to Mr. Obama, the government debt under his administration has expanded at a much slower pace in percentage terms than under the Reagan administration and the two Bush geniuses. In fact, as much as I hate to say this, Mr. Obama has been (or has been forced to be) a fiscal conservative.

click to enlarge

However, what 18th and 19th century economists and social observers failed to observe is that democracies can also collapse over loose monetary policies. And in this respect, under the Obama administration, the Fed's balance sheet has exploded. John Maynard Keynes got it 100% right when he wrote:

'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…

'Those to whom the system brings windfalls…become 'profiteers' who are the object of the hatred… 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.'

The Fed takes great pride in the fact that US household wealth has now exceeded the 2007 high. However, I was pleasantly surprised when I recently attended a presentation by Larry Lindsey, at my friend Gary Bahre's New Hampshire estate. He unmistakably showed, based on the Fed's own Survey of Consumer Finance and Flow of Funds, that the recovery in household wealth has been extremely uneven.

click to enlarge

Readers should focus on the last column of Table 1, which depicts the change in household wealth between 2007 and 2013 by wealth percentile. As can be seen, the bottom 50% of the population is still down more than 40% in terms of their 'wealth' from the 2007 high. (Lindsey is a rather level-headed former Member of the Board of the Governors of the Federal Reserve System, in which capacity he served between 1991 and 1997.)

Besides the uneven recovery of household wealth among different wealth groups, a closer look at consumer credit, which is now at a record level, is also revealing. Furthermore, consumer credit as a percentage of disposable personal income is almost at the pre-crisis high.

But what I found most interesting is how different income and wealth groups adjusted their outstanding total debt (including consumer credit, mortgage debt, etc.) following the crisis.

Larry Lindsey showed us a table – again based on the Fed's own Survey of Consumer Finance and Flow of Funds data – which depicts total debt increases and decreases (in US$ billions) among these different income and wealth groups.

I find it remarkable that the lower 40% of income recipients and the lower 50% of wealth owners actually increased their debts meaningfully post-2007. In other words, approximately 50% of Americans in the lower income and wealth groups who are both voters and consumers would seem to be more indebted than ever. A fair assumption is also that these people form the majority of the government's social benefits recipients.

Now, since these lower income and wealth groups increased their debts post-2007 and enjoyed higher social benefits, they were also to some extent supporting the economy and corporate profits. But what about the future?

Entitlements are unlikely to expand much further as a percentage of GDP, and these lower-income recipients' higher debts are likely to become a headwind for consumer spending. Simply put, in my opinion, it is most unlikely that US economic growth will surprise on the upside in the next few years.

It is more likely there will be negative surprises.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nveMvo5ME5I/story01.htm Tyler Durden

.

 

 

 

 

 

 

.

 

 

 

.

 

By @blumaberlin

Visual Combat Warrior

 

.

 

 

 

.

.

 

With Benjamins stuffed up his nose

The monster inside Benny grows

It’s taken control

He’s losing his soul

Has Ben gone insane?

…no one knows!

The Limerick King

.

 

 

.

.

 

Ben has an interesting sign

It speaks to the nation’s decline

He wants assets higher

And fools as a buyer

This moron is crossing the line

The Limerick King

 

 

.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/atpIDsBn5v8/story01.htm williambanzai7

Since late 2012 Zero Hedge has been very critical of Japan’s Abenomics experiment, and its first and only real arrow: a massive increase in the monetary base thanks to the BOJ’s shock and awe QE announced in April, resulting in the collapse of the Yen (although in a not zero sum world this means ever louder complaints from US exporters such as Ford competing with Japanese companies), a soaring Nikkei (if only through May), and what was expected to be an economic renaissance as a result of a return to stable 2% inflation.

We repeatedly warned that the only inflation anyone would see in Japan is in imported energy costs and food prices, which in turn would crush real disposable income especially once nominal wage deflation accelerated, which it has for the past 16 months straight. So far this has happened precisely as warned.

Another thing we warned about is that the result of the bank reserves tsunami – just like in the US – lending in Japan would grind to a halt, as everyone and their grandmother sought to invest the resulting excess deposits in risk markets as exemplified best by JPMorgan’s CIO division.

Today, with the traditional one year delay (we assume they had to give it the benefit of the doubt), the mainstream media once again catches up to what Zero Hedge readers knew over a year ago, and blasts the outright failure that is Abenomics, but not only in the US (with the domestic honor falling to the WSJ), but also domestically, in a truly damning op-ed in the Japan Times.

We will let readers peruse the WSJ’s “Japan’s Banks Find It Hard to Lend Easy Money: Dearth of Borrowers Illustrates Difficulty in Japan’s Program to Increase Money Supply” on their own. It summarizes one aspect of what we have been warning about – namely the blocked monetary pipeline, something the US has been fighting with for the past five years, and will continue fighting as long as QE continues simply because the “solution” to the problem, i.e., even more QE, just makes the problem worse.

We will however, show the one chart summary which captures all the major failures of the BOJ quite succinctly.

More importantly, we will repost the Japan Times Op-Ed from last night, titled “BOJ’s money mountain growing but debt may explode” because it not only copies all we have said over the past year, but is a dramatic reversal from the Japanese population eagerly drinking Abe’s Koolaid long after its expiration date. Because once the media starts asking questions, the broader population can’t be far behind.

