Month: November 2014

Submitted by Raúl Ilargi Meijer of The Automatic Earth

Japan: QE As Morphine For A Terminal Patient

You can jot down Halloween 2014 in your calendar, and it’s unfortunately too tragic to make proper use of the irony involved, as the day Japan committed suicide. The sun is no longer rising. Not that the vital signs weren’t bad before, indeed it might not have survived regardless, but this lethal blow announced today is still quite the statement.

That financial markets interpret it as a reason to cheer and party and make lots of dough is yet one more proof of how shallow and single-minded the people operating in these markets are, lacking all insight in historical context, longer term consequences, wars and politics, and the human mind.

Because the ‘QE as morphine’ concept introduced today by the megalomaniac Shinzo Abe and his central bank raving mad puppets will change the world in ways that make financial gain less than even an afterthought, except perhaps for those of us who cannot see beyond today, or beyond the one single lonely dimension money is of any use in.

If and when a country resorts to having it central bank buy up – the equivalent of – all sovereign bonds it issues, the snake truly eats its tail, and not in a metaphorical sense. Japan eats it children, most of them as yet unborn, to keep its rapidly ageing population contented and in relative wealth, because the alternative would cost Tokyo’s financial-political power cabal their jobs and heads.

Japan’s problem is, and has been for many years, twofold: first, the Japanese people lost the spending power to keep the domestic real economy growing some 20 years ago and never got it back, and second, a whole slew of successive governments refused to restructure the debts in the financial sector, and instead put those debts on the public tally.

The negative growth announced today in US consumer spending should be a warning sign, as should similar numbers that have come from across Europe for a while now, a sign that we need to think about how to run our societies and economies without everlasting growth, and without the ever more failing and ever more costly policies aimed at constructing and maintaining that growth.

However, the worse the policies are for the real economy and the people who depend on it for survival, the more money the financial markets, and the banks, make. It truly is QE as morphine, and Japan has shown us today that morphine can alleviate pain, but it is also in the end the ultimate killer.

It may already be too late, but we can still make the effort to not fall into the same trap Japan has fallen in. Which in essence is simply trying to recreate a past world that is long gone, by applying measures that ‘wise men’ say are sure to bring back the past, and then more.

We must look at ourselves and wonder why we want more. And realize that if we don’t take that look, and we continue on our present path, we will all end up like Japan, guaranteeing that our quest for more will leave us with less, much less. We cannot build our world with credit, we need to work in order to build it. And we cannot borrow our way into growth, nor do we need to grow.

Halloween 2014. A day we could have learned something.

via Zero Hedge http://ift.tt/1G6E6jx Tyler Durden

The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way.

 

Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.

 

Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.

 

In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…

 

$1.4 trillion is…

 

1)   The equivalent of 24% of Japan’s total annual economic output.

2)   Enough to fly every human being in Japan to California for a 2-week vacation.

3)   The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.

 

Moreover, with $1.4 trillion, you could…

 

1)   Buy Australia’s entire economy for a year.

2)   Fund NASA for the next 82 years.

3)   Treat every person on the planet to a $200 five star-dinner at one of New York’s top restaurants.

 

The program has been a complete failure. Japan’s GDP growth accelerated for only two quarters before turning down again. The misery index in Japan has hit a 33-year high as households were crushed by riding prices.

 

Even exports, which were supposed to be the primary beneficiaries of a weakening Yen, have tanked. According to CLSA, real exports remain 16% below the 2008 peak in real terms. Sony, the once great electronics giant of Japan slashed its profit outlook by 70% and canceled its dividend for the first time in 50 years.

 

In simple terms, Abenomics has failed to revitalize Japan. In very specific terms a single QE program equal to over 24% of Japan’s GDP FAILED to generate sustainable growth in GDP, jobs, or even exports.

 

So what did the Bank of Japan do?

 

It increased its QE efforts.

 

It is now clear that Central Banks will do absolutely anything but admit failure. Japan has proven point blank than QE does not create growth. Instead of admitting this, the Bank of Japan has chosen to increase QE.

 

This is only going to usher in the next round of the Great Crisis that much faster. Only this time around, entire countries will go bust, NOT just banks.

