When the PBOC popped the Chinese equity market bubble earlier in the week, American investors (and talking heads) were stunned by such limitations on speculative excess. However, as the following chart suggests, perhaps it was a public service they were doing as the demise of Macau’s easy-visa workarounds to currency controls has meant China’s habitual gamblers needed to find a new outlet for their cash…
“Customers who used to wager on casino tables are probably now sitting at home betting on stocks,” said Tai Hui, Hong Kong-based chief Asia market strategist at JPMorgan Asset Management. “Investors are levering up on margin trading, or ‘using a small knife to cut a large tree.’”
…
Casino revenue in Macau slumped last month to 24.3 billion patacas ($3 billion), the lowest level since September 2012, while trading on the Shanghai and Shenzhen stock exchanges reached a high of 1.24 trillion yuan ($200 billion) yesterday.
Rather than being charged for crimes against humanity, everyone’s favorite war criminal, Dick Cheney, will appear as a guest on NBC’s softball propaganda show “Meet the Press” this Sunday. Mr. Cheney loves appearing on “Meet the Press,” as it gives him the perfect platform to blatantly lie to as many plebs as possible.
I live in Houston, which has been a huge economic beneficiary of the sustained increases in oil prices, drilling, refining and related processes. As such, the amount of wealth created in energy-related investments has been enormous and, not surprisingly, a vast majority of individuals have overweighted portfolios in energy with the expectations that "oil prices can only go up." Of course, this sentiment is certainly understandable when you look at the performance of the energy sector versus the S&P 500 since the turn of the century. (Annualized return, capital appreciation only: S&P 500 3.24% vs Energy 17.71%)
Not surprisingly, the recent plunge in oil prices, and related energy stocks, has sent investors scurrying for cover. Previous "complacency" has turned to outright "panic" as portfolios, and retirement plans, have been crushed by plunging asset prices.
Strongly rising asset prices, and in this case commodity prices, have driven investor exuberance in the sector leading many to ignore deteriorating fundamentals, excessive leverage, and other financial diseases. However, when prices deteriorate rapidly, investment mistakes are quickly revealed.
It is important to remember that we are not investors. We are speculators placing bets on the direction of the price of an electronic share. More importantly, we are speculating, more commonly known as gambling, with our "savings." We are told by Wall Street that we "must" invest into the financial markets to keep those hard-earned savings adjusted for inflation over time. Unfortunately, due to repeated investment mistakes, the average individual has failed in achieving this goal.
With this in mind, this is an excellent time to review 10 legendary investment lessons from legendary investors. These time-tested rules about "risk" are what have repeatedly separated successful investors from everyone else. (Quote Source: 25iQ)
1) Jeffrey Gundlach, DoubleLine
"The trick is to take risks and be paid for taking those risks, but to take a diversified basket of risks in a portfolio."
This is a common theme that you will see throughout this post. Great investors focus on "risk management" because "risk" is not a function of how much money you will make, but how much you will lose when you are wrong. In investing, or gambling, you can only play as long as you have capital. If you lose too much capital but taking on excessive risk, you can no longer play the game.
Be greedy when others are fearful and fearful when others are greedy. One of the best times to invest is when uncertainty is the greatest and fear is the highest.
2) Ray Dalio, Bridgewater Associates
“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”
Nothing good or bad goes on forever. The mistake that investors repeatedly make is thining "this time is different." The reality is that despite Central Bank interventions, or other artificial inputs, business and economic cycles cannot be repealed. Ultimately, what goes up, must and will come down.
WallStreet wants you to be fully invested "all the time" because that is how they generate fees. However, as an investor, it is crucially important to remember that "price is what you pay and value is what you get." Eventually, great companies will trade at an attractive price. Until then, wait.
3) Seth Klarman, Baupost
“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”
Investor behavior, driven by cognitive biases, is the biggest risk in investing. "Greed and fear" dominate the investment cycle of investors which leads ultimately to "buying high and selling low."
4) Jeremy Grantham, GMO
“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.”
Successful investors avoid "risk" at all costs, even it means underperforming in the short-term. The reason is that while the media and WallStreet have you focused on chasing market returns in the short-term, ultimately the excess "risk" built into your portfolio will lead to extremely poor long-term returns. Like Wyle E. Coyote, chasing financial markets higher will eventually lead you over the edge of the cliff.
5) Jesse Livermore, Speculator
“The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….”
Allowing emotions to rule your investment strategy is, and always has been, a recipe for disaster. All great investors follow a strict diet of discipline, strategy, and risk management.
