Despite (Or Thanks To) More Macro Bad News, Overnight Futures Levitate To New All Time Highs

The overnight fireworks out of China’s interbank market, which saw a surge in repo and Shibor rates (O/N +78 to 5.23%, 1 Week +64.6 to 5.59%) once more following the lack of a follow through reverse repo as described previously, and once again exposed the rogue gallery of sellside “analysts” as clueless penguins all of whom predicted a quick resumption of Chinese interbank normalcy, did absolutely nothing to make the San Diego’s weatherman‘s forecast of the overnight Fed-driven futures any more difficult: “stocks will be… up. back to you.” And so they were, despite as DB puts it, “yesterday saw another round of slightly softer US data that helped drive the S&P 500 and Dow Jones to fresh highs” and “the release of weaker than expected Japanese IP numbers hasn’t dampened sentiment in Japanese equities” or for that matter megacorp Japan Tobacco firing 20% of its workforce – thanks Abenomics. Ah, remember when data mattered? Nevermind – long live and prosper in the New Normal.

Heading into US trading, today the markets will be transfixed by the FOMC announcement at 2 pm, which will likely say nothing at all (although there is a chance for a surprise – more shortly), and to a lesser extent the ADP Private Payrolls number, which as many have suggested, that if it prints at 0 or goes negative, 1800 on the S&P is assured as early as today.

On today’s US docket

  • US: MBA mortgage applications, cons (12:00)
  • US: ADP employment change 150k (13:15)
  • US: CPI m/m cons 0.2% (13:30)
  • US: FOMC rate decision, cons unch 0.25% (19:30)

Market Recap from Ransquawk

Despite the looming risk event (FOMC), credit spreads tightened and stocks traded higher, with oil & gas sector outperforming following earnings from ENI. In spite of supply from Italy and Germany, Bunds also traded higher, supported by the positive NCR, with coupons & redemptions coming from Spain and Italy this week.  Italy successfully sold EUR 6bln in 5 and 10y BTPs, while German raised EUR 3.413bln in 2% 2023.

In terms of macroeconomic releases this morning, German joblessness rose to its highest level since June 2011 in October, but the unemployment rate remained close to its lowest level since reunification. Going forward, market participants will get to digest the release of the latest ADP Employment Change, CPI report for the month of September and also await the outcome of the FOMC meeting. On the corporate front, Visa, GM, Facebook and Starbucks are set to report earnings today.

Overnight bulletin recap from Bloomberg and RanSquawk

  • EU’s Rehn sees a quite broad-based economy recovery in Europe and said that rapid initial fiscal tightening was essential in crisis and that Europe can now afford slower fiscal consolidation.
  • Apart from another round of earnings and a slew of macroeconomic releases, market participants will await FOMC rate decision due out later today.
  • Treasuries gain before Fed’s two-day policy meeting ends in Washington, statement due at 2pm, and as week’s $96b note auctions conclude with $29b 7Y notes.
  • Fed expected to leave asset purchases unchanged at $45b in Treasuries, $40b in MBS; for roundup of views
  • 7Y to be sold today yield 1.890% in WI trading; drew 2.058% in Sept. after 2.21% in August, highest in two years. 5Y notes sold yesterday drew 1.300%, near 1pm WI level
  • ECB says euro-area banks expect to ease credit standards on loans to companies in 4Q, the first such expectation since 4Q 2009; also said banks expect to ease standards on consumer credit and mortgages in 4Q
  • China’s yuan fell for a fourth day, the longest losing streak since July, as the central bank cut the currency’s reference rate amid a rally in the dollar
  • Sovereign yields mostly lower, EU peripheral spreads widen. Nikkei +1.2%, leading Asian equities higher; European stocks, U.S. equity-index futures gain. WTI crude lower; gold and copper rise

Asian Headlines

Movements in Chinese money market rates reflect temporary liquidity shortage and the PBOC is not tightening policy by limiting interbank funding, according to a unidentified person from the PBOC.

China’s overnight repo weighted average rate hit highest since June at 5.28%, whilst the 7 day repo weighted average rate also hit highest since June at 5.68%.

Japanese Industrial Production (Sep P) M/M 1.5% vs. Exp. 1.8% (Prev. -0.9%); Y/Y 5.4% vs. Exp. 5.5% (Prev. -0.4%)

The BoJ is likely to raise FY 2014 Japan GDP forecast from 1.3% on government stimulus measures.

EU & UK Headlines

EU’s Rehn sees a quite broad-based economy recovery in Europe and said that rapid initial fiscal tightening was essential in crisis and that Europe can now afford slower fiscal consolidation.

German Unemployment Change (000’s) (Oct) M/M 2k vs. Exp. 0k (Prev. 25k, Rev. 24k)
German Unemployment Rate (Oct) M/M 6.90% vs. Exp. 6.90% (Prev. 6.90%)
German CPI – Saxony (Oct) Y/Y 1.1% (Prev. 1.5%)
German CPI – Hesse (Oct) Y/Y 0/9% (Prev. 1.1%)
German CPI – Bavaria (Oct) Y/Y 1.0% (Prev. 1.4%)
German CPI – Brandenburg (Oct) Y/Y 1.2% (Prev. 1.3%)
German CPI – North Rhine Westphalia (Oct) Y/Y 1.4% (Prev. 1.5%)

Eurozone Business Climate Indicator (Oct) M/M -0.01 vs. Exp. -0.19 (Prev. -0.20, Rev. -0.19)

BoE governor Carney said 7% unemployment threshold right time to adjust policy. Carney said won’t tighten policy until recovery is sustained. Carney added that the UK’s recovery was being driven by the housing market.

Germany sells EUR 3.413bln in 2% 2023 Bund Auction, b/c 1.7 (Prev. 1.3) and avg. yield 1.71% (Prev. 1.79%), retention 14.6% (Prev. 18.8%)

Italian bond auction results, sells EUR 6bln vs. Exp. EUR 6bln
– Sells EUR 3bln in 3.50% 01/18, b/c 1.65 (Prev. 1.43) and avg. yield 2.89% (Prev. 3.38%)
– Sells EUR 3bln in 4.50% 03/24, b/c 1.53 (Prev. 1.38) and avg. yield 4.11% (Prev. 4.50%)

Barclays month-end extension: Euro Agg +0.08y
Barclays month-end extension: Sterling Agg +0.02y

US Headlines

A handful of Democratic senators, many facing tough elections in conservative states next year, are beginning to echo longstanding Republican demands for delays and other technical changes in the law, including to the individual mandate that will impose a tax penalty on every uninsured American beginning
next year.

Equities

Looming risk event failed to dent investor appetite for risk and instead stocks traded higher, with oil & gas sector outperforming following an impressive earnings report from ENI. Elsewhere, Barclays shares also rose after the bank reported inline with exp. adjusted pretax profits, while also noting that the amount that it has set aside to pay compensation for mis-sold personal protection insurance is unchanged at GBP 3.95bln.

FX

EUR/USD and GBP/USD traded steady this morning, with GBP/USD moving back towards its 21DMA line as market participants refrained from committing ahead of the key FOMC rate decision later on today.

Combination of higher gold prices, together with touted demand from Asian central bank saw AUD/USD trend higher overnight in Asia and in Europe this morning. Technically, upside resistance level is seen at the 21DMA line.

Commodities

Gold on the spot
market is cheaper in Shanghai than in London for the first time in 2013,
afte
r trading at a premium for most of the year. In fact, the premium
had widened in April to USD 30 a troy ounce as tumbling prices prompted a
rush of buying by Chinese consumers and investors.

