Tag: finance

"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."

 

-Paul Singer, Elliott Management

In his latest letter to investment partners, the outspoken realist pulls the curtain on everything from loss of faith on fiat currencies to unsound policies such as Obamacare, the missing jobs recovery, and media misunderstandings of the nature of hedge funds.

On The Fed's "temporary" effects on bonds and stocks:

The volatility in fixed income markets earlier this year, occasioned by the Fed’s use of the word “tapering” (meaning a possible gradual reduction in the pace of Fed bondbuying), resulted in medium- and long-term interest rates rising back to the levels of the spring of 2009. In other words, $3.8 trillion of bond-buying since 2008 by the Fed has had only a temporary effect on medium- and long-term interest rates. It is impossible to predict the prices of bonds in the event the Fed stops buying, or actually starts to sell off its massive portfolio, although it is a decent bet that prices would be much lower than current levels.

 

It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. However, the fragility of capital markets, so reliant on zero percent interest rates (ZIRP) and QE Infinity for their equilibrium, is clearer. The markets’ ability to withstand any adversity is highly questionable, and it appears to us that the Fed is basically paralyzed (though they would probably call it “focused and determined”) and afraid (perhaps they would say “prudently risk-averse”) to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets.

On The Fed's lack of effects on the real economy:

The Fed is undoubtedly praying that economic growth will accelerate, giving it proper cover to tighten its ultra-loose monetary policy. However, the economy is now in its fifth year of subpar growth, with little pick-up in sight.

On Hedge Funds:

Lately we have seen a number of reports about the “disappointing” results of hedge funds. But as we have noted many times before, hedge funds that are actually hedging are unlikely to perform as well as equities during a bull run.

 

…

 

We understand it is not easy for investors to distinguish who is good and sustainable from who is a flash in the pan, but the task is worthwhile, and investors who do the hard work are likely to be pleased with their manager selection in the medium to long term. Unfortunately, the supply of firms that can produce (or at least have a reasonable prospect of achieving) absolute returns is far lower than the demand for such results.

On the "unsound" underlying structural issues of US Fiscal policy:

What has been happening with the U.S. federal government in its recent highly-theatrical phase, as contentious and difficult as it has been, is merely a precursor to much bigger events.

 

…

 

we are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the government having made (and continuing to make) massively unpayable promises for the future. As we have pointed out, the current annual federal deficit, so ballyhooed to be “coming down nicely,” is actually catastrophically out of control. It is not a trillion dollars. The true figure is more like $7 trillion (and growing!) after accounting for unfunded liabilities, which are mounting at a fantastic pace. It is not an exaggeration to say that America is deeply insolvent, and for that matter, so are most of continental Europe, the U.K. and Japan. No combination of achievable growth rates and taxes can pay for the promises that have been made. The numbers are clear and inexorable.

 

None of the major governmental leaders in these regions is telling the truth about the present state of affairs and where it will lead, nor are they making the structural changes necessary to unlock the potential to grow their respective economies significantly faster than current rates.

 

…

 

As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations. That will not work and would lead the world down the road to total ruin.

 

…

 

The situation is deeply unstable. It is so sad that after the major developed countries recovered from World War II, they gradually morphed from soundly-financed global engines of growth and prosperity into massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.

On The Global financial system's fragility:

The global financial system is not much healthier. In the last five years, laws and regulations have been passed, bankers have been pilloried, financiers have been vilified, “living wills” have been prepared and carefully and beautifully wrapped for presentation, regulatory entities have been formed and fresh-faced regulators, eager to save the world, have been hired and placed at new desks in front of new computers. But through it all, one thing has not changed: The major banking and other financial institutions remain opaque and overleveraged.

 

…

 

The really bad news is that the “hair-trigger” aspect of modern global trading markets is just getting more intense. Market action from earlier this year is a harbinger of how modern markets will react to a real change in perceptions. In this past spring’s episode, a sign from the Fed that it might gently begin scaling back the pace of its bond-buying caused medium- and long-term bonds to be abruptly repriced, which removed just about all of the price elevation caused by four years of Fed purchases. The lesson of the crash of 2008 was that it is essential to act immediately to save your assets from an uncertain counterparty or clearing firm.

On Yellen and The Fed admitting its wrong:

it is unlikely that her reign will be characterized by any more courage or deep understanding than that of her predecessor, “Helicopter Ben” Bernanke.

