Category: zerohedge

Submitted by Gregory Cummings via The Ludwig von Mises Institute of Canada,

Last week, I heard about a particularly tragic example of the post hoc, ergo propter hoc logical fallacy, which Frederic Bastiat, the great 19th-century economist, called “the greatest and most common fallacy in reasoning.”

After the outbreak of World War II, many isolated islands located in the Pacific Ocean became staging grounds for Japanese and Allied forces. This development unfolded before the primitive indigenous peoples, including those on the island of Tanna, Vanuatu. According to Wikipedia:

The vast amounts of military equipment and supplies that both sides air-dropped (or airlifted to airstrips) to troops on these islands meant drastic changes to the lifestyle of the islanders, many of whom had never seen outsiders before. Manufactured clothing, medicine, canned food, tents, weapons and other goods arrived in vast quantities for the soldiers, who often shared some of it with the islanders who were their guides and hosts.

Sadly, this arrangement came to an abrupt end with the end of the war, when the Allied forces abandoned these temporary airbases. Once again, the islanders no longer had access to the myriad of consumer goods provided by visitors from distant advanced economies.

As a result, on Tanna island and elsewhere, local inhabitants formed so-called “cargo cults” in order to restore their lost prosperity:

In an effort to get cargo to fall by parachute or land in planes or ships again, islanders imitated the same practices they had seen the soldiers, sailors, and airmen use. Cult behaviours usually involved mimicking the day to day activities and dress styles of US soldiers, such as performing parade ground drills with wooden or salvaged rifles. The islanders carved headphones from wood and wore them while sitting in fabricated control towers. They waved the landing signals while standing on the runways. They lit signal fires and torches to light up runways and lighthouses.

 

In a form of sympathetic magic, many built life-size replicas of aeroplanes out of straw and cut new military-style landing strips out of the jungle, hoping to attract more aeroplanes.

The indigenous peoples of Tanna island observed that material goods arrived after the presence of landing strips and aeroplanes. This led them to falsely conclude that material goods arrived because of the presence of landing strips and aeroplanes. They failed to consider other causal factors, such as the war, and based their conclusion solely on the order of events. This is the essence of the post hoc ergo propter hoc logical fallacy.

This error in reasoning persists today, particularly in the realm of economics as it relates to the role of government. For example, relative to a hundred years ago, it is obvious that our standard of living has drastically improved. P.J. O’Rourke illustrated this brilliantly by observing, “When you think of the good old days, think one word: dentistry.” Quite simply, we owe this increased prosperity to staggering improvements in marginal productivity and the division of labour brought about by capital accumulation and savings in a society based on voluntary exchange and a price system resulting from the ownership of justly-acquired private property. There is no other path to prosperity.

In spite of this knowledge, there remain numerous court intellectuals and their acolytes who serve as apologists for government, falsely insisting that since we are more prosperous after such and such regulation or such and such measure of taxation (other factors not being equal), we are more prosperous because of such and such regulation or such and such measure of taxation. Therefore, they conclude, more and more economic intervention is needed to cure our accumulating economic woes. And so it is, that the post hoc ergo propter hoc fallacy reasserts itself.

But insofar as our well-being is concerned, government intervention in the economy is no more effective than the straw aeroplanes and wooden headphones of some bewildered “cargo cult.” In truth, it probably does more harm.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/B8HRwVBhWk4/story01.htm Tyler Durden

Authored by Anthony Peters of SwissInvest, via IFR,

Risk is a four-letter word

The markets seem to think we live in a largely riskless world.

RISK IS A funny old thing at the best of times, and even funnier when it is supposed to be correctly priced.

Most of us grew up with the understanding that the correct price for credit – my main area of expertise – was a function of the default probability, adjusted for the expected recovery rate.

Perhaps the simplest and cleanest example of risk pricing is to be found in the credit card industry, where your “bucketing” is of paramount importance. The lower your perceived risk is, the better a risk bucket you get lumped into and the lower your interest rate is. That’s banking 101, but it still isn’t clear to everyone that the net earnings from each bucket are expected to be similar, based on higher spreads being matched to higher defaults. Excess returns are generated when the expected defaults do not occur at the forecast rate.