China’s
alumina capacity may rise to to 60mln tonnes by end of 2013 57.2mln
tonnes in 2012, according to Chalco’s Zhengzhou research alumina
division director Yin.

Senator Menendez has said that new
sanctions are to be debated in the Senate that will halve Iran’s oil
sales by around 500,000bpd. However, analysts have said that these
measures are unrealistic.

Rosneft have asked Russian President Vladimir Putin to sell the states 20% holding in the Novorossiisk Commmercial Sea Port to the Russian oil producer.

SocGen summarizes the key macro catalysts of the day

The outcome of the FOMC meeting today should be straightforward, with no change expected to the current asset purchase rate of USD85bn per month thanks to sluggish US economic data and a H2 drag on growth due to the government shutdown. There is no press conference, or for that matter even economic projections, planned after the FOMC meeting ends. So, from where will the markets take their cue, given the certainty in the status quo? Every wording in the outlook statement will be carefully scrutinised by the markets to discern how the Fed’s thinking has evolved after the recent softness in the labour market as well as the added uncertainty that the federal shutdown has induced. As a result, the FOMC minutes due to be released on 20 November will be of greater importance, and the markets will weigh the probability of tapering starting based on statements from Fed speakers in the interim. Profit taking and positioning ahead of the FOMC meeting have meant that the USD cut some losses vs most G10 counterparts yesterday. The Aussie remained the worst performer within the G10 space, registering a ~0.8% drop after RBA Governor Stevens commented that it will be “materially lower” than it is today. The rates markets, however, were calm as 10y treasuries continued to swing between gains and losses, with 10y rates ranging between 2.50% to 2.53%.

Ahead of the seminal FOMC outcome tonight, we have the KOF leading indicator from Switzerland, German unemployment and CPI data as well as consumer confidence data from the eurozone. In the US, we also have MBA mortgage applications, ADP employment and CPI data.

Within emerging markets, China continues to hog the limelight, as a cash injection of CNY13bn seemed to be insufficient to pull down the benchmark 7-day repo rate below 5%. By resetting the 7-day reverse repos at 4.1% (up 20bps) vs the 3.9% that was being offered at previous auctions since mid August, is the PBOC hinting at an upcoming mild tightening?

DB’s Jim Reid complete the overnight event walkthrough.

Aside from the FOMC, today will also see the release of the October ADP employment report which has become an increasingly good guide to payrolls over the last few months. DB’s Joe Lavorgna points out that since October 2012, when the vendor responsible for compiling the ADP survey changed from Macroeconomic Advisors to Moody’s, the absolute forecast miss between ADP and private payrolls has been just 38k. Looking just at the last six months to September, the average discrepancy between the two surveys has been around 36k on an absolute basis, including a couple of recent months (June and August) where the two measures were virtually the same. For the record, the consensus is expecting today’s ADP report to show a +150k gain, lower than last month’s +166k result. At the moment, Bloomberg consensus is pointing to a +155k gain in next week’s BLS private payrolls, and just a 115k gain in nonfarm payrolls (though these estimates will probably get revised after today’s ADP). The ADP report is due before the opening bell in New York, which will set the tone for trading before we get to the FOMC later in the day.

Overnight markets are trading with a positive tone across the board led by the TOPIX (+0.8%) and Hang Seng (+1.0%). The release of weaker than expected Japanese IP numbers (1.5% MoM vs 1.8% expected) hasn’t dampened sentiment in Japanese equities, and a strong gain in USDJPY (+0.5%) is probably helping. The Chinese seven day repo rate continues to climb (+45bp to 5.85%) after yesterday’s small RMB13bn liquidity injection by the PBoC was seen as mostly a symbolic move. Market chatter continues to suggest that the PBoC is attempting to limit recent consumer and house price inflation while others are attributing the recent money market rate rises to month-end effects and corporate tax payments. The rise in the repo rate hasn’t stopped A-shares from posting solid gains (+1.0%) today. Elsewhere S&P500 futures are flat, after a strong run late yesterday.

Indeed yesterday saw another round of slightly softer US data that helped drive the S&P 500 (+0.6%) and Dow Jones (+0.7%) to fresh highs. European markets started off on a weaker footing, after a number of earnings misses from banks saw financial stocks struggle at the open. The sentiment improved later in the day, thanks to stronger earnings from the likes of BP. Indeed, the DAX (+0.48%) managed to break above the 9000 mark for the first time in the minutes before the close. The positive sentiment was evident across asset classes including credit where the European senior and sub financials indices grinded to new series tights. In the UK, there is increasing market chatter about what the Chancellor will decide in terms of RBS’ problem assets. RBS subordinated paper continues to be better bid, perhaps on reports that Osborne will avoid a breakup of the group.

Yesterday’s US dataflow supported those arguing for a later start to the taper. US retail sales for September were down 0.1% MoM (vs 0% expected) and retail sales ex auto and gas were up 0.4%, lower than the 0.5% expected. On the inflation side, September PPI was lower than expectations in the headline (- 0.1% vs. +0.2% expected). Consumer confidence for October dropped sharply to 71.2 (vs 75.0 expected, 79.7 previous) probably due to the impact of the fiscal standoff in Washington. Most surprising of all was the gain in the USD (dollar index +0.46%) which strengthened in spite of the weaker than expected US data. This weighed on EURUSD (-0.3%) which had its sharpest fall in three weeks. Treasuries traded in a tight range between 2.50% to 2.53%. An uneventful 5yr UST auction helped 10yr yields close at 2.50%, not far from where they are trading this morning.

Today will be mostly about the FOMC announcement and the ADP employment report. Ahead of that, German CPI and unemployment data will be released together with the Spanish preliminary Q3 GDP report. It will be a busy day on the government bond calendar with new Italian 5 & 10yr, German 10yr and 7yr UST supply. In the US, the other data releases of note are the monthly budget statement and CPI (consensus 0.2% MoM vs 0.1% in August). General Motors reports earnings today before the opening bell – its always interesting to hear management’s views on global demand, particularly in light of Ford’s upbeat assessment last week.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/2X2P573gO6M/story01.htm Tyler Durden

Obamacare Data Hub Crashes For Second Time In Three Days, Verizon Blamed Again

The first and last time a critical data center for Obamacare crashed this past Sunday night, leading to healthcare.gov becoming completely inaccessible and thus halting enrollment (assuming there had been any in the first place but of course allowing the government to blame any lack thereof on Verizon), we said “whether or not Verizon fixes the glitch any time soon, or merely lets it linger, one thing is becoming obvious: the Obamacare delay, which was hard fought by the Teaparty, and which was so opposed by the administration leading to the grotesque 16 day government shutdown, has all but become a reality with every passing day. Only instead of someone actually taking responsibility, said delay will be scapegoated on Verizon’s data centers, faulty fiber-optic and copper cables, Cisco switches, Syrian hackers, millions of lines of faulty (Fortran?) code, inept contractors, end users who never read the Help.doc file, and everyone and everything else. Just never the government itself.” Once again, we were proven correct when overnight the Connecticut state healthcare exchange, “Access Health CT”, announced that the Obamacare data hub was “experiencing an outage” on Tuesday evening. The culprit – Verizon once again. Which answered our question: not Syrian hackers or Cisco but, conveniently, Verizon Terremark.