…

The problem is that they all, including Yellen, are looking in the wrong direction. Similar to Bernanke (and arguably more so), Yellen places a heavy reliance on the Fed’s data-driven financial models to draw conclusions and make predictions. Sadly, she also seems to share Bernanke’s lack of humility regarding the inescapable fact that the Fed’s models and predictions were catastrophically wrong about the financial system, financial institutions and risks in the period leading up to and during the financial crisis.

For the Fed’s governors to admit that they got it profoundly and tragically (for the millions of people who are unemployed, underemployed or now deeply steeped in the brine of dependency) wrong, and that their role needs to be more modest than holding up the entire world on their shoulders, would also take courage.

On ZIRP and QE's lack of societal benefit:

In the absence of that courage, which could only be exhibited by the Fed (or perhaps by Congress if it legislated an end to the “dual mandate”), it is not easy to see where current Fed policy leads the country. We believe that continued QE will not accelerate the economic recovery. We also believe that the recovery and the economy are distorted and unfair to ordinary citizens who do not own stocks or high-end real estate, which are priced at their highs. ZIRP and QE, therefore, are placing the economy at severe risk of another financial crisis and possibly a spike in inflation for no societal benefit.

On timing the collapse:

Although the risks are clear, the probabilities and timing are not.

 

We do know that the transmission mechanism would be a loss of confidence – in the government, in its ability to pay its obligations, in its ability to provide the conditions for acceptable levels of economic growth and job creation in a competitive world beset by the glories and challenges of job-crushing technological change, and in paper money itself.

On the idiocy of the counter-factual:

To those who maintain that things would have been even worse if the government hadn’t initiated QE2 (and beyond), our response is that this is the wrong test. The only justifiable reason to have done QE was to provide liquidity during the immediate emergency period. After that, a full range of policy tools – including tax, regulation, labor, trade, education, energy and innovation – should have been brought to bear to overcome the mess, get the economy growing as fast as it reasonably could and counteract the job-suppressive aspects of the march of otherwise-wonderful technology. If and only if those growth-enhancing policies failed would it have made sense to declare a further emergency and do something as distortionary and risky as further rounds of QE.

 

Frustratingly, in no part of the developed world were those “pro-growth” policies pursued. Instead, central bankers went right ahead after stepping back from the precipice and pursued QE in unprecedented size, from then until this day. In effect, this has provided cover for the leaders of the developed countries to continue buying votes with dependency-enhancing policies, avoiding difficult decisions and eschewing effective but contentious pro-growth policies. This is a bad mix, and it will lead to bad outcomes.

On The Endgame:

Chairman Bernanke has been administering painkillers and artificial respiration instead of telling the President and Congress to take intelligent action to improve economic growth. As we have said over and over: Leadership is wanting; leadership is needed.

 

If QE loses effectiveness now and the plug is pulled, the economic consequences could be disastrous, because the Fed didn’t force the President and Congress to adopt progrowth policies when it had the chance. At the same time, if the current course is maintained, the ultimate results are likely to be much worse.
 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/W_sjt9efVcU/story01.htm Tyler Durden

Authored by Martin Feldstein, originally posted at Project Syndicate,

Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance – about 15% of the US population.

Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. The program was therefore formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.” More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.

But what about conditions like a heart attack or injuries sustained in an automobile accident? In those cases, the individual would not have time to purchase the health insurance that the law allows. If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately.

But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. They might even choose to self-insure the emergency risk for their employees.

The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Kcgkb1N2-Fc/story01.htm Tyler Durden

Authored by Martin Feldstein, originally posted at Project Syndicate,

Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance – about 15% of the US population.

Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. The program was therefore formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.” More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.

But what about conditions like a heart attack or injuries sustained in an automobile accident? In those cases, the individual would not have time to purchase the health insurance that the law allows. If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately.

But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. They might even choose to self-insure the emergency risk for their employees.

The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Kcgkb1N2-Fc/story01.htm Tyler Durden

Recent surveys and research studies by sources from the UN to streetRx.com put the size of the illegal drug market in the U.S. at anywhere from $200 to $750 billion. The market is notoriously hard to track by design, and it is constantly evolving as prices and usage fluctuates; but as ConvergEx’s Nick Colas notes, there’s a plethora of data on the topic: formal surveys by the CDC and user-submitted blog posted on websites like Hightimes.com trace price, usage, and traffic stats for marijuana, powder and crack cocaine, d-methamphetamine, and heroin. Legalized dispensaries now allow us to estimate potential tax revenue from marijuana sales, while incarceration rates for drug offenders reveal the economic impact of the illegal drug trade. In short, while the illegal drug market might be hard to track – if only by virtue of its illegality – Colas points out that we can learn a lot about its size and scope by aggregating these formal and informal data. Most surprising of them all: illicit drug use is no longer the realm of just the youth.

