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One week after we explained not once but twice that next week’s main central bank event is not the Fed – which won’t do anything – but the Bank of Japan, even CNBC has finally figured it out, observing with about a 7 day delay that “Everyone’s waiting for the Federal Reserve in the week ahead, but the real action may be coming out of Tokyo.” Well, thanks for that.

But while it’s clear that Yellen won’t dare shock the market (which now trades with a 20% probability of a September rate hike and as we showed a year ago, the Fed has never hiked unless the market is already pricing in at lest 60% odds), the question remains – just what will Kuroda and the BOJ do, especially since as we wrote last week, not even the BOJ knows what it will do, and has instead flooded the market with news report trial balloons covering every possible, even contradictory, possibility. Which also makes the BOJ’s decision that much more important.

As DB points out, “this week will be the litmus test for whether central banks are in shift mode as regards ongoing accommodative monetary policy. Investor consensus revolves around the notion that monetary policy has run its course and it “needs” to be supplanted by fiscal policy or at least combined with fiscal policy, via helicopter money, to be effective. The potential for a BoJ move on short rates and a shift in QE plus a Fed insistence on hiking despite market expectations (including a “hawkish” hold for September) might be considered to be consistent with a steeper curve.”

Here is what DB’s Dominik Constam, one of Wall Street’s best credit strategists expects the BOJ will reveal on Wednesday:

The BoJ is conducting a comprehensive review of monetary policy. It is fair to say that there is substantial uncertainty as to what they may choose to do but recent policy speak has suggested that further cuts in the deposit facility rate are possible as well as a shift in the duration target away from the 7-12 year sector towards the 3-5 year sector. The proposed logic would be to steepen the yield curve, offering extra NIM to banks whilst also alleviating pressure on the entitlement industry. Some Fed officials meanwhile have also chimed in regarding the concern for financial stability that emanates from low long yields that in turn have compressed risk premia across asset classes as part of a “hunt for yield”. The implication is that if long rates stay artificially low, there may be a case for earlier moves higher in short rates to compensate even if the data itself was less compelling for such a move, all else equal. In both cases the potential for a BoJ move on short rates and a shift in QE plus a Fed insistence on hiking despite market expectations (including a “hawkish” hold for September) might be considered to be consistent with a steeper curve. Even the ECB could be added to this mix after the recent “disappointment” around not committing to an extension of its QE program nor adjusting the parameters.

In other words, in line with what we predicted ten days ago, Japan may engage in a reverse Twist, where it cuts short end rates while slowing down purchases of longer maturities to force the JGB curve steeper. Citigroup’s Brent Donnelly caught up to this idea this over the past week, and added the following notable color:

there is an interesting and lively debate going on here at Citi and elsewhere about the JPY impact of the recently-touted BoJ actions. If they cut front end rates and reduce 30-year purchases in a Twist-type operation, is that good or bad for USDJPY? I feel it is 100% terrible for USDJPY but there are enough smart people disagreeing that I’m not fully confident. I think it is negative USDJPY because:

1. It’s not great for Japanese banks (see Chart1, note they gapped lower overnight after the rate cut story came out in NY time).
2. The last time the BOJ cut (and the last time the ECB cut) the currency ripped. There is no empirical evidence that rate cuts below zero are bad for a currency. There is a small body of evidence that rate cuts below zero are good for a currency.
3. When the US did Twist, the currency ripped and equities tumbled aggressively as you can see in the next two charts.

Overall I think what the market wants from the BoJ is pretty simple: Incremental stimulus. The composition of current stimulus, the shape of the yield curve and all that is just noise. If the BoJ buys foreign assets, USDJPY will explode higher and if they do not, it will go down. I really think trading the BoJ meeting is that simple… Note one important point made by Deegs this morning: US Twist flattened the curve and Japanese Twist would steepen the curve so it’s not unreasonable to guess the reaction in the currency would be opposite. That’s not my view but it’s certainly a reasonable view.

So while DB and Citi agree on what the BOJ may (or may not do) with Japan’s interest rate (cut from -0.1% to -0.2%), and shifts to QE (fewer purchases on the long end, perhaps shifting the focus from 7-12 to  7-10 to 5-10 year bonds), others like CLSA take aim at a different aspect of the BOJ’s monetary lunacy, namely the ongoing nationalizaton of the stock market.

According to Bloomberg, CLSA’s Nicholas Smith says he’s “absolutely certain” the Bank of Japan will stop buying exchange-traded funds tracking the Nikkei 225 Stock Average amid criticism its use of the measure is distorting the market.

