Category: zerohedge

Submitted by Michael Snyder of The Economic Collapse blog,

The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing.  On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion.  When this news came out, it sent shockwaves through financial markets all over the planet.  But the truth is that not that much has really changed.  The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace.  It will just be slightly less than before.  However, this very well could represent a very important psychological turning point for investors.  It is a signal that "the party is starting to end" and that the great bull market of the past four years is drawing to a close.  So what is all of this going to mean for average Americans?  The following are 8 ways that "the taper" is going to affect you and your family…

1. Interest Rates Are Going To Go Up

Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a "bad omen for bonds".  Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.

2. Home Sales Are Likely Going To Go Down

Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries.  Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up.  That is one of the reasons why the number of mortgage applications just hit a new 13 year low.  And now if rates go even higher that is going to tighten things up even more.  If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.

3. Your Stocks Are Going To Go Down

Yes, I know that stocks skyrocketed today.  The Dow closed at a new all-time record high, and I can't really provide any rational explanation for why that happened.  When the announcement was originally made, stocks initially sold off.  But then they rebounded in a huge way and the Dow ended up close to 300 points.

A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock.  I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news.  But of course I absolutely cannot prove this at all.  I hope someday we learn the truth about what actually happened on Wednesday afternoon.  I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.

In any event, what we do know is that when QE1 ended stocks fell dramatically and the same thing happened when QE2 ended.  If you doubt this, just check out this chart.

Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of "easy money" are over and that we have reached the peak of the market.

And if you are at the peak of the market, what is the logical thing to do?

Sell, sell, sell.

But in order to sell, you are going to need to have buyers.

And who is going to want to buy stocks when there is no upside left?

4. The Money In Your Bank Account Is Constantly Being Devalued

When a new dollar is created, the value of each existing dollar that you hold goes down.  And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years.  Just check out what has been happening to M1.  It has nearly doubled since the financial crisis of 2008…

The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much.  Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.

And for those that insist that what the Federal Reserve is doing is "working", it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while too before ending in complete and utter disaster.

5. Quantitative Easing Has Been Causing The Cost Of Living To Rise

The Federal Reserve insists that we are in a time of "low inflation", but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is.  The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.

Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation.  As one CNBC article recently stated, we are seeing absolutely rampant inflation in "stocks and bonds and art and Ferraris and farmland".

6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won't Either

The Federal Reserve actually first began engaging in quantitative easing back in late 2008.  As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…

The mainstream media continues to insist that quantitative easing was all about "stimulating the economy" and that it is now okay to cut back on quantitative easing because "unemployment has gone down".  Hopefully you can see that what the mainstream media has been telling you has been a massive lie.  According to the government's own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010.  Anyone that tries to tell you that we have had an "employment recovery" is either very ignorant or is flat out lying to you.

7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System

Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use it to monetize staggering amounts of government debt.  They have been warning us to stop doing this, but the Fed has been slow to listen.

The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on.  Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.

Right now, far more U.S. dollars are used outside the country than inside the country.  The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.

We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.

If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble.  Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.

And there are signs that this is already starting to happen.  In fact, China recently announced that they are going to quit stockpiling more U.S. dollars.  This is one of the reasons why the Fed felt forced to do something on Wednesday.

But what the Fed did was not nearly enough.  It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.

8. The Economy As A Whole Is Going To Continue To Get Even Worse

Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline.  If you doubt this, please see my previous article entitled "37 Reasons Why 'The Economic Recovery Of 2013' Is A Giant Lie".

And no matter what the Fed does now, our decline will continue.  The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…

During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.

But the truth is that you don't have to travel far to see evidence of our economic demise for yourself.  All you have to do is to go down to the local shopping mall.  Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking.  The following is from a recent article by Wolf Richter…

The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.

 

Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.

And J.C. Penney is suffering a similar fate.  According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…

Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.

So don't believe the hype.

The economy is getting worse, not better.

Quantitative easing did not "rescue the economy", but it sure has made our long-term problems a whole lot worse.

And this "tapering" is not a sign of better things to come.  Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/03KiUiOz9Ow/story01.htm Tyler Durden

Only 5% of hospitals in American saw year-over-year growth in overall admissions in November, according to Citi. This is the weakest inpatient admission rate on record and comes amid both doctor and patient uncertainty over the Obamacare changes. As Citi’s Gary Taylor notes “the paralyzing effect of the impotent Obamacare rollout” and Medicare’s new “two-midnight” rule will weigh notably on hospital earnings as doctor’s employment and compensation modesl remain in flux. 13 days to go…

Citi’s survey drops to record low…

Only 5% of responders cited yty growth in overall admissions. This result is the weakest in the 11-year history of our survey and compares to a revised 22% in October, 37% in September and 24% in August.

 

And the survey has tended to be predictive of reality…

 

Via Reuters,

…

 

New billing rules for the Medicare program for the elderly and disabled require hospitals to treat patient stays lasting less than “two midnights” as an outpatient visit.

