zerohedge – Page 18436

Obamacare Website Enrollment 90% Below Government Expectations

The administration had estimated that nearly 500,000 people would enroll in October, according to internal memos cited last week by Rep. Dave Camp (R., Mich.); but as WSJ reports, initial reports suggest that fewer than 50,000 people successfully navigated the troubled federal health-care website to enroll in private health insurance plans as of last week. The figures represent an improvement from the website’s first days. On Oct. 1, when it opened, only six people signed up for coverage, according to internal administration memos but remains 90% below expectations with only 4 months until seven million are expected to have signed up for private coverage when the open-enrollment period is set to end.

And on a quiet news day… (h/t @bondskew)

Via WSJ,

Initial reports suggest that fewer than 50,000 people successfully navigated the troubled federal health-care website to enroll in private health insurance plans as of last week, two people familiar with the matter said Monday.

The early tally falls far short of internal goals set by President Barack Obama’s administration in the months leading up to the opening of the HealthCare.gov site Oct. 1, and the low number has worried health insurers that are counting on higher turnout.

…

The administration had estimated that nearly 500,000 people would enroll in October, according to internal memos cited last week by Rep. Dave Camp (R., Mich.). An estimated seven million were expected to gain private coverage by the end of March, when the open-enrollment period is set to end.

…

Health and Human Services spokeswoman Erin Shields Britt said Monday she couldn’t confirm the enrollment numbers. She added, “We have always anticipated that initial enrollment numbers would be low and increase over time.”

In some cases, insurers have reported duplicated 834s and other data-integrity problems,

…

The initial federal numbers set for release this week are expected to show enrollment only through the end of October, so the figures are expected to be lower

…

Supporters of the law say they expect the largest share of enrollees to arrive late this year. When Massachusetts rolled out a similar statewide health overhaul in 2007, only 123 people signed up in the first month. That figure has been cited by Obama administration officials who have taken pains to play down expectations for the early enrollment numbers

…

Mr. Ulrich, who runs his own financial-planning firm, said he wanted to sign up by Dec. 15 but is hesitating because he also wants to review small-business plans. That part of the site isn’t yet working.

“I’ve got a month to make a decision, and I don’t even have the information available to me,” Mr. Ulrich said.

The tight timeline has health insurers worried.

…

The administration hasn’t said whether it will release demographic data such as ages when it announces the number of enrollees.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YbW7QonL9Cw/story01.htm Tyler Durden

Next From The ECB: Here Comes QE, According To BNP

The latest myth of a European recovery came crashing down two weeks ago when Eurostat reported an inflation print of 0.7% (putting Europe’s official inflation below that of Japan’s 1.1%), followed promptly by a surprise rate cut by Mario Draghi which achieves nothing but sends a message that the ECB is, impotently, watching the collapse in European inflation and loan creation coupled by an ongoing rise in unemployment to record levels (not to mention the record prints in the amount of peripheral bad debt).

Needless to say, all of this is largely aggravated by the soaring EURUSD, which until a week ago was trading at a two year high against the dollar, and while helpful for Germany, makes the so-needed external rebelancing of the peripheral Eurozone countries next to impossible. Which means that like it or not, and certainly as long as hawkish Germany says “nein”, Draghi is stuck in a corner when it comes to truly decisive inflation-boosting actions.

But what is Draghi to do? Well, according to BNP’s Paul-Mortimer Lee, it should join the “no holds barred” monetary “policy” of the Fed and the BOJ, and promptly resume a €50 billion per month QE.

Why? Some preliminary perspectives from BNP:

Some economies in the eurozone are already in deflation. This has adverse effects on resource allocation (nominal rigidities in some prices mean that relative prices do not adjust enough) and, of course, sets in train adverse debt dynamics. It deters spending today, because things will be cheaper tomorrow. When significantly negative real interest rates are warranted, zero or negative inflation makes these impossible to achieve. Countries that are undergoing structural reform need lower real interest rates than they would otherwise have. Extremely low or negative inflation, therefore, militates against structural reform.

One fact sums up the parlous state of affairs: the eurozone has lower inflation than Japan (0.7% versus 1.1%).

At such low levels of inflation, deflation is a real danger. How big a threat is it? The inflation forecasting literature says that since the Great Moderation, the best way to forecast inflation over longer periods is a random walk. (Over short periods, judgemental forecasts, (eg, taking account of energy prices, tax increases etc) are preferable.) A random walk model says that decreases in inflation are as likely as increases. If we start from 0.7% inflation, the central forecast of a random walk model will be that inflation stays around its current level, ie, that deflation is less than 50% likely. Our own forecasts agree with this but also – like the ECB judges – indicate that inflation will remain at very low levels for a very long period.

Why has inflation in Europe proper not become outright deflation across the continent, especially when considering the record low rate of growth (in reality, contraction) of loans to private sector companies? The only silver lining are “inflation expectations” which are still anchored somewhere aroun the 2% area. However, that may not last.

