another site
It’s no secret the US is facing a dilemma when it comes to its prison system. With the largest prison population and incarceration rate in the World, the US is facing severe overcrowding and more spending on prisons than education. What does the future hold for the US prison system?
Boston University Online Masters in Criminal Justice
     |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3-L1wW1fR-w/story01.htm Tyler Durden
It’s no secret the US is facing a dilemma when it comes to its prison system. With the largest prison population and incarceration rate in the World, the US is facing severe overcrowding and more spending on prisons than education. What does the future hold for the US prison system?
Boston University Online Masters in Criminal Justice
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3-L1wW1fR-w/story01.htm Tyler Durden
Back in May, just after the BOJ unleashed its epic QE program, which on a relative basis was about twice the size of the Fed’s own QE, and when bond yields for JGBs suddenly soared higher before a flurry of bond market halts forced the BOJ to completely take over the entire JGB market, the key question among the financial community was how big the losses for Japan’s banks would be as a result of a big jump in yields. We provided the answer: “A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan’s banks.” Or, roughly $100 billion for 100 bps. Which is why the BOJ promptly decided to take away from the market the ability to set yields on the margin: after all the paradox of pushing for inflation and keeping bond rates low did not compute so might as well do away with the bond market entirely.
Fast forward to today when it is not Japan but the US that suddenly the topic of discussion over the possibility of spiking rates (thanks to the Fed’s recently announced creeping taper), and specifically how big the losses at US bond funds and various other financial institutions would be as a result of a 1%, 2% or bigger jump in rates. Now, courtesy of the Treasury’s Office of Financial Research, we know precisely how badly US investors, funds, and financial firms would be impaired should rates spike.
To wit:
Losses from a given change in interest rates would be larger than in the past. These positions increase the vulnerability for some market participants to outsized losses that could be difficult to absorb in the event of an unanticipated increase in long-term rates. To assess the degree of vulnerability, we simulated an adverse interest rate shock to estimate losses by bond funds from an instantaneous parallel shift in the yield curve of 100 basis points from current levels. We then compared the impact of such losses in today’s context to loss rates from a similar hypothetical scenario during the three previous periods of U.S. monetary policy tightening. Losses during each tightening cycle are calculated by averaging monthly estimated losses, where the Barclays Capital U.S. Aggregate Bond Index is used as a proxy for duration and mutual fund bond holdings are based on data from the Investment Company Institute. Figure 15 shows that losses could rise to nearly $200 billion, underscoring that current bond portfolios are vulnerable to a sudden, unanticipated rise in long-term rates.
Which brings us to this simple rule of thumb:
A sharp 1% spike in yields would lead to
So bring on the bond sales. Let’s hope that everyone sells in a calm, cool and collected manner or else the bond funds (oh wait, the same entities who are selling, and are thus motivated to sell first and avoid future losses) get it…
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/At6ouf2JI1w/story01.htm Tyler Durden
Wondering what a 'market' looks like up, close, and personal in the seconds before, during, and after this week's "most important FOMC meeting ever." From SPY's 50-second lead on the news release to VIX's gap, and from crossed markets to e-mini futures leading the premature charge, Nanex's charts are a smorgasbord of SEC-inspiration…
Close-up charts in SPY (mostly) around the 2pm Federal Reserve FOMC news release on December 19, 2013.
SPY – jumps 50 seconds early. Each dot is a trade. There was more activity in this time period, than during the actual news release.
This one-second zoom shows a confused bid/ask spread. What is the bid/ask spread here? What does it matter? Who cares!
Not only does the NBBO in VIIX widen from pennies to dollars, but it flutters hundreds – sometimes thousands – of times in a second! No trading though, so that's good. More is always better, right? Wait, did you say no trading? That's bad.
SPY drops sharply about 488 Million nanoseconds later than last time.
Zooming in on 1 second of trading (shade is NBBO spread). Multiple buying and selling waves – buyers and sellers must keep missing each other.
What exactly is the bid/ask spread in SPY during this one second? How do you measure it? Was there any trading going on? Who cares!
The same second of time, but showing trades in SPY executing all over the bid/ask spread. Lots of trades. Trading is good!