6) Howard Marks, Oaktree Capital Management
“Rule No. 1: Most things will prove to be cyclical. – Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”
As with Ray Dalio, the realization that nothing lasts forever is critically important to long term investing. In order to "buy low," one must have first "sold high." Understanding that all things are cyclical suggests that after long price increases, investments become more prone to declines than further advances.
7) James Montier, GMO
"There is a simple, although not easy alternative [to forecasting]… Buy when an asset is cheap, and sell when an asset gets expensive…. Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance."
"Cheap" is when an asset is selling for less than its intrinsic value. "Cheap" is not a low price per share. Most of the time when a stock has a very low price, it is priced there for a reason. However, a very high priced stock CAN be cheap. Price per share is only part of the valuation determination, not the measure of value itself.
8) George Soros, Soros Capital Management
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
Back to risk management, being right and making money is great when markets are rising. However, rising markets tend to mask investment risk that is quickly revealed during market declines. If you fail to manage the risk in your portfolio, and give up all of your previous gains and then some, then you lose the investment game.
9) Jason Zweig, Wall Street Journal
“Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”
The chart below is the 3-year average of annual inflation-adjusted returns of the S&P 500 going back to 1900. The power of regression is clearly seen. Historically, when returns have exceeded 10% it was not long before returns fell to 10% below the long-term mean which devasted much of investor's capital.
10) Howard Marks, Oaktree Capital Management
“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”
The biggest driver of long-term investment returns is the minimization of psychological investment mistakes. As Baron Rothschild once stated: "Buy when there is blood in the streets." This simply means that when investors are "panic selling," you want to be the one that they are selling to at deeply discounted prices. The opposite is also true. As Howard Marks opined: “The absolute best buying opportunities come when asset holders are forced to sell.”
As an investor, it is simply your job to step away from your "emotions" for a moment and look objectively at the market around you. Is it currently dominated by "greed" or "fear?" Your long-term returns will depend greatly not only on how you answer that question, but to manage the inherent risk.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham
With memorandum S-7258, titled “Implementation of New NYMEX/COMEX Rule Regarding Special Price Fluctuation Limits for Certain NYMEX and COMEX Metals Futures and Options Contracts” released moments ago by the CME Group, and set to become effective on December 21, 2014, and which seeks a 5 minute trading halt when “price movements in lead-month primary futures contracts result in triggering events”… “as a measure that is consistent with promoting price discovery and cash-futures price convergence” in order to “deter sharp price movements that may, for example, be driven by illiquid central limit order books prevailing from time to time in otherwise liquid markets”, one wonders why now, and what does the CME know about upcoming volatility, or lack of liquidity, in the precious metals space that nobody else does (and does any of this have to do with the “berserk” algo test from November 25?)?
Implementation of New NYMEX/COMEX Rule Regarding Special Price Fluctuation Limits for Certain NYMEX and COMEX Metals Futures and Options Contracts
Background
Effective Sunday, December 21, 2014 for trade date Monday, December 22, 2014, and pending all relevant Commodity Futures Trading Commission regulatory review periods, the New York Mercantile Exchange, Inc. (NYMEX) and Commodity Exchange, Inc. (COMEX) (collectively, the Exchanges) will implement new NYMEX/COMEX Rule 589 (Special Price Fluctuation Limits) to apply price fluctuation limits to certain metals futures and options contracts. Price fluctuation limits deter sharp price movements that may, for example, be driven by illiquid central limit order books prevailing from time to time in otherwise liquid markets.
NYMEX currently applies price fluctuation limits to its energy complex of futures and options contracts. These limits are referenced in each contract’s respective NYMEX product rulebook chapter. The Exchanges are proposing new Rule 589 to extend price fluctuation limit functionalities to certain metals futures and options as a measure that is consistent with promoting price discovery and cash-futures price convergence. The operation of new Rule 589 for metals futures and options contracts is described below. The full text of the new rule is set forth in Appendix B. Appendix C provides the specific limit levels for the relevant NYMEX/COMEX contracts to which Rule 589 will apply.
The Operation of New Rule 589 for Metals Futures and Options
At the commencement of each trading day, new Rule 589 will require the Exchanges to determine initial price fluctuation limits as levels above or below the previous day’s settlement price for lead-month primary futures contracts. There are three primary COMEX metals futures contracts and two primary NYMEX metals futures contracts. These contracts have the largest and most liquid metals central limit order books on CME Globex or are considered separate and distinct stand-alone products on an outright basis. The lead-month contract, as determined by the Exchanges, will typically be a primary contract’s most actively traded futures contract month.