Conveniently, because recall which company was first implicated in the avalanche of Edward Snowden revelations – why Verizon, which before the NSA disclosure, was first said to be the major communication interception hub used by the government. So when Obama asks the firm that gets unknown kickbacks from the government for providing private client data to the NSA, to take one for the team, well… Verizon promptly obliges.

More on this hilarious “coincidence” from Reuters:

“Access Health CT was informed by CMS (Center for Medicare and Medicaid Services) that the Federal Data Services Hub is currently experiencing an outage,” a statement from the Connecticut state exchange said.

 

A similar outage on Sunday halted online enrollment on the federal Healthcare.gov website as well as similar state sites.

 

An official at the U.S. Department of Health and Human Services (HHS) acknowledged the Obamacare website had been impacted by the problem.

 

“Tonight, Verizon Terremark again experienced network issues in their data center that caused a system outage impacting the federal data services hub and the Healthcare.gov marketplace application,” the official, who asked not to be named, said in an email to Reuters.

 

“Verizon Terremark is conducting maintenance overnight to resolve their issue with our technical team and when that is complete we will bring our systems back online,” the official said.

 

Verizon’s Terremark operates the data services hub that links online health insurance marketplaces with numerous federal agencies and can verify people’s identity, citizenship, and other facts.

 

“We are now undertaking infrastructure maintenance, which should be complete overnight. We anticipate the strengthened infrastructure will help eliminate application downtimes,” said a statement by Jeff Nelson, vice president of global corporate communications at Verizon Enterprise Solutions.

 

“Verizon is committed to supporting our HHS client and stabilizing their www.healthcare.gov website. Since HHS asked us to provide additional compute and storage capacity, our engineers have worked 24/7 to trouble-shoot issues with the site,” the statement said.

And once the Verizon wildcard is used a few more time, ostensibly every single day allowing the Obama administration’s apparatchiks an explanatory loophole why Obamacare enrollment is in the single digits, then come the Syrian hackers of course.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/qekaV0IHJng/story01.htm Tyler Durden

Despite PBOC Liquidity, Chinese Repo Rates Blow-Out To 4-Month Wides

The last two weeks have seen US equity markets on a one-way path to the moon, breaking multi-year records in terms of rate of change and soaring to new all-time highs. However, away from the mainstream media's glare, another 'market' has been soaring – but this time it is not good news. Chinese overnight repo rates – the harbinger of ultimate liquidity crisis – have exploded from 6-month lows (at 2.5%) to 4-month highs (5.8% today). The PBOC even added liquidity for the first time in months yesterday (via Reverse Repo – at much higher than normal rates) but clearly, that was not enough and the banks are running scared once again that the re-ignition of the housing bubble in China will mean more than 'selective' liquidity restrictions.

“The surge in money rates and the very volatile intraday trading shows the market is totally confused about the PBOC’s intentions,” says Frances Cheung, Hong Kong-based rate strategist at Credit Agricole CIB. “The central bank’s reverse-repo operations yesterday are deemed not enough by the market.”

It would seem yesterday's reverse repo – at considerably higher than normal rates – was a shot across the bow of Chinese banks that the liquidity spigot may not be as open they hoped.

As MNI reports, the 1Y Chinese Treasuries went off at 4.01%, significantly higher than market rates at 3.8% and were only 1.22 times oversubscribed (as opposed to a more normal 2x).

Traders said demand was weak because liquidity is tight on end-of-month squeeze…

 

Is the Fed finally getting to China?

 

As we noted previously,

Naturally, it is not rocket science that the only reason why China is growing at its current pace is because it is once again injecting record amount of liquidity into the system, and if the credit spigot is open, the country grows; if it's shut – it stagnates, as we described in "China: No Leverage, No Growth."

But a far bigger problem is that while China's debt is already at record levels, it needs an increasingly greater "credit impulse" to generate the same or smaller amount of GDP "growth" as before, a phenomenon we described in April.

The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.

But while banks are finally starting to catch up to the reality that their balance sheets are woefully unprepared for what may be an epic superbubble house of cards crashing on everyone's head, a key issue is that the price discovery process of insolvent entities in China is simply non-existent.

 

Which all ties rather nicely into Michael Pettis recent note that China's hidden debts still need to paid…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Y1vtYkFsn5c/story01.htm Tyler Durden

The Second Dot-Com Bubble Is Raging, But “This Time Is Different”

“It’s gotten pretty frothy,” is how one portfolio manager describes the behavior in internet-based companies currently as signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. As WSJ reports, home prices in San Francisco and surrounding counties rose more than 15% in the past year. Office rents in San Francisco are 23% above their 2008 peak. As SnapChat, Pinterest, and Twitter are set to join such illustrious names as RocketFuel; asset managers are careful to remind suckers investors that it’s not at all like 1999 – companies going public are more mature, the leadership teams more seasoned, the business models more proven – but the “reach for growth” at all costs echoes Kyle Bass’ remarks that “financial memory is no longer than two years,” with even younger and more revenue-deprived companies come to market at massively elevated multiples.

 

 

Via WSJ,

“It’s gotten pretty frothy,” says Daniel Cole, a senior portfolio manager at Manulife Asset Management who has invested in highflying IPOs, including for Rocket Fuel Inc. The Redwood City, Calif., online-advertising company sold shares to the public last month at $29 each. They traded at $61.72 a share Friday, giving Rocket Fuel a market valuation of $2 billion, without having recorded a profit.

 

 

Technology and finance veterans say this time is different—and it is. Companies going public are more mature, the leadership teams more seasoned, the business models more proven. Social networks such as Twitter and Pinterest are drafting off the success of Facebook Inc., which sports a market value of $126.5 billion, or about 70 times next year’s expected earnings.

 

But the current surge is accelerating, aided by some little-appreciated factors. Big companies are scarcely growing, and interest rates remain near zero, boosting zeal for investment opportunities in companies with high-growth potential. Moreover, a federal law enacted last year will allow startups to raise money from smaller investors, opening a vast new pool of potential funding.

 

“People are reaching for growth,”

 

 

“The big difference now, is companies like LinkedIn, Twitter, Facebook have demonstrated an ability to generate sales, and with the exception of Twitter, profits,” Mr. Ritter says. In the dot-com days, “there were all sorts of companies going public that were essentially startups.”

 

But investor enthusiasm is filtering down to younger, less-proven companies today, too. Pinterest, an electronic-scrapbook service that began testing ads this month, said Wednesday that it had raised $225 million from venture-capital firms. Pinterest didn’t need the money; the company said it hadn’t spent any of the $200 million it raised in February when it was valued at $2.5 billion.

 

The new investment values the three-year-old company at $3.8 billion, a 52% jump in eight months.

 

Snapchat, a two-year-old mobile-messaging service popular with teens, is considering raising up to $200 million at a valuation exceeding $3 billion, people briefed on the matter said Friday. That would be more than triple the valuation that venture firms placed on Snapchat in June, when it raised $60 million.

 

 

Another factor: Last year’s Jumpstart Our Business Startups Act soon will make it easier for less-wealthy individual investors to back startups. Already, the law has made it easier for financiers to pool money from individuals.

 

Some people worry that the looser rules may end up hurting small investors.

 

 

As less-sophisticated investors jump into backing embryonic companies, “the odds aren’t in those people’s favor,” he says. A lot of those companies will fail, “then all of a sudden all you have is a piece of paper to stick on the wall.”