SPY tumbles in heavy trading. This is just 200 milliseconds of time, literally the blink of an eye. The red shading indicates where the NBBO is crossed (the bid from one exchange higher than the offer from another). Regulations prohibit crossed NBBO's, so this didn't really happen: you didn't see any red shading here.
Here's the same time period as chart above, but showing trading in the eMini futures which takes place in Chicago – a city that is a few million nanoseconds away.
Down one second, back up 2 seconds later. The people can't decide what the news means. But there is trading, and trading is good!
The blue diamonds are late trade reports from Direct Edge. Naughty, naughty.
Green dots are trades reported by dark pools – clearly running many seconds behind.
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Rd0_Wy61nxo/story01.htm Tyler Durden
34 years after Canada’s Supreme Court upheld the country’s anti-prositution laws, the highest court has struck down the nation’s three prosititution-related laws in their entirety in a unanimous 9-0 ruling. Following the US’ demand for minimum wage for strippers, AP reports Canada’s ruling is a victory for sex workers seeking safer working conditions because it found the laws violated the charter guarantee to life, liberty, and security of the prison.
Canada’s highest court has struck down the country’s prostitution laws in their entirety in a unanimous 9-0 ruling.
The high court on Friday struck down all three prostitution-related laws: against keeping a brothel, living on the avails of prostitution, and street soliciting.
The ruling is a victory for sex workers seeking safer working conditions because it found that the laws violated the charter guarantee to life, liberty and security of the person.
But the Supreme Court of Canada decision also gives Parliament a one-year reprieve to respond with new legislation.
Ontario’s Appeal Court previously struck down the ban on brothels on the grounds it exposed women to more danger.
Friday’s landmark ruling comes 34 years after the Supreme Court last upheld the country’s anti-prostitution laws.
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/MZ9HIlDyPdE/story01.htm Tyler Durden
Submitted by Michael Snyder of The Economic Collapse blog,
The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing. On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion. When this news came out, it sent shockwaves through financial markets all over the planet. But the truth is that not that much has really changed. The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace. It will just be slightly less than before. However, this very well could represent a very important psychological turning point for investors. It is a signal that "the party is starting to end" and that the great bull market of the past four years is drawing to a close. So what is all of this going to mean for average Americans? The following are 8 ways that "the taper" is going to affect you and your family…
1. Interest Rates Are Going To Go Up
Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a "bad omen for bonds". Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.
2. Home Sales Are Likely Going To Go Down
Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries. Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up. That is one of the reasons why the number of mortgage applications just hit a new 13 year low. And now if rates go even higher that is going to tighten things up even more. If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.
3. Your Stocks Are Going To Go Down
Yes, I know that stocks skyrocketed today. The Dow closed at a new all-time record high, and I can't really provide any rational explanation for why that happened. When the announcement was originally made, stocks initially sold off. But then they rebounded in a huge way and the Dow ended up close to 300 points.
A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock. I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news. But of course I absolutely cannot prove this at all. I hope someday we learn the truth about what actually happened on Wednesday afternoon. I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.
In any event, what we do know is that when QE1 ended stocks fell dramatically and the same thing happened when QE2 ended. If you doubt this, just check out this chart.
Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of "easy money" are over and that we have reached the peak of the market.
And if you are at the peak of the market, what is the logical thing to do?
Sell, sell, sell.
But in order to sell, you are going to need to have buyers.
And who is going to want to buy stocks when there is no upside left?
4. The Money In Your Bank Account Is Constantly Being Devalued
When a new dollar is created, the value of each existing dollar that you hold goes down. And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years. Just check out what has been happening to M1. It has nearly doubled since the financial crisis of 2008…
The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much. Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.
And for those that insist that what the Federal Reserve is doing is "working", it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while too before ending in complete and utter disaster.
5. Quantitative Easing Has Been Causing The Cost Of Living To Rise
The Federal Reserve insists that we are in a time of "low inflation", but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is. The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.
Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation. As one CNBC article recently stated, we are seeing absolutely rampant inflation in "stocks and bonds and art and Ferraris and farmland".
