finance – Page 18618

The Great Buyback Surge Is Over: Corporations Are Once Again Net Sellers Of Shares

By now most are aware that the primary reason there was EPS growth last year (or the prior two years) was the relentless buying back of their own stock by corporate treasurers, accounting for 75% of the increase in S&P500 earnings per share even as revenues stagnated for the second year in a row and actual earnings growth was comatose at best.

At $500 billion in net stock buybacks in 2013, this was an immense amount of bidding power, equal to half of the Fed’s entire annual liquidity injection. And while EPS was artificially boosted by an allocation of capital that most would say is the least efficient in terms of future growth (remember when companies spent on capital expenditures to fund long-term growth, not satisfy activist shareholders?) the only good thing that could be said about the second highest annual corporate buyback in history was that companies still saw their stocks as cheap: after all, not even the most aggressive of CFOs would greenlight a massive buyback campaign if they expected their stock to plunge.

That is no longer the case.

As JPM’s Nikolas Panigirtzoglou notes in his latest “Flows and Liquidity” weekly, “the S&P500 index Divisor rose in Q4 following a flattish pattern in the previous two quarters.” This means that after buying back stock for rightly two years in a row, companies have once again turned to net sellers and as a result are increasing the divisor (aka the denominator in the EPS fraction) of the S&P500, which means two things: i) the boost to EPS from buybacks is now over and ii) even corporations view the market as overvalued and prefer to sell their stock rather than buy it.

This is how JPM’s Panigirtzoglou see the development:

[One] measure of net equity withdrawal available on a higher frequency basis is the share count of equity indices. This share count is reflected in the so called “Divisor” of an equity index which roughly speaking is equal to the market value of the index divided by the price of the index. Divisor changes reflect changes in outstanding shares due to share buybacks or other corporate actions such as the ones mentioned above. But they also reflect addition or deletion of stocks to the index. If the S&P 500 closes at 1838 and one stock is replaced by another, after the market close, the index should open at 1838 the next morning if all of the opening prices are the same as the previous day’s closing prices. This is achieved with an adjustment to the divisor.

The Divisor captures the collective impact of share buybacks, share offerings, exchange of common stock for debentures, conversion of preferred stock or convertible securities, as well as stock options and employee stock programs. The Divisor of the S&P500 Index is shown in Figure 1. This Divisor experienced a big decline between 2004 and 2008 due to strong buyback activity. Between 2004 and 2008 it fell by 7% or almost at a 2% per annual pace of decline. It rose after Lehman due to large share issuance especially by financials and a drying up of share buyback activity. It started declining again in 2011 as share buybacks picked up. Between Q3 2011 and Q1 2013 the S&P500 Index Divisor was down by 2.2%.

But the trend started changing in Q2. The Divisor was little changed in Q2 and Q3 last year and rose modestly in Q4. There is little doubt that the increased pace of equity offerings is to a large extent responsible for the reversal in the declining trend. IPOs were up 140% from a year ago in Q4 while secondary offerings were up by 100%.

In the past, the decline in the S&P500 Index Divisor was used as a reason to question the quality of Earnings-per-share data. Academic studies have found that managers tend to increase share buybacks in periods of slow earnings growth to boost EPS via shrinking the denominator, i.e. the number of shares. Indeed all of the increase in the quarterly S&P500 Operating Earnings-Per-Share between Q3 2011 and Q1 2013 was due to the decline in the Divisor. There was practically zero “real” earnings growth over that period.

And judging by the record number of negative earnings preannouncements there won’t be any growth not only in Earnings in 2014, but in EPS as well, now that the S&P as an entity is collectively a seller of equity.

To summarize: tapering has begun and according to many the Fed’s injection of flow will completely end by the late summer; Goldman just said the S&P is overvalued by every measure, and we just learned that corporations are once again net stock sellers. Oh, and let’s not forget the worst monthly payroll number in nearly three years.

So… BTFATH?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/N800LKidnIM/story01.htm Tyler Durden

IMF: ‘This is Our Last Wake Up Call for Your Savings’

Do you remember? The IMF set off the public and the media in October by stating in a report that it would be a great idea to invoke a one-time levy on the savings of the public to get governments’ finances in the industrialized world back on track. That message or that ‘theoretical exercise’ as the IMF called it then, did not sit well with most people and it resulted in a media frenzy. A few weeks later they did try and failed at damage control, which was nothing more than public embarrassment. Meanwhile we have reached 2014 and yes, we have a new document commissioned by the IMF, from two Harvard economists, Carmen Reinhart and Kenneth Rogoff.

IMF: high time for financial repression

Both Harvard economists are not beating around the bush. The idea that the mountain of government debt in the industrialized world is controllable and can be solved over time with enough economic growth is completely unrealistic. Next to that it appears that politicians are suffering from collective memory loss. In Europe and the US, in the period between both World Wars, countries also defaulted. The current mindset that defaults are only reserved for Emerging Markets is completely incorrect, according to Reinhart and Rogoff.

Both economists state that the mountain of debt from the industrialized world is at the highest level in the last 200 years. And that is a problem, a problem which cannot be resolved by economic growth exclusively. The Eurozone’s debt amounts to 95 percent of its GDP and the US is almost at 110 percent. Ultimately, the Eurozone is not that far behind at the rate at which debt is growing. You can bicker about the level at which debt is impossible to pay back, but the consensus is that this lies somewhere between 90 and 100 percent for the industrialized world, because of its low growth figures (1 – 2.5 percent).

Turnkey solution

‘Fortunately’, both Harvard economists have a turnkey solution. Before we get into the details we want to emphasize that this report is commissioned by the IMF. That gives the IMF at least the possibility to distance themselves from its contents, if hell breaks loose once more. For now it remains quiet, however. Most media channels, and especially the MSM, did not pick up the (at least to us) explosive report. In these financial times, nobody appreciates sleeping journalists we would think, but who are we to judge.

