zerohedge – Page 18740

Bill Clinton Gives Sage Advice To Obama – The Cartoon Edition

You know it’s bad when…

(h/t IBD via The Burning Platform)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0Z3WmcYAXOU/story01.htm Tyler Durden

Should We End The Fed?

With the market ebullient at the prospect of more “miracles” from Yellen, we thought it worth dusting off the following brief clip discussing what it would mean to “end the Fed.” In order to answer this question, we examine countries throughout history that did not have an established central bank. So who performs the functions of a central bank in these countries? Professor White cites private institutions, including clearing house systems, banks, and financial companies, as the main actors in the monetary systems of countries without a central bank. Ultimately, he concludes that the Federal Reserve is not necessary. Evidence shows that nations can survive without a central bank. What the Federal Reserve does well can be done even better by private institutions, and the institution is capable of serious errors.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/tLg40fEgTrA/story01.htm Tyler Durden

6 Things To Ponder This Weekend

Submitted by Lance Roberts of STA Wealth Management,

Is there a bubble in the financial markets? This is probably been the most written about issue over the past two weeks. However, as I stated in "Too Much Bubble Talk:"

"That lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected. The real surprise in 2014 could very well be an increase in size and scope of the current quantitative easing programs if interest rates remain elevated, deflationary pressures continue to increase and economic growth stalls. The injection of more liquidity could very well drive asset prices to the irrational extremes of a true market bubble. However, if that occurs, the majority of market analysts and economists will not be talking about a "bubble" in asset prices but why "this time is truly different."

Are we currently witnessing a market bubble? It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance."

That viewpoint was confirmed during Janet Yellen's Senate confirmation hearings when she stated:

YELLEN SAYS ECONOMY, JOBS 'PERFORMING FAR SHORT' OF POTENTIAL

YELLEN: SUPPORTING RECOVERY IS PATH TOWARD MORE NORMAL POLICY

YELLEN SAYS FED DOESN'T SEE BUILDUP OF FINANCIAL RISKS

YELLEN SEES LIMITED EVIDENCE OF 'REACH FOR YIELD'

YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES

YELLEN DOESN'T SEE 'MISALIGNMENTS' IN ASSET PRICES

Are the markets currently in a bubble or is Janet Yellen correct? This week's edition of things to ponder is a collection of views on this issue so that you can decide for yourself.

1) This Is Your Brain In A Bull Market by John Coumarianos

"As for those metrics like PE10, our psychology invents all sorts of excuses to avoid them. For example, data before 1950 is sketchy, naysayers say, and the average since then is around 18, not 16.5. We’re coming off a terrible recession, and profits must continue to improve off the trough despite the fact that profit margins are at record highs, and show a powerful tendency toward mean reversion. Even typically sober observers like Jack Bogle argue that corporate profit growth will be 5% as far as the eye can see, which combined with a 2% dividend yield, will produce 7% annualized stock market returns or 5% adjusted for inflation. That’s not the historical 6.5%, but it’s not bad.

Another bullish argument: Prices were ridiculously low in 2009, so the runup until now doesn’t necessarily make them expensive. The counter for this argument is that PE10 bottomed at around 13 in early 2009. While below average, 13 is not ridiculously low.

So the problem is these may all be excuses and avoidances of a harsher reality. When prices rise like they have in recent years, the neurons in the primitive, reactive parts of our brains start firing, causing us, however perversely, to buy securities that cost more than double the price they did a few years ago. Higher prices are begetting still higher prices, not for economic reasons, but because of our psychological weaknesses."

2) Bull Today, Bear Tomorrow? by Paul Farrell

"Many optimists see this bull climbing up through 2014, like Merrill Lynch strategist Michael Hartnett and celebrity economist Nouriel Roubini. Some even see this bull roaring till 2017, repeating the incredible assault up the 2002-2008 mountain of worry. But not everyone’s optimistic lately.

Why? 2013 is a turning-point year. Some see today’s bullish columns as contrarian indicators when compared with earlier warning columns from Bill Gross, Gary Shilling, Peter Schiff, Jeffrey Gundlach and other bears. Remember, Gross’ warning that the bond market just ended a 30-year bull run on April 29? Then along came bulls like Hartnett and Roubini.

