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On Tuesday, Bernie Sanders swept to victory in the New Hampshire primary over rival Hillary Clinton.

To be sure, Sanders was expected to win. Handily.

Still, there’s something surreal about the fact that America is edging ever closer to a situation that will see an avowed socialist square off against one of the country’s quintessential capitalists for the keys to The White House.

As we and others have documented, the American electorate is fed up with politics as usual in Washington. Many voters have no hope that the system can be changed as long as both parties continually field mainstream, establishment candidates all of whom are connected to powerful lobbyists, Wall Street, and corporate America.

So disgruntled are Americans that the candidates with the most buzz around their campaigns are Donald Trump and Bernie Sanders.

The capitalist and the socialist.

Against that backdrop we present the following interesting chart from a recent YouGov survey and brief color from WaPo. As you can see, respondents younger than 30 now rate socialism more favorably than capitalism. We suppose it’s all that good will towards Wall Street.

From WaPo’s Catherine Rampell: 

In my column today, I mentioned that one reason millennials prefer Bernie Sanders to Hillary Clinton is that they’re not just willing to look past Sanders’s socialism — they actually like his socialism. It’s a feature, not a bug.

 

Here are some of the data I was referring to.

 

In a recent YouGov survey, respondents were asked whether they had a “favorable or unfavorable opinion” of socialism and of capitalism. Below are the results of their answers, broken down by various demographic groups.

 

Democrats rated socialism and capitalism equally positively (both at 42 percent favorability). And respondents younger than 30 were the only group that rated socialism morefavorably than capitalism (43 percent vs. 32 percent, respectively).

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“Feel the Bern”…

via Zero Hedge http://ift.tt/1o4euin Tyler Durden

Submitted by John Browne via Euro Pacific Capital,

On January 29^th, Japan’s central bank governor, Haruhiko Kuroda, announced that the Bank of Japan would introduce a Negative Interest Rate Policy, or NIRP, on bank reserve deposits held in excess of the minimum requisite. The European Central Bank, and central banks in Switzerland, Denmark and Sweden have already partially blazed this mysterious trail. The banks have done so in order to weaken their respective currencies and to light a fire under inflation. Swiss national bonds now carry negative rates out to maturities of eleven years, meaning investors must lock up funds for eleven years to receive even a small positive nominal return!

There are economists and investors to whom these policies seem logical. After all, if low interest rates are good, wouldn’t negative rates be better? Many have argued that the “zero bound’, or the point past which rates can go no lower, is simply the same type of archaic thinking that brought us the gold standard and moral hazard.

These contemporary economists like to suggest that markets should become comfortable with negative rates and accept that they have an important role to play in the “science” of modern finance. But this analysis ignores the fundamental absurdity of the concept.

Money has a time value. Funds available today are worth more to the owner than money available tomorrow. I would imagine that, if asked, 100% of people would choose to receive $10,000 today rather than the same sum a year from now. Many might even pay for the quicker delivery. Even if we allow for the unlikely possibility that real deflation exists, and that consumers are therefore making sensible decisions in deferring purchases, life is uncertain and consumers are impatient. That’s why banks have always had to offer interest to savers to lock up their funds on account. Paying for the privilege of not spending one’s money is a completely new development in human history, and one that I believe is at odds with fundamental concepts of economics and psychology.

The ECB, as did the Bank of Japan (BoJ), cited economic stimulation as its main reason for negative rates. These sentiments were recently cited in a blog post by former Fed President Narayana Kocherlakota where he urged his former Fed colleagues to bring rates into negative territory. The logic is that people and businesses would refuse to pay to keep their money on deposit, and would instead withdraw those funds to spend and invest. However, zero percent interest rates do not appear to have had this affect. The money may, in fact, have been spent, but the growth never materialized. So will the dead horse we are beating suddenly get up if we beat it harder? Apparently so.

Only eight days before taking the dramatic and highly debatable step to trigger negative rates, Bank of Japan President Haruhiko Kuroda had assured his Parliament in Tokyo that such a policy was not even being considered (Reuters, 1/21/16). But less than six days later, after attending the World Economic Forum in Davos, his position had changed. Did private discussions with world leaders in Davos convince him that a serious international recession and credit crisis would unfold unless all central bankers could fire all available weaponry?