Back to both Harvard economists and their ‘solution’ for the government debt, which has increased beyond belief. The solution is very simple: financial repression. It does not sound pleasant and it isn’t indeed. It is a cocktail of: (higher) inflation, capital restrictions, default and a savings tax.

Let that ‘solution’ settle in your stomach. It does not sit very well does it? Again we have the cursed savings tax, again the absurd capital restrictions. And according to both Harvard economists, a form of restructuring (default) of debts that have gotten out of hand should come on top. Probably you, as an investor/saver do not own government bonds, so you do not lose sleep over all of this. Well, that might not be so smart: the odds are high actually, that you are building your pension, and subsequently, the odds are high that your pension fund does own government bonds.

IMF thinks it is smart

The question is: what do we do with all of this? What do we do with an IMF, led by a highly accredited, charming lawyer, who just played the same old trick on us? First the organization starts with a ‘theoretical exercise’, only to deny completely that the IMF is aiming for your savings. And now this report, commissioned by the IMF and from the hand of two not undisputed Harvard economists, which features once more the savings tax and capital restrictions.

Does the IMF truly believe it gets away with this? Having a report written by two Harvard economists, that have made crucial calculation errors in an earlier report ‘Growth in a Time of Debt’. And despite that the report was happily used by Olli Rehn, the financial head honcho of the European Commission.

Watch your savings!

Let us put forward that we also believe that the government debt has gotten out of hand in many countries. On top of that there is a whole array of artificial constructions with guarantees, debt displacements, etc. that naturally do not offer any solution to the mountain of debt in itself, but have to be seen for what they are: smoke screens.

That ‘something’ needs to happen, is clear. That we would ultimately all be better off with a financial system that survives, is also crystal clear. However, swinging capital restrictions, one-time levies on savings, to just then continue with the same people as if nothing happened on the same path: that should be out of the question right? Old top exec from De Nederlands Bank, Lex Hoogduin, came up with a creative proposal: a 1 percent norm. The government needs to spend 1 percent less every year, structurally. The proceedings of these structural budget cuts then need to be used to lower taxes. Creative, certainly. Maybe a little bit too simple, but definitely on a better track than our two Harvard economists.

The last word has definitely not been spoken here. The fact that the IMF just a few months after the last debacle comes out again with a political, explosive report, is a clear wake up call for every investor and saver. The financial need among the different governments is high, too high. And the day that politicians will recognize that is coming closer each day, with the necessary consequences to follow for your financial future. And that means most importantly: watch your savings! There will be a levy, we are sure of it. Probably in the form of a ‘one-time solidarity tax’. The ‘theoretically calculated percentage of 10 percent’ by the IMF, is moreover not realistic in our opinion. Furthermore, we believe they will not stop when they have touched your savings: they will most likely take your entire capital into account, of which your savings are just a part.

Damage control is essential. And that is best achieved by spreading your capital. To be continued…

Take cover & Download our Free ‘Guide to Gold’

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Ie4HZtBlzb8/story01.htm Sprout Money

IMF: 'This is Our Last Wake Up Call for Your Savings'

IMF: high time for financial repression

Turnkey solution

IMF thinks it is smart

Watch your savings!

Damage control is essential. And that is best achieved by spreading your capital. To be continued…

Take cover & Download our Free ‘Guide to Gold’

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Ie4HZtBlzb8/story01.htm Sprout Money

Guest Post: The Greatest Myth Propagated About The Fed: Central Bank Independence (Part 1)

Submitted by L. Randall Wray via New Economic Perspectives blog,

It has been commonplace to speak of central bank independence – as if it were both a reality and a necessity. Discussions of the Fed invariably refer to legislated independence and often to the famous 1951 Accord that apparently settled the matter. [1] While everyone recognizes the Congressionally-imposed dual mandate, the Fed has substantial discretion in its interpretation of the vague call for high employment and low inflation. For a long time economists presumed those goals to be in conflict but in recent years Chairman Greenspan seemed to have successfully argued that pursuit of low inflation rather automatically supports sustainable growth with maximum feasible employment.

In any event, nothing is more sacrosanct than the supposed independence of the central bank from the treasury, with the economics profession as well as policymakers ready to defend the prohibition of central bank “financing” of budget deficits. As in many developed nations, this prohibition was written into US law from the founding of the Fed in 1913. In practice, the prohibition is easy to evade, as we found during WWII in the US when budget deficits ran up to a quarter of GDP. If a central bank stands ready to buy government bonds in the secondary market to peg an interest rate, then private banks will buy bonds in the new issue market and sell them to the central bank at a virtually guaranteed price. Since central bank purchases of bonds supply the reserves needed by banks to buy bonds, a virtuous circle is created so that the treasury faces no financing constraint. That is what the 1951 Accord was supposedly all about—ending the cheap source of US Treasury finance.

Since the Global Financial Crisis hit in 2007 these matters have come to the fore in both the US and the European Monetary Union. In the US, discussion of “printing money” to finance burgeoning deficits was somewhat muted, in part because the Fed purportedly undertook Quantitative Easing to push banks to lend—not to provide the Treasury with cheap funding. But the impact has been the same as WWII-era finances: very low interest rates on government debt even as a large portion of the debt ended up on the books of the Fed, while bank reserves have grown to historic levels (the Fed also purchased and lent against private debt, adding to excess reserves). While hyperinflationists have been pointing to the fact that the Fed is essentially “printing money” (actually reserves) to finance the budget deficits, most other observers have endorsed the Fed’s notion that QE might allow it to “push on a string” by spurring private banks to lend—which is thought to be desirable and certainly better than “financing” budget deficits to allow government spending to grow the economy. Growth through fiscal austerity is the new motto as the Fed accumulates ever more federal government debt and suspect mortgage-backed securities.