So far, so good. But then how does one extrapolate that basic rule of lending to the way credit markets have been performing of late?

My old chum Suki Mann, living legend and credit strategist at Societe Generale here in London, highlighted the point – albeit probably not intentionally – in a piece he wrote this week. He asked, rhetorically, whether it would be possible for the credit markets to repeat this year’s performance in 2014 – wondering, in other words, whether a further 8.4% of returns on 220bp of spread tightening in high-yield or 2.4% returns with 22bp of spread tightening in investment-grade were possible.

“We’d concur with the former,” he wrote, “but up to 7% is not impossible off 100bp of spread tightening; while in IG, we think 2%-plus is possible with tightening in [iBoxx] index spreads of around 30bp.”

Although I don’t entirely disagree with Suki, I can’t detect too much science going into his pricing model, if that is what it is. The sole point of reference seems to be the all-time low spread of the iTraxx Main index, which was registered at 20bp in June 2007. As recently as early October it was trading at 100bp but is now marking around 75bp. Hence, his rather confident assertion that a further 20bp of tightening should not be a problem.

PERHAPS, BUT ONLY because the first rule of investing now appears to have become: if the worst is about to occur, then the monetary authorities will make sure that it doesn’t.

Let’s face it, Saint Mario Draghi did not only say that he will do “whatever it takes”, the bit of his assertion everyone remembers, but also, and perhaps more importantly, “…and believe me, it will be enough”.

In doing so, he removed huge swathes of what we once called risk – a concept that used to be known as a four-letter word. This raises the question: are risk assets now riskless assets or are they risk assets disguised as riskless?

What goes for bonds appears to go for equities too, even though we did experience something of a wobble in the summer when the US Fed seemed set to taper its bond buying programme. Since then, though, the Fed, in its own inimitable way, appears to have let equity markets believe that it will do nothing that might hurt share prices and hence shareholders. If anything, the velocity of the rally now appears to be increasing rather than decreasing.

Either the Fed is deceiving markets into believing that there is nothing to fear, or it is not making itself clear enough. To be frank, I doubt it is the latter.

SO WHAT HAS become of risk pricing? Well, one might try to argue that if there is no risk, then there can be no price for it. But that would be perhaps taking it a little bit too far – even for me.

Nevertheless, pricing risk has become so alien that even non-monetary policy-related risks are being disregarded. The little tiff between China and Japan (and by proxy the Americans) over a group of uninhabited islands never even caused a ripple in financial markets. And although it was written that oil prices had fallen in the aftermath of the interim agreement between Iran and the West, if one looks at the charts, WTI was trading well below its 300-day moving average long before the news broke – and the Geneva breakthrough doesn’t appear to have even registered.

Is there no risk or has the way in which authorities prevented the fallout from the credit bubble and the events that led to its formation led a generation of traders and investors to believe that it is a thing of the past?

One hedge fund manager once proudly stated that life is a bull market intersected by corrections. In the midst of the credit crisis I laughed at him.

Looking at the state of the world now, he might be laughing back, having concluded that the 2007 financial crisis and the 2008 fall of the House of Lehman were nothing more than bigger corrections and hence thumping buying opportunities that could only have been missed by idiots.

I guess that puts me in my place. Either that or there is something lurking out there that we have forgotten how to identify – and hence how to value.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xlrbeJKU6IE/story01.htm Tyler Durden

In Bernanke’s centrally-planned, inverse Robin Hood world, record stock prices for the few unfortunately mean record homelessness for the many: this is what the state of Massachusettes found out the hard way after it was flooded with a record number of homeless families who are overwhelming the state’s emergency shelter system.

As the Boston Globe reports, citing a recent report from the Department of Housing and Urban Development, the number of homeless people in shelters and living on the streets in Massachusetts has risen 14 percent since 2010 to a record 20,000 in January 2013, even as homelessness has declined nationally.