 

Don’t let the second round of the financial crisis crush your portfolio… we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

 

You can pick up a FREE copy at:

http://ift.tt/1rPiWR3

 

Best Regards

Phoenix Capital Research

 

 

 

 

 

 

 

 

 

via Zero Hedge http://ift.tt/1G6E5fI Phoenix Capital Research

Earlier this week the Fed’s QE3 ended… and less than 48 hours later the Bank of Japan boosted its own bond (and stock) monetization program. The good news is that by now it is clear to everyone, including CNBC, that the world is so addicted to some form of global central bank liquidity injection that the mere thought of going without a monetary policy “flow” backstop can only last for a couple of days.

Why is that? That answer, by now, is also obvious: the “wealth effect”, i.e., the rich getting richer and leading to wealth inequality that surpassed the levels of either the pre-Great Depression days, and according to some, the pre-French revolution.

However, until now it was virtually impossible to quantify the “wealth effect” channel courtesy of the Fed. Overnight, however, JPMorgan did the math, and we now know. Here is JPM’s Nikolaos Panigirtzoglou with the explanation:

The decline in asset yields especially during QE3 created large wealth effects. Since the Fed’s QE started at the end of 2008 the PE multiple of the S&P500 index (12-month forward) went up by five points, from 10.5 at the end of 2008 to 15.5 currently. This PE multiple expansion is responsible for around 650 index points or 32% of the current S&P500 index level. Extending that to the total stock of US corporate equities ($29tr currently), it implies an equity wealth boost of $9tr.

Actually according to many the current PE, when one strips away the non-GAAP gibberish of the second dot com bubble and those hundreds of billions in recurring, ordinary course of business “one-time, non-recurring” criminal and legal charges for America’s criminal banks, is about 19, which means 9 point of S&P PE expansion, or about 1200 S&P points, which also means that virtually the entire increase since the lows of 2009 has been due to the Fed. Nuances aside, you get the message.

Similarly, the yield compression in property over the past few years also created large wealth effects. On our calculations the yield compression alone boosted US house prices by around 10% and US commercial property prices by around 20%. Applying this to total US housing universe of $22tr and a tradable US commercial property universe of $2.3tr, it implies a property wealth boost of around $2.5tr.

Indicatively, property is where the vast bulk of the “non-1%” wealth is located, suggesting that even its wealth channel itself has been abnormally levered toward those who own the vast majority of financial assets: less than 10% of the population.

Another way of showing this finding is with the Household Net Worth chart from the Fed’s quarterly Flow of Funds report. In it we find that of the $13.6 trillion increase in household net worth from the last bubble peak in 2007, when households had an aggregative wealth of about $68 trillion (mostly in financial assets), through the most recent, Q2 $81.5 trillion, $11.5 trillion is due to the Fed.

 

Finally, we doubt this needs to be highlighted, but in case anyone is still confused who was the only beneficiary of this surge in financial-related “wealth”, here it is again:

Household Net Worth Just Hit A Record High: Here Is Who Benefited

Since the end of the first quarter of 2009 — when the stock market bottomed — households’ collective net worth has increased by $26.5 trillion. More than 75% of that increase — $20.1 trillion — reflects the change in market value of assets. Gains in the value of real estate assets account for $3.6 trillion of that increase, while gains in the value of financial assets account for the rest.

Of various classes of financial assets, equities held directly by households increased in value the most over the last six years, rising in value by $9.2 trillion. Today’s Chart of the Day shows the cumulative gains in the market value of equities held directly by households.

Not that many households hold equities directly, however. (And it’s important to remember that the household data in the Z.1 report includes holdings of hedge funds, private equity funds and personal trusts.) The Fed’s 2013 Survey of Consumer Finances showed that just 13.8% of families held stocks directly in 2013, down from 17.9% in 2007 before the financial crisis. Our next chart shows the percentage of families with direct holdings of stocks by income percentile in each of the SCFs since 1989.

The share of all families holding stocks directly peaked in 2001, after the dot-com bubble. The share of families holdings stocks declined for most income percentiles from 2001 to 2013, even those families in the 90-100th income percentile.

Bottom line: the gains in net worth associated with holding stocks directly have been concentrated among a relatively small number of households.