The Exchanges will monitor the price movements of lead-month primary futures contracts in real-time on a daily basis. Price movements in lead-month primary futures contracts will result in triggering events. Triggering events result in monitoring periods, possible temporary trading halts followed by the re-opening of trading, and price fluctuation limit expansions.
If the lead-month primary futures contract is bid or offered via CME Globex at the upper or lower first special price fluctuation limit, the Exchanges will consider such an occurrence a triggering event that will begin a five-minute monitoring period in the lead-month contract. If at the end of this five-minute period the lead-month primary futures contract is not bid or offered at the applicable limit, the Exchanges will expand the limits an additional price limit increment above and below the lead-month contract’s previous-day settlement price. If, however, at the end of the five-minute interval, the Exchanges determine that the lead-month primary futures contract is bid or offered at the applicable limit, they will commence a two-minute temporary trading halt in all contract months of the primary futures contract as well as in all contract months of associated products. Primary contracts and associated products are identified in Appendixes A and C.
Following the end of a temporary trading halt, the Exchanges will re-open trading in all contract months of the primary futures contract as well as in all contract months of associated products. When trading resumes, the Exchanges will expand the price fluctuation limit an additional increment above and below the lead-month contract’s previous-day settlement price. Subsequent price fluctuations, if significant enough, will trigger the same sequence of monitoring periods, possible trading halts followed by the re-opening of trading, and incremental adjustments to price fluctuation limits.
As noted above, when an initial triggering event occurs, the Exchanges will commence a five-minute monitoring period. In each instance, the Exchanges will subsequently expand the price fluctuation limit for all primary futures contract months, as well as all associated products, by an additional increment above and below the lead-month contract’s previous-day settlement price. The incremental adjustment will occur regardless of whether or not a trading halt is triggered. However, no further special price fluctuation limits will be implemented following a trading day’s fourth price fluctuation limit adjustment.
Expiring Contracts
There shall be no special price fluctuation limits for an expiring primary metals futures contract during the period between and including the contract’s first intent day and the last delivery day. The Exchanges will also not call temporary trading halts or an expansion of special price fluctuation limits for primary futures contract months or their associated products during the last five minutes of trading between and including the first intent day and the last delivery day of a related expiring primary metals futures contract.
Floor Trading
The Exchanges will apply special price fluctuation limits to all primary metals futures and options contracts and all associated metals products that are available for trading on the floor. Although the Exchanges will limit all applicable markets on the trading floor at these price levels, floor trading in lead-month primary futures markets at these price levels will not constitute a triggering event under new Rule 589. In all instances when a triggering event resulting in a trading halt occurs on CME Globex, the Exchanges will immediately halt floor trading in all contract months of primary futures contracts and associated products. The Exchanges will implement a coordinated temporary trading halt for any floor-traded associated products that are options on primary contracts or other associated products. When the Exchanges re-open CME Globex markets with expanded price limits, the Exchanges will simultaneously re-open all affected markets on the trading floor with the expanded limits in place.
Questions regarding this notice may be directed to:
September 15, 2008 is the day that Lehman died and the moment that the world’s central banks led by the Fed went all-in. As it has turned out, that was an epochal leap into the most dangerous monetary deformation that the world has ever known.
It needn’t have been. What was really happening at this pregnant moment was that the remnants of honest capital markets were begging for a purge and liquidation of the speculative rot that had built up during the Greenspan era. But the phony depression scholar running the Fed, Ben Bernanke, would have none of it. So he falsely whooped-up a warning that Great Depression 2.0 was at hand—-sending Washington, Wall Street and the rest of the world into an all-out panic.
The next day’s AIG crisis quickly became ground zero—the place where the entire fraudulent narrative of systemic “contagion” was confected. Yet that needn’t have been, either. In truth, AIG was not the bearer of a mysterious financial contagion that had purportedly arrived on a comet from deep space.
As subsequent history has now proven, AIG’s $800 billion globe spanning balance sheet at the time was perfectly solvent at the subsidiary level.Not a single life insurance contract, P&C cover or retirement annuity anywhere in the world was in jeopardy on the morning of September 16th.
The only thing gone awry was that the London-based CDS (credit default swap) operation of AIG’s holding company was monumentally illiquid. Joseph Cassano and the other latter-day geniuses who were running it had spent two decades picking up nickels (CDS premium) in front of a steamroller, while booking nearly the entirety of these winnings as profits—all to the greater good of their fabulous bonuses.
But now, as the underlying securitized mortgage market imploded, they needed to meet huge margin calls on insurance contracts they had written against mortgage CDOs. In truth, however, the whole mountain of CDS was bogus insurance because AIG’s holding company did not have a legal call on the hundreds of billions of cash and liquid assets ensconced in dozens of its major subsidiaries.