6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won't Either
The Federal Reserve actually first began engaging in quantitative easing back in late 2008. As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…
The mainstream media continues to insist that quantitative easing was all about "stimulating the economy" and that it is now okay to cut back on quantitative easing because "unemployment has gone down". Hopefully you can see that what the mainstream media has been telling you has been a massive lie. According to the government's own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010. Anyone that tries to tell you that we have had an "employment recovery" is either very ignorant or is flat out lying to you.
7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System
Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use it to monetize staggering amounts of government debt. They have been warning us to stop doing this, but the Fed has been slow to listen.
The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on. Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.
Right now, far more U.S. dollars are used outside the country than inside the country. The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.
We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.
If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble. Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.
And there are signs that this is already starting to happen. In fact, China recently announced that they are going to quit stockpiling more U.S. dollars. This is one of the reasons why the Fed felt forced to do something on Wednesday.
But what the Fed did was not nearly enough. It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.
8. The Economy As A Whole Is Going To Continue To Get Even Worse
Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline. If you doubt this, please see my previous article entitled "37 Reasons Why 'The Economic Recovery Of 2013' Is A Giant Lie".
And no matter what the Fed does now, our decline will continue. The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…
During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.
But the truth is that you don't have to travel far to see evidence of our economic demise for yourself. All you have to do is to go down to the local shopping mall. Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking. The following is from a recent article by Wolf Richter…
The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.
Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.
And J.C. Penney is suffering a similar fate. According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…
Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.
So don't believe the hype.
The economy is getting worse, not better.
Quantitative easing did not "rescue the economy", but it sure has made our long-term problems a whole lot worse.
And this "tapering" is not a sign of better things to come. Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/03KiUiOz9Ow/story01.htm Tyler Durden
Only 5% of hospitals in American saw year-over-year growth in overall admissions in November, according to Citi. This is the weakest inpatient admission rate on record and comes amid both doctor and patient uncertainty over the Obamacare changes. As Citi’s Gary Taylor notes “the paralyzing effect of the impotent Obamacare rollout” and Medicare’s new “two-midnight” rule will weigh notably on hospital earnings as doctor’s employment and compensation modesl remain in flux. 13 days to go…
Citi’s survey drops to record low…
Only 5% of responders cited yty growth in overall admissions. This result is the weakest in the 11-year history of our survey and compares to a revised 22% in October, 37% in September and 24% in August.
And the survey has tended to be predictive of reality…
Via Reuters,
…
New billing rules for the Medicare program for the elderly and disabled require hospitals to treat patient stays lasting less than “two midnights” as an outpatient visit.
“In addition, it is reasonable to conclude that the cumulative impact of changing physician employment and payment models is beginning to play a role, as well as the paralyzing effect of the impotent Obamacare rollout,” Citi analyst Gary Taylor said in a report.
Hospital inpatient admissions in November fell to their weakest level in more than a decade, based on responses to the bank’s monthly survey of 98 hospitals, Taylor said.
In October and November combined, admissions were down 4 to 5 percent from a year ago, which will likely weigh on hospital operators’ fourth-quarter earnings and 2014 forecasts, he said.
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/l5F4SmNwrQ4/story01.htm Tyler Durden
From the United States to Europe and Asia: The world's central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory. Jim Grant tells Germany's Finanz und Wirtschaft that he "fears that this journey will not end well." The sharply thinking Wall Street veteran doesn’t trust the theoretical models of the central banks and warns of irrational exuberance in the financial markets adding that "the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance."
Mr. Grant, half a decade after the financial crisis hope is rising that the United States finally are on a sustainable path to economic recovery. How are chances that the US economy gets back soon its status as the growth engine of the world?
In the past, the United States has been very resilient even in the face of very unfavorable and even punitive policy measures. The United States seem to want to be prosperous despite of what’s happening in Washington. Therefore, one can never rule out a great unscripted outburst of prosperity. I hope for that to happen, but I don’t predict it. Also, I’m coming increasingly to wonder about the concept of an economy as an integrated whole. People who talk that way don’t appreciate the incredible complexity of individual choices and decisions. Until fairly recently, no one thought about what we now call the economy as anything organic and macro in whole. This wasn’t a concept that entered our collective thinking until the nineteen forties. If you go back and read what economists wrote and what newspapers reported in the early portion of the twentieth century, you see that they would talk about prosperity or depression. But they wouldn’t talk about the economy. They just didn’t see it that way.
