Tag: news

By now everyone knows there is an unprecedented student debt bubble, amounting to well over $1 trillion and rising at a rate of nearly $200 billion per year. However, what is far less known, is what all these hundreds of billions in government loan proceeds are being spent on. The following two charts should shed some light on this all important matter just how Government money goes from Point A to Point B, using indebted to the hilt students as a pass-thru.

First, the change in the number of higher education employees since the mid-1970s, broken down by job category. One can almost see why preserving the status quo of the Keynesian religion is the lifetime goal of most professors.

And then, the change in average salaries across the higher education spectrum. It would appear the only thing Krugman would want more than being a tenured op-ed writer, pardon professor, is CEO of a private college.

Source: American Association Of University Professors, Losing Focus: The Annual Report on the Economic Status of the Profession, 2013-14

via Zero Hedge http://ift.tt/Uy5O5r Tyler Durden

S&P 500 futures are jumping exuberantly as Japan and China PMIs print above expectations and back in expansion territory (Japan best in 3 months, China best in 7 months). This is China's best 2-month PMI rise since Oct 2010 (which makes perfect sense amid the collapsing housing market and CCFD ponzi probe) – which provides the perfect propaganda meme that targeted RRR cuts workl. However, while stocks don;t care to scratch the surface, there are 2 glaring similarities that could become a problem. Both China and Japan saw employment drop (Japan's first in 11 months) and furthermore both China and Japan saw input prices rise and output prices decline – not exactly the margin expansion dream everyone is hoping for… and all this as China's Beige Book shows the slowdown deepening on weak investment.

China's Manufacturing PMI saw its best 2 months since Oct 2010… so RRRs work right?

Which is odd given that GDP expectations continue to collapse… (h/t @M_McDonough )

And China and Japan both see employment drop and margin pressures build…

as Japan employment tumbles…

But none of that "fact" details matter – you buy stocks…

As China's Beige Book was anything but positive…

• CHINA BEIGE BOOK SAYS SLOWDOWN DEEPENING ON WEAK INVESTMENT
• CHINA BEIGE BOOK SAYS FEWER COMPANIES ACCESSED CREDIT IN 2Q

China’s economy continues to decelerate quarter-on-quarter, driven by “perhaps unprecedented weakness” in capital expenditure, China Beige Book says in its 2Q survey released today.

* Fewest number of firms increasing investment and most pronounced quarter-on-quarter drop in 10 quarters of surveys
* Fewer companies surveyed accessed credit from banks, shadow lenders and the bond market
* Survey finds loan rates inverted, with bank interest rates ticking up in the quarter while non-bank rates saw a “substantial slide” to below levels offered by banks
* Firms appear to be responding to current economic conditions by borrowing and spending less
* Weakness in investment has “sweeping effects” on sectors, regions and gauges of company performance
* Services weakened more sharply while transportation, mining, and retail slowed
* Manufacturing showed year-on-year growth for the fourth quarter in a row and was stable vs previous quarter
* In property sector, residential and commercial realtors “were pummeled,” while builders reported higher starts and rising prices, with stable or larger proportions reporting revenue growth
* Investment slowdown depressed growth in hiring, wages, laboractivism
* Worst-performing sector was minerals as coal producers sawrevenue contraction

*  *  *

So who is making stuff up? Markit (who just IPO'd) or the Chinese government – a 7 month high from Markit's survey? or the worst QoQ drop in 30 months from the Beige Book.

via Zero Hedge http://ift.tt/1m2Pf7a Tyler Durden

Submitted by James Stafford of OilPrice.com

LNG: The Long, Strategic Play for Europe: Interview with Robert Bensh

Liquefied natural gas (LNG) to Europe isn’t a get-rich-quick scenario for the impatient investor: It’s a long, strategic play for the sophisticated investor who can handle no small amount of politics and geopolitics along the way. When it comes to Europe, Russia’s strategy to divide and conquer has worked so far, but Gazprom is a fragile giant that will eventually feel the pressure of LNG.

Robert Bensh is an LNG and energy security expert who has over 13 years of experience with leading oil and gas companies in Ukraine. He has been involved in various roles in finance, capital markets, mergers and acquisitions and government for the past 25 years. Mr. Bensh is the Managing Director and partner with Pelicourt LLC, a private equity firm focused on energy and natural resources in Ukraine.

