Things That Make You Go Hmmm… Like Moral Hazard

A mere 24 hours before the US (at least according to Jack Lew, who, as some of you may have known, is the Secretary of the Treasury of the United States of America) was going to run out of money and default on its obligations (the Lew-styled “catastrophe”, which according to the great and the good would once again “bring the financial system to its knees” — how many MORE times are we going to have to listen to that, I wonder?), the S&P 500 was trading exactly 2.30% from its all-time high.

Sound like anybody was worried about financial Armageddon to you, dear reader? Not to me, either, but here’s the thing:

The danger WAS very real, as a default by the US on its debt obligations would have gone to the very heart of the “plumbing” that underlies financial markets and caused havoc in the repo market and all kinds of problems with collateral (or at least, what little collateral is allowed amongst market participants once central banks have hoovered up their ever-expanding allotments).

The key clue passed most people by a week ago; but it came from, of all places, Hong Kong:

(FT): Hong Kong’s stock exchange decided the possibility of a US default had made some types of short-term Treasury bonds more risky, prompting it to force traders using the securities as collateral to provide extra backstops….


It came as the Asia Securities Industry & Financial Markets Association (Asifma), which represents banks, brokers and asset managers in the region, warned that any announcement by the US Treasury in advance of a default must arrive before the opening of the day’s trading in Asia to avoid “chaos”.


Japan’s clearing house, the Japan Securities Clearing Corporation (JSCC), said it was in “intensive discussions” to prepare for “anything that might happen”.


Hong Kong Exchanges & Clearing (HKEx) said on Thursday it had taken two measures designed to reflect the increased difficulty of valuing certain short-term US Treasuries amid the debt impasse.


First, its clearing house would apply an increased “haircut” to its valuation of US Treasuries held as collateral against futures trades. For bonds held with maturity of less than one year, that would be raised from 1 per cent to 3 per cent, effective immediately, HKEx said in a circular to members.


“This new haircut shall be applied on a daily basis to determine the value of the US Treasuries allowed to be used as cover for the margin requirements of HKCC [Hong Kong Clearing Corporation] participants,” HKEx said.


“Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the US Treasuries haircut.”

Anyone posting US Treasuries with less than a year to maturity as collateral, would need to come up with three times their current posted margin.

Not good. Not good at all. The amount of liquidity this would suck out of a fragile market would be catastrophic very bad indeed, and any forced selling on behalf of those unable to post the additional collateral would be a catastrophe major problem, leading to falling prices and spiking rates — neither of which are allowed anymore. Now, if HKEx’s move had become fashionable around the world (and it’s safe to say that exchanges are very much pack animals), it would have been quite bad a catastrophe.

After a very subdued reaction to the can being kicked down the road until February debt ceiling being agreed, something rather strange happened on Thursday. See if you can identify at what point in the day it occurred:

(I should point out that the yellow overlay of the gold price looks green where it sits on top of the blue DXY chart. There are only two variables in this chart, the yellow gold price and the blue US dollar price.)

Now, there was already a clue as to what this event was, hidden away in an earlier chart, but (cue drum roll) the catalyst for the dollar’s sudden drop and the sharp spike in the price of gold waaaaaaaaaaaas… THIS:

(Reuters): Chinese rating agency Dagong has downgraded the United States to A- from A and maintained a negative outlook on the sovereign’s credit.


The agency suggested that, while a default has been averted by a last minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged.


“Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future,” Dagong said in a press release.

Now those are the straight facts of the issue, but contained within the rest of what was a very short article are three fascinating sentences that speak to the very crux of the problem as things stand today. The first two constituted the very next paragraph:

(Reuters): Dagong’s ratings are hardly followed outside of China. The agency also classifies most countries it follows very differently from major agencies such as Moody’s, Standard & Poor’s and Fitch.

Absolutely correct. Dagong’s ratings are seen as something of a joke and very much inferior in nature to the Big Three — a poor man’s Egan Jones, if you will.

…So here’s where we get to the nub (finally!) of this week’s philosophical wanderings.

The question I posed, all those charts ago, was this:

If something bad happens, but nobody reacts badly to it, did nothing bad happen?

Well, with each successfully navigated new crisis, the reaction of the market the next time a crisis flares up becomes more muted. We’ve seen the spectre of a Lehman-style collapse dealt with, and now the phrase “… could bring the global financial system to its knees…” is shrugged off with alacrity.