* * *

We lay this out there just in case the Fed’s Chairperson Janet Yellen is again “confused” in the not so near future about the source of America’s record wealth inequality…

via Zero Hedge http://ift.tt/1wQUAGi Tyler Durden

The US dollar had a good week to close out October.  It was bolstered to new highs against the euro and yen.  It is driven by both positive developments in the US and negative developments in Europe and Japan.  

 

There were two highlights from the US.  First, the FOMC statement was read with a hawkish tilt. The decline in inflation expectations seemed to have been played down while the improvement in the labor market was recognized.   The two hawks that dissented last time, joined the majority, while there was new dovish dissent.  Q3 US GDP surprised on the upside.  

 

Second, the preliminary estimate of 3.5%, was above the 3.0% consensus, and the 4.2% rise in final sales was the strongest since 2010.  The April-September period is the best six-month economic performance in the US since the second half of 2003.  

 

Underpinning the dollar has been a shift in the pendulum of market expectations of Fed policy. During the panic in the middle of October, the effective Fed funds rate at the end of 2015 fell to 32 bp, according to the December 2015 Fed funds futures contract.  It finished last week at 53 bp, which is almost half way back to where the contract finished September (77 bp). 

 

Developments on the US are positive for the dollar, but developments in Europe and Japan have been negative for their respective currencies.  The lowest inflation in nearly a year, and apparent confirmation that the large government pension fund (GPIF, which acts as a path setter for other pension funds) will reduce its JGB purchases, spurred the BOJ’s unexpected decision to increase its asset purchases from JPY60-JPY70 trillion to JPY80 trillion.  This sent the yen reeling.  The dollar soared to near JPY112.50, the highest level since late-2007. 

 

The dollar’s 3.8% advance against the yen was the largest in seven years and pushed the greenback well above its upper Bollinger Band, which is set two standard deviations above the 20-day moving average.  In fact, dollar finished the week near 3.5 standard deviations away from the 20-day moving average.  This should make one cautious even though the RSI and MACDs look constructive.   

 

Since the high was recorded, the dollar has not been below JPY111.80.  A break of this area could spur a move toward JPY111.00.  The dollar’s pullbacks may be limited because many weak longs had already been squeezed out on the pullback to almost JPY105.25 in the middle of October. In addition, the  bulls are not just talking about JPY115.00, but JPY120.  

 

Euro area data, especially until the end of the week, was generally better than expected.  These reports included the Asset Quality Review and stress tests, PMI, M3 money supply and the bank lending survey.  The euro’s rally fizzled mid-week near $1.2770, from which it staged a reversal and an outside down day.  Data in the second half of the week, including German and French retail sales and soft German inflation figures pushed a soft market even lower.  

 

The euro was pushed to almost $1.2485 before the weekend.  The technical tone is poor.  The RSI continues to head lower, (but is not over-extended), and the MACDs have turned down.  The only note of caution comes from the weekly close below the lower Bollinger Band (~$1.2550).  There is little chart support until $1.20.   Initial resistance is pegged near $1.2560 and then $1.2600-20.  

 

The inverse head and shoulders pattern sterling appeared to have carved out failed.  Sterling has found bids below $1.60, but the upside may be limited.  Initial resistance is seen in the $1.6060-70 area, more formidable resistance near $1.6200 seems miles away.   

 

The Australian dollar was the only of the major currencies to have held its own against the US dollar last week. The RSI is neutral, and the MACDs are set to cross.  A rally into the $0.8880-$0.8900 will likely be sold while initial support is seen in the $0.8770 area.  

 

The Canadian dollar was pushed lower ahead of the weekend by a poor August GDP figure.  The 0.1% contraction is the first such contractions this year.  The US dollar appears to be comfortable in a CAD1.12-CAD1.13.  A close beyond that range may point to the direction of the next big figure move,  

 

The strong dollar environment is too much for the peso.  At the start of last week, the dollar pushed above MXN13.60, before reversing.  In the second half of the week, the greenback tested MXN13.40 and found bids there.    Look for a test on the dollar cap again in the week ahead.  

 

 

Observations based on speculative positioning in the futures market:  

 

1.  There were no significant (more than 10k contracts) adjustment in the gross currency futures positions in the CFTC reporting week ending October 28.  Of the 14 gross positions we track, only four changed by more than 5k contracts.  

