Category: zerohedge

Workers at a tire plant in Northern France have taken two managers hostage until Goodyear (the firm that owns the plant and has been trying to shutter it for years) meets the mabor unions demands. WSJ reports, as Goodyear winds down operations with the plant almost idle, French labor law requires the company to keep all workers employed, which means many of them don't work more than a couple of hours a day while still getting full salary. The situation is why Titan International's Maurice Taylor blasted that he "would be stupid" to operate the plant on that basis.

 

As we noted previosuly the tire factory farce escalated a year ago…

 

But now, Goodyear is entangled in legal proceedings with unions representing workers, led by the communist-backed CGT… and their actions have re-escalated… (via WSJ)

Workers at a Goodyear Tire & Rubber Co. factory in northern France prevented two managers from leaving the facility on Monday, the latest in a string of protests by union members who were accused by a U.S. executive last year of doing little work.

 

…

 

Mickaël Wamen, a union representative, said the managers would be held until workers get a satisfactory response to their requests. He said the managers already have been informed that they will spend the night at the site.

 

Goodyear, of Akron, Ohio, has been trying to shut the plant for several years, but is entangled in legal proceedings with unions representing workers, led by the communist-backed CGT. Efforts to sell the factory to U.S. tire maker Titan International Inc. hit the headlines last year, after Titan Chief Executive Maurice Taylor blasted French labor laws and work habits.

 

As Goodyear winds down operations and the plant almost idle, French labor law requires the company to keep all workers employed, which means many of them don't work more than a couple of hours a day while still getting full salary.

 

The situation enraged Mr. Taylor, who dropped the first offer he had made for the plant and told France's industry minister that he would be "stupid" to operate in a country where workers get high wages for little work.

 

…

 

Tense labor relations in France were exacerbated by the financial crisis, leading to a string of so-called boss-nappings. In 2009, when industrial companies started retrenching their operations, managers at the French plants of several foreign firms, including Caterpillar Inc., Sony Corp. and 3M Co., were held captive by workers angry at being laid off.

As we warned earlier, this can and will only lead to the triple-dip recession in France as industrial production continues to slump. We strongly urge Detroit's Kevyn Orr to get a bodyguard…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Z46obnSisrk/story01.htm Tyler Durden

And now, the saddest chart of the day: Greek poverty since the crisis, and in 2013, when the so-called “Grecovery” arrived.

Here is how Greek Kathimerini describes the fact that nearly half of all Greek incomes, some 44%, had an income below the poverty line in 2013 according to estimates by the Public Policy Analysis Group of the Athens University of Economics and Business (AUEB).

The poverty threshold is measured as 60 percent of the price-adjusted average income in 2009, or up to 665 euros per person per month and up to 1,397 for a couple supporting two underage children. The AUEB researchers also found that last year 14 percent of Greeks earned below the adequate living standards, compared with 2 percent of the population four years ago.

The blame, of course, was placed squarely on austerity, or the fact that Greece, whose epic socio-economic problems stem primarily from its massive overleveraging leading up to 2008, did not leverage some more to “fix” itself.

The group’s report, published last week, suggested that during the crisis instead of strengthening support to the unemployed – which is one of the most efficient methods to rekindle demand – the state was forced to reduce it.

Well, not all the blame: some was reserved for where it rightfully resides: an incompetent, corrupt, crony and quite criminal political system:

… besides the austerity policies of the last few year, the inability of the state to contain the collapse of social structures is due to the lack of targeted strategies and to the inefficient use of resources, problems that dogged Greece even before the onset of the crisis.

No mention that Greece was merely a pawn in the “political capital” invested in the failed Eurozone experiment, in which the main thing at stake is the vested interest of the legacy oligarchs and, of course, the bankers.

As for the Greece: don’t cry for it – it still has the euro – that symbol of successful European integration – so all is well.

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Submitted by Shane Obata-Marusic,

It’s ironic that in a day and age where Keynesian economics is the “accepted view” we still don’t pay enough attention to what Keynes said about inflation.

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Those to whom the system brings windfalls,…become "profiteers," who are the object of the hatred… the process of wealth-getting degenerates into a gamble and a lottery… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Keynes On Inflation

The problem today is that some people believe inflation is lower than it actually is.

The Consumer Price Index CPI is used to measure the cost of maintaining a certain standard of living. Now it measures the cost of maintaining a certain level of satisfaction.

