Tag: finance

Submitted by Chris Martenson via Peak Prosperity,

After five years of aggressive Federal Reserve and government intervention in our monetary and financial systems, it’s time to ask: Where are we? 

The “plan,” such as it has been, is to let future growth sweep everything under the rug. To print some money, close their eyes, cross their fingers, and hope for the best.

On that, I give them an “A” for wishful thinking – and an “F” for actual results.

For the big banks, the plan has involved giving them free money so that they can be “healthy.” This has been conducted via direct (TARP, etc.) and semi-direct bailouts (such as offering them money at zero percent and then paying them 0.25% for stashing that same money back at the Fed), and indirectly via telegraphing future market interventions so that the big banks could ‘front run’ those moves to make virtually risk-free money.

This has been fabulously lucrative for the big banks that are in the inner circle. As we’ve noted somewhat monotonously, the big banks enjoy “win ratios” on their trading activities that are, well, implausible at best.

Here’s a chart of J.P. Morgan’s trading revenues for the first three quarters of 2013, showing how many days the bank made or lost money:

(Source)

Do you see the number of days the bank lost money? No? Oh, that’s right. There weren’t any.

Now, for you or me, trading involves losses, or risk. Sometimes you win, and sometimes you lose. There appears to be zero risk at all to JP Morgan’s trading activities. They won virtually all of the time over this 9-month period.

That’s like living at a casino poker table for months and never losing.

Of course, Bank of America/Merrill Lynch, Goldman Sachs, and a few other U.S.-based banks were able to turn in roughly similar results. Pretty sweet deal being a bank these days, huh?

So one might think, Well, that’s just how banks are now. Bernanke’s flood of liquidity is allowing them to simply ‘win’ at trading. If true (which it appears to be), we can’t call this trading. The act of “trading” implies risk. And it’s clear that what the big banks are doing carries no risk; otherwise they would be posting at least some degree of losses. We should call it sanctioned theft, corporate welfare, cronyism – the list goes on. And it is most grossly unfair, as well as corrosive to the long-term health of our markets.

Therefore, sadly, I have to give Bernanke an A++ on his objective of handing the banks a truly massive amount of risk-free money. He’s done fabulously well there. 

But will this be sufficient to carry the day? Will this be enough to set us back on the path of high growth? 

And even if we do magically return to the sort of high-octane growth that we used to enjoy back in the day, will that really solve anything?

Endless Growth Is Plan A Through Plan Z

The problem I see with the current rescue plans is that they are piling on massive amounts of new debts.

These debts represent obligations taken on today that will have to be repaid in the future. And the only way repayment can possibly happen is if the future consists of a LOT of uninterrupted growth upwards from here.

It’s always easiest to make a case when you go to silly extremes, so let’s examine Japan. It’s no secret that Japan is piling on sovereign debt and just going nuts in an attempt to get its economy working again. At least that’s the publicly stated reason. The real reason is to keep its banking system from imploding.

After all, exponential debt-based financial systems function especially poorly in reverse. So Japan keeps piling on the debt in rather stunning amounts:

(Source)

That’s up nearly 40% in three years (!).

It’s the people of Japan who are on the hook for all that borrowing, now standing well over 200% of GDP. So here’s the kicker: In 2010, Japan had a population of 128 million. In 2100, the ‘best case’ projected outcome for Japan is that its population will stand at 65 million. The worst case? 38 million.

So…who, exactly, is going to be paying all of that debt back?

The answer: Japan’s steadily shrinking pool of citizens. 

This is simple math, and the trends are very, very clear. Japan has a swiftly rising debt load and a falling population. Whoever it is that is buying 30-year Japanese debt at 1.69% today either cannot perform simple math, or, more likely, is merely playing along for the moment but plans on getting out ahead of everybody else.

But the fact remains that Japan’s long-term economic prospects are pretty terrible. And they will remain so as long as the Japanese government, slave to the concept of debt-based money, cannot think of any other response to the current economic condition besides trying to shock the patient back to vigorous life by borrowing and spending like crazy.

If, instead, Japan had used its glory days of manufacturing export surpluses to build up real stores of actual wealth that would persist into the future, then the prognosis could be entirely different. But it didn’t.

The U.S. Is No Different

Except for some timing differences, the U.S. is largely in the same place as Japan twenty years ago and following a nearly identical trajectory.  Currently, it’s an economic powerhouse, folks are generally optimistic on the domestic economic front (relatively speaking), and its politicians are making exceptionally short-sighted decisions. But the long-term math is the same.

There’s too much debt representing too many promises. The only possible way those can be met is if rapid and persistent economic growth returns.   

However, even under the very best of circumstances, where the economy rises from here without a hitch – say, at historically usual rates of around 3.5% in real terms (6% or more, nominally) – we know that various pension and entitlement programs will still be in big trouble.