If inflation expectations break down, then as rates are close to the zero bound, getting them back up again could be extremely difficult. In fact, it may be impossible. Don’t wait until you are drowning to think about looking for a lifejacket. That is one of the lessons of Japan, waiting until too late can leave you locked into an insoluble problem.

Why then did the hawkish members not want a rate cut? It is difficult to be sure but we suspect it is a combination of strategic and tactical considerations (our comments in parentheses):

Inflation expectations are stable; therefore there will be a gravitational pull upward in inflation over time. The ECB’s credibility will do the job. (Only if expectations hold up, which is questionable if inflation stays around 1% or below for a prolonged period, which seems likely even on an optimistic assessment.)

Core inflation is very stable in Germany, which shows that the lows for inflation elsewhere are cyclical not structural and as growth picks up inflation will come back to target. (Our perspective: There is no sign the output gap will close any time soon. The level of the output gap is likely to put downward pressure on inflation.)

The disinflation in the eurozone as a whole primarily reflects relative price changes of peripheral countries. As they regain competitiveness, their inflation will converge again on the German level. (We would argue this can take a very long time – how many years will it take to get Spanish unemployment back to pre-crisis levels? Also, if the gravitational pull of German inflation was so strong, how did the periphery lose competitiveness in the first place?)

The severity of the fall in inflation is overstated by developments in energy prices. (There is truth in this, but they were not singing from the same hymn-sheet when energy prices were rising.)

The rate cut will not do anything. (We agree.)

The sooner the rate cut ammunition is used up the closer we come to QE. (We agree, but see this as entirely beneficial.)

We might get lucky and inflation will just pick up. (Much less than a 50% chance in our view.)

What all this amounts to is that the hawks will continue to resist easing until either inflation expectations crack, by which time it will be too late to recover, or until German inflation sinks to the levels other countries are experiencing today. With full employment in Germany and a minimum wage on the horizon for 2015, that looks likely only in a very severe recession. In either case, what this boils down to is that the hawks will only support radical easing in a disaster scenario, by which time it will probably be too late and deflation will be entrenched. Presumably the ECB’s minutes will be published in Japanese.

Needless to say, all of the above is only correct and valid in the confines of a Keynesian macroeconomic framework where deflation is a bete noire and must be avoided at all costs, and instead the taxation on money also known as inflation is the only saving grace. We will refrain from the well-known philosophical refrain that the only reason the world is in its current inescapable predicament is due to a faulty economic framework which has advocated precisely more of the same for about a century and continue within the false dichotomy laid out as gospel.

So assuming the ECB does have to stimulate inflation what can it do? It is here that the BNP strategist gets excited:

Does the ECB have enough conventional ammunition left to narrow the output gap by enough to get inflation from less than 1% to close to 2%? No way. According to conventional models, it will struggle to stop inflation from decelerating further.

Where should rates be? Let’s consider the Taylor rule. It’s by no means infallible as a guide to where monetary policy setting should be, but it provides some sort of benchmark. First, let’s ask where real policy rates should be in equilibrium. We estimate trend growth to be about 1%, so that is a reasonable starting point, which would suggest a nominal equilibrium rate of 1.7% given current inflation.

But we are not in equilibrium. From 1.7% we have to subtract 0.5 times the output gap. We do not know how large this is, but let’s take the OECD figur
e of 4%, taking our Taylor rule rate down to -0.3%. However, we haven’t finished yet because inflation is below target. To stabilise inflation, deviations of inflation from target have to be met by a larger reduction in nominal rates otherwise the real rate would not fall and the economy would not stabilise and bring inflation back up. The Taylor rule says subtract 1.5 times the inflation shortfall, which is 1% if we assume “below but close to 2%” means 1.7%, so we subtract another 1.5% points, giving us a Taylor rule appropriate rate of -1.8%.

Since this is in negative territory, only a deposit rate cut can deliver it. However, we doubt that the ECB would take the deposit rate so far into negative territory for fear of a variety of distortions and adverse effects that would result (see link here to my note on negative deposit rates earlier this year). Failing this, unorthodox monetary policies are called for, such as expanding the balance sheet.

As an aside, the Taylor rule may cast light on why the hawks do not want rate cuts. The Breugel think-tank (http://www.bruegel.org/nc/blog/detail/article/1151-15-percent-to-plus-4-… rule-interest-rates-for-euro-area-countries) recently calculated that the appropriate Taylor rule rate (based on an unemployment gap, that gives an appropriate rate higher than our estimates) in the eurozone varies between -15% (Greece) and +4% (Germany). Unfortunately it would appear some ECB Board members are not voting in the interests of the eurozone as a whole. Of course, too low a rate is a problem for Germany, for asset prices and perhaps inflation. But macro-prudential measures should be used to offset adverse effects rather than forcing others to have massively too-high rates.

Which means, according to BNP, that the only realistic deus ex machina (ignoring that the Fed has so far failed to stimulate broad CPI-defined inflation for five years running) would be, you guessed it, QE. A lot of it.