Now as we near year-end, a new twist. Bears are again growling: Hong Kong permabear Marc Faber and Nomura Securities’ strategist Bob Janjuah are reviving earlier crash warnings from the bears. And investors asking: Am I going crazy? Can I be both a bull and a bear? Bull today? Bear tomorro
w?"

3) Citi Warns "Fed Is Kicking The Can Over The Edge Of A Cliff" via Zero Hedge

"It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility – 'America is exhausted…..it is time.'"

4) Same Old Speculation In A New Guise by Comstock Partners

"The market continues to rise solely on the perception that the Fed's easy money policy can hold stock prices up indefinitely. We think that this line of thinking will prove to be no more durable than the dot-com bubble that peaked in early 2000 or the housing bubble that topped out in late 2007. In both cases the market gave back a large proportion of the gains made during the bull market, and we believe that will prove to be the case this time as well. When the vast majority of investors faithfully believe in a bubble, momentum takes over and the market goes up because it's going up, ignoring all of the obvious warnings such as high valuations, over bullishness, decreasing earnings momentum and an underperforming economy. When reality suddenly sets in, as it inevitably does, most investors are left holding the bag, hoping that the market doesn't go any lower."

5) 10 Laws Of Stock Market Bubbles by Doug Kass

To my five conditions mentioned earlier, I add five more (several of these quantify the "degree of bubbliness" to complete my 10 laws of bubbles:

Debt is cheap.
Debt is plentiful.
There is the egregious use of debt.
A new marginal (and sizeable) buyer of an asset class appears.
After a sustained advance in an asset class's price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
The distance of valuations from earnings is directly proportional to the degree of bubbliness.
The newer the valuation methodology in vogue the greater the degree of bubbliness.
Bad valuation methodologies drive out good valuation methodologies.
When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed "financial weapons of mass destruction").

6) Get Ready For The Mania Phase by Richard Russell

"We spend our time searching for security and hate it when we get it." — John Steinbeck.

One of the basics of Dow Theory is the thesis of three psychological phases in both bull and bear markets. In a bull market, which we are now in, the first or initial phase is the early accumulation phase. This is the phase where wise and seasoned investors enter the market at or near the bottom, when many stocks are selling at great values after having been battered for months by the preceding bear market. Here many blue-chip stocks are selling "below known value."

The second phase of a bull market is usually the longest and most deceptive, containing many secondary reactions. During the second phase the retail public shows interest in stocks, and enters the market carefully and sporadically.

The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed."

Closing comment.

The third stage of bull markets, the mania phase, can last longer and go farther that logic would dictate. However, the data suggests that the risk of a more meaningful reversion is rising. However, it is necessary to note that "reversions" do not occur without a catalyst. What will that catalyst be? I have no idea and nor does anyone else. Things that we are already aware of, like the upcoming debt ceiling debate, are already factored into the market.

It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout. Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to. This is the danger that exists today.

Are we in the third phase of a bull market? Most who read this article will say "no." However, those were the utterances made at the peak of every previous bull market cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk and manage accordingly.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/iiQ1dtpR-N0/story01.htm Tyler Durden

Cognitive Dissonance: Sell-Side Stock Analyst "Expectations" Edition

How many more quarters of this Einsteinian insanity will it take for investors to realize the sell-side analysts’ “forecasts” are worse than useless…?

The last six quarters have on average seen analyst forecasts for growth slide from 4% of hope-driven exuberance to a dead flatline reality… quarter-after-quarter…

(h/t @Not_Jim_Cramer)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cm6z8ja6-lY/story01.htm Tyler Durden

Cognitive Dissonance: Sell-Side Stock Analyst “Expectations” Edition

How many more quarters of this Einsteinian insanity will it take for investors to realize the sell-side analysts’ “forecasts” are worse than useless…?

The last six quarters have on average seen analyst forecasts for growth slide from 4% of hope-driven exuberance to a dead flatline reality… quarter-after-quarter…

(h/t @Not_Jim_Cramer)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cm6z8ja6-lY/story01.htm Tyler Durden

No Inflation To See Here…

Submitted by Simon Black of Sovereign Man blog,

One of the biggest lies in finance is this perpetual deception that inflation is good.