After the financial crisis of 2008, the U.S. Fed and the Bank of England (BoE) followed the lead of Japan to experiment with QE and ZIRP, even though those policies never delivered a recovery to the Japanese. The Fed and BoE unleashed stimulation with unprecedented vigor at home and then urged acceptance by other central banks. In essence, a huge global debt crisis was to be cured, or at least postponed, by even more international liquidity based on massive debt creation and the socialization of bank losses.

Much of the massive synthetic liquidity created by the QE experiment was funneled into financial assets. This diverted business investment away from job-creating investment in plants, equipment and employment. Wages remained stagnant and consumer demand and GDP growth were disappointingly flat. According to data from the Bureau of Economic Analysis, expansion of real U.S. GDP growth between 2009 and 2015 averaged 1.4 percent per year or less than half the average rate of 3.5 percent experienced between 1930 and 2008.

Meanwhile, ZIRP has caused mal-investment along with an unhealthy reach by banks and investors for high yield, but riskier investments. This became most obvious in the high yield debt market, which now is being hit hard by the fall in oil prices.

Negative interest rates mean that borrowers are paid to borrow. This serves as a powerful inducement for companies to borrow up to the hilt to buy other companies, to pay dividends that are unjustified by earnings levels and to invest in financial assets. Often this includes buying back their own corporate shares thereby increasing earnings per share, the share price and linked executive bonuses.

For savers, negative rates discourage savings, stifling future business investment and consumer demand. However, central banks hope that discouraged savers will instead be lured into spending on consumer products and create short-term economic growth albeit at the price of future growth.

Negative interest rates mean that lenders have to pay borrowers and that depositors have to pay banks to keep and use their money. One does not require a PhD in economics to recognize this as an unnatural distortion that will create more problems than it solves.

If individual and business depositors draw down their balances, the deposit base of banks will fall as will the velocity of money circulation. This will not only discourage lending, but, through reverse leverage, cause bank liquidity problems. Should banks with loans to high-yield companies and emerging market nations, especially those hit by falling oil prices, see their loans become non-performing at the same time as deposits are falling, a potentially catastrophic banking crisis could threaten. Since the Financial Crisis of 2008, over $50 trillion dollars of new debt have been added globally to the levels that precipitated the banking crisis in the first place.

Negative interest rates act effectively as a hidden tax funneled directly to banks. They are inherently unhealthy. Currently, they could indicate also a measure of unease among two of the four most powerful central banks. If so, that could well escalate. Depositors should be aware acutely of the hidden risks to their deposits. Already, nations with looming bank liquidity problems, such as Russia and many in Africa, are increasing their levels of bank deposit insurance to reduce potential political unrest.

Readers know that we have felt for many months that the U.S. is far from ready for interest rate increases. We are of the opinion, now echoed by others, that the U.S. will see zero and possibly even negative interest rates before it experiences a one percent Fed rate. This does not bode well for our future.

via Zero Hedge http://ift.tt/1QZ1Ivm Tyler Durden

We’ve been shouting from the rooftops about the dangers inherent in the subprime auto market for more than a year.

Auto debt in America has joined student loan debt in the trillion dollar bubble club and part of the reason why is that Wall Street is once again perpetuating the “originate to sell” model whereby lenders relax underwriting standards because they know they’ll be able to offload the credit risk.

Looser standards mean the eligible pool of borrowers expands, but it also means the loans being pooled and securitized by Wall Street are increasingly dubious. Data from Experian shows that terms for new and used car loans are beginning to border on the absurd, as the percentage of new vehicles with financing rose to 86.6% in Q3 (that’s up from 79.9% in 2010), the average amount financed climbed $1,137 from the same period a year ago, and the average loan term inched up to 67 months.

There’s also evidence – from the NY Fed – to suggest that a higher and higher percentage of auto loan originations are going to borrowers with lower credit scores. Here’s the chart (note the highlighted portion in the bottom right hand corner):

For those who might have missed it, the industry went full-retard in November when Skopos Financial – the king of unbelievably bad securitizations – sold a deal in which 14% of the loans “backing” $154 million in new ABS were made to borrowers with no credit score at all. 