The other case is in the EMU where the European Central Bank had long been presumed to be prohibited from buying debt of the member governments. By design, these governments were supposed to be disciplined by markets, to keep their deficits and debt within Maastricht criteria. Needless to say, things have not turned out quite as planned. The ECB’s balance sheet has blown up just as the Fed’s did—and there is no end in sight in Euroland even as the Fed has begun to taper. It would not be hyperbole to predict that the ECB will end up owning (or at least standing behind) most EMU government debt as it continues to expand its backstop.

It is, then, perhaps a good time to reexamine the thinking behind central bank independence. There are several related issues.

First, can a central bank really be independent? In what sense? Political? Operational? Policy formation?
Second, should a central bank be independent? In a democracy should monetary policy—purportedly as important as or even more important than fiscal policy—be unaccountable? Why?
Finally, what are the potential problems faced if a central bank is not independent? Inflation? Insolvency?

While this two part piece will focus on the US and the Fed, the analysis is relevant to general discussions about central bank independence. We will limit our analysis to the questions surrounding what we mean by central bank independence. We leave to other analyses the questions surrounding the wisdom of granting independence to the Fed, democratic accountability, and potential problems. We will argue here that the Fed is independent only in a very narrow sense. We have argued elsewhere that the Fed’s crisis response during the global financial crisis does raise serious issues of transparency and accountability—issues that have not been resolved with the Dodd-Frank legislation.[2] Finally, it will become apparent that we do not believe that lack of central bank independence raises significant problems with inflation or insolvency of the sovereign government.

For the US case we will draw on an excellent study of the evolution of governance of the Fed by Bernard Shull, one of the foremost authorities of the history of the Fed.[3] As we will see, the dominant argument for independence throughout the Fed’s history has been that monetary policy should be set to promote the national interest. This requires that it should be free of political influence coming from Congress. Further, it was gradually accepted that even though the Federal Open Market Committee includes participation by regional Federal Reserve banks, the members of the FOMC are to put the national interest first. Shull shows that while governance issues remain unresolved, Congress has asserted its oversight rights, especially after economic or financial crises.

I’ll also include summaries of the arguments of two insiders—one from the Treasury and the other from the Fed—that also conclude that the case of the Fed’s independence is frequently overstated. The former Treasury official argues that at least within the Treasury there is no presumption that the Fed is operationally independent. The Fed official authored a comprehensive statement on the Fed’s independence, arguing that the Fed is a creature of Congress. More recently, Chairman Bernanke has said that “of course we’ll do whatever Congress tells us to do”: if the Congress is not satisfied with the Fed’s actions, the Congress can always tell the Fed to behave differently.[4]

In the aftermath of the GFC, Congress has attempted to exert greater control with its Dodd-Frank legislation. The Fed handled most of the US policy response to the Great Recession (or, GFC). As we have documented, most of the rescue was behind closed doors and intended to remain secret. (See Felkerson 2012; and Wray 2012)[5] Much of it at least stretched the law and perhaps went beyond the now famous section 13(3) that had been invoked for “unusual and exigent” circumstances for the first time since the Great Depression. Congress has demanded greater transparency and has tightened restrictions on the Fed’s future crisis response. Paradoxically, Dodd-Frank also increased the Fed’s authority and responsibility. However, in some sense this is “deja-vu” because Congressional reaction to the Fed’s poor response to the onset of the Great Depression was similarly paradoxical as Congress simultaneously asserted more control over the Fed while broadening the scope of the Fed’s mission.

INDEPENDENT OF WHAT?

Most references to central bank independence are little more than vague hand-waves. In the US, the Fed is a “creature of Congress”, established by the Federal Reserve Act of 1913, which has been modified a number of times. Elected officials play a role in selecting top Fed officials. And while the Fed is nominally owned by share-holding banks, and while the Fed’s budget is separate, profits above 6% on equity are returned to Treasury. Congress also has asserted its authority to mandate that the Fed release detailed information on its operations and budget—and there seems to be nothing but Congressional timidity to stop it from demanding more control over the Fed (indeed, Dodd-Frank sanctions many of the actions taken by the Fed during the GFC, now requiring prior approval by the President, the Treasury Secretary, and/or Congress for various interventions). Further, as we will see, the Fed’s operations are necessarily closely coordinated with the Treasury’s; the Fed, after all, functions as the Treasury’s bank. Finally, as everyone knows, Congress has provided a dual mandate to guide Fed policy although one could easily interpret Congressional will as consisting of four (at least some of which are related) mandates: high employment, low inflation, acceptable growth, and financial stability.

Above I have argued that the Fed is a creature of Congress. MacLaury has put the relationship this way:

Ultimately the [Federal Reserve] System is accountable to congress, not the executive branch, even though Reserve Board members and the chairman are president-appointed. The authority and delegated policy powers are subject to review by the congress not the president, the Treasury Department, nor by banks or other interests. (p. 4)

While many supporters and critics alike have stressed the Fed’s nominal ownership by member banks as evidence that it is somehow independent of government, the Fed’s Bruce MacLaury interprets the independence as follows[6]:

First, let’s be clear on what independence does not mean. It does not mean decisions and actions made without accountability. By law and by established procedures, the System is clearly accountable to congress—not only for its monetary policy actions, but also for its regulatory responsibilities and for services to banks and to the public. Nor does independence mean that monetary policy actions should be free from public discussion and criticism—by members of congress, by professional economists in and out of government, by financial, business, and community leaders, and by informed citizens. Nor does it mean that the Fed is independent of the government. Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the “public interest.” It has a degree of independence within the government—which is quite different from being independent of government. Thus, the Federal Reserve System is more appropriately thought of as being “insulated” from, rather than independent of, political—government and banking—special interest pressures. Through their 14-year terms and staggered appointments, for example, members of the Board of Governors are insulated from being dependent on or beholden to the current administration or party in power. In this and in other ways, then, the monetary process is insulated—but not isolated—from these influences. In a functional sense, the insulated structure enables monetary policy makers to look beyond short-term pressures and political expedients whenever the long-term goals of sustainable growth and stable prices may require “unpopular” policy actions. Monetary judgments must be able to weigh as objectively as possible the merit of short-term expedients against long-term consequences—in the on-going public interest.

