Category: zerohedge

With the Q4 earnings season beginning, ConvergEx’s Nick Colas reminds that the top of the income statement matters more than the bottom line if we expect further upside to domestic equities in 2014.  Revenue growth has been in short supply over the last four quarters, with the companies of the Dow only able to average a 0.6% top line growth rate over the last year.  If 2013 was all about multiple expansion in equity markets, then, Colas warns this will be the year when revenue growth must fulfill the promise of a U.S. stock market so near all-time highs. Analysts have been perennial over-optimists on revenues every month since early 2012. Maybe they finally have it right, but that is purely a matter of faith at this point; their track record on this count is not good.

 

Via ConvergEx’s Nick Colas,

The Ford Mustang turns 50 in just a few months, but this storied Baby Boomer icon of a car almost never made it into production.  In the early 1960s Henry Ford II, grandson of the Ford Motor Company founder, had just watched the Edsel become the most celebrated flop in automotive history.  It was overpriced, overhyped, launched with poor quality, and suffered from questionable styling – especially its “Toilet seat” grill.  Worse of all, it bore the name of Ford’s own father and “Hank the Deuce” wanted no part of another high profile vehicle launch.  The only thing that kept the Mustang program on track at Ford in 1962-1964 was Lee Iacocca’s constant promotion of the car.  He convinced Henry Ford II that the car was the right product for younger buyers and would use largely off-the-shelf components to keep costs low.

In a recent – and rare – interview with Jay Leno (quoted in the 1/6/2104 edition of Automotive News), Iacocca talked about this now-fabled American sports car and revealed a provocative nugget of information.  Here is what he said, prefaced with a little background:

The basic story is well-known in automotive circles: the original Mustang’s base price was an affordable $2,400 out the door of the dealership and over the first 2.5 years of production Ford sold +1.1 million units.

 

What Iacocca revealed to Leno about these early cars tells us something new about how profitable they were: customers ordered $1,000 of options, on average.

 

The contribution profit margin for a passenger car of the day was about 30%, but options typically carried a 60-70% margin.  Using Iacocca’s anecdote, that made the average profit per unit about $1,370.

 

In the 1966 model year, Ford sold 607,000 Mustangs and – using the profit analysis above – made about $830 million pretax.  That translated into $5.8 billion in 2013 dollars, using the Bureau of Labor Statistics’ CPI Inflation Calculator.

 

Analysts estimate that Ford made $10.8 billion in EBITDA in 2013, which means that the Mustang’s inflation-adjusted profits from 1967 are the equivalent of more than 50% of the company’s earnings power today.  Not bad for a car that almost got canceled.

That’s the power of marginal revenues, both from new products and higher incremental profit margins, and how they can create explosive earnings growth for the company that is smart/lucky enough to have them.  It is also a story which has been in short supply since the initial economic snapback from the Financial Crisis.   Every month for the last few years we’ve tracked both analysts’ expectations and actual revenue growth for the 30 companies of the Dow Jones Industrial Average, and here is a summary of our latest findings:

The just-completed year of 2013 may have been an excellent one for equities, but it was the worst year for corporate revenue growth since the Great Recession.  Assuming that analysts have dialed-in their expectations correctly for Q4, the average year-on-year sales growth for the Dow companies was a paltry 0.6% last year.  Double digit growth did occur – back in 2010 – but that was admittedly against the easy comps of 2009.  Since then, even the mega-names of the Dow – generally well run companies – have had real trouble growing their top lines.

 

Analysts may have set the Q4 2013 low enough so that we might get some upside surprises as earnings season progresses over the next few weeks.  Back in March 2013, the Street thought that the Dow companies could grow revenues by 4-5%. As the year progressed a sluggish global economy poured cold water on those hopes.  Estimates now run 1.5% for the Dow companies, and 1.6% for the non-financial names in the Average.

 

According to their currently published revenue estimates, brokerage analysts expect revenue growth to accelerate from here.  For Q1 2013, that 1.5% Q4 comp becomes 2.5%.  Then, in Q2 2014, that grows to 3.0%.  How about Q3?  Yep, more growth, to a 4.2% comp to last year.

 

 

At the same time, you might look for a salt mine to accompany these estimates, for our tracking of past analyst modeling shows they are prone to excessive optimism.  The now-unimpressive Q4 comp to last year of 1.5% began its life a year ago as a 3.4% expectation.  It peaked in March as a very brave 4.6% expectation.  From there, it slowly crept back into its shell and shrank to its current size.  Which is to say very small indeed.

 

The contours of this year’s quarterly revenue growth expectations are following those of the current quarter.  They coming out swinging in the early rounds, only to be pummeled back into their corner by the brutish form of a global economy barely able to get out of its own way.  For the first quarter of 2014, analysts were printing a 4.5% expected comp in May 2013.  As mentioned, that has shrunk to 2.5% in less than a year.  And that 3.0% growth rate in analyst models for Q2?  It was a much more impressive +4% comp in October.

 

Interestingly, the Street has not yet cut its full-year revenue expectations for 2014.  These still remain at 3.8%, close to where they started life in late 2012.  If you want to know how an analyst can cut their quarterly numbers every month but keep their annual expectations the same, I don’t have an answer for you.