From a legal and cash flow point of view, Hank Greenberg’s mighty insurance empire was essentially a mutual fund. Cassano and his posse had been implicitly pledging assets (via AIG’s corporate or consolidated AAA rating) that belonged to someone else—-namely, the insurance subsidiaries and the state insurance commissioners who effectively controlled them.
Yet this scandalous fact was not a world crisis, nor really any crisis at all. Yes, the several hundred billions of CDS contracts sold by the Cassano London operation were bogus and could not be paid off—–since the holding company had no available liquid capital. Nevertheless, they had been purchased almost entirely by a dozen or so of the largest banks in the world, including Deutsche Bank, Barclays, Societe Generale, Bank of America/Merrill Lynch and Goldman Sachs, to name a few of the usual suspects. And as I documented in The Great Deformation,these banks could have readily afforded the hit on the underlying CDOs—– and they deserved it,too.
As to the former point, the combined balance sheet of the impacted big banks was about $20 trillion at the time, and the potential loss on the CDS contracts that AIG’s holding company could not fund was perhaps $80 billion at the outside. After all, most of the CDO paper which these mega-banks had purchased and then magically transformed into AAA credits (and thereby could hold without posting a dime of capital) consisted of the so-called “super-senior” tranches. The really nasty crud at the bottom of the CDO capital structures—which did generate deep losses—- had been pawned off to institutional investors and trust funds for Norwegian fishing villages and the like.
So the day of reckoning for AIG’s CDS fraud presented no danger to the world’s banking system. The loss might have amounted to 0.5% of their combined footings—–a one-time hit that Wall Street brokers would have counseled to ignore and which might have zapped banker bonuses for the next year or even less.
And those foolish bankers did need to be punished for negligence, stupidity and unseemly greed. In point of fact, Cassano was never indicted for his bulging book of bogus CDS insurance because it amounted to fraud in plain sight. Any one who read AIG’s 10K could have seen that the consolidated balance sheet of AIG was riddled with dividend stoppers and capital conservation limits imposed by the insurance regulators at the subsidiary level. Cassano never, ever had the cash to meet margin calls or pay-off the supposedly remote risk of actual claims; his policies had been purchased all along by the proverbial greater fools.
But this calamity of stupidity and negligence has turned out to be a really big thing in the history of the modern financial era; it was indeed the Rubicon. By falsely transforming a negligible hit to the balance sheet of the world’s mega-banks—-most of which were quasi-socialist institutions in Europe and would have been bailed out by their governments anyway—-into the alleged collapse of the mighty AIG, Secretary Paulson, Bernanke and their cabal of Wall Street henchman opened the door in one fell swoop to the present global monetary madness.
At that fraught moment in time, AIG was the financial gold standard—–the massive AAA balance sheet that anchored the entire financial market. So when out of the blue—literally without even a few days notice to even the attentive public—–it had apparently descended into a $180 billion black hole, the myth of systemic breakdown and all-consuming financial “contagion” was not only born; it gained instant resonance throughout Wall Street and Washington.
The rest is history, as they say. And what a fantastic, but lamentable history it was. Owing to the cursed recency bias that now animates the mainstream narrative, it has already been forgotten that today’s elephantine central bank balance sheets did not remotely exist just six years ago. Indeed, they could not have been imagined back then—not even by Bernanke himself.
But upon the eruption of the AIG catalyst, the mad money printing dash was on. As shown below, it had taken the first 94 years of the Fed’s existence to grow its balance sheet footings to $900 billion—-something achieved by steadily plucking new credits out of thin air over the years and decades. But within six weeks of the so-called AIG meltdown, Bernanke had replicated what had taken his predecessors nigh on to a century to accomplish.
And then he didn’t stop. Fighting the fabricated enemy of “contagion” and thereby thwarting Wall Street’s desperate need for a cleansing financial enema, he had nearly tripled the Fed’s historic balance sheet by year-end 2008, and on it went from there.
And of course it was not just the Fed running the printing presses red hot. Owing to both Keynesian ideology and defensive necessity, the other major central banks of the world followed suit. At the time of the crisis, the combined balance sheet of the Fed, ECB and BOJ was $3.5 trillion or about 11% of GDP. In short order that number will reach $11 trillion and 30% of the combined GDP of the so-called G-3.