We can take that as our starting point: the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures. Let’s explore this independence in more detail, beginning with an historical perspective.

Fed Governance: Historical Perspective

Shull[7] (2014) offers a detailed history of the evolution of Fed governance. He notes that the Fed is an independent government agency like the Federal Trade Commission, the National Labor Relations Board, and the Securities and Exchange Commission. Each of these has substantial discretion in implementing laws through rules and regulations and in formulating policies. Most independent agencies have an Inspector General and are subject to Congressional oversight. The Fed is somewhat unusual in that it is self-financing and in that there is a widely held belief that if its formulation of monetary policy were not independent, the policy outcome would be worse. In other words, good monetary policy supposedly depends on independence (from Congress and the Administration).Thus, the Fed’s monetary policy is not subject to audit by the General Accountability Office—and courts have refused to hear suits that accuse the Fed of policy mistakes. In recent decades, the Administration has been reluctant even to criticize the Fed’s monetary policy. However, as we will see, that has not always been the case.

The movement to create a central bank strengthened after the Panic of 1907. Rival plans were put forward, which ranged from a bank-supported plan which would create a privately-owned central bank (like the Bank of England), to a proposal to house the US central bank within the Treasury. The Glass-Owen bill split the difference, with private ownership and a decentralized system, but with the Treasury Secretary and the Comptroller of the Currency sitting on the Board. The decentralized system was supposed to ensure “fair representation of the financial, industrial and commercial interests and geographic divisions of the country,” (quoted in Shull p. 4). The Board was to be “a distinctly nonpartisan organization and was to be wholly divorced from politics.” (ibid p. 5) According to Paul Warburg, governance was to be maintained by a “system of checks and counter-checks— a paralyzing system which gives powers with one hand and takes them away with the other.” (ibid) In other words, the idea was that by ensuring broad representation of interests, the Fed would be stymied by a “clash of interests” that would reduce the damage it might do; as Shull puts it, “The checks and balances thus constituted a form of internal governance.” (ibid p. 5) That of course sounds somewhat familiar as a typically American approach to governance.

When WWI came along, however, the Fed turned its attention to supporting the Treasury’s debt issue. In the inflationary period at the end of the war, the regional Feds raised discount rates sharply (up to 85%) and a deep retraction followed that led to deflation of farm prices. Congress revisited the governance issue as some critics wanted to force the Fed to seek Congressional approval in advance of future rate hikes. One of the Board members, Adolph Miller, understood the implication:

“The American people will never stand contraction if they know it can be helped. Least of all will they stand contraction if they think it is contraction at the instance, or with the consent of an institution like the Federal Reserve System….The Reserve System cannot ‘make’ the business situation but it can do an immense deal to make its extremes less pronounced and violent….Discount policy…should always address itself to the phase of the business cycle through which the country happens to be passing.” (quoted in Shull, p. 7)

As Shull argues, the governance by paralyzing checks and balances conflicted with the need to cooperate to use monetary policy to stabilize the economy. Congress tightened the reins on the Fed but also centralized decision-making at the Board in Washington. The GAO began to audit the Board and there were a number of Commissions and Committees that investigated new guidelines to control the Fed. However, the 1927 Pepper-McFadden Act replaced the Fed’s original 20 year charter with an indefinite charter, and a Congressional report at the time declared that the Fed had demonstrated its usefulness. In the end, Congressional anger dissipated and not much was done to constrain the Fed’s discretion.

Governance issues again came to the forefront during the Great Depression, with serious consideration given to government ownership of the Fed, to be housed in the Treasury. President Roosevelt (who seemed to have supported such a move) as well as many in Congress were concerned that the Fed was not sufficiently attune to the national interest. Title II of the Banking Act of 1935 was a compromise that preserved private ownership but moved to ensure the Board would be more responsive, focusing on the national interest. (Shull, p. 10) As power was further centralized in Washington, the “checks-and-balances” approach to governance continued to fade.

As in WWI, WWII saw the Fed cooperating with Treasury, in the national interest to keep rates on national debt low. That ended in the famous Accord of 1951, restoring “independence” of the Fed to formulate monetary policy. However, policy was still to be undertaken in the national interest, with the Fed keeping rates very low until the mid 1960s; the Fed mainly operated in short-term Treasury bills so as to have minimum effects on other financial markets. Monetary policy remained on the backburner until the inflation-recession cycle of the early 1970s. In 1975, Congress decided to exert greater control, in House Resolution 113.

In the Federal Reserve Reform Act of 1977, the Senate insisted on the requirement that it confirm the President’s appointment of the Fed’s chairman and vice-chairman. In addition Congress required that Class B Reserve bank directors had to be “elected to represent the public”. (Shull p. 12) The 1978 Humphrey-Hawkins full Employment and Balanced Growth Act clarified the Fed’s mandates and required semi-annual reports to both the Senate and the House. Later, after Chairman Greenspan got caught in “white lies” provided to Chairman Gonzalez, the Fed was required to release its transcripts of FOMC meetings (albeit with a five year lag).[8] The Fed also voluntarily agreed to measures designed to increase transparency (including announcing its explicit interest rate target).

The final big changes to governance occurred after the GFC, when Dodd-Frank tightened limits on what the Fed can do in response to a crisis. This was a surprising turn of events, as Chairman Greenspan had become the darling of Congress and the media and his replacement, Chairman Bernanke, had declared the era of the New Moderation in which central bankers could do nothing wrong. However, in the aftermath of the crisis, many elected representatives as well as the media and the population at large blamed the Fed for the crisis and for bungling a response that made the downturn worse than it should have been. As we’ve argued elsewhere, even many of those directly involved agreed that the Fed’s crisis response “stunk” and that it should never be repeated.[9] The Dodd-Frank legislation was designed in part to ensure it would not happen again.