Worse, we know that the environment is screaming for attention based on our poor stewardship. Addressing issues such as over-farming, water wastage, and oceanic fishery depletion – to say nothing of carbon levels in the atmosphere – will be hugely expensive. 

Likewise, a complete focus on consumer borrowing and spending at the exclusion of everything else (except bailing out big banks, of course), along with a dab of excessive state security spending, has left the U.S. with an enormous infrastructure bill that also must be paid, one way or the other. That is, short-term decisions have left us with long-term challenges.

But what happens if that expected (required?) high rate of growth does not appear?

What if there are hitches and glitches along the way in the form of recessions, as is certain to be the case?  There always have been moments of economic retreat, despite the Fed’s heroic recent attempts to end them. Then what happens?

Well, that’s when an already implausible story of ‘recovery’ becomes ludicrous.

If we take a closer look at the projections, the idea that we’re going to grow – even remotely – into a gigantic future that will consume all entitlement shortfalls within its cornucopian maw becomes all but laughable.

Of course, the purpose of this exercise is not to make fun of anyone, nor to mock any particular beliefs, but to create an actionable understanding of the true nature of where we really are and what you should be doing about it.

In Part II: Why Your Own Plan Better Be Different, we examine more deeply the unsustainability of our current economic system and why it is folly to assume “things will get better from here.”

Given the unforgiving math at the macro altitudes, the need for adopting a saner, more prudent plan at the individual level is the best option available to us now.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

via Zero Hedge http://ift.tt/1c571Hb Tyler Durden

Submitted by Chris Martenson via Peak Prosperity,

After five years of aggressive Federal Reserve and government intervention in our monetary and financial systems, it’s time to ask: Where are we? 

The “plan,” such as it has been, is to let future growth sweep everything under the rug. To print some money, close their eyes, cross their fingers, and hope for the best.

On that, I give them an “A” for wishful thinking – and an “F” for actual results.

For the big banks, the plan has involved giving them free money so that they can be “healthy.” This has been conducted via direct (TARP, etc.) and semi-direct bailouts (such as offering them money at zero percent and then paying them 0.25% for stashing that same money back at the Fed), and indirectly via telegraphing future market interventions so that the big banks could ‘front run’ those moves to make virtually risk-free money.

This has been fabulously lucrative for the big banks that are in the inner circle. As we’ve noted somewhat monotonously, the big banks enjoy “win ratios” on their trading activities that are, well, implausible at best.

Here’s a chart of J.P. Morgan’s trading revenues for the first three quarters of 2013, showing how many days the bank made or lost money:

(Source)

Do you see the number of days the bank lost money? No? Oh, that’s right. There weren’t any.

Now, for you or me, trading involves losses, or risk. Sometimes you win, and sometimes you lose. There appears to be zero risk at all to JP Morgan’s trading activities. They won virtually all of the time over this 9-month period.

That’s like living at a casino poker table for months and never losing.

Of course, Bank of America/Merrill Lynch, Goldman Sachs, and a few other U.S.-based banks were able to turn in roughly similar results. Pretty sweet deal being a bank these days, huh?

So one might think, Well, that’s just how banks are now. Bernanke’s flood of liquidity is allowing them to simply ‘win’ at trading. If true (which it appears to be), we can’t call this trading. The act of “trading” implies risk. And it’s clear that what the big banks are doing carries no risk; otherwise they would be posting at least some degree of losses. We should call it sanctioned theft, corporate welfare, cronyism – the list goes on. And it is most grossly unfair, as well as corrosive to the long-term health of our markets.

Therefore, sadly, I have to give Bernanke an A++ on his objective of handing the banks a truly massive amount of risk-free money. He’s done fabulously well there. 

But will this be sufficient to carry the day? Will this be enough to set us back on the path of high growth? 

And even if we do magically return to the sort of high-octane growth that we used to enjoy back in the day, will that really solve anything?

Endless Growth Is Plan A Through Plan Z

The problem I see with the current rescue plans is that they are piling on massive amounts of new debts.

These debts represent obligations taken on today that will have to be repaid in the future. And the only way repayment can possibly happen is if the future consists of a LOT of uninterrupted growth upwards from here.

It’s always easiest to make a case when you go to silly extremes, so let’s examine Japan. It’s no secret that Japan is piling on sovereign debt and just going nuts in an attempt to get its economy working again. At least that’s the publicly stated reason. The real reason is to keep its banking system from imploding.

After all, exponential debt-based financial systems function especially poorly in reverse. So Japan keeps piling on the debt in rather stunning amounts:

(Source)

That’s up nearly 40% in three years (!).