 

To paraphrase a Ford marketing message (although not directly from the Mustang), revenue growth has to be “Job 1” for stock markets and the companies they track in 2014.  Last year’s market, with its above-average gains, didn’t come for free.  If investors want to see further advances – or at least the maintenance of current levels – then revenue growth and its attendant improvements in profits must be part of the picture this year.  It is easy to pick on analysts for their wayward estimates.  Truth be told, it is actually kind of fun.  But inside those numbers sit a fidgety truth: you only get to miss sales expectations so many times before investors grow inpatient.  Equity investing may be an optimist’s game, but it is not supposed to be a sucker’s bet
.  This year must deliver on the promise laid out in last year’ stellar investment results, and it must do so both at the bottom AND at the top of the income statement.   

via Zero Hedge http://ift.tt/1me3OsF Tyler Durden

The head of the UN weapons inspectors said that the American case for Syrian government firing chemical weapons was weak, because the rockets can only go 2 miles … but government-held territory is much further away.

Similarly, McClatchy reported yesterday:

A team of security and arms experts, meeting this week in Washington to discuss the matter, has concluded that the range of the rocket that delivered sarin in the largest attack that night was too short for the device to have been fired from the Syrian government positions where the Obama administration insists they originated.

 

***

 

The authors of a report released Wednesday said that their study of the rocket’s design, its likely payload and its possible trajectories show that it would have been impossible for the rocket to have been fired from inside areas controlled by the government of Syrian President Bashar Assad.

In the report, titled “Possible Implications of Faulty U.S. Technical Intelligence,” Richard Lloyd, a former United Nations weapons inspector, and Theodore Postol, a professor of science, technology and national security policy at the Massachusetts Institute of Technology, argue that the question about the rocket’s range indicates a major weakness in the case for military action initially pressed by Obama administration officials.

 

***

 

To emphasize their point, the authors used a map produced by the White House that showed which areas were under government and rebel control on Aug. 21 and where the chemical weapons attack occurred. Drawing circles around Zamalka to show the range from which the rocket could have come, the authors conclude that all of the likely launching points were in rebel-held areas or areas that were in dispute. The area securely in government hands was miles from the possible launch zones.

 

In an interview, Postol said that a basic analysis of the weapon – some also have described as a looking like a push pop, a fat cylinder filled with sarin atop a thin stick that holds the engine – would have shown that it wasn’t capable of flying the 6 miles from the center of the Syrian government-controlled part of Damascus to the point of impact in the suburbs, or even the 3.6 miles from the edges of government-controlled ground.

 

He questioned whether U.S. intelligence officials had actually analyzed the improbability of a rocket with such a non-aerodynamic design traveling so far before Secretary of State John Kerry declared on Sept. 3 that “we are certain that none of the opposition has the weapons or capacity to effect a strike of this scale – particularly from the heart of regime territory.”

 

“I honestly have no idea what happened,” Postol said. “My view when I started this process was that it couldn’t be anything but the Syrian government behind the attack. But now I’m not sure of anything. The administration narrative was not even close to reality. Our intelligence cannot possibly be correct.”

 

Lloyd, who has spent the past half-year studying the weapons and capabilities in the Syrian conflict, disputed the assumption that the rebels are less capable of making rockets than the Syrian military.

 

“The Syrian rebels most definitely have the ability to make these weapons,” he said. “I think they might have more ability than the Syrian government.” [He's right.]

 

***

 

They said that Kerry’s insistence that U.S. satellite images had shown the impact points of the chemical weapons was unlikely to be true. The charges that detonate chemical weapons are generally so small, they said, that their detonations would not be visible in a satellite image.

 

The report also raised questions whether the Obama administration misused intelligence information in a way similar to the administration of President George W. Bush in the run-up to the 2003 invasion of Iraq.  [Correct, indeed.] Then, U.S. officials insisted that Iraqi dictator Saddam Hussein had an active program to develop weapons of mass destruction. Subsequent inspections turned up no such program or weapons.

 

“What, exactly, are we spending all this money on intelligence for?” Postol asked.

 

***

Even the New York Times – one of the main advocates for the claims that the rockets came from a Syrian government base – has quietly dropped the claim.

But the U.S. is still taking the position that the only acceptable outcome for the coming Syria negotiations is for Assad to be replaced by the US-backed transitional government.

As with Iraq, the “facts” are being fixed around the policy.

via Zero Hedge http://ift.tt/1i3nAH6 George Washington

2013 was a brutal year for precious metals investors. Santiago Capital's Brent Johnson begins his excellent presentation "#$1%!k##!!***#$$" with a mea culpa for the worst year in a dozen even as Santiago topped the list of precious metals funds. But crucially, Brent points out, "it is only half-time" in this fight and "if gold investors will stick with the fundamentals – which is very hard to do sometimes – the second half could be very rewarding." Simply put, he notes, the only reason the level of water in our economic bucket has increased slightly is not because the holes are fixed… but because we are pumping dollars in quicker than they are leaking out. "Excess Reserves are a ticking time bomb," Johnson adds, and the second half of this monetary game will be very different from the first.