The central bank will make the change at its meeting next week, shunning ETFs following the price-weighted stock gauge in favor of those linked to more modern indexes, Smith said. He says he’s been talking to BOJ officials within the last three days, while declining to name them. BOJ board members have made no public indication of an impending shift in the ETF program ahead of announcing their monetary policy review on Sept. 21.

 

The Nikkei 225 gives undue influence to certain stocks because it determines its rankings by the price of one share, rather than market capitalization. Fast Retailing Co., for example, accounts for 8 percent of the gauge, versus just 0.3 percent of the Topix. That means it benefits disproportionately from the central bank’s Nikkei 225 purchases. Since the BOJ almost doubled its annual budget for ETFs on July 29, the issues associated with the Nikkei 225 have become more pronounced, Smith said.

 

“I am absolutely certain that they will shift their buying to pretty much Topix-based,” Smith, a Tokyo-based strategist at the brokerage, said by phone Friday. “The Nikkei 225 is a Flintstones index from the abacus era,” he said. “It’s been a laughing stock for a long time.”

Perhaps he is right, although adjusting ETF purchases would be peanuts in the grand scheme of things, where the BOJ needs to inject trillions instead of trifling with billions in stocks here and there.

* * *

Finally, the most comprehensive assessment of the BOJ’s “comprehensive assessment” due next week, comes from Goldman’s Naohiko Baba, who has a rather unexpected conclusion: don’t expect much if anything, at all.

Here is Goldman’s full report:

Final update on BOJ’s “comprehensive assessment”

At the next Monetary Policy Meeting (MPM) on September 20-21, the Bank of Japan (BOJ) will conduct a “comprehensive assessment” of trends in economic activity and prices under the current policy framework, as well as the policy impact, with a view to achieving its 2% price stability target at the earliest possible time. We gave our take on this in our August 5 Japan Views and September 7 Japan Views, and our overall view remains essentially unchanged. Below we provide a final update of our view in a Q&A format ahead of next week’s MPM, focusing on the most common queries we have fielded, particularly from overseas investors, since our last report.

Key points

• We believe the BOJ’s comprehensive assessment has four main objectives: (1) reiterate the positive aspects of its easing policy (quantitative/qualitative easing with a negative interest rate); (2) switch from quantitative easing to a negative interest rate policy (NIRP) as its primary policy tool; (3) correct the excessive impact of the easing policy on the yield curve; and (4) curve excessive market expectations of additional easing by extending the policy timeframe.
• We expect the BOJ to retain its 2% target due to the risk of severe yen appreciation if scrapped.
• The BOJ will highly likely move towards negative interest rates as its primary policy tool, as quantitative and qualitative easing are approaching the limits of their effectiveness. The BOJ also sees negative rates as an effective tool for combating the strong yen.
• We think possibilities of both helicopter money and foreign bond purchases by the BOJ as extremely unlikely.
• Although taking interest rates deeper into negative territory is likely to be seriously discussed at the policy meeting next week, we expect the BOJ ultimately to opt to push back the rate cut until a later date.

Q1: What are the purposes of the BOJ’s comprehensive assessment?

A1: We believe the BOJ’s review has four main objectives: (1) reiterate the positive aspects of its three-dimensional monetary easing policy (quantitative/qualitative easing a with negative interest rate); (2) switch from quantitative easing to a negative interest rate policy (NIRP) as its primary policy tool; (3) correct the excessive impact of the easing policy on the yield curve; and (4) dampen excessive market expectations of additional easing by extending the policy time-frame.

Below we touch on each of these points.

1. We believe the BOJ will attribute its inability to reach the 2% inflation target so far to deflationary pressure from external factors beyond its control, including lower crude oil prices, a slowdown in emerging market economies, and greater-than-expected downward pressure on the economy following the consumption tax hike, and explain how this impact has spread to backward-looking inflation expectations. In other words, we expect the BOJ to stress that its QQE with NIRP policy would have had sufficient clout to achieve its objective if not for the impact of such factors out of its control, and that this policy could still be effective moving forward.
2. The BOJ faces various issues relating to its “quantitative” easing (QE) policy, such as (1) the likelihood that it will eventually reach a physical limit to its large-scale JGB purchases, (2) excessive flattening of the yield curve due to the combination of large-scale JGB purchases and the NIRP, and the concerns this has generated for financial intermediation, and (3) the drying up of liquidity in the JGB market. As such, we believe the BOJ has a strong desire to shift from QE to the NIRP as its primary policy tool (see Q3 below). At the same time, we think the BOJ seeks to remove uncertainty over the future direction of policy by clearly defining the fulcrum of its policy framework. In a recent speech, BOJ Governor Haruhiko Kuroda said that “in order to ensure the effectiveness of monetary policy…the important thing is…to maintain consistent and predictable policy responses.”[1]
3. The excessive decline in interest rates, particularly in the super-long zone, has raised concerns over the potential impact on life insurance and pensions, and thus we believe the BOJ could well shorten the maturity of JGBs it purchases. However, we believe it will not shift its annual purchase target from ¥80 tn to a more flexible range of ¥70-¥90 tn, for example, as has been suggested by some observers (Sankei newspaper, August 9), given the risk of further yen appreciation should the market focus only on the lower figure of ¥70 tn.
4. We expect the BOJ will effectively scrap its two-year time-frame for achieving its 2% inflation target in favor of the less defined and more ambiguous wording, “at the earliest possible timing.” This is not just because 3.5 years have passed already since the launch of the easing program, but because we believe the BOJ also aims to curb excessive market expectations for additional easing by redefining the QQE with NIRP as a long-term strategy, strengthening the bias towards status quo, rather than a quick-fix policy.