Signs of a brighter economic environment have encouraged the Federal Reserve to finally start the tapering of its massive bond purchase program, also known as QE3. What’s your take on this, for most market participants surprising move?
The «non-taper taper», Wednesday’s announcement, is yet another Federal Reserve innovation. To remove the sting from its decision to reduce the gait of its asset purchases, the central bank has vowed to hold its policy rate at zero even when the jobless rate falls below 6½%. «Inflation or bust – or both» would appear to be the Fed’s mantra.
Janet Yellen, who will be the next Fed chairman, has already made clear that she stands behind the recent monetary policy. What can Investors expect from her?
She is the vey figure head of our monetary system which is what I call the PhD-standard. In the not so distant past, until a generation or so ago, central bankers were as likely to be ordinary bankers or ordinary business people as they were academics like the college professors who are mainly running the show now in this country. Apparently, in the Federal Open Market Committee, the interest rate setting regime here, nine out of the twelve members this year never had an experience in the private sector. Janet Yellen is the quintessential academic economist who is now in charge of what we ought to call – in the interest of plain speaking – price control. They certainly mean well but they have led us on a path of price administration rather than price discovery.
What do you mean by that?
If you ask economists they will tell you that price controls are a very bad idea. But that’s exactly what these mandarins at the Fed are doing. We are embarked on a unique experiment in monetary manipulation. That kind of central banking might be more accurately called central planning. One time, I therefore asked Fed-Governor Jeremy Stein in an open meeting if he could help us understand the substantial economic difference between central banks manipulating money market interest rates on one hand and traders at commercial banks manipulation Libor at the other. He just denied answering it. Also, since interest rates are artificially low the valuation of all earning assets must be called into question. This is the difficulty investors are facing the world over. We live in a hall of mirrors thanks to the zero interest rate regime and the chronic nonstop interventions by central banks
What are the consequences of these distortions?
One distortion is that people who are in the business of dealing with distressed debt have very little to do these days because there is less and less distressed debt because there are fewer bankruptcies. That’s because interest rates are so low that companies, even in a very bad way, can survive. That reduces in an unintended fashion the dynamism of our economy. In a dynamic society entrepreneurs start things and other entrepreneurs finish them or bankers finish them for the entrepreneurs because the entrepreneurs have failed. Without failure there really can’t be any success. Otherwise you have a futile system of permanent state sponsored enterprises. So our manipulated interest rates have given us a society that, in commercial terms, is much less dynamic than it should be.
But with super low interest rates, central banks like the Fed or the European Central Bank are fighting the low inflation rates which can also cause some serious problems to the economy. The ECB just recently cut its intervention rate in half to one quarter of one percent because it expressed its concern over an inadequate rate of the depreciation of the value of the Euro. Seven tenths of one percent is not good enough, we need two percent, they think. But why is two percent of inflation a good thing? They even acknowledge that the statistical difference between seven tenths of one percent and one and a half percent might all be error. It is very difficult to measure these price indices and to assure that the data are compiled properly and seasonally adjusted in a correct way. It speaks to our collective faith in our economic technicians or to the lack of critical thought that we accept so generally theses numbers as if they were gospel.
Then again, there is still the risk of deflation looming. Examples of how harmful deflation can be are the Great Depression or more recently the economic malaise of Japan.
They never make a distinction between deflation and progress. In the last quarter of the nineteenth century thanks to everything, from the electric light to progress in the process of steal making or the telephone, prices and costs fell for the better part of thirty years. Real wages went up, some people suffered, many didn’t, society progressed and people got richer. Also, in the early nineteen sixties prices as measured by the CPI did not rise by as much as two percent for five years in a row. Nobody cared at that time. But now there is this fear fanned by the professors who run our central banks and we are all hysterics about deflation.