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jFJmmt7_ZUw/story01.htm Tyler Durden

The Second Dot-Com Bubble Is Raging, But "This Time Is Different"

“It’s gotten pretty frothy,” is how one portfolio manager describes the behavior in internet-based companies currently as signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. As WSJ reports, home prices in San Francisco and surrounding counties rose more than 15% in the past year. Office rents in San Francisco are 23% above their 2008 peak. As SnapChat, Pinterest, and Twitter are set to join such illustrious names as RocketFuel; asset managers are careful to remind suckers investors that it’s not at all like 1999 – companies going public are more mature, the leadership teams more seasoned, the business models more proven – but the “reach for growth” at all costs echoes Kyle Bass’ remarks that “financial memory is no longer than two years,” with even younger and more revenue-deprived companies come to market at massively elevated multiples.

 

 

Via WSJ,

“It’s gotten pretty frothy,” says Daniel Cole, a senior portfolio manager at Manulife Asset Management who has invested in highflying IPOs, including for Rocket Fuel Inc. The Redwood City, Calif., online-advertising company sold shares to the public last month at $29 each. They traded at $61.72 a share Friday, giving Rocket Fuel a market valuation of $2 billion, without having recorded a profit.

 

 

Technology and finance veterans say this time is different—and it is. Companies going public are more mature, the leadership teams more seasoned, the business models more proven. Social networks such as Twitter and Pinterest are drafting off the success of Facebook Inc., which sports a market value of $126.5 billion, or about 70 times next year’s expected earnings.

 

But the current surge is accelerating, aided by some little-appreciated factors. Big companies are scarcely growing, and interest rates remain near zero, boosting zeal for investment opportunities in companies with high-growth potential. Moreover, a federal law enacted last year will allow startups to raise money from smaller investors, opening a vast new pool of potential funding.

 

“People are reaching for growth,”

 

 

“The big difference now, is companies like LinkedIn, Twitter, Facebook have demonstrated an ability to generate sales, and with the exception of Twitter, profits,” Mr. Ritter says. In the dot-com days, “there were all sorts of companies going public that were essentially startups.”

 

But investor enthusiasm is filtering down to younger, less-proven companies today, too. Pinterest, an electronic-scrapbook service that began testing ads this month, said Wednesday that it had raised $225 million from venture-capital firms. Pinterest didn’t need the money; the company said it hadn’t spent any of the $200 million it raised in February when it was valued at $2.5 billion.

 

The new investment values the three-year-old company at $3.8 billion, a 52% jump in eight months.

 

Snapchat, a two-year-old mobile-messaging service popular with teens, is considering raising up to $200 million at a valuation exceeding $3 billion, people briefed on the matter said Friday. That would be more than triple the valuation that venture firms placed on Snapchat in June, when it raised $60 million.

 

 

Another factor: Last year’s Jumpstart Our Business Startups Act soon will make it easier for less-wealthy individual investors to back startups. Already, the law has made it easier for financiers to pool money from individuals.

 

Some people worry that the looser rules may end up hurting small investors.

 

 

As less-sophisticated investors jump into backing embryonic companies, “the odds aren’t in those people’s favor,” he says. A lot of those companies will fail, “then all of a sudden all you have is a piece of paper to stick on the wall.”


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jFJmmt7_ZUw/story01.htm Tyler Durden

Michael Pettis Cautions China’s Hidden Debt Must Still Be Repaid

Debt always matters because it must always be paid for by someone – even if the borrower defaults, of course, the debt is simply “paid” by the lender. As China Financial Markets' Michael Pettis notes, this is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. The author of "Avoiding The Fall", explains that if the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. Therefore, in spite of all the hope among global stock-buying hope-mongers, this reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.

 

Via Michael Pettis of China Financial Markets,

Five or six years ago, a few skeptics first started pointing out that the credit dynamics underlying Chinese growth was creating an unsustainable increase in debt. This, they warned, would ultimately undermine the banking system and cause growth to collapse if it were not addressed in time.

There were three standard rejoinders to the warnings.

First, analysts argued that investment was not being misallocated, and because credit growth poured mostly into investment, it did not therefore follow, as the skeptics argued, that debt was rising faster than debt servicing capacity. Although I think few analysts still support this argument, there remain some analysts who do not think China has an overinvestment problem. For example my Carnegie colleague Yukon Huang, who has argued, for example in one of the FT blogs that China is actually underinvested:

The perception that China has invested too much is also misleading. Actually, China’s capital stock relative to GDP is lower than other comparable east Asian countries. Moreover, much of the surge in investment over the past decade is due to housing construction, where the country is still making up for the shortfalls from the Mao era.

Because I have addressed this issue many times before in my newsletters, especially the common and distressingly ahistorical fallacy that one can determine whether a very poor country like China is over- or under-invested by comparing its capital stock per capita to more advanced countries with much higher levels of social capital and the consequent ability to absorb investment efficiently, I will not do so again. Needless to say, I think that the evidence of investment misallocation has continued to rise, and in the past two years the number of analysts that are not worried about a systematic tendency for debt to rise faster than debt-servicing capacity has dropped significantly. I have no doubt that their refusal to accept the consensus on the subject is useful in that it helps sharpen the debate, but this is a losing battle and, like the capital stock argument, distressingly ahistorical.

The second rejoinder, which has also largely faded away as an argument over the past few years, is that debt in China doesn’t matter. Sometimes, these analysts argue, it doesn’t matter because it is funded domestically. Sometimes it doesn’t matter because the banks are implicitly guaranteed by the central government. Sometimes it doesn’t matter because China was able to resolve its last debt crisis, 10-15 years ago, in an environment of rapid growth and at no cost, and so of course it can do so again.

Again I have addressed all of these arguments as to why debt doesn’t matter in China many times before and it is pretty easy to show that all of these claims are fairly nonsensical, and this is especially obvious from the very wide range of historical precedents. Debt always matters. Either it must be repaid out of the proceeds of the investment that was funded by the debt, or – if the debt funded consumption or was misallocated into insufficiently productive investments – it must be repaid by transfers from some other sector of the economy, and these transfers reduce growth by reducing real demand.

The third rejoinder should have been, in principle, the easiest to refute, and for a while it looked like it had been refuted to everyone’s satisfaction, but in the past year I have seen a revival. China doesn’t have to worry about rising bad debts in its banking sector, according to this argument, because the PBoC’s extensive reserves will make it easy to recapitalize the banks.

Ray Chan, of the South China Morning Post, for example, had an interesting article last Saturday that made this point. He starts off the article by warning that the rapid growth in credit in China has uneasy parallels with rapid credit growth in the US before the 2007 crisis:

Parallels between the United States and China have started to look more ominous after several years of rampant credit growth and the emergence of an increasingly uncontrollable and unsustainable shadow banking system. China’s massive foreign reserves could, however, be the last tool in the bag for its bank-centric financial system if no timely regulations are implemented.

 

With the memory of the collapse of Lehman Brothers in 2008 still fresh, investors are fretting over the growth of thinly regulated shadow banking activity. Trusts, entrusted loans and bank acceptance bills shot up sharply to a record 294 billion yuan (HK$370 billion) last month. According to Moody’s Analytics, China’s core shadow banking products, which are often opaque and subject to little or no regulation, almost doubled to 20.5 trillion yuan last year from 11.7 trillion yuan in 2010. The US firm excludes entrusted loans and trust loans as they own underlying assets.

