Tag: finance

The Bank of Japan's governor Kuroda proudly told the world "long-term yields are bound to rise at some point, but we can curb it when it happens," and on a grand scale – that is what they have done (for now). But market participants are growing increasingly concerned. As we have warned numerous times, the suppression of 'normal' volatility in teh short-term can only lead to larger uncontrollable moves in the future. As The FT reports, some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness – "effectively we have removed the light from the lighthouse." Some say the transition has been unsettling as many analysts talk more openly of the risks inherent in what the BoJ is trying to pull off. For one thing, liquidity has evaporated… "volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk."

 

As if to support this view that the Japanese are hiding reality, the US Treasury had some thoughts:

• *U.S. SAYS IT WILL CLOSELY MONITOR JAPAN FOR DOMESTIC DEMAND

 

Realized vol has collapsed in JGB rates (but forward implied volas for Japan swaptions is surging again)…

 

Via The FT,

There are few bigger bond bulls than Haruhiko Kuroda.

 

The governor of the Bank of Japan told a New York forum this month that flat or falling yields in Japan’s Y936tn ($10tn) government bond market “can, and should continue” – even as inflation keeps edging towards the central bank’s target of 2 per cent.

 

…

 

since the end of June, yields have settled into a gentle downward groove, meaning that JGBs have beaten all other markets bar some peripheral Europeans. Bond yields move inversely to prices.

 

Indeed, on Wednesday the benchmark 10-year yield dropped below 0.6 per cent, to its lowest since early May, stretching away from Switzerland as the lowest in the world, as investors anticipated another firm commitment to easing at the BoJ’s policy meeting on Thursday.

 

This is what the governor ordered.

 

…

 

But some say the transition has been unsettling. Analysts are beginning to talk more openly of the risks inherent in what Mr Kuroda is trying to pull off.

 

For one thing, liquidity has evaporated. Banks that used to be busy making markets for private-sector institutions say they have been marginalised

 

…

 

“If a client asks us to bid it’s easy, as the market is very, very stable,” says one dealer who asked not to be named. “But if a client comes with an offer, it is a problem, as the duration to cover a short position is much longer and no one is offering. The BoJ is swallowing everything.”

 

…

 

In the first week of October, for example, the yield on the benchmark 10-year bond moved by just 0.001 per cent, or one-tenth of one basis point, on three consecutive days.

 

…

 

“Volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk.”

 

Some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness.

 

…

 

Under its previous governor, Masaaki Shirakawa, the BoJ was always sensitive to the charge that it was indulging a profligate government. Under Mr Kuroda, the bank still argues that because the purchases are not made directly from the finance ministry, they do not fall foul of a 1947 law that banned central bank underwriting.

 

But it is an increasingly fine distinction, say analysts.

 

…

 

“Effectively we have removed the light from the lighthouse.”

 

…

 

But the bond market seems to be storing up tensions anyway, says Yasunari Ueno, chief market economist at Mizuho Securities.

 

Investors “should remember”, he says, “that the currently irrational movement will probably translate into a growing momentum for a large price move in the future”.

Or as Taleb wrote: "There is no freedom without noise – and no stability without volatility."

And always a great read on the real dangers of suppressing natural volatility:

ForeignAffairs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/MM5yOV1lBls/story01.htm Tyler Durden

The Bank of Japan's governor Kuroda proudly told the world "long-term yields are bound to rise at some point, but we can curb it when it happens," and on a grand scale – that is what they have done (for now). But market participants are growing increasingly concerned. As we have warned numerous times, the suppression of 'normal' volatility in teh short-term can only lead to larger uncontrollable moves in the future. As The FT reports, some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness – "effectively we have removed the light from the lighthouse." Some say the transition has been unsettling as many analysts talk more openly of the risks inherent in what the BoJ is trying to pull off. For one thing, liquidity has evaporated… "volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk."

 

As if to support this view that the Japanese are hiding reality, the US Treasury had some thoughts:

• *U.S. SAYS IT WILL CLOSELY MONITOR JAPAN FOR DOMESTIC DEMAND

 

Realized vol has collapsed in JGB rates (but forward implied volas for Japan swaptions is surging again)…

 

Via The FT,

There are few bigger bond bulls than Haruhiko Kuroda.

 

The governor of the Bank of Japan told a New York forum this month that flat or falling yields in Japan’s Y936tn ($10tn) government bond market “can, and should continue” – even as inflation keeps edging towards the central bank’s target of 2 per cent.