Q2: Will the BOJ stick to its 2% inflation target?

A2: We expect the BOJ to retain its 2% target due to the risk of severe yen appreciation if scrapped.

The BOJ originally chose 2% as its inflation target primarily focusing on the impact on the exchange rate. The widely held view is that long-term exchange rate trends are formed based on purchasing power parity (PPP: a comparison of inflation levels between two countries). In many developed economies, such as the US, long-term inflation (or inflation expectations) is viewed as anchored around the 2% level, whereas in Japan, inflation levels were markedly lower. This is perceived to have formed the long-term trend in yen appreciation, from a PPP perspective. For this reason, the BOJ has had to make a strong commitment to achieving 2% inflation, an international norm, in order to reverse the long-term trend of yen appreciation. If it were now to scrap its 2% inflation target, forex market expectations could reverse completely as the BOJ would be viewed as tolerating a severe appreciatory yen trend. Also, we expect the BOJ not to adopt a more flexible band target such as between 1% and 3% at least at this stage.

Q3: Why is the BOJ likely to choose the NIRP as its primary policy tool?

A3: Within the current policy framework, QQE is approaching the limits of its effectiveness, so we think the BOJ wants to place the NIRP as its primary policy tool before this occurs. Another important reason is that the BOJ sees negative rates as an effective tool for combating the strong yen.

We touched on the “quantitative” aspect of easing in Q1 (2) above. The “quality” aspect of the current policy, which centers on the purchase of equity exchange-traded funds (ETFs), has already seen purchases balloon out to ¥6 tn annually, and there is strong recognition now of three potential side-effects (see our August 3, 2016 Japan Economics Analyst).

First, there is the possibility of across-the-board rises in share prices, including for companies that should be exiting the market or else languishing at low valuations due to poor earnings prospects. Second, stocks that are substantially overvalued by the market may become even more so on the influx of funds. Third, from a corporate governance perspective, we think the market’s surveillance function could be diminished. This last point, in particular, would appear to run contrary to the Abe administration’s corporate governance reform efforts.

Furthermore, a simple estimate of potential risk from the BOJ’s equity holdings suggests this will likely surpass the BOJ’s capital even for a 1-year holding period. Under the current BOJ Act, the BOJ is prohibited from receiving loss compensation from the government. Because erosion of a central bank’s balance sheet could undermine confidence in the value of the currency, further expanding ETF purchases could be difficult. 

We believe there is a strong willingness at the BOJ to move the focus on to its NIRP not only because its QQE options are approaching their limits, but also because the BOJ considers the NIRP to be an effective means of countering the strengthening yen.

In a recent speech, Governor Kuroda stated that “The basic mechanism of monetary policy … is to drive the real interest rate higher or lower than the “natural rate of interest”. In normal times, this can be achieved by adjusting short-term rates; namely, simply lifting or lowering them.” He went on to say, “Any additional monetary easing entails ‘costs’ which negatively affects some sectors. That said, we should not hesitate to go ahead with it as long as it is necessary for Japan’s economy as a whole; namely, if its ‘benefits’ outweigh its ‘costs’”[2]. We think both statements can be seen as very supportive of the NIRP.

Q4: What is the likelihood of helicopter money and foreign bond purchases by the BOJ?

A4: We think both possibilities are extremely unlikely.

Both helicopter money and foreign bond purchases are in a legal gray zone and therefore cannot be ruled out entirely (see our July 15 Japan Views, and August 30 Japan Views). With helicopter money, however, we see a major risk of the BOJ having difficulty exiting such a policy once it has been set in motion. This is because of the high possibility that giving the government a really convenient tool, namely monetary financing, would cause it to lose fiscal discipline. Given Governor Kuroda is a notable proponent of fiscal consolidation, we think the likelihood of him agreeing to such a policy is extremely low.