 

“In addition, it is reasonable to conclude that the cumulative impact of changing physician employment and payment models is beginning to play a role, as well as the paralyzing effect of the impotent Obamacare rollout,” Citi analyst Gary Taylor said in a report.

 

Hospital inpatient admissions in November fell to their weakest level in more than a decade, based on responses to the bank’s monthly survey of 98 hospitals, Taylor said.

 

In October and November combined, admissions were down 4 to 5 percent from a year ago, which will likely weigh on hospital operators’ fourth-quarter earnings and 2014 forecasts, he said.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/l5F4SmNwrQ4/story01.htm Tyler Durden

From the United States to Europe and Asia: The world's central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory. Jim Grant tells Germany's Finanz und Wirtschaft that he "fears that this journey will not end well." The sharply thinking Wall Street veteran doesn’t trust the theoretical models of the central banks and warns of irrational exuberance in the financial markets adding that "the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance."

 

Via FuW,

Mr. Grant, half a decade after the financial crisis hope is rising that the United States finally are on a sustainable path to economic recovery. How are chances that the US economy gets back soon its status as the growth engine of the world?
In the past, the United States has been very resilient even in the face of very unfavorable and even punitive policy measures. The United States seem to want to be prosperous despite of what’s happening in Washington. Therefore, one can never rule out a great unscripted outburst of prosperity. I hope for that to happen, but I don’t predict it. Also, I’m coming increasingly to wonder about the concept of an economy as an integrated whole. People who talk that way don’t appreciate the incredible complexity of individual choices and decisions. Until fairly recently, no one thought about what we now call the economy as anything organic and macro in whole. This wasn’t a concept that entered our collective thinking until the nineteen forties. If you go back and read what economists wrote and what newspapers reported in the early portion of the twentieth century, you see that they would talk about prosperity or depression. But they wouldn’t talk about the economy. They just didn’t see it that way.

Signs of a brighter economic environment have encouraged the Federal Reserve to finally start the tapering of its massive bond purchase program, also known as QE3. What’s your take on this, for most market participants surprising move?
The «non-taper taper», Wednesday’s announcement, is yet another Federal Reserve innovation. To remove the sting from its decision to reduce the gait of its asset purchases, the central bank has vowed to hold its policy rate at zero even when the jobless rate falls below 6½%. «Inflation or bust – or both» would appear to be the Fed’s mantra.

Janet Yellen, who will be the next Fed chairman, has already made clear that she stands behind the recent monetary policy. What can Investors expect from her?
She is the vey figure head of our monetary system which is what I call the PhD-standard. In the not so distant past, until a generation or so ago, central bankers were as likely to be ordinary bankers or ordinary business people as they were academics like the college professors who are mainly running the show now in this country. Apparently, in the Federal Open Market Committee, the interest rate setting regime here, nine out of the twelve members this year never had an experience in the private sector. Janet Yellen is the quintessential academic economist who is now in charge of what we ought to call – in the interest of plain speaking – price control.  They certainly mean well but they have led us on a path of price administration rather than price discovery.

What do you mean by that?
If you ask economists they will tell you that price controls are a very bad idea. But that’s exactly what these mandarins at the Fed are doing. We are embarked on a unique experiment in monetary manipulation. That kind of central banking might be more accurately called central planning. One time, I therefore asked Fed-Governor Jeremy Stein in an open meeting if he could help us understand the substantial economic difference between central banks manipulating money market interest rates on one hand and traders at commercial banks manipulation Libor at the other. He just denied answering it. Also, since interest rates are artificially low the valuation of all earning assets must be called into question. This is the difficulty investors are facing the world over. We live in a hall of mirrors thanks to the zero interest rate regime and the chronic nonstop interventions by central banks

What are the consequences of these distortions?
One distortion is that people who are in the business of dealing with distressed debt have very little to do these days because there is less and less distressed debt because there are fewer bankruptcies. That’s because interest rates are so low that companies, even in a very bad way, can survive. That reduces in an unintended fashion the dynamism of our economy. In a dynamic society entrepreneurs start things and other entrepreneurs finish them or bankers finish them for the entrepreneurs because the entrepreneurs have failed. Without failure there really can’t be any success. Otherwise you have a futile system of permanent state sponsored enterprises. So our manipulated interest rates have given us a society that, in commercial terms, is much less dynamic than it should be.

But with super low interest rates, central banks like the Fed or the European Central Bank are fighting the low inflation rates which can also cause some serious problems to the economy. The ECB just recently cut its intervention rate in half to one quarter of one percent because it expressed its concern over an inadequate rate of the depreciation of the value of the Euro. Seven tenths of one percent is not good enough, we need two percent, they think. But why is two percent of inflation a good thing? They even acknowledge that the statistical difference between seven tenths of one percent and one and a half percent might all be error. It is very difficult to measure these price indices and to assure that the data are compiled properly and seasonally adjusted in a correct way. It speaks to our collective faith in our economic technicians or to the lack of critical thought that we accept so generally theses numbers as if they were gospel.