Part 1 – "The First Half Of This Monetary Game" –

Fund performance, Mea Culpa…

 

What the Fed has done so far, holes in our economic bucket…"the only reason the level of water in our economic bucket has increased slightly is not because the holes are fixed… but because we are pumping dollars in quicker than they are leaking out"

money printing, the housing 'recovery', and stocks vs the real economy… "if you spend $8 trillion and can't throw a good party, you should be thrown in jail"

Part 2 – "How The Second Half Will Play Out"

 

Where has all the QE money gone? Why inflation has remained tame… "excess reseves are a ticking time bomb"

 

Fed reassuranes are bullshit. How reverse repo will work and how the second half of non-expanding monetary base will be a problem. Simply put, if the Fed cannot get monetary velocty to pick back up then they will not be able to continue tapering… and velocity increasing is inflationary.

They can't rase rates as they are now in extreme forward guidance mode that they will keep interest rates low for an extraordinary period of time…

This will end badly – its a matter of "if" not "when"… but as Johnson goes on, there are still challenges (e.g. India) but selling gold now is concentrating assets not diversifying them… and we are going to win in the end.

via Zero Hedge http://ift.tt/1j5ahDv Tyler Durden

While the topic of Howard Marks’ latest letter is the role of luck in everything from the life one leads to investing, the part we found particularly engaging was his discussion of (in)efficient markets, and why according to him inefficient markets are to be cherished, especially if one knows in advance just how rigged the game is and the skill of the other players.  Here is the key excerpt.

Let me say up front that I have always considered the reasoning behind the efficient market hypothesis absolutely sound and compelling, and it has greatly influenced my thinking.

 

In well-followed markets, thousands of people are looking for superior investments and trying to avoid inferior ones. If they find information indicating something’s a bargain, they buy it, driving up the price and eliminating the potential for an excess return. Likewise, if they find an overpriced asset, they sell it or short it, driving down the price and lifting its prospective return. I think it makes perfect sense to expect intelligent market participants to drive out mispricings.

 

The efficient market hypothesis is compelling . . . as a hypothesis. But is it relevant in the real world? (As Yogi Berra said, “In theory there is no difference between theory and practice, but in practice there is.”) The answer lies in the fact that no hypothesis is any better than the assumptions on which it’s premised.

 

I believe many markets are quite efficient. Everyone is aware of them, basically understands them, and is willing to invest in them. And in general everyone gets the same information at the same time (in fact, it’s one of the SEC’s missions to make sure that’s the case). I had markets like that in mind in 1978 when, on going into portfolio management, my rule was, “I’ll do anything but spend the rest of my life choosing between Merck and Lilly.”

 

But I also believe some markets are less efficient than others. Not everyone knows about them or understands them. They may be controversial, making people hesitant to invest. They may appear too risky for some. They may be hard to invest in, illiquid, or accessible only through locked-up vehicles in which some people can’t or don’t want to participate. Some market participants may have better information than others . . . legally. Thus, in an inefficient market there can be mastery and/or luck, since market prices are often wrong, enabling some investors to do better than others.

 

* * *

 

The Current State of Market Efficiency

 

Let’s compare the current environment for efficiency with that of the past.

 

• Data on all forms of investing is freely available in vast quantities.
• Every investor has extensive computing power. In contrast, there were essentially no PCs or even four-function calculators before 1970, and no laptops before 1980.
• “Hedge fund,” “alternative investing,”
  “distressed debt,” “high yield bond,” “private equity,” “mortgage backed security” and “emerging market” are all household words today. Thirty years ago they were non-existent, little known or poorly understood. Today, as I say about the impact of the browsers on our mobile phones, “everyone knows everything.”
• Nowadays few people make moral judgments about investments. There aren’t many instances of investors turning down an investment just because it’s controversial or unseemly. In contrast, most will do anything to make a buck.
• There are about 8,000 hedge funds in the world, many of which have wide-open charters and pride themselves on being infinitely flexible.

It’s hard to prove efficiency or inefficiency. Among other reasons, the academics say it takes many decades of data to reach a conclusion with “statistical significance,” but by the time the requisite number of years have passed, the environment is likely to have been altered. Regardless, I think we must look at the changes listed above and accept that the conditions of today are less propitious for inefficiency than those of the past. In short, it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer. Thus, in general, I think it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller.

 

People often ask me about the inefficient markets of tomorrow. Think about it: that’s an oxymoron. It’s like asking, “What is there that hasn’t been discovered yet?” The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there’s little that people don’t know about, understand and embrace.

 

How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn’t touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I’m sure they’ll be back the next time investors turn tail and run.

 

Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles.

* * *

In hindsight, considering just how lucrative the past several years of straight line higher movement in the S&P500 have been to some market participants – especially those E-Trade babies with virtually zero grasp of that fundamental non-common sense concept called valuation (see GMO’s letter earlier) –  one can therefore add one more distinction to Bernanke’s legacy: creating the world’s most inefficient marketplace.