 

…

 

since the end of June, yields have settled into a gentle downward groove, meaning that JGBs have beaten all other markets bar some peripheral Europeans. Bond yields move inversely to prices.

 

Indeed, on Wednesday the benchmark 10-year yield dropped below 0.6 per cent, to its lowest since early May, stretching away from Switzerland as the lowest in the world, as investors anticipated another firm commitment to easing at the BoJ’s policy meeting on Thursday.

 

This is what the governor ordered.

 

…

 

But some say the transition has been unsettling. Analysts are beginning to talk more openly of the risks inherent in what Mr Kuroda is trying to pull off.

 

For one thing, liquidity has evaporated. Banks that used to be busy making markets for private-sector institutions say they have been marginalised

 

…

 

“If a client asks us to bid it’s easy, as the market is very, very stable,” says one dealer who asked not to be named. “But if a client comes with an offer, it is a problem, as the duration to cover a short position is much longer and no one is offering. The BoJ is swallowing everything.”

 

…

 

In the first week of October, for example, the yield on the benchmark 10-year bond moved by just 0.001 per cent, or one-tenth of one basis point, on three consecutive days.

 

…

 

“Volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk.”

 

Some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness.

 

…

 

Under its previous governor, Masaaki Shirakawa, the BoJ was always sensitive to the charge that it was indulging a profligate government. Under Mr Kuroda, the bank still argues that because the purchases are not made directly from the finance ministry, they do not fall foul of a 1947 law that banned central bank underwriting.

 

But it is an increasingly fine distinction, say analysts.

 

…

 

“Effectively we have removed the light from the lighthouse.”

 

…

 

But the bond market seems to be storing up tensions anyway, says Yasunari Ueno, chief market economist at Mizuho Securities.

 

Investors “should remember”, he says, “that the currently irrational movement will probably translate into a growing momentum for a large price move in the future”.

Or as Taleb wrote: "There is no freedom without noise – and no stability without volatility."

And always a great read on the real dangers of suppressing natural volatility:

ForeignAffairs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/MM5yOV1lBls/story01.htm Tyler Durden

Submitted by Marin Katusa via Casey Research,

While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe.

The US quietly surpassed Saudi Arabia as the biggest oil producer in the world.

You read that correctly: "The jump in output from shale plays has led to the second biggest oil boom in history," stated Reuters on October 15. "U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia's output from 1970-1974."

After the initial moment of awe, pragmatic readers will surely wonder: Then why isn't gasoline dirt-cheap in the US?

There's indeed a good explanation why most Americans don't drive up to the gas pump whistling a happy tune (and it has nothing to do with evil speculators). Let's start with the demand side of this equation.

Crude oil consists of very long chains of carbon atoms. The refineries take the crude and essentially "crack" those long chains of carbon atoms into shorter chains of carbon atoms to make various petroleum products. Some of the products that are made from petroleum may surprise you.

The United States has the largest refining capacity in the world and is still by far the largest consumer of oil in the world (though China is beginning to catch up), and its refineries require 15 million barrels of oil a day. That means even though, due to the shale revolution, domestic production has dramatically increased to about 8 million barrels, the US still has to import between 7 and 8 million barrels of expensive foreign oil a day.

Let's take a look at who the US buys the imported oil from. (Now that I finally figured out my way around the new Windows 8—which, by the way, really sucks—I can even add some color to my tables.)

Canada is blue because it is not only friendly with the US, but also has the ability to increase oil production. The other countries are red because they either have decreasing oil production, or the country is not on good terms with the US government, or the production may be at risk for various reasons. The "red countries" all sell oil to the US at higher prices than does Canada.

As I said, the US imports about 7 million barrels of oil a day, and our top 5 exporters make up between 5.6 and 6.8 million barrels while the rest is split among other countries.

This means that even though the US has significantly increased its oil production in the past five years, a good chunk of oil has to be imported at much higher prices. And higher crude oil prices for refineries means higher prices at the gas pump.

But that's not the only issue: The "new oil" produced from the shale oil fields in the Bakken and Eagle Ford formations isn't cheap. Both the Bakken and Eagle Ford have been hugely successful, and an average well in either region can produce over 400 barrels of oil per day.

That may sound like a lot, but drilling thousands of meters into the ground (both vertically and horizontally), then casing and fracking the well, costs millions of dollars. And the trouble doesn't end once the well has been drilled: oil and gas production can drop as much as 50% in the first year.