How many government bonds would the ECB need to buy to achieve its past batting average? M3 is almost EUR 10trn, meaning that 1% of M3 is EUR 100bn. Credit to general government is almost EUR 3½trn and is up just 0.7% y/y. Taking M3 up from its September y/y rate of 2.1% to the old reference rate of 4½% would require about EUR 240bn of QE in 2014. Taking M3 to its average growth rate of 5.8% would require EUR 370bn. But there is also the cumulative shortfall relative to trend to make up – some EUR 1.2trn. We would not advocate closing all this in one year, but taking this into account, we would suggest EUR 50bn a month for purchases over the first year or two.

We see the attractions of QE as being:

Increasing the rate of monetary growth to reduce disinflationary pressures;

Reducing long-term rates and stimulating growth;

Being likely to reduce risk premia in the economy;

Being likely to boost asset prices, such as stocks and credit (namely, Japan);

Being likely to soften the EUR on the FX markets;

Being likely to stabilise inflationary expectations, which might otherwise sink;

Demonstrating the ECB’s commitment to price stability and to stick to its Treaty obligations; and

Reducing the quantity of government bonds on banks’ balance sheets while increasing their liabilities (deposits due to higher M3) would stimulate private credit by reducing crowding out.

Of course, there are downsides, too:

There would probably be legal challenges on the basis that the ECB was embarking on monetary financing of governments (though buying in the secondary market would circumvent this);

In some countries, such as Germany, there might be an atavistic adverse reaction;

The programme would not be self-extinguishing in the same way as LTROs were (a good thing, in our view);

Inflation expectations may rise (again, a good thing, but challenged somewhat by the experience of the US and Japan, where QE has hardly resulted in rampant inflation);

It could reduce the incentive for governments to carry on with fiscal consolidation because financing would be easier; and

Asset bubbles might result from it.

What assets would be bought?

The last question is one we believe will exercise the ECB a good deal. There is a question as to whether private debt markets would be deep and uniform enough across the eurozone to allow the scale of purchases required. When the ECB bought covered bonds, its programmes were limited in scope. (The first scheme in 2009-10 resulted in total purchases of EUR 60bn, equivalent to around 0.7% of annual eurozone GDP. The second programme in 2011-12 was smaller still, resulting in total purchases of EUR 16bn versus the initial target of EUR 40bn.)

Buying government bonds is the obvious route. However, buying only peripheral bonds would not seem to be an option. (It would, effectively, be the OMT, but without a programme and without conditionality.) So, buying across the spectrum of government bonds seems natural (with the proportions determined by the ECB’s capital key).

There would probably be objections to buying German Bunds, as:

Rates are already low;

Germany, and German business, has no problem financing itself; and

Financial and monetary conditions in Germany are already easy; why make them easier still?

We would respond that QE in a European context would work in a different way to the US:

In the US, lowering the risk-free rate lowers rates for private borrowers also;

Private bond finance (mortgages as well as corporate debt issuance) is stimulated and this benefits the economy;

In Europe, the private bond market is less developed and firms largely finance through banks;

Similarly, mortgage finance in the eurozone comes much more from banks than from mortgage bonds ;

Therefore, QE in Europe would not work in the same way as in the US;

Much more of the effect of ECB QE would come through the exchange rate;

It is those assets held by foreigners that the ECB should target in its purchases, encouraging a very low rate that makes the assets unattractive to current foreign holders; and

So, Bunds and OATs and the bonds of the other core countries are precisely the assets the ECB should buy.

Over 60% of German Bunds are held by non-residents; the proportion of foreign holdings of OATs is also high. Therefore, buying these assets would not only benefit the economies of the issuer of the securities, but also the countries of the holders. The benchmark status of the Bund would lower all yields in the eurozone and need not bring about spread widening – substitution and a search for yield would be likely to narrow spreads.

Telling a Weimar-PTSD’ed Germany that the ECB is coming and will almost exclusively monetize just Germany’s bonds? Good luck.

In conclusion:

We would expect the ECB to exhaust other channels before resorting to QE – cutting the refi rate below 25bp, and maybe opting for a negative deposit rate to try to get the exchange rate down. It may engage in forward guidance more actively. However, the power of such measures looks limited. If we have further downward surprises to inflat
ion, as we had this month, there will be very little alternative, if the ECB is not to accept a magnified risk of deflation, other than to go for QE. Inflation data and inflation expectations will be crucial in determining what the ECB does over the coming months.

It is very unlikely that the hawks will agree to such measures until disaster is already at the door, so to get the right result for the eurozone, Mr Draghi will have to risk resignations. Otherwise, he should take Japanese lessons.

Of course, BNP is ultimately correct as the European experiment, which is doomed for the simple reason that Europe will never be able to achieve the kind of internal rebalancing it needs absent standalone currencies, will require every weapon in the ECB’s arsenal, and sooner or later the ECB, too, will succumb to the same monetary lunacy that has gripped the rest of the developed world in the ongoing “all in” bet to reflate or bust. All logical arguments that outright monetization of bonds are prohibited by various European charters will be ignored: after all, there is “political capital” at stake, and as Mario Draghi has made it clear there is no “Plan B.”