From Japan Times, November 17, 2013 highlights ours

BOJ’s money mountain growing but debt may explode

by Reiji Yoshida

Haruhiko Kuroda hit the ground running when he was appointed by Prime Minister Shinzo Abe in March to take charge of the Bank of Japan.

Out of the blue, the central bank’s new governor unveiled a super-aggressive easing policy the next month to double the nation’s monetary base in just two years. He said the BOJ would buy more than ¥7 trillion in long-term Japanese government bonds per month to flood the financial system with money to end more than a decade of deflation.

The BOJ’s nine-member Policy Board unanimously supported Kuroda’s goal of stoking 2 percent inflation in two years — a surprise about-face from its stance under his predecessor, Masaaki Shirakawa, who was concerned about the potential side effects of embracing such radical quantitative easing.

More than six months have passed. How has the BOJ’s strategy changed Japan’s financial markets and the real economy?

Critics say Kuroda’s monetary easing scheme isn’t working, although most of the public apparently believes otherwise.

There are growing signs of inflation, but not the sort heralding the start of Abe’s much-advertised recovery and rising wages. Instead, imported fuel and other products have become more expensive because of the weak yen ushered in by Kuroda and Abe, and this bodes ill for the public’s living standards.

Meanwhile, Kuroda’s aggressive plan is allowing the debt-ridden government to issue fresh bonds continuously, further increasing the likelihood of a fiscal crisis, they said.

“People have been deceived by ‘Abenomics,’ ” Yukio Noguchi, a prominent economist and adviser to Waseda University’s Institute of Financial Studies, told The Japan Times in a recent interview.

“Monetary easing is not working, and it’s going nowhere,” Noguchi said.

Since April, the BOJ has been gobbling up JGBs from banks and the open market. Its purchases amount to roughly 70 percent of the value of all new JGBs issued.

But the banks are just stowing that money in their accounts at the BOJ because they can’t find any companies interested in borrowing it.

“There is no demand for funds on the part of businesses. That’s why the monetary easing is not working,” Noguchi said.

Japan’s monetary base — the sum of cash in circulation plus banks’ current account balances at the BOJ — surged from 23.1 percent in April to 45.8 percent in October, thanks to the BOJ’s aggressive operations.

But its money stock — the total amount of monetary assets available in an economy including credit created by bank loans, but excluding deposits held by financial institutions and the central government — only rose to 3.3 percent from 2.3 percent in the period.

This means banks are just depositing the massive funds provided by the BOJ in their own accounts at the central bank. The unloaned cash is thus having little affect on the real economy.

Meanwhile, the long-term interest rate, which theoretically factors in an expected rate of inflation, has fallen and is dwindling at an ultralow level of around 0.6 percent.

This signals that the market does not yet seriously believe that inflation in Japan will reach Kuroda’s 2 percent goal, said Kazuhito Ikeo, an economics professor at Keio University.

“When the policy interest rate has effectively fallen to zero, monetary policy won’t work much any more,” Ikeo said in a recent interview.

Ikeo believes the economy is stuck in a rut because its potential for economic growth has declined and monetary measures alone can’t solve the problem, he said.

“I think it has become clearer that there is a limit to what monetary policy can do,” Ikeo said.

Much of the public believes the drastic easing measures adopted by Abe and Kuroda helped weaken the yen and benefitted exporters. The yen-dollar rate has fallen from around 78 to about 100 over the past 14 months. This helped send the Nikkei stock index soaring from December, one of the main reasons Abenomics has public support.

But the yen started depreciating last fall, long before Kuroda’s widely proposed takeover at the BOJ officially took place in April, Noguchi said.

Abe was just “lucky” to see the yen fall, Noguchi claimed, crediting the easing of the eurozone debt crisis last fall rather than clear signs that Abe’s Liberal Democratic Party was getting ready to boot the unpopular Democratic Party of Japan from power.

In September, Japan’s consumer price index rose 0.7 percent from the same month last year to log its fourth consecu
tive rise, hinting at inflation. The uptick, however, was misleading. It was largely caused by the costly rise in energy imports, exacerbated by a weaker yen.

This, of course, is not a sign of economic recovery, both Noguchi and Ikeo said.

Workers’ real wages fell 2 percent in August compared with the same month the previous year, logging two drops in a row. Inflation without wage hikes will only erode people’s living standards.

“It is wages that matter. If prices go up without a rise in wages, the real income of the people just goes down,” Noguchi said.

Abe apparently is well aware of this risk and has repeatedly urged top business leaders in Keidanren, the nation’s largest business lobby, to push for wage hikes to generate “a virtuous cycle” of raises and economic expansion.

Noguchi calls Abe’s approach “sheer nonsense” because Japan is not a planned economy and the government thus cannot force businesses to raise wages against their will.

Probably the biggest risk with Abenomics, however, is a potential crash in JGB prices that would cause long-term interest rates to spike and gut the debt-laden government.

Ikeo pointed out that the BOJ’s massive bond purchases are in fact helping the debt-ridden government finance itself, even if the central bank claims this is not its intention. If the BOJ keeps up this charade, confidence in JGBs might crash, Ikeo said.

“Soon or later, concerns over fiscal sustainability will emerge. You can’t rule out the possibility of a surge in the (long-term) interest rate at a critical point,” he said.