Aaron Gornstein, the undersecretary for housing, said the surge has followed cuts in state and federal housing subsidies, soaring rents in Greater Boston, and still-high rates of unemployment and underemployment, particularly among lower-income workers.

 

“The state as a whole has recovered from the Great Recession faster than most other states, but in many ways we’re still struggling,” Gornstein said. “Federal budget cuts have made the situation worse.”

However, in what may be the most curious twist, and yet another example of how perverted the incentive and capital allocation system in the US is, the nearly 2,100 families who could not find place in shelters, were housed in motel rooms at a greater cost to all US taxpayers amounting to tens of millions.

An average of nearly 2,100 families a night — an all-time high — were temporarily housed in motel rooms in October, just about equaling the number of families in emergency shelters across the state, according to be the state Executive Office of Housing and Economic Development.

 

The demand for shelter is so great that the state has been temporarily sending homeless families from Boston to motels in Western Massachusetts, although state officials said many have been relocated back again, closer to home.

The rest of the story is largely well-known. “This jump in homelessness is another example of an uneven recovery. Even as stocks soar to new heights and real estate values rebound, many of the state’s poorest residents remain without jobs and homes four years after the last recession. The problems have been compounded by the dramatic federal spending cuts, known as sequestration, which have cut housing and food subsidies.”

“There’s no question, this is a continuing legacy of the Great Recession,” said Michael Goodman, a professor of public policy at the University of Massachusetts Dartmouth. “There’s more we can do to help, but it’s not likely, given where federal policy is. That suggests it’s going to be a very long winter for many.”

Whatever the reason for the record class disparity (and the reason is quite clear – Ben Bernanke – whose existence has made America’s legislative branch obsolete, and with it taken away the only thing that may help America’s poor: fiscal reform), one thing is certain: as tales of the hotel-housed homeless spread, everyone and their grandmother (quite literally) will scramble to join the ranks of people without a roof and be housed, on the taxpayers’ dime, in your friendly, local and quite comfortable hotel.

In the Western Massachusetts community of Greenfield, taxicabs pull up to the Quality Inn, but instead of tourists or business travelers with wheeled luggage, homeless families toting belongings in trash bags emerge.

 

Gretchen Vazquez is one of them. She moved into a room in the Quality Inn in October with her two daughters, 1- and 9-years-old, when the state subsidy for her Roxbury apartment ran out after the Legislature stopped funding a program called HomeBASE. The program was created to provide an alternative to emergency shelters.

 

The cramped motel, Vazquez lamented, is far from her evangelical church and her daughter’s school in West Roxbury. After missing about two weeks of school, her daughter enrolled in the public school system here.

 

“I’m stuck,” said Vazquez. “I don’t know what’s going to happen next.”

 

Massachusetts has one of the most extensive shelter systems in the country. Unlike most states, it offers emergency housing to anyone who qualifies. Many end up in shelters or living in homes that board families in rooms, known as congregate housing.

In the meantime, Massachusettes (and the homeless of course) are grateful for the generosity of America’s taxpayers.

Motels are one of the state’s most expensive options at $82 a night, almost as much as congregate housing’s $100 a night cost. In the past five years, state spending on motels has exploded to more than $46 million from about $1 million in 2008, according to state records

 

The average motel stay, state housing officials said, is about seven months, although some families live in motels for a year waiting for affordable housing.

 

Libby Hayes, executive director of Homes for Families, a Boston advocacy group, said it is not surprising that low-income workers with fewer skills cannot make ends meet since even college graduates are struggling to find work.

Naturally, the people are angry:

“The economy is not working,” Hayes said. “How do we expect people from the lowest income tier to make it if people who have had opportunities can’t?”

 

The recent jump in homeless people signals that people have run out of alternatives, said Randy Albelda, an economics professor at the University of Massachusetts Boston. Many families were able to stay off the streets by living off savings, doubling up with family members, or sleeping on friends’ couches, Albelda said. But eventually their money or relatives’ good will “just runs out.”