For much more insight from the Oaktree chairman, read the full letter (pdf).

via Zero Hedge http://ift.tt/1dA3tye Tyler Durden

While the topic of Howard Marks’ latest letter is the role of luck in everything from the life one leads to investing, the part we found particularly engaging was his discussion of (in)efficient markets, and why according to him inefficient markets are to be cherished, especially if one knows in advance just how rigged the game is and the skill of the other players.  Here is the key excerpt.

Let me say up front that I have always considered the reasoning behind the efficient market hypothesis absolutely sound and compelling, and it has greatly influenced my thinking.

 

In well-followed markets, thousands of people are looking for superior investments and trying to avoid inferior ones. If they find information indicating something’s a bargain, they buy it, driving up the price and eliminating the potential for an excess return. Likewise, if they find an overpriced asset, they sell it or short it, driving down the price and lifting its prospective return. I think it makes perfect sense to expect intelligent market participants to drive out mispricings.

 

The efficient market hypothesis is compelling . . . as a hypothesis. But is it relevant in the real world? (As Yogi Berra said, “In theory there is no difference between theory and practice, but in practice there is.”) The answer lies in the fact that no hypothesis is any better than the assumptions on which it’s premised.

 

I believe many markets are quite efficient. Everyone is aware of them, basically understands them, and is willing to invest in them. And in general everyone gets the same information at the same time (in fact, it’s one of the SEC’s missions to make sure that’s the case). I had markets like that in mind in 1978 when, on going into portfolio management, my rule was, “I’ll do anything but spend the rest of my life choosing between Merck and Lilly.”

 

But I also believe some markets are less efficient than others. Not everyone knows about them or understands them. They may be controversial, making people hesitant to invest. They may appear too risky for some. They may be hard to invest in, illiquid, or accessible only through locked-up vehicles in which some people can’t or don’t want to participate. Some market participants may have better information than others . . . legally. Thus, in an inefficient market there can be mastery and/or luck, since market prices are often wrong, enabling some investors to do better than others.

 

* * *

 

The Current State of Market Efficiency

 

Let’s compare the current environment for efficiency with that of the past.

 

• Data on all forms of investing is freely available in vast quantities.
• Every investor has extensive computing power. In contrast, there were essentially no PCs or even four-function calculators before 1970, and no laptops before 1980.
• “Hedge fund,” “alternative investing,”
  “distressed debt,” “high yield bond,” “private equity,” “mortgage backed security” and “emerging market” are all household words today. Thirty years ago they were non-existent, little known or poorly understood. Today, as I say about the impact of the browsers on our mobile phones, “everyone knows everything.”
• Nowadays few people make moral judgments about investments. There aren’t many instances of investors turning down an investment just because it’s controversial or unseemly. In contrast, most will do anything to make a buck.
• There are about 8,000 hedge funds in the world, many of which have wide-open charters and pride themselves on being infinitely flexible.

It’s hard to prove efficiency or inefficiency. Among other reasons, the academics say it takes many decades of data to reach a conclusion with “statistical significance,” but by the time the requisite number of years have passed, the environment is likely to have been altered. Regardless, I think we must look at the changes listed above and accept that the conditions of today are less propitious for inefficiency than those of the past. In short, it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer. Thus, in general, I think it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller.

 

People often ask me about the inefficient markets of tomorrow. Think about it: that’s an oxymoron. It’s like asking, “What is there that hasn’t been discovered yet?” The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there’s little that people don’t know about, understand and embrace.

 

How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn’t touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I’m sure they’ll be back the next time investors turn tail and run.

 

Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles.

* * *

In hindsight, considering just how lucrative the past several years of straight line higher movement in the S&P500 have been to some market participants – especially those E-Trade babies with virtually zero grasp of that fundamental non-common sense concept called valuation (see GMO’s letter earlier) –  one can therefore add one more distinction to Bernanke’s legacy: creating the world’s most inefficient marketplace.

For much more insight from the Oaktree chairman, read the full letter (pdf).

via Zero Hedge http://ift.tt/1dA3tye Tyler Durden

A glimpse at the wordcloud of Bernanke's farewell speech this morning tells you all you need to know about the Fed's extraordinary policies – the two most-used words are "think" and "know". From "hoping" the Fed did the right thing to explaining how Main Street "needs to understand what they did was necessary," Bernanke admits that they still have no idea how QE works "QE is at least somewhat effective… works in practice but not in theory," and almost admitted that the Fed's new plan 'forward guidance' worked in practice but not in theory. The "populist reactions" around the world to central bank interventions are "probably not avoidable," he adds, also noting in his awkward 'don't pin me down' manner than stocks are "in historical ranges."