1. VESTED INTERESTS

In reality, the purchasing power of the consumer dollar is tanking and the prices of many goods, services, and assets are increasing in price. The end result is that the consumer is suffering. By creating incredible amounts of money, the central banks of the world are debasing the currencies that they issue. In other words, the value of all of existing dollars is reduced when new dollars are supplied.

This is translating to a lower quality of life for more Americans. When one examines real median household income – which was down to $51 ,000 in 201 2 from $56,000 in the year 2000 – this becomes evident.

Before we continue, let’s make something clear. The year over year rate of increase in inflation has been in a downtrend for some time. Therefore, it’s reasonable to conclude that disinflation is a real risk.

That said, because of the presence of the central banks, it’s unlikely that deflation will become a real problem.

The CPI affects the economy because cost of living adjustments to social security, federal civilian and military retirement, and supplemental security income are tied to it. It’s also used to index income tax parameters, TIPS, and some federal contracts.

If the CPI is so important then why does it understate inflation?

That question brings us to the government’s “inflation dilemma”. The US government has 1 of 2 choices: either it can 1 ) mislead its citizens by understating inflation or 2) release accurate inflation data thereby increasing social benefit obligations. This is a lose-lose situation because, unfortunately, both choices only serve to perpetuate an already insurmountable debt problem.

So why is it important to know that inflation is understated? Because, as Keynes said in the opening quote, inflation is essentially a means by which wealth – in the form of real assets such as real estate, businesses, stocks, and bonds – is transferred from the poor and the middle class to the rich. As asset prices inflate, the rich get richer. This allows them to purchase even more assets. At the same time, the poor and middle class become worse off because they have fewer assets and more debt.

Due to the fact that the CPI understates actual inflation, low and middle income individuals are struggling to keep up with the rising costs of living. As a result, more and more people are relying on the government for support.

Inflation is only “low” because of how it’s calculated. Since the 1980s, the US government has made many changes to how the CPI is calculated. These changes have resulted in an index that no longer accurately represents how expensive it is for people to live.

The Way The Politicians Wanted It

 

In the early-1990’s, political Washington moved to change the nature of the CPI. The contention was that the CPI overstated inflation (it did not allow substitution of less-expensive hamburger for more-expensive steak). Both sides of the aisle and the financial media touted the benefits of a “more-accurate” CPI, one that would allow the substitution of goods and services.

 

The plan was to reduce the cost of living adjustments for government payments to Social Security recipients, etc. The cuts in reported inflation were an effort to reduce the federal deficit without anyone in Congress having to do the politically impossible: to vote against Social Security. The inflation-calculation changes had the further benefit to government fiscal conditions of pushing taxpayers artificially in to the higher tax brackets, thus increasing tax revenues. The changes afoot were publicized, albeit under the cover of academic theories. Few in the public paid any attention.

 

Federal Reserve Chairman Alan Greenspan and Michael Boskin, then chairman of the Council of Economic Advisors, were very clear as to how changing or “correcting” the CPI calculations would help to reduce the deficit. As described at the time by Robert Hershey of the New York Times, “Speaker Newt Gringrich, Republican of Georgia, suggested this week that fixing the [CPI] index, with its implications for lower spending [Social Security, etc.] and higher revenue [tax bracket adjustments], would provide maneuvering room for budget negotiators…”

 

John Williams'
Shadow Governement Statistics

The Boskin Commission estimates that the cumulative effects of a 1% bias (to the upside) would have added 1 trillion dollars to national debt in between 1997-2008; clearly, this was an incentive to lower the reported state of inflation.

2) PROBLEMS WITH THE CPI

If the CPI understates inflation then why is it so widely used and referred to? Probably because it’s accepted as “the best measure of inflation that exists”.

In terms of measurement, the CPI has 3 main problems: 1 ) hedonics, 2) substitution, and 3) understated costs.

1 ) Hedonic Adjustments are meant to account for changes in the quality of goods and services. The concept of adjusting prices for changes in quality makes sense. That said, the process is too subjective and is far from perfect.

Some examples:

New computer features were deemed quality improvements, with downside price adjustments made in the CPI for the changes, even though a consumer may not have wanted or used the features

 

The consumer still had to buy those features and pay full cost out-of-pocket, irrespective of what the government determined those products were generating in purported hedonic quality benefits that the consumer was not considering or using.