Which means the only question is when will Europe join the lunaprint asylum: for the sake of the systemic reset we hope the answer is sooner rather than later.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uOwU9o64l20/story01.htm Tyler Durden

Volume-less, Bond-less Day Pushes Dow To Another Record High

Isn't it intriguing that with the cash bond market closed, every other risk-asset-class in the world dies a horrible death of volume-less list-less price action? Today's only activity – bearing in mind the absence of the bond-market's almost ubiquitous POMO leveraging idiocy – was from the US open to the European close. From that point on FX markets (JPY crosses) and stocks went dead-stick pinned to VWAP (but managed new highs in the Dow). There was some divergences… HY credit (via ETFs) dropped rather notably to its lowest in almost a month; VIX was banged back under 12.5% – its lowest in almost 3 months; and crude oil prices jerked higher. Treasury futures indicate a 1-3bps yield rise on the day, the USD leaked lower (led by EUR strength), and PMs went nowhere fast treading water with modest losses. Stocks closed at record highs as the dash-for-trash remains front-and-center: "most shorted' names have tripled the market's 1.4% gain in the last 2 days!

"Most Shorted" stocks are up 4.3% from Thursday's close… triple the return of the market…

Stocks went nowhere fast today…

with futures pinned to VWAP after Europe closed… withvolume 35% below average…

Trannies topped the equity tables today as the early squeeze ramped them back near their highs…

Treasury futures imply a small 1-3bps yield rise on the day… (with the long-end underperforming)

Credit markets remain decidedly unimpressed…

There was no JPY carry to drive stocks…

VIX was banged lower – below 12.5% for its lowest close in 3 months…

Oil jumped, copper flatlined, and PMs oscillated aftae rovernight weakness…

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JhOuTS6nv0Y/story01.htm Tyler Durden

John Hussman Asks "What Is Different This Time?"

Submitted by John Hussman of Hussman Funds,

Investors who believe that history has lessons to teach should take our present concerns with significant weight, but should also recognize that tendencies that repeatedly prove reliable over complete market cycles are sometimes defied over portions of those cycles. Meanwhile, investors who are convinced that this time is different can ignore what follows. The primary reason not to listen to a word of it is that similar concerns, particularly since late-2011, have been followed by yet further market gains. If one places full weight on this recent period, and no weight on history, it follows that stocks can only advance forever.

What seems different this time, enough to revive the conclusion that “this time is different,” is faith in the Federal Reserve’s policy of quantitative easing. Though quantitative easing has no mechanistic relationship to stock prices except to make low-risk assets psychologically uncomfortable to hold, investors place far more certainty in the effectiveness of QE than can be demonstrated by either theory or evidence. The argument essentially reduces to a claim that QE makes stocks go up because “it just does.” We doubt that the perception that an easy Fed can hold stock prices up will be any more durable in the next couple of years than it was in the 2000-2002 decline or the 2007-2009 decline – both periods of persistent and aggressive Fed easing. But QE is novel, and like the internet bubble, novelty feeds imagination. Most of what investors believe about QE is imaginative.

As Ray Dalio of Bridgwater recently observed,

“The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up. We think the question around the effectiveness of QE (and not the tapering, which gets all the headlines) is the big deal. In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.”

While we can make our case on the basis of fact, theory, data, history, and sometimes just basic arithmetic, what we can’t do – and haven’t done well – is to disabuse perceptions. Beliefs are what they are, and are only as malleable as the minds that hold them. Like the nearly religious belief in the technology bubble, the dot-com boom, the housing bubble, and countless other bubbles across history, people are going to believe what they believe here until reality catches up in the most unpleasant way. The resilience of the market late in a bubble is part of the reason investors keep holding and hoping all the way down. In this market cycle, as in all market cycles, few investors will be able to unload their holdings to the last of the greater fools just after the market’s peak. Instead, most investors will hold all the way down, because even the initial decline will provoke the question “how much lower could it go?” It has always been that way.

The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There’s no calling the top, and most of the signals that have been most historically useful for that purpose have been blaring red since late-2011.

As a result, the Shiller P/E (the S&P 500 divided by the 10-year average of inflation-adjusted earnings) is now above 25, a level that prior to the late-1990’s bubble was seen only in the three weeks prior to the 1929 peak. Meanwhile, the price/revenue ratio of the S&P 500 is now double its pre-bubble norm, as is the ratio of stock market capitalization to GDP. Indeed, the median price/revenue ratio of the S&P 500 is actually above the 2000 peak – largely because small cap stocks were much more reasonably priced in 2000 than they are today (not that those better relative valuations prevented wicked losses in small caps during the 2000-2002 decline).