It’s the people of Japan who are on the hook for all that borrowing, now standing well over 200% of GDP. So here’s the kicker: In 2010, Japan had a population of 128 million. In 2100, the ‘best case’ projected outcome for Japan is that its population will stand at 65 million. The worst case? 38 million.

So…who, exactly, is going to be paying all of that debt back?

The answer: Japan’s steadily shrinking pool of citizens. 

This is simple math, and the trends are very, very clear. Japan has a swiftly rising debt load and a falling population. Whoever it is that is buying 30-year Japanese debt at 1.69% today either cannot perform simple math, or, more likely, is merely playing along for the moment but plans on getting out ahead of everybody else.

But the fact remains that Japan’s long-term economic prospects are pretty terrible. And they will remain so as long as the Japanese government, slave to the concept of debt-based money, cannot think of any other response to the current economic condition besides trying to shock the patient back to vigorous life by borrowing and spending like crazy.

If, instead, Japan had used its glory days of manufacturing export surpluses to build up real stores of actual wealth that would persist into the future, then the prognosis could be entirely different. But it didn’t.

The U.S. Is No Different

Except for some timing differences, the U.S. is largely in the same place as Japan twenty years ago and following a nearly identical trajectory.  Currently, it’s an economic powerhouse, folks are generally optimistic on the domestic economic front (relatively speaking), and its politicians are making exceptionally short-sighted decisions. But the long-term math is the same.

There’s too much debt representing too many promises. The only possible way those can be met is if rapid and persistent economic growth returns.   

However, even under the very best of circumstances, where the economy rises from here without a hitch – say, at historically usual rates of around 3.5% in real terms (6% or more, nominally) – we know that various pension and entitlement programs will still be in big trouble.

Worse, we know that the environment is screaming for attention based on our poor stewardship. Addressing issues such as over-farming, water wastage, and oceanic fishery depletion – to say nothing of carbon levels in the atmosphere – will be hugely expensive. 

Likewise, a complete focus on consumer borrowing and spending at the exclusion of everything else (except bailing out big banks, of course), along with a dab of excessive state security spending, has left the U.S. with an enormous infrastructure bill that also must be paid, one way or the other. That is, short-term decisions have left us with long-term challenges.

But what happens if that expected (required?) high rate of growth does not appear?

What if there are hitches and glitches along the way in the form of recessions, as is certain to be the case?  There always have been moments of economic retreat, despite the Fed’s heroic recent attempts to end them. Then what happens?

Well, that’s when an already implausible story of ‘recovery’ becomes ludicrous.

If we take a closer look at the projections, the idea that we’re going to grow – even remotely – into a gigantic future that will consume all entitlement shortfalls within its cornucopian maw becomes all but laughable.

Of course, the purpose of this exercise is not to make fun of anyone, nor to mock any particular beliefs, but to create an actionable understanding of the true nature of where we really are and what you should be doing about it.

In Part II: Why Your Own Plan Better Be Different, we examine more deeply the unsustainability of our current economic system and why it is folly to assume “things will get better from here.”

Given the unforgiving math at the macro altitudes, the need for adopting a saner, more prudent plan at the individual level is the best option available to us now.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

via Zero Hedge http://ift.tt/1c571Hb Tyler Durden

Effective April 1st, Target announced to day that it would no longer offer healthcare coverage to its part-time employees. As The Hill reports, Target’s HR executives ‘spun’ the decision as good for the employees…”by offering them insurance, we could actually disqualify many of them from being eligible for newly available subsidies that could reduce their overall health insurance expense.” The company will provide a $500 cash payment to “minimize disruption,” and specifically calls out Obamacare as “providing new options… that we believe our part-time members may prefer.”Of course, just for good measure, Target is cutting 475 jobs and chooing not to fill a further 700 open positions – again, we presume, to minimize disruption (to their bottom line).

 

Via The Hill,

In a blog post on the company’s website, Jodee Kozlak, the executive vice president of human resources, framed it as a positive development for part-time employees of the company.

 

“The Health Insurance Marketplaces provides new options for healthcare coverage that we believe our part-time members may prefer,” she wrote. “In fact, by offering them insurance, we could actually disqualify many of them from being eligible for newly available subsidies that could reduce their overall health insurance expense.”

 

…

 

The company’s new policy goes into effect on April 1, 2014. Consumers have until mid-March to sign up for ObamaCare to be eligible for coverage this year.

 

Target said it has a transition program in place to “minimize any disruption and reduce confusion” for those who will no longer be eligible for the company’s healthcare plan.

 

The company will provide a $500 cash payment to employees losing coverage, as well as access to a benefits consultant.

 

Target stressed the company would not be reducing hours for any employees.