 

John Williams'
Shadow Governement Statistics

More issues related to subjectivity:

• where does a good stop being a variety of a given product class and become a product on its own? – ex: Toyota corollas and Toyota camrys.
• when it comes to a good or service’s characteristics, who’s judging their utility? The consumer or the producer or both?
• how can someone accurately determine the “quality” of novel or intangible items?
• what if the ratio of prices does not = the ratio of qualities?

Examples:

1. if an old product is discounted and a new product is introduced at an unusually high price
2. if an item is introduced into the market at an unreasonably low price in order to induce demand and then subsequently increases in price during a return to normal market conditions
3. when a new item is not comparable to an old item

and one final comment on inflation:

The take away point here is not that hedonics is a bad concept but that a lot of subjectivity is involved in calculating hedonic adjustments. I t’s a conflict of interest for the Bureau of Labor Statistics (BLS) to calculate the CPI because it’s in the government’s interest to lower social benefit payments. As a result, the BLS’s inflation data are questionable.

2) Substitution may reflect changes in consumption patterns. That said, the concept of substitution invalidates the CPI as a measure of the cost to maintain a certain standard of living. Ex: if Bob eats steak every day for a year but is then forced to switch to chicken because of rising beef costs then it’s plausible to think he’s maintained the same level of utility. That said, one cannot argue that he’s maintained the same standard of living if he’s forced to substitute steak for a lesser alternative.

BLS introduced: More frequent re-weightings of the CPI index from every ten years to every two years, which moved the CPI closer to a substitution-based index, but the change was not considered a change in methodology.

 

BLS introduced: On-going re-weightings of sales outlets (discount/mass-merchandisers versus Main Street shops), also moving closer to a substitution-based index and creating other constant-standard-of-living issues.

3) If the BLS was actually trying to measure the cost of home ownership then their measure of housing inflation – the Owner’s Equivalent Rent (OER) – would include property taxes, maintenance costs, and insurance. The next best option would be to use the actual price of home. The OER is even less realistic as it measures “how much someone’s house would rent for monthly, unfurnished and without utilities.

“the problem with this hypothetical approach to measuring a significant portion ofCPI is obvious at best. At worst, it’s somewhat disturbing in today’s information age where actual home price data are readily-available at the mere stroke of a key. The “corrected” CPI measure clearly failed to predict an incredible amount of home price inflation which ultimately led to the biggest housing bubble in the history of the world.”

A lower OER leads to a lower CPI . This in turn leads to lower rates which lead to an even lower rate of growth in OER; it’s a negative feedback loop. What’s more is that the OER is the single largest component of the CPI"

The CPI also fails to reflect higher costs in other areas such as energy, tuition, medical care, and food and beverages. Here is a chart that demonstrates how the CPI underestimates inflation:

Lastly, it’s important to the note that the CPI doesn’t include taxes – which have grown from 5% in 1 91 3 to over 30% in 201 3. I t doesn’t make sense that the CPI doesn’t include such a significant expense. Thus, the CPI is flawed as a measure of maintaining a certain standard of living.

3) ALTERNATIVES TO THE CPI

The following section will examine multiple alternative measures of inflation. I t is not that any or all of these measures are perfect, it’s that the actual rate of inflation is higher than the CPI says it is. As a reminder, at its current levels, the CPI indicates that inflation is running at around 1% year over year.

1 ) Shadow Stats:

According to Shadow Stats, the CPI understates inflation by around 3% and 7% for the 1990s and 1980s based shadow stats alternatives respectively.

CPI Year-to-Year Growth The CPI -U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the Bureau of Labor Statistics (BLS).

While the headline number usually is the seasonally-adjusted month-to-month change, the formal CPI is reported on a not seasonally-adjusted basis, with annual inflation measured in terms of year-to-year percent change in the price index.

In the charts above we show two SGS-Alternate CPI estimates: One based on the pre-1990 official methodology for computing the CPI -U, and the other based on the methodology which was employed prior to 1980.

2) Chapwood index:

In 2012, the average inflation rate for the top 30 cities – ranked by population – was approximately 11% – or more than 3x higher than what the CPI was.