Debt and reserves

The article does a good job of listing many of the problems that have emerged in the past few years, but then quotes a number of analysts who argue that China’s problems is very different from that of the US and it is unlikely to suffer the same kind of crisis. The article continues:

China’s credit situation is somewhat different, though, as it has a high saving rate and massive foreign reserves. Mervyn Davies, a former head of Standard Chartered and British government minister, said: “China is very rich in reserves … At the end of the day, the [Chinese] banks do need recapitalising, which is not a huge challenge to them because the government can recapitalise the banks.”

I agree that China is in a very different position than the US, but this isn’t necessarily a good thing. The main relevant difference is that because all the banks are perceived to be guaranteed by the central government, and Chinese households have a limited number of ways to save outside the banking system, it is unlikely that China will experience a system-wide bank run as long as the credibility of the guarantee survives, and runs on individual banks can be resolved by regulatory fiat (banks that receive deposits will be forced to lend to banks that lose deposits). We are not likely to see a Lehman-style crisis.

We are also not likely to see, however, the advantages of a Lehman-style crisis, and these are a relatively quick adjustment in the process of investment misallocation. I have always said that the resolution of the Chinese banking problems is far more likely to resemble that of Japan than the US, and instead of three of four chaotic years as the system adjusts quickly, and at times violently, we are more likely to see a decade or more of a slow grinding-away of the debt excesses. The net economic cost is likely to be higher in a Japanese-style rebalancing, but American-style rebalancing is risky except in countries with very flexible institutions – financial as well as political.

But I do disagree very strongly with Mervyn Davies’ claim that because the PBoC is “very rich in reserves” it will not be much of a challenge to recapitalize the banks. China’s reserves only matter to its credit position if China faced a problem of external debt.

It doesn’t, and so the amount of reserves are almost wholly irrelevant, because this argument seems to be reviving, it makes sense, I think, to repeat why central bank reserves cannot in any way help China resolve the crisis. I will leave aside the problems of whether the reserves are transferred in the form of foreign currency, in which case it does little to satisfy domestic RMB-denominated funding needs, or in RMB, in which case the PBoC must stop buying dollars in order to hold down the value of the RMB and in fact must sell dollars, which would cause the value of the RMB to soar, thereby wiping out the export sector in China.

A much more important objection is that the idea that reserves can be used to clean up the banks (or anything else, for that matter) is based on a misunderstanding about how the reserves were accumulated in the first place. There seems to be a still-widespread perception that PBoC reserves represent a hoard of unencumbered savings that the PBoC has somehow managed to collect.

But of course they are not. The PBoC has been forced to buy the reserves as a function of its intervention to manage the value of the RMB. And as they were forced to buy the reserves, the PBoC had to fund the purchases, which it did by borrowing RMB in the domestic market.

This means that the foreign currency reserves are simply the asset side of a balance sheet against which there are liabilities. What is more, remember that the RMB has appreciated by more than 30% since July, 2005, so that the value of the assets has dropped in RMB terms even as the value of the liabilities has remained the same, and this has been exacerbated by the lower interest rate the PBoC currently earns on its assets than the interest rate it pays on much of its liabilities.

In fact there have been rumors for years that the PBoC would be insolvent if its assets and liabilities were correctly marked, but whether or not this is true, any transfer of foreign currency reserves to bail out Chinese banks would simply represent a reduction of PBoC assets with no corresponding reduction in liabilities. The net liabilities of the PBoC, in other words, would rise by exactly the amount of the transfer. Because the liabilities of the PBoC are presumed to be the liabilities of the central government, the net effect of using the reserves to recapitalize the banks is identical to having the central government borrow money to recapitalize the banks.

This is the point. Any government that is able to borrow money can borrow money to recapitalize its banks, whether or not it has large amounts of foreign currency reserves. The amount of central bank reserves that China or any other country has is wholly irrelevant, except perhaps to the extent that without those reserves the central government would lack the credibility to borrow domestically, which hardly seems to be a concern in China’s case.

Bailing out the banks, it turns out, is conceptually no different than transferring debt from the banks to the central government. China can handle bad debts in the banking system, in other words, by transferring the net obligations from the banks to the central government, and the large hoard of reserves held by the PBoC does not make it any easier for China can resolve any future debt problems. In fact if anything it should remind us that when we are trying to calculate the total amount of debt the central government owes, the total should include any net liabilities of the PBoC, and that these net liabilities will increase by 1% of GDP every time the RMB strengthens against the dollar by 2%.

Does hidden debt matter?

Before finishing on this topic, I want to address another related fallacy that pops up a surprisingly large number of times when I discuss the net liabilities of the central bank. I am often told that because these liabilities are hidden in the central bank books, and so no one really knows how much debt the PBoC adds to the central government’s debt burden, they really shouldn’t matter in our calculations. The central bank will presumably never default because its obligations are guaranteed by the central government, and the its net liability position is hidden, so why bother even consider the PBoC’s balance sheet when assessing China’s debt position?

Even those who do not understand why this reasoning is incorrect should know that it must obviously be incorrect. If it weren’t, any country could solve all of its debt problems merely by borrowing in a non-transparent way through the central bank. As the Greeks and the Italians most recently showed us, non-transparent borrowing may cause us to recognize a problems later than we otherwise would have, but it cannot solve the problem.

The reason is because in any case debt must either be serviced or the borrower must default. If the assets which were funded by the debt do not create enough wealth with which to service the debt, and if the borrower does not default, then by definition there must have been a transfer from some other entity to cover the difference between the debt servicing cost and the returns on the asset.

Typically this other entity, in China and elsewhere, has been the household sector, and in the case of China the transfer occurred primarily in the hidden form of severely repressed interest rates. Whether the transfer is from the household sector, however, of from other sector, this is where the problem of debt lies for China.

If the central bank (or the commercial banks or any other borrower whose obligations are covered by the central government) is unable to service its debt – and remember that the “economic” debt servicing cost is not the coupon, which is repressed by policymakers, but consists of whatever the “natural” interest rate would have been – the difference will be paid for by someone else, and the economy will suffer slower growth because of the reduction in demand caused by the transfer payment.

So who is likely to cover the cost of NPLs in Chinese banks? This isn’t an easy question to answer. If the household sector continues to pay, either in the hidden form of repressed interest rates, or in the more explicit form of taxes, the existence of bad debt in the Chinese banking system must act to repress future household consumption growth. The transfers from the household sector to pay what may turn out to be a huge NPL bill will significantly lower the household income share of GDP, making it very unlikely that the household consumption share of GDP will rise.

If however the state sector covers the difference (perhaps by privatizing state assets and using the proceeds to pay down debt), we are left with the very difficult political problems, which China currently faces, of assigning the costs to different sectors or groups that control the state sector in China. The potentially very large cost of cleaning up NPLs must be assigned to groups that are likely to be both powerful and reluctant to pay the cost.

Debt always matters because it must always be paid for by someone –even if the borrower defaults, of course, the debt is simply “paid” by the lender. This is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. If the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. This reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dPK18GtHqZs/story01.htm Tyler Durden

Michael Pettis Cautions China's Hidden Debt Must Still Be Repaid

Debt always matters because it must always be paid for by someone – even if the borrower defaults, of course, the debt is simply “paid” by the lender. As China Financial Markets' Michael Pettis notes, this is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. The author of "Avoiding The Fall", explains that if the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. Therefore, in spite of all the hope among global stock-buying hope-mongers, this reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.