Then again, there is still the risk of deflation looming. Examples of how harmful deflation can be are the Great Depression or more recently the economic malaise of Japan.
They never make a distinction between deflation and progress. In the last quarter of the nineteenth century thanks to everything, from the electric light to progress in the process of steal making or the telephone, prices and costs fell for the better part of thirty years. Real wages went up, some people suffered, many didn’t, society progressed and people got richer. Also, in the early nineteen sixties prices as measured by the CPI did not rise by as much as two percent for five years in a row. Nobody cared at that time. But now there is this fear fanned by the professors who run our central banks and we are all hysterics about deflation.

That’s maybe because so many governments and households are so heavily indebted these days. Why shouldn’t we have some mild form of inflation to make the deleveraging process a little bit easier?
By insisting on trying to raise the price level the Fed is in effect resisting the progress of our time. As technology advances one would expect that the cost of production would fall. Digital technology and the accession of all these hundreds of millions of hands in the world labor force ought to be forces for falling costs of making things. And as the cost of production falls so should the cost of selling things. Yet, the Fed, the ECB and ot
her central banks resist this by using monetary policy. And as they resist the tendency of prices to fall in time of technological progress they unintentionally seed the booms and busts in financial markets.

More and more people on Wall Street are screaming alarm about new bubbles of speculation. Do you spot any sings of irrational exuberance?
The massive market of treasury securities is itself in some kind of a bubble. Other examples are junk bonds or biotechnology stocks. Another bubble is the art market as the record auction prices are indicating. A similar case is classic sport cars: Some weeks ago, a Ferrari 250 GTO commanded 52 Mio. $ in a private sale. That’s almost a 50% increase on the record that was achieved last year for another 250 GTO. Investors who are looking for tangible assets find better value in antique furniture or in historic documents.

Another reason why the Federal Reserve is going to start to taper its securities purchases might be fear of exactly such kind of bubbles. Do you think they will ever find a way back to a normal monetary policy?
They say they have everything under control. To do, what they are saying they are going to do, requires both: technique and judgment. But they did not see one clue before the disaster of the years 2007, 2008 and 2009 – absolutely nothing. These people are well intending and most respectable but they are very concrete minded and very fixated on their way of thinking. What a good investor has – and what a bureaucrat typically lacks of – is imagination.

So what could go wrong this time?
What happens if, despite the Obama administration, there is a succession of booming months in job growth and the Fed at first doesn’t react and then, when it finally tries, it’s too late: First, there is a little bit inflation and then there is some more inflation and bond yields suddenly go up. The Fed thinks it has to control this by selling bonds and contributes thereby to the rise in interest rates and the fall in bond prices. And suddenly, there’s a disaster in the bond market.

But there seems to be really not that much investor nervousness in the bond market these days.
What one can observe about interest rates is that they have tended to rise and fall in generation length intervals, at least throughout Europe and North America. Since the early eighties they have been falling now most of the past 31 years. So, one would expect that we are closer to the end of this bull market than to the beginning. Therefore, bond yields are likely to go up in the future, which makes bonds look like a very poor investment.

Also, the setback in the gold market does not flash red lights for inflation. What’s next for the archaic metal after the terrible performance in 2013?
Gold is just an enigma, isn’t it? As an asset it yields nothing and pays no dividend. Therefore, you can’t value it like a common stock or bond. To me, gold is an investment in the almost certain failure of the PhD-standard in central banking. The gold price is down some 25% this year and gold stocks have been destroyed. In fact, the bear market in gold equities is the only bear market I know of these days. But when the world gets a full-on glance of the new Fed Chairman Yellen and understands the measure of the policies that central bankers will likely continue to implement, the gold price will go up a lot against the dollar. Only if the central bankers ever achieve to solve all the problems with fiat money and if governments end their tendency to over-issue uncollateralized debt then gold gets obsolete. But I certainly don’t agree with that promise. I think gold will yet shine as a monetary alternative and maybe serve in my grand children’s life time again as an anchorage to the world’s monetary system.

How should investors behave in such an environment?
At «Grant’s Interest Rate Observer», our ambition is to identify assets that are priced in such ways that you can afford a margin of error, knowing that one is likely to be early or even wrong about certain aspects of a particular situation. With a properly conservative valuation you are protected to a degree against such kind of human errors. A friend of a friend once had a great saying. What this fellow said was: Successful investing is all about having everyone agreeing with you – later. We are trying to live that kind of philosophy: to think of a thing that is now out of favor but has a reason to be in favor.

What would be such a thing?
Russian oil stocks like Lukoil, Gazprom and Rosneft exhibit several of desirable characteristics. There is insider buying – oddly enough. The business seems to be viable or even more than viable. Corporate governance is awful and investor sentiment is almost universally depressed. So here are cheap stocks in an environment of great skepticism toward them and with the added appeal of substantial insider accumulation. Once we looked at these stocks we were even more attracted since these companies are soundly financed which mitigates the risk of being wiped out through bankruptcy.