The resulting surge in debt-serving costs would devastate the government, which has already racked up a public debt totaling almost 200 percent of gross domestic product — the highest of all developed countries. Nearly half of Japan’s ¥92.6 trillion general account for fiscal 2013 is barely being financed by fresh JGB issues.

According to Noguchi’s simulation, if the average JGB yield jumps to 4 percent in fiscal 2014, debt-serving costs will leap to a staggering ¥50 trillion in fiscal 2025 alone, which is more than half the size of the fiscal 2013 budget.

“This is nothing but fiscal bankruptcy,” Noguchi warned.

For some two decades, fears and rumors have swirled about just such a scenario. Economists who warned of the impending crisis were labeled alarmists while speculators who bet on it always lost.

That situation may soon change.

Japan’s trade balance has turned into a deficit and the current account surplus has shrunk. Japan posted a surplus of ¥3.05 trillion in the current account for the April-September half, the second-lowest level since 1985, when comparable data became available.

Ikeo warned that if the current account balance sinks into red and people are convinced the yen will no longer strengthen, investors may start buying foreign bonds and ditch their JGBs.

Another possible danger is, ironically, a full-fledged economic rebound, which would also push up long-term interest rates, Ikeo said.

The government needs to walk “a dangerous narrow path” of seeking a recovery while trying to prevent interest rates from surging at the same time, he said.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/54ep3jNUAqI/story01.htm Tyler Durden

Since late 2012 Zero Hedge has been very critical of Japan’s Abenomics experiment, and its first and only real arrow: a massive increase in the monetary base thanks to the BOJ’s shock and awe QE announced in April, resulting in the collapse of the Yen (although in a not zero sum world this means ever louder complaints from US exporters such as Ford competing with Japanese companies), a soaring Nikkei (if only through May), and what was expected to be an economic renaissance as a result of a return to stable 2% inflation.

We repeatedly warned that the only inflation anyone would see in Japan is in imported energy costs and food prices, which in turn would crush real disposable income especially once nominal wage deflation accelerated, which it has for the past 16 months straight. So far this has happened precisely as warned.

Another thing we warned about is that the result of the bank reserves tsunami – just like in the US – lending in Japan would grind to a halt, as everyone and their grandmother sought to invest the resulting excess deposits in risk markets as exemplified best by JPMorgan’s CIO division.

Today, with the traditional one year delay (we assume they had to give it the benefit of the doubt), the mainstream media once again catches up to what Zero Hedge readers knew over a year ago, and blasts the outright failure that is Abenomics, but not only in the US (with the domestic honor falling to the WSJ), but also domestically, in a truly damning op-ed in the Japan Times.

We will let readers peruse the WSJ’s “Japan’s Banks Find It Hard to Lend Easy Money: Dearth of Borrowers Illustrates Difficulty in Japan’s Program to Increase Money Supply” on their own. It summarizes one aspect of what we have been warning about – namely the blocked monetary pipeline, something the US has been fighting with for the past five years, and will continue fighting as long as QE continues simply because the “solution” to the problem, i.e., even more QE, just makes the problem worse.

We will however, show the one chart summary which captures all the major failures of the BOJ quite succinctly.

More importantly, we will repost the Japan Times Op-Ed from last night, titled “BOJ’s money mountain growing but debt may explode” because it not only copies all we have said over the past year, but is a dramatic reversal from the Japanese population eagerly drinking Abe’s Koolaid long after its expiration date. Because once the media starts asking questions, the broader population can’t be far behind.

From Japan Times, November 17, 2013 highlights ours

BOJ’s money mountain growing but debt may explode

by Reiji Yoshida

Haruhiko Kuroda hit the ground running when he was appointed by Prime Minister Shinzo Abe in March to take charge of the Bank of Japan.

Out of the blue, the central bank’s new governor unveiled a super-aggressive easing policy the next month to double the nation’s monetary base in just two years. He said the BOJ would buy more than ¥7 trillion in long-term Japanese government bonds per month to flood the financial system with money to end more than a decade of deflation.

The BOJ’s nine-member Policy Board unanimously supported Kuroda’s goal of stoking 2 percent inflation in two years — a surprise about-face from its stance under his predecessor, Masaaki Shirakawa, who was concerned about the potential side effects of embracing such radical quantitative easing.

More than six months have passed. How has the BOJ’s strategy changed Japan’s financial markets and the real economy?

Critics say Kuroda’s monetary easing scheme isn’t working, although most of the public apparently believes otherwise.

There are growing signs of inflation, but not the sort heralding the start of Abe’s much-advertised recovery and rising wages. Instead, imported fuel and other products have become more expensive because of the weak yen ushered in by Kuroda and Abe, and this bodes ill for the public’s living standards.

Meanwhile, Kuroda’s aggressive plan is allowing the debt-ridden government to issue fresh bonds continuously, further increasing the likelihood of a fiscal crisis, they said.

“People have been deceived by ‘Abenomics,’ ” Yukio Noguchi, a prominent economist and adviser to Waseda University’s Institute of Financial Studies, told The Japan Times in a recent interview.

“Monetary easing is not working, and it’s going nowhere,” Noguchi said.

Since April, the BOJ has been gobbling up JGBs from banks and the open market. Its purchases amount to roughly 70 percent of the value of all new JGBs issued.

But the banks are just stowing that money in their accounts at the BOJ because they can’t find any companies interested in borrowing it.

“There is no demand for funds on the part of businesses. That’s why the monetary easing is not working,” Noguchi said.