 

Via Michael Pettis of China Financial Markets,

Five or six years ago, a few skeptics first started pointing out that the credit dynamics underlying Chinese growth was creating an unsustainable increase in debt. This, they warned, would ultimately undermine the banking system and cause growth to collapse if it were not addressed in time.

There were three standard rejoinders to the warnings.

First, analysts argued that investment was not being misallocated, and because credit growth poured mostly into investment, it did not therefore follow, as the skeptics argued, that debt was rising faster than debt servicing capacity. Although I think few analysts still support this argument, there remain some analysts who do not think China has an overinvestment problem. For example my Carnegie colleague Yukon Huang, who has argued, for example in one of the FT blogs that China is actually underinvested:

The perception that China has invested too much is also misleading. Actually, China’s capital stock relative to GDP is lower than other comparable east Asian countries. Moreover, much of the surge in investment over the past decade is due to housing construction, where the country is still making up for the shortfalls from the Mao era.

Because I have addressed this issue many times before in my newsletters, especially the common and distressingly ahistorical fallacy that one can determine whether a very poor country like China is over- or under-invested by comparing its capital stock per capita to more advanced countries with much higher levels of social capital and the consequent ability to absorb investment efficiently, I will not do so again. Needless to say, I think that the evidence of investment misallocation has continued to rise, and in the past two years the number of analysts that are not worried about a systematic tendency for debt to rise faster than debt-servicing capacity has dropped significantly. I have no doubt that their refusal to accept the consensus on the subject is useful in that it helps sharpen the debate, but this is a losing battle and, like the capital stock argument, distressingly ahistorical.

The second rejoinder, which has also largely faded away as an argument over the past few years, is that debt in China doesn’t matter. Sometimes, these analysts argue, it doesn’t matter because it is funded domestically. Sometimes it doesn’t matter because the banks are implicitly guaranteed by the central government. Sometimes it doesn’t matter because China was able to resolve its last debt crisis, 10-15 years ago, in an environment of rapid growth and at no cost, and so of course it can do so again.

Again I have addressed all of these arguments as to why debt doesn’t matter in China many times before and it is pretty easy to show that all of these claims are fairly nonsensical, and this is especially obvious from the very wide range of historical precedents. Debt always matters. Either it must be repaid out of the proceeds of the investment that was funded by the debt, or – if the debt funded consumption or was misallocated into insufficiently productive investments – it must be repaid by transfers from some other sector of the economy, and these transfers reduce growth by reducing real demand.

The third rejoinder should have been, in principle, the easiest to refute, and for a while it looked like it had been refuted to everyone’s satisfaction, but in the past year I have seen a revival. China doesn’t have to worry about rising bad debts in its banking sector, according to this argument, because the PBoC’s extensive reserves will make it easy to recapitalize the banks.

Ray Chan, of the South China Morning Post, for example, had an interesting article last Saturday that made this point. He starts off the article by warning that the rapid growth in credit in China has uneasy parallels with rapid credit growth in the US before the 2007 crisis:

Parallels between the United States and China have started to look more ominous after several years of rampant credit growth and the emergence of an increasingly uncontrollable and unsustainable shadow banking system. China’s massive foreign reserves could, however, be the last tool in the bag for its bank-centric financial system if no timely regulations are implemented.

 

With the memory of the collapse of Lehman Brothers in 2008 still fresh, investors are fretting over the growth of thinly regulated shadow banking activity. Trusts, entrusted loans and bank acceptance bills shot up sharply to a record 294 billion yuan (HK$370 billion) last month. According to Moody’s Analytics, China’s core shadow banking products, which are often opaque and subject to little or no regulation, almost doubled to 20.5 trillion yuan last year from 11.7 trillion yuan in 2010. The US firm excludes entrusted loans and trust loans as they own underlying assets.

Debt and reserves

The article does a good job of listing many of the problems that have emerged in the past few years, but then quotes a number of analysts who argue that China’s problems is very different from that of the US and it is unlikely to suffer the same kind of crisis. The article continues:

China’s credit situation is somewhat different, though, as it has a high saving rate and massive foreign reserves. Mervyn Davies, a former head of Standard Chartered and British government minister, said: “China is very rich in reserves … At the end of the day, the [Chinese] banks do need recapitalising, which is not a huge challenge to them because the government can recapitalise the banks.”

I agree that China is in a very different position than the US, but this isn’t necessarily a good thing. The main relevant difference is that because all the banks are perceived to be guaranteed by the central government, and Chinese households have a limited number of ways to save outside the banking system, it is unlikely that China will experience a system-wide bank run as long as the credibility of the guarantee survives, and runs on individual banks can be resolv
ed by regulatory fiat (banks that receive deposits will be forced to lend to banks that lose deposits). We are not likely to see a Lehman-style crisis.

We are also not likely to see, however, the advantages of a Lehman-style crisis, and these are a relatively quick adjustment in the process of investment misallocation. I have always said that the resolution of the Chinese banking problems is far more likely to resemble that of Japan than the US, and instead of three of four chaotic years as the system adjusts quickly, and at times violently, we are more likely to see a decade or more of a slow grinding-away of the debt excesses. The net economic cost is likely to be higher in a Japanese-style rebalancing, but American-style rebalancing is risky except in countries with very flexible institutions – financial as well as political.

But I do disagree very strongly with Mervyn Davies’ claim that because the PBoC is “very rich in reserves” it will not be much of a challenge to recapitalize the banks. China’s reserves only matter to its credit position if China faced a problem of external debt.

It doesn’t, and so the amount of reserves are almost wholly irrelevant, because this argument seems to be reviving, it makes sense, I think, to repeat why central bank reserves cannot in any way help China resolve the crisis. I will leave aside the problems of whether the reserves are transferred in the form of foreign currency, in which case it does little to satisfy domestic RMB-denominated funding needs, or in RMB, in which case the PBoC must stop buying dollars in order to hold down the value of the RMB and in fact must sell dollars, which would cause the value of the RMB to soar, thereby wiping out the export sector in China.

A much more important objection is that the idea that reserves can be used to clean up the banks (or anything else, for that matter) is based on a misunderstanding about how the reserves were accumulated in the first place. There seems to be a still-widespread perception that PBoC reserves represent a hoard of unencumbered savings that the PBoC has somehow managed to collect.

But of course they are not. The PBoC has been forced to buy the reserves as a function of its intervention to manage the value of the RMB. And as they were forced to buy the reserves, the PBoC had to fund the purchases, which it did by borrowing RMB in the domestic market.

This means that the foreign currency reserves are simply the asset side of a balance sheet against which there are liabilities. What is more, remember that the RMB has appreciated by more than 30% since July, 2005, so that the value of the assets has dropped in RMB terms even as the value of the liabilities has remained the same, and this has been exacerbated by the lower interest rate the PBoC currently earns on its assets than the interest rate it pays on much of its liabilities.

In fact there have been rumors for years that the PBoC would be insolvent if its assets and liabilities were correctly marked, but whether or not this is true, any transfer of foreign currency reserves to bail out Chinese banks would simply represent a reduction of PBoC assets with no corresponding reduction in liabilities. The net liabilities of the PBoC, in other words, would rise by exactly the amount of the transfer. Because the liabilities of the PBoC are presumed to be the liabilities of the central government, the net effect of using the reserves to recapitalize the banks is identical to having the central government borrow money to recapitalize the banks.

This is the point. Any government that is able to borrow money can borrow money to recapitalize its banks, whether or not it has large amounts of foreign currency reserves. The amount of central bank reserves that China or any other country has is wholly irrelevant, except perhaps to the extent that without those reserves the central government would lack the credibility to borrow domestically, which hardly seems to be a concern in China’s case.