That’s maybe because so many governments and households are so heavily indebted these days. Why shouldn’t we have some mild form of inflation to make the deleveraging process a little bit easier?
By insisting on trying to raise the price level the Fed is in effect resisting the progress of our time. As technology advances one would expect that the cost of production would fall. Digital technology and the accession of all these hundreds of millions of hands in the world labor force ought to be forces for falling costs of making things. And as the cost of production falls so should the cost of selling things. Yet, the Fed, the ECB and ot
her central banks resist this by using monetary policy. And as they resist the tendency of prices to fall in time of technological progress they unintentionally seed the booms and busts in financial markets.
More and more people on Wall Street are screaming alarm about new bubbles of speculation. Do you spot any sings of irrational exuberance?
The massive market of treasury securities is itself in some kind of a bubble. Other examples are junk bonds or biotechnology stocks. Another bubble is the art market as the record auction prices are indicating. A similar case is classic sport cars: Some weeks ago, a Ferrari 250 GTO commanded 52 Mio. $ in a private sale. That’s almost a 50% increase on the record that was achieved last year for another 250 GTO. Investors who are looking for tangible assets find better value in antique furniture or in historic documents.
Another reason why the Federal Reserve is going to start to taper its securities purchases might be fear of exactly such kind of bubbles. Do you think they will ever find a way back to a normal monetary policy?
They say they have everything under control. To do, what they are saying they are going to do, requires both: technique and judgment. But they did not see one clue before the disaster of the years 2007, 2008 and 2009 – absolutely nothing. These people are well intending and most respectable but they are very concrete minded and very fixated on their way of thinking. What a good investor has – and what a bureaucrat typically lacks of – is imagination.
So what could go wrong this time?
What happens if, despite the Obama administration, there is a succession of booming months in job growth and the Fed at first doesn’t react and then, when it finally tries, it’s too late: First, there is a little bit inflation and then there is some more inflation and bond yields suddenly go up. The Fed thinks it has to control this by selling bonds and contributes thereby to the rise in interest rates and the fall in bond prices. And suddenly, there’s a disaster in the bond market.
But there seems to be really not that much investor nervousness in the bond market these days.
What one can observe about interest rates is that they have tended to rise and fall in generation length intervals, at least throughout Europe and North America. Since the early eighties they have been falling now most of the past 31 years. So, one would expect that we are closer to the end of this bull market than to the beginning. Therefore, bond yields are likely to go up in the future, which makes bonds look like a very poor investment.
Also, the setback in the gold market does not flash red lights for inflation. What’s next for the archaic metal after the terrible performance in 2013?
Gold is just an enigma, isn’t it? As an asset it yields nothing and pays no dividend. Therefore, you can’t value it like a common stock or bond. To me, gold is an investment in the almost certain failure of the PhD-standard in central banking. The gold price is down some 25% this year and gold stocks have been destroyed. In fact, the bear market in gold equities is the only bear market I know of these days. But when the world gets a full-on glance of the new Fed Chairman Yellen and understands the measure of the policies that central bankers will likely continue to implement, the gold price will go up a lot against the dollar. Only if the central bankers ever achieve to solve all the problems with fiat money and if governments end their tendency to over-issue uncollateralized debt then gold gets obsolete. But I certainly don’t agree with that promise. I think gold will yet shine as a monetary alternative and maybe serve in my grand children’s life time again as an anchorage to the world’s monetary system.
How should investors behave in such an environment?
At «Grant’s Interest Rate Observer», our ambition is to identify assets that are priced in such ways that you can afford a margin of error, knowing that one is likely to be early or even wrong about certain aspects of a particular situation. With a properly conservative valuation you are protected to a degree against such kind of human errors. A friend of a friend once had a great saying. What this fellow said was: Successful investing is all about having everyone agreeing with you – later. We are trying to live that kind of philosophy: to think of a thing that is now out of favor but has a reason to be in favor.
What would be such a thing?
Russian oil stocks like Lukoil, Gazprom and Rosneft exhibit several of desirable characteristics. There is insider buying – oddly enough. The business seems to be viable or even more than viable. Corporate governance is awful and investor sentiment is almost universally depressed. So here are cheap stocks in an environment of great skepticism toward them and with the added appeal of substantial insider accumulation. Once we looked at these stocks we were even more attracted since these companies are soundly financed which mitigates the risk of being wiped out through bankruptcy.