Japan’s monetary base — the sum of cash in circulation plus banks’ current account balances at the BOJ — surged from 23.1 percent in April to 45.8 percent in October, thanks to the BOJ’s aggressive operations.

But its money stock — the total amount of monetary assets available in an economy including credit created by bank loans, but excluding deposits held by financial institutions and the central government — only rose to 3.3 percent from 2.3 percent in the period.

This means banks are just depositing the massive funds provided by the BOJ in their own accounts at the central bank. The unloaned cash is thus having little affect on the real economy.

Meanwhile, the long-term interest rate, which theoretically factors in an expected rate of inflation, has fallen and is dwindling at an ultralow level of around 0.6 percent.

This signals that the market does not yet seriously believe that inflation in Japan will reach Kuroda’s 2 percent goal, said Kazuhito Ikeo, an economics professor at Keio University.

“When the policy interest rate has effectively fallen to zero, monetary policy won’t work much any more,” Ikeo said in a recent interview.

Ikeo believes the economy is stuck in a rut because its potential for economic growth has declined and monetary measures alone can’t solve the problem, he said.

“I think it has become clearer that there is a limit to what monetary policy can do,” Ikeo said.

Much of the public believes the drastic easing measures adopted by Abe and Kuroda helped weaken the yen and benefitted exporters. The yen-dollar rate has fallen from around 78 to about 100 over the past 14 months. This helped send the Nikkei stock index soaring from December, one of the main reasons Abenomics has public support.

But the yen started depreciating last fall, long before Kuroda’s widely proposed takeover at the BOJ officially took place in April, Noguchi said.

Abe was just “lucky” to see the yen fall, Noguchi claimed, crediting the easing of the eurozone debt crisis last fall rather than clear signs that Abe’s Liberal Democratic Party was getting ready to boot the unpopular Democratic Party of Japan from power.

In September, Japan’s consumer price index rose 0.7 percent from the same month last year to log its fourth consecutive rise, hinting at inflation. The uptick, however, was misleading. It was largely caused by the costly rise in energy imports, exacerbated by a weaker yen.

This, of course, is not a sign of economic recovery, both Noguchi and Ikeo said.

Workers’ real wages fell 2 percent in August compared with the same month the previous year, logging two drops in a row. Inflation without wage hikes will only erode people’s living standards.

“It is wages that matter. If prices go up without a rise in wages, the real income of the people just goes down,” Noguchi said.

Abe apparently is well aware of this risk and has repeatedly urged top business leaders in Keidanren, the nation’s largest business lobby, to push for wage hikes to generate “a virtuous cycle” of raises and economic expansion.

Noguchi calls Abe’s approach “sheer nonsense” because Japan is not a planned economy and the government thus cannot force businesses to raise wages against their will.

Probably the biggest risk with Abenomics, however, is a potential crash in JGB prices that would cause long-term interest rates to spike and gut the debt-laden government.

Ikeo pointed out that the BOJ’s massive bond purchases are in fact helping the debt-ridden government finance itself, even if the central bank claims this is not its intention. If the BOJ keeps up this charade, confidence in JGBs might crash, Ikeo said.

“Soon or later, concerns over fiscal sustainability will emerge. You can’t rule out the possibility of a surge in the (long-term) interest rate at a critical point,” he said.

The resulting surge in debt-serving costs would devastate the government, which has already racked up a public debt totaling almost 200 percent of gross domestic product — the highest of all developed countries. Nearly half of Japan’s ¥92.6 trillion general account for fiscal 2013 is barely being financed by fresh JGB issues.

According to Noguchi’s simulation, if the average JGB yield jumps to 4 percent in fiscal 2014, debt-serving costs will leap to a staggering ¥50 trillion in fiscal 2025 alone, which is more than half the size of the fiscal 2013 budget.

“This is nothing but fiscal bankruptcy,” Noguchi warned.

For some two decades, fears and rumors have swirled about just such a scenario. Economists who warned of the impending crisis were labeled alarmists while speculators who bet on it always lost.

That situation may soon change.

Japan’s trade balance has turned into a deficit and the current account surplus has shrunk. Japan posted a surplus of ¥3.05 trillion in the current account for the April-September half, the second-lowest level since 1985, when comparable data became available.

Ikeo warned that if the current account balance sinks into red and people are convinced the yen will no longer strengthen, investors may start buying foreign bonds and ditch their JGBs.

Another possible danger is, ironically, a full-fledged economic rebound, which would also push up long-term interest rates, Ikeo said.

The government needs to walk “a dangerous narrow path” of seeking a recovery while trying to prevent interest rates from surging at the same time, he said.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/54ep3jNUAqI/story01.htm Tyler Durden

 

 

.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rdgyrUo5ovQ/story01.htm williambanzai7

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It may appear to be safe for everyone to be on the same side of the boat, but the gunwale is awfully close to the water.

Gee, we're all on one side of the boat now–long the S&P 500, NASDAQ, Dow, Eurozone stocks, the Nikkei, not to mention rental housing, junk bonds, bat quano, 'roo belly futures and the quatloo–basically every "risk-on" trade on the planet–is that a problem?

The conventional (and convenient) answer is "nah–stocks can only rise from here." So what if market bears have fallen to 15% or less? So what if 85% of investors are on the same side of the boat? You'd be nuts to leave the winning side, the trend-is-your-friend side, the "don't fight the Fed" side, the side with all the "smart money."