 

 

On The Crisis…

• *BERNANKE SAYS FED'S LENDER OF LAST RESORT ROLE IS ESSENTIAL
• *BERNANKE SAYS HE HAD CLOSE PARTNERSHIP WITH PAULSON, GEITHNER
• *BERNANKE SAYS BUSH GAVE PAULSON, BERNANKE LOTS OF `LEEWAY'
• *BERNANKE AGREED WITH PAULSON, GEITHNER ON NEED FOR BANK RESCUES
• *BERNANKE SAW NO CHANCE OF TARP PROGRAM PRIOR TO INTENSE CRISIS
• *BERNANKE: PARLIAMENTARY SYSTEMS WERE MORE RESPONSIVE IN CRISIS
• *BERNANKE SAYS CRISIS WASN'T CONTINUOUS BUT EBBED, FLOWED
• *BERNANKE: MOST INTENSE PHASE OF CRISIS INVOLVED FANNIE, LEHMAN
• *BERNANKE SAYS `MUCH OF GOOD WORK' WAS TO STABILIZE MARKETS

On Fed Independence…

• *BERNANKE SEES NEED TO INSULATE FED FROM POLITICAL PRESSURE
• *BERNANKE SAYS NEW REGULATION SHOULD BRING GREATER STABILITY
• *BERNANKE SAYS FED CAN'T BEND TO SHORT RUN POLITICAL PRESSURES

On Helping Main Street…

• *BERNANKE SAYS `PEOPLE WILL UNDERSTAND' FED TOOK NEEDED STEPS
• *BERNANKE SAYS CRISIS ACTIONS WERE AIMED AT HELPING MAIN STREET
• *BERNANKE SAYS FED `DID THE RIGHT THING, I HOPE'

Bernanke explains how he "hopes" they are right…

BERNANKE: So we did the right thing, I hope. We tried to do the right thing. And there certainly has been pushback. We hope that, as the economy improves and as we tell our story, and as more information comes out about, you know, why we did what we did and so on, that — you know, that people will — will appreciate and understand that what we did was necessary, that it was in the interest of the broader public, it was a Main Street set of actions aimed at helping the average American. And as time passes and that becomes clearer, I'm hopeful that these political concerns will wane.

• *BERNANKE: `NOT SURPRISING' TO SEE POPULIST REACTION TO FED
• *BERNANKE: FINANCIAL CRISES OFTEN LEAD TO POPULIST REACTIONS

Bernanke explains how the protesters need to get with the program…

BERNANKE: It's — you know, if you look around the world, there — there are populist reactions, you know, in most countries where there were serious financial crises, and that's probably not avoidable completely. And what we have to do is — again, to explain what we did, why we did it, and try to win back the confidence of the — of the public. And that's, I think, an important objective for all of us around the world.

On QE…

• *BERNANKE SAYS FED HAS TOOLS TO TIGHTEN MONETARY POLICY      
• *BERNANKE SAYS STUDIES SHOW QE IS AT LEAST SOMEWHAT EFFECTIVE
• *BERNANKE SAYS QE HAS `BEEN HELPFUL'
• *BERNANKE SAYS QE IS A `BASIC MONETARIST PRINCIPLE'
• *BERNANKE SAYS QE FOUNDED ON `A BASIC MONETARIST PRINCIPLE'
• *BERNANKE SAYS QE WORKS IN PRACTICE BUT NOT IN THEORY
• *BERNANKE SAYS INFLATION NOT A SIGNIFICANT RISK OF QE
• *BERNANKE SAYS INFLATION IS NOT A BIG RISK OF QE
• *BERNANKE SAYS FED TOOLS EFFECTIVE EVEN WITH BIG BALANCE SHEET
• *BERNANKE SAYS FED HAS TOOLS TO ENSURE QE ISN'T INFLATIONARY

Bernanke admits they were winging it and almost admits that forward guidance is just as unproven:

AHAMED: So, in devising QE and all these other unconventional monetary policies, were you pretty confident that the theory would work or that whatever you — that — going into it?

 

BERNANKE: Well, the problem with QE is that it works in practice, but it doesn't work in theory. That's…

 

AHAMED: Yeah. Right. (LAUGHTER) And the other way about forward guidance, probably.

 

BERNANKE: Right — well, I — I'm — urrr

On Bubbles:

• *BERNANKE: FED SENSITIVE TO RISK TO FINANCIAL STABILITY
• *BERNANKE: MARKETS BROADLY WITHIN HISTORICAL RANGES
• *BERNANKE SAYS FED LOOKING AT IMPLICATIONS OF ANY IMBALANCE

Bernanke gets entirely tongue-tied in his efforts to not admit that there is no bubble:

AHAMED: But sort of bottom line for the moment, you're not worried about too much froth in financial markets?

 

BERNANKE: Well, it's always, of course, bad luck to make any forecast about any particular market. (LAUGHTER) But the — the markets currently seem to be broadly within — you know, the metrics of market valuation seem to be broadly within historical ranges. The financial system is strong. The key financial institutions are well-capitalized.

On ZIRP Forever…

• *BERNANKE NOT CONCLUDING VERY LOW RATES A `PERMANENT' CONDITION
• *BERNANKE:BETTER BALANCE IN GROWTH COULD AVOID ZERO-LOWER-BOUND
• *BERNANKE: FISCAL POLICY COULD HELP AVOID ZERO-LOWER BOUND

On Real Economy…

• *BERNANKE SAYS REASONS FOR SLOW PRODUCTIVITY GROWTH NOT CLEAR
• *BERNANKE SAYS PRODUCTIVITY INCREASE HAS BEEN VERY SLOW
• *BERNANKE: FALL IN LABOR PARTICIPATION PARTLY LONG-TERM TREND

Bernanke explained that Main Street is just too dumb to get it…

Because my sense is, the American people — Main Street, Wall Street — there's still a great deal of confusion, and I think we're paying the consequences of it even today.