 

As usual, it’s for your own good…

And as if that was not enough, Target just announced:

• *TARGET CUTTING 475 JOBS AT HEADQUARTERS: STAR TRIBUNE
• *STAR TRIBUNE ALSO SAYS TARGET NOT FILLING 700 OPEN POSITIONS

via Zero Hedge http://ift.tt/1mut9fd Tyler Durden

There was a time in the financial industry when the many wouldn’t suffer for the sins of the few (although taxpayers were certainly excluded from this maxim). Well, for the “many” who work at JPMorgan, that is no longer the case because as Reuters reports, JPM employees can forget getting a pay raise in 2013 (although with sub-2% annual inflation as calculated by the BLS one wonders just why anyone should be getting a raise: just hand out an edible iPad or two and the COLA is fixed). The reason for the lack of a raise: “the bank’s massive legal bills” – bills which incidentally were incurred when a select few JPM employees cheated and defrauded the system – illegally – in order to procure massive year end bonuses, most if not all of which were not clawed back, and subsequently were caught (one can only imagine how many of the “few” are still at the bank, doing manipulation and defrauding as usual. And now it is everyone else’s turn to pay because the bank lacked the most elementary supervision of its criminal employees (long since fired) and raked up roughly $20 billion in litigation and legal settlement charges.

From Reuters:

Overall compensation per employee was roughly flat with 2012, just as managers had warned employees in November, said the person who was not authorized to speak publicly. While some individuals are getting more money, their payouts have come at the expense of others.

 

Pay increases have been muted across much of the banking sector in the aftermath of the financial crisis, but 2013 was especially tough at JPMorgan as profits declined because of the cost to settle government and private claims against the bank.

 

Company-wide compensation expense was $30.8 billion for the year, up a fraction of one percent from 2012. At the same time, JPMorgan reduced headcount by more than 7,500 people to 251,196, with the result that compensation expense per employee rose nearly 4 percent to $122,653, according to data disclosed by the company last week.

 

…

 

In the company’s Corporate & Investment Bank, where its deal-makers and traders work, total compensation expense declined 4 percent and employment remained flat. Average compensation expense per employee in the division was $207,368, down about $10,000 from a year earlier.

And of course, for the workers in the bank’s mortgage origination group – you know, the one product that banks used to rely on most of all before the bank as glorified hedge fund concept came along – the news in 2013 was worse: instead of getting any comp in 2014 they simply got a pink slip.

Most of JPMorgan’ job cuts were from positions handling mortgage loans. Some tellers in bank branches were also replaced with financial advisors selling investment products.

That said, this being JPMorgan, hardly many a tear will be shed. As for our advice to JPM’s workers, please voice your grievances to Jamie Dimon: after all there is a reason why he is “richer than of you.”

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

Submitted by Brandon Smith via Alt-Market blog,

There is one rule to citizen defiance that, in my opinion, surpasses all others in strategic importance; and it is a rule that I have tried to drive home for many years. I would call it the “non-participation principle” and would summarize it as follows:

When facing a corrupt system, provide for yourself and your community those necessities that the system cannot or will not. Become independent from establishment-controlled paradigms. If you and your community do this, the system will have one of two choices:

1)  Admit that you do not need them anymore and fade into the fog of history, OR…

2)  Reveal its tyrannical nature in full and attempt to force you back into dependence.

In either case, the citizenry gains the upper hand. Even in the event of government retaliation or a full-blown shooting war, dissenting movements maintain the moral high ground, which is absolutely vital to legitimate victory. No revolutionary movement for freedom can succeed without honoring this rule. All independent solutions to social destabilization and despotism rely on it. Any solutions that ignore it are destined for failure.

I am hard-pressed to think of a better recent example of the non-participation principle in action than the rise of Mexican citizen militias in the Western state of Michoacan.

Michoacan, like most of Mexico, has long been overrun with violent drug cartels that terrorized private citizens while Mexican authorities did little to nothing in response. I could easily cite the abject corruption of the Mexican government as the primary culprit in the continued dominance of cartel culture. I could also point out the longtime involvement of the CIA in drug trafficking in Mexico and its negative effects on the overall social development of the nation. This is not conspiracy theory, but openly recognized fact.

The Mexican people have nowhere to turn; and this, in my view, has always been by design. Disarmed and suppressed while government-aided cartels bleed the public dry, it is no wonder that many Mexicans have turned to illegal immigration as a means of escape. The Mexican government, in turn, has always fought for a more porous border with the U.S. exactly because it WANTS dissenting and dissatisfied citizens to run to the United States instead of staying and fighting back. My personal distaste for illegal immigration has always been predicated on the fact that it allows the criminal oligarchy within Mexico to continue unabated without opposition. Unhappy Mexicans can simply run away from their problems to America and feed off our wide-open welfare system. They are not forced to confront the tyranny within their own country. Under this paradigm, Mexico would never change for the better.