Think of it as running on a treadmill—but the incline gets steeper and steeper the longer you run. That's the current reality of America's oil production.

Now, these areas also have to deal with declining legacy oil production ("legacy" meaning older oil wells that produced before fracking became popular) due to depletion rates. Freeze-offs, and even hurricane season can affect the legacy oil wells' production decline.

As the old wells begin to deplete, they need to be replaced by unconventional wells with horizontal drilling and hydraulic fracturing. Even though these new wells provide an initial burst of production, they decline very quickly. That means you need to drill even more wells just to keep up—and the vicious cycle continues.

The costs, as you can imagine, are forbiddingly high. Even in known oil-rich regions like the Bakken and Eagle Ford, the all-in cost of extracting a barrel of oil from the ground can cost as much as US$75 per barrel (for comparison, Saudi Arabia can produce oil for as low as US$1 per barrel). To put it in simple terms: cheap oil in North America is a thing of the past.

So, the US produces expensive oil and relies on imports of even more expensive oil. And since the refiners need to make money as well, this means higher prices at the pumps. Who loses? The US consumer, of course.

What would help lower gas prices? Building more pipelines to deliver cheaper Canadian oil to refineries in the US and decreasing the refineries' dependence on expensive foreign oil. Until these new and much safer pipelines are built, rail has to pick up the slack. Almost 400,000 railcars full of oil are expected to be shipped in 2013, compared with just 9,500 railcars in 2008, a whopping 41-fold increase.

But rail is not the answer. In fact, transporting oil by rail is much more dangerous than transporting it by pipeline. Just last week, we wrote about two recent accidents, one of which claimed 47 lives.

Federal and state taxes at every step of the gasoline-making progress make the pain at the pump even worse. The US government already takes more than 60% of the divisible income from every barrel of oil produced… and another 50 cents per gallon at the pump.

Then there's the matter of Obama's supposed "Green Revolution" and how America would be saved through the use of alternative energies. Obama wrote massive checks to different renewable energy firms that went belly-up, the most famous
of them all being solar panel manufacturer Solyndra, whose bankruptcy cost American taxpayers more than $500 million. Obama is also a heavy supporter of ethanol (his home state of Illinois, after all, is the third-largest ethanol-producing state) and has increased the targets for the use of ethanol in transportation.

Someone has to pay for all of these subsidies, so why not get the dirty, evil oil companies to pay for them? Keep in mind, though, that the oil companies have enough lobbyists and lawyers to keep the government at bay—so the higher prices will be passed on to the consumers.

To sum up why the price of gasoline is so high even though the US is producing so much more oil than before:

1. The high cost of American oil production
2. Even higher costs due to imported (non-Canadian) oil
3. Obama not allowing cheaper Canadian oil to flow to the refineries via pipelines such as the Keystone XL
4. The taxes on crude are used to fund Obama's green dream—his green-energy "legacy"—and his love for ethanol and the taxes at the pump will not decrease

 

Doug Casey and I are convinced that new technologies applied in the Old World will bring huge New World profits. But don't take my word for it—I challenge you to try out my research. Click here to take me up on my 100% money-back guarantee.

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

The chair of the House Intelligence Committee – Mike Rogers – said yesterday in an NSA spying hearing which he led that there is no right to privacy in America.

Constitutional expert Stephen I. Vladeck – Professor of Law and the Associate Dean for Scholarship at American University Washington College of Law – disagreed.

Here’s the exchange:

Rogers: I would argue the fact that we haven’t had any complaints come forward with any specificity arguing that their privacy has been violated, clearly indicates, in ten years, clearly indicates that something must be doing right. Somebody must be doing something exactly right.

 

Vladeck: But who would be complaining?

 

Rogers: Somebody who’s privacy was violated. You can’t have your privacy violated if you don’t know your privacy is violated.

 

Vladeck: I disagree with that. If a tree falls in the forest, it makes a noise whether you’re there to see it or not.

 

Rogers: Well that’s a new interesting standard in the law. We’re going to have this conversation… but we’re going to have wine, because that’s going to get a lot more interesting…

What Rogers is really saying is that the government has the right to spy on everyone so long as it doesn’t get caught doing so.

How’s that different from arguing that it’s okay for a thief to takes $100 from your bank account as long as you don’t notice that the money is missing? Or that it’s okay to rape a woman while she’s passed out so long as she doesn’t realize what happened?

That’s beyond ridiculous.