Throw in the BOE, the People’s Printing Press of China, the bloated central banks of the oil exporters and Russia and assorted others like the reserve banks of India and Australia and you have total central banks footings in excess of $16 trillion or roughly triple the pre-crisis level.
tsunami of central bank credit did little for the real economy in places where the private sector was already at “peak debt” such as the US and Europe; and it did fuel one final blast of the malinvestment boom in places that still had balance sheet runway available like China, Brazil and much of the rest of the EM world.
But what it did do universally and thunderously was to fuel a financial asset inflation the likes of which the world had never before seen.
Prior to their recent stumble, the combined equity markets of the world had reached a capitalization of nearly $75 trillion compared to barely $25 trillion at the dark bottom in March 2009. And, yes, $50 trillion of gain in a comparative historical heartbeat did wonders for the net worth of the global 1%.
But it also did something else; it destroyed the remaining vestiges of financial market stability and honest price discovery. After 6-years of the central bank tsunami, two-way markets were gone; the shorts were dead; skeptics were out of business; greybeard investors had retired; speculators regularly bought downside “protection” (i.e. puts on the S&P 500) for chump change; and the law of “buy the dips” became unassailable.
Even more crucially, capital markets were transformed into rank casinos that were virtually devoid of all economic information……except, except the word clouds, leaks and sound bites of central bank speakers and their tools in the press and monitors in the banks, brokerage houses and hedge funds.At length, this meant that the only reason to buy was that virtually every risk asset class was rising; and it also meant that the only risk worth worrying about in a day-trading market was from the verbal emissions of central bankers and their Wall Street accomplices and stooges.
So as long as the central bank con job lasted, there was no reason not to buy, buy, buy. The financial world’s greatest clown, Jim Cramer of CNBC, became a prophet in his own time. Indeed, the man’s stupendous insouciance became embedded in the casino itself.
And the VIX is the smoking gun of proof. Over the span of approximately 72 months, the world’s raging central bankers simply drove risk right out of the casino.
Except they didn’t actually banish financial risk; they just drove it underground. When every financial asset is rising, the casino creates its own marginable collateral. Yesterday’s gain becomes tomorrow’s repo and re-hypothecated security against the next day’s round of buying. And as long as asset values are inflating, the inherent risk in these daisy chains is muffled and discounted.
Yet that’s exactly why the present mother of all financial bubbles is so dangerous and palpably unstable. The marginal “bid” is dependent upon wildly inflated collateral which is tucked away in the warp and woof of the entire global financial system. When the Chinese stock market hit a 5.5% air pocket within a few minutes two nights ago, for example, it was because the financial authorities there said icksnay to the repo of bonds issued by essentially bankrupt local development agencies.
Stated differently, there are financial time bombs planted everywhere in the world economy because central bank financial repression has caused drastic mispricing of nearly every class of financial asset, which is to say, every layer of collateral which has ratcheted-up the entire edifice.
As the redoubtable Ambrose Evans-Prichard so cogently noted, central bank ZIRP has radically compressed the debt markets of the world. This means that cap rates—-the basis for valuation of tens of trillions of fixed income securities and real estate around the world—are now so aberrantly low as to be downright stupid:
What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.
Needless to say, this drastic central bank driven financial repression has unleashed a mindless pursuit of “yield” or short-term trading gains that give the concept of “irrational exuberance” an entirely new definition. Consider for example, the hapless mutual fund investors or institutional managers who have been buying energy sector CLOs. What is the collateral for the 5% yields advertised by these fly-by-night funds—–often issued and managed by the same folks who sold housing sector CLOs and CDOs last time around?
Why its the leveraged loans issued by E&P operators in the shale patches. The collateral for these leveraged loans, in turn, is shale rocks 4,000-9,000 feet down under that have been worthless until approximately 2005 and would be worthless today without dramatically over-priced crude oil and drastically underpriced debt capital.
That is to say, the vaunted collateral in the shale patch craps out after about two-years unless new money is poured down the well bore and oil prices are above $75-$80 per barrel on the WTI marker price to cushion the sharp discounts back to the wellhead. But with marker price now plunging into the $50s, the drilling will soon stop, the production will crap-out, the shale rock collateral value will regress toward the zero bound, the E&P borrowers will default, the energy CLO’s will implode and the hapless yield chasers will be left high, dry and panicked.
Cannot the same thing be said of Italian bonds at 2%? As reminded below, the Italian economy has not grown for six years, its debt-to-GDP ratio has gone critical and its political system is disintegrating.
So from whence did the “bid” arise after Draghi’s “whatever it takes” ukase, which in just 24 months drove the yield on this sovereign junk from 7% to 2%?