Some in the Mexican public, however, have been courageous enough to stay and fight back against rampant theft, kidnapping and murder.

The people of Michoacan, fed up with the fear and subjugation of the cartels and the inaction of the government, have taken a page from the American Revolution, organizing citizen militias that have now driven cartels from the region almost entirely. These militias have decided to no longer rely upon government intervention and have taken independent action outside of the forced authoritarian structure.

The fantastic measure of this accomplishment is not appreciated by many people in America. Though many cartels are populated by well-trained former Mexican military special ops and even covert operations agents, the citizens of Michoacan have proven that the cartels are a paper tiger. They can be defeated through guerrilla tactics and force of will, which many nihilists often deny is even possible.

NPR reported:

Joel Gutierrez, a militia member of the Michoacan region, says residents were “sick of the cartel kidnapping, murdering and stealing.”

“That’s why we took up arms,” says Gutierrez, 19. “The local and state police did nothing to protect us.”

 

The militia men have been patrolling their towns and inspecting cars at checkpoints like this one for nearly a year. All that time, federal police did little to stop them, and at times seemed to encourage the movement.

 

But that tacit approval appeared to end last weekend, when the number of the militias mushroomed and surrounded Apatzingan, a town of 100,000 people and the Knights Templar’s stronghold. A major battle between the militias and the cartel seemed imminent.

 

The federal government sent in thousands of police and troops to disarm the civilian patrols. A deadly confrontation ensued. Federal soldiers fired into a crowd of civilian militia supporters, killing two.

 

Militia leader Estanislao Beltran says the government should have gone after the real criminals, the Knights Templar, and not those defending themselves. He vehemently denies rumors that he takes funds from a rival group.

 

“The cartels have been terrorizing us for more than a decade,” Beltran says. “Why would we side with any of them?”

Initially, local authorities encouraged the militias, or stayed out of their way. The citizens armed themselves with semi-automatic weapons, risking government reprisal, in order to defend their homes; and so far, they have been victorious. One would think that the federal government of Mexico would be enthusiastic about such victories against the cartels they claim to have been fighting against for decades; but when common citizens take control of their own destinies, this often incurs the wrath of the establishment as well.

The Mexican government has decided to reward the brave people of Michoacan with the threat of military invasion and disarmament.

In some cases, government forces have indeed fired upon militia supporters, killing innocents while exposing the true intentions of the Mexican political structure.

Mainstream media coverage of the situation in the western states of Mexico has been minimal at best; and I find the more I learn about the movement in the region, the more I find a kinship with them. Whether we realize it or not, we are fighting the same fight. We are working toward the same goal of liberty, though we speak different languages and herald from different cultures. Recent government propaganda accusing Michoacan militias of “working with rival cartels” should ring familiar with those of us in the American liberty movement. We are the new “terrorists,” the new bogeymen of the faltering American epoch. We are painted as the villains; and in this, strangely, I find a considerable amount of solace.

If the liberty movement were not effective in its activism, if we did not present a legitimate threat to the criminal establishment, they would simply ignore us rather than seek to vilify us.

The militias of Michoacan have taken a stand. They have drawn their line in the sand, and I wish I could fight alongside them. Of course, we have our own fight and our own enemies to contend with here in the United States. As this fight develops, we have much to learn from the events in Western Mexico. Government retaliation has been met with widespread anger from coast to coast. And despite the general mainstream media mitigation of coverage, the American public is beginning to rally around the people of Michoacan as well. The non-participation principle prevails yet again.

The liberty movement in the U.S. must begin providing mutual aid and self-defense measures in a localized fashion if we have any hope of supplanting the effects of globalization and centralized Federal totalitarianism. We must begin constructing our own neighborhood watches, our own emergency response teams, our own food and medical supply stores, and our own alternative economies and trade markets that do not rely on controlled networks. We must break from the system and, in the process, break the system entirely.

Even now, we are beginning to understand the subversive transformation of our own law enforcement structure, and find a system designed to protect the criminal establishment, not the people.  The FBI, for example, has recently changed the language of its primary mission statement, claiming that their goal is "national security", not law enforcement.

Police department across the U.S. are also changing how they interpret their mandate.  U.S. courts have ruled that police departments do not have a constitutional duty to protect citizens from harm, rather, they simply exist to enforce legal code after a crime has already been perpetrated.  This means that local police are no longer considered "peace officers", but agents of bureaucracy who are not necessarily required to defend the citizenry from violent action.  The terrors Mexican citizens face in Michoacan are coming to America, and if disarmament proponents have their way, we will have no means to stop it.