Ben Bernanke, the current high priest of US monetary policy, recently remarked that it’s “important to prevent US inflation from falling too low.”

Well of course, we wouldn’t want that, would we? Just imagine the chaos and devastation that would ensue if the cost of living actually remained… you know… the same.

One shudders at the mere thought of price stability.

Of course I jest. Fact is, inflation benefits those who are in debt up to their eyeballs at the expense of people who have been financially responsible.

Yet economists have somehow managed to convince people that inflation is just and necessary. We all know inflation exists. But we’ve been programmed to shrug it off as if it’s a natural part of the system.

The even greater deceit is how they report the figures.

Governments all over the world lie about inflation; they do this because inflation has such a huge impact in monetary policy.

The playbook they all use is very simple– as long as inflation is ‘low’, then central bankers can print money. So they have a big incentive to underreport it.

Quoting a report from the US Department of Labor, for example, a recent headline from Reuters stated “U.S. consumer prices rise, but underlying inflation benign”.

I’m not entirely sure how inflation can be ‘benign’ while consumer prices are simultaneously rising.

Yet this is the modern day doublethink coming from the Ministry of Truth that we are all expected to unquestioningly believe.

Inflation does exist. I’ve seen it all over the world as I travel. In India right now, the reported inflation figure just hit 10% at a time when the economy is sagging.

In Bangladesh, workers are now rioting over rising cost of living, which far exceeds the proposed wage hikes that are on the table.

In the Land of the Free, the average price of a movie ticket is $8.38 earlier this year, another record high. Walnut farmers in California are now reaping record high prices on their crop.

And of course, McDonald’s is now killing their once popular dollar menu as they can no longer afford to sell anything at that price.

There are examples everywhere. And this also goes for asset price inflation.

We can see many stock and bond markets near their all-time highs. But then there are other asset classes… like farmland in Illinois, which is now selling for $13,600 per acre.

With an average yield of 160 bushels per acre, the net financial return after paying variable costs is less than 2%. It just doesn’t make any sense.

And in the art world, a Francis Bacon triptych just sold for a record $142 million at Christie’s in New York.

Everywhere you look, there’s overwhelming evidence of bubbles and price hikes. It’s simple. There’s too much money in the system.

Not only is this destructive, it’s the height of deceit to tell people that there’s no inflation.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/924SWS2pRy4/story01.htm Tyler Durden

The Unspoken, Festering Secret At The Heart Of Shadow Banking: "Self-Securitization" … With Central Banks

By now everyone has heard of securitization: the process whereby banks take risky assets on their books, package, tranche them, and then re-sell them to yield chasing fiduciaries of widows and orphans. The conversion process can be nebulous, usually involving a 20 year-old evil French mastermind working for Goldman, and a billionaire hedge fund manager, who select the worthless securities put into the weakest tranche, just so the abovementioned two parties can short it while misrepresenting their conflicts of interest, and make a boatload of money when the whole securitized structure implodes. The process usually takes place “off balance sheet” via Special Purpose Vehicles so it is completely unregulated, and as such allows massive leverage.

According to many, the hidden leverage embedded in the securitization pipeline is what catalyzed the 2008 near-death experience of the financial markets.

All of this is well-known to most.

What however is certainly not known, because until a few days ago the concept did not technicall exist, is what emerged deep from the bowels of the FSB’s 2013 “Global Shadow Banking report“, and what is barely even defined anywhere in popular literature, which thus we have defined as the “unspoken, festering secret at the heart of shadow banking.”

Presenting self-securitization.

What is “self-securitization”? Go ahead and Google it: there doesn’t exist any technical definition of this heretofore unheard of phrase.

Rather the term, conceived by the FSB as a means of making the total size of the $71 trillion shadow banking sector somewhat more palatable, is defined as follows:

Self-securitisation (retained securitisation) is defined as those securitisation transactions done solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All of the securities issued by the Structured Finance Vehicle (SFV) for all tranches are owned by the originating bank and remain on its balance sheet.

At this point alarm bells should be going off. And if they aren’t, here is some more color.