 

BERNANKE: Well, it was a big challenge to explain what was going on. And, you know, at the Federal Reserve, we tried to do it. We didn't always succeed, I'm sure.

• *BERNANKE SAYS FED HAS HELPED ECONOMY, FISCAL SITUATION

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

A glimpse at the wordcloud of Bernanke's farewell speech this morning tells you all you need to know about the Fed's extraordinary policies – the two most-used words are "think" and "know". From "hoping" the Fed did the right thing to explaining how Main Street "needs to understand what they did was necessary," Bernanke admits that they still have no idea how QE works "QE is at least somewhat effective… works in practice but not in theory," and almost admitted that the Fed's new plan 'forward guidance' worked in practice but not in theory. The "populist reactions" around the world to central bank interventions are "probably not avoidable," he adds, also noting in his awkward 'don't pin me down' manner than stocks are "in historical ranges."

 

 

On The Crisis…

• *BERNANKE SAYS FED'S LENDER OF LAST RESORT ROLE IS ESSENTIAL
• *BERNANKE SAYS HE HAD CLOSE PARTNERSHIP WITH PAULSON, GEITHNER
• *BERNANKE SAYS BUSH GAVE PAULSON, BERNANKE LOTS OF `LEEWAY'
• *BERNANKE AGREED WITH PAULSON, GEITHNER ON NEED FOR BANK RESCUES
• *BERNANKE SAW NO CHANCE OF TARP PROGRAM PRIOR TO INTENSE CRISIS
• *BERNANKE: PARLIAMENTARY SYSTEMS WERE MORE RESPONSIVE IN CRISIS
• *BERNANKE SAYS CRISIS WASN'T CONTINUOUS BUT EBBED, FLOWED
• *BERNANKE: MOST INTENSE PHASE OF CRISIS INVOLVED FANNIE, LEHMAN
• *BERNANKE SAYS `MUCH OF GOOD WORK' WAS TO STABILIZE MARKETS

On Fed Independence…

• *BERNANKE SEES NEED TO INSULATE FED FROM POLITICAL PRESSURE
• *BERNANKE SAYS NEW REGULATION SHOULD BRING GREATER STABILITY
• *BERNANKE SAYS FED CAN'T BEND TO SHORT RUN POLITICAL PRESSURES

On Helping Main Street…

• *BERNANKE SAYS `PEOPLE WILL UNDERSTAND' FED TOOK NEEDED STEPS
• *BERNANKE SAYS CRISIS ACTIONS WERE AIMED AT HELPING MAIN STREET
• *BERNANKE SAYS FED `DID THE RIGHT THING, I HOPE'

Bernanke explains how he "hopes" they are right…

BERNANKE: So we did the right thing, I hope. We tried to do the right thing. And there certainly has been pushback. We hope that, as the economy improves and as we tell our story, and as more information comes out about, you know, why we did what we did and so on, that — you know, that people will — will appreciate and understand that what we did was necessary, that it was in the interest of the broader public, it was a Main Street set of actions aimed at helping the average American. And as time passes and that becomes clearer, I'm hopeful that these political concerns will wane.

• *BERNANKE: `NOT SURPRISING' TO SEE POPULIST REACTION TO FED
• *BERNANKE: FINANCIAL CRISES OFTEN LEAD TO POPULIST REACTIONS

Bernanke explains how the protesters need to get with the program…

BERNANKE: It's — you know, if you look around the world, there — there are populist reactions, you know, in most countries where there were serious financial crises, and that's probably not avoidable completely. And what we have to do is — again, to explain what we did, why we did it, and try to win back the confidence of the — of the public. And that's, I think, an important objective for all of us around the world.

On QE…

• *BERNANKE SAYS FED HAS TOOLS TO TIGHTEN MONETARY POLICY      
• *BERNANKE SAYS STUDIES SHOW QE IS AT LEAST SOMEWHAT EFFECTIVE
• *BERNANKE SAYS QE HAS `BEEN HELPFUL'
• *BERNANKE SAYS QE IS A `BASIC MONETARIST PRINCIPLE'
• *BERNANKE SAYS QE FOUNDED ON `A BASIC MONETARIST PRINCIPLE'
• *BERNANKE SAYS QE WORKS IN PRACTICE BUT NOT IN THEORY
• *BERNANKE SAYS INFLATION NOT A SIGNIFICANT RISK OF QE
• *BERNANKE SAYS INFLATION IS NOT A BIG RISK OF QE
• *BERNANKE SAYS FED TOOLS EFFECTIVE EVEN WITH BIG BALANCE SHEET
• *BERNANKE SAYS FED HAS TOOLS TO ENSURE QE ISN'T INFLATIONARY

Bernanke admits they were winging it and almost admits that forward guidance is just as unproven:

AHAMED: So, in devising QE and all these other unconventional monetary policies, were you pretty confident that the theory would work or that whatever you — that — going into it?