Russian oil stocks are a little bit exotic, though. What about investment ideas for Western Europe or for the United States?
Nobody knows what is going to happen in Europe. Additionally, we can’t find a lot of buying opportunities. Stocks have already gone up and they don’t seem to reflect the risks of the still precarious macro environment. Of course, there are always risks. But the question is if you are being adequately compensated for that risk. One stock that stands out is the Italian energy company Eni. The ideal hedge against the possible consequences of an overly aggressive monetary policy would be a value-laden equity that could prosper in any macro-economic setting but could shine in an inflationary one. Eni conforms to that description.

And what’s your take on the US stock market?
In the US we’re seeing more to do on the short side than on the long side. As an example it could pay off to take a closer look at story stocks. A story stock is a stock that is highly valued by the price earnings or price revenue calculation. Its price is manly driven by the quality of the narrative brokers are telling about it. So we just recently compiled an index of such kind of stocks because we think the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance. Examples for such story stocks are Tile Shop Holdings or Boulder Brands.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-WWnCQ2ookI/story01.htm Tyler Durden

From the United States to Europe and Asia: The world's central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory. Jim Grant tells Germany's Finanz und Wirtschaft that he "fears that this journey will not end well." The sharply thinking Wall Street veteran doesn’t trust the theoretical models of the central banks and warns of irrational exuberance in the financial markets adding that "the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance."

 

Via FuW,

Mr. Grant, half a decade after the financial crisis hope is rising that the United States finally are on a sustainable path to economic recovery. How are chances that the US economy gets back soon its status as the growth engine of the world?
In the past, the United States has been very resilient even in the face of very unfavorable and even punitive policy measures. The United States seem to want to be prosperous despite of what’s happening in Washington. Therefore, one can never rule out a great unscripted outburst of prosperity. I hope for that to happen, but I don’t predict it. Also, I’m coming increasingly to wonder about the concept of an economy as an integrated whole. People who talk that way don’t appreciate the incredible complexity of individual choices and decisions. Until fairly recently, no one thought about what we now call the economy as anything organic and macro in whole. This wasn’t a concept that entered our collective thinking until the nineteen forties. If you go back and read what economists wrote and what newspapers reported in the early portion of the twentieth century, you see that they would talk about prosperity or depression. But they wouldn’t talk about the economy. They just didn’t see it that way.

Signs of a brighter economic environment have encouraged the Federal Reserve to finally start the tapering of its massive bond purchase program, also known as QE3. What’s your take on this, for most market participants surprising move?
The «non-taper taper», Wednesday’s announcement, is yet another Federal Reserve innovation. To remove the sting from its decision to reduce the gait of its asset purchases, the central bank has vowed to hold its policy rate at zero even when the jobless rate falls below 6½%. «Inflation or bust – or both» would appear to be the Fed’s mantra.

Janet Yellen, who will be the next Fed chairman, has already made clear that she stands behind the recent monetary policy. What can Investors expect from her?
She is the vey figure head of our monetary system which is what I call the PhD-standard. In the not so distant past, until a generation or so ago, central bankers were as likely to be ordinary bankers or ordinary business people as they were academics like the college professors who are mainly running the show now in this country. Apparently, in the Federal Open Market Committee, the interest rate setting regime here, nine out of the twelve members this year never had an experience in the private sector. Janet Yellen is the quintessential academic economist who is now in charge of what we ought to call – in the interest of plain speaking – price control.  They certainly mean well but they have led us on a path of price administration rather than price discovery.

What do you mean by that?
If you ask economists they will tell you that price controls are a very bad idea. But that’s exactly what these mandarins at the Fed are doing. We are embarked on a unique experiment in monetary manipulation. That kind of central banking might be more accurately called central planning. One time, I therefore asked Fed-Governor Jeremy Stein in an open meeting if he could help us understand the substantial economic difference between central banks manipulating money market interest rates on one hand and traders at commercial banks manipulation Libor at the other. He just denied answering it. Also, since interest rates are artificially low the valuation of all earning assets must be called into question. This is the difficulty investors are facing the world over. We live in a hall of mirrors thanks to the zero interest rate regime and the chronic nonstop interventions by central banks

What are the consequences of these distortions?
One distortion is that people who are in the business of dealing with distressed debt have very little to do these days because there is less and less distressed debt because there are fewer bankruptcies. That’s because interest rates are so low that companies, even in a very bad way, can survive. That reduces in an unintended fashion the dynamism of our economy. In a dynamic society entrepreneurs start things and other entrepreneurs finish them or bankers finish them for the entrepreneurs because the entrepreneurs have failed. Without failure there really can’t be any success. Otherwise you have a futile system of permanent state sponsored enterprises. So our manipulated interest rates have given us a society that, in commercial terms, is much less dynamic than it should be.

But with super low interest rates, central banks like the Fed or the European Central Bank are fighting the low inflation rates which can also cause some serious problems to the economy. The ECB just recently cut its intervention rate in half to one quarter of one percent because it expressed its concern over an inadequate rate of the depreciation of the value of the Euro. Seven tenths of one percent is not good enough, we need two percent, they think. But why is two percent of inflation a good thing? They even acknowledge that the statistical difference between seven tenths of one percent and one and a half percent might all be error. It is very difficult to measure these price indices and to assure that the data are compiled properly and seasonally adjusted in a correct way. It speaks to our collective faith in our economic technicians or to the lack of critical thought that we accept so generally theses numbers as if they were gospel.