Despite the unusually extended period of speculation as a result of faith in quantitative easing, I continue to believe that normal historical regularities will exert themselves with a vengeance over the completion of this market cycle. Importantly, the market has now re-established the most hostile overvalued, overbought, overbullish syndrome we identify. Outside of 2013, we’ve observed this syndrome at only 6 other points in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention).

These concerns are easily ignored since we also observed them at lower levels this year, both in February (see A Reluctant Bear’s Guide to the Universe) and in May. Still, the fact is that this syndrome of overvalued, overbought, overbullish, rising-yield conditions has emerged near the most significant market peaks – and preceded the most severe market declines – in history:

1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 25.

2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.

3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 55.2% vs. 15.6%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.

4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

The blue bars in the chart below depict the complete set of instances since 1970 when these conditions have been observed.

Our investment approach remains to align our investment outlook with the prospective market return/risk profile that we estimate on the basis of prevailing conditions at each point in time. On that basis, the outlook is hard-defensive, and any other stance is essentially speculative. Such speculation is fine with insignificant risk-limited positions (such as call options), but I strongly believe that investors with a horizon of less than 5-7 years should limit their
exposure to equities. At this horizon, even “buy-and-hold” strategies in stocks are inappropriate except for a small fraction of assets. In general, the appropriate rule for setting investment exposure for passive investors is to align the duration of the asset portfolio with the duration of expected liabilities. At a 2% dividend yield on the S&P 500, equities are effectively instruments with 50-year duration. That means that even stock holdings amounting to 10% of assets exhaust a 5-year duration. For most investors, a material exposure to equities requires a very long investment horizon and a wholly passive view about market prospects.

Again, our approach is to align our outlook with the prospective return/risk profile we estimate at each point in time. That places us in a defensive stance. Still, we’re quite aware of the tendency for investors to capitulate to seemingly relentless speculation at the very peak of bull markets, and saw it happen in 2000 and 2007 despite our arguments for caution.

As something of an inoculation against this tendency, the chart below presents what we estimate as the most “optimistic” pre-crash scenario for stocks. Though I don’t believe that markets follow math, it’s striking how closely market action in recent years has followed a “log-periodic bubble” as described by Didier Sornette (see Increasingly Immediate Impulses to Buy the Dip).

A log periodic pattern is essentially one where troughs occur at increasingly frequent and increasingly shallow intervals. As Sornette has demonstrated across numerous bubbles over history in a broad variety of asset classes, adjacent troughs (say T1, T2, T3, etc) are often related to the crash date (the “finite-time singularity” Tc) by a constant ratio: (Tc-T1)/(Tc-T2) = (Tc-T2)/(Tc-T3) and so forth, with the result that successive troughs come closer and closer in time until the final blowoff occurs.

Frankly, I thought that this pattern was nearly exhausted in April or May of this year. But here we are. What’s important here is that the only way to extend that finite-time singularity is for the advance to become even more vertical and for periodic fluctuations to become even more closely spaced. That’s exactly what has happened, and the fidelity to the log-periodic pattern is almost creepy. At this point, the only way to extend the singularity beyond the present date is to envision a nearly vertical pre-crash blowoff.

So let’s do that. Not because we should expect it, and surely not because we should rely on it, but because we should guard against it by envisioning the most “optimistic” (and equivalently, the worst case) scenario. So with the essential caveat that we should neither expect, rely or be shocked by a further blowoff, the following chart depicts the market action that would be consistent with a Sornette bubble with the latest “finite time singularity” that is consistent with market action since 2010.

To be very clear: conditions already allow a finite-time singularity at present, the scenario depicted above is the most extreme case, it should not be expected or relied on, but we should also not be shocked or dismayed if it occurs.

Just a final note, which may or may not prove relevant in the weeks ahead: in August 2008, just before the market collapsed (see Nervous Bunny), I noted that increasing volatility of the market at 10-minute intervals was one of the more ominous features of market action. This sort of accelerating volatility at micro-intervals is closely related to log-periodicity, and occurs in a variety of contexts where there’s a “phase transition” from one state to another. Spin a quarter on the table and watch it closely. You’ll notice that between the point where it spins smoothly and the point it falls flat, it will start vibrating uncontrollably at increasingly rapid frequency. That’s a phase transition. Again, I don’t really believe that markets follow math to any great degree, but there are enough historical examples of log-periodic behavior and phase-transitions in market action that it helps to recognize these regularities when they emerge.

Risk dominates. Hold tight.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/B_0XVe8QLF0/story01.htm Tyler Durden

John Hussman Asks “What Is Different This Time?”

Submitted by John Hussman of Hussman Funds,

As Ray Dalio of Bridgwater recently observed,

“The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up. We think the question around the effectiveness of QE (and not the tapering, which gets all the headlines) is the big deal. In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.”

1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 25.

2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.

3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 55.2% vs. 15.6%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.

4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

The blue bars in the chart below depict the complete set of instances since 1970 when these conditions have been observed.