However, yet again, Congress actually extended Fed responsibility, to include authority over large, systemically important non-bank financial institutions. Still, the Act restricted application of Section 13(3) in future crises, and for some actions required approval from the Treasury. It also mandated increased transparency (including a review by the GAO of all the Fed’s emergency assistance after the GFC). Congress also created the Financial Stability Oversight Council that is chaired by the Treasury Secretary and includes heads of agencies involved in overlooking the financial sector—including the Fed. In that manner it diluted the Fed’s power somewhat. Exactly what difference all this will make for the response in the next crisis cannot be foreseen in advance.

Next time, in Part 2, we look at the Fed’s supposed independence from our elected representatives. We’ll see that that is a fabricated myth.

[1] Thorvald Moe examines the role of Marriner Eccles and the discussions and events that led up to the 1951 Accord. Eccles was a dominant figure in the transformation of the Fed from the relatively weak and decentralized institution that had been created in 1913 to the modern central bank we know now. Moe makes a strong case that the vision of Eccles was instrumental in that evolution; as we will see, modern theories of central banks, however, deviate sharply from the Eccles vision in quite illuminating ways. See: Thorvald Grung Moe “Marriner S. Eccles and the 1951 Treasury – Federal Reserve Accord: Lessons for Central Bank Independence” Working Paper No. 747, Levy Economics Institute of Bard College January 2013.

[2] See two annual reports of research conducted with the support of Ford Foundation Grant no. 1110-?0184, administered by the University of Missouri–Kansas City. See: L. Randall Wray, 2012. “Improving Governance of the Government Safety Net in Financial Crises,” Research Project Report, April 9. http://www.levyinstitute.org/pubs/rpr_04_12_wray.pdf; and L. Randall Wray, 2013. “The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007”, Research Project Report, April http://www.levyinstitute.org/publications/?docid=1739.

[3] Bernard Shull, who made a great presentation at the annual ASSA meetings in Philadelphia. His paper, “Financial crisis resolution and Federal Reserve governance: economic thought and political realities”, Jan 4 2014, is forthcoming as Levy Institute Working Paper.

[4] See his statement here: http://www.youtube.com/watch?v=a7XV3vS1hAM.

[5] See James A. Felkerson, 2012 “A Detailed Look at the Fed’s Crisis Response by Funding Facility and Recipient.” Public Policy Brief No. 123. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. http://www.levyinstitute.org/pubs/ppb_123.pdf; and L. Randall Wray, 2012. “Improving Governance of the Government Safety Net in Financial Crises,” Research Project Report, April 9. http://www.levyinstitute.org/pubs/rpr_04_12_wray.pdf.

[6] See Bruce K. MacLaury; “Perspectives on Federal Reserve Independence – A Changing Structure for Changing Times”; Published January 1, 1977, The Federal Reserve Bank of Minneapolis, Annual Report 1976, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=690, which examines Fed independence with respect to Congress, the Executive branch (including the Treasury), member banks, and within itself (ie, for example relations between the Board of Governors in Washington and the District banks). I will use several quotes from this comprehensive survey.

[7] Bernard Shull, “Financial crisis resolution and Federal Reserve governance: economic thought and political realities”, Jan 4 2014, forthcoming as Levy Institute Working Paper.

[8] See L. Randall Wray, “The Fed and the New Monetary Consensus: The Case for Rate Hikes, Part Two”, Public Policy Brief No. 80, December 2004, p. 14 for a discussion of this episode.

[9] See Wray 2013, the second report of this Ford Foundation-funded project, cited above.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/TyYIgxoM-r8/story01.htm Tyler Durden

PRISM PiZZa…

This week we are supposed to hear what kind of NSA pizza Obozo plans to deliver. Extra cheese anyone?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0Fn9TP8ZTNQ/story01.htm williambanzai7

The Best Scientific Images Of 2013

It is a slow Saturday with virtually no financial, economic or any other news, so what better way to spend it than looking at the coolest non-finance related images of the past year. Without further ado, here they are, courtesy of Wired: the best scientific visualizations of 2013.

* * *

1. The Mathematics of Familiar Strangers

We live in an image-dominated age, and popular science abounds with visuals: eye-popping photographs, gorgeous graphics and slick information design. Amidst all this eye candy, not much attention is paid to figures accompanying articles in scientific journals and white papers.

Even if they’re utilitarian and low-resolution, though — or perhaps because of that — these figures are a sort of scientific folk art. They convey complex findings or principles with simplicity and grace, and sometimes even beauty.

On the following pages are Wired Science’s favorite research graphics of 2013. They’re in no particular order, except that the first are particular favorites. Based on a population-wide analysis of bus ridership in Singapore, they depict a little-appreciated type of social network: that of “familiar strangers,” or the people we encounter while going about our everyday routines.

Above is the encounter network of a single bus and its 214 regular passengers. Below and at left is a single individual’s “encounter network” over the course of a week; to the right are the formal chances of bumping into a familiar stranger a given time. Even at a glimpse, the figures quantify a truth intuited by commuters: beneath urban life’s chaotic, seemingly random surface lies pattern and order.

Citation: “Understanding metropolitan patterns of daily encounters.” By Lijun Sun, Kay W. Axhausen, Der-Horng Lee, Xianfeng Huang. Proceedings of the National Academy of Sciences, Vol. 110 No. 34, August 20, 2013.

2. An Unexpected Engine of Evolution

It’s often thought that evolution is fueled by competition, with red-in-tooth-and-claw dynamics generating new, better-adapted forms and species. But sometimes — perhaps frequently — new species just happen.