3) The EPI (Every day Price Index):

As you can see in the following chart, the CPI and EPI tracked relatively closely until the early 2000s. At that point in time, the 2 measures began to diverge. Since 1 987, the EPI and CPI have increased by approximately 1 40 and 1 1 0 percent respectively. In other words, the EPI suggests that cumulative inflation from 1 987 to the present is 30% higher than the CPI would suggest.

4) CONCLUSION

Inflation is higher than the CPI says that it is and most people are aware of that. I f you ask your friends and family whether or not they’ve noticed a general increase in prices then they’ll say yes. As noted above, both food and beverages and energy costs have risen in price dramatically. Why is that important? Because the majority of people are exposed to one or both of those costs on a regular basis.

You can argue the magnitude of the inflation understatement but you can’t argue that the official numbers are accurate.

Under reporting inflation has led to many predictable outcomes.

Americans are accumulating debt, reducing their spending, relying on government transfers, and searching for yield because the cost of living is going up.

A repressed CPI also has many effects on the financial markets.
1) It provides justification for artificially low interest rates and QE
2) It leads to the perception that the USD is holding its value and
3) It leads to overstated real returns in stocks and especially bonds

In conclusion, inflation is the means and a wealth transfer from poor and the middle class
to the rich is the end.

Don’t be fooled by people who claim that there’s no inflation.

Although disinflation is – at present – a real risk, cumulative inflation is still drastically reducing the consumer’s purchasing power.

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

US equities converged down to VIX's warnings from the holiday period as for the 3rd day in a row equities dropped. This is the worst start to the year for the S&P 500 since 2005. Equities improved during the European session but top-ticked at the US open, tumbling to 10-day lows by the time Europe closed. A leak higher with a vertical ramp to VWAP in the afternoon gave way to selling in the last hour. Trannies are the worst year-to-date (-2.2% from 2013 close highs). Treasuries gained further today, with yields down 6-8bps on the year. The USD lost ground during the European session then flatlined for the rest of the day (-0.25% on the day). From Friday's close, commodities are ending almost unchanged but all had a very volatile ride today (most notably in gold and silver).

 

VWAP once again played a key role in S&P 500 futures trading today…(and volume was well above the average of the holiday period)…

 

Stocks caught down to VIX…

 

Performance off the 2013 Close highs has been ugly (despite the Bernanke bounce)…

 

Commodities all seemed to regroup back around unchanged after a majorly volatile day (most notably in the PMs)

 

The USD's weakness today (-0.25%) all occurred betwee the US open and EU close with it flat otherwise (as POMO started)…

 

But stocks tracked JPY very closely once again…

 

Treasuries are tending to trade one way since the start of the year… (but again – it has been a US open to EU close story there also…)

 

Charts: Bloomberg

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Presented with no comment…

(h/t The Burning Platform blog)

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Submitted by Tim Price via Sovereign Man blog,

On December 31st, 1964, the Dow Jones Industrial Average stood at 874. On December 31st, 1981, it stood at 875. In Buffett’s words, “I’m known as a long term investor and a patient guy, but that is not my idea of a big move.”

To see in stark black and white how the US stock market could spend 17 years going nowhere– even when the GDP of the US rose by 370% and Fortune 500 company sales went up by a factor of six times during the same period– the price chart for the Dow is shown below.

 

So the US stock market suffered a Japan-style lost decade, and then some. Back to Buffett, again:

“To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates.

 

“These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities.

 

“So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.

 

“In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities.

 

“So there–in that tripling of the gravitational pull of interest rates- -lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.”

So how you feel about asset allocation this year should largely be a function of how you feel about interest rates.

And if you fear that interest rates are more likely to rise– triggered, perhaps, by a combination of Fed tapering and general weariness / revulsion at the manipulation of so many financial assets– then you should perhaps question your commitment to western equity markets as well as to bonds.

As Buffett wrote in a 1999 article in Fortune magazine, “Secular equity bull markets occur when long-term rates are dropping… and secular bears occur when rates are rising.” This is hardly rocket science.

Of course, 2014 could be yet another year in which equity markets rise further, driven by hopes and expectations of still more QE. But that’s not a bet we’re entirely comfortable making.

Since we’re primarily attracted by valuations and not by momentum, we’re now fishing for equities in a clearly demarcated pool (Asia and Japan– because that’s where values are most compelling).

We are not interested in most western markets because the value isn’t visible to us and the underlying growth (fundamentals, anybody?) looks pathetic.