Given all of the above, you can see why some money managers would be interested in shorting that paper and according to Citi, quite a few hedge fund managers, inspired by “The Big Short” are inundating banks wil requests to bet agains the market. “We have received an explosion of calls from equity and hedge fund investors looking to short auto ABS,” Citi’s Mary Kane wrote in a note out last month. 

For her part, Mary doesn’t think it’s a good idea. Here’s why: 

There are four principal reasons to NOT short auto ABS: 1) consistent and stable long-term performance through numerous cycles; 2) robust credit enhancement protecting principal at risk 3) auto loan growth historically in line while securitization rates remain low, 4) originate-to-sell practices are not and have never been prevalent. Data shows that auto loan growth is not out of line with historical growth and that auto loan financing is not excessively reliant on the ABS market. The auto ABS securitization rate varied from 15–28% from 2004–present. Currently at 16%, it shows that most US auto loans are held on lenders’ balance sheet.

 

Now first of all, Mary can say the originate to sell model isn’t “prevalent” all she wants, but it’s at 16% and at one point around 2010 was nearly a third of the market, so we’re not entirely sure what counts as “prevalent”, but it’s definitely a big piece of the puzzle. Additionally, auto loan ABS supply rose by something like 25% in 2015 and the types of deals getting done clearly involve shoddy credits.

Of course you’d think that if this was such a “bad” idea, then Citi would gladly dream-up some bespoke deals, take the other side of the trade, and sit back as the premiums come in. 

In any event, we suppose the point is this: just because the originate to sell model isn’t as “prevalent” as it could be in some hypothetical world where the market is even riskier than it is now, doesn’t mean that shorting specific issues isn’t a good idea. Especially when the Skopos Financials and Santander Consumers of the world are selling deals that are obviously filled with junk. Unfortunately, there’s no way to get synthetic exposure to the market and Kane is correct that shorting the cash bonds would likely turn into an expensive proposition. 

Kane’s conclusion: “It seems like too many people have seen the movie “The Big Short” and are starting to think the movie heroes’ short strategy would translate to the ABS market. By the way, the ABS conference did NOT take place at Caesar’s Palace that year as per the film, it was at The Venetian. So, it’s not wise to believe everything you see in a movie and hit films are not the best source for trade ideas.” 

Right. Movies “aren’t the best source for trade ideas.” 

Neither are sellside desks.

Just ask a Goldman client.

via Zero Hedge http://ift.tt/1KJ3125 Tyler Durden

It’s a day ending in -day, which means it is time for another Jeff Gundlach fire sermon, as transcribed by Reuters. And while in his most recent address to the mortals the new bond king from DoubleLine focused on tremors in the bond market, predicting that “credit fund bankruptcies are coming,” and that “the VIX needs to surge above 40 before a bottom can be made in the high-yield junk bond market”, today he focused on a topic we have been covering all day, namely the collapse of faith in central bankers and the ascent of gold as a preferred asset class to paper money and bank deposits.

In his latest communication with the outside world, Gundlach said that gold prices are likely to reach $1400 an ounce “as investors lose faith in central banks“, Reuters reported.

“The evidence that negative rates are harmful and not helpful has piled up to the point that the ‘In Central Banks We Trust’ mantra has finally been laid bare as a hoax,” Gundlach said.

Well, yes, even Bloomberg finally admitted it.

But the question is why does Gundlach see gold rising to only $1400. After all if, as JPM calculated the ECB, BOJ and Fed will cut rates to as low at -4.5%, then gold – as the only form of currency that will remain in physical form and is not taxable (at least until the government confiscates it) – will end up far, far higher than just $1,400, which is less than 15% from the current price.

Indeed, if the Chinese population decides to reallocate just a tiny fraction of their $25 trillion in deposits away from cash and into gold ahead of the inevitable massive Chinese devaluation, the question is how many zeroes Gundlach’s forecast will be off by.