 

Via ConvergEx’s Nick Colas,

The laws of supply and demand exist everywhere, and looking at the most esoteric markets can give you some very useful insights into mainstream topics. There is a lot to learn here about consumer behavior, the social costs of drug law enforcement, and even some surprising demographic data.

Ever wondered how much a particular narcotic or opioid costs in your city? The answer might’ve been hard to find out 20 years ago without some serious hook ups in the shady part of town, but today all you have to do is head to streetrx.com. Type in your drug of choice, and up pops the data: location, price, date, and a 1-5 star rating. You’ve got your standard cocktails on here – oxycodone, heroin, marijuana – and then a few not-so-popular choices like hydrocodone, Exalgo, and Klonopin. Each one of them is going to cost you a pretty penny, depending on where you buy it – but at least you’ll know whether you got a good deal or not.

Streetrx.com and similar, user-run sites like Hightimes.com have made the drug economy more transparent than ever – but it’s still virtually impossible to put a sticker price on it. Academic literature on the topic puts the figure at anywhere from $200 to more than $750 billion, with most estimating around the $400-$500 billion level. But as an illegal activity, illicit drug use is highly under-reported, if at all, so “guesstimates” are the name of the game when it comes to determining the market’s size.

Still, while we might not be able to guess the exact dollar amount the underground drug market rakes in every year, these informal data sources – along with some of the more formal stats tracked by the Center for Disease Control – can tell us quite a bit about the nature of this economy in the US. From price inflation to average user age, the aggregation of this formal and informal data paints a slightly less-fuzzy and, to some degree, larger picture of the market. Here’s the top 10 that we found, in no particular order:

1. Say what you want about the 1960s and 1970s, but the current decade has logged the heaviest drug use per person per year in the history of the United States. 23.9 million Americans aged 12 or older – 9.2% of the entire population – were “current users” (i.e. had used in the past month) of an illicit drug in 2012, the latest data available from the CDC shows. That’s up from 7.1% in 2001, and more than double the rate of 1969’s 4% (according to a 1969 Gallup poll). But the “peace and love” decades aren’t totally free of blame. The youngsters that seemed to have pioneered increasing drug usage in the 60s and 70s are apparently still at it today: 7.2% of those aged 50-54 reported illicit drug use within the past month, compared to 6.6% of those 55-59 and 3.6% of those 60-64. Each of these figures is more than double the respective rates recorded in 2002. Use of illicit drugs among those 12-17, meanwhile, is dropping, while usage in the “young adult” community of 18-25 has been rather stable at around 21.3%.

 

2. The most “Typical” drug user is apparently an 18-25 year old male living in the urban South, based on data from the National Survey on Drug Use and Health. The South is the biggest drug consuming region in the country by sheer numbers with 7.5 million current users, according to the National Survey on Drug Use and Health. But New England and the Pacific West had the highest rates of usage at 11.4% and 12.3% of the total population. The biggest “experimenting” population is also in New England; the number of people reporting that they had used an illicit drug at some point in their lifetime was higher here than anywhere else (55.4%). City dwellers were also the most common drug users: 57.5% of the total “current users” recorded in 2012 lived in metro areas with more than 1 million people, for example, while less than 1% lived in “rural” areas. Males are almost twice as likely to use as females (11.2% versus 6.8%), though the numbers are rising among both genders. And finally, drug usage among ethnic backgrounds vary widely: 9.1% of whites report being current users, compared to 10.7% of blacks, 3.5% of Asians, and 12.1% of American Indians.

 

3. Each region has their “drug of choice”. Marijuana seems to have the widest fan base, with current users making up at least 5% of the population in every region, but the Pacific West and New England again have the highest rates of current usage here at 10%. The Northeast, and specifically New England, houses the top users of powder cocaine; the South Atlantic is the hub of crack cocaine and hallucinogen usage, though. The Pacific West is the top culprit for inhalant use – which is also most popular in rural areas – and for un-prescribed psychotherapeutics (tranquilizers, sedatives, etc.). The Midwest finally tops a category with illicit use of pain relievers, though the East South Central region of the South is also high on the list.