In an exclusive interview with Oilprice.com, Bensh tells us:  

•    Why the smart LNG play is a long-term one
•    How LNG fits into the European energy picture
•    Why LNG will eventually pressure Russia in Europe
•    Why Gazprom is but a fragile giant
•    How Russia combines gas and political influence in Eastern Europe
•    How the European Union is easy to divide and conquer
•    Why the Ukraine crisis has brought attention to the South Stream pipeline
•    Why Bulgaria is the new front line
•    How Lithuania succeeded in negotiating down Gazprom
•    What Moscow’s Crimea annexation really achieved
•    Why it’s game over for Gazprom prices when Turkey steps in

James Stafford: Where does LNG fit into the overall European energy picture?

Robert Bensh: A better question might be, “When does LNG fit into the European energy picture?” When the price is right, it fits into the picture across the European Union, with new import terminals under construction, plenty of transmission lines to deliver it to land-locked countries and the prospect of deliveries from rising energy hub Turkey. And while it may not be a reality at this very moment, it is the prospect of cheaper LNG and the pace of LNG infrastructure development that has Gazprom worried about maintaining its monopoly.

James Stafford: So from an investor’s perspective, what do we need to know here?

Robert Bensh: Listen, the LNG economics are marginal. LNG is about long-term, steady supply. It’s a low-margin, long-term supply of gas to Europe. This is not a play for impatient investors who are looking to get rich quickly. This is a play for investors with longer-term vision, patience and strategic capabilities on a regional level. Those are the people who are going to make money off of this and, along the way, help reshape the balance in Europe away from Russia.

James Stafford: Who are the buyers in this scenario?

Robert Bensh: The countries that primarily take LNG are the Eastern European countries that are paying the highest gas prices and feeling the most significant strategic energy crunch from Russia. They can purchase large amounts of LNG on five 10-year contracts.

James Stafford: And what will Gazprom’s response to more LNG for Europe be? What are its options?

Robert Bensh: Gazprom will either see its supply reduced, or it will be forced to reduce prices to limit economic impact. But once we can start getting LNG through the Turkish-controlled Bosphorus Strait, it is game over for Gazprom in terms of pricing. You’ll still have LNG coming into Europe simply because demand will always exceed supply with long-term contracts in place. That’s when you’ll start to see significant amounts of Canadian and American LNG entering the European and Asian markets, which will affect gas prices in Europe.

James Stafford: Has Russia’s, or Gazprom’s, energy strategy in Europe really been as sinisterly brilliant as is often suggested?

Robert Bensh: In many ways, yes; but it has its limitations. Financially, Russian gas monopoly Gazprom is a fragile giant.

Russia’s European energy policy is to approach different EU states on an individual basis in order to discriminate with price and get the maximum price possible from each. Beyond that, Russia also attempts to lock in supply by consolidating control over strategic energy infrastructure throughout Europe, as well as Eurasia.

In 2002, for example, Russia attempted to buy major energy infrastructure holdings in the Baltic states of Lithuania and Latvia. When both countries refused to cede control, Moscow sharply cut oil deliveries to both states. The final piece of Moscow’s strategy is to maintain control of energy corridors, thus denying Europe any alternative energy routes.

Russia gets away with this because its divide-and-conquer energy strategy is made easy by the fact that the European Union is anything but unified.   

James Stafford: How does Gazprom’s controversial South Stream pipeline play into the crisis in Ukraine?

Robert Bensh: The South Stream pipeline is now coming into much clearer focus against the backdrop of the Ukraine crisis. This pipeline, which would run from the Black Sea to Austria and bypass Ukraine, is both a frightening and exciting proposition for Central and Eastern Europe. The specter of this pipeline makes the fractures in Europe highly visible.

The annexation of Crimea was significant on numerous fronts. The Ukraine crisis provided Russia with the opportunity to achieve important the economic and geopolitical goals of promoting alternative energy supplies that bypass Ukraine. And the results have been quick: Already, some EU countries have indicated that they are willing to drop their objections to the South Stream pipeline in order to increase the percentage of gas shipped directly from Russia.

James Stafford: What about Bulgaria’s recent back-and-forth over South Stream? What can we read into this?