Well, it came from its own bootstraps, that’s what. The front-running speculators who backed up their trucks to Draghi’s pronouncement where not sitting on a pile of cash looking for “value”. Instead, they bought a pile of Italian bonds and then margined their purchases in the repo market. Yes, central bank ZIRP means essentially zero cost of carry; its the source of the bid that never asks whether 2% is enough. When bonds are held by the day or even hour, its far more than enough as long as the repo can be rolled and bond prices keep inflating.
Until the don’t. Are the international dollar bonds of Turkish banks—one example of the $9 trillion EM debt market—– issued against their loan books any different? Just consider the daisy chain of collateral there. Istanbul is comprised of miles of empty apartment and commercial buildings which are collateral for the Turkish bank loans. Yet what is the equity of the real estate developer borrowers of these generously leveraged loans—-other than their “investments” in the Erdogan regime? More often than not its the down-payments on newly built space made by speculators who borrowed the money from the very same banks.
Indeed, in a ZIRP world the collateral chains extend so deep into the netherworld of speculation that no one can possibly trace them. That is, until after they erupt. Then we will learn all about the “risk” that was driven below the surface during the great bubble of the past 6 years just like we did in September 2008.
In short, what is happening now is that risk is coming out of hiding; the collateral chains are buckling; the financial time bombs are beginning to explode.
There is nothing especially newabout this development—its the third occurrence this century. But there is possibly something different this time around the block.
This time the carnage could be much worse because the most recent tsunami of central bank credit was orders of magnitude larger and more virulent than during the run-up to the Lehman event or the dotcom implosion.
Moreover, the central banks are now out of dry powder—– impaled on the zero-bound. That means any resort to a massive new round of money printing can not be disguised as an effort to “stimulate” the macro-economy by temporarily driving interest rates to “extraordinarily” low levels. They are already there.
Instead, a Bernanke style balance sheet explosion like that which stopped the financial meltdown in the fall and winter of 2008-2009 will be seen for exactly what it is—-an exercise in pure monetary desperation and quackery.
With Detroit emerging from bankruptcy yesterday, its experience under Chapter 9 was apparently so successful (occasional subsequent massive power outage notwithstanding), that suddenly every other insolvent city in the US is also i) admitting it is in dire straits and ii) hoping to recreate the Detroit experience.
Enter East Cleveland.
As Bloomberg Brief reports, the council president in East Cleveland said if she had her way, the city would follow Detroit’s path and become Ohio’s first municipality to file for bankruptcy to help solve its fiscal woes.
State Auditor Dave Yost said the suburb of 17,500, where oil baron John D. Rockefeller once had a summer estate, is insolvent. Things in the small town, representative of most small cities in middle America, are so bad “the community lacks a working ladder truck in its fire department, had its mobile phones shut off and faces $1.7 million in unpaid bills.”
East Cleveland, a city of three square miles, has struggled with its finances for decades, said Finance Director Jack Johnson. About 43 percent of residents live in poverty, almost triple the state level, while median household income, at about $20,600, is less than half the Ohio average, U.S. Census data show
It encountered “the perfect storm” after the recession, with the 2011 closing of a Cleveland Clinic hospital that generated about $1.5 million a year in income taxes and the loss of about half its annual $3 million in state aid since 2010, he said. “There have always been challenges here, but those two things just sort of made it devastating,” he said.
City officials say the options include asking voters to raise taxes, deeper spending cuts, merging with Cleveland or filing for bankruptcy protection.
Of course, none of those options would rest well with the voters who elect the city officials in well-paying jobs, so the alternative is to simply go straight for the shortcut that cuts liabilities by more than half while, most importantly, preserving city official jobs. After all, why engage in painful reform when someone else (preferably someone who doesn’t vote you into office) can bite the bullet.
Council President Barbara Thomas favors the latter, following the Motor City’s record $18 billion bankruptcy in July 2013. Detroit was able to reduce its liabilities by $7 billion and exited Chapter 9 as of today.
“We might come out a little bit better, just like Detroit,” Thomas said. “Isn’t it better to clear away your debt in a proven process than to keep trying to rob Peter to pay Paul?”
Ohio has rebounded from the recession that ended in 2009, recovering all but a quarter of the 375,000 jobs it lost.
The state might have, but the small suburb city has not: “Yost sent a Nov. 21 letter to the commission overseeing its finances saying East Cleveland is insolvent, and that its recovery plan “is inadequate to return it to fiscal health in this current environment.”
“It is fair to say the City is on the verge of collapse,” Yost wrote.