Bailing out the banks, it turns out, is conceptually no different than transferring debt from the banks to the central government. China can handle bad debts in the banking system, in other words, by transferring the net obligations from the banks to the central government, and the large hoard of reserves held by the PBoC does not make it any easier for China can resolve any future debt problems. In fact if anything it should remind us that when we are trying to calculate the total amount of debt the central government owes, the total should include any net liabilities of the PBoC, and that these net liabilities will increase by 1% of GDP every time the RMB strengthens against the dollar by 2%.

Does hidden debt matter?

Before finishing on this topic, I want to address another related fallacy that pops up a surprisingly large number of times when I discuss the net liabilities of the central bank. I am often told that because these liabilities are hidden in the central bank books, and so no one really knows how much debt the PBoC adds to the central government’s debt burden, they really shouldn’t matter in our calculations. The central bank will presumably never default because its obligations are guaranteed by the central government, and the its net liability position is hidden, so why bother even consider the PBoC’s balance sheet when assessing China’s debt position?

Even those who do not understand why this reasoning is incorrect should know that it must obviously be incorrect. If it weren’t, any country could solve all of its debt problems merely by borrowing in a non-transparent way through the central bank. As the Greeks and the Italians most recently showed us, non-transparent borrowing may cause us to recognize a problems later than we otherwise would have, but it cannot solve the problem.

The reason is because in any case debt must either be serviced or the borrower must default. If the assets which were funded by the debt do not create enough wealth with which to service the debt, and if the borrower does not default, then by definition there must have been a transfer from some other entity to cover the difference between the debt servicing cost and the returns on the asset.

Typically this other entity, in China and elsewhere, has been the household sector, and in the case of China the transfer occurred primarily in the hidden form of severely repressed interest rates. Whether the transfer is from the household sector, however, of from other sector, this is where the problem of debt lies for China.

If the central bank (or the commercial banks or any other borrower whose obligations are covered by the central government) is unable to service its debt – and remember that the “economic” debt servicing cost is not the coupon, which is repressed by policymakers, but consists of whatever the “natural” interest rate would have been – the difference will be paid for by someone else, and the economy will suffer slower growth because of the reduction in demand caused by the transfer payment.

So who is likely to cover the cost of NPLs in Chinese banks? This isn’t an easy question to answer. If the household sector continues to pay, either in the hidden form of repressed interest rates, or in the more explicit form of taxes, the existence of bad debt in the Chinese banking system must act to repress future household consumption growth. The transfers from the household sector to pay what may turn out to be a huge NPL bill will significantly lower the household income share of GDP, making it very unlikely that the household consumption share of GDP will rise.

If however the state sector covers the difference (perhaps by privatizin
g state assets and using the proceeds to pay down debt), we are left with the very difficult political problems
, which China currently faces, of assigning the costs to different sectors or groups that control the state sector in China. The potentially very large cost of cleaning up NPLs must be assigned to groups that are likely to be both powerful and reluctant to pay the cost.

Debt always matters because it must always be paid for by someone –even if the borrower defaults, of course, the debt is simply “paid” by the lender. This is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. If the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. This reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dPK18GtHqZs/story01.htm Tyler Durden

From $27 To $886,000 In Four Years: Name The Investment

Not Tesla, Not Apple, Not Netflix…

 

 

Via The Guardian,

Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.

 

 

The meteoric rise in bitcoin has meant that within the space of four years, one Norwegian man’s $27 investment turned into a forgotten $886,000 windfall.

 

 

Bitcoins are stored in encrypted wallets secured with a private key, something Koch had forgotten. After eventually working out what the password could be, Koch got a pleasant surprise: “It said I had 5,000 bitcoins in there. Measuring that in today’s rates it’s about NOK5m ($886,000),” Koch told NRK.

 

 

Koch exchanged one fifth of his 5,000 bitcoins, generating enough kroner to buy an apartment in Toyen, one of the Norwegian capital’s wealthier areas.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/SH1lDBzd0Yc/story01.htm Tyler Durden

Peter Schiff Blasts “The Website Is Fixable, Obamacare Isn’t!”

Submitted by Peter Schoff via Euro Pacific Capital,

Since Obamacare made its debut, discussions have focused on Ted Cruz' efforts to defund the law and the shockingly bad functionality of the Website itself. Fortunately for Obama, polling indicates that Senator Cruz has lost, at least for now, the battle for hearts and minds. The President has not been nearly so lucky on the technological front. If current trends continue, the rollout may go down as the worst major product launch in history. But given the government's enormous resources, it's safe to say that the site itself will ultimately be fixed. But when it is finally up and running, the plan's many deeper, and more intractable, flaws will come into focus. That's when the fun will really begin.

Put simply the program is built on a mountain of false assumptions and is covered by a terrain of unanticipated incentives. Any cleared-eyed observer should conclude that it is perfectly designed to raise the costs of care and wreck the federal budget. However, like just about every other complicated problem that bedevils the nation, the public has become far too caught up in the politics and has ignored the horrific details.

Most people agree that the plan can only remain solvent if enough young and healthy people ("the invincibles") agree to sign up. They are the ones who are likely to pay more into the system than they take out. But now that insurance coverage is guaranteed to anyone at any time (at the same price — even after they have gotten sick or injured), the only incentive for the invincibles to sign up will be to avoid the penalty (I think we can dismiss "civic duty" as an effective motivator). But as I detailed in a column last year, Justice John Roberts declared the law to be constitutional only because the penalties are far too low to actually compel behavior. Once young healthy people understand that they can save money by dropping insurance, they will. No amount of slick, cheerful TV ads will change that.

The good news for Obama is that the plan will get a large percentage of young people covered. The bad news is that many of those that do sign up will not help the bottom line. The youngest and healthiest of the group are under 26 and will now be able to stay on their parents' plans. This group will add nothing to the pool of premiums (but will use services). Among those older than 26, the ones who qualify for the largest subsidies will be more inclined to sign up. The way the plan is structured, individuals and families earning between 1.38 and 4 times the Federal poverty level will qualify for a subsidy. The government subsidy covers almost the entire premium for those near the bottom of that spectrum. These individuals will definitely sign up. But just like those under 26, they will be a net drain on the system.

From my estimations, private premium contributions don't surpass the government contributions until an individual or a family makes about 2.5 times the poverty level (which equates to about $28,000 for an individual and $55,000 for a family of 4). Since a very large percentage of young people earn less than that, many will sign up to get the benefit. But these people will likely be net drains to the system as well. Their total premiums paid may be more than the services they receive, but that may not be true when you look only at what they actually pay in.

Young women, who plan on using maternity care, may also be motivated. But they can cost more than they bring in. The real cash cows are the young men, not covered by parents, who make more than 4 times the poverty level. But their only incentive to sign up is to avoid the penalty. But at just one percent of income, the penalty just won't be a deciding factor. Most young men will save money by dropping insurance, paying the tax and incidental doctor visits out of pocket, and then only adding the insurance if and when something really bad happens.