Then again, there is still the risk of deflation looming. Examples of how harmful deflation can be are the Great Depression or more recently the economic malaise of Japan.
They never make a distinction between deflation and progress. In the last quarter of the nineteenth century thanks to everything, from the electric light to progress in the process of steal making or the telephone, prices and costs fell for the better part of thirty years. Real wages went up, some people suffered, many didn’t, society progressed and people got richer. Also, in the early nineteen sixties prices as measured by the CPI did not rise by as much as two percent for five years in a row. Nobody cared at that time. But now there is this fear fanned by the professors who run our central banks and we are all hysterics about deflation.

That’s maybe because so many governments and households are so heavily indebted these days. Why shouldn’t we have some mild form of inflation to make the deleveraging process a little bit easier?
By insisting on trying to raise the price level the Fed is in effect resisting the progress of our time. As technology advances one would expect that the cost of production would fall. Digital technology and the accession of all these hundreds of millions of hands in the world labor force ought to be forces for falling costs of making things. And as the cost of production falls so should the cost of selling things. Yet, the Fed, the ECB and other central banks resist this by using monetary policy. And as they resist the tendency of prices to fall in time of technological progress they unintentionally seed the booms and busts in financial markets.

More and more people on Wall Street are screaming alarm about new bubbles of speculation. Do you spot any sings of irrational exuberance?
The massive market of treasury securities is itself in some kind of a bubble. Other examples are junk bonds or biotechnology stocks. Another bubble is the art market as the record auction prices are indicating. A similar case is classic sport cars: Some weeks ago, a Ferrari 250 GTO commanded 52 Mio. $ in a private sale. That’s almost a 50% increase on the record that was achieved last year for another 250 GTO. Investors who are looking for tangible assets find better value in antique furniture or in historic documents.

Another reason why the Federal Reserve is going to start to taper its securities purchases might be fear of exactly such kind of bubbles. Do you think they will ever find a way back to a normal monetary policy?
They say they have everything under control. To do, what they are saying they are going to do, requires both: technique and judgment. But they did not see one clue before the disaster of the years 2007, 2008 and 2009 – absolutely nothing. These people are well intending and most respectable but they are very concrete minded and very fixated on their way of thinking. What a good investor has – and what a bureaucrat typically lacks of – is imagination.

So what could go wrong this time?
What happens if, despite the Obama administration, there is a succession of booming months in job growth and the Fed at first doesn’t react and then, when it finally tries, it’s too late: First, there is a little bit inflation and then there is some more inflation and bond yields suddenly go up. The Fed thinks it has to control this by selling bonds and contributes thereby to the rise in interest rates and the fall in bond prices. And suddenly, there’s a disaster in the bond market.

But there seems to be really not that much investor nervousness in the bond market these days.
What one can observe about interest rates is that they have tended to rise and fall in generation length intervals, at least throughout Europe and North America. Since the early eighties they have been falling now most of the past 31 years. So, one would expect that we are closer to the end of this bull market than to the beginning. Therefore, bond yields are likely to go up in the future, which makes bonds look like a very poor investment.

Also, the setback in the gold market does not flash red lights for inflation. What’s next for the archaic metal after the terrible performance in 2013?
Gold is just an enigma, isn’t it? As an asset it yields nothing and pays no dividend. Therefore, you can’t value it like a common stock or bond. To me, gold is an investment in the almost certain failure of the PhD-standard in central banking. The gold price is down some 25% this year and gold stocks have been destroyed. In fact, the bear market in gold equities is the only bear market I know of these days. But when the world gets a full-on glance of the new Fed Chairman Yellen and understands the measure of the policies that central bankers will likely continue to implement, the gold price will go up a lot against the dollar. Only if the central bankers ever achieve to solve all the problems with fiat money and if governments end their tendency to over-issue uncollateralized debt then gold gets obsolete. But I certainly don’t agree with that promise. I think gold will yet shine as a monetary alternative and maybe serve in my grand children’s life time again as an anchorage to the world’s monetary system.

How should investors behave in such an environment?
At «Grant’s Interest Rate Observer», our ambition is to identify assets that are priced in such ways that you can afford a margin of error, knowing that one is likely to be early or even wrong about certain aspects of a particular situation. With a properly conservative valuation you are protected to a degree against such kind of human errors. A friend of a friend once had a great saying. What this fellow said was: Successful investing is all about having everyone agreeing with you – later. We are trying to live that kind of philosophy: to think of a thing that is now out of favor but has a reason to be in favor.

What would be such a thing?
Russian oil stocks like Lukoil, Gazprom and Rosneft exhibit several of desirable characteristics. There is insider buying – oddly enough. The business seems to be viable or even more than viable. Corporate governance is awful and investor sentiment is almost universally depressed. So here are cheap stocks in an environment of great skepticism toward them and with the added appeal of substantial insider accumulation. Once we looked at these stocks we were even more attracted since these companies are soundly financed which mitigates the risk of being wiped out through bankruptcy.