An East Cleveland bankruptcy would probably cause less of a stir among bondholders than those in Detroit and Central Falls, Rhode Island, said Howard Cure, head of muni research at Evercore Wealth Management LLC, which oversees $5.5 billion.
“Detroit is different because it’s the biggest city in Michigan, and Central Falls is different because Rhode Island is such a small state,” Cure said. “Here, you have a small city in a big state, and I don’t think it would garner the same concerns.”
Well, that settles it: time for bonds to eat some more losses. Until, of course, the bondholders who are massively levered themselves, scream bloody murder and threaten a repeat of 2008, slamming any attempts of downside risk, and demanding another blank check bailout or else the entire financial system gets it.
I don’t like editorial cartoons. I
really don’t like them (Friday Funnies
excepted). Nick Gillespie explains
the problem
better than I can. Even, or especially, in situations where
important issues come to the attention of the mainstream media. The
recent attention paid to incidents of excessive use of force by
police are no exception. I particularly didn’t like
this cartoon depicting the Statue of Liberty lying on the
ground saying she can’t breathe. When was the last time an
immigrant saw the Statue of Liberty on their way into America? More
likely to see a cactus or a coyote. I don’t know for whom the
Statue of Liberty is a non-ironic symbol of “American values.”
But this
cartoon, depicting a group of children asking Santa Claus to
protect them from the police for Christmas, I liked. Maybe I’m
partial to Santa, though that didn’t make
this different Santa/police violence cartoon any less
cringe-worthy. But when the former cartoon ran in the Bucks
County Courier Times, police officers in the Philadelphia area
were not amused. Local police union president John McNesby wrote a
bullying letter to the newspaper. Via
Philly.com:
You owe a public apology to every law enforcement officer and
their families. What’s more, you owe a particular apology to the
families of those officers who gave their lives to ensure that
people like you could remain safe while you defame their
memories.
There is a special place in hell for you miserable parasites in
the media who seek to exploit violence and hatred in order to sell
advertisement.
Two thoughts: (1) unless McNesby has a particular fallen officer
in mind, I’m not aware of any cop dying in the line of duty to
protect the Courier Times from an assault on their
headquarters and (2) I don’t know what the moral issue is with
selling advertisements to willing advertisers, but I’m sure there’s
a special place in hell for those who seek to exploit fear and
crime in order to avoid responsibility for misconduct while
demanding respect for doing a job they’re paid to do.
And a third thought: what a bully tihs McNesby sounds like. This
is the kind of person the police choose to represent them to the
public. And so many in the public continue to ignore the role of
police unions in police violence.
In the last 3 days, the broad Greek stock market has cratered a stunning 20%. This is the biggest 3-day drop since 1987 and all on the back of the 'possibility' that an anti-EU party takes over.
Did we just get a glimpse of the ugly reality hiding behind the veil of status-quo-maintaining central-bank-sponsored manipulation?
The so-called economic recovery that America has experienced in recent years is "unfair" and "distorted" according to Elliott Management's Paul Singer. Speaking at The DealBook Conference in New York, Singer warned that the recent 'great' jobs data is "part of the distrortion" that he has so vociferously ascribed (having previously noted that he "does not think the current optimism is warranted.") But when asked if the Fed should be blamed for income inequality in America, Singer exclaimed "Yes, they are the enablers."
"What [ZIRP and QE] that has created is a series of distortions and an unfair recovery.
A distorted recovery meaning the beneficiaries of the asset price levitation are bond holders, stock holders, investors.
The middle class is not doing great."
As CNBC reports, on the markets, Singer warned about the dangers of bonds…
So-called high quality bonds from governments in the U.S. and Europe "provide horrendous value," Singer said, as they do not price in the risk of inflation and that central banks have been the major buyer for years.
Bonds are "very, very over-priced for the risk-reward," he added.
While bonds are over-priced, Singer said it doesn't mean they are about to collapse.
Singer called stocks "a more complicated picture."
The investor said it's hard to know how stocks would react when market confidence is lost.
As Singer recently explained… it's bad business all around…
"[when inflation strikes] …the normal yardsticks of risk, return and profit may be thrown into the garbage can. These measures may be replaced by a scramble by citizens and investors to preserve value on a foundation of shifting sand, together with societal unrest that may make the current politically-useful “inequality” riffs, blaming the “1%” and attacking those “millionaires and billionaires” who refuse to “pay their fair share,” look like mere warm-ups for real class warfare.
A SURE-FIRE CURE FOR INEQUALITY: CRASH AND DEPRESSION
Inequality has become a political theme. Some are using it as a stepping stone to political power, stating that inequality is unfair, getting worse and in need of redress. It is worthwhile to point out the facts.