With foreign bond purchases, we think they cannot be dismissed if positioned as a means of expanding the monetary base and not for the purpose of influencing foreign exchange rates. However, even if foreign bond purchases were positioned as a means of monetary base expansion by the BOJ, they would almost certainly be seen by the international community as an attempt to influence foreign exchange rates, in our view. We think foreign bond purchases would be very difficult, especially in light of the US Treasury including Japan on its new currency monitoring list in April 2016.

Q5: What is the likelihood of the BOJ easing further at the September MPM (next week)?

A5: If the BOJ were to position the NIRP at the center of its easing policy, we think that it would be only a matter of time before it takes interest rates deeper into negative territory, and that there will be serious discussions on the topic at the September MPM next week. However, we expect the BOJ ultimately to opt to push back additional easing until a later date.

If the comprehensive assessment was to result in negative interest rates becoming the central pillar of the BOJ’s efforts to achieve its 2% inflation target, it may be natural to think the BOJ would then seek to immediately show a strong commitment to the NIRP, and therefore a deeper negative rate at the September meeting is a possibility. At the next meeting, however, we believe the BOJ will ultimately opt to stand pat and is likely to postpone a deeper interest rate cut for the following three reasons.

First, in its July Outlook Report, the BOJ sharply raised its GDP growth forecast for FY2017 (to +1.3%, from +0.1%), and kept its bullish inflation forecast (+1.7%) for the same period. Behind this are two main measures on the fiscal front, including a postponement of the second consumption tax hike, and the formation of an economic stimulus package. By the time of the September MPM, however, the only additional macro data available to the BOJ since the July-end Outlook Report will be that for July. While the figures are mixed, we think macro data are unlikely to be weak enough to warrant a major downgrading of the overall economic assessment (see our September 5 Japan Economic Flash).

The BOJ identified overseas economic developments as the largest downside risk to the economy and prices, but we note that the turmoil in the wake of the Brexit decision has eased, and Chinese macro data, among others, have somewhat improved. Based on the BOJ’s most fundamental approach, we believe that it would see no need to urgently implement additional easing measures if there was no basis for downgrading its economic assessment. 

Second, because the September MPM and the US FOMC meeting will be held on the same day, the BOJ will need to make its monetary policy decision half a day ahead of the FOMC due to the world time differences. This means that, even if the BOJ were to decide to cut interest rates further, there is a risk of the FOMC decision nullifying the impact on the markets (especially the foreign currency market) of any additional BOJ easing. Considering the possible side-effects and the limited number of chances the BOJ has to take negative interest rates deeper, we believe it will need to think very carefully about the optimal timing when making its next move.

Third, we believe there is considerable risk in the BOJ cutting rates further before ensuring a more stable steepening of the yield curve. While the yield curve has steepened significantly of late on anticipation of more flexibility on the maturity of JGB purchase, we think this mainly reflects expectations running ahead and that the curve may not stabilize based solely on any news of a more flexible purchase maturities. Rather, with market expectations driving wild fluctuations in yields, we think an actual decision could invite more volatility. If the yield curve fails to steepen in a stable manner in spite of the BOJ taking the negative rate deeper, we think this could have consequences for the financial intermediation function. Consequently, we expect the BOJ to adopt a phased approach, and to consider the timing of future rate cuts only after adjusting the maturity of its JGB purchases first.

via http://ift.tt/2cFXGdQ Tyler Durden

Submitted by Jeffrey Snider via Alhambra Investment Partners,

The University of Michigan released its September update for their surveys of consumers. The overall index of consumer “sentiment” was unchanged from August at 89.8, and up just 3% from last September. This “confidence” index peaked in January 2015 at 98.1 and has been sideways to lower ever since. Most of the internals were practically unchanged throughout, leading Chief Economist Richard Curtin to note:

…modest gains in the outlook for the national economy have been offset by small declines in income prospects as well as buying plans

Not everything in the surveys was so uninteresting. Inflation expectations dropped yet again, as both short-term and intermediate consumer projections for the rate of prices changes continue to sink.

The surveyed result for the inflation rate next year fell to 2.3%, the lowest since September 2010 just prior to the start of QE2. Straight away, it would appear that consumers are no longer so convinced that “money printing” actually accomplishes what money printing is supposed to.

Since the data is made up of surveys of American consumers we are really talking about perceptions, and thus this reduction in expected inflation has been shaped by recent (money, not monetary policy) events. The peak outlook, the one most faithful to the myth of “money printing”, was reached not surprisingly in early 2011. Since then, shorter-term expectations were as inflation breakevens in the TIPS part of UST trading; seemingly stable but only as a matter of being unconvinced about policy efficacy, primarily QE.