Our investment approach remains to align our investment outlook with the prospective market return/risk profile that we estimate on the basis of prevailing conditions at each point in time. On that basis, the outlook is hard-defensive, and any other stance is essentially speculative. Such speculation is fine with insignificant risk-limited positions (such as call options), but I strongly believe that investors with a horizon of less than 5-7 years should limit their exposure to equities. At this horizon, even “buy-and-hold” strategies in stocks are inappropriate except for a small fraction of assets. In general, the appropriate rule for setting investment exposure for passive investors is to align the duration of the asset portfolio with the duration of expected liabilities. At a 2% dividend yield on the S&P 500, equities are effectively instruments with 50-year duration. That means that even stock holdings amounting to 10% of assets exhaust a 5-year duration. For most investors, a material exposure to equities requires a very long investment horizon and a wholly passive view about market prospects.

Risk dominates. Hold tight.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/B_0XVe8QLF0/story01.htm Tyler Durden

ISDA Proposes To “Suspend” Default Reality When Big Banks Fail

With global financial company stock prices soaring, analysts proclaiming holding bank shares is a win-win on rates, NIM, growth, and “fortress balance sheets”, and a European stress-test forthcoming that will ‘prove’ how great banks really are; the question one is forced to ask, given the ruling below, is “Why is ISDA so worried about derivatives-based systemic risk?“

As DailyLead reports,

…regulators from the U.S., U.K., Germany and Switzerland have asked ISDA to include a short-term suspension of early-termination rights in its master agreement when it comes to bank resolutions. Many derivatives market participants oppose the move.

The regulators say the suspension, preferably no more than 48 hours, gives resolution officials time to switch derivatives contracts to a third party or bridging entity, when necessary.

We are sure that creditors will be ‘fine’ with this.. and that banks will not use this loophole to hive off all their ‘assets’ into a derivative vehicle protected ‘temporarily’ from the effects of a bankruptcy…

So the question is – what are they so worried about?

ISDA Statement on Letter from Major Resolution Authorities

NEW YORK, November 6, 2013 – The International Swaps and Derivatives Association, Inc. (ISDA) today issued the following statement:

“ISDA supports efforts to create a more robust financial system and reduce systemic risk. Toward that end, we have, over the course of 2013, discussed with policymakers and OTC derivatives market participants issues related to the early termination of OTC derivatives contracts following the commencement of an insolvency or resolution action. We have developed and shared papers that explore several alternatives for achieving a suspension of early termination rights in such situations.

“One of those alternatives, which is supported by a number of key global policymakers and regulatory authorities, would be to amend ISDA derivatives documentation to include a standard provision in which counterparties agree to a short-term suspension. Developing such a provision that could be used by counterparties will continue to be a primary focus of our efforts in this important area of regulatory reform. We are committed to working with supervisors and regulators around the world to achieve an appropriate solution that will contribute to safe, efficient markets.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Sl1bReAUYGI/story01.htm Tyler Durden

ISDA Proposes To "Suspend" Default Reality When Big Banks Fail

As DailyLead reports,

…regulators from the U.S., U.K., Germany and Switzerland have asked ISDA to include a short-term suspension of early-termination rights in its master agreement when it comes to bank resolutions. Many derivatives market participants oppose the move.

The regulators say the suspension, preferably no more than 48 hours, gives resolution officials time to switch derivatives contracts to a third party or bridging entity, when necessary.

So the question is – what are they so worried about?

ISDA Statement on Letter from Major Resolution Authorities

NEW YORK, November 6, 2013 – The International Swaps and Derivatives Association, Inc. (ISDA) today issued the following statement:

“ISDA supports efforts to create a more robust financial system and reduce systemic risk. Toward that end, we have, over the course of 2013, discussed with policymakers and OTC derivatives market participants issues related to the early termination of OTC derivatives contracts following the commencement of an insolvency or resolution action. We have developed and shared papers that explore several alternatives for achieving a suspension of early termination rights in such situations.

“One of those alternatives, which is supported by a number of key global policymakers and regulatory authorities, would be to amend ISDA derivatives documentation to include a standard provision in which counterparties agree to a short-term suspension. Developing such a provision that could be used by counterparties will continue to be a primary focus of our efforts in this important area of regulatory reform. We are committed to working with supervisors and regulators around the world to achieve an appropriate solution that will contribute to safe, efficient markets.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Sl1bReAUYGI/story01.htm Tyler Durden

El-Erian Fears The "Over-Empowerment" Of Central Bankers

Authored by Mohamed El-Erian, originally posted at Project Syndicate,

History is full of people and institutions that rose to positions of supremacy only to come crashing down. In most cases, hubris – a sense of invincibility fed by uncontested power – was their undoing. In other cases, however, both the rise and the fall stemmed more from the unwarranted expectations of those around them.

Over the last few years, the central banks of the largest advanced economies have assumed a quasi-dominant policymaking position. In 2008, they were called upon to fix financial-market dysfunction before it tipped the world into Great Depression II. In the five years since then, they have taken on greater responsibility for delivering a growing list of economic and financial outcomes.