It may appear to be safe for everyone to be on the same side of the boat, but the gunwale is awfully close to the water. With the sea remarkably calm (i.e. no waves of turbulence or volatility), the fact that the boat is overloaded doesn't seem dangerous.

But once the sea rises even a bit and water starts lapping over the gunwale, the "guaranteed safety" of the bullish trade might start looking questionable.

When the boat takes on water quicker than anyone believes possible and capsizes, it will be "every punter for himself." But few longside punters are wearing lifejackets.

This is all Investing 101: be wary of extremes of euphoria and confidence and being on the same side of the trade as everyone else. Yet everyone continues adding to their long positions without adding portfolio protection (puts, etc.):

Three indicators suggest this move will reverse shortly, either in a "healthy correction" or a reversal of trend–which one cannot be determined until the downturn is underway.

The rapid rise of the market has traced out a bearish rising wedge. This pattern usually leads to some sort of correction. The MACD histogram is divergent, dropping to the neutral line as the SPX has soared ever higher.

Lastly, price has pulled away from both the 50-day and 200-day Moving Averages, suggesting the rubber band is remarkably stretched.

Round-number attractors are close at hand. The SPX at 1798 is two measly points from the round-number attractor of 1800, and the Dow at 15,961 is a coin-toss away from its round-number attractor of 16,000. This level will invite great cheering ("new all time high," never mind adjusting for inflation) and also present an opportunity for the imbalanced boat to capsize.

Even more astonishing, the crowd is also betting on volatility declining from extreme lows. Look at the put and call options on the VXX, a security that tracks the short-term volatility of the VIX: at the money December calls (bets volatility will rise by December 20) number 311 while puts (bets volatility will decline some time between now and December 20) number 11,265.

Hey, you 311 bears! Join us 11,265 longs on the guaranteed winning side of the boat! Uh, thank you for the kind offer, but no thanks. Though the uncrowded side is uncomfortably above the water at this point, with 11,265 fattened Bulls on the side close to the waterline, the few on this side are less likely to be trampled when physics trumps psychology.

Hey all you PhDs in Behavioral Economics: perhaps you could investigate the "how many angels can dance on the head of a pin?" nature of this psychological conundrum:the market can only do what few expect of it, so if everyone is looking for bubbles, there can't be any bubbles. But what else do you call a market that rises 10+% in a mere 6 weeks?

In other words, if people are looking at the market and realizing it is dangerously close to capsizing, then it can't capsize because the market can only capsize if nobody expects it. The absurdity of this argument is revealed by turning it around: if Bulls confidently expect the market to keep rising, then how can it rise when everybody expects it to rise?

The answer to the question "how many angels can dance on the head of a pin?" is the same as the answer to the question, "How many Bulls can crowd on one side of the trade without capsizing the boat if there are 311 Bears on the other side?" The absurdly concise answer is 11,265–at least for now.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/i8oTZoO4pzM/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It may appear to be safe for everyone to be on the same side of the boat, but the gunwale is awfully close to the water.

Gee, we're all on one side of the boat now–long the S&P 500, NASDAQ, Dow, Eurozone stocks, the Nikkei, not to mention rental housing, junk bonds, bat quano, 'roo belly futures and the quatloo–basically every "risk-on" trade on the planet–is that a problem?

The conventional (and convenient) answer is "nah–stocks can only rise from here." So what if market bears have fallen to 15% or less? So what if 85% of investors are on the same side of the boat? You'd be nuts to leave the winning side, the trend-is-your-friend side, the "don't fight the Fed" side, the side with all the "smart money."

It may appear to be safe for everyone to be on the same side of the boat, but the gunwale is awfully close to the water. With the sea remarkably calm (i.e. no waves of turbulence or volatility), the fact that the boat is overloaded doesn't seem dangerous.

But once the sea rises even a bit and water starts lapping over the gunwale, the "guaranteed safety" of the bullish trade might start looking questionable.

When the boat takes on water quicker than anyone believes possible and capsizes, it will be "every punter for himself." But few longside punters are wearing lifejackets.

This is all Investing 101: be wary of extremes of euphoria and confidence and being on the same side of the trade as everyone else. Yet everyone continues adding to their long positions without adding portfolio protection (puts, etc.):

Three indicators suggest this move will reverse shortly, either in a "healthy correction" or a reversal of trend–which one cannot be determined until the downturn is underway.

The rapid rise of the market has traced out a bearish rising wedge. This pattern usually leads to some sort of correction. The MACD histogram is divergent, dropping to the neutral line as the SPX has soared ever higher.

Lastly, price has pulled away from both the 50-day and 200-day Moving Averages, suggesting the rubber band is remarkably stretched.

Round-number attractors are close at hand. The SPX at 1798 is two measly points from the round-number attractor of 1800, and the Dow at 15,961 is a coin-toss away from its round-number attractor of 16,000. This level will invite great cheering ("new all time high," never mind adjusting for inflation) and also present an opportunity for the imbalanced boat to capsize.

Even more astonishing, the crowd is also betting on volatility declining from extreme lows. Look at the put and call options on the VXX, a security that tracks the short-term volatility of the VIX: at the money December calls (bets volatility will rise by December 20) number 311 while puts (bets volatility will decline some time between now and December 20) number 11,265.