 

“Families close to the edge have not been able to pull back from the edge in this recovery,” Albelda said. “That’s in part because the recovery has not affected the bottom 30 to 40 percent of people.”

However, something tells us that one of the proposed solutions…

Rather than warehousing families in motel rooms, said Jim Greene, director of the Emergency Shelter Commission of Boston, the state needs more long-term rental assistance programs that target families who are homeless or at risk of homelessness.

 

“That’s how you bring the numbers down, with the right social services,” he said. “Short-term programs don’t get people out of homelessness.”

… namely converting short-term help into long-term (read perpetual) state and government help, is hardly the solution either.

Then again, who really cares about the plight of a few thousand homeless families as long as America’s billionaires can tweet about a stock, and immediately become billionairish-er, in the process buying off however many politic
ians and regulators is required to keep behavior such as that legal.

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

Retirement is still on for now. Late-minute desperation (in EURJPY) dragged the Dow just back over 16,000 and the S&P limped above 1,800. Bonds were sold (though less aggressively than gold and silver) and the USD rallied as early exuberance gave way to an uglier realization that good-news-is-really-bad-news after all following today's data. Volume was average as VIX continued to rise to 14.3% – its highest close since mid-October as we see the 4th session in a row with selling into the close. Today was the worst frst-day-of-month for the S&P since May.

 

EURJPY and S&P 500 joined at the hip – clearly EURJPY was the algo lever to ensure an 1,800 close…

 

4th day in a row of late-day selling pressure…

 

As VIX is rising rather notably…

 

Disconnecting further from stocks…

 

How long before the hedges are rotated into actual unwinds of this?

 

An ugly day for precious metals…as oil rallied further

 

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/gUHiBseG2Jk/story01.htm Tyler Durden

Retirement is still on for now. Late-minute desperation (in EURJPY) dragged the Dow just back over 16,000 and the S&P limped above 1,800. Bonds were sold (though less aggressively than gold and silver) and the USD rallied as early exuberance gave way to an uglier realization that good-news-is-really-bad-news after all following today's data. Volume was average as VIX continued to rise to 14.3% – its highest close since mid-October as we see the 4th session in a row with selling into the close. Today was the worst frst-day-of-month for the S&P since May.

 

EURJPY and S&P 500 joined at the hip – clearly EURJPY was the algo lever to ensure an 1,800 close…

 

4th day in a row of late-day selling pressure…

 

As VIX is rising rather notably…

 

Disconnecting further from stocks…

 

How long before the hedges are rotated into actual unwinds of this?

 

An ugly day for precious metals…as oil rallied further

 

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/gUHiBseG2Jk/story01.htm Tyler Durden

From the start of 2012, the S&P 500 up over 40% with the bulk of that surge coming since QE3 (and 4EVA) was unleashed. Until that point, Goldman’s global risk and macro models had stayed relatively well synced with stock market ‘reality’ but once that torrent of liquidity was released, all bets were off. As the following chart shows, more than half the equity market performance is due to factors unrelated to risk, macro fundamentals, or country-specific factors. So, BFTATH of course?

 

 

Chart: Goldman Sachs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rD-IQUSsuU4/story01.htm Tyler Durden

From the start of 2012, the S&P 500 up over 40% with the bulk of that surge coming since QE3 (and 4EVA) was unleashed. Until that point, Goldman’s global risk and macro models had stayed relatively well synced with stock market ‘reality’ but once that torrent of liquidity was released, all bets were off. As the following chart shows, more than half the equity market performance is due to factors unrelated to risk, macro fundamentals, or country-specific factors. So, BFTATH of course?

 

 

Chart: Goldman Sachs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rD-IQUSsuU4/story01.htm Tyler Durden

Submitted by Howard Kunstler of Kunstler.com,

The rock is reality. The squishy place is the illusion that pervasive racketeering is an okay replacement for an economy. The essence of racketeering is the use of dishonest schemes to get money, often (but not always) employing coercion to make it work. Some rackets can function on the sheer cluelessness of the victim(s).