The downward turn in expectations occurs first in the summer of 2014 with the appearance of the “rising dollar”, fully corroborating inflation breakevens concurrently moving against the recovery narrative. The next break lower happened last summer with the appearance of “global turmoil.” More importantly, however, despite the constant mainstream emphasis of temporary and “transitory” as well as the imposition of “full employment” at every possible juncture, expectations have only continued to get worse even this year in a clear sign of shaken faith in central bank power and efficacy.

In the past two decades, short-term expectations in the UofM surveys have rarely been as low as they are now and have been almost all year this year. While that means expectations for the short run are equivalent to 1998 and the Asian flu, there is tremendous difference given that there were not four QE’s “printing” trillions in bank reserves at that time intended to remove any doubt about Federal Reserve ability. To have expectations as low now as the Asian flu even after the Fed acted (supposedly) hugely and continuously is immensely significant.

Longer-term inflation expectations reflect perceptions about what all this means. If faith in “money printing” is exceptionally low in the short run, that can only at best create greater uncertainty about what will occur beyond the short term in economic potential. It is thus reasonable to suggest that consumers are recognizing the full “cycle” in views about monetary policy; from first buying into it, then questioning it, and now disregarding it.

Again we find the same “dollar”-led inflections where regular Americans perceive these “dollar” events not as “transitory” random acts but as a pattern of further and further disproving everything that central bankers have been declaring all along. It is highly compelling that in the face of the appearance of “full employment” in late 2014, consumer expectations regarding inflation have followed the warnings in markets rather than the emphatic, heated rhetoric of economists; they declared success and nobody buys it.

To emphasize that point, the only other time in the entire series (dating back to March 1990) where 5-year inflation expectations have been this low was September 2002 at the bottom of the dot-com bust. That was just one month at 2.5%, however, where in 2016 that low has been repeated five times since January, including the latest in September (and two other months were just 2.6%).

What we are witnessing here and in market trading of inflation expectations is the unwinding of the myth of the Great Moderation. This is not to say that calculated inflation rates didn’t moderate during the 1990’s; far from it. Rather, what is happening is the market and regular Americans are coming to realize (even if they don’t yet fully realize why) that the “low inflation” environment of that time was never due to monetary policy of the “maestro.” The economic stability of the 1990’s and 2000’s wasn’t so stable after all; it was largely a mirage where the cost of “purchasing” such artificial strength (by allowing through determined ignorance the eurodollar system to run wild all over the world) would have to be paid where John Maynard Keynes said it didn’t matter – the dangerously unsatisfactory long run that we now have to live in.

You would think this would be a big problem for economists and policymakers (redundant), but in their rush to hold fast to their ideology these kinds of contrary results are just set aside. In the case of inflation expectations that is the literal truth. Even published FOMC policy statements acknowledge that market-based inflation expectations have been ruling against them for some time, but the inclusion of consumer survey-based expectations in the contra column hasn’t elicited the required awakening. Instead, as usual, economists have rushed to dismiss now this data, too.

Writing for the St. Louis Fed at the end of last month, VP and Economist William Dupor declares consumers too stupid (my word) to be reliable:

The above evidence suggests that monetary policymakers may want to think hard about how they use individual inflation expectations surveys to inform monetary policy—at least until the nation’s economic education program raises the public’s understanding of inflation.

The public understands economy, money, and inflation just fine; after all, unlike Dupor they have to live in the wreckage that economists like him call recovery and success. I wrote at the beginning of this month in response that it isn’t just inflation expectations that are in the process of “de-anchoring”, a potentially fatal blow to orthodox monetary policy and its understanding (if it might be called that) of how this is all supposed to work, it is economists completely breaking from reality.

And thus we have found a new form of de-anchoring. Long run inflation expectations may be doing that all their own, but the more concerning and troubling de-anchoring relates to what we see here (again) of economists. Markets, as I said, long ago turned against them and now consumers are in the process of confirming markets – but to economists that just can’t be so both are judged to be wrong for whatever their alleged faults and set aside as meaningful data. The FOMC is only to be left with “professional forecasters” for determining whether or not inflation expectations are anchored properly, an incredibly crucial property of orthodox monetary policy. Since most if not all “professional forecasters” are themselves economists, really statisticians, once again we find economist policymakers relying upon economists forecasters to tell them what they want to hear no matter how much the rest of actual evidence ends up otherwise.

To an economist, the only thing that is “real” is what other economists and their models tell them is real.