Hey, you 311 bears! Join us 11,265 longs on the guaranteed winning side of the boat! Uh, thank you for the kind offer, but no thanks. Though the uncrowded side is uncomfortably above the water at this point, with 11,265 fattened Bulls on the side close to the waterline, the few on this side are less likely to be trampled when physics trumps psychology.

Hey all you PhDs in Behavioral Economics: perhaps you could investigate the "how many angels can dance on the head of a pin?" nature of this psychological conundrum:the market can only do what few expect of it, so if everyone is looking for bubbles, there can't be any bubbles. But what else do you call a market that rises 10+% in a mere 6 weeks?

In other words, if people are looking at the market and realizing it is dangerously close to capsizing, then it can't capsize because the market can only capsize if nobody expects it. The absurdity of this argument is revealed by turning it around: if Bulls confidently expect the market to keep rising, then how can it rise when everybody expects it to rise?

The answer to the question "how many angels can dance on the head of a pin?" is the same as the answer to the question, "How many Bulls can crowd on one side of the trade without capsizing the boat if there are 311 Bears on the other side?" The absurdly concise answer is 11,265–at least for now.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/i8oTZoO4pzM/story01.htm Tyler Durden

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Germany has neither a minimum wage nor a government. Someday it might have both.

If not, there will be new elections, and Chancellor Angela Merkel might get pummeled because she’d get blamed for them. The CDU/CSU won a phenomenal victory in September, but not an absolute majority. To govern, it must form a coalition. Erstwhile coalition partner, the FDP, got kicked out of parliament. Now Merkel’s clan is negotiating with the left-leaning SPD, runner-up in the elections, to form a Grand Coalition.

They’re horse trading over who gets which ministry, and they’re tearing each other’s hair out over sharing election spoils, and they’re butting heads over legislative projects. Among the SPD’s campaign promises was a general minimum wage. Not a non-subsistence minimum wage, of the kind favored by the US government, but €8.50 ($11.50) per hour.

Fear-mongering over it started to heat up at the end of October when Daimler CEO Dieter Zetsche told the Handelsblatt that imposition of a minimum wage would cost jobs in the long run. It would not hit the automotive industry per se due to its higher wage levels, he said, but the Mittelstand – privately held enterprises that have become world leaders in their niche, at least until the Chinese came along. They’re component suppliers, so higher wages would feed into input costs for automakers. The labor market must remain flexible, Zetsche said. But at the time, he still couldn’t envision moving production from Germany to China.

What a difference three weeks make.

Germany has been accused of becoming a low-wage country. For a reason. Workers – from doctors to cleaning staff – have watched their real wages decline for years. Individual taxes have been jacked up, corporate taxes have been cut. Retail sales are now lower than they were in 1994. It’s not magic. It’s a national policy handed down from government to government like a religious document: exports at any price.

This dependence on exports, and the parallel overexposure to wages in China and elsewhere, “has deprived Germany’s workers of what they have earned, and should be able to save and spend,” US economist Adam Posen writes. “Most importantly, this means they move down the value chain in relative terms, not up.”

But low wages are corporate manna. Hence the fight over minimum wage, with a good dose of corporate extortion.

They did it together during a joint interview published by the Sunday edition of the Bild, the most read paper and tabloid in Germany: the CEOs of Daimler, BMW, VW, und Opel. But it was Daimler’s Zetsche who pulled the ripcord: “If the conditions in Germany continue to get worse, we have to think about the transfer of production to other locations.”

Offshoring to China? For years, they’ve been building plants in China, and it has become their most promising market. China is written between the lines every time a CEO of a German automaker says anything at all.

The auto industry needed to strengthen its competitiveness, not weaken it, Zetsche said. VW CEO Martin Winterkorn agreed; collective bargaining partners should be the ones negotiating wages, not the government. “The principle of collective bargaining autonomy in Germany has been proven,” he said – in light of the real-wage declines that these CEOs are so proud of. And they fretted about the controversy over temporary and contract workers that has been spiraling out of control.

More than one million people work as temporary or contract workers for the metal and electrical industry in Germany, which includes the automakers, the Spiegel reported. Nearly one third of the workers in the industry! In the auto industry, 100,000 temporary workers and 250,000 contract workers (employed by Randstad, Loewe, or other staffing agencies) work alongside 763,000 regular employees.

Manfred Schoch, chairman of BMW’s supervisory board (workers’ council) explained that he was not opposed to contract work per se to keep some flexibility, but “a problem arises when tasks that used to be performed by BMW employees are assigned to other companies whose employees on our premises get half the wages.”

Detlef Wetzel, head of the Industrial Union of Metalworkers (IG-Metall) didn’t mind contract workers in general, he said. But he was against them “when they’re used to massively suppress wages.”

The evil combination of a decent minimum wage and some limitations on temporary and contract work are now on the negotiating table in Berlin. If they make it into law, Zetsche said, “Germany would squander its lead in Europe in terms of competitiveness.” And VW’s Winterkorn opined that it was “reckless to eliminate or limit these instruments of flexibility.”