And our monetary authorities have showered financial markets with kerosene by ensuring that the conventional ‘risk-free’ alternative to equities (i.e. government debt) is anything but.

Yet our exposure to ‘alternative’ assets, primarily precious metals, proved variously problematic last year.

2013 was the year that the mainstream financial media went aggressively anti-gold, and in his magisterial (and deeply witty) 2013 Year In Review, Cornell chemistry professor and economic agent provocateur David Collum cites three pertinent quotations from the New York Times:

“There is simply nothing in the economic picture today to cause a rush into gold. The technical damage caused by the decline is enormous and it cannot be erased quickly. Avoid gold and gold stocks”;

 

“Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels”;

 

“The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”

But as Collum also points out, these quotes are from 1976, when the spot price of gold fell from $200 to $100 an ounce. Thereafter, gold rose from $100 to $850.

Why do we continue to keep the faith with gold (and silver)? We can encapsulate the argument in one statistic.

Last year, the US Federal Reserve enjoyed its 100th anniversary, having been founded in a blaze of secrecy in 1913. By 2007, the Fed’s balance sheet had grown to $800 billion.

Under its current QE programme (which may or may not get tapered according to the Fed’s current intentions), the Fed is printing $1 trillion a year.

To put it another way, the Fed is printing roughly 100 years’ worth of money every 12 months. (Now that’s inflation.)

Conjuring up a similar amount of gold from thin air is not so easy.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/S_awa5zULrE/story01.htm Tyler Durden

While there were some concerns that due to adverse weather conditions, the Yellen vote may take longer than usual with many senators’ return to Washington D.C. delayed, for now proceedings are going according to schedule: the vote is expected to proceed at 5:30 pm Eastern, with one option being that the roll call could begin as planned, leaving the tally open for a number of hours to allow latecomers to vote. As a reminder, Yellen needs a simple majority (51 votes if no senators abstain) with Democrats holding 55 seats in the Senate, so there will be no major surprises and Yellen will receive confirmation. The only open question is how many Republicans will abstain from supporting Yellen, and whether this will surpass the previous record of 30 Senators refusing to support Ben Bernanke during his 2010 renomination.

In the meantime, the actual debate surrounding Yellen’s confirmation is set to begin at 3 pm Eastern.

C-Span feed after the jump

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The predictions of Blackstone’s octogenarian Byron Wien (born in 1933) have been all over the place in the past 10 years, some correct, most wrong (with a recent hit rate of about 25%) – his 2013 year end S&P forecast was for 1300 – yet always entertaining. Which is the only value in the latest release of his 10 forecasts for 2014. Naturally, take all of these with a salt mine.

Byron’s Ten Surprises of 2014 are as follows:

1. We experience a Dickensian market with the best of times and the worst of times. The worst comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of more than 10%. The best then follows with a move to new highs as the Standard & Poor’s 500 approaches a 20% total return by year end (ZH: or, said otherwise, S&P 500 at 2200).
2. The U.S. economy finally breaks out of its doldrums. Growth exceeds 3% and the unemployment rate moves toward 6%. Fed tapering proves to be a non-event.
3. The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.
4. Shinzo Abe is the only world leader who understands that Dick Cheney was right when he said that deficits don’t matter. He continues his aggressive fiscal and monetary expansion and the Nikkei 225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and declining work force finally begin to take their toll and the market suffers a sharp (20%) correction in the second half.
5. China’s Third Plenum policies to rebalance the economy toward the consumer and away from a dependence on investment spending slow the growth rate to 6% in 2014. Chinese mainland traded equities have another disappointing year. The new leaders emphasize that their program is best for the country in the long run.
6. Emerging market investing continues to prove treacherous. Strong leadership and growth policies in Mexico and South Korea result in significant appreciation in their equities, but other emerging markets fail to follow their performance.
7. In spite of increased U.S. production the price of West Texas Intermediate crude exceeds $110. Demand from developing economies continues to outweigh conservation and reduced consumption in the developed world.
8. The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.00.
9. The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the 10-year U.S. Treasury to rise to 4%. Short-term rates stay near zero, but the increase in intermediate-term yields has a negative impact on housing and a positive effect on the dollar.
10. The Affordable Care Act has a remarkable turnaround. The computer access problems are significantly diminished and younger people begin signing up. Obama’s approval rating rises and in the November elections the Democrats not only retain control of the Senate but even gain seats in the House.

Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”

Also rans:

1. Through a combination of intelligence, extremism, celebrity and cunning Ted Cruz emerges as the clear front runner for the 2016 Republican presidential nomination. Chris Christie and the moderates fade in popularity as momentum builds for fiscal and social conservative policies.
2. In 2½ years the price of a Bitcoin has increased from $25 to $975. The supply of Bitcoins is fixed at 21 million with 11.5 million in circulation. Bitcoins lack gold’s position as a store of value over time. During the year Bitcoin’s acceptance collapses as investors realize that it cannot be used as collateral in financial transactions and its principal utility is for illegal business dealings where anonymity is important.
3. Overcoming objections from the Cuban exile community, President Obama opens discussions on initiating trade and diplomatic relations with Cuba. A reduction in sanctions is proposed, as well as limited financial support in the form of bonds, quickly dubbed as “Castro convertibles.”
4. Hillary Clinton decides not to run for President in 2016. She says her work with various Clinton non-for-profit initiatives is important and unfinished. Specifically, she explains that her health was not an issue in her decision. The Democratic race for the top seat becomes chaotic.

* * *

Good luck Byron

And as a reminder, from a year ago here are Byron’s Ten Surprises for 2013.

1. Iran announces it has adequate enriched uranium to produce a nuclear-armed missile and the International Atomic Energy Agency confirms the claim. Sanctions, the devaluation of the currency, weak economic conditions and diplomacy did not stop the weapons program. The world must deal with Iran as a nuclear threat rather than talk endlessly about how to prevent the nuclear capability from happening. Both the United States and Israel shift to a policy of containment rather than prevention.
2. A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline below $100, disappointing investors. The S&P 500 trades below 1300. Companies complain of limited pricing power in a slow, highly competitive world economic environment.
3. Financial stocks have a rough time, reversing the gains of 2012. Intense competition in commercial and investment banking, together with low trading volumes, puts pressure on profits. Layoffs continue and compensation erodes further. Regulation increases and lawsuits persist as an industry burden.
4. In a surprise reversal the Democrats sponsor a vigorous program to make the United States independent of Middle East oil imports before 2020. The price of West Texas Intermediate crude falls to $70 a barrel. The Administration proposes easing restrictions on hydraulic fracking for oil and gas in less populated areas and allowing more drilling on Federal land. They see energy production, infrastructure and housing as the key job creators in the 2013 economy.
5. In a surprise reversal the Republicans make a major effort to become leaders in immigration policy. They sponsor a bill that paves the way for illegal immigrants to apply for citizenship if they have lived in the United States for a decade, have no criminal record, have a high school education or have served in the military, and can pass an English proficiency test. Their goal for 2016 is to win the Hispanic vote, which they believe has a naturally conservative orientation and which put the Democrats over the top in 2012.
6. The new leaders in China seem determined to implement reforms to root out corruption, to keep the economy growing at 7% or better and to begin to develop improved health care and retirement programs. The Shanghai Composite finally comes alive and the “A” shares are up more than 20% in 2013, in contrast with the previous year when Chinese stocks were down and some developing markets, notably India, rose.
7. Climate change contributes to another year of crop failures, resulting in grain and livestock prices rising significantly. Demand for grains in developing economies continues to increase as the standard of living rises. More investors focus on commodities as an investment opportunity and increase their allocation to this asset class. Corn rises to $8.00 a bushel, wheat to $9.00 a bushel and cattle to $1.50 a pound.
8. Although inflation remains tame, the price of gold reaches $1,900 an ounce as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.
9. The Japanese economy remains lackluster and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world’s third largest economy.
10. The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues. Civil unrest subsides as the weaker countries adjust to austerity. Greece proves successful in implementing policies that reduce wasteful government expenditures and raise revenues from citizens who had been evading taxes. European equities, however, decline 10% in sympathy with the U.S. market.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4q5e5hjQU5o/story01.htm Tyler Durden

The predictions of Blackstone’s octogenarian Byron Wien (born in 1933) have been all over the place in the past 10 years, some correct, most wrong (with a recent hit rate of about 25%) – his 2013 year end S&P forecast was for 1300 – yet always entertaining. Which is the only value in the latest release of his 10 forecasts for 2014. Naturally, take all of these with a salt mine.