The economy that “should” be is all that matters because that is the one derived from mathematics. Nothing could possibly get in the way of what “should” happen, so anything that suggests as much must be the product of “irrationality”, “disequilibrium” (as in the case, twice, both 2007 and again in 2015-16, of eurodollar futures), or just plain uneducated stupidity.

This is not science at all, it is Aristotelian farce; but dangerous farce because the whole world economy is stuck upon this one point. Monetary policy contains no money, and the rest of the world is finally realizing it even if economists refuse all the different and irrefutable ways of being shown.

via http://ift.tt/2cTqS4i Tyler Durden

Peak Debt… or Peak Stupidity?

 

Source: MichaelPRamirez.com

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Submitted by Alice Salles via TheAntiMedia.org,

Much like in the United States, Canada has seen a spike in the rates of opiate use among its populace.

Over a four-month period early this year, 256 Canadians died after overdosing on fentanyl, the same substance tied to “bad batches” of heroin that have been killing Americans.

In order to respond to what Canadian officials see as a growing threat, Health Canada launched new proposals in May to “allow doctors to prescribe heroin to some opioid addicts who do not respond to treatments such as methadone.”

On September 8, Canada enacted these new rules as a response to the country’s “opioid overdose crisis.” But despite the changes, drug war laws remain mostly in place, meaning the only change regulators made was to the health code, allowing healthcare providers to prescribe the substance only to individuals who have an addiction problem. Also, these prescriptions may only happen “under a special-access program in cases where traditional treatment has failed.”

To users who are not considered addicts, however, heroin access remains restricted.

ABC News explains further:

“In the [Canadian] pilot program users must be a long time heroin user, who has tried at least twice to stop using drugs. The drug users are allowed to come to the clinic between two to three times a day where they are provided a syringe and drugs for injection. Medical staff on site monitor the drug users and can intervene if they show signs of overdose.”

Instead of legalizing heroin use and commerce, what the Canadian government has attempted to do is approach the overdose issue as the number one health threat, allowing doctors to handle individuals who are on the brink of a deadly episode due to potential abuse of heroin.

According to Daniel Raymond, the policy director for Harm Reduction New York, the Canadian approach “is not so much the Marie Antoniette-style let them have heroin.” Instead, he said, new rules should be seen as “an extension of medicine-based rehab programs.”

Despite the limited access that comes with the new policy, Raymond contends Canada’s decision to embrace “harm reduction” policies shows people are finally learning that “asking drug users to quit drugs isn’t always a feasible goal.” Much like what has already been tried in Europe and Vancouver, this new policy simply hopes to keep the rates of heroin abuse low, which is what happened in Switzerland. Still, it’s far from full legalization or decriminalization of drug commerce.

In “How Legal, Branded Heroin Would Make Drugs Safer,” Chris Calton writes that freeing the drug market means producers will have to compete by providing good products.

Branding, he explains, is what makes any product safe.

When choices are abundant, “goods are remarkably heterogeneous.” And as customers become aware of the differences, they begin to demand more choices. That’s why when we go to the grocery store to buy anything, we have a variety of choices. We can purchase affordable items, which are often associated with big brand names, or we can pick organic, reduced sugar, grain-free, vegan, and other products from smaller brands.

“Economically,” Calton explains, “name brands serve an important function. … [in a free market], brand names ‘are a way of economizing on scarce knowledge and forcing producers to compete in quality as well as price’.”

If you know and trust the Heinz brand, for instance, but you’re not acquainted with Great Value, you are more likely to pick Heinz. But if all you want is something affordable, Great Value will do just fine. Consumers, Calton adds, “have to weigh the cost benefit of a cheaper brand against the risk of getting an inferior product; with the brand name product, the quality is more certain.”

In a free drug market that is not plagued by the violence inherent to a black market — which is created by illegality of a substance or product — consumers have more open access to knowledge, despite the shortcomings that may come with it, such as major brand names using deceptive tricks to tweak labels here and there. In any case, when the markets are freer, consumers are better informed. But “[w]hen goods are made illegal, smugglers will continue to trade them, but the ability to establish brand consistency is suppressed.”

For a black market brand to become safe and well-known, Calton explains, “[i]t would require a producer to survive the illicit trade long enough to establish this reputation, a means of conveying the information in the absence of open and legitimate advertisement, and some enforcement mechanism for distributors to prevent the alteration of the product.”

In an environment where drug producers and salespeople are constantly afraid of being caught by the police or by a competitor, the cost of advertising and producing such well-branded products is simply too high — and that’s why addicts are often the ones who get hurt.