I am growing increasingly exhausted with the incessant rationalizations of frightened activists posing as non-aggression proponents; the same kinds of people who refuse to even entertain the probability that physical self defense will be needed against corrupt government. The pungent smog of cowardice that follows them curls the nostrils, and the obvious transparency of their fear is a bit sickening. I wish I could convey how refreshing it is to witness a group of common people, regardless of nationality, with a set of brass ball bearings large enough to face off against government supported drug cartels notorious for mass murder and decapitation.

If you want see into the future, into the destiny of America, I suggest you examine carefully the developments of the Michoacan region. It is no mistake that good men and women are being disarmed around the world, and America is certainly not exempt. Look at what happens when we are not helpless! We can crush cold and calculating drug cartels as easily as we can crush psychopathic government entities. We are capable of superhuman feats. We are capable of globalist overthrow. We are capable of unthinkable greatness, as long as we are not distracted by false solutions and false leaders who lure us away from localized action towards centralized non-events.

The rise of Mexican non-participation groups gives me much hope for the future. For if the most corrupt and criminally saturated of societies can find it within themselves to fight, to truly fight, regardless of the obstacles and regardless of the supposed consequences, then there is a chance for us all. We must look beyond the odds of success and become men — real men — once again. We must face down evil, without reservation and without apprehension first by separating from the system, and then by standing our ground. We must be willing to risk everything; otherwise, there is absolutely nothing to gain.

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

Citi's credit group is bullish; but, as they admit, for all the wrong reasons. Bullish, because they still believe that the extraordinary liquidity environment which has dominated the last four years will remain in place this year (despite tapering) and for the wrong reasons because aside from their doubts about the foundations of much of the economic recovery itself, nearly all the factors that they would normally base their view on the markets on seem to be pulling in the opposite direction. In their own words, "everything is expensive; and the market is driven purely by a variant of the Greater Fool's Theory."

 

Via Citi's Credit group:

…We are bullish…

For the wrong reasons, because aside from our doubts about the foundations of much of the economic recovery itself, nearly all the factors that we would normally base our view on credit on seem to be pulling in the opposite direction:

Credit fundamentals are deteriorating. Although the fragile European and global recovery should support earnings, we expect leverage to rise further as companies push shareholder value.

 

Valuations are increasingly unattractive. Scored against 20 different fundamental metrics, credit spreads come in as 'Tight' or 'Very tight' on every single one of them at the moment. The yield offered by € IG corporate credit is in the 4th percentile looking at the last ten years – hardly a compelling case for investing if you look at credit from a total-return perspective.

 

The marginal money is going elsewhere. Judging by our survey, inflows into corporate credit have been on a falling trend for 18 months and are now close to neutral at a five-year low. This weakens the technical that has so often left the credit market almost impervious to negative headlines in recent years.

 

Market composition is deteriorating. We think the European credit market should see a record volume (~€90bn) of subordinated debt issuance next year. While some of that (the AT1 issuance) will remain outside the indices for now, the market will still have to absorb a lot of additional risk.

 

And to top it off, positioning in the credit market is very different. The rush into beta may have further to go, but already the rally we have seen since September has created a vulnerability through higher-beta exposure in the market. We reckon that it is at least comparable to the one that was exposed by the Fed's change in tone on tapering in May.

We'd argue that markets may be driven by a variant of the Greater Fool's Theory, where the underlying rationale for many would in essence be:

"I don't like credit here, but I don't like other assets very much either (other than, perhaps, equities). I don't see what turns the market any time soon and I can't afford to sit and wait for a better entry point, especially while central banks are backstopping everything. I'll have to take more risk and then sell to someone else when I see a trigger ahead. Worst case, I'll be in the same boat as everybody else."

We are not arguing that this is irrational – on the contrary, for individual investors whose performance is tracked on a monthly, weekly or daily basis, this argument seems entirely rational – especially against the perception that central banks can no more afford to let the prevailing equilibrium slip today than they could in 2009.

But the sum of that individual rationality is a market with a very obvious vulnerability.

When no one sees an immediate risk of losing, when positions get ever longer and when valuations are stretched further and further as a result, less and less is needed to eventually topple the consensus. Longer-term, it is a recipe for breeding black swans.

So the inherent challenge is to predict how long the Greater Fool's game goes on.

However, the more tension that builds up between market valuations and fundamentals and the more stretched positions get, the more likely a subsequent selloff becomes.

Where's the value? Spreads look tight to fundamentals on every single one of the 20 metrics

By our metrics non-financial leverage has been rising for the past two years now (spreads are ignoring that)…

To strengthen the case for that link between central bank actions and market performance, we’ve regressed US credit spreads (in differences) against 1) the Fed’s holdings of long-dated securities (in differences), 2) US GDP5, 3) non-farm payrolls, 4) US economic surprises and 5) US earnings revisions. It’s pretty clear from Figure 29 below that most of the cumulative contribution to spread tightening in this simple framework is coming from the Fed’s balance sheet, rather than the fundamental economic variables.