In most of the world, inequality in fact is declining. More precisely, economic growth and the march of technology, medicine, agriculture, mass education, energy and transportation have in recent decades enabled hundreds of millions of people to make the journey from subsistence poverty to a middle-class standard of living. For billions of people around the world, that journey, and the benefits that people get from a mass rise in living standards stemming from freedom, technological progress and economic growth, are life-transforming, and are inestimably more important than the difference between the living standards of the wealthiest cohort and those experienced by the majority of people. Of course, in many places around the world, corrupt (or incompetent) rulers and oligarchs keep people mired in poverty and oppression. But in those places, it is tyranny and corruption, not “inequality,” which is the problem and the source of the need for “social change.”
Inequality as a political theme is primarily a focus of developed countries. Let us examine its shape and causes. Inequality is exacerbated when asset prices rise. When people save money, buy investable assets and those assets rise in price, inequality is exacerbated because those people have higher income (by definition) than people who do not have enough income to save and invest. The period from the end of World War II to the present has been characterized by growth, prosperity, no world wars or depressions, and rising asset prices. Savers and asset owners receive dividends and capital gains in addition to their ordinary income. Prosperity and bull markets exacerbate inequality. Crashes and depressions reduce it.
Tax policy also has a role, at least in America. In the 1980s, there were tax law changes in America which had the effect of transferring a significant portion of income from the corporate tax returns of privately-held businesses to the individual tax returns of their owners. To the extent that this tax policy represented merely a shift of the same income from corporations to individuals, it created an exaggerated picture of rising inequality.
The march of technology also has played a role. Technological change has created a new class of global entrepreneurs, as well as generally increased the earnings capacity of technologists. The economic value (and consequent wage ranges) of undereducated workers is in the process of declining compared with tech-savvy and highly-educated people. The changes to the income distribution caused by these forces are not small or incremental. Rather, they have demonstrated the ability to capture, destroy or reshape entire industries overnight in today’s world. The people (many of them highly trained) who build and invest in these disruptive businesses can become very wealthy, sometimes very quickly. But the masses who are disrupted by such increasingly rapid changes suffer if policymakers do not create responsive education and job-training paths for them to keep up and change jobs and careers. Technology will continue to be disruptive and exacerbate inequality (while reducing costs and increasing efficiency and effectiveness), but governmental policies could mitigate a good deal of the pain to employees in obsolete or “outsourced” industries and help people adapt to the world of the future. Such policies are currently inadequate, and most policymakers find it more politically useful to rail against “the rich” than to create policies that help the bulk of the people compete and prosper.
So who are “the rich?” In our December 2012 quarterly report, we did an analysis of the Forbes 400. By studying the origins of all on the list, we found that 256 of the 400 were self-made. Of those, 46 grew up in either poverty or the lower-middle class). Another 146 were raised in a middle-class home, without special advantages or circumstances. We recommend going back to read the piece we wrote on this topic, but the point was powerful and is worthy of repeating: America is not a place of static concentrations of wealth. Mobility, growth, freedom and innovation are alive and well in America, and they are the reasons that this country has been the greatest engine of mass prosperity the world has ever seen.
We see the current focus on inequality as primarily an ideological and political theme aimed at justifying higher taxes on the rich, which amounts to the confiscation of wealth and more votes for the politicians shouting these populist riffs, none of whom has proposed any actionable ideas about how to narrow the gap other than by redistributing wealth. We do not think that beating down the income or assets of rich people is going to help middle class or poor people become more competitive or prosperous.
Furthermore, we believe that by railing against the rich and decrying inequality, politicians are attempting to divert attention from their unrelentingly poor policies. Making unaffordable promises and engaging in truly vast expansions of government programs have transmogrified into post-financial crisis solutions to restore ordinary people’s income and positive expectations.
The most important thing we can convey about inequality as a current political theme is that it is sharply exacerbated by the current mix of governmental policies in the developed world, particularly in America. If policies were oriented toward unlocking America’s considerable growth potential (policies described elsewhere in this report), then the rise of asset markets would be balanced alongside considerable improvement in the economic conditions of the vast middle class. But that is not the case in America, where growth-suppressive policies exist alongside extreme monetary ease. The consequence of this combination is that asset prices have risen sharply (exacerbating inequality), with only modest second-order benefits for economic activity, while the middle class has suffered from poor overall economic growth and job prospects combined with significant increases in basic cost-of-living items. This terrible combination is at the root of today’s perception of growing inequality, but the policymakers who are causing this set of circumstances are the ones railing (for political gain) against inequality.