 

2.  The bearish currency view is highlighted by the increase gross short position, except for the yen (-7.1k contracts to 91.3k) and Canadian dollar (-2.9k contracts to 47.5k).  Gross long positions mostly fell, except for sterling (+4.2k contracts to 40.7k) and the Australian dollar (+3.5k contracts to 17.4k)

 

3.  The net short yen futures position has been nearly halved to 67.4k contracts early September.  It is the smallest since July.  This has been mostly a function of short covering.  The gross short position has fallen by 60k contracts over the past four reporting periods.  The gross long position has fallen by about 6k contracts over the same period.   The yen’s sell-off in the second half of last week occurred as the gross short yen position was the smallest in two months.

 

4.  The gross short 10-year US Treasury futures position was cut to 35.8k contracts from 90.0k.  The longs were trimmed by 25.5k contracts to 431.2k.  The gross short position fell 79.7k to 467.1k contracts.  

via Zero Hedge http://ift.tt/1wQUyOJ Marc To Market

Submitted by Erico Tavares of Sinclair & Co.

Thoughts on Prosperity in America

With equity markets at all-time highs, does this mean that prosperity in the US is also at record levels?

The 1980s were a great time for many Americans. Jobs were plentiful. The civilian unemployment rate went from almost 11% in November 1982 to around 5% by May 1989. The number of households making more than $75,000 per year (in today’s money) increased by almost seven percentage points from the low in 1982 to the end of the decade. A new sense of optimism pervaded the nation. The hit song “The Future’s So Bright, I Gotta Wear Shades” rocked the airwaves. After enduring some terrible years in the prior decade, America came roaring back.

“The Future’s So Bright, I Gotta Wear Shades” by the US band Timbuk3, 1986

The Economist magazine agreed. In its “The World in 1988” publication, the US was ranked as the best place to be born out of 50 countries. It seemed as if American babies back then should all be wearing shades indeed.

So how did things turn out for them and their parents?

By definition, in a truly prosperous country the wealth going around rises and becomes more accessible to an increasing number of people. Stated differently, the percentage of households that earn more than a certain amount steadily rises, drawing in people from the poorer sectors of society.

The US Census Bureau provides information annually on income levels adjusted for inflation in America, with the most recent report (for 2013) published last September. Is there one that we can use as the most representative of a minimal prosperity threshold?

In a 2010 Princeton study, Daniel Kahneman and Angus Deaton found that making more than $75,000 per year will not significantly improve the emotional wellbeing of American households as a whole. It’s not like you have “made it” once you start making more than that; it’s just that the marginal comfort you get out of most things in life is much less than at lower income levels. OK, there are variations by State given different cost structures and even in attitudes towards money (it might be hard to get a date in New York City earning just that), but this seems like a reasonable demarcation line.

Therefore, we will assume that America is getting more prosperous (or at the very least getting more materially satisfied, according to Kahneman and Deaton) if an increasing percentage of households make more than $75,000 per year, which we will call the “prosperity line”.

Here’s how it looked like going back to the early 1980s:

Households Split by Selected Income Levels (in 2013 CPI-U-RS adjusted dollars)(%): 1979-2013
Source: US Census Bureau.

After the recession in the early part of the 1990s, the prosperity line just kept on rocking through the end of the decade. Not only people were getting richer, but less and less people at all lower income levels were staying poor, as evidenced by the decline in their respective lines.

The boom times were back. Technology was the new rage, promising a whole new era of corporate efficiency and affordable gadgets purchased online. Inflation was a fading memory and the great moderation was in. Equity markets were rising exponentially. Civilian unemployment dropped to levels not seen in thirty years. Everyone was getting rich. It was time to wear shades again.

“Californication” by the US band Red Hot Chili Peppers, 1999

Then the new century came, the tech bubble popped and the economy went south in short order. The ensuing recession turned out to be the deepest in a generation. As the bills came due, that’s when things really started to go wrong for a lot of people, more or less up until today in fact.

After peaking in 1999 at 37%, the prosperity line has gradually declined since, and is now sitting at 34%. In between there was a housing boom and a global financial crash, both with noticeable effects on the line. That decline may not sound like much, but it will take years to rebuild all that wealth – assuming that the economy is moving in the right direction.

