Goldilocks And The Dog That Didn't Bark

Submitted by Ben Hunt of Epsilon Theory

Det. Gregory: Is there any other point to which you would wish to draw my attention?

Holmes: To the curious incident of the dog in the night-time.

Det. Gregory: The dog did nothing in the night-time.

Holmes: That was the curious incident.

      — Arthur Conan Doyle, “Silver Blaze”

Goldilocks And The Dog That Didn’t Bark

The market was down more than 2% last Monday. Why? According to the WSJ, CNBC, and all the other media outlets it was “because” investors were freaked out (to use the technical term) by poor US growth data. Disappointing ISM number, car sales, yada, yada, yada. But then the market was up more than 2% last Thursday and Friday (and another 1% this Tuesday), despite a Friday jobs report that was more negative in its own right than the ISM number by a mile. Why? According to those same media arbiters, investors were now “looking through” the weak data.

Please. This is nonsense. Or rather, it’s an explanation that predicts nothing, which means that it’s not an explanation at all. It’s a tautology. What we want to understand is what makes investors either react badly to bad news like on Monday or rejoice and “look through” bad news like on Friday. To understand this, I sing the Epsilon Theory song, once more with feeling … it’s not the data! It’s how the data is molded or interpreted in the context of the dominant market Narratives.

We have two dominant market Narratives – the same ones we’ve had for almost 4 years now – Self-Sustaining US Growth and Central Bank Omnipotence.

The former is pretty self-explanatory. It’s what every politician, every asset manager, and every media outlet wants to sell you. Is it true? I have no idea. Probably yes (technological innovation, shale-based energy resources) and probably no (global trade/currency conflict, growth-diminishing policy decisions). Regardless of what I believe or what you believe, though, it IS, and it’s not going away so long as all of our status quo institutions have such a vested interest in its “truth”.

The latter – Central Bank Omnipotence – is something I’ve written a lot about, so I won’t repeat all that here. Just remember that this Narrative does NOT mean that the Fed always makes the market go up. It means that all market outcomes – up and down – are determined by Fed policy. If the Fed is not decelerating an easy money policy (what we’ve taken to calling the Taper), the market goes up. If the Fed is decelerating its easy money policy, the market goes down. But make no mistake, the Common Knowledge information structure of this market is that Fed policy is responsible for everything. It was Barzini all along!

How do Narratives of growth and monetary policy come together? Well, there’s one combination that the stock market truly and dearly loves – the Goldilocks scenario. That’s when growth is strong enough so that there’s no fear of recession (terrible for stocks), but not so strong as to whip the flames of inflation (not necessarily terrible for stocks, but sure to provoke the Fed tightening which is terrible for stocks).

Over the past few years the Goldilocks scenario has changed. Inflation is … well, let’s be straight here … inflation is dead. I know, I know … our official measures of inflation are all messed up and intentionally constructed to keep the concept of “inflation” and the Inflation Narrative in check. I get that. But it’s the Narratives that I care about for trying to predict market behaviors, not the Truth with a capital T about inflation. If you want to buy your inflation hedge and protect yourself from the ultimate wealth-destroyer, go right ahead. At some point I’m sure you’ll be right. But I’m in a business where the path matters, and I can’t afford to make a guess about where the world may be in 5 to 10 years and just close my eyes. The Inflation Narrative is, for the foreseeable future, dead. It’s a zombie, as all powerful Narratives are, so it will return one day. But today Goldilocks has nothing to do with inflation.

The Goldilocks scenario today is macro data that’s strong enough to keep the Self-Sustaining US Growth Narrative from collapsing (ISM >50 and positive monthly job growth) but weak enough to keep the market-positive side of the Central Bank Omnipotence Narrative in play. That’s the scenario we’ve enjoyed for the past few years, particularly last year, and it’s the scenario that our political, economic, and media “leaders” are desperate to preserve. So they will.

On Monday we had bad macro data on the heels of the Fed establishing a focal point of $10 billion in additional Taper cuts per FOMC meeting, a clear signal that monetary easing is decelerating on a predictable path. This is the market-negative side of the Central Bank Omnipotence coin, which turns bad macro news into bad market news. And so we were down 2%. And so the Powers That Be started to freak out. Did you see Liesman on CNBC after the Monday debacle? He was adamant that the Fed needed to reconsider the path and pace of the Taper.