Byron’s Ten Surprises of 2014 are as follows:

1. We experience a Dickensian market with the best of times and the worst of times. The worst comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of more than 10%. The best then follows with a move to new highs as the Standard & Poor’s 500 approaches a 20% total return by year end (ZH: or, said otherwise, S&P 500 at 2200).
2. The U.S. economy finally breaks out of its doldrums. Growth exceeds 3% and the unemployment rate moves toward 6%. Fed tapering proves to be a non-event.
3. The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.
4. Shinzo Abe is the only world leader who understands that Dick Cheney was right when he said that deficits don’t matter. He continues his aggressive fiscal and monetary expansion and the Nikkei 225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and declining work force finally begin to take their toll and the market suffers a sharp (20%) correction in the second half.
5. China’s Third Plenum policies to rebalance the economy toward the consumer and away from a dependence on investment spending slow the growth rate to 6% in 2014. Chinese mainland traded equities have another disappointing year. The new leaders emphasize that their program is best for the country in the long run.
6. Emerging market investing continues to prove treacherous. Strong leadership and growth policies in Mexico and South Korea result in significant appreciation in their equities, but other emerging markets fail to follow their performance.
7. In spite of increased U.S. production the price of West Texas Intermediate crude exceeds $110. Demand from developing economies continues to outweigh conservation and reduced consumption in the developed world.
8. The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.00.
9. The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the 10-year U.S. Treasury to rise to 4%. Short-term rates stay near zero, but the increase in intermediate-term yields has a negative impact on housing and a positive effect on the dollar.
10. The Affordable Care Act has a remarkable turnaround. The computer access problems are significantly diminished and younger people begin signing up. Obama’s approval rating rises and in the November elections the Democrats not only retain control of the Senate but even gain seats in the House.

Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”

Also rans:

1. Through a combination of intelligence, extremism, celebrity and cunning Ted Cruz emerges as the clear front runner for the 2016 Republican presidential nomination. Chris Christie and the moderates fade in popularity as momentum builds for fiscal and social conservative policies.
2. In 2½ years the price of a Bitcoin has increased from $25 to $975. The supply of Bitcoins is fixed at 21 million with 11.5 million in circulation. Bitcoins lack gold’s position as a store of value over time. During the year Bitcoin’s acceptance collapses as investors realize that it cannot be used as collateral in financial transactions and its principal utility is for illegal business dealings where anonymity is important.
3. Overcoming objections from the Cuban exile community, President Obama opens discussions on initiating trade and diplomatic relations with Cuba. A reduction in sanctions is proposed, as well as limited financial support in the form of bonds, quickly dubbed as “Castro convertibles.”
4. Hillary Clinton decides not to run for President in 2016. She says her work with various Clinton non-for-profit initiatives is important and unfinished. Specifically, she explains that her health was not an issue in her decision. The Democratic race for the top seat becomes chaotic.

* * *

Good luck Byron

And as a reminder, from a year ago here are Byron’s Ten Surprises for 2013.

1. Iran announces it has adequate enriched uranium to produce a nuclear-armed missile and the International Atomic Energy Agency confirms the claim. Sanctions, the devaluation of the currency, weak economic conditions and diplomacy did not stop the weapons program. The world must deal with Iran as a nuclear threat rather than talk endlessly about how to prevent the nuclear capability from happening. Both the United States and Israel shift to a policy of containment rather than prevention.
2. A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline below $100, disappointing investors. The S&P 500 trades below 1300. Companies complain of limited pricing power in a slow, highly competitive world economic environment.
3. Financial stocks have a rough time, reversing the gains of 2012. Intense competition in commercial and investment banking, together with low trading volumes, puts pressure on profits. Layoffs continue and compensation erodes further. Regulation increases and lawsuits persist as an industry burden.
4. In a surprise reversal the Democrats sponsor a vigorous program to make the United States independent of Middle East oil imports before 2020. The price of West Texas Intermediate crude falls to $70 a barrel. The Administration proposes easing restrictions on hydraulic fracking for oil and gas in less populated areas and allowing more drilling on Federal land. They see energy production, infrastructure and housing as the key job creators in the 2013 economy.
5. In a surprise reversal the Republicans make a major effort to become leaders in immigration policy. They sponsor a bill that paves the way for illegal immigrants to apply for citizenship if they have lived in the United States for a decade, have no criminal record, have a high school education or have served in the military, and can pass an English proficiency test. Their goal for 2016 is to win the Hispanic vote, which they believe has a naturally conservative orientation and which put the Democrats over the top in 2012.
6. The new leaders in China seem determined to implement reforms to root out corruption, to keep the economy growing at 7% or better and to begin to develop improved health care and retirement programs. The Shanghai Composite finally comes alive and the “A” shares are up more than 20% in 2013, in contrast with the previous year when Chinese stocks were down and some developing markets, notably India, rose.
7. Climate change contribut
   es to another year of crop failures, resulting in grain and livestock prices rising significantly. Demand for grains in developing economies continues to increase as the standard of living rises. More investors focus on commodities as an investment opportunity and increase their allocation to this asset class. Corn rises to $8.00 a bushel, wheat to $9.00 a bushel and cattle to $1.50 a pound.
8. Although inflation remains tame, the price of gold reaches $1,900 an ounce as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.
9. The Japanese economy remains lackluster and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world’s third largest economy.
10. The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues. Civil unrest subsides as the weaker countries adjust to austerity. Greece proves successful in implementing policies that reduce wasteful government expenditures and raise revenues from citizens who had been evading taxes. European equities, however, decline 10% in sympathy with the U.S. market.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4q5e5hjQU5o/story01.htm Tyler Durden