 

4. According to the CDC, median prices for 0.1-10 grams of the 5 most common drugs are as follows: Powder cocaine – $150; Crack cocaine – $180; Heroin – $650; Meth – $280; Marijuana – $14. For context, we should note that cocaine and marijuana users typically buy “by the gram”, and these numbers coincide closely with reported prices on drug user blogs. Heroin and meth are more expensive partially because of higher purity, partially because of higher risk, and partially because users here tend to buy “by the hit” – which seems to be less than 1 gram. Interestingly enough, marijuana is actually the only drug that has increased in price (in current dollars) compared to its cost in the 1980s. The CDC’s drug price data shows that, in 2007 dollars, powder cocaine costs have dropped by -87.2% (you would have paid $1,000 for the same amount back in 1982), crack cocaine by -66.5%, Heroin by 93.2%, and Meth by -43.1%. Marijuana has doubled from $6.57 in 1981 to about $14 today.

 

According to Streetrx.com and Hightimes.com, though, prices seem to have been relatively stable over the past 10-15 years or so; $20/gram for marijuana, $80-$100/gram for powder cocaine, $20/20 mg of oxycontin, etc. This would seem to imply that drug prices haven’t inflated or deflated in years; perhaps everyone is just getting their fix on the cheap. Or maybe the government is woefully misinformed. What it probably comes down to, though, is demand and supply: millions more people are smoking marijuana, while total drug production for pot, cocaine, and opioids has stepped up in the past decade. Some prices may be on the rise again in the years to come, however, a
s reports show that some top exporters (Columbia, Peru, Afghanistan) are trying to crack down on production.

 

5. Interestingly enough, prices don’t vary too much between the black market and the brick and mortar dispensary, at least in terms of pot. According to a dispensary we spoke to in Colorado, 1/8 ounce packs of marijuana run around $60; it’s about the same on the street, per streetrx.com. And it’s exactly this street competition that keeps dispensary prices low: street dealers don’t have to pay taxes or building costs to keep profits high. As a result, many of these dispensaries find themselves just breaking even.

 

6. Illegal producers, though, are making a killing on mark-ups. According to research by “Drugs Uncovered” in the UK, heroin can sell for 60x its original price in the end market: cocaine can get up to 18x, and marijuana about 3.5x. Most of the money goes to operations, like worker pay and money laundering fees, but there’s no doubt that the kingpins of these organizations are living large off their markup dime. Which leads us to our next point…

 

7. Although unquantifiable, drug money is undoubtedly spent regularly in the luxury retail space. At least once a month police around the world will make a massive drug bust at a gang or kingpin’s home base and discover a kind of “millionaire lifestyle”: luxury cars, jewelry, alcohol, clothing, etc. Drug suppliers might not be the target audience of these luxury retailers, but they’re certainly providing a chunk of what economists call “Marginal demand”.

 

8. While the drug market might generate large amounts of cash for suppliers, its cost to the state is astronomical. Of the roughly 1.6 million people in prison in 2012, some 330,000 were doing time for drug offenses, and at an average cost of about $25,000 per inmate. All together that’s a whopping $8.2 billion. And, interestingly, according to a 2005 paper “Long-Run Trends in Incarceration of Drug Offenders in the US” by J. Caulkins and S. Chandler, higher arrest rates for drug offenders have actually correlated to higher usage rates. Keeping them in prison doesn’t seem to be stopping the flow of drugs.

 

9. The National Institute on Drug Abuse estimates that illicit drug use costs the U.S. $11 billion in healthcare every year, and $193 billion when accounting for crime costs and lost work productivity. Those abusing prescription narcotics and rotating multiple doctors for scripts are estimated to cost insurers $10,000-$15,000 every year.

 

10. Several studies also indicate that legalization of marijuana (and potentially other illicit drugs) in the US would have a net positive impact on the economy. Not only would state and local governments be able to tax sales – which, according to the Cato Institute, could rake in about $8.7 billion per year – but much of the money that we currently spend on incarceration and enforcement would also be saved. It’s not exactly a budget saver, true, but $8.7 billion is nothing to sneeze at either.