While the new health policy will help countless heroin addicts, the goal must be analyzed closely. Legislators both in Canada and the United States should ask themselves if what they want is to end addiction or restore safety. Either goal necessitates a more humane approach to the drug policy — one that does not involve prohibition.

via http://ift.tt/2d9bVuq Tyler Durden

In the historyvof data from The fed, this has never happened before…

Aggregate Auto Loan volume actually fell last week… And less loans means one simple thing… less sales (because prices have never been higher and noone is paying cash)…

 

Which is a major problem since motor vehicle production continues to rise as management is blindly belieiving the Hillbama narrative that everything is (and will be) awesome.

The problem is… inventories are already at near record highs relative to sales (which are anything but plateauing)…

 

In fact, the last time inventories were this high relative to sales, GM went bankrupt and was bailed out by Obama.

The big picture here is simple… US Automakers face a plunge in auto loans for the first time in this ‘recovery’, and with sales plunging and inventories near record highs, production (i.e. labor) will have to take a hit… and that plays right into Trump’s wheelhouse and crushes Hillbama’s narrative just weeks before the election.

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Originally authored by Todd Starnes

Patriotism is under fire in Western Michigan.

The OK Conference, representing 50 schools, has announced a crackdown on fans chanting, “USA” at football games. They are also implementing strict rules on flags and political banners.

“Coaches and fans are irate,” said Bill Simonson, the host of a statewide sports radio show. “People are tired of being told what flag to fly or what political side to lean towards.”

Mr. Simonson, who hosts “The Huge Show”, was the first to break this insane story.

The athletic conference’s crackdown comes after fans from a predominantly black school took offense after fans from a predominantly white school displayed a Betsy Ross flag and a “Make America Great Again” banner.

Critics called the flag racist and a local superintendent said it symbolized hate.

“To wave a historical version of our flag, that to some symbolizes exclusion and hate, injects hostility and confusion to an event where no one intended to do so,” wrote Forest Hills Public Schools Superintendent Daniel Behm in a letter to parents.

Simonson, host of "The Huge Show," told me local residents are furious.

“He painted a picture that the school is filled with insensitive people,” he said. ‘If Colin Kaepernick can have his freedom of speech and freedom of expression – guess what – it’s a two-way street.”

OK Commissioner Jim Haskins said their executive board decided that moving forward fans will only be allowed to chant “USA, USA” after the National Anthem.

He told Mlive.com that it has nothing to do with banning patriotism. He said students are using the chant in a derogatory manner – such as “U Suck (bleep) and those type of things.”

“That’s what we have the problems with,” he told the newspaper.

But television station WOOD reports the Michigan High School Athletics Association has not received any official complaints about fans “repurposing ‘USA’ to mean anything derogatory.”

The athletic conference is also cracking down on signs and banners and flags.

“Any signs, flags, banners, cheers, or promotional material that carry questionable implications or are degrading are prohibited at any OK Conference venue,” he told WOOD.

Mike Shibler, the superintendent of Rockford Public Schools, supports the crackdown.

“We will certainly inform our students that this type of behavior when done in a derogatory and insulting way will not be accepted and will not occur,” he told WOOD.

But what happens if a student argues that the chant is in fact patriotic?

“I don’t believe that,” the superintendent told the television station.

It sounds like Western Michigan is dealing with a severe infestation of liberal educators.

“This is the United States of America,” Simonson told me. “What happens if someone walks in with a military uniform and the kids want to chant, ‘USA’? You can’t do that? Are we living in Communist Russia?”

Instead of punishing all the fans, why not just identify the troublemakers and yank them out of the stands?

One thing I cannot abide is stupidity and ignorance. And there’s a whole mess of it in Western Michigan’s school system.

There is a time and a place for citizens to defy the government and this may be one of those moments.

I hope every person reading this column in Western Michigan will show up at tonight’s football games waving Old Glory.

And if the Spirit moves, inhale a big gulp of air and belt out a patriotic cheer – one that we’ll be able to hear from sea to shining sea.

“USA, USA, USA.”

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Last April, we commented on the most blatant (pre) revolving door we had ever seen at the SEC (and there have been many): the departure of the SEC’s head HFT investigator, Gregg Berman, who during his tenure at the agency (whose alleged purpose is to keep the “market” fair, efficient and unmanipulated) did everything in his power to draw attention away from HFTs. He did that, for example, by blaming Waddell and Reed for the May 2010 flash crash. This is what Berman, whose full title was the SEC’s “Associate Director of the Office of Analytics and Research in the Division of Trading and Markets” said in the final version of the agency’s Flash Crash report:

At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) [ZH: Waddell and Reed] initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.”