Anyway, back to Gundlach who said that negative rates are highly correlated with equities, particularly with banks and financials. Their stocks have come under severe selling pressure as negative rates would hurt their balance sheets.

“What’s scaring people is the ’12 rate hikes in three years’ in the dots. When are they going to change the dots? They are still there,” Gundlach said about the Fed’s dot plot.

He repeeated that “the market is going to humiliate the Fed. It’s bizarro to have rate hike projections while at the same time, Yellen is talking about negative rates. What a mess.”

Gundlach’s predictive track record speaks for itself:  last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China’s slowing economy would pressure emerging markets. In 2014, Gundlach correctly also forecast U.S. Treasury yields would fall, not rise as many others had expected.

“The Fed raising rates in this environment is unthinkable,” Gundlach said. Gundlach also told Reuters that he purchased more Puerto Rico general obligation bonds at around 70 cents on the dollar. He added: “You make money on the short side. The market is moving too fast for the Fed to keep up.”

Or, if one wants to avoid the threat of idiotic short squeezes driven by idiotic headlines such as the recurring “OPEC is cutting production” hoax (note: the Saudis aren’t cutting anything until the US shale sector lies in a rubble of chapter 11s and 7s), one can just buy gold.

Yes, the BIS will do its best to slam it down with naked shorting, but that only provides lower entry points to accumulate positions in a commodity which as even the Amazon Post’s Keynesian lackey correctly put it, is “a bet that the people in charge don’t know what they’re doing.” 

If by now it is not clear that the people in charge are idiots – and the US 2016 presidential race should have sealed it – it never will be.

via Zero Hedge http://ift.tt/1O5xFO7 Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

Companies Lose Billions On Stock Buybacks

I recently wrote an article about why “Benchmarking Your Portfolio Is A Losing Bet.” In that missive, I discussed all the things that benefit a mathematically calculated index versus what happens in an actual portfolio of securities. One of those issues was the impact of share buybacks:

“The reality is that stock buybacks are a tool used to artificially inflate bottom line earnings per share which, ultimately, drives share prices higher. As John Hussman recently noted:

 

The preferred object of debt-financed speculation, this time around, is the equity market. The recent level of stock margin debt is equivalent to 25% of all commercial and industrial loans in the U.S. banking system. Meanwhile, hundreds of billions more in low-quality covenant-lite debt have been issued in recent years.”

Note the surge in debt to fund those buybacks.

“The importance of buybacks cannot be overlooked. The dollar amount of sales, or top-line revenue, is extremely difficult to fudge or manipulate. However, bottom line earnings are regularly manipulated by accounting gimmickry, cost cutting, and share buybacks to enhance results in order to boost share prices and meet expectations. Stock buybacks DO NOT show faith in the company by the executives but rather a LACK of better ideas for which to use capital for.”

The entire article is worth a read to understand how indices and your portfolio are two very different things.

I bring this up because surges in stock buybacks are late bull market stage events. This is something I have repeatedly warned about in the past it is a false premise that companies repurchase stock at high prices because they have faith in their company. Such actions eventually lead to rather negative outcomes as capital is misallocated to non-productive resources.

Bernard Condon via AP picked up on this issue:

“When a company shells out money to buy its own shares, Wall Street usually cheers. The move makes the company’s profit per share look better, and many think buybacks have played a key role pushing stocks higher in the seven-year bull market.

 

But buybacks can also sap companies of cash that they could be using to grow for the future, no matter if the price of those shares rises or falls.

 

Defenders of buybacks say they are a smart use of cash when there are few other uses for it in a shaky global economy that makes it risky to expand. Unlike dividends, they don’t leave shareholders with a tax bill. Critics say they divert funds from research and development, training and hiring, and doing the kinds of things that grow the businesses in the long term.

 

Companies often buy at the wrong time, experts say, because it’s only after several years into an economic recovery that they have enough cash to feel comfortable spending big on buybacks. That is also when companies have made all the obvious moves to improve their business — slashing costs, using technology to become more efficient, expanding abroad — and are not sure what to do next to keep their stocks rising.