Robert Bensh: For the South Stream pipeline, which is largely a macrocosm of the Ukraine crisis, the front line is Bulgaria, where Russian influence is now at its strongest, and where there is already talk of the country becoming the next Ukraine. The wider EU is trying to block the South Stream project, while Central and Eastern Europe are very torn. Bulgaria is where this pipeline will enter the EU, and accusations persist that Gazprom has had a hand in framing Bulgarian legislation that would circumvent EU competition directives. All of Europe wants this pipeline, but Brussels doesn’t want it to be majority-Russian owned — they want to enable other suppliers to bring gas through it.

The Bulgarian story is getting very interesting. Last week, the Bulgarian government said it was suspending working on South Stream, under pressure from the EU over the project and U.S. sanctions against Russian firms working on the project. Bulgaria is caught in a very bad place here—between Russia and the EU. On the one hand it is suspending work—for now, as it consults with the EU. On the other hand, it is making sure everyone knows it still intends to go ahead with South Stream.  

James Stafford: How much of a threat to Russia is the European Commission’s pending investigation into Gazprom’s monopolistic activities?

Robert Bensh: Europe has argued that Gazprom manipulates prices for political gain and the European Commission is set to release the results of a two-year investigation this month, which is expected to demonstrate substantial evidence that Gazprom is breaking European laws. After that report is released, the EC could take action relatively quickly with up to10 billion euros in fines, which Gazprom cannot afford. Again, the Bulgaria question will figure prominently in his debate.

James Stafford: How does Russia take advantage of the divisions within the EU?

Robert Bensh: The problem within the EU is that Western European countries have more supply opportunities, while Central and Eastern Europe are stuck with Russia. There is no common policy among the EU countries, so there can be no unified front to take on Russia in the energy sphere. Russia takes full advantage of this bifurcation. While talking of interdependence and dialogue, Russia has insisted on providing demand guarantees for the producers and sharing responsibilities and risks among energy supplier’s consumers and transit states. Russia’s actions have not backed up its visions for a new global energy security due to the state policy of not budging from monopolizing gas production or oil and gas pipeline transportation. Europeans are wholly energy dependent on Russia.   

Russia conducts geo-economic warfare on Europe. Russia’s vast oil and gas resources and strategic geographic positioning has translated into increased influence in global energy markets and political clout in its relations with the numerous states that remain more or less dependent on Russian energy. Lawsuits and rulings from the European Commission will prove to be well intended, yet ultimately failed efforts to control Russia’s policy aims driven by control of energy supply and transportation. Here is where efforts to reduce dependence by one client state will have a concomitant benefit for other client state consumers. The European Union lacks a coherent, unified energy strategy and policy towards Russia. Russia thus wisely triangulates client states and the EU to achieve their policy goals either through cheaper supply or infrastructural development.   

James Stafford: Will other countries in the region follow the example of Lithuania and Poland—both of which are aggressively pursuing alternatives to Russian piped gas?

Robert Bensh: Some, yes, out of necessity. The wisest ones, of course, will develop what they can internally of their own resources in an effort to reduce or possibly even remove the need for Russian oil and gas.

James Stafford: Where in Europe is there the potential to actually develop domestic resources to reduce Russian dependence?

Robert Bensh: Ukraine has the potential to do so. Poland, potentially, as well. Other countries, the Baltics in particular, will have a much harder time reducing dependence through internal resource development. For this reason, the development of LNG and additional transportation routes to the region are vital strategically to reduce the dependence on Russian energy.

James Stafford: How should we perceive Lithuania’s recent success in negotiating down gas prices with Gazprom?

Robert Bensh: The country has very earnestly pursued LNG and is close to signing a supply deal with Norway’s Statoil. This, in turn, has forced Russia into price concessions for fear of losing market share. But for now, it’s a luxury that the poorer members of the EU in Central and Eastern Europe cannot afford, economically or politically.  

Unfortunately, most countries will not play ball. Either they have enough of an internally generated resource base to help reduce dependence on Russian energy, or they have multi-integrated economic ties to Russia. Or both.  

The crisis in Ukraine has taught us a devastating lesson: The failure to reduce dependence on Russia, in combination with a multi-integrated economic union with Russia, exposes a client state to geo-economic warfare. In Ukraine, this situation eventually led to President Viktor Yanukovych refusing to sign an Association Agreement with the European Union, which in ignited the Maidan protests that led to the president’s overthrow and Russia’s annexation of Crimea.   

James Stafford: Where will politics and geopolitics head this off? What is Russia’s weak point, it’s Achilles’ heel?