Above and at right is a map of greenish warbler distribution, color-coded according to local genetic signatures, around the Tibetan plateau. The warblers are what’s known as a ring species, occupying a horseshoe-shaped range; as neighboring populations intermingle, genes flow around the horseshoe, but populations at its tips no longer interbreed and eventually become different species.

At left is a computational model of this process. According to the model, no adaptations or differences in reproductive fitness are necessary to produce new species. Rather, they seem to arise as a function of time and space; evolution itself is a generative, diversifying force.

Citation: “Evolution and stability of ring species.” By Ayana B. Martins, Marcus A. M. de Aguiar and Yaneer Bar-Yam. Proceedings of the National Academy of Sciences, March 11, 2013.

3. A Fossil Insect’s Forest Tale

At first glance, this computer re-creation of a 110 million-year-old fossil lacewing larvae might seem like eye candy. But what makes it special is the information it provides — not just about the insect’s anatomy and the evolutionary history of its family, but the Early Cretaceous forests in which it lived. In modern lacewings, those frond-like shell structures catch small, fine hairs that grow on the surface of ferns, creating a fern-like camouflage coat. The fossil lacewing, surmise researchers, lived in forests burned regularly by wildfires, opening habitat in which ferns could grow.

Citation: “Early evolution and ecology of camouflage in insects.” By Ricardo Pérez-de la Fuente, Xavier Delclòs, Enrique Peñalver, Mariela Speranza, Jacek Wierzchos, Carmen Ascaso, and Michael S. Engel. Proceedings of the National Academy of Sciences, Vol. 109 No. 52, December 26, 2012.

4. Alan Turing’s Fingers

Nearly six decades after Alan Turing’s death, the British mathematician is still celebrated as a Nazi code-breaking World War II hero and father of modern computer science. His most enduring legacy, though, may be in biology: Late in his life, Turing theorized that a particular type of chemical interaction could account for many patterns observed in nature. In subsequent decades, scientists would find these Turing patterns in everything from cheetah spots to organ formation. In the image above, Turing patterns can be seen in the development of mouse fingers, just as they’re seen in fish fin development — suggesting, say researchers, that some Turing-type mechanism is an ancestral feature of vertebrate evolution.

Citation: “Hox Genes Regulate Digit Patterning by Controlling the Wavelength of a Turing-Type Mechanism.” By Rushikesh Sheth, Luciano Marcon, M. Félix Bastida, Marisa Junco, Laura Quintana, Randall Dahn, Marie Kmita, James Sharpe, Maria A. Ros. Science, Vol. 338 No. 6113, 14 December 2012.

5. The Sleep-Deprived Genome

If you miss a night’s sleep, you feel like a zombie — a phenomenon described at the genomic level in this comparison of gene expression in well-rested and sleep-deprived people. The two groups differ, not only in genes linked to sleep and circadian rhythms, but also to immune function cell, repair and stress response.

6. Mental CLARITY

A new technique for dissolving fatty molecules in biological tissue can be used to render organs transparent (below). Known, appropriately, as CLARITY, the technique’s power becomes evident when combined with fluorescent tags that affix to particular cell types. The result: translucent, color-coded brains, such as the mouse brain above, that could give researchers a literal window into neurological function and anatomy.

Citation: “Structural and molecular interrogation of intact biological systems.” By Kwanghun Chung, Jenelle Wallace, Sung-Yon Kim, Sandhiya Kalyanasundaram, Aaron S. Andalman, Thomas J. Davidson, Julie J. Mirzabekov, Kelly A. Zalocusky, Joanna Mattis, Aleksandra K. Denisin, Sally Pak, Hannah Bernstein, Charu Ramakrishnan, Logan Grosenick, Viviana Gradinaru & Karl Deisseroth. Nature, online publication 10 April 2013.

7. How Much Is a Forest Worth?

Jungle cleared late in the 19th century to build the Panama Canal grew back quickly; by 2000, when the United States gave control of the canal to Panama, the forests had largely recovered. Soon, however, they were threatened by commercial and residential development. This is problematic for many reasons: not only is the juncture of North and South America a biodiversity hotspot, but canal operations rely on dry-season water flows impacted by changes in forest cover.

Of course, when weighed against short-term profit, such well-meaning but fuzzy-sounding environmental arguments often lose. Enter ecosystem services, which quantifies nature’s bottom-line financial worth to humans. For the map above, researchers calculated the annual value of sustainably managed Panamanian forests. They’re worth far more as water-gathering, carbon-sequestering timber than as parking lots.

Citation: Bundling ecosystem services in the Panama Canal watershed.” By Silvio Simonit and Charles Perrings. Proceedings of the National Academy of Sciences, Vol. 110 No. 23, 4 June 2013.

8. Parasitic Complexity

For decades, parasites were viewed primarily as pests: something to ignore, perhaps with a sniff of disgust, unless they harmed humans, in which case they were enemies. In recent years, though, scientists have come to appreciate the nuanced, often important roles played by parasites in animal life.

Much of that appreciation involves the relationship between parasites and immune system function, but there’s an ecological angle, too. Witness this computer-modeled food web: When parasites are included in its parameters, it’s revealed as a far more complex system than it appeared without them.

Citation: “Parasites Affect Food Web Structure Primarily through Increased Diversity and Complexity.” By Jennifer A. Dunne, Kevin D. Lafferty, Andrew P. Dobson, Ryan F. Hechinger, Armand M. Kuris, Neo D. Martinez, John P. McLaughlin, Kim N. Mouritsen, Robert Poulin, Karsten Reise, Daniel B. Stouffer, David W. Thieltges, Richard J. Williams, Claus Dieter Zander. PLoS Biology, Vol. 11 No. 6, 11 June 2013

9. A Genome Is Not a Book

Until very recently, genomes were treated as linear strings of genetic information — something that could be read sequentially, DNA molecule by DNA molecule, like lines in a book. Inside our cells, though, our chromosomes are tangled in fabulously complex ways, and the shape of these tangles may be inseparable from their function.