And then we had Friday. Honest to God, I thought Liesman was going to collapse of apoplexy, what my Grandmother would have called a conniption fit, right there on the CNBC set. The Fed MUST reconsider its Taper path. The Fed MUST do everything in its power to avoid even a whiff of deflationary pressures. Heady stuff. By 10 am ET that morning the WSJ was running an online lead story titled “U.S Stocks Rise as Focus Returns to Fed”, acknowledging and promulgating the dynamic behind bad macro news driving good market news.

It’s not necessary (and is in fact counter-productive from a Narrative construction viewpoint) to switch the Fed trajectory 180 degrees from Taper to no-Taper. What’s necessary is to inject ambiguity into Fed communication policy, particularly after the non-ambiguous FOMC signal of two weeks ago that led directly to Monday’s horror show. The need for ambiguity is also something I’ve written a lot about so won’t repeat here. But this is why Hilsenrath and Zandi and all the rest of the in-crowd are writing that the Taper is still on track … probably. Unless, you know, the data continues to be weak. What you’re NOT seeing are the articles and statements by the Powers That Be placing a final number on QE3, extrapolating from the last FOMC meeting to a projected QE conclusion. And that’s the dog that didn’t bark. It’s the projection that Yellen won’t be asked about in her testimony; it’s the article that won’t be written in the WSJ or the FT. Is the Taper still on? Two weeks ago the common knowledge here was “Yes, and how.” Today, after a stellar bout of Narrative construction, the answer is back to “Yes, but.” That’s the ambiguous, “data dependent” script that Yellen and all the other Fed Governors now have the freedom to re-assert.

If I’m right, what does this mean for markets? It means that our default is a Goldilocks scenario between now and the next FOMC meeting in mid-March. It means that bad macro news is good market news, and vice versa. If the next ISM manufacturing number (no one cares about ISM services) is a big jump upwards, the market goes down. Ditto for the February jobs number. If they’re weak, though, that’s more pressure on the Fed and another leg up for markets.

Place your bets, ladies and gentlemen, the croupier is about to spin the roulette wheel. Pardon me if I sit this one out, though. My crystal ball is broken.

If I’m rig
ht, what does this mean for the real world? It means an Entropic Ending to the story … disappointing, slow and uneven growth as far as the eye can see, but never negative growth, never an honest assignment of losses to clear the field or cull the herd. That’s not my vision of a good investment world, but who cares? I’ve got to live in the world as it is, even if it’s a long gray slog.


via Zero Hedge Tyler Durden

Are Millions of Business People At Risk of Dying In Collapsing Buildings?

This is one in a series of safety-related public service announcements.

Death Traps?

Millions of people work in or visit high-rise buildings … assuming the buildings were more or less safe.

But it turns out that there is a severe, lethal risk of sudden collapse in even the best-made skyscrapers in America, Britain, Germany, Japan and other nations worldwide.

A New Understanding

Before 9/11, no modern steel-frame high-rise building had ever collapsed due to fire.

9/11 radically changed our understanding of architecture and engineering …

Specifically, 3 steel-frame buildings collapsed on that day. That includes one that was never hit by a plane, and had only small, isolated office fires prior to its collapse.

This was unexpected, as much hotter, longer-lasting fires have never before brought down a modern steel-frame office building.  For example, the 2005 Madrid skyscraper fire “reached 800 degrees Celsius (1,472 F), said Javier Sanz, head of Madrid firefighter”  and lasted some 20 hours without collapsing.

In other words, officials who write building codes, architects and structural engineers had never before worried about small office fires causing office buildings from collapsing.

Appendix A of the Federal Emergency Management Agency’s World Trade Center Building Performance Study notes:

In the case of the fire at One Meridian Plaza, the fire burned uncontrolled for the first 11 hours and lasted 19 hours. Contents from nine floors were completely consumed in the fire. In addition to these experiences in fire incidents, as a result of the Broadgate fire, British Steel and the Building Research Establishment performed a series of six experiments at Cordington in the mid-1990s to investigate the behavior of steel frame buildings. These experiments were conducted in a simulated, eight-story building. Secondary steel beams were not protected. Despite the temperature of the steel beam reaching 800-900 °C (1,500-1,700 °F) in three tests (well above the traditionally assumed critical temperature of 600 °C [1,100 °F]), no collapse was observed in any of the six experiments.