Russian oil stocks are a little bit exotic, though. What about investment ideas for Western Europe or for the United States?
Nobody knows what is going to happen in Europe. Additionally, we can’t find a lot of buying opportunities. Stocks have already gone up and they don’t seem to reflect the risks of the still precarious macro environment. Of course, there are always risks. But the question is if you are being adequately compensated for that risk. One stock that stands out is the Italian energy company Eni. The ideal hedge against the possible consequences of an overly aggressive monetary policy would be a value-laden equity that could prosper in any macro-economic setting but could shine in an inflationary one. Eni conforms to that description.

And what’s your take on the US stock market?
In the US we’re seeing more to do on the short side than on the long side. As an example it could pay off to take a closer look at story stocks. A story stock is a stock that is highly valued by the price earnings or price revenue calculation. Its price is manly driven by the quality of the narrative brokers are telling about it. So we just recently compiled an index of such kind of stocks because we think the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance. Examples for such story stocks are Tile Shop Holdings or Boulder Brands.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-WWnCQ2ookI/story01.htm Tyler Durden

While central bank intervention in the foreign exchange markets is nothing new, the last 4 years have seen unprecedented use of direct and indirect (jawboning) manipulation of exchange rates. As Goldman Sachs notes non-cooperative exchange-rate mechanics (i.e. currency wars) remains the new normal dynamic in world markets; and while some of the moves are generally consistent with cyclical (or structural conditions), efforts by central banks to ‘manage’ developed market rates in a low volatility range may come under further pressure with the Fed “tapering” as emerging market nations face money flow crises.

(click image for large legible version)

 

Chart: Goldman Sachs

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Submitted by Lance Roberts of STA Wealth Management,

This past week the Federal Reserve began tapering their current large scale asset purchase (LSAP) program, more commonly referred to as Quantitative Easing (QE), by trimming $10 billion in bond purchases from the previous monthly totals.  This week's "Things To Ponder" is a diverse set of views on the potential effect of the taper on the financial markets and the impact to investors.  Regardless of your personal expectations as to the impact of the reduction of liquidity in the months ahead, it is always a good mental exercise to consider opposing viewpoints to balance your own views by eliminating confirmation bias.  Here are 5 disparate views on the effect, and potential outcome, of the Federal Reserve's latest move.

1) The Fed Is Just Winging It Now by Jeffrey Snider, Alhambra Partners

I have discussed in the past that the Fed's primary concern are the deflationary pressures that continue to plague the economy.  (See here and here)  Jeffrey did a terrific job discussing this point, and the entire post is well worth your time reading.

"In the wake of finally (FINALLY) reaching the primary taper point, it is worth remembering exactly what QE was supposed to do. QE is the 'extraordinary' policy tool that accompanies ZIRP. That mystical lower bound of 0% rates is believed penetrable by jiggering with inflation expectations. Thus, QE is meant as a means to increase inflation expectations, leading to negative real interest rates – and economic panacea/utopia from there.

 

Instead of that, we still have ZIRP now almost for five full years and inflation behaving very much contrary to modeled and publicized expectations. That is true not only in the CPI, but in nearly every official measure of inflation. That would make this a curious development in the light, again, of what QE was supposed to accomplish."

2) Fed Taper Begins, What Happen's Next by Mohammed El-Erian

Mohammed points to four reasons why the Fed's actions make sense:

1) Fed is right to be more confident of the economy.

2) Fed's confidence is not overwhelming, just better.

3) Mixed outlook calls for delicate policy balance.

4) Fed still has room to lower the overnight lending rates.

"Investors are right to take all this to mean that the Fed remains highly committed to supporting an improving economy — and, since it seemingly can only do so through 'the asset channel,' the institution thus remains committed to supporting markets.

This is particularly good news for equity markets in the short-term, building on what already has been a great performance year. It also contains the disruptions to bonds."

3) Post-FOMC Strategy by Doug Kass

Doug does a good analysis of the Federal Reserve's QE program.

"1) QE has provided a stock market put and has also prevented the natural discovery of prices in both the stock and bond markets.

 

2) The general belief is that the U.S. stock market will be able to overcome the reduction in bond buying.

 

3) The critical questions are whether the economy can handle higher interest rates and whether stocks can rally in the face of a less liquidity.

 

4) The addiction to low interest rates runs deep with consumers, corporations in the private sector and our government in terms of financing the U.S. deficit, which will weigh on optimistic growth expectations and the consensus view that stocks will rise further.

 

5) The domestic economy is heavily doped up by abnormally low interest rates and monetary accommodation.

 

6) Monetary policy (the Fed) has been needed to support growth in our domestic economy. With that monetary support moderating coupled with the lack of fiscal responsibility and the inability of Democrats and Republicans to come together, more uncertainty than less certainty of policy lies ahead.

This should be valuation-deflating.