It flies in the face of more than 200 years of American law. In fact, experts say that the NSA spying program is wildly illegal, and is exactly the kind of thing which King George imposed on the American colonists … which led to the Revolutionary War.

Hat tip: Tech Dirt.

 

BONUS: 

How to Help Protect Yourself from Fukushima Radiation

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/u79J-ddmN_s/story01.htm George Washington

Today’s AM fix was USD 1,349.50, EUR 980.81 and GBP 840.23per ounce.
Yesterday’s AM fix was USD 1,346.75, EUR 978.81 and GBP 837.06 per ounce.

Gold dropped $8.40 or 0.62% yesterday, closing at $1,344.60/oz.
Silver rose $0.01 or 0.04% closing at $22.48. Platinum fell $15.50 or
1.1% to $ 1,454.50/oz, while palladium slipped $0.78 or 0.1% to
$742.72/oz.

Gold was treading water below five week highs today, as investors
weighed the decline in Chinese demand from record levels with still very
robust demand in India. Silver is up 1% as robust industrial and store
of wealth demand supports silver.

Silver in US Dollars, 1 Year – (Bloomberg)

Gold prices in China closed lower than global prices yesterday for
the first time this year. This may be due to a slight decrease in demand
in recent days. There was also speculation that this was due to fears
of a credit tightening and the possibility of a credit crisis in China.

Indian premiums stayed near record highs at $130 per ounce due to a supply crunch and supply shortages.

Hedge funds and money managers raised bullish bets in futures and
options of U.S. gold and silver markets for the week ended October 8,
the latest report by the Commodity Futures Trading Commission (CFTC)
showed.

More savvy trend following speculators are getting long gold again in anticipation of higher prices.

The Fed will make a statement later on Wednesday at the end of its
two-day policy meeting. The bank is widely expected to say it will stay
on course with its ultra loose monetary policies and will not reduce its
money printing, debt monetisation programme.

U.S. stocks closed at historic highs on hopes that the Fed will
continue supporting and indeed creating another liquidity driven bubble.

U.S. Mint sales advanced across all bullion products in October. In
total ounces, U.S. Mint distributors bought 5,000 ounces of gold coins
and 197,500 ounces of silver coins.

Silver Eagle bullion coins advanced 194,500 for a year-to-date total
of 39,175,000. This means they are on track for  a new annual record –
surpassing the record seen in 2011.

When the annual record for the Silver Eagles happened in 2011 at
39,868,500, it took until December 13, for sales to reach the levels
reached this year.

================================================================
                                       Total
                                     Ounces        YOY%        MOM%
================================================================
Oct. 2013
Month-to-Date        3,087,000
Full month pace     3,381,000        7.2%       12.2%
—————————————————————-
Sept. 2013               3,013,000       -6.6%      -16.9%
Aug. 2013                3,625,000       26.3%      -17.7%
July 2013                 4,406,500       93.4%       34.5%
—————————————————————-
June 2013               3,275,000       14.6%       -5.3%
May 2013                 3,458,500       20.3%      -15.4%
================================================================
American Eagle Bullion Sales In One Ounce Coins – Bloomberg via U.S Mint

The U.S. Mint’s sales of American Eagle silver coins have
reached 3.087 million troy ounces so far this October and have
surpassed the September sales figure, according to figures from the U.S.
Mint’s website. Sales increased to 3.087 million troy ounces in October
from 3.013 million troy ounces in September.

Monthly American Eagle Bullion Sales In One Ounce Coins – U.S. Treasury via Bloomberg

The figures are as of yesterday and at that pace, total sales for the
month would be 3,381,000 ounces, up 7.2% from a year earlier.

The chart above clearly shows the long term trend towards higher
silver eagle demand in recent years as store of value buyers accumulate
silver eagles to protect against currency devaluation and wealth
confiscation.

Below are the latest daily, October and year-to-date United States Mint bullion sales figures, courtesy of CoinNews.net

CoinNews.net

Some of those who bought silver in 2011 as an investment may be
reluctant to buy more silver due to recent volatility. We have long
pointed out that silver is not an ‘investment’ per se rather it is a
store of value and a form of financial insurance. Silver is to be bought
for the long term – until it has to be sold due to a need to raise cash
– indeed a permanent holding.

Realising this helps people stomach the short term price swings that
are typical in the silver market. This is important as silver will
protect them from currency devaluations and the coming bail-in regime.