Underwriters Laboratories tested the steel components at the Twin Towers and found they could withstand fires for hours without failure:

“NIST [the government agency – National Institute of Standards and Technology, a branch of the Department of Commerce – responsible for investigating the collapse of the 3 buildings on 9/11] contracted with Underwriters Laboratories, Inc. to conduct tests to obtain information on the fire endurance of trusses like those in the WTC towers…. All four test specimens sustained the maximum design load for approximately 2 hours without collapsing… The Investigation Team was cautious about using these results directly in the formulation of collapse hypotheses. In addition to the scaling issues raised by the test results, the fires in the towers on September 11, and the resulting exposure of the floor systems, were substantially different from the conditions in the test furnaces. Nonetheless, the [empirical test] results established that this type of assembly was capable of sustaining a large gravity load, without collapsing, for a substantial period of time relative to the duration of the fires in any given location on September 11.” (NIST, 2005, p. 140).

Other fire tests have also failed to cause failures at high temperatures.

So the collapse of World Trade Center Building 7 on 9/11 (not hit by a plane) was a surprise … and should be a huge concern to the millions of people who work in office buildings worldwide.

To get to the bottom of this issue, Washington’s Blog reached out to a former manager at Underwriters Laboratories – Kevin Ryan – to seek reassurance that the danger was small for the millions of financial services industry workers, business men, lawyers, web executives, and others who work in office buildings:

[Question]  Wasn’t the steel used in the Twin Towers and Building 7 of inferior quality?  So as long as builders use better-quality steel, can’t we be assured of safety?

[Kevin Ryan]   The steel used to build WTC Building 7 was the standard grade for high-rise construction–still used to this day–called ASTM A36 grade steel. It was not inferior in any way from the steel used to make many of the other high-rise buildings in America.

For the Twin Towers, fourteen different grades of steel were used in the construction, including A36, which has a nominal strength of 36 ksi.  The other grades used were higher strength steels like 100 ksi WEL-TEN steel which was manufactured in Japan and shipped to the States. The steel used in the Towers was actually far superior to typical structural steel.

The official government reports on the destruction of the WTC buildings did not find any problem with the quality of the materials or construction methods used. And although those reports did make some recommendations for changes to building codes, those changes have not been incorporated in municipal codes or adopted by the building construction community.

[Question]   You write in Foreign Policy Journal:

“And if people actually understood and believed the official account of what happened at the WTC they would not enter tall buildings because in doing so they would be putting their lives at risk.”

What do you mean?

[Ryan]  What I mean is that high-rise buildings are designed and constructed to withstand fires that are much worse than what we know existed in WTC Building 7. My former company, Underwriters Laboratories (UL), plays a big part in that process. We know that UL did the fire resistance testing that was behind the selection of the steel components for WTC7 because that fact is in the NIST WTC7 report. Therefore the steel columns and floor assemblies should have withstood 2 to 3 hours of intense fire in a testing furnace, as required by the NYC code.  But on 9/11, the fire lasted only 20 minutes in any given area, a fact that NIST admits, and the entire structure was destroyed due to an inexplicable failure to resist fire.

Moreover, NIST abandoned its previous hypotheses that suggested the destruction of WTC7 might have resulted from diesel fuel fires, or damage from falling debris, or the design of the building. In the end, NIST said that it was only the effects of the fire fed by office furnishings, on fully-fireproofed steel components, that caused the total destruction of this 47-story building. And since no actions have been taken to retrofit any existing high-rise buildings, we must assume that what happened to WTC7, according to the official account, could happen to any tall building that experiences a typical office fire.

No Change (?!)

Given that 9/11 totally changed our understanding of how dangerous small office fires could be, we couldn’t believe Ryan’s claim that “changes have not been incorporated in municipal codes or adopted by the building construction community.”

So Washington’s Blog contacted Richard Gage,  a practicing architect for more than two decades, who has worked on most types of building construction, including one project which used  around 1,200 tons of steel framing:

[Question] Have high-rise architects and engineers changed how they build skyscrapers, to prevent collapses after 9/11?

And have they changed how they build skyscrapers to prevent office fires from knocking down steel buildings?

[Richard Gage] No – they haven’t made any structural changes.

No structural changes?!

Either building code writers, architects and engineers are cavalierly ignoring this catastrophic new understanding of the extreme danger of small office fires, or the investigation into the collapse of World Trade Center building 7 on 9/11 was flawed.

No wonder New York residents have launched a High Rise Safety Initiative to try to protect the safety of those who work or visit office buildings.