Even in the darling asset class of the day – equities – attractive opportunities are getting harder and harder to come by.

 

To be clear, we do still prefer long equity versus credit strategies, where possible, but there too valuations are full, if not stretched already in many places. The rally in small-caps, for instance, has left valuations at historical extremes versus large caps in both Europe and the US.

 

So you decide – play the game knowing you're a greater fool… or exit now?

via Zero Hedge http://ift.tt/1f7y8lg Tyler Durden

Citi's credit group is bullish; but, as they admit, for all the wrong reasons. Bullish, because they still believe that the extraordinary liquidity environment which has dominated the last four years will remain in place this year (despite tapering) and for the wrong reasons because aside from their doubts about the foundations of much of the economic recovery itself, nearly all the factors that they would normally base their view on the markets on seem to be pulling in the opposite direction. In their own words, "everything is expensive; and the market is driven purely by a variant of the Greater Fool's Theory."

 

Via Citi's Credit group:

…We are bullish…

For the wrong reasons, because aside from our doubts about the foundations of much of the economic recovery itself, nearly all the factors that we would normally base our view on credit on seem to be pulling in the opposite direction:

Credit fundamentals are deteriorating. Although the fragile European and global recovery should support earnings, we expect leverage to rise further as companies push shareholder value.

 

Valuations are increasingly unattractive. Scored against 20 different fundamental metrics, credit spreads come in as 'Tight' or 'Very tight' on every single one of them at the moment. The yield offered by € IG corporate credit is in the 4th percentile looking at the last ten years – hardly a compelling case for investing if you look at credit from a total-return perspective.

 

The marginal money is going elsewhere. Judging by our survey, inflows into corporate credit have been on a falling trend for 18 months and are now close to neutral at a five-year low. This weakens the technical that has so often left the credit market almost impervious to negative headlines in recent years.

 

Market composition is deteriorating. We think the European credit market should see a record volume (~€90bn) of subordinated debt issuance next year. While some of that (the AT1 issuance) will remain outside the indices for now, the market will still have to absorb a lot of additional risk.

 

And to top it off, positioning in the credit market is very different. The rush into beta may have further to go, but already the rally we have seen since September has created a vulnerability through higher-beta exposure in the market. We reckon that it is at least comparable to the one that was exposed by the Fed's change in tone on tapering in May.

We'd argue that markets may be driven by a variant of the Greater Fool's Theory, where the underlying rationale for many would in essence be:

"I don't like credit here, but I don't like other assets very much either (other than, perhaps, equities). I don't see what turns the market any time soon and I can't afford to sit and wait for a better entry point, especially while central banks are backstopping everything. I'll have to take more risk and then sell to someone else when I see a trigger ahead. Worst case, I'll be in the same boat as everybody else."

We are not arguing that this is irrational – on the contrary, for individual investors whose performance is tracked on a monthly, weekly or daily basis, this argument seems entirely rational – especially against the perception that central banks can no more afford to let the prevailing equilibrium slip today than they could in 2009.

But the sum of that individual rationality is a market with a very obvious vulnerability.

When no one sees an immediate risk of losing, when positions get ever longer and when valuations are stretched further and further as a result, less and less is needed to eventually topple the consensus. Longer-term, it is a recipe for breeding black swans.

So the inherent challenge is to predict how long the Greater Fool's game goes on.

However, the more tension that builds up between market valuations and fundamentals and the more stretched positions get, the more likely a subsequent selloff becomes.

Where's the value? Spreads look tight to fundamentals on every single one of the 20 metrics

By our metrics non-financial leverage has been rising for the past two years now (spreads are ignoring that)…

To strengthen the case for that link between central bank actions and market performance, we’ve regressed US credit spreads (in differences) against 1) the Fed’s holdings of long-dated securities (in differences), 2) US GDP5, 3) non-farm payrolls, 4) US economic surprises and 5) US earnings revisions. It’s pretty clear from Figure 29 below that most of the cumulative contribution to spread tightening in this simple framework is coming from the Fed’s balance sheet, rather than the fundamental economic variables.

Even in the darling asset class of the day – equities – attractive opportunities are getting harder and harder to come by.

 

To be clear, we do still prefer long equity versus credit strategies, where possible, but there too valuations are full, if not stretched already in many places. The rally in small-caps, for instance, has left valuations at historical extremes versus large caps in both Europe and the US.

 

So you decide – play the game knowing you're a greater fool… or exit now?

via Zero Hedge http://ift.tt/1f7y8lg Tyler Durden

Submitted by Peter Schiff via Euro Pacific Capital,

Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom… they just marked down Cheerios!

 

via Zero Hedge http://ift.tt/LVIVVx Tyler Durden

Submitted by Peter Schiff via Euro Pacific Capital,

Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom… they just marked down Cheerios!