It is worth pointing out that all markets are volatile today and silver’s volatility is often exaggerated.

 
Silver in US Dollars, 5 Years – (Bloomberg)

Silver remains undervalued from a long term, historical, inflation adjusted perspective.

Our long held belief that silver could reach the record 1980 high in real terms, inflation adjusted, if $140/oz remains.

Immediate support is at the $18/oz to $20/oz level (see charts) and
store of value buyers should continue to accumulate on this dip.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-fX309ZZvig/story01.htm GoldCore

While nearly three years after the Fukushima disaster the world is finally focused, rightfully so, on the epic ecological and radioactive clusterfuck unfolding in Japan, where in a desperate effort to distract the population from what is going on in its back yard, the Premier has launched the most ridiculous monetary experiment doomed to failure, the reality is that the US itself harbors a veritable waste land of radioactive fallout, much of it hidden in plain sight.

As the following interactive map from the WSJ shows, of the 517 active sites in the continental US, found on the Department of Energy’s listing of facilities “considered” for radioactive cleanup through its Formerly Utilized Sites Remedial Action Program, some 43 have a “potential for significant radioactive contamination” through the time of the study.

From the WSJ:

During the build-up to the Cold War, the U.S. government called upon hundreds of factories and research centers to help develop nuclear weapons and other forms of atomic energy. At many sites, this work left behind residual radioactive contamination requiring government cleanups, some of which are still going on.

 

The Department of Energy says it has protected the public health, and studies about radiation harm aren’t definitive. But with the government’s own records about many of the sites unclear, the Journal has compiled a database that draws on thousands of public records and other sources to trace this historic atomic development effort and its consequences.

Find out if your state, city, or town is located next to a potential dormant and largely secret Fukushima, using the following handy interactive map.

 

While we invite readers to drill down their particular state, the top ten states with the most cites are listed in descending order below, starting with…

New York

 

Ohio

 

Pennsylvania

 

Illinois

 

New Jersey

 

Massachusettes

 

California

 

Colorado

 

Michigan

 

New Mexico

 

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

"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."

 

-Paul Singer, Elliott Management

In his latest letter to investment partners, the outspoken realist pulls the curtain on everything from loss of faith on fiat currencies to unsound policies such as Obamacare, the missing jobs recovery, and media misunderstandings of the nature of hedge funds.

On The Fed's "temporary" effects on bonds and stocks:

The volatility in fixed income markets earlier this year, occasioned by the Fed’s use of the word “tapering” (meaning a possible gradual reduction in the pace of Fed bondbuying), resulted in medium- and long-term interest rates rising back to the levels of the spring of 2009. In other words, $3.8 trillion of bond-buying since 2008 by the Fed has had only a temporary effect on medium- and long-term interest rates. It is impossible to predict the prices of bonds in the event the Fed stops buying, or actually starts to sell off its massive portfolio, although it is a decent bet that prices would be much lower than current levels.

 

It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. However, the fragility of capital markets, so reliant on zero percent interest rates (ZIRP) and QE Infinity for their equilibrium, is clearer. The markets’ ability to withstand any adversity is highly questionable, and it appears to us that the Fed is basically paralyzed (though they would probably call it “focused and determined”) and afraid (perhaps they would say “prudently risk-averse”) to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets.

On The Fed's lack of effects on the real economy:

The Fed is undoubtedly praying that economic growth will accelerate, giving it proper cover to tighten its ultra-loose monetary policy. However, the economy is now in its fifth year of subpar growth, with little pick-up in sight.

On Hedge Funds:

Lately we have seen a number of reports about the “disappointing” results of hedge funds. But as we have noted many times before, hedge funds that are actually hedging are unlikely to perform as well as equities during a bull run.

 

…

 

We understand it is not easy for investors to distinguish who is good and sustainable from who is a flash in the pan, but the task is worthwhile, and investors who do the hard work are likely to be pleased with their manager selection in the medium to long term. Unfortunately, the supply of firms that can produce (or at least have a reasonable prospect of achieving) absolute returns is far lower than the demand for such results.

On the "unsound" underlying structural issues of US Fiscal policy:

What has been happening with the U.S. federal government in its recent highly-theatrical phase, as contentious and difficult as it has been, is merely a precursor to much bigger events.