Russian oil stocks are a little bit exotic, though. What about investment ideas for Western Europe or for the United States?
Nobody knows what is going to happen in Europe. Additionally, we can’t find a lot of buying opportunities. Stocks have already gone up and they don’t seem to reflect the risks of the still precarious macro environment. Of course, there are always risks. But the question is if you are being adequately compensated for that risk. One stock that stands out is the Italian energy company Eni. The ideal hedge against the possible consequences of an overly aggressive monetary policy would be a value-laden equity that could prosper in any macro-economic setting but could shine in an inflationary one. Eni conforms to that description.
And what’s your take on the US stock market?
In the US we’re seeing more to do on the short side than on the long side. As an example it could pay off to take a closer look at story stocks. A story stock is a stock that is highly valued by the price earnings or price revenue calculation. Its price is manly driven by the quality of the narrative brokers are telling about it. So we just recently compiled an index of such kind of stocks because we think the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance. Examples for such story stocks are Tile Shop Holdings or Boulder Brands.
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-WWnCQ2ookI/story01.htm Tyler Durden
From the United States to Europe and Asia: The world's central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory. Jim Grant tells Germany's Finanz und Wirtschaft that he "fears that this journey will not end well." The sharply thinking Wall Street veteran doesn’t trust the theoretical models of the central banks and warns of irrational exuberance in the financial markets adding that "the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance."
Mr. Grant, half a decade after the financial crisis hope is rising that the United States finally are on a sustainable path to economic recovery. How are chances that the US economy gets back soon its status as the growth engine of the world?
In the past, the United States has been very resilient even in the face of very unfavorable and even punitive policy measures. The United States seem to want to be prosperous despite of what’s happening in Washington. Therefore, one can never rule out a great unscripted outburst of prosperity. I hope for that to happen, but I don’t predict it. Also, I’m coming increasingly to wonder about the concept of an economy as an integrated whole. People who talk that way don’t appreciate the incredible complexity of individual choices and decisions. Until fairly recently, no one thought about what we now call the economy as anything organic and macro in whole. This wasn’t a concept that entered our collective thinking until the nineteen forties. If you go back and read what economists wrote and what newspapers reported in the early portion of the twentieth century, you see that they would talk about prosperity or depression. But they wouldn’t talk about the economy. They just didn’t see it that way.
Signs of a brighter economic environment have encouraged the Federal Reserve to finally start the tapering of its massive bond purchase program, also known as QE3. What’s your take on this, for most market participants surprising move?
The «non-taper taper», Wednesday’s announcement, is yet another Federal Reserve innovation. To remove the sting from its decision to reduce the gait of its asset purchases, the central bank has vowed to hold its policy rate at zero even when the jobless rate falls below 6½%. «Inflation or bust – or both» would appear to be the Fed’s mantra.
Janet Yellen, who will be the next Fed chairman, has already made clear that she stands behind the recent monetary policy. What can Investors expect from her?
She is the vey figure head of our monetary system which is what I call the PhD-standard. In the not so distant past, until a generation or so ago, central bankers were as likely to be ordinary bankers or ordinary business people as they were academics like the college professors who are mainly running the show now in this country. Apparently, in the Federal Open Market Committee, the interest rate setting regime here, nine out of the twelve members this year never had an experience in the private sector. Janet Yellen is the quintessential academic economist who is now in charge of what we ought to call – in the interest of plain speaking – price control. They certainly mean well but they have led us on a path of price administration rather than price discovery.
What do you mean by that?
If you ask economists they will tell you that price controls are a very bad idea. But that’s exactly what these mandarins at the Fed are doing. We are embarked on a unique experiment in monetary manipulation. That kind of central banking might be more accurately called central planning. One time, I therefore asked Fed-Governor Jeremy Stein in an open meeting if he could help us understand the substantial economic difference between central banks manipulating money market interest rates on one hand and traders at commercial banks manipulation Libor at the other. He just denied answering it. Also, since interest rates are artificially low the valuation of all earning assets must be called into question. This is the difficulty investors are facing the world over. We live in a hall of mirrors thanks to the zero interest rate regime and the chronic nonstop interventions by central banks
What are the consequences of these distortions?