Several years later, when the HFT lobby made a coordinated push to eliminate human spoofers (which algos were apparently helpless against without regulatory intervention), the SEC changed its story entirely and blamed the flash crash on one solitary trader, Navinder Sarao. By then the SEC had lost all credibility. It had also lost Gregg Berman, who six months after quitting the SEC ended up taking a nondescript job at EY, where he joined the Financial Services Organization (FSO) of Ernst & Young LLP as a Principal focusing on market risk and data analytics.

We, for one, were surprised: having expended so much energy to cater to the HFT lobby, we were confident Berman would end up collecting a 7-figure paycheck from one of the world’s most prominent high frequency frontrunning parasite firms. As a reminder, this is what we predicted when the creator of Midas, and Eric Hunsader’s archnemesis, quit the SEC:

Gregg will find a hospitable and well-paid position after spending 6 years defending the well-paying HFTs lobby. In all likelihood after taking a 2-4 month break from the industry, he will pull a Bart Chilton, and will join either HFT powerhouse Virtu, perennial accumulator of former government staffers, Goldman Sachs, or – most likely – the NY Fed’s shadow trading desk and the world’s most leveraged hedge fund, Citadel itself. Because for every quo there is a (s)quid.

In retrospect, Berman’s detour into E&Y ended up being just that: an attempt to mask his true career intentions by taking a less than 1 year “sabbatical” from his true calling: getting compensated from the very HFT industry whom he did everything in his power to reward generously during his tenure at the SEC.

Well, as it turns out, we were right after all, because lo and behold, as the WSJ first reported, Gregg Berman is now director of market-structure research at the world’s most levered hedge fund, HFT powerhouse and massive electronic market-making firm: Citadel, which also happens to be the entity through which the NY Fed intervenes in the market.

And just like that all is well again in the corrupt world, in which the market “regulators” pretends to protect the little guy, when in reality all they only cater to the most criminal with the simple hope of landing a job there one day and getting paid in 1 year what they make in 10 at the SEC or any other government agency.

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By EconMatters

We analyze the Gold Market ahead of the Federal Reserve`s Policy Rate Decision, and the Bank of Japan`s Monetary Decision this week. The bottom line: No rate hike this week means buy Gold. Just another example of kicking the rate hike can down the road.

 

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Submitted by Pater Tenebrarum via Acting-Man.com,

The Economy and the Stock Market

As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth.

 

What’s left of the Brooklyn Domino Sugar Refinery.

Contrary to what one often hears from central bankers and their courtier economists, we cannot consume ourselves to prosperity. Rising consumption is a possible effect of economic growth, not a cause of it. Debt-funded capital consumption promoted by loose monetary policy can only lead to impoverishment.

Our friend Jonathan Tepper of Variant Perception (VP) is doing a lot of excellent and highly creative econometric work. It is  strongly focused on the discovery and creation of proprietary leading indicators that can provide actionable information to stock market investors.

In the course of an email discussion with him and several others on the above-mentioned topic, he has provided a number of charts developed by VP that bring the current weakness in a number of economic data into context with the stock market’s performance.

We felt that one of these charts (which he has created only two days ago), was particularly striking. It shows past instances when both the manufacturing and services ISM headline indexes were below the level of 52 (50 is the threshold between expansion and contraction, readings between 50 and 52 indicate a weak expansion).

This state of affairs has recently returned, after both the August manufacturing and services ISM numbers came in well below expectations, with the former actually dipping into contraction territory slightly below the 50 level. It is incidentally quite funny (but not unusual) that the Fed is musing about hiking rates at this particular juncture. Here is Jonathan’s chart:

 

The Variant Perception ISM signal: The red bars indicate times when both the manufacturing and non-manufacturing ISM headline readings were below the level of 52. Evidently, this kind of environment has not been particularly friendly to stock market investors in the past – click to enlarge.

 

Will brisk money supply growth and ample liquidity combined with financial engineering by listed companies overrule the signal this time? That is of course possible. After all, we only have one reading to go on so far, which may yet turn out to be an outlier (we actually don’t think it is, as it is corroborated by other data as well).

In any case, we thought this is a very interesting data point and we will keep  readers posted on future developments. At the very least this should be seen as an important heads-up.

 

US broad true money supply TMS-2: as of July 2016 its y/y growth rate stands at a brisk 8.43%; since early 2008 it has grown by a cumulative 128%. This is the main driver of asset price inflation – click to enlarge.

 

Conclusion

The stock market can defy economic weakness up to a point, particularly during times of strong money supply growth – but this isn’t going to last if the weakness continues or worsens. Ultimately it will hinge on the state of the economy’s pool of real funding, and all indications are that it is increasingly in trouble.

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