 

…

 

we are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the government having made (and continuing to make) massively unpayable promises for the future. As we have pointed out, the current annual federal deficit, so ballyhooed to be “coming down nicely,” is actually catastrophically out of control. It is not a trillion dollars. The true figure is more like $7 trillion (and growing!) after accounting for unfunded liabilities, which are mounting at a fantastic pace. It is not an exaggeration to say that America is deeply insolvent, and for that matter, so are most of continental Europe, the U.K. and Japan. No combination of achievable growth rates and taxes can pay for the promises that have been made. The numbers are clear and inexorable.

 

None of the major governmental leaders in these regions is telling the truth about the present state of affairs and where it will lead, nor are they making the structural changes necessary to unlock the potential to grow their respective economies significantly faster than current rates.

 

…

 

As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations. That will not work and would lead the world down the road to total ruin.

 

…

 

The situation is deeply unstable. It is so sad that after the major developed countries recovered from World War II, they gradually morphed from soundly-financed global engines of growth and prosperity into massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.

On The Global financial system's fragility:

The global financial system is not much healthier. In the last five years, laws and regulations have been passed, bankers have been pilloried, financiers have been vilified, “living wills” have been prepared and carefully and beautifully wrapped for presentation, regulatory entities have been formed and fresh-faced regulators, eager to save the world, have been hired and placed at new desks in front of new computers. But through it all, one thing has not changed: The major banking and other financial institutions remain opaque and overleveraged.

 

…

 

The really bad news is that the “hair-trigger” aspect of modern global trading markets is just getting more intense. Market action from earlier this year is a harbinger of how modern markets will react to a real change in perceptions. In this past spring’s episode, a sign from the Fed that it might gently begin scaling back the pace of its bond-buying caused medium- and long-term bonds to be abruptly repriced, which removed just about all of the price elevation caused by four years of Fed purchases. The lesson of the crash of 2008 was that it is essential to act immediately to save your assets from an uncertain counterparty or clearing firm.

On Yellen and The Fed admitting its wrong:

it is unlikely that her reign will be characterized by any more courage or deep understanding than that of her predecessor, “Helicopter Ben” Bernanke.

…

The problem is that they all, including Yellen, are looking in the wrong direction. Similar to Bernanke (and arguably more so), Yellen places a heavy reliance on the Fed’s data-driven financial models to draw conclusions and make predictions. Sadly, she also seems to share Bernanke’s lack of humility regarding the inescapable fact that the Fed’s models and predictions were catastrophically wrong about the financial system, financial institutions and risks in the period leading up to and during the financial crisis.

For the Fed’s governors to admit that they got it profoundly and tragically (for the millions of people who are unemployed, underemployed or now deeply steeped in the brine of dependency) wrong, and that their role needs to be more modest than holding up the entire world on their shoulders, would also take courage.

On ZIRP and QE's lack of societal benefit:

In the absence of that courage, which could only be exhibited by the Fed (or perhaps by Congress if it legislated an end to the “dual mandate”), it is not easy to see where current Fed policy leads the country. We believe that continued QE will not accelerate the economic recovery. We also believe that the recovery and the economy are distorted and unfair to ordinary citizens who do not own stocks or high-end real estate, which are priced at their highs. ZIRP and QE, therefore, are placing the economy at severe risk of another financial crisis and possibly a spike in inflation for no societal benefit.

On timing the collapse:

Although the risks are clear, the probabilities and timing are not.

 

We do know that the transmission mechanism would be a loss of confidence – in the government, in its ability to pay its obligations, in its ability to provide the conditions for acceptable levels of economic growth and job creation in a competitive world beset by the glories and challenges of job-crushing technological change, and in paper money itself.

On the idiocy of the counter-factual:

To those who maintain that things would have been even worse if the government hadn’t initiated QE2 (and beyond), our response is that this is the wrong test. The only justifiable reason to have done QE was to provide liquidity during the immediate emergency period. After that, a full range of policy tools – including tax, regulation, labor, trade, education, energy and innovation – should have been brought to bear to overcome the mess, get the economy growing as fast as it reasonably could and counteract the job-suppressive aspects of the march of otherwise-wonderful technology. If and only if those growth-enhancing policies failed would it have made sense to declare a further emergency and do something as distortionary and risky as further rounds of QE.

 

Frustratingly, in no part of the developed world were those “pro-growth” policies pursued. Instead, central bankers went right ahead after stepping back from the precipice and pursued QE in unprecedented size, from then until this day. In effect, this has provided cover for the leaders of the developed countries to continue buying votes with dependency-enhancing policies, avoiding difficult decisions and eschewing effective but contentious pro-growth policies. This is a bad mix, and it will lead to bad outcomes.