One distortion is that people who are in the business of dealing with distressed debt have very little to do these days because there is less and less distressed debt because there are fewer bankruptcies. That’s because interest rates are so low that companies, even in a very bad way, can survive. That reduces in an unintended fashion the dynamism of our economy. In a dynamic society entrepreneurs start things and other entrepreneurs finish them or bankers finish them for the entrepreneurs because the entrepreneurs have failed. Without failure there really can’t be any success. Otherwise you have a futile system of permanent state sponsored enterprises. So our manipulated interest rates have given us a society that, in commercial terms, is much less dynamic than it should be.
But with super low interest rates, central banks like the Fed or the European Central Bank are fighting the low inflation rates which can also cause some serious problems to the economy. The ECB just recently cut its intervention rate in half to one quarter of one percent because it expressed its concern over an inadequate rate of the depreciation of the value of the Euro. Seven tenths of one percent is not good enough, we need two percent, they think. But why is two percent of inflation a good thing? They even acknowledge that the statistical difference between seven tenths of one percent and one and a half percent might all be error. It is very difficult to measure these price indices and to assure that the data are compiled properly and seasonally adjusted in a correct way. It speaks to our collective faith in our economic technicians or to the lack of critical thought that we accept so generally theses numbers as if they were gospel.
Then again, there is still the risk of deflation looming. Examples of how harmful deflation can be are the Great Depression or more recently the economic malaise of Japan.
They never make a distinction between deflation and progress. In the last quarter of the nineteenth century thanks to everything, from the electric light to progress in the process of steal making or the telephone, prices and costs fell for the better part of thirty years. Real wages went up, some people suffered, many didn’t, society progressed and people got richer. Also, in the early nineteen sixties prices as measured by the CPI did not rise by as much as two percent for five years in a row. Nobody cared at that time. But now there is this fear fanned by the professors who run our central banks and we are all hysterics about deflation.
That’s maybe because so many governments and households are so heavily indebted these days. Why shouldn’t we have some mild form of inflation to make the deleveraging process a little bit easier?
By insisting on trying to raise the price level the Fed is in effect resisting the progress of our time. As technology advances one would expect that the cost of production would fall. Digital technology and the accession of all these hundreds of millions of hands in the world labor force ought to be forces for falling costs of making things. And as the cost of production falls so should the cost of selling things. Yet, the Fed, the ECB and other central banks resist this by using monetary policy. And as they resist the tendency of prices to fall in time of technological progress they unintentionally seed the booms and busts in financial markets.
More and more people on Wall Street are screaming alarm about new bubbles of speculation. Do you spot any sings of irrational exuberance?
The massive market of treasury securities is itself in some kind of a bubble. Other examples are junk bonds or biotechnology stocks. Another bubble is the art market as the record auction prices are indicating. A similar case is classic sport cars: Some weeks ago, a Ferrari 250 GTO commanded 52 Mio. $ in a private sale. That’s almost a 50% increase on the record that was achieved last year for another 250 GTO. Investors who are looking for tangible assets find better value in antique furniture or in historic documents.
Another reason why the Federal Reserve is going to start to taper its securities purchases might be fear of exactly such kind of bubbles. Do you think they will ever find a way back to a normal monetary policy?
They say they have everything under control. To do, what they are saying they are going to do, requires both: technique and judgment. But they did not see one clue before the disaster of the years 2007, 2008 and 2009 – absolutely nothing. These people are well intending and most respectable but they are very concrete minded and very fixated on their way of thinking. What a good investor has – and what a bureaucrat typically lacks of – is imagination.
So what could go wrong this time?
What happens if, despite the Obama administration, there is a succession of booming months in job growth and the Fed at first doesn’t react and then, when it finally tries, it’s too late: First, there is a little bit inflation and then there is some more inflation and bond yields suddenly go up. The Fed thinks it has to control this by selling bonds and contributes thereby to the rise in interest rates and the fall in bond prices. And suddenly, there’s a disaster in the bond market.