 

BERNANKE: Well, the problem with QE is that it works in practice, but it doesn't work in theory. That's…

 

AHAMED: Yeah. Right. (LAUGHTER) And the other way about forward guidance, probably.

 

BERNANKE: Right — well, I — I'm — urrr

On Bubbles:

• *BERNANKE: FED SENSITIVE TO RISK TO FINANCIAL STABILITY
• *BERNANKE: MARKETS BROADLY WITHIN HISTORICAL RANGES
• *BERNANKE SAYS FED LOOKING AT IMPLICATIONS OF ANY IMBALANCE

Bernanke gets entirely tongue-tied in his efforts to not admit that there is no bubble:

AHAMED: But sort of bottom line for the moment, you're not worried about too much froth in financial markets?

 

BERNANKE: Well, it's always, of course, bad luck to make any forecast about any particular market. (LAUGHTER) But the — the markets currently seem to be broadly within — you know, the metrics of market valuation seem to be broadly within historical ranges. The financial system is strong. The key financial institutions are well-capitalized.

On ZIRP Forever…

• *BERNANKE NOT CONCLUDING VERY LOW RATES A `PERMANENT' CONDITION
• *BERNANKE:BETTER BALANCE IN GROWTH COULD AVOID ZERO-LOWER-BOUND
• *BERNANKE: FISCAL POLICY COULD HELP AVOID ZERO-LOWER BOUND

On Real Economy…

• *BERNANKE SAYS REASONS FOR SLOW PRODUCTIVITY GROWTH NOT CLEAR
• *BERNANKE SAYS PRODUCTIVITY INCREASE HAS BEEN VERY SLOW
• *BERNANKE: FALL IN LABOR PARTICIPATION PARTLY LONG-TERM TREND

Bernanke explained that Main Street is just too dumb to get it…

Because my sense is, the American people — Main Street, Wall Street — there's still a great deal of confusion, and I think we're paying the consequences of it even today.

 

BERNANKE: Well, it was a big challenge to explain what was going on. And, you know, at the Federal Reserve, we tried to do it. We didn't always succeed, I'm sure.

• *BERNANKE SAYS FED HAS HELPED ECONOMY, FISCAL SITUATION

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

For well over five years now we’ve been told that the US was in recovery and that as most the biggest risk was a potential double dip or worse a slow down to the recovery.

 

 The reality however was that the US never experienced a real recovery (unless you work at one of the “chosen” firms on Wall Street).

 

Housing has re-entered a bubble driven by liquidity, not first time homebuyers entering the market.

 

The key relationship for housing is home prices relative to income, NOT nominal prices. Stocks are valued relative to earnings. Homes have to be priced relative to incomes.

 

Today, the median US income is $51K. The median home price is $328K. So homes are priced at 6.4X incomes.

 

To put this into perspective, in 2007, the housing bubble was only marginally higher than this with homes priced at 6.8X incomes. So housing, which is alleged to be in a recovery, is not much more affordable today than it was in 2007… at a time when home prices were more overpriced than at any point in the last 100 YEARs.

 

Speaking of incomes, they remain WELL below their 2007 peaks… which were in fact below the 2000 peaks. In fact, the median income in the US today is effectively the same as back in 1987.

 

 

Again, NO recovery to be seen here.

Indeed, the number of people of working age who actually HAVE jobs is back to levels no seen since the 70s. Gotta love that recovery… when the percentage of people working is the same as it was back when the US was in a recession four decades ago!

At the end of the day, the entire economic landscape is very simple to understand. The economy grows when people make more money and spend that money on things including homes.

Lower incomes= lower spending= lower economic activity. Sure, you can reflate a credit bubble in which spending rises briefly due to people having easy access to credit…

But at the end of the day, all this does is set the stage for another economic collapse when people once again default on their credit card payments/ mortgage payments.

That day of reckoning is coming… It’s just a matter of time.

For a FREE Special Report outlining how to set up your portfolio from this, swing by: http://ift.tt/170oFLH

Best Regards

Phoenix Capital Research 

 

 

 

 

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

Submitted by Hunter Lewis via The Circle Bastiat Mises Economics blog,

People often ask today: if the Fed has created so much new money, why hasn’t it produced more inflation?

When the Fed creates masses of new money, it initially flows to Wall Street, which profits from  it in a variety of imaginative ways, but from there its path is unpredictable.

The Fed inserted into the TARP bill in 2008 the authority to pay interest on bank reserves. Of course this interest is paid by creating even more new money, but it provides an incentive for banks to leave reserves idle.

On the other hand, the reserves are not as idle as they look. For example, they support derivatives activity. The total amount of derivatives held by the top four US banks is estimated at the moment to be $217 trillion. And keep in mind that it was derivatives exposure that brought Lehman Brothers down in 2008.

To the degree that the new money does get out into the economy, it will flow in different directions and have different effects. If it reaches the average consumer, it will produce consumer price inflation. This does seem to be happening. Consumer price inflation calculated as it was in the past would be much higher than today’s reported 1%.