Robert Bensh: Russia has done a good job of tactically focusing on each client state, recognizing their weaknesses and exacerbating them to suit their needs. The only countries that can head this off are those with independent economies and diversified energy supplies. Russia can only provide oil and gas supplies and energy infrastructure development. It cannot provide expertise in oil and gas drilling or service, which really comes from the United States.

And Gazprom’s Achilles’ heel—that which makes it a fragile giant—is the prospect of losing the European market to LNG. And it eventually will, at least in part, though it won’t be tomorrow.

James Stafford: What does the LNG pricing look like right now?

Robert Bensh: LNG is always about $1 less than Gazprom. The U.S. wants to sell their LNG, period. Asian prices are higher, anywhere from $3-$4 higher. But long, steady supply will always get sold. Unless Gazprom comes down in its prices, to make LNG uneconomic, there will always be an LNG marketplace in Europe. There will always be enough supply to meet demand in Europe. All Gazprom has to do is drop its prices down $1 and LNG will be uneconomic. But you have some countries in Europe who are willing to pay a premium to reduce their dependence on Russian gas. LNG supply and the development of internal resources is a strategic decision being made by each country.  

There won’t really be U.S. LNG hitting Europe until 2017-2018. There isn’t enough LNG coming from the U.S. to supply both Asia and Europe. Until there are more export terminals built in the U.S., there will always be significantly more demand than supply, from a U.S. standpoint. For now, U.S. LNG does not impact Europe—we’re not transporting enough in the next five years.  

James Stafford: Last month, amid the crisis in Ukraine, Russia and China inked what is viewed as a highly significant gas deal. What are the implications of this deal for Europe?

Robert Bensh: Let’s put this into perspective a bit: This Russia-China deal might not be squeezing out potential supply to Europe, but making up for the likely disappearance of the market for gas from Ukraine. A decade ago, Ukraine was buying 52 billion cubic meters of gas annually from Russia, and last year, this was down to 28bcm. The take-or-pay agreement signed in 2009 was for 42 bcm, which is more than the annual supply as per the China deal. It is not unreasonable to think of Ukraine being totally self-sufficient in gas over the next decade as rational energy pricing reduces very inefficient consumption, while Ukraine has lot of opportunities to hike production — assuming it remains unified.

This is part one of a three-part series of interviews examining the prospects for Black Sea LNG.

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

With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation's retirees savings will be greatly rotated to the stock market and away from the nation's largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the "all-talk" has turned to action…The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of 'wealth' – we can only imagine the GPIF risk models just got switch to '11'. As we explained last year, Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

As Nikkei Asian Review reports,

The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected.

 

The pensions' net selling of JGBs and "zaito" bonds — the latter used to finance the government's fiscal investment and loan program — totaled 1.85 trillion yen, according to flow-of-funds statistics released Wednesday by the Bank of Japan. This marked the third consecutive quarter of net selling and the largest sum since the April-June quarter of 2012.

 

The GPIF is the world's largest pension fund, with roughly 130 trillion yen in invested assets, and is set to revise its portfolio by autumn. As part of its growth strategy, the government has been considering raising the proportion of domestic stocks in the fund to nearly 20% from the 17% at the end of 2013, as well as scaling back its bond allocation to less than half. Investors are paying close attention, since such a shift would send money streaming into the stock market.

 

"If the proportion of stocks goes up to 20%, roughly 4 trillion yen will flow from government bonds into stocks," says Keiichi Ito of SMBC Nikko Securities.

 

The rebalancing could also lead to sell-offs of the yen, which is seen as a safe asset, if rising share prices lure investors.

 

Some market watchers say pension fund money has already begun moving into equities. The Nikkei Stock Average hit a roughly four-and-a-half-month high Thursday. That share prices are rising even as the yen trades in a narrow band of around 102 against the dollar is spurring suspicions that GPIF money is flowing in.

Which is hardly surprising since Abe's popularity and approval rating appears directly linked to the level of the Nikkei 225 – Kuroda will do "whetever it takes" to keep the dream alive and as we noted previously, central banks are now among the biggest buyers of stocks in the world.

It seems once again – Meet the world's bubble-blowing bagholder – The Japanese Pensioner

But be careful what you wish for…

As we discussed previously, if indeed the GPIF does reallocate into equities (a very big if considering its multi-functional usage depending on the dry-powder threat need du jour), it will have to sell JGBs. Even more than it has sold so far. Which will then precipitate yet another rout in the JGB market, from where we go into such issues as the "VaR shock" we described two weeks ago (a topic the FT caught up with today), and all too real capital losses for Japanese banks who mark JGBs on a MTM basis.