 

‘For the average company, it gets harder to increase earnings per share,’ says Fortuna’s Milano. ‘It leads them to do buybacks precisely when they should not be doing it.’

 

And, sure enough, buybacks approached record levels recently even as earnings for the S&P 500 dropped and stocks got more expensive. Companies spent $559 billion on their own shares in the 12 months through September, according to the latest report from S&P Dow Jones Indices, just below the peak in 2007 — the year before stocks began their deepest plunge since the Great Depression.”

While buybacks work great during bull market advances, as individuals willfully overlook the fundamentals in hopes of further price gains, the eventual collision of reality with fantasy has been a nasty event. This is shown in the chart below of the S&P 500 Buyback Index versus the S&P 500 Total Return.

If this was the Dr. Phil Show, I am sure he would ask these companies;

“Well, how is that working out for you ?”

Tax Withholding Paints Real Employment Picture

I always find the mainstream media and blogosphere quite humorous around employment reporting day. The arm waving and cheering, as the employment report is released, reaches the point of hilarity over some of the possibly most skewed and manipulated economic data released by any government agency.

Think about it this way. How can you have the greatest level of employment growth since the 1990’s and the lowest labor force participation rate since the 1970’s? Or, how can you have 4.9% unemployment but not wage growth? Or, 95.1% of the population employed but 1/3rd of employable Americans no longer counted?

The importance of employment, of course, is that individuals must produce first in order to consume. Since the economy is nearly 70% based on consumption, people need to be working to create economic growth. Of course, there is another problem with the data. How can you have 4.9% unemployment and an economic growth rate of sub-2%?

A recession is coming and a look at real employment data, the kind you can’t fudge, tells us so. David Stockman recently dug into the data.

“If we need aggregated data on employment trends, the US government itself already publishes a far more timely and representative measure of Americans at work. It’s called the treasury’s daily tax withholding report, and it has this central virtue: No employer sends Uncle Sam cash for model imputed employees, as does the BLS in its trend cycle projections and birth/death model; nor do real businesses forward withholding taxes in behalf of the guesstimated number of seasonally adjusted payroll records for phantom employees who did not actually report for work.

 

My colleague Lee Adler…now reports that tax collections are swooning just as they always do when the US economy enters a recession.

 

The annual rate of change in withholding taxes has shifted from positive to negative. It has grown increasingly negative in inflation adjusted terms for more than a month and it is the most negative growth rate since the recession.”

“Needless to say, the starting point for overcoming the casino’s blind spot with respect to the oncoming recession is to recognize that payroll jobs as reported by the BLS are a severely lagging indicator. Here is what happened to the headline jobs count in just the 12 months after May 2008. The resulting 4.6% plunge would amount to a nearly a 7 million job loss from current levels.”

Good point.

Is The Yield Curve Indicator Broken?

As one indicator after another is signaling that the U.S. economy is on the brink of a recession (see here and here), the bulls are desperately clinging to the yield curve as “proof” the economy is still growing.

There are a couple of points that need to be addressed based on the chart below.

1. As shown in the chart above, the 2-year Treasury has a very close relationship with the Effective Fed Funds Rate. Historically, the Federal Reserve began to lift rates shortly after economic growth turned higher. Post-2000 the Fed lagged in raising rates which led to the real estate bubble / financial crisis. Since 2009, the Fed has held rates at the lowest level in history artificially suppressing the short-end of the curve.
2. The artificial suppression of shorter-term rates is likely skewing the effectiveness of the yield curve as a recession indicator.
3. Lastly, negative yield spreads have historically occurred well before the onset of a recession. Despite their early warnings, market participants, Wall Street, and even the Fed came up with excuses each time to why “it was different.” 

Just as the yield spread was negative in 2006, and was warning of the onset of a recession, Bernanke and Wall Street all proclaimed that it was a “Goldilocks Economy.” It wasn’t.

Here is the point, as shown in the chart above, the Fed should have started lifting rates as the spike in economic growth occurred in 2010-2011. If they had, interest rates on the short-end of would have risen giving the Fed a policy tool to combat economic weakness with in the future. However, assuming a historically normal response to economic recoveries, the yield curve would have been negative some time ago predicting the onset of a recession in the economy about…now.  Of course, such would simply be a confirmation of a majority of other economic indicators that are already suggesting the same.