New methods are being now developed to study real-time, real-shape genomes. Above is one such analysis: in a series of cell-nucleus snapshots, it captures gene activity across time and space. Activity proved to be coordinated in far-flung regions of the genome, but in ways that fluctuated over time. Structure itself is a form of information.

Citation: “Micron-scale coherence in interphase chromatin dynamics.” By Alexandra Zidovska, David A. Weitz, and Timothy J. Mitchison. Proceedings of the National Academy of Sciences, online publication 9 September 2013.

10. A Lost Underground Kingdom

Soil isn’t just dirt. It’s rich microbial ecosystems integral to the life that grows above. In the Great Plains, these ecosystems have been almost entirely wiped out: as tallgrass prairies were converted to farmland, soil composition changed, too. The microbial relationships that sustained one of Earth’s great biomes were lost to time. Yet a few prairie fragments remain; by taking DNA samples from their soils, researchers reconstructed this vanished underground world.

Citation: “Reconstructing the Microbial Diversity and Function of Pre-Agricultural Tallgrass Prairie Soils in the United States.” By Noah Fierer, Joshua Ladau, Jose C. Clemente, Jonathan W. Leff, Sarah M. Owens, Katherine S. Pollard, Rob Knight, Jack A. Gilbert, Rebecca L. McCulley. Science, Vol. 342 No. 6158, 1 November 2013.

11. Lunar Cycles, Life Cycles

In the North American arctic, populations of snowshoe hares, autumnal moths and Canada lynx rise and fall in 9.3 year-long cycles, moving in uncanny tandem with the time it takes for our moon’s orbit to cross the sun’s visual path. This might not be a coincidence. Solar and lunar cycles modulate Earth’s exposure to cosmic rays, which are known to damage plant DNA; this could result in plants concentrating resources on cell repair, thus producing fewer of the indigestive compounds that typically serve as defense against predation.

Every 9.3 years, then, when the sun and moon are positioned just so, Arctic plants are at their most vulnerable; population booms among plant-hungry moth and hare soon follow, and are followed in turn by booms in rabbit-munching lynx. This synchronization of the celestial and ecological is still just a hypothesis, but it’s a lovely one.

Citation: “Linking ‘10-year’ herbivore cycles to the lunisolar oscillation: the cosmic ray hypothesis.” By Vidar Selås. Oikos, published online 12 September 2013.

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

Government Spent $224,863 On “Custom-Fit” Condoms

Money well-spent, we are sure some would suggest; but when the National Institute of Health spends $224,863 to test 95 “custom-fitted” condoms so every hard-working American man can choose the one that fits ‘just right’, we suggest the government is stretching the tax dollar a little too far. As NY Post reports, the study was prompted by concern that despite the wide-scale promotion of latex condoms to help prevent the spread of HIV, their use remains “disappointingly low,” because, the government says, one-third to one-half of men complain of poor-fitting prophylactics and are less likely to use them… apparently. Of course, we assume, when questioned, all said the condom was ‘too small’.

Via NY Post,

…

The NIH blames US “regulatory guidelines” for American men having to choose from a “narrow range of condom sizes.”

The six-figure grant was awarded to TheyFit of Covington, Ga., which offers a wide variety of condoms that vary in length — from a bit more than 3 inches to nearly 9 ¹/? — and in width.

They’re available in European Union countries, but not in the United States, where they would have to be approved by the Food and Drug Administration.

“For most of their existence, condoms were custom fitted,” TheyFit explains on its Web site.

“For hundreds of years, until the early part of the 20th century, they were made of linen or animal gut fitted to over individual penis sizes.”

But the introduction of latex, mass production of condoms and other factors created what the firm calls “the ‘one size fits all’ condom.”

For the man who doesn’t know his own penis size, TheyFit offers a free downloadable “FitKit.”

…

In 2009, the NIH financed a $423,500 study to find out why condom usage is so low in the United States.

Brings a whole new meaning to Obama’s new “Promise Zones”…

But for those intrigued enough… here is @OnionSlayer ‘s informative map of the world’s penis size…

And before you freak out (the scale is in cm not inches)…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lSVBkD6thrw/story01.htm Tyler Durden

Government Spent $224,863 On "Custom-Fit" Condoms

Via NY Post,

…

The NIH blames US “regulatory guidelines” for American men having to choose from a “narrow range of condom sizes.”

The six-figure grant was awarded to TheyFit of Covington, Ga., which offers a wide variety of condoms that vary in length — from a bit more than 3 inches to nearly 9 ¹/? — and in width.

They’re available in European Union countries, but not in the United States, where they would have to be approved by the Food and Drug Administration.

“For most of their existence, condoms were custom fitted,” TheyFit explains on its Web site.

“For hundreds of years, until the early part of the 20th century, they were made of linen or animal gut fitted to over individual penis sizes.”

But the introduction of latex, mass production of condoms and other factors created what the firm calls “the ‘one size fits all’ condom.”

For the man who doesn’t know his own penis size, TheyFit offers a free downloadable “FitKit.”

…

In 2009, the NIH financed a $423,500 study to find out why condom usage is so low in the United States.

Brings a whole new meaning to Obama’s new “Promise Zones”…

But for those intrigued enough… here is @OnionSlayer ‘s informative map of the world’s penis size…

And before you freak out (the scale is in cm not inches)…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lSVBkD6thrw/story01.htm Tyler Durden

From Non-GAAP To Non-Sense: David Stockman Slams The “Earnings Ex-Items” Smoke-Screen

We noted on Thursday, when Alcoa reported, that "non-recurring, one-time" charges are anything but; indicating just how freely the company abuses the non-GAAP EPS definition, and how adding back charges has become ordinary course of business. But it's not just Alcoa, and as David Stockman, author The Gret Deformation, notes Wall Street’s institutionalized fiddle of GAAP earnings made P/E multiples appear far lower than they actually are, and thereby helps perpetuate the myth that the market is "cheap."