The drug economy is nothing new, but according to most of these data points it is an ever-growing and ever-evolving market. As long as it stays underground, we’re unlikely to get a clear reading of its exact size or value, but based on user-reported data and informed estimates we can try to approximate how much it generates and how much it costs. Perhaps once we have those numbers, we can try to figure out how we approach the drug market and its participants.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GguJCOSXT08/story01.htm Tyler Durden

Surprised why FB stock is soaring higher by 15% after hours on results that were a beat but nothing all that spectacular, with $2.02 billion in revenues ($1.91 billion expected), and EPS of $0.25 ($0.19 expected)? Because according to the company, it will soon need to colonize a new planet as it will promptly run out of real, bot-based, imaginary and potential users on planet earth following a ridiculous 25% increase Y/Y in daily active users to 728 million, and a mindblowing 18% increase in Monthly Active Users to 1.19 billion (however look at the charts below to see just where the bulk of the growth comes from).

• Daily active users (DAUs) were 728 million on average for September 2013, an increase of 25% year-over-year.
• Monthly active users (MAUs) were 1.19 billion as of September 30, 2013, an increase of 18% year-over-year.
• Mobile MAUs were 874 million as of September 30, 2013, an increase of 45% year-over-year. Mobile DAUs were 507 million on average for September 2013.

Looking at the financials, of the $2 billion in revenue 90% was from advertising:

• Revenue – Revenue for the third quarter of 2013 totaled $2.02 billion, an increase of 60%, compared with $1.26 billion in the third quarter of 2012.
• Revenue from advertising was $1.80 billion, a 66% increase from the same quarter last year.
• Mobile advertising revenue represented approximately 49% of advertising revenue for the third quarter of 2013.
• Payments and other fees revenue was $218 million for the third quarter of 2013.

… which means that between FaceBook and Twitter, the world’s (but mostly America’s) corporations better have infinite+1 advertising budgets. That, or they better not grasp just what the conversion on every incremental eyeball or click truly is.

Whatever the underlying story, FB has hit escape velocity after hours as any incremental recent shorts just got sledgehammered.

 

Still, before rushing to buy the stock at its all time high, perhaps one should ask if the organic user growth in the US, where the bulk of ad revenue is focused has peaked:

Daily Active Users rose by just 2 million in the US.

 

While Monthly Active Users rose by the smallest quarterly amount in the past 2 years: just 1 million. 

 

And here is why FB users in Asia and Africa are not the same as American users: ARPU.

 

Full investor deck below (pdf):

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/03D5kx4bkVE/story01.htm Tyler Durden

But, but, but… was the common refrain heard across mainstream media – perplexed that i) stocks could close anything but green, and ii) stocks could close green after the FOMC kept the dream alive. Markets broke everywhere (stock and options) and VIX saw flash-smashes a number of times as the great rotation from stocks to levered stocks (i.e. options) continued (in what smells a lot like the ‘what could go wrong’ ‘portfolio insurance’ days of yore). Stocks slid lower into the FOMC, knee-jerked up to VWAP, then skidded to 2-day lows, bounced towards VWAP once again then slumped into the close for the worst day in 3 weeks (down a measly 0.6%). Treasury yields had fallen notably into the FOMC statement and snapped higher after (30Y +4bps on the week). The USD had been rising all week and was smashed higher on the FOMC news (+0.7% on the week). Gold and silver kneejerked lower but bounced back (-0.5% and +0.75% respectively) on the week.

 

VIX went lower post FOMC as it appeared hedgers lifted protection and redced underlying exposure…

 

which is quite clear from this chart…

 

Which provided an artifical lift to stocks that was faded on heavier volume into the close…

 

 

Gold and Silver kneejerked lower but bounced back somewhat…

 

Treasury yields surged higher…

 

and the USD surged (and faded back a little)

 

Credit markets are at 2-week wides – as stocks are just off all-time highs…

 

Charts: Bloomberg

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Fukushima Amplifies Japanese Energy Import Dependence

By Ned Pagliarulo at Global Risk Insights, at OilPrice

When Typhoon Wipha flooded Japan with heavy rains last week, the operator of the Fukushima nuclear power plant ordered precautionary measures to prevent leakage of contaminated water. Ever since the March 2011 earthquake and tsunami caused a reactor meltdown at the plant, Fukushima has become a symbol of a Japanese nuclear strategy and energy supply in disarray. As the clean-up from the disaster continues, all fifty of Japan’s nuclear reactors have been taken offline, creating a large shortfall in energy production that Japan has had to fill from abroad.