Is it fair to suppose that money management is at the heart of the sort of advanced, complex economy that developed early in the 20th century? I think so. Money is the lifeblood of trade and of investment in productive activities that support trade. Of course, in order for money to have meaning, to function in such transactional relations, the people must be convinced that it legitimately represents its face value. Otherwise, money must be labeled “money” — that is, a medium of exchange suspected of false value. An economy that uses “money” — especially an economy of rackets — is an economy in a lot of trouble, and that is where ours is in December 2013.

The trouble reached escape velocity in the fall of 2008 when a particular brand of racket among the Wall Street kit-bag of rackets got badly out-of-hand, namely the business of selling securitized bundled mortgages and their “innovative” derivative “products” to dupes unaware that they were booby-trapped for failure which would, perversely, hugely reward the seller of such trash paper. These were, in the immortal words of Senator Carl Levin (D-Mich), the “really shitty deal[s]” propagated by the likes of the Goldman Sachs crypto-bank — so-called collateralized debt obligations — pawned off on credulous pension fund managers and other “marks” around the world greedy for “yield.”

It turned out that all the large banks trafficking in such booby-trapped contracts ended up choking on them when “the music stopped” — that is, when the derivative “swaps” payoffs at the heart of this particular racket began to fail, sending up a general alarm that all such “products” were primed to blow up the entire “banking” system. By the way, the quotation marks I so liberally resort to are necessary to denote that in such a matrix of rackets things are not what they appear to be but only what they pretend to be.

The failure of Bear Stearns followed by the implosion of Lehman Brothers and the near-death experience of AIG alerted “civilians” outside Wall Street that the banks were linked in a web of fraud and insolvency and had to be “rescued” in order for the rest of America to keep its “way of life” going. The rescue remedy proved to be several new layers of fraud that have now matured into institutionalized rackets. The best known are the Siamese twins of “Quantitative Easing” and zero interest rate policy (ZIRP). The lesser-known racket was the 2009 rule change by the Financial Accounting Standards Board that allowed banks to make up whatever numbers they felt like in reporting the value of their holdings (“assets”).

Hence, these dishonest, regularized operations can be labeled a hostage racket with coercion at their core. The coercion comes in the form of the threat that any let-up in the stream of QE “money” enjoyed by the banks in the form of carry-trade “loans” and “primary dealer” premium cream-offs will send the economy back to the stone age. Overlooked in this equation is the ongoing destruction of ordinary citizens (a.k.a. the “middle class”) who have already lost their grip on the emblematic “way of life” Wall Street is working so tirelessly to defend. Politicians are, of course, deeply implicated and indeed directly involved in all these rackets, since these hired handmaidens make and execute the laws protecting Wall Street’s looting operations.

The catch to all this, lately, lies in the cognitive dissonance between the symptomatic euphoria of record stock market indexes versus the conviction of a few hardcore skeptical observers that the rackets are now so reckless and impudent as to be beyond any hope of control and on a trajectory to bring about hardships orders of magnitude above anything imagined in 2008.

So-called “health care” is also a hostage racket, since sick people are hardly in a position to bargain for anything, but it is only a sub-system of the larger matrix of rackets that have made this such an unusually dishonest society. My guess is that ObamaCare is sure to make it worse, and pretty quickly too, since the rules for ObamaCare were written by the hireling lobbyists of the industries that benefit from the racketeering.

The big mystery in all this remains: where are the people with some institutional power who might stand up and denounce all this perfidy? What has made us such a culture of cowards and cravens that the best we can do is produce a couple of comedians who speak truth to power in the form of jokes. Most of this is not that funny.