The possibility of a French recession is not exactly new: even the venerable Economist penned an an extensive article – with a humorous cover – over a year ago describing just such a possibility (the French were unamused). Yet to this date, not only has France managed to avoid the dreaded “Triple Dip” but its bonds continue to be well-bid, with the yield on the 10 Year well inside the US, at only 2.53%, nearly 1% below the wides seen in 2011. However, and especially now that Hollande’s 75% millionaire tax has finally been enacted, the fuse on the baguette time bomb is getting shorter.

As GaveKal’s Francois Chauchat rhetorically asks, “Is every country in Europe recovering, but France? This is the question raised by a third consecutive month of disappointing French manufacturing Purchasing Managers Indices (PMIs), which plunged to 47 in December even as the eurozone-wide PMI expanded to 52.7, a 31-month high. Such a large divergence is peculiar, since France and eurozone PMIs have historically been aligned. It could be that

France’s recovery is just a bit more painful and taking that much longer—but what if the real story is that the country is slipping back into recession?

 

Judged by the PMI surveys alone, and the economy indeed looks to be contracting, a pretty worrying development since the rest of the advanced economies are firmly in growth territory. Another recession would suggest that socialist President Francois Hollande’s targeted high tax agenda has hit a wall, and that a messy revision in economic policy, possibly preceded by financial market pressure, could be in store.

The divergence between France and the rest of Europe can be seen vividly on the European PMI chart below:

So a French recession would be a bad thing, right? Well, yes – for the French population, and certainly whatever is left of its middle class. However, as has been made clear repeatedly, in the New Normal in which only the trickle down effects from the wealth effect of the 1% matters, what the broader population wants and needs is hardly high on the list of priorities of the central planners. What does matter are stocks. And it is the wealthiest 1% and the stock market which, in keeping up with the old bad news is good news maxim, that may be the biggest beneficiary of a French triple dip.

The reason, at least according to GaveKal and increasingly others, is that a French re-re-recession would be precisely the catalyst that forces the ECB out of its inaction slumber and pushes it to engage in what every other “self-respecting” bank has been doing for the past five years – unsterilized quantitative easing: an event which the soaring European stocks have largely been expecting in recent weeks and months.

Quote GaveKal:

But even if the country is slipping back into recession, it is not clear that the “French tail risk” would reignite a broader euro financial crisis — a fear that has been raised repeatedly in the past few years. Would not a shockingly weak French GDP number rather increase pressure on the European Central Bank to act, weaken the euro and push Hollande to deliver more quickly and efficiently on his new pledge to regain business confidence? If this is what a still very hypothetical new French recession produces, not much lasting damage would be done to eurozone financial markets. Rather the opposite.

And there you have it: spinning bad economic news as more hopium for market bulls, and in fact setting the stage when the latest surge in risk assets just happens to coincide with that negative French GDP print, an outcome predicted by BNP two months ago, and an outcome which Draghi and the other ECB doves and which the Hawks on the ECB will theatrically complain about, but in the end, do nothing as usual. And with Merkel incapacitated, well: vive la recession!

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