Growing dependence on imports

According to the U.S. Energy Information Administration (EIA), Japan falls far short of providing enough energy for its domestic uses, with only 16% domestic energy production. Not surprisingly, Japan needs to import heavily — it is the world largest importer of liquefied natural gas (LNG). Before the disaster at Fukushima and the following reevaluation of nuclear power in Japan, nuclear sources supplied 13% of Japan’s energy consumption. The EIA notes in another report that “Japan’s electric power utilities have been consuming more natural gas and petroleum to make up for the shortfall in nuclear output…” With this shift, fossil fuel use has jumped 21% in 2012 compared to 2011 levels.

High energy costs in the near term (the IMF forecasts that the spot price for crude will remain above $100/barrel for 2014) pose a problem for Japan’s trade balance. As Japan imports more fossil fuels, its trade deficit widens (Japan ran a surplus before 2011). This hurts its current account, which has shrunk considerably. While the depreciation of the yen would usually helps by making exports competitive, the IMF’s Article 4 consultation with Japan noted that the weaker yen has yet to improve the current account.

Between a rock and a hard place 

The higher energy costs in Japan have not, however, turned consumer opinion back in favor of nuclear power. According to a recent poll, 31% of 1,085 Japanese citizens surveyed said they had not felt any pinch from higher utility bills, and 41% said they felt the effect “a little.” This poses a political challenge for Japan. Japan’s leaders would undoubtedly prefer to be able to rely on domestic nuclear energy production, but restarting nuclear reactors with Fukushima continuing to make headlines is political poison.

That leads to a muddled energy strategy. Former Prime Minister Naoto Kan made a promise to end the use of nuclear power in Japan, but his successor (Yoshihiko Noda) ungracefully retreated from a 2040 goal of phasing out all nuclear power. The current Japanese government finds itself caught between businesses who favor nuclear energy production and citizens who still doubt those reactors can be overseen responsibly. For example, a legal claim filed recently appealed the decision not to indict the former heads of Tokyo Electric Power (which oversaw Fukushima). Furthermore, Junichiro Koizumi, a former prime minister and a political heavyweight, recently declared he had changed his stance on the nuclear issue and now opposes atomic power plants.

Energy costs have also intertwined themselves with “Abenomics,” Prime Minister Shinz? Abe’s new stimulus plan. Ending Japan’s dogged deflation is a primary goal, and the economy shows signs of inflation picking up. However, as covered previously on GRI, much of that inflation has to do with the higher energy costs that have come with increased imports. While Abe is eager to claim that inflation as a success, it needs to be broad-based in a way that can contribute to wage growth and boost the economy further.

Bloomberg’s editorial board recently urged the government to better manage the Fukushima issue to rehabilitate the image of nuclear power in Japan. They also noted that restarting reactors would be critical to Abe’s economic plan. While all the reactors do not need to be brought on at once, Japan’s government needs to build a credible strategy, which instills confidence in the Japanese public. The public needs to be reassured that the government can properly regulate and ensure the safety of nuclear power plants. With a stronger domestic energy supply, utility costs for businesses and consumers would hopefully decline and Japan’s economic fundamentals might improve to help further growth.

****

 

Big opportunities are lining up all over the energy sector right now. And energy investors are facing potential windfalls caused by the massive increases in spending. Click here to see the details on each of these trends now. Free 30-day trial to OilPrice’s Premium Newsletter.

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The most succinct post-mortem summary of the FOMC announcement comes from Citi’s Stephen Englander. It is as follows:

After reading the Fed statement, CitiFX Head G10 Strategist Steven Englander says that he would put tapering odds at:

• 20% December
• 45% January
• 25% march
• 10% Beyond March

Before this meeting his estimates would have been:

• 10% December
• 25% January
• 35% March
• 30% Beyond March

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Following Tavenner and Sebelius self-sacrifice in the last two days – despite the grossly partisan questioning (and congratulating) – it seems its time for the Presidential pitchman to take the stand once again. We are sure we’ll be told that you can keep your plans (kinda sorta), that it’s not about the website, and just how great it is for a few hand-picked kids with diabetes, moms with cancer, and veterans that the rest of Americans should be happy to pay up for. We will also be keeping an eagle eye open for any feinting…

 

 

Live Stream:

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Submitted by Lance Roberts of STA Wealth Management,

 

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