The subsidies in Obamacare kick in and kick out very abruptly. People finding themselves on the wrong side of a dividing line will face difficult choices that hurt the plan's finances. The San Francisco Chronicle recently profiled a California couple in their early 60s making about $64,000 per year who would be able to qualify for a $14,000 annual subsidy by reducing their income by $2,000 dollars per year. It's easy to imagine such individuals reducing their hours or their pay to qualify. Of course this type of behavior modification has not been anticipated by preparing premium and budget projections. It is no accident that the government has offered no serious projections about how much in healthcare subsidies it should expect to pay out over the coming years

In truth, the premium levels themselves are based on nothing but assumptions. It is true that those lucky enough to actually get through the website's technological maze have seen (unsubsidized) premiums that are lower than similarly constituted plans in the private market. But those low prices are only possible because no one knows what the new pool of insurance holders will look like. They assume it will look like the pools that already exist. But they won't.

Of course, the incentives for the young and healthy to drop out, and for the sick, old and the heavily subsidized to drop in will mean that the post-Obamacare pool will have very different actuarial arithmetic than the current pools. But all of that is as yet unknown. The numbers we see now were put there just to make us feel good. But once the economics kicks in, look for them to rise quickly.

It is also ironic that high-deductible, catastrophic plans are precisely what young people should be buying in the first place. They are inexpensive because they provide coverage for unlikely, but expensive, events. Routine care is best paid for out-of-pocket by value conscious consumers. But Obamacare outlaws these plans, in favor of what amounts to prepaid medical treatment that shifts the cost of services to taxpayers. In such a system, patients have no incentive to contain costs. Since the biggest factor driving health care costs higher in the first place has been the over use of insurance that results from government-provided tax incentives, and the lack of cost accountability that results from a third-party payer system, Obamacare will bend the cost curve even higher. The fact that Obamacare does nothing to rein in costs while providing an open-ended insurance subsidy may be good news for hospitals and insurance companies, but it's bad news for taxpayers, on whom this increased burden will ultimately fall.

The real shock of Obamacare is not the unbelievable ineptitude in which it was launched, but the naiveté in which it was designed. The only thing worse than the product launch may be the product itself. But unlike other major entitlements, like Social Security and Medicare, that took years to produce red ink that was far in excess of original assumptions, the financial shortfalls in Obamacare should show up very quickly. Republicans should not miss that opportunity to destroy this monster that threatens us all.


    



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

Peter Schiff Blasts "The Website Is Fixable, Obamacare Isn't!"

Submitted by Peter Schoff via Euro Pacific Capital,

Since Obamacare made its debut, discussions have focused on Ted Cruz' efforts to defund the law and the shockingly bad functionality of the Website itself. Fortunately for Obama, polling indicates that Senator Cruz has lost, at least for now, the battle for hearts and minds. The President has not been nearly so lucky on the technological front. If current trends continue, the rollout may go down as the worst major product launch in history. But given the government's enormous resources, it's safe to say that the site itself will ultimately be fixed. But when it is finally up and running, the plan's many deeper, and more intractable, flaws will come into focus. That's when the fun will really begin.

Put simply the program is built on a mountain of false assumptions and is covered by a terrain of unanticipated incentives. Any cleared-eyed observer should conclude that it is perfectly designed to raise the costs of care and wreck the federal budget. However, like just about every other complicated problem that bedevils the nation, the public has become far too caught up in the politics and has ignored the horrific details.

Most people agree that the plan can only remain solvent if enough young and healthy people ("the invincibles") agree to sign up. They are the ones who are likely to pay more into the system than they take out. But now that insurance coverage is guaranteed to anyone at any time (at the same price — even after they have gotten sick or injured), the only incentive for the invincibles to sign up will be to avoid the penalty (I think we can dismiss "civic duty" as an effective motivator). But as I detailed in a column last year, Justice John Roberts declared the law to be constitutional only because the penalties are far too low to actually compel behavior. Once young healthy people understand that they can save money by dropping insurance, they will. No amount of slick, cheerful TV ads will change that.

The good news for Obama is that the plan will get a large percentage of young people covered. The bad news is that many of those that do sign up will not help the bottom line. The youngest and healthiest of the group are under 26 and will now be able to stay on their parents' plans. This group will add nothing to the pool of premiums (but will use services). Among those older than 26, the ones who qualify for the largest subsidies will be more inclined to sign up. The way the plan is structured, individuals and families earning between 1.38 and 4 times the Federal poverty level will qualify for a subsidy. The government subsidy covers almost the entire premium for those near the bottom of that spectrum. These individuals will definitely sign up. But just like those under 26, they will be a net drain on the system.

From my estimations, private premium contributions don't surpass the government contributions until an individual or a family makes about 2.5 times the poverty level (which equates to about $28,000 for an individual and $55,000 for a family of 4). Since a very large percentage of young people earn less than that, many will sign up to get the benefit. But these people will likely be net drains to the system as well. Their total premiums paid may be more than the services they receive, but that may not be true when you look only at what they actually pay in.

Young women, who plan on using maternity care, may also be motivated. But they can cost more than they bring in. The real cash cows are the young men, not covered by parents, who make more than 4 times the poverty level. But their only incentive to sign up is to avoid the penalty. But at just one percent of income, the penalty just won't be a deciding factor. Most young men will save money by dropping insurance, paying the tax and incidental doctor visits out of pocket, and then only adding the insurance if and when something really bad happens.

The subsidies in Obamacare kick in and kick out very abruptly. People finding themselves on the wrong side of a dividing line will face difficult choices that hurt the plan's finances. The San Francisco Chronicle recently profiled a California couple in their early 60s making about $64,000 per year who would be able to qualify for a $14,000 annual subsidy by reducing their income by $2,000 dollars per year. It's easy to imagine such individuals reducing their hours or their pay to qualify. Of course this type of behavior modification has not been anticipated by preparing premium and budget projections. It is no accident that the government has offered no serious projections about how much in healthcare subsidies it should expect to pay out over the coming years

In truth, the premium levels themselves are based on nothing but assumptions. It is true that those lucky enough to actually get through the website's technological maze have seen (unsubsidized) premiums that are lower than similarly constituted plans in the private market. But those low prices are only possible because no one knows what the new pool of insurance holders will look like. They assume it will look like the pools that already exist. But they won't.

Of course, the incentives for the young and healthy to drop out, and for the sick, old and the heavily subsidized to drop in will mean that the post-Obamacare pool will have very different actuarial arithmetic than the current pools. But all of that is as yet unknown. The numbers we see now were put there just to make us feel good. But once the economics kicks in, look for them to rise quickly.

It is also ironic that high-deductible, catastrophic plans are precisely what young people should be buying in the first place. They are inexpensive because they provide coverage for unlikely, but expensive, events. Routine care is best paid for out-of-pocket by value conscious consumers. But Obamacare outlaws these plans, in favor of what amounts to prepaid medical treatment that shifts the cost of services to taxpayers. In such a system, patients have no incentive to contain costs. Since the biggest factor driving health care costs higher in the first place has been the over use of insurance that results from government-provided tax incentives, and the lack of cost accountability that results from a third-party payer system, Obamacare will bend the cost curve even higher. The fact that Obamacare does nothing to rein in costs while providing an open-ended insurance subsidy may be good news for hospitals and insurance companies, but it's bad news for taxpayers, on whom this increased burden will ultimately fall.

The real shock of Obamacare is not the unbelievable ineptitude in which it was launched, but the naiveté in which it was designed. The only thing worse than the product launch may be the product itself. But unlike other major entitlements, like Social Security and Medicare, that took years to produce red ink that was far in excess of original assumptions, the financial shortfalls in Obamacare should show up very quickly. Republicans should not miss that opportunity to destroy this monster that threatens us all.


    



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