We’ve seen the spectre of a European fracture, a Grexit, a Spexit, and the end of the euro taken off the table by determined governments and central bankers; and now, each fresh outbreak of the European crisis is greeted with apathy and ennui. (I wonder if the French have a word for that.)

And now we’ve seen the extent of the reaction to the US debt-ceiling debacle the second time around. I would describe it as “quizzical interest” at best.


Because the Nannycrats are continually telling us that everything will be OK, that we shouldn’t worry about things and ought instead to just Keep Calm and Carry On.

How bad has it gotten? Well, amidst the “hoo-ha on the Hill” recently, we saw one of the most bizarre things I’ve witnessed during the mayhem of recent years: Barack Obama’s telling Wall Street that they SHOULD worry

Barack, let me explain something to you.

The reason Wall Street WASN’T worrying is that you and Be
rnanke and Geithner and Paulson (not you, John — Hank) and Yellen and the rest of the Crazy Crew have gone out of your way for five years to make absolutely certain that nothing bad ever happens again
. Ever. Why the hell WOULD they worry?


It’s YOUR fault that they’re not. You just can’t have it both ways.

That’s what moral hazard looks like, I’m afraid…

Read Grant Williams’ full letter below…

Ttmygh 14 October 2013


via Zero Hedge Tyler Durden

Picturing The Biggest Scam In The History of Mankind

Last week Mike Maloney exposed the "biggest scam in the history of mankind" in 7 easy steps in his latest presentation. As Mike explains, most people can feel deep down that something isn't quite right with the world economy, but few know what it is. Gone are the days where a family can survive on just one paycheck…every day it seems that things are more and more out of control, yet only one in a million understand why. Here is the simple infographic to explain the grift…


(click image for massive legible version)


via Zero Hedge Tyler Durden

Tuesday Humor: New Normal Fundamental Analysis

Tired of reading 640 pages of “The Intelligent Investor”? Exhausted from imbibing 700 pages of “Security Analysis”? Fed up with the 400 pages of “The General Theory of Employment, Interest, and Money”? Have no fear, we have summarized the new normal’s investing mantra into 14 words



h/t @Not_Jim_Cramer


via Zero Hedge Tyler Durden

Kimberly Clark Contains Leaks While Hiding Inflation With Diaper Trim

We have long discussed the 'hidden' and not-so-hidden inflations that are impacting the standard of living for all but the wealthiest in America… and it is hardly new to anyone that the USA faces a demographic dilemma as aging boomers draw down on an ever-shrinking base of entitlement provisions… However, when we saw this slide from Kimberly-Clark's latest earnings call, we were surprised at just how clearly these two trends showed up



So… Aging Demographics:

  • Depends and Poise driving the top-line growth in North America
  • Medical Devices volume up 8%

And… Stealth Inflation…


Welcome to the new normal!

As we noted previously…

In the last two years, according to Intuit, Americans are reaching deeper into their pockets to cover family-related expenses. Given the current concerns over dis-inflationary pressures, we thought the following infographic might highlight just where that hidden liquidity-/credit-fueled inflation is leaking out.



via Zero Hedge Tyler Durden

Based On 100 Years of Data, We Are Likely Nearing a Major Peak



Today I’m going to tell you about the single most important metric for long-term investing.


That metric is the cyclically adjusted price-to-earnings ratio or CAPE ratio.


Generally speaking, most investors price a company based on its current Price to Earnings or P/E ratio. Essentially what you’re doing is comparing the price of the company today to its ability to produce earnings (cash).


However, corporate earnings are heavily influenced by the business cycle.


Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.


CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.


I mentioned before that CAPE is the single most important metric for long-term investors. I wasn’t saying that for impact.


Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns. Indeed, CAPE outperformed


1.     P/E ratios

2.     Government Debt/ GDP

3.     Dividend yield

4.     The Fed Model,


…and many other metrics used by investors to predict market value.


So what is CAPE telling us today?



Today the S&P 500 has a CAPE of over 24.  This means the market as a whole is trading at 22 times its average earnings of the last ten years.


Put another way, if you bought the entire stock market today, it would take you roughly 22 years to make your money back.


That is hardly what I’d call cheap.


Indeed, as you’ll note in the above chart, the market has only been above this level three times in history. They were the 1929 Bubble, the Tech Bubble and the Housing Bubble.