Postscript:  Until this issue is resolved through a complete revision of building codes and architectural and engineering practices, we recommend that everyone stay out of office buildings. Because if even small office fires can cause the whole building to collapse, it’s just not worth the risk to go inside.


via Zero Hedge George Washington

The European Debt Crisis Visualized

At the heart of the European debt crisis is the euro, the currency that ties together 17 countries in an intimate manner. So when one country teeters on the brink of financial collapse, the entire continent is at risk. The following excellent mini-documentary visually explains how such a flawed system came to be… and what’s next?



via Zero Hedge Tyler Durden

“Foreclosure Rebound Pattern”: Foreclosure Starts SUDDENLY Jump 57% in California (And Soar In Much Of The Country)

Wolf Richter

From Federal-Reserve-fueled bubble to debilitating return to reality – reality being a financial calamity – to Federal-Reserve-hyper-fueled bubble: that’s the US housing market over the last ten years. There are many places around the country, including some cities in Silicon Valley, where home values are now higher than they were at the peak of the last bubble. Of course, no one at the Fed or in government calls it “bubble.” They’re talking about the housing “recovery.”

But the excesses and speculators are back, and private equity funds and highly leveraged REITs are all over it, buying up every single-family home in sight, and now Wall-Street-engineering firms have come up with a new and improved contraption, a synthetic structured security that on its polished surface looks like that triple-A rated mortgage-backed toxic waste that helped blow up the banks. But this time, it’s different. The securities are backed by sliced and diced rental payments from single-family homes that are, hopefully, rented out [read…. Another Exquisitely Reengineered Frankenstein Housing Monster].

So wither this “recovery?”

Foreclosure filings – default notices, scheduled auctions, and bank repossessions – suddenly jumped 8% to 124,419 in January across the nation, according to RealtyTrac. Which left some people scratching their heads. A mild uptick was expected after the holidays, but 8%? And what about the polar vortices – weren’t they supposed to have slowed things down to a crawl?  

OK, foreclosure filings were still down 18% from a year earlier, the 40th month in a row that they declined on an annual basis. But it was the smallest annual decline since September 2012. And the 8% jump from December was the largest such increase since May 2012. Crummy as they were, these national averages covered up some, let’s say, interesting phenomena in a number of states.

“The sharp annual increases in some states shows that many states are not completely out of the woods when it comes to cleaning up the wreckage of the housing bust,” said RealtyTrac VP Daren Blomquist. “The foreclosure rebound pattern is not only showing up in judicial states like New Jersey, where foreclosure activity reached a 40-month high in January, but also some non-judicial states like California….

Ah, my beloved state of California. Housing has been booming, and prices in coastal areas have been soaring – along with rents, to the point that mini-rebellions are breaking out. In this hyped and glorified housing market where the Big Money rules and where first-time buyers have been shoved aside unceremoniously, where foreclosure starts in 2013 had plunged 60% from 2012, and had declined year-over-year for 17 months in a row, or with the exception of five months, had declined four years in a row, well, in this wondrously recovered housing market, foreclosures starts in January suddenly jumped 57%.

It’s not just in California. Foreclosure starts rose 10% from December to hit 57,259 properties across the country. That they on average were still down 12% from a year earlier obscured major annual increases in certain individual states, and not just in one or two, like us crazies out here in California, but in 22 states! And California with its 57% jump in foreclosure starts now suddenly seems tame: In New Jersey, they soared 79%, in Connecticut 82%, and in Maryland 126%!

The cynic in me says the sudden and dizzying jump in foreclosure starts, not only in California but in much of the country, must be some kind of data problem. Maybe RealtyTrac’s computers got hacked by some evildoer who was short the housing market or something. But when I contacted RealtyTrac to request permission to republish the chart, there was no word of a retraction, though this would have been a good opportunity, and so the numbers hold.

Maybe foreclosure starts in February and March will somehow, miraculously, plunge and return to trend. Maybe January was just a fluke. But that may be wishful thinking. Instead, it could be the indication of a turning point of sorts, like some of the other indications we’ve already observed, and maybe the strange sound that we’re hearing out there is the hot air hissing out of this whole construct, so carefully inflated by the Fed, and so assiduously taken advantage of by private equity funds and other Wall Street outfits with access to the Fed’s nearly free money.