The numbers for OFIs presented in sections 2 to 4 of this report include all financial assets of Structured Finance Vehicles (SFVs), regardless of who holds the securitised products. However, in a number of jurisdictions, some of these products are returned back onto the balance sheet of the bank that originally provided the asset to be securitised. This so called self-securitisation, or retained securitisation, is defined as those securitisation transactions done solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All of the securities issued by the SFV for all tranches are owned by the originating bank and remain on the bank’s balance sheet, so that third-party investors do not own any of the securities issued by the SFV. These assets should not be included in the shadow banking figure, as prudential consolidation rules consider them as banks’ own assets and as such subject to consolidated supervision and capital requirements.

… some of the assets that are currently ‘self-securitised’ by banks may at some point be sold to third parties when financial conditions improve.

Wait a minute: a company is “securitizing” assets…. which it then keeps, but only after it has “obtained funding with a central bank”? What?

Judging by the countries whose shadow bank institutions are the most aggressive participants in “self-securitization”, it gets clearer just what is going on here:

While Italy and Spain are clear, why is Australia on this list?

While the large increase in Australian banks’ self-securitisation of residential mortgage-backed securities (RMBS) started in 2008 (i.e. before Basel III was developed), the amount of self-securitisation is expected to stay high going forward as these securities are eligible as collateral for the Reserve Bank of Australia’s Committed Liquidity Facility (CLF). Indeed some banks are gearing up already for the CLF. Given the low level of government debt in Australia, the Australian prudential regulator has adopted elements of the Basel rules that allow banks to count a committed liquidity facility provided by the central banks as part of their Basel III liquidity requirements.

So that very strict Basel III requirements are permissive enough to allow… shadow “banks” to engage in self-securitization with their central bank? Just brilliant.

Finally, what amount of circularly (non) securitized, central-bank backstopped securities are we talking here?

Answer: $1,200,000,000,000.

That is the amount of unlevered notional that shadow (and regular) banks engage in circular check-kiting games with central banks for, and in the process obtaing “funding.” As one trading desk explained it:

you take yr worst assets… package up in an spv (which removes em from yr gaap balance sheet) then flip to central bank for cash at modest haircut and boom revenues…

And presto: magic balance sheet clean up and even more magical “revenues.”

But wait, there’s more.

Where this mindblowing, circular scheme in which riskless central banks serve as secret sources of incremental bank funding, i.e., free money, gets completely insane, is the realization that these self-securitized assets can also participate in rehypothecation chains. Recall from our exposition yesterday on the permitted leverage resulting from collateral reuse in a repo chain which is fundamentally what shadow banking is all about: unregulated, stratospheric leverage.

We added:

So… three participants result in 4x leverage; four: in roughly 6x, and so on. Of course, these are conservative estimates: in the real, collateral-strapped world, the amount of collateral reuse, and thus the number of participants is orders of magnitude higher. Which means that after just a few turns of rehypothecation, leverage approaches infinity.

Which means that should these same banks that self-securitize with Central Bank X, then proceed to re-use the same securit
y with the same counterparty – i.e., their host central bank, or the Fed of course – then this $1.2 trillion in assets, already carried off-balance sheet with Basel III’s blessings, can get 2x, 3x, 5x, 8x, 13x or more turns of leverage on them, as for the shadow bank it is the central bank that is the (up to infinity) levered counterparty. And the central bank, as everyone knows, can always just print money if and when the worthless collateral backing the bank’s self securitization ends up worthless.

The implication of this unprecedented shadow banking circle jerk, which could very easily make even the direct wealth transfer resulting from trillions in QE pale by comparison, is so stunning that we leave it up to the reader to come to their own conclusion.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8Z3YYO9fUWQ/story01.htm Tyler Durden

The Unspoken, Festering Secret At The Heart Of Shadow Banking: “Self-Securitization” … With Central Banks

According to many, the hidden leverage embedded in the securitization pipeline is what catalyzed the 2008 near-death experience of the financial markets.

All of this is well-known to most.

Presenting self-securitization.

What is “self-securitization”? Go ahead and Google it: there doesn’t exist any technical definition of this heretofore unheard of phrase.

Rather the term, conceived by the FSB as a means of making the total size of the $71 trillion shadow banking sector somewhat more palatable, is defined as follows:

Self-securitisation (retained securitisation) is defined as those securitisation transactions done solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All of the securities issued by the Structured Finance Vehicle (SFV) for all tranches are owned by the originating bank and remain on its balance sheet.