On The Endgame:

Chairman Bernanke has been administering painkillers and artificial respiration instead of telling the President and Congress to take intelligent action to improve economic growth. As we have said over and over: Leadership is wanting; leadership is needed.

 

If QE loses effectiveness now and the plug is pulled, the economic consequences could be disastrous, because the Fed didn’t force the President and Congress to adopt progrowth policies when it had the chance. At the same time, if the current course is maintained, the ultimate results are likely to be much worse.
 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/W_sjt9efVcU/story01.htm Tyler Durden

"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."

 

-Paul Singer, Elliott Management

In his latest letter to investment partners, the outspoken realist pulls the curtain on everything from loss of faith on fiat currencies to unsound policies such as Obamacare, the missing jobs recovery, and media misunderstandings of the nature of hedge funds.

On The Fed's "temporary" effects on bonds and stocks:

The volatility in fixed income markets earlier this year, occasioned by the Fed’s use of the word “tapering” (meaning a possible gradual reduction in the pace of Fed bondbuying), resulted in medium- and long-term interest rates rising back to the levels of the spring of 2009. In other words, $3.8 trillion of bond-buying since 2008 by the Fed has had only a temporary effect on medium- and long-term interest rates. It is impossible to predict the prices of bonds in the event the Fed stops buying, or actually starts to sell off its massive portfolio, although it is a decent bet that prices would be much lower than current levels.

 

It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. However, the fragility of capital markets, so reliant on zero percent interest rates (ZIRP) and QE Infinity for their equilibrium, is clearer. The markets’ ability to withstand any adversity is highly questionable, and it appears to us that the Fed is basically paralyzed (though they would probably call it “focused and determined”) and afraid (perhaps they would say “prudently risk-averse”) to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets.

On The Fed's lack of effects on the real economy:

The Fed is undoubtedly praying that economic growth will accelerate, giving it proper cover to tighten its ultra-loose monetary policy. However, the economy is now in its fifth year of subpar growth, with little pick-up in sight.

On Hedge Funds:

Lately we have seen a number of reports about the “disappointing” results of hedge funds. But as we have noted many times before, hedge funds that are actually hedging are unlikely to perform as well as equities during a bull run.

 

…

 

We understand it is not easy for investors to distinguish who is good and sustainable from who is a flash in the pan, but the task is worthwhile, and investors who do the hard work are likely to be pleased with their manager selection in the medium to long term. Unfortunately, the supply of firms that can produce (or at least have a reasonable prospect of achieving) absolute returns is far lower than the demand for such results.

On the "unsound" underlying structural issues of US Fiscal policy:

What has been happening with the U.S. federal government in its recent highly-theatrical phase, as contentious and difficult as it has been, is merely a precursor to much bigger events.

 

…

 

we are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the government having made (and continuing to make) massively unpayable promises for the future. As we have pointed out, the current annual federal deficit, so ballyhooed to be “coming down nicely,” is actually catastrophically out of control. It is not a trillion dollars. The true figure is more like $7 trillion (and growing!) after accounting for unfunded liabilities, which are mounting at a fantastic pace. It is not an exaggeration to say that America is deeply insolvent, and for that matter, so are most of continental Europe, the U.K. and Japan. No combination of achievable growth rates and taxes can pay for the promises that have been made. The numbers are clear and inexorable.

 

None of the major governmental leaders in these regions is telling the truth about the present state of affairs and where it will lead, nor are they making the structural changes necessary to unlock the potential to grow their respective economies significantly faster than current rates.

 

…

 

As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations. That will not work and would lead the world down the road to total ruin.

 

…

 

The situation is deeply unstable. It is so sad that after the major developed countries recovered from World War II, they gradually morphed from soundly-financed global engines of growth and prosperity into massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.

On The Global financial system's fragility:

The global financial system is not much healthier. In the last five years, laws and regulations have been passed, bankers have been pilloried, financiers have been vilified, “living wills” have been prepared and carefully and beautifully wrapped for presentation, regulatory entities have been formed and fresh-faced regulators, eager to save the world, have been hired and placed at new desks in front of new computers. But through it all, one thing has not changed: The major banking and other financial institutions remain opaque and overleveraged.