 

To a person, the talking heads in the media who provided instant analysis of the Fed's tapering decision were bullish late yesterday afternoon. Not surprisingly, many of the same commentators who were bullish after a 300-point rise in the DJIA had previously cautioned about the market's likely adverse response to a tapering.

 

It is for the reasons listed above (and others) that I shorted yesterday's market rip and moved from a market-neutral stance to a net 10% short position. (I have since shifted back to neutral.)

 

What keeps me from moving more aggressively short is that I have learned to be respectful of the market's unbelievable price momentum, and frankly, I don't know the timing of a downturn/correction with any degree of certainty or precision.

 

That I am certain of is, as The Oracle wrote, it might shortly 'be time to be fearful when others are greedy.'"

4)  5 Reasons Stocks Didn't Suffer A Taper Tantrum by Adam Shell, USA Today 

"The past two times the Fed warned of tapering, the Dow fell — 4.9% back in May and June, and 5.6% in August. The declines were dubbed 'Taper Tantrum 1' and 'Taper Tantrum 2.'

 

So why did stocks go up when most pundits figured they would go down?

 

Here are five theories why the first taper didn't tank the stock market:

 

1. It signals the Fed's faith in the recovery.

2. It reduces uncertainty.

3. It amounts to 'Taper Lite.'

4. It caught Wall Street off guard.

5. It doesn't change the Fed's dovish stance.

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The takeaway: The Fed will remain highly accommodative for years."

5) The Taper Morning After: A Full Summary Of What "They" Are Saying via Zero Hedge

"Strategists were largely wrong about the yes taper in September, and then they were just as largely wrong about the no taper in December, and yet their opinion is just as largely gospel and people continue to listen to them (what else is there to be distracted by in a still very much centrally-planned market and economy). Which is why the below summary by Bloomberg of what global financial strategists and investors, also known as "they", are saying about how to trade assets in the post-taper world, should probably be taken, largely, with a grain of salt."

Views from PIMCO, BlackRock, HSBC, UBS, Morgan Stanley, SocGen and others.  It's a good read particularly if you have a currency bias in your portfolio.

Chart Of The Week – What Difference Does $10 Billion A Month Make

The chart below shows the Federal Reserve's balance sheet as compared to the S&P 500 with both being projected through the end of 2016.  The dashed lines denote the projected expansion of the balance sheet, and the correlated rise in asset prices, both before and after the Federal Reserve's most recent "taper."

Wishing you a very happy holiday season and a merry Christmas.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-HpbMrXK4XE/story01.htm Tyler Durden

Treasury curve flattening continues to gather pace as 30Y bonds rallied their most in 8 months today (even as the shorter-end sold off modestly) but on the week the flattening is dramatic to say the least. Of course, all eyes were on stocks as the Dow and S&P leaked (post European close) to new highs (and the Russell gained back yesterday's losses and some to close the week's winner +3.5%). Gold (and silver) rallied on the day back over $1200 (but closes -3% on the week). VIX followed a similar pattern to yesterday with an early drop followed by a drift higher as it's clear managers are protecting into year-end. Quad witching and rebalancing provided some fireworks into the close as volume rose and stocks slid (as Nanex noted – something broke – lots of micro-crashes/rallies) as CBOE quotes stopped with 10 minutes to go.

 

The late-day chaos perhaps summed up best by Nanex…

Whoa something broke or screwed up – lots of micro crash/rally events

— Eric Scott Hunsader (@nanexllc) December 20, 2013

 

The long bond surged lower in yields today…

 

and on the week the flattening is very clear…

 

Gold rallied on the day but closed -3% on the week…

 

Stocks were well coupled with JPY crosses until the European close and then decoupled… with the closing dump seemingly attempting to recouple…

 

After yesterday's disappointing performance, the Russell 2000 surged back to take the victory on the week… (even as the Dow and S&P rolled over)…

 

But VIX tracked a similar trajectory today with protection bid all afternoon…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Zpn7tZZx7mk/story01.htm Tyler Durden

Treasury curve flattening continues to gather pace as 30Y bonds rallied their most in 8 months today (even as the shorter-end sold off modestly) but on the week the flattening is dramatic to say the least. Of course, all eyes were on stocks as the Dow and S&P leaked (post European close) to new highs (and the Russell gained back yesterday's losses and some to close the week's winner +3.5%). Gold (and silver) rallied on the day back over $1200 (but closes -3% on the week). VIX followed a similar pattern to yesterday with an early drop followed by a drift higher as it's clear managers are protecting into year-end. Quad witching and rebalancing provided some fireworks into the close as volume rose and stocks slid (as Nanex noted – something broke – lots of micro-crashes/rallies) as CBOE quotes stopped with 10 minutes to go.