If the new money  reaches rich people, it will drive up the prices of what rich people buy. We see this today when a single townhouse in Manhattan is listed for over $100 million. If it flows into the stock market, it will raise stock prices. If enough flows in this direction, it will create an asset bubble, which seems to be happening once again today. Asset bubbles are followed by crashes, which in turn bring recession and unemployment.

Wherever the new money flows, it may increase demand in the short run, only to reduce it in the long run. This is because the new money created by the Fed is not just given away. It is made available to banks to lend, which means that it enters the economy as debt. A little debt, especially if spent or invested wisely, may help an economy. But too much will strangle it.

As consumers, businesses, and governments become weighed down with more and more debt from the past, especially debt that was spent unwisely, the interest and principal payments become increasingly burdensome. Dollars that might have been spent on new investments with the potential to create new jobs and new income are instead siphoned off to pay for past mistakes. We end up with a zombie economy, still breathing, but just barely.

Historically we can measure how many dollars of economic growth we get from each new dollar of debt. At the moment, it seems to be negative. In other words, more new debt makes it worse, not better.

Despite this plain evidence, the Fed continues to try to persuade consumers and businesses to increase their borrowing and spending and also underwrites government borrowing and spending. It holds interest rates very low, which for now keeps the debt house of cards from tumbling down.

Will the Fed’s feckless money creation end in inflation or depression? It could go either way, which is potentially confusing. Insofar as it stokes demand, it could lead to inflation. Insofar as it increases an already too heavy debt burden, it could lead instead to recession, joblessness, and depression. Or it could lead first to the one and then to the other.

It could also lead to a third possibility: stagflation. In this scenario, consumer prices advance even while unemployment increases. We had this in the 1970’s. If we measured inflation as we did in the 1970’s, it would be apparent that this already exists today.

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

We thought that all perfectly idiotic headlines regarding the encroachment of central-planning would come from traditional banana republics as Venezuela, and of course France, such as the following:

• MADURO SAYS VENEZUELA TO HAVE NEW FX SYSTEM
• MADURO SAYS DOLLAR TO REMAIN AT 6.3 BS/DOLLAR IN 2014
• MADURO CREATES AGENCY TO ENFORCE FAIR PRICES
• MADURO SAYS LAW TO ALLOW MAX. 30% PROFIT MARGIN
• NIGERIA TO SET UP FANNIE MAE-STYLE MORTGAGE FINANCE CO.
• FRANCE PASSES LAW TO TAX WEALTHY AT 75%

And so on.

Boy were we wrong.

Moments ago The Hill reported that what many thought was absolutely impossible, may in fact become a reality: President Obama is considering issuing an executive order (#394,039,993,837?) to raise the minimum wage for Federal Workers… and in the process – with the help of that other central planner par excellence Bernyellen – lap all those other Banana republics that everyone so enjoys making fun of.

From the Hill:

President Obama is considering using his executive authority to raise the minimum wage for federal contractors, he told Senate Democrats during a closed meeting at the White House.

 

Lawmakers present at the Wednesday night session said Thursday that Obama did not bring up the matter himself, but appeared receptive to the idea when questioned on the topic. “The issue was raised,” Sen. Barbra Boxer (D-Calif.) said Thursday. “He said he was looking at it, as he looks at everything else.”

 

Sen. Bernie Sanders (I-Vt.), who was also in attendance, offered a similar account and said he has heard from members of the president’s staff that he is seriously considering executive action on the measure.

 

Obama and congressional Democrats are pushing for an across-the-board hike in the minimum hourly wage, from $7.25 to $10.10. But Republicans are cool to the plan, warning it could hurt the economy.

 

Federal contractors represent only a fraction of the nation’s employees. Businesses that together received more than $446 billion in federal contracts employ some 2 million workers, only some of whom are paid the minimum wage. Still, an increase for that segment of the workforce could generate momentum toward a raise for all workers now paid the lowest amount allowable by law.

 

An executive order to that effect would be tantamount to setting a minimum wage for federal contractors, they said. “Profitable corporations that receive lucrative contracts from the federal government should pay all of their workers a decent wage,” the lawmakers wrote. Obama in recent days has vowed to make 2014 “a year of action,” even if it means relying heavily on administrative authority to pursue policy goals in lieu of congressional action.

Suddenly it all makes sense: in order to “fix” one idiotic act of central planning with unintended consequences, namely letting the Fed take over capital markets in order to preserve the oligarchic, kleptocratic system, pardon financial stability, and in the process make the uber-wealthy richer beyond their wildest dreams, while making the poor yearn for the days of the first Great Depression, the president will now one-up that act, and progress with even more “centrally-(un)planned”, authoritarian acts which bypass Congress entirely, make a mockery of the republic, result in even more adverse unintended consequences, and practically assure that in the great race for the Banana Republic (or is that Banana Dictatorship?) endgame, the US has just overtaken everyone.

If only the Fed could now proceed to stop pretending things are getting better and promptly Taper the Taper, so as to push the superturbo printing button, it would at least assure that the great reset will come that much faster. At this point, it couldn’t possibly come fast enough.

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