The more responsibilities central banks have acquired, the greater the expectations for what they can achieve, especially with regard to the much-sought-after trifecta of greater financial stability, faster economic growth, and more buoyant job creation. And governments that once resented central banks’ power are now happy to have them compensate for their own economic-governance shortfalls – so much so that some legislatures seem to feel empowered to lapse repeatedly into irresponsible behavior.

Advanced-country central banks never aspired to their current position; they got there because, at every stage, the alternatives seemed to imply a worse outcome for society. Indeed, central banks’ assumption of additional responsibilities has been motivated less by a desire for greater power than by a sense of moral obligation, and most central bankers are only reluctantly embracing their new role and visibility.

With other policymaking entities sidelined by an unusual degree of domestic and regional political polarization, advanced-country central banks felt obliged to act on their greater operational autonomy and relative political independence. At every stage, their hope was to buy time for other policymakers to get their act together, only to find themselves forced to look for ways to buy even more time.

Central banks were among the first to warn that their ability to compensate for others’ inaction is neither endless nor risk-free. They acknowledged early on that they were using imperfect and untested tools. And they have repeatedly cautioned that the longer they remain in their current position, the greater the risk that their good work will be associated with mounting collateral damage and unintended consequences.

The trouble is that few outsiders seem to be listening, much less preparing to confront the eventual limits of central-bank effectiveness. As a result, they risk aggravating the potential challenges.

This is particularly true of those policymaking entities that possess much better tools for addressing advanced economies’ growth and employment problems. Rather than use the opportunity provided by central banks’ unconventional monetary policies to respond effectively, too many of them have slipped into an essentially dormant mode of inaction and denial.

In the United States, for the fifth year in a row, Congress has yet to pass a full-fledged budget, let alone dealt with the economy’s growth and employment headwinds. In the eurozone, fiscal integration and pro-growth regional initiatives have essentially stalled, as have banking initiatives that are outside the direct purview of the European Central Bank. Even Japan is a question mark, though it was a change of government that pushed the central bank to exceed (in relative terms) the Federal Reserve’s own unconventional balance-sheet operations.

Markets, too, have fallen into a state of relative complacency.

Comforted by the notion of a “central-bank put,” many investors have been willing to “look through” countries’ unbalanced economic policies, as well as the severe political polarization that now prevails in some of them. The result is financial risk-taking that exceeds what would be warranted strictly by underlying fundamentals – a phenomenon that has been turbocharged by the short-term nature of incentive structures and the lucrative market opportunities afforded until now by central banks’ assurance of generous liquidity conditions.

By contrast, non-financial companies seem to take a more nuanced approach to central banks’ role. Central banks’ mystique, enigmatic policy instruments, and virtually unconstrained access to the printing press undoubtedly captivate some. Others, particularly large corporates, appear more skeptical. Doubting the multi-year sustainability of current economic policy, they are holding back on long-term investments and, instead, opting for higher self-insurance.

Of course, all problems would quickly disappear if central banks were to succeed in delivering a durable economic recovery: sustained rapid growth, strong job creation, stable financial conditions, and more inclusive prosperity. But central banks cannot do it alone. Their inevitably imperfect measures need to be supplemented by more timely and comprehensive responses by other policymaking entities – and that, in turn, requires much more constructive national, regional, and global political paradigms.

Having been pushed into an abnormal position of policy supremacy, central banks – and those who have become dependent on their ultra-activist policymaking – would be well advised to consider what may lie ahead and what to do now to minimize related risks. Based on current trends, central banks’ reputation increasingly will be in the hands of outsiders – feuding politicians, other (less-responsive) policymaking entities, and markets that have over-estimated the monetary authorities’ power.

Pushed into an unenviable position, advanced-country central banks are risking more than their standing in society. They are also putting on the line their political independence and the hard-won credibility needed to influence private-sector behavior. It is in no one’s interest to see these critical institutions come crashing down.

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El-Erian Fears The “Over-Empowerment” Of Central Bankers

Authored by Mohamed El-Erian, originally posted at Project Syndicate,

Markets, too, have fallen into a state of relative complacency.

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Global Corporations Are Net Sellers Of Their Equity For The First Time Since The Lehman Crisis

JPM’s “flows and liquidity’ expert Nikolaos Panigirtzoglou, who last week spotted the “most extreme ever excess liquidity” bubble, has just noticed yet another indication that not even corporations believe in further equity upside.

While on one hand it has been well-known that during the entire Fed-driven equity bubble, corporate insiders have been aggressive sellers of equity, either through automatic selling programs or more recently, on a discretionary basis, and locking in profits, it was corporations that, under activist duress or otherwise, had opted to engage in shareholder friendly stock activities such as buybacks. In fact, netting equity withdrawal and injections, in the form of equity offerings, had resulted in a consistently negative print ever since the Lehman crisis meaning companies were net buyers of their own stock.