 

…

 

The really bad news is that the “hair-trigger” aspect of modern global trading markets is just getting more intense. Market action from earlier this year is a harbinger of how modern markets will react to a real change in perceptions. In this past spring’s episode, a sign from the Fed that it might gently begin scaling back the pace of its bond-buying caused medium- and long-term bonds to be abruptly repriced, which removed just about all of the price elevation caused by four years of Fed purchases. The lesson of the crash of 2008 was that it is essential to act immediately to save your assets from an uncertain counterparty or clearing firm.

On Yellen and The Fed admitting its wrong:

it is unlikely that her reign will be characterized by any more courage or deep understanding than that of her predecessor, “Helicopter Ben” Bernanke.

…

The problem is that they all, including Yellen, are looking in the wrong direction. Similar to Bernanke (and arguably more so), Yellen places a heavy reliance on the Fed’s data-driven financial models to draw conclusions and make predictions. Sadly, she also seems to share Bernanke’s lack of humility regarding the inescapable fact that the Fed’s models and predictions were catastrophically wrong about the financial system, financial institutions and risks in the period leading up to and during the financial crisis.

For the Fed’s governors to admit that they got it profoundly and tragically (for the millions of people who are unemployed, underemployed or now deeply steeped in the brine of dependency) wrong, and that their role needs to be more modest than holding up the entire world on their shoulders, would also take courage.

On ZIRP and QE's lack of societal benefit:

In the absence of that courage, which could only be exhibited by the Fed (or perhaps by Congress if it legislated an end to the “dual mandate”), it is not easy to see where current Fed policy leads the country. We believe that continued QE will not accelerate the economic recovery. We also believe that the recovery and the economy are distorted and unfair to ordinary citizens who do not own stocks or high-end real estate, which are priced at their highs. ZIRP and QE, therefore, are placing the economy at severe risk of another financial crisis and possibly a spike in inflation for no societal benefit.

On timing the collapse:

Although the risks are clear, the probabilities and timing are not.

 

We do know that the transmission mechanism would be a loss of confidence – in the government, in its ability to pay its obligations, in its ability to provide the conditions for acceptable levels of economic growth and job creation in a competitive world beset by the glories and challenges of job-crushing technological change, and in paper money itself.

On the idiocy of the counter-factual:

To those who maintain that things would have been even worse if the government hadn’t initiated QE2 (and beyond), our response is that this is the wrong test. The only justifiable reason to have done QE was to provide liquidity during the immediate emergency period. After that, a full range of policy tools – including tax, regulation, labor, trade, education, energy and innovation – should have been brought to bear to overcome the mess, get the economy growing as fast as it reasonably could and counteract the job-suppressive aspects of the march of otherwise-wonderful technology. If and only if those growth-enhancing policies failed would it have made sense to declare a further emergency and do something as distortionary and risky as further rounds of QE.

 

Frustratingly, in no part of the developed world were those “pro-growth” policies pursued. Instead, central bankers went right ahead after stepping back from the precipice and pursued QE in unprecedented size, from then until this day. In effect, this has provided cover for the leaders of the developed countries to continue buying votes with dependency-enhancing policies, avoiding difficult decisions and eschewing effective but contentious pro-growth policies. This is a bad mix, and it will lead to bad outcomes.

On The Endgame:

Chairman Bernanke has been administering painkillers and artificial respiration instead of telling the President and Congress to take intelligent action to improve economic growth. As we have said over and over: Leadership is wanting; leadership is needed.

 

If QE loses effectiveness now and the plug is pulled, the economic consequences could be disastrous, because the Fed didn’t force the President and Congress to adopt progrowth policies when it had the chance. At the same time, if the current course is maintained, the ultimate results are likely to be much worse.
 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/W_sjt9efVcU/story01.htm Tyler Durden

Authored by Martin Feldstein, originally posted at Project Syndicate,

Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance – about 15% of the US population.

Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. The program was therefore formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.” More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.

But what about conditions like a heart attack or injuries sustained in an automobile accident? In those cases, the individual would not have time to purchase the health insurance that the law allows. If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately.

But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. They might even choose to self-insure the emergency risk for their employees.

The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Kcgkb1N2-Fc/story01.htm Tyler Durden

Authored by Martin Feldstein, originally posted at Project Syndicate,

Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance – about 15% of the US population.

Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. The program was therefore formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.” More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.

But what about conditions like a heart attack or injuries sustained in an automobile accident? In those cases, the individual would not have time to purchase the health insurance that the law allows. If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately.

But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. They might even choose to self-insure the emergency risk for their employees.

The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Kcgkb1N2-Fc/story01.htm Tyler Durden