All of these times occurred close to market peaks.


This is not to say that stocks can’t go even higher than they are today. Bubbles, such as the one we’re experiencing today, can often last longer than anyone expects.


However, the fact is that the markets are significantly overpriced. And based on over 100 years worth of data, this kind of overvaluation usually precedes a market peak.


This doesn’t mean the markets will crash next week or next month. But it does pose a warning to those who are heavily allocated to stocks, expecting to see significant upside in the long-term.


For a FREE Special Report outlining how to protect your portfolio from the Fed’s policies, swing by:



Phoenix Capital Research



via Zero Hedge Phoenix Capital Research

Scotiabank Asks The Most Important Question

Via Guy Haselmann of Scotiabank,

QE – Speculative Market Fuel

·  A weak economic report lifted an overbought equity market to even-loftier historic highs.   Investors and traders have become programmed to believe that QE (rather than economic growth) is enough to launch asset prices ever-higher. At the moment, there is little to refute this view.  “Melt-up” mentality is back.  However, shouldn’t a sluggish economy with slow job creation make investors question whether enough economic activity will be generated to justify prices?  Unless the economy improves materially, then today’s move is just another example of speculative excesses caused by QE.

“Adequate Progress” – Undefined

·  The key to market direction appears to be driven by assessing the timing of any changes to Fed action.  The longer QE lasts the higher prices are expected to be pushed, thus the basis for today’s rally.  However, reacting so robotically may not be so straightforward. After all, the FOMC communication has not been that helpful. This is because they say that asset purchases are “dependent on the state of the economy” and “making adequate progress”, yet they never define what “adequate” means.

Unemployment Rate Creeping Toward the 7% Threshold

·  The FOMC initially presented “thresholds”, saying QE would end when the unemployment rate (UR) hit 7.0%, but the rate has already hit 7.2%.  How will the markets react if the rate falls to 7.0% with the next employment report two weeks from Friday – and QE has not yet ended (let alone begun)?  Would the Fed lose credibility if this occurs?  Would it spook markets who are now expecting QE to continue well into 2014?

Fed Policy Based on an Unstable Indicator

·  The Fed has problematically tied their policy to an inherently unstable and unpredictable economic indicator (i.e., the unemployment rate).  This guidance may need to change as they develop a (sorely-needed) QE withdrawal strategy.  Formulating and communicating such a strategy would be helpful to markets as well as to the FOMC who would benefit from getting all members on the same page.

FOMC Press Conferences

·  A detailed or updated QE exit strategy could be presented at the October 30th FOMC meeting.   The stakes are rising, so announcing that a press conference will occur at every meeting is likely.

·  “I live on a one-way street that is also a dead end. I’m not sure how I got there.” –Steven Wright


via Zero Hedge Tyler Durden

Carl Icahn Covers 3 Million NFLX Shares On 457% Gain

Just as we wondered earlier in the day…




What is perhaps most worrisome for the market is the sale of 2.99 million shares collapsed the market cap by around 20%…


Of course, he hedges his sell…






via Zero Hedge Tyler Durden

Fayette County is on the move — welcome aboard!


Many of us moved to Fayette County for its highly regarded public schools, low crime rates, and the wide-open spaces, or maybe the charm of small towns like Tyrone, Brooks, and Woolsey. 

We also recognize the need for a vibrant economy to provide career opportunities right here for our children, along with the attendant challenges of growth.

How do we retain our character and grow too? How do we maximize our strengths and respond to threats? How do we thrive without selling the soul of Fayette County?

read more

via The Citizen

Just say ‘no’ to underwriting more debt

The fiasco in Washington over the partial government shutdown, raising the debt ceiling and deepening animosity between Republicans and Democrats (and Republicans and Republicans), has left many asking if there is any way out of this bitter, endless cycle. There may be.

The Financial Times recently suggested that America’s largest foreign creditor — China — might want to reduce the size of its loans financing our debt.

read more

via The Citizen

Universal health insurance lie

There are many things that might have been done to reform healthcare in the United States after Barack Obama was elected. The Affordable Care Act does begin to address some of these problems:

It begins to break the bond of employers being the primary provider of health insurance coverage.

This was always an odd idea that exists as an artifact of the wage and price freeze of World War Two. Employers were not allowed to raise wages to attract workers, so they began offering “fringe” benefits instead.

read more

via The Citizen