Meanwhile, my beloved state of California, whose $2 trillion economy is the eight largest in the world ahead of Italy and Russia, has a new problem: it’s awash in cash. It’s projecting multi-billion dollar surpluses for years to come. The feeding frenzy in Sacramento is a sight to behold. Read…. California MUST Have Magnificent, Endless Bubbles in Housing, Stocks, And IPOs – Or Go Broke Again


via Zero Hedge testosteronepit

Martin Armstrong Exclaims “The Entire Social Contract Is Collapsing”

Submitted by Martin Armstrong via Armstrong Economics,

The German high court has ruled that children MUST take care of their parents even if they have not spoken to them in 27 years.

The entire social contract is collapsing.

The historical norm of children taking care of their parents was displaced with the New Deal where government stepped in to provide the safety-net.

Now the high court has ruled that it is the child’s responsibility. So what are all these taxes for?

German politicians earn more than 4 times the average politician. Government costs money – it is not an entitlement to extract taxes from the people.


via Zero Hedge Tyler Durden

Martin Armstrong Exclaims "The Entire Social Contract Is Collapsing"

Submitted by Martin Armstrong via Armstrong Economics,

The German high court has ruled that children MUST take care of their parents even if they have not spoken to them in 27 years.

The entire social contract is collapsing.

The historical norm of children taking care of their parents was displaced with the New Deal where government stepped in to provide the safety-net.

Now the high court has ruled that it is the child’s responsibility. So what are all these taxes for?

German politicians earn more than 4 times the average politician. Government costs money – it is not an entitlement to extract taxes from the people.


via Zero Hedge Tyler Durden

A Tale Of Two Extremes: Global Inflation In One Chart

While Europe, and the bulk of the Developed World is struggling to dig out of its unprecedented credit crunch (in which central banks are the only source of credit money which instead of entering the economy is stuck in the capital markets via the reserve pathway) and resulting deflation, the rest of the Emerging Market world is doing just fine. If by fine one means inflation at what Goldman calls, bordering on “extreme levels.” This is shown in the chart below which breaks down the Y/Y change in broad prices across the main DM and EM countries, and which shows that when talking about inflation there are two worlds: the Emerging, where inflation is scorching, and Developing, where inflation is in a state of deep freeze.

What is notable here is that despite hopes for a convergence between the inflationary trends in the Developed (downside extremes) and Emerging (upside extremes) world for the past year, what has happened instead is an acceleration of the process especially in recent weeks as EMs have been forced to devalue their currencies at an ever faster pace in order to offset the impact of the taper, leading to surging inflation as Turkey, Argentina, and Venezuela among many others, have found out the hard way in just the past month.

And as inflation in EM nations continues to roil ever higher not only does the implicit exporting of deflation to the DM accelerate, but it means that their societies approach ever closert to the tipping point when the citizens decide they have had just about enough with their government and/or their currency and decide to change one and/or the other. Hopefully, in a peaceful matter.


via Zero Hedge Tyler Durden

The Un-Taper? Stocks Up, Bonds Up, Gold Up, Oil Up, USD Down

It seems Janet has some work to do on her "communications". Judging by today's follow-through on dismal retail sales data (and a miss for claims), stocks, bonds, and gold screamed higher (and the USD lower) suggesting an increasing crowd does not believe the QEeen's "stay the taper course" meme. The S&P 500 rallied 25pts off early lows – practically in a straight-line, dislocated from JPY-carry, dislocated from bonds, and coupled almost perfectly with gold after Europe close. Nasdaq is up 6 days in a row and back near multi-year highs (+1.5% in 2014) as "most shorted" stocks were ripped 2.5% higher intraday. Gold closed back above $1,300 (outperforming on the week and since Taper); Treasury yields tumbled 6-7bps; and the USD Index dropped 0.5% led by EUR and GDP strength. VIX traded under 14% briefly. Bad news is great news once again. This is the Nasdaq's best 6-day run in 27 months.



The Nasdaq bounced perfectly off its 100DMA and has rallied 6.8% in the last 6 days – its best run since December 2011…


This morning saw Nasdaq open right at unchanged for 2014 and found support…


As "most shorted" stocks were crushed higher…


QE-maven Materials and Discretionary and Homebuilders are leading the way off last week's lows as they anticipated Yellen printing to oblivion… but she didn't!!


But stocks decoupled from USDJPY and bonds – and found a new friend in gold…


Commodities all rallied today with Gold outperforming…


And Treasuries (espeially the long-end) have almost recovered all the post-Yellen losses…


FX markets were more volatile with EUR and GBP strength dragging the USD Index lower…



Charts: Bloomberg


via Zero Hedge Tyler Durden