Via David Stockman,

THE “EARNINGS EX-ITEMS” SMOKE SCREEN

One of the reasons that the monetary politburo was unconcerned about the blatant buying of earnings through financial engineering is that it fully subscribed to the gussied-up version of EPS peddled by Wall Street. The latter was known as “operating earnings” or “earning ex-items,” and it was derived by removing from the GAAP (generally accepted accounting principles)- based financial statements filed with the SEC any and all items which could be characterized as “one-time” or “nonrecurring.”

These adjustments included asset write-downs, goodwill write-offs, and most especially “restructuring” charges to cover the cost of head-count reductions, including severance payments. Needless to say, in an environment in which labor was expensive and debt was cheap, successive waves of corporate downsizings could be undertaken without the inconvenience of a pox on earnings due to severance costs; these charges were “one time” and to be ignored by investors.

Likewise, there was no problem with the high failure rate of M&A deals. In due course, dumb investments could be written off and the resulting losses wouldn’t “count” in earnings ex-items.

In short, Wall Street’s institutionalized fiddle of GAAP earnings made PE multiples appear far lower than they actually were, and thereby helped perpetuate the myth that the market was “cheap” during the second Greenspan stock market bubble. Thus, as the S&P 500 index reached its nosebleed peaks around 1,500 in mid-2007, Wall Street urged investors not to worry because the PE multiple was within its historic range.

In fact, the 500 S&P companies recorded net income ex-items of $730 billion in 2007 relative to an average market cap during the year of $13 trillion. The implied PE multiple of 18X was not over the top, but then it wasn’t on the level, either. The S&P 500 actually reported GAAP net income that year of only $587 billion, a figure that was 20 percent lower owing to the exclusion of $144 billion of charges and expenses that were deemed “nonrecurring.” The actual PE multiple on GAAP net income was 22X, however, and that was expensive by any historic standard, and especially at the very top of the business cycle.

During 2008 came the real proof of the pudding. Corporations took a staggering $304 billion in write-downs for assets which were drastically overvalued and business operations which were hopelessly unprofitable. Accordingly, reported GAAP net income for the S&P 500 plunged to just $132 billion, meaning that during the course of the year the average market cap of $10 trillion represented 77X net income.

To be sure, after the financial crisis cooled off the span narrowed considerably between GAAP legal earnings and the Wall Street “ex-items” rendition of profits, and not surprisingly in light of how much was thrown into the kitchen sink in the fourth quarter of 2008. Even after this alleged house cleaning, however, more than $100 billion of charges and expenses were excluded from Wall Street’s reckoning of the presumptively “clean” S&P earnings reported for both 2009 and 2010.

So, if the four years are taken as a whole, the scam is readily evident. During this period, Wall Street claimed that the S&P 500 posted cumulative net income of $2.42 trillion. In fact, CEOs and CFOs required to sign the Sarbanes-Oxley statements didn’t see it that way. They reported net income of $1.87 trillion. The difference was accounted for by an astounding $550 billion in corporate losses that the nation’s accounting profession insisted were real, and that had been reported because the nation’s securities cops would have sent out the paddy wagons had they not been.

During the four-year round trip from peak-to-bust-to-recovery, the S&P 500 had thus traded at an average market cap of $10.6 trillion, representing nearly twenty-three times the average GAAP earnings reported during that period. Not only was that not “cheap” by any reasonable standard, but it was also indicative of the delusions and deformations that the Fed’s bubble finance had injected into the stock market.

In fact, every dollar of the $550 billion of charges during 2007–2010 that Wall Street chose not to count represented destruction of shareholder value. When companies chronically overpaid for M&A deals, and then four years later wrote off the goodwill, that was an “ex-item” in the Wall Street version of earnings, but still cold corporate cash that had gone down the drain. The same was true with equipment and machinery write-off when plants were shut down or leases written off when stores were closed. Most certainly, there was destruction of value when tens of billions were paid out for severance, health care, and pensions during the waves of headcount reductions.

To be sure, some of these charges represented economically efficient actions under any circumstances; that is, when the Schumpeterian mechanism of creative destruction was at work. The giant disconnect, however, is that these actions and the resulting charges to GAAP income statements were not in the least “one time.” Instead, they were part of the recurring cost of doing business in the hot-house economy of interest rate repression, central bank puts, rampant financial speculation, and mercantilist global trade that arose from the events of August 1971.

The economic cost of business mistakes, restructurings, and balance sheet house cleaning can be readily averaged and smoothed, an appropriate accounting treatment because these costs are real and recurring. Accordingly, the four-year average experience for the 2007–2010 market cycle is illuminating.

The Wall Street “ex-item” number for S&P 500 net income during that period overstated honest accounting profits by an astonishing 30 percent. Stated differently, the time-weighted PE multiple on an ex-items basis was already at an exuberant 17.6X. In truth, however, the market was actually valuing true GAAP earnings at nearly 23X.

This was a truly absurd capitalization rate for the earnings of a basket of giant companies domiciled in a domestic economy where economic growth was grinding to a halt. It was also a wildly excessive valuation for earnings that had been inflated by $5 trillion of business debt growth owing to buybacks, buyouts, and takeovers.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/INDOc97iAXw/story01.htm Tyler Durden

From Non-GAAP To Non-Sense: David Stockman Slams The "Earnings Ex-Items" Smoke-Screen

Via David Stockman,

THE “EARNINGS EX-ITEMS” SMOKE SCREEN

Likewise, there was no problem with the high failure rate of M&A deals. In due course, dumb investments could be written off and the resulting losses wouldn’t “count” in earnings ex-items.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/INDOc97iAXw/story01.htm Tyler Durden