The simplest explanation is that flush with record amounts of cash, the best “investment” for the corporate world was not investing in long-term growth via CapEx spending or hiring (perhaps because said “growth” never appears to actually materialize, five years into the Fed’s grandest of all monetary experiments), and certainly not raising equity to fund such projects, but through (mostly levered) buybacks and dividends, which provided the biggest bang for the near-term buck. Another implication of this is that corporate treasurers, not as investors but as fiduciaries, had perceived stocks as cheap in a low-rate environment, as otherwise they would not have been repurchasing their own equities hand over fist.

Said otherwise, this means that for the first time since the Lehman crisis, non-financial corporations within the entire developed, G-4 (US, Europe, Japan and UK) world, have shifted from net buyers of stock to net sellers, as net “equity withdrawal” have just turned positive.

This has now changed and as JPM summarizes, “The G4 non-financial corporate sector appears to have stopped withdrawing its own equity in Q2.” JPM continues:

The latest release of Euro area Flow of Funds for the second quarter allows us to get a more complete picture about the behavior of non–financial corporations across the whole of the G4, i.e. the US, Euro area, UK and Japan. The big surprise in these data was a collapse of G4 net equity withdrawal to zero for the first time since the Lehman crisis (Figure 1). That is, at face value, Figure 1 suggests that for the first time since the Lehman crisis, the G4 non financial corporate sector stopped withdrawing its own equity on net.

This is shown visually below:

JPM’s explanation of the chart above:

1) The decline of the blue line in Figure 1 is driven by non-US net equity issuance, which reversed from negative (i.e. from net withdrawal) to positive (i.e. to net supply) in Q2, both in the raw data and our seasonally adjusted figures. The problem with non-US net equity issuance data is that they are typically a lot more volatile than their US counterparts and similar spikes in the blue line in the past were quickly reversed and not sustained.

2) Net equity withdrawal is almost exclusively a US phenomenon. Figure 1 shows that the blue (G4) and black lines (US) are very closely aligned (in $bn) suggesting that the non-US component, although volatile, is on average very small. And the net equity withdrawal by US non financials corporations (the black line in Figure 1) held up well in Q2. In fact it increased slightly in Q2.

Do other higher-frequency data substantiate the above observations? Yes:

What evidence do we get from higher-frequency data on announced share buybacks? Figure 3 shows a sharp slowing in announced share buybacks outside the US, but in Q3 rather than Q2! And this is the caveat with announced share buybacks: they do not necessarily reflect actual buybacks as there is typically a lag between announcements and actual stock purchases. The other problem is that while share buybacks reduce the share count of a company, they do not capture the equity withdrawal impact of M&A (to the extent that the acquirer uses cash or debt) or LBO activities. Similarly share buybacks do not capture offsetting corporate activities such as share offerings, exchange of common stock for debentures, conversion of preferred stock or convertible securities, as well as stock options and employee stock programs.
To address some of the above issues and better capture high-frequency corporate equity withdrawal trends, we augment the announced share buybacks with equity offerings and LBOs. Figure 4 augments announced share buybacks with LBOs, which also cause equity withdrawal, but deducts equity offerings, i.e. IPOs and secondary offerings, which increase the share count. The evolution of the red line in Figure 4 is effectively a higher-frequency proxy of the Flow of Funds equity issuance/withdrawal data of Figure 1.
Consistent with Figure 1, Figure 4 shows that equity issuance turned a lot less supportive for equity markets (i.e. red line increased) in Q2 relative to Q1, and worsened even further in Q3. This is both because of a slowing in announced share buybacks but also an increase in IPO/secondary offering activity in Q2/Q3. Also consistent with the Flow of Funds data of Figure 1, Figure 4 suggests that equity withdrawal appears to have peaked in 2011 (red line bottomed) in terms of its pace across calendar years. This year’s pace is roughly equal on average with that of 2012. In addition, there appears to be still a long way for equity withdrawal to return to its 2007 historical peak.
The implication of all the above evidence is that, sequentially, between 2012 and 2013, there appears to have been no improvement in the equity withdrawal/buying activity of corporates themselves. If anything, there has been a slight deterioration.

And in chart format:

In other words, thank the Fed’s lucky stars for the retail “great rotation” because not only are corporate insiders dumping their stock holdings at a historic pace, but now the very corporations themselves, record cash holdings notwithstanding, have for the first time in the past 5 years, shifted away from being a net buyer of stock to a net seller.

And who are they selling to?

Well, the vacuum tubes of course, and whoever has the misfortune of being suckered into the whole “recovery” myth (after how many years of “growth is just around the corner” will people learn?) and is the last carbon-based “retail” bagholder standing.

But don’t worry: because at the end of the day what do companies really know about the potential upside (and thus attractiveness) of their own stock? Nothing that Joe Sixpack doesn’t know from behind the comfort of the CNBC, and momentum-chasing, glow. So just ignore this latest telltale inflection point, and keep on ploughing in: after all Mr. Chairwoman’s $4 trillion balance sheet has your back and nothing can ever go wrong in centrally-planned, manipulated markets.

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