These “instruments of flexibility” have worked well: record corporate profits, fabulous bonuses for the top echelon, and record trade surpluses. On the other side of the ledger: strung-out workers who cannot afford to spend or save money they’re not making. And the consequences have been documented by a huge, multi-year ECB study…. Total Fiasco: Germans are the Poorest in The Eurozone

But cheap labor wasn’t their only concern. They also complained about the cost of energy, which BMW CEO Norbert Reithofer said was twice as high as in the US. And now, companies may soon lose an exemption from expensive renewable energy surcharges. Business leaders worry this will “destroy Germany’s industrial core.” Read…. German Industry Dreads Getting Slammed By The Costs Of Green Energy

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FRjFi4iOsUw/story01.htm testosteronepit

Well you buy what’s working, right? Don’t fight the Fed? Oh wait…

 

 

BTC just hit $670…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Uce1y4IIZmY/story01.htm Tyler Durden

Somehow, Fed head Bill Dudley has managed to encompass the entire “we must keep the foot to the floor” premise of the Fed in one mind-bending sentence:

• *DUDLEY SEES `POSSIBILITY OF SOME UNFORESEEN SHOCK’

So – based on an “unforeseen” shock – which he “sees”, and while there are “nascent signs the economy may be doing better”, the Fed should remain as exceptionally easy just in case… (asteroid? alien invasion? West Coast quake?)

However, for all those “hopers”, clinging to Dudley’s confident projections, while:

• *DUDLEY SAYS `GROWTH IN 2013 HAS BEEN DISAPPOINTING’

He remains hopeful:

• *DUDLEY SEES `NASCENT SIGNS’ ECONOMY `MAY BE DOING BETTER’
• *DUDLEY `MORE HOPEFUL’ ECONOMY REBOUNDING AS FISCAL DRAG WANES

Just like he did in May 2011:

Fed’s Dudley: Economy’s ‘Soft Patch’ Is Temporary

 

“The weakness of real GDP growth in the first quarter probably will prove temporary,” Federal Reserve Bank of New York President William Dudley said. “There are many reasons to believe conditions are in place for stronger growth in the coming months in the nation and the region,” he said.

Finally, the following line caught our eye: “Key measures of household leverage have declined and are now near the lowest levels they have been in well over a decade“.

Uh, is Bill “edible iPads” Dudley looking at the following chart showing total consumer credit, including car and student loans, when he makes that assessment?

And investors really believe these guys have a clue?

 

Full Speech:

…

Regional Economic Conditions

Starting with the area’s economy, one of the greatest challenges in the City over the past year has been the massive disruption and destruction caused by Superstorm Sandy.  While areas of the New York City metropolitan region were hard hit by the storm, the devastation was particularly severe along the waterfronts of Queens—and in particular in Far Rockaway.  We saw and heard about the devastation of the storm first-hand from many of those affected, through a series of support clinics that we held in the storm’s immediate aftermath, as well as from many of our own employees who lived in some of the hardest hit areas.

The good news is that a little more than one-year later there has been a significant rebound in employment and economic activity across the five boroughs.  New York City has continued to see pretty solid job creation through this past summer, and, in stark contrast with past economic expansions, this is happening without any direct contribution from the securities industry—or, more colloquially, Wall Street.  So far this year, the city’s job gains have been broad-based, led by strong growth in industries such as education and health, advertising, computer services, leisure and hospitality, wholesale and retail trade, and, especially, construction. 

Of course, while it is reassuring that most of the city has bounced back strongly from this historic natural disaster, it is important to remember that the hardest hit communities, and the residents and businesses there, who lost so much, are still struggling to recover.  Many of those communities are right here in Queens: the whole Rockaway peninsula—from Breezy Point to Arverne—was completely flooded, as were neighborhoods like Howard Beach, Springfield Gardens, Lindenwood, and even parts of Flushing, Long Island City, Astoria and Maspeth.  Still, Queens as a whole showed strong resilience—employment bounced back from Sandy fairly quickly, and as of early 2013 it had already surpassed its pre-Sandy level. 

While many residents here commute to work in other boroughs, primarily Manhattan, Queens has a formidable industrial base of its own.  Jobs are prevalent in industries ranging from medical care to construction, not to mention printing and a number of other manufacturing industries that benefit from being in a large population center.  But Queens’ most concentrated industry is transportation—specifically air transportation which employs about 27,000 workers, about five percent of Queens’ jobs. 

Education is another key industry in Queens and the city as a whole. And it is not just a job creator. The investment in human capital that education entails makes it a socially desirable activity.  There is considerable value from a college education both to the person that has been educated and to society as a whole.  The Great Recession and sluggish recovery that has followed has made it difficult for people to find jobs, and I’m sure you may be wondering about whether going to college will turn out to be a good investment, especially if faced with the burden of student debt, something we track quite closely. 

Let me reassure you, the benefits of a college degree remain significant.  Research we have undertaken at the New York Fed shows that young people with a college degree are more likely to have a job and they tend to earn considerably higher wages than those without degrees—and this is true even for those who may be underemployed initially when they first enter the labor market after graduation.  Although the labor market has been challenging for college graduates in recent years, I am confident that most will find work and transition into higher-skilled jobs as they gain experience and as the labor market improves.  

Now, I’d like to turn my attention to recent developments in the national economy.

National Economic Conditions

Let me begin by taking stock of where we are at the moment. Then I will address my expectations for the performance of the economy in 2014 and 2015.

Since the end of what is now called the Great Recession in mid-2009, the U.S. economy has experienced 17 consecutive calendar quarters of positive growth of real GDP. However, the compound annual rate of growth over that period has only been around 2 ¼ percent, close to prevailing estimates of the economy’s potential growth rate. Thus, we have made limited progress in closing the substantial output gap that was created during the recession.