Most of the households which left those happier ranks likely ended up in the next level down in the graph, which can be broadly regarded as the “middle class” (if we consider that median income adjusted for inflation has generally gravitated within that interval). While the percentage here stabilized at over 30%, this might mask an awful lot of turnover as other people got pushed down even further.

And it was exactly at the bottom of the earnings scale that things got pretty bad. People earning less than $35,000 per year went from 31% at the turn of the century to 34% today, more or less matching the decline in percentage points at the top of the table. The new century brought a lot more discomfort to a growing number of Americans, fueling a lot of talk recently about income inequality in the country.

“Venomous Rat Regeneration Vendor” by the US artist Rob Zombie, considered to be one of the best rock albums of 2013

Therefore, despite all the subsequent economic growth, large fiscal stimulus packages, unprecedented Federal Reserve intervention and booming capital markets, we could say that PROSPERITY IN AMERICA PEAKED IN 1999!

Now there’s something you don’t often hear in the news, especially with the S&P500 at new all-time highs. In fact, record equity markets don’t tell the whole story. There’s a deeper dynamic at work here that is worth considering.

Here’s a graph of the S&P500 expressed in terms of gold, or as the “real money” crowd prefers to call it, the true value of the stock market (presumably as any “artificial” efforts to boost nominal share prices are neutralized by higher gold prices, which in well-functioning markets tend to respond faster to credit-led inflation):

S&P500-to-Gold Ratio (based on end of month data) and the Prosperity Line (%): Dec 1978 – Dec 2013
Source: US Census Bureau, World Gold Council.

A correlation between the S&P500-to-gold ratio and the prosperity line (again, representing the percentage of households earning more than $75,000 per year) can be clearly observed. Both datasets sort of track each other and have peaked roughly at the same time.

This is not really surprising. It is the real (as opposed to just the nominal) value of equity markets that reflects the broader prosperity in society, a point which is often lost in financial commentary. And here the US still has a lot of ground to cover. This also somewhat validates the assumptions we have been using to gauge prosperity levels in the US.

Therefore, as equity markets roar and gold tanks, investors seem to believe that the US is well on its way to regain its peak prosperity, much to the chagrin of the “gold bugs”, which (implicitly at least) are making the opposite bet.

But US investors can also bet on the prosperity of others. And the fact is that other nations have been steadily climbing the prosperity ladder. To get a sense of how the mix has changed since the go-go days of the 1980s, when American babies seemed to have it all, let’s go back to the Economist, which updated the rankings of the best place to be born in late 2012.

This time they included many more countries and used a broader set of indicators, including: material wellbeing (as measured by GDP per head), life expectancy at birth, the quality of family life, the state of political freedoms, job security, climate, personal physical security ratings, quality of community life, governance and gender equality.

The latest results are presented in the following table, along with the 1988 rankings (only the top 25 countries are shown):

Source: The Economist Intelligence Unit.
(1) West Germany in 1988.
(2) Change disregards newcomers to the ranking.

While comparing the two rankings may not be as robust as we would have liked given the change in methodology and inclusion of new countries, some interesting trends can be observed.

Generally speaking, things have really improved in smaller advanced nations, which have shot up to the top of the rankings over the last 25 years. Pristine, tiny, organized and educated Switzerland came out on top. Singapore is an absolute star, jumping 30 places, and as Asia gains prominence it is a strong contender for the #1 spot next time around.

Equally striking is how much the economic “giants” have gone down in the rankings. The US dropped from #1 to #16, or 14 places disregarding newcomers to the list, only closely surpassed here by Japan and Italy, both countries not exactly known for their economic dynamism of late. Germany also struggled (fruit of integrating their Eastern neighbors?) and France did not even make it to the top 25, after ranking #3 in 1988. C’est la vie…

It seems that in a globalized world the creation of prosperity and general wellbeing is much less related to size and, we would venture to say, more to a nation’s ability to finding a niche where they can excel in, educating its people and properly managing its finances. Perhaps there is something to be learned here as people and investors think about future prospects around the world.

As it stands, Swiss babies are currently in pole position for a life of abundance. But if general prosperity does not return in earnest to the US, they may have a hard time beating them “gold bugs”.

via Zero Hedge http://ift.tt/1ugLaHi Tyler Durden