Just some things to think about.

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

Authored by Steve H. Hanke of The Johns Hopkins University

The Great Recession of 2008-09 brought with it quantitative easing. This, in turn, spawned a cottage industry of books, articles and blog posts about hyperinflation. The burgeoning literature contains a great deal of hype, which validates the 95% Rule: 95% of what is written about economics and finance is either wrong or irrelevant.

Several years ago, upon the invitation of the editors of the Routledge Handbook of Major Events in Economic History, I wrote the Handbook’s chapter on hyperinflation. That invitation was forthcoming, in part, because of my accurate estimates of the hyperinflation in Yugoslavia (1994) and in Zimbabwe(2008).

The assignment turned out to be much more daunting than I had anticipated. Fortunately, my load was made lighter, because I was assisted by Nicholas Krus.

Our first step was to define hyperinflation. Ever since 1956, when Prof. Phillip Cagan wrote his classic article on hyperinflation, the threshold for hyperinflation in the professional literature has been defined as 50% per month. That was the easy part. Armed with that threshold, we produced The Hanke-Krus Hyperinflation Table. That required a great deal of heavy lifting. We had to locate, document, and verify each hyperinflation episode. All 56 episodes that have ever occurred are represented in the table. While there are many interesting conclusions that can be made by a study of the table, it is worth noting that Germany’s well-known hyperinflation (1923) ranks as only the fifth most virulent. It doesn’t even come close to the world’s top four hyperinflations.

Today there is much musing about Venezuela’s alleged hyperinflation. Even though Venezuela’s annual inflation is the highest in the world (442%), Venezuela is not close to the hyperinflation threshold. Its monthly inflation rate is “only” 21%.

It’s time to halt the hype. Instead, check The Hanke-Krus Hyperinflation Table.

via Zero Hedge http://ift.tt/20YgPdg Steve H. Hanke

Market Psychology has swung from this…

 

To this…Losing SPY Religion

 

And seemingly back.

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Gold grabs the headlines today. After beginning to surge yesterday, Hong Kong's reopen sparked a spike which then accelerated all day.

 

This was gold's best day since Nov 2008 and the highest level in a year…

 

With the best quarter in 30 years…

 

Perhaps even more stunning is the collapse in USDJPY since Kuroda unleashed NIRP – this is the worst 2-week drop (Yen strength) since LTCM in 1998…

 

Damn It, Janet!

 

It seems much of today's turmoil began as Hong Kong re-opened last night…

 

An OPEC Rumor – which struck perfectly as the S&P broke 1812 – a crucial technical level (January's intraday low back to Feb 2014)… And just look at VIX!!! Does that look like a "normal" market?

 

Spiked stocks briefly (enabling NASDAQ to briefly get green before dropping), and the soared again…

 

Techs managed to scramble green in the last hour but financials were the biggest loser…

 

Deutsche Bank's dead-cat-bounce died and is back to tracking Lehman's analog…

 

And it is spreading to US banks – Sub financial credit risk is up 18% this week – the worst week since at least 2011…

 

 

Treasury yields crashed overnight – 2Y was down 10bps and 10Y down 20bps at its apex, before a miraculous bid for USDJPY appeared and rescued risk…

 

The yield curve (2s10s) collapsed even further below 100bps – to Dec 07 lows near 95bps at its lows today – leading financials lower…

 

The last time 2s10s was flattening and at these levels was Jan 2005

 

FX markets were volatile early on (with a huge drop in USDJPY when HK opened) and the USD drifted weaker…

 

The biggest 2-week drop in USD Index in 4 years…

 

Crude and Copper slumped as Gold & Silver surged…

 

As front-month crude plunged relative to 2nd month crude to 5 year lows..

 

Charts: Bloomberg

Bonus Chart: If everything is awesome, why is USA default risk on the rise?

via Zero Hedge http://ift.tt/20YgPd6 Tyler Durden

via Zero Hedge http://ift.tt/1O5s5es williambanzai7