 

NFLX is soaring after hours to fresh all time highs, not so much due to some blockbuster numbers, but because the company reported results that beat Wall Street’s lowballed estimates once again. These were as follows:

• Revenue of $1.175 billion
• EPS of $0.79, or $48.4 million, beating expectations of $0.66
• Domestic net adds were 2.33 million, Estimate 2.05 million, leaving a total of 33.4 million subs at the end of the quarter, and 31.7 million paid subs.

In terms of the company’s business model, the things are as they were: NFLX is using the cash generated from its doomed, runoff legacy DVD rental business, which in Q4 generated $110MM of the total profit, or half of total, and is using that to fund its international expansion. So far, NFLX has 10.9 million total international streaming subs, which resulted in losses of $57.2 million. It remains unclear what the breakeven on this international growth strategy is in terms of subs, although NFLX has so far burned $663 million on foreign expansion in the past two years, offset by $991 million in profits at its domestic streaming operations. Does this justify a 300x P/E? For now the market’s answer is a resounding yes, having sent the stock higher by $55 in the after hours, up 17%!

 

The company’s forecast is below: the bottom line is that NFLX anticipates 1.6 million net adds in Q1 2014 higher than the 1.275 consensus, and expects EPS of $0.78 compared to the estimated $0.75.

However, EPS for this company, which has massive company content acquisition costs, are largely meaningless.

Additionally, since everyone is wondering just what pricing power NFLX has, here is how the company plans to once again reintroduce plan tiering – it bears remining what a horrible idea this was the last time around.

Last April we introduced a 4-concurrent stream $11.99 option to begin our evaluation of plan tiering. Since late last year, we have also been testing 1-stream and 3-stream variants, as well as SD/HD variations, at various price points. Eventually, we hope to be able to offer new members a selection of three simple options to fit everyone’s taste.

 

If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices, so there would be no material near-term revenue increase from moving to this potential broader set of options. We are in no rush to implement such new member plans and are still researching the best way to proceed.

…

In Ireland, on January 10th, we increased our monthly subscription price for new members by one Euro from €6.99 to €7.99, bringing Ireland pricing in line with our other Euro-zone countries. Existing members in Ireland received two-year grandfathering of their existing €6.99 pricing. Because of this grandfathering, there will be no material revenue impact from this change in 2014. It’s too early to tell if this change will materially affect our growth in Ireland.

Netflix also admitted the competition is growing fast:

We think YouTube, Amazon Instant Video, iTunes video and BBC iPlayer are also growing fast. In the traditional MVPD sector, there is lots of activity that may affect us on the margin. Verizon is buying the Intel Internet MVPD system and recently bought a CDN (EdgeCast) and streaming software firm (UpLynk). These are big  investments, so they clearly have big plans. Sony announced they are launching an Internet MVPD system this year. Finally, depending on the decision of the Supreme Court, Aereo will either have to pay for the broadcast content like MVPDs, or the MVPDs will no longer be obliged to pay. Within the MVPD ecosystem, there are potentially big shake ups. In contrast, we continue licensing and producing more exclusive content for our direct-to-consumer business, and are relatively unaffected by the big bundle questions.

As for the one biggest item that everyone is, or should be, concerned about, the recent passage of Net Neutrality, NFLX was surprisingly non-challant, and its only argument against the potential collapse in profits once ISP start putting up gates, is that there is “broad public support” for cheap content, and “ISPs will “avoid this consumer-unfriendly path of discrimination.” Good luck with that – the reality is that ISPs can’t wait to start charging NFLX now that they have a legal backstop.

On Net Neutrality:

 

Unfortunately, Verizon successfully challenged the U.S. net neutrality rules. In principle, a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide. The motivation could be to get Netflix to pay fees to stop this degradation. Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.

 

The most likely case, however, is that ISPs will avoid this consumer-unfriendly path of discrimination. ISPs are generally aware of the broad public support for net neutrality and don’t want to galvanize government action.

 

Moreover, ISPs have very profitable broadband businesses they want to expand. Consumers purchase higher bandwidth packages mostly for one reason: high-quality streaming video. ISPs appear to recognize this and many of them are working closely with us and other streaming video services to enable the ISPs subscribers to more consistently get the high-quality streaming video consumers desire. In the long-term, we think Netflix and consumers are best served by strong network neutrality across all networks, including wireless. To the degree that ISPs adhere to a meaningful voluntary code of conduct, less regulation is warranted. To the degree that some aggressive ISPs start impeding specific data flows, more regulation would clearly be needed.

Finally, curious how much cash a company that tomorrow will likely have a $23 bilion market cap, generates, here is the answer: $5.2 million in the quarter, and 16.3 million for all of 2013…. negative, that is.

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