By the way, one reason for the vulgar orgy of “consumerism” that, in recent years, has turned the Thanksgiving holiday into a sort of grotesque sporting event, is to mount a crude demonstration that our “money” is a viable medium of exchange. The dumbest people in the land are induced to swarm through the merchandise warehouse stores and fight to exchange their “money” for hard goods offered at false “bargains.” I wonder how much of it is a dress rehearsal for what happens in a hyper-inflation?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Y-18TUNaV3Y/story01.htm Tyler Durden

Spot Silver is trading back to early July 2013 levels as it drop 4.1% – its biggest down-day since the SeptTaper debacles began. Gold is also being monkey-hammered; down 2.9% for the biggest drop in 2 months. Meanwhile, Bitcoin is on the rise…

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/R2xNdBa1eeE/story01.htm Tyler Durden

With even the Fed somewhat challenging the credibility of the official unemployment rate – as labor force participation collapses structurally – the possibility that if Congress does not act by Dec 28th, a further 1.3 million people will lose emergency aid and may be deemed 'out' of the labor force merely exaggerates an already farcical situation. As JPM's Mike Feroli notes, the "official" unemployment rate may drop up to 0.8 percentage points, but it won't mean the economy is any better. Is this the 'excuse' the Fed needs to transition from QE to forward guidance (with the public seeing only a rapidly collapsing unemployment rate as evidence of their success) even as the data that they are so "dependent" on becomes worse than useless?

 

As we warned in November, the only two charts that matter ahead of Friday's likely distorted nonfarm payrolls report.

First, the labor force participation rate, which plunged from 63.2% to 62.8% – the lowest since 1978!

 

But more importantly, the number of people not in the labor force exploded by nearly 1 million, or 932,000 to be exact, in just the month of October, to a record 91.5 million Americans! This was the third highest monthly increase in people falling out of the labor force in US history.

At this pace the people out of the labor force will surpass the working Americans in about 4 years.

 

And if the Congress does not pass the bill to extend emergency aid – set to expire Dec 28th – then up to 1.3 million more people will be added to that list of 91.5 million already our of the labor force (and another 800,000 more to come in further months)…

This has profound implications for the oh-so-important unemployment rate that  the Fed is so dependent upon…

JPM's Feroli: One observation that could set an upper bound on thinking about a participation effect is to hypothesize that all 1.3 million EUC claimants exit the labor force after benefits expire in 1Q (again, should Congress allow that to happen). In that case, the unemployment rate would fall by 0.8%-pt, obviously an extreme example. Some of the Fed studies can help to narrow the range of outcomes.

 

One of the more recent works (Farber and Valletta from the San Francisco Fed) indicates that about a fifth of long-term unemployment is due to extended benefits. With just over 4 million long-term unemployed recently, this would imply that the absence of extended UI benefits could lower the unemployment rate by 0.5%-pt.

This will directly impact the Fed's credibility to manage the economt in a "data-dependent" manner:

JPM's Feroli: Setting aside the normative aspect of whether from a public policy perspective this is a desirable or undesirable outcome, such a fall in the unemployment and participation rates could create some tricky choices for Fed policymakers as they assess the health of the labor market.

Remember, while consensus is convinced Taper is a positive (the Fed wouldn't pull back unless everything is golden); we suspect, and today's Treasury Auction Failure supports that thesis, that the Fed is looking for excuses to Taper (or shift policy away from QE)…

As we have noted numerous times before; the "taper" is all about economic cover for a forced move the Fed has to make:

 

1. Deficits are shrinking and the Fed has less and less room for its buying

 

2. Under the surface, various non-mainstream technicalities are breaking in the markets due to the size of the Fed's position (repo markets, bond specialness, and fail-to-delivers among them).

 

3. Sentiment is critical; if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government's debt (which it clearly is), then the game accelerates away from them very quickly – and we suspect they fear we are close to that tipping point

 

4. The rest of the world is not happy. As Canada just noted, the US monetary policy will be discussed at the G-20

Simply put, they are cornered and need to Taper; no matter how bad the macro data and we are sure 'trends' and longer-term horizons will come to their rescue in defending the prime dealers' clear agreement that it is time…

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