A similar conclusion is drawn from an assessment of labor market conditions. Although the unemployment rate has declined by about 2 ¾ percentage points since peaking at 10 percent in October of 2009, a significant portion of that decline reflects the substantial decline of the labor force participation rate over that period. It should also be noted that since the previous business cycle peak at the end of 2007, the decline of the labor force participation rate has been more than accounted for by a decline in participation of people in the prime working age of 25 to 54.

The inflation data are also consistent with this overall picture of an economy operating well below its full potential. Total inflation, as measured by the personal consumption expenditures (PCE) deflator, has been quite volatile in recent years due to sharp fluctuations in energy prices. Core inflation, which excludes the volatile food and energy components and thereby may be a better guide as to underlying inflation, slowed from around 2 percent in early 2012 to just above 1 percent in mid-2013. In recent mo
nths it has shown signs of stabilizing, but remains well below the FOMC’s expressed goal of 2 percent for total inflation. Fortunately, inflation expectations remain relatively stable at levels somewhat above the current inflation rate. This stability should help prevent an undesirable further drop in inflation relative to our 2 percent objective.

That said, there are some nascent signs that the economy may be doing better.  For example, based on the first estimate, which is subject to revision, real (gross domestic product) GDP increased at a 2.8 percent annual rate in the third quarter of 2013, above the trend of the past four years.  And the most recent payroll employment report showed a pickup in the monthly pace of job gains.  The 3-month moving average rose back above a 200,000 pace after slowing to about 150,000 as of July of this year.  I hope that this marks a turning point for the economy.

But before we rush to this conclusion a few more cautionary comments are appropriate.   With respect to GDP growth, it turns out that inventory investment contributed ¾ of a percentage point to that overall growth rate. Thus, because this impetus from inventories will likely reverse this quarter, the real GDP growth rate is likely to slow to around a 2 percent annual rate or a bit less in the fourth quarter. With respect to payroll employment, we have seen such bursts in payroll growth before over the past few years and have been disappointed when the pickups proved temporary and did not lead to a rise in the overall growth rate.

But, I have to admit that I am getting more hopeful.  Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving. 

The first thing to note is that federal fiscal policy in 2013 has been unusually contractionary.  At the beginning of the year the payroll tax cut expired while tax rates on higher income households were raised, a series of taxes associated with the Affordable Care Act took effect, and spending was reduced due to the sequester and the gradual winding down of foreign military operations.  According to the Congressional Budget Office, the cyclically-adjusted or full-employment budget balance increased by roughly 1 ¾ percentage points of GDP in fiscal year 2013. Over the past 50 years there have been only two other episodes of fiscal contraction of this order of magnitude, and both of those occurred when the unemployment rate was substantially lower than it has been of late.  Under current law, the amount of federal fiscal restraint will decline in 2014 and then decline further in 2015.  At the same time, the sustained contraction in spending and employment by state and local governments appears to be over.

The fact that the U.S. economy has continued to grow at around a 2 percent pace in 2013 despite this quite intense fiscal restraint provides evidence to the second key point, which is that the private sector of the economy has largely completed its healing process and is now poised to ramp up its level of activity. Key measures of household leverage have declined and are now near the lowest levels they have been in well over a decade. Household net worth, expressed as a percent of disposable income, has increased back to its average of the previous decade, reflecting rising equity and home prices and declining debt. Recently, banks have eased credit standards somewhat after a prolonged period of tightness. As a result, we are now experiencing a fairly typical cyclical recovery of consumer spending on durable goods. For example, sales of light-weight motor vehicles have increased steadily over the past four years, reaching an annual rate of 15.7 million in the third quarter of 2013, though sales in September and October have been somewhat below that average.

Similarly, after five years in which housing production was well below what is consistent with underlying demographic trends and the replacement demand for houses, it now appears that we have worked off the excess supply of housing built up during the boom years of the last decade. Housing market activity has begun to recover, and a widely followed national home price index is up 12 percent over the 12 months ending in September.¹ Anecdotal reports suggest that this higher-than-expected increase in home prices is due to a relatively low number of homes for sale.  Due to this shortness of supply, there is reason to expect increases in starts going forward.

Yet another bright spot on the horizon is the fact that growth prospects among our major trading partners have improved following a few years of lackluster performance which induced a sharp slowing of growth of U.S. exports. In particular, the euro area appears to have emerged from a protracted recession and is experiencing modest but positive growth.

To summarize, while growth in 2013 has been disappointing, I believe a good case can be made that the pace of growth will pick up some in 2014 and then somewhat more in 2015. The private sector of the economy should continue to heal, while the amount of fiscal drag should subside. Despite near-term concerns, growth prospects among our major trading partners will improve further next year. This combination of events is likely to create an environment in which business investment spending will strengthen. As growth picks up, I expect to see more substantial improvement in labor market conditions and a gradual updrift in inflation back towards the FOMC’s target rate.

However, the notion that the economy will grow more swiftly remains a forecast rather than a reality at this point. As is always the case, there is substantial uncertainty surrounding this forecast. Moreover, there is always the possibility of some unforeseen shock. Thus, we will continue to monitor U.S. and global economic conditions very carefully and will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cdSTjeTFfKo/story01.htm Tyler Durden