 

The late-day chaos perhaps summed up best by Nanex…

Whoa something broke or screwed up – lots of micro crash/rally events

— Eric Scott Hunsader (@nanexllc) December 20, 2013

 

The long bond surged lower in yields today…

 

and on the week the flattening is very clear…

 

Gold rallied on the day but closed -3% on the week…

 

Stocks were well coupled with JPY crosses until the European close and then decoupled… with the closing dump seemingly attempting to recouple…

 

After yesterday's disappointing performance, the Russell 2000 surged back to take the victory on the week… (even as the Dow and S&P rolled over)…

 

But VIX tracked a similar trajectory today with protection bid all afternoon…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Zpn7tZZx7mk/story01.htm Tyler Durden

It will likely come as no surprise that, despite a ‘surging’ economy (based on today’s inventory-stacked GDP), that CEOs are less than upbeat about the future when one scratches below the surface of 5-second soundbites. As Bloomberg’s Rich Yamarone notes, from the most recent quarter’s earnings calls, two critical themes emerge as top of mind for CEOs – consumer-related companies remain skittish about the ability of households to spend without a heavily promotional environment and companies cited upcoming healthcare legislation as a hurdle to performance and profitability.

 

Coldwater Creek [CWTR] Earnings Call 12/11/13: “While the third quarter was a challenging period for us, we were able to react quickly to the trends in the business by improving our assortments and refining our marketing plans. We have seen an improvement in our sales trends and conversion rates. However, we are seeing an increasingly competitive and highly promotional environment, traffic remains challenging and the majority of the holiday season lies ahead of us.”

Bebe Stores [BEBE] Earnings Call 11/7/13: “While we are pleased with the progress that we have made in first quarter of 2014, we are facing a few headwinds as we enter second quarter. As it has been widely reported, the macroeconomic environment has been increasingly difficult starting the last week of September and continued into October, which has resulted in some decline in traffic trends as well as creating a highly promotional environment.”

Cosi Inc [COSI] Earnings Call 11/14/13: “The increase in labor and related benefits as a percentage of restaurant net sales was due in large part to the deployment of additional hourly labor in an effort to improve speed of service and guest satisfaction, combined with the deleveraging impact of the comparable store sales decline on the fixed portion of our labor costs. We were also adversely impacted in the quarter by higher employee health insurance costs.”

Flowers Foods [FLO ] Earnings Call 11/7/13: “You look at employ-related costs, we’re seeing increase there. You have healthcare increases. It’s kind of some of the typical things you would expect from an employee perspective.”

Wal-Mart [WMT] Earnings Call 11/14/13: “The retail environment, both in stores and online, remains competitive. At the same time, some customers feel uncertainty about the economy, government, jobs stability and their need to take care of their families through the holidays. Walmart has aggressive plans to help our customers enjoy the holiday season…”

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Submitted by Simon Black of Sovereign Man blog,

In investing, it’s often said that nothing goes up or down in a straight line.

Stocks, bonds, commodities… they all go through periods of growth, correction, collapse, mania, etc.

We’re seeing this right now with respect to a substantial decline in the nominal gold price after more than 12 straight years of gains.

But I’ve just recently come across an investment trend that has posted the same results for more than 20-years straight. And it’s actually quite alarming.

Every human being on the planet requires sustenance… typically measured in Calories per day.

What’s interesting is that the global average of per-capita Calorie consumption has increased a whopping 24.6% since 1964.

So over the last fifty years, the data clearly show that human beings are eating more… now to an average of roughly 2,940 Calories per person per day.

As you can probably guess, most of the rise has taken place in East Asia just over the last two decades, owing to the increased wealth in that part of the world.

Roughly a billion people have been lifted out of poverty in Asia alone. And as people begin to generate income and accumulate savings, their dietary habits have invariably changed. They eat more, i.e. demand more Calories.

As we eat more, we require more resources from the world. And in the case of food, this means more arable land to grow crops.

But there’s another twist to this trend. As people become wealthier, they not only eat more, but they also begin to consume more resource consumptive foods– especially meat.

It takes a lot more land to grow a kilogram of beef than it does to grow a kilogram of tomatoes. The difference can often be an order of magnitude greater.

So when you look at the demand side of this equation, per capita food consumption is increasing… and we are also consuming a vastly greater amount of land-intensive foods.

In short, the global trend is that we are demanding a much greater amount of arable land per person.

Yet the data on the supply side show the precise opposite.

According to World Bank data, the global average of arable land per person has been on a one-way decline since 1992.

In fact, since 1964, there has only been one year that the global average of arable land per person has increased. In every other instance over the last five decades, arable land per person has declined.

This is an astounding trend.

Our modern ‘science’ is stepping in to address this trend. It’s why much of what we eat is now concocted in a laboratory rather than grown on a farm. It’s why McDonalds puts pink slime in its hamburgers instead of… you know… beef.

But even still, science only goes so far.

Yields for many staple crops (like wheat) essentially hit a wall about ten years ago. After decades of miraculous gains in the amount of tons, bushels, and kilograms per acre we have been able to extract from the Earth, productive capacity has largely plateaued.

In other words, we have maxed out what we can pull out of the soil for now. And the amount of soil per person that’s in production is in serious decline.

To me, this spells out an obvious case for investing in agriculture… and even more specifically, to own farmland.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ejO4TjqBvMA/story01.htm Tyler Durden