At this point alarm bells should be going off. And if they aren’t, here is some more color.

The numbers for OFIs presented in sections 2 to 4 of this report include all financial assets of Structured Finance Vehicles (SFVs), regardless of who holds the securitised products. However, in a number of jurisdictions, some of these products are returned back onto the balance sheet of the bank that originally provided the asset to be securitised. This so called self-securitisation, or retained securitisation, is defined as those securitisation transactions done solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All of the securities issued by the SFV for all tranches are owned by the originating bank and remain on the bank’s balance sheet, so that third-party investors do not own any of the securities issued by the SFV. These assets should not be included in the shadow banking figure, as prudential consolidation rules consider them as banks’ own assets and as such subject to consolidated supervision and capital requirements.

… some of the assets that are currently ‘self-securitised’ by banks may at some point be sold to third parties when financial conditions improve.

Wait a minute: a company is “securitizing” assets…. which it then keeps, but only after it has “obtained funding with a central bank”? What?

Judging by the countries whose shadow bank institutions are the most aggressive participants in “self-securitization”, it gets clearer just what is going on here:

While Italy and Spain are clear, why is Australia on this list?

While the large increase in Australian banks’ self-securitisation of residential mortgage-backed securities (RMBS) started in 2008 (i.e. before Basel III was developed), the amount of self-securitisation is expected to stay high going forward as these securities are eligible as collateral for the Reserve Bank of Australia’s Committed Liquidity Facility (CLF). Indeed some banks are gearing up already for the CLF. Given the low level of government debt in Australia, the Australian prudential regulator has adopted elements of the Basel rules that allow banks to count a committed liquidity facility provided by the central banks as part of their Basel III liquidity requirements.

So that very strict Basel III requirements are permissive enough to allow… shadow “banks” to engage in self-securitization with their central bank? Just brilliant.

Finally, what amount of circularly (non) securitized, central-bank backstopped securities are we talking here?

Answer: $1,200,000,000,000.

you take yr worst assets… package up in an spv (which removes em from yr gaap balance sheet) then flip to central bank for cash at modest haircut and boom revenues…

And presto: magic balance sheet clean up and even more magical “revenues.”

But wait, there’s more.

We added:

So… three participants result in 4x leverage; four: in roughly 6x, and so on. Of course, these are conservative estimates: in the real, collateral-strapped world, the amount of collateral reuse, and thus the number of participants is orders of magnitude higher. Which means that after just a few turns of rehypothecation, leverage approaches infinity.

Which means that should these same banks that self-securitize with Central Bank X, then proceed to re-use the same security with the same counterparty – i.e., their host central bank, or the Fed of course – then this $1.2 trillion in assets, already carried off-balance sheet with Basel III’s blessings, can get 2x, 3x, 5x, 8x, 13x or more turns of leverage on them, as for the shadow bank it is the central bank that is the (up to infinity) levered counterparty. And the central bank, as everyone knows, can always just print money if and when the worthless collateral backing the bank’s self securitization ends up worthless.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8Z3YYO9fUWQ/story01.htm Tyler Durden

Weekly Bull/Bear Recap: Nov 11th-15th 2013

This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.

Via Rodrigo Serrano’s RCS Investments,

RCS Investments Weekly Bull/Bear Recap

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/7SzqqNKBKb8/story01.htm Tyler Durden

Mission (Almost) Accomplished: S&P 500 Nears Bernanke's 1,800 Year-End Target

As we "forecast" this morning (and a month ago – if our extrapolation of the Fed's balance sheet is correct – i.e. no Taper – that the S&P 500 Fed L-A-B-I-A should be around 1800 by year-end), the Fed can be proud that they managed (remember it "costs" $3.25bn in POMO to create 1 S&P 500 point) to get the key US equity index – the S&P 500 – near the critical 1,800 level…

K-Hen's PT for today: 1801

— zerohedge (@zerohedge) November 15, 2013

Mission (Almost) Accomplished…

Cue Tom Lee… need to re-raise that year-end target again stat… (of course there is always the real "Bernanke" plan)

The last four weeks have seen the S&P 500 rise 4%, IG credit spreads drop 1bps, and HY credit spreads +6bps (as supply overwhelms a saturated credit market)…