But there seems to be really not that much investor nervousness in the bond market these days.
What one can observe about interest rates is that they have tended to rise and fall in generation length intervals, at least throughout Europe and North America. Since the early eighties they have been falling now most of the past 31 years. So, one would expect that we are closer to the end of this bull market than to the beginning. Therefore, bond yields are likely to go up in the future, which makes bonds look like a very poor investment.
Also, the setback in the gold market does not flash red lights for inflation. What’s next for the archaic metal after the terrible performance in 2013?
Gold is just an enigma, isn’t it? As an asset it yields nothing and pays no dividend. Therefore, you can’t value it like a common stock or bond. To me, gold is an investment in the almost certain failure of the PhD-standard in central banking. The gold price is down some 25% this year and gold stocks have been destroyed. In fact, the bear market in gold equities is the only bear market I know of these days. But when the world gets a full-on glance of the new Fed Chairman Yellen and understands the measure of the policies that central bankers will likely continue to implement, the gold price will go up a lot against the dollar. Only if the central bankers ever achieve to solve all the problems with fiat money and if governments end their tendency to over-issue uncollateralized debt then gold gets obsolete. But I certainly don’t agree with that promise. I think gold will yet shine as a monetary alternative and maybe serve in my grand children’s life time again as an anchorage to the world’s monetary system.
How should investors behave in such an environment?
At «Grant’s Interest Rate Observer», our ambition is to identify assets that are priced in such ways that you can afford a margin of error, knowing that one is likely to be early or even wrong about certain aspects of a particular situation. With a properly conservative valuation you are protected to a degree against such kind of human errors. A friend of a friend once had a great saying. What this fellow said was: Successful investing is all about having everyone agreeing with you – later. We are trying to live that kind of philosophy: to think of a thing that is now out of favor but has a reason to be in favor.
What would be such a thing?
Russian oil stocks like Lukoil, Gazprom and Rosneft exhibit several of desirable characteristics. There is insider buying – oddly enough. The business seems to be viable or even more than viable. Corporate governance is awful and investor sentiment is almost universally depressed. So here are cheap stocks in an environment of great skepticism toward them and with the added appeal of substantial insider accumulation. Once we looked at these stocks we were even more attracted since these companies are soundly financed which mitigates the risk of being wiped out through bankruptcy.
Russian oil stocks are a little bit exotic, though. What about investment ideas for Western Europe or for the United States?
Nobody knows what is going to happen in Europe. Additionally, we can’t find a lot of buying opportunities. Stocks have already gone up and they don’t seem to reflect the risks of the still precarious macro environment. Of course, there are always risks. But the question is if you are being adequately compensated for that risk. One stock that stands out is the Italian energy company Eni. The ideal hedge against the possible consequences of an overly aggressive monetary policy would be a value-laden equity that could prosper in any macro-economic setting but could shine in an inflationary one. Eni conforms to that description.
And what’s your take on the US stock market?
In the US we’re seeing more to do on the short side than on the long side. As an example it could pay off to take a closer look at story stocks. A story stock is a stock that is highly valued by the price earnings or price revenue calculation. Its price is manly driven by the quality of the narrative brokers are telling about it. So we just recently compiled an index of such kind of stocks because we think the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance. Examples for such story stocks are Tile Shop Holdings or Boulder Brands.
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-WWnCQ2ookI/story01.htm Tyler Durden
While central bank intervention in the foreign exchange markets is nothing new, the last 4 years have seen unprecedented use of direct and indirect (jawboning) manipulation of exchange rates. As Goldman Sachs notes non-cooperative exchange-rate mechanics (i.e. currency wars) remains the new normal dynamic in world markets; and while some of the moves are generally consistent with cyclical (or structural conditions), efforts by central banks to ‘manage’ developed market rates in a low volatility range may come under further pressure with the Fed “tapering” as emerging market nations face money flow crises.
(click image for large legible version)
Chart: Goldman Sachs
| |
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wCMQDK1Yiyk/story01.htm Tyler Durden