Here is what HSBC had to say on this issue:

There is also an asymmetric risk to JGB yields in the very long term (ie beyond the next couple of years), making diversification compelling on a risk-adjusted basis. If official policies in Japan begin to bite and inflation rises on a more sustainable basis, this would place pressure on interest rates and materially reduce the value of JGBs held by banks. Yet, given the scale of such holdings, reducing exposure to JGBs would be difficult. Japanese financial institutions hold a substantial amount of JGBs. According to the BIS, Japanese banks hold 90% of their tier 1 capital in JGBs. Japan’s largest bank, Bank of Tokyo-Mitsubishi, has already acknowledged that reducing its USD485bn holdings of JGBs would be disruptive for the markets

Wait, what? Let's read more from the FT, shall we:

Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it.…The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure.

Well that's not good: if the largest Japanese bank can't handle what may soon be concerted selling by one of the largest single holders of JGBs, who can? And what can be done then?

Oh, that's right: this is where Kuroda's plea to please not sell bonds, just to buy stocks comes into play. The problem is only the BOJ can come up with money out of thin air, for everyone else buying something, means selling something else first. So unfortunately unless the BOJ wishes to further increase its QE, which will be needed to absorb all the selling without a surge in yields (something Kyle Bass warned about last week), a move which however would further break the connection between bonds and inflation expectations, and further destabilize the equity, FX and bond markets.

So in short: Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

Finally, for those who just can't get enough, we recommend the following piece by James Shinn for Institutional Investor which should explain all lingering questions about what really goes on at Japan's Plan B.

GPIF – Ant, Grasshopper and Widowmaker

via Zero Hedge http://ift.tt/1m2eEhp Tyler Durden

After hundreds of years knowing that no matter how many ‘double-taps to the head’ or ‘sleeping with the fishes’ orders they give, a quick penance and the mafia is going to pass through the pearly gates; the Pope, having met the father of a 3-year-old boy slain in the region’s drug war, declared that all mobsters are automatically excommunicated from the Catholic Church. “Those who go down the evil path, as the Mafiosi do, are not in communion with God. They are excommunicated,” Pope Francis decreed during his one-day pilgrimage to the southern region of Calabria – the heart of Italy’s biggest crime syndicate. With the world already having a ChairSatan, is it now time for The SatanFather?

As CBS reports,

Pope Francis journeyed Saturday to the heart of Italy’s biggest crime syndicate, met the father of a 3-year-old boy slain in the region’s drug war, and declared that all mobsters are automatically excommunicated from the Catholic Church.

 

During his one-day pilgrimage to the southern region of Calabria, Francis comforted the imprisoned father of Nicola Campolongo in the courtyard of a prison in the town of Castrovillari.

 

In January the boy was shot, along with one of his grandfathers and the grandfather’s girlfriend, in an attack blamed on drug turf wars in the nearby town of Cassano all’Jonio. The attackers torched the car with all three victims inside.

 

Calabria is the power base of the ‘ndrangheta, a global drug trafficking syndicate that enriches itself by extorting businesses and infiltrating public works contracts in underdeveloped Calabria.

 

During his homily at an outdoor Mass, Francis denounced the ‘ndrangheta for what he called its “adoration of evil and contempt for the common good.”

 

“Those who go down the evil path, as the Mafiosi do, are not in communion with God. They are excommunicated,” he warned.

 

As much as the church has been a force against the mafia there have also been instances of priests colluding with them, CBS News correspondent Allen Pizzey reports from Rome. Francis’ visit and rhetoric could also be seen as a message that that won’t happen again.

The big question, of course, is if there is a ‘godthering’ clause that enable the Dons access to the after-life? How long before Francis gets an offer he can’t refuse?

via Zero Hedge http://ift.tt/1nX6taB Tyler Durden

Well this is awkward. A week after the Polish central bank was busted offering favors to the government (exposing its utter un-independence); the same Polish news magazine has obtained s ecret recording of Foreign Minister Radoslaw Sikorski saying that Poland’s relationship with the United States was worthless. The Wprost news magazine said the recording was of a private conversation between Sikorski and Jacek Rostowski (finance minister) with such headlines as “you know that the Polish-US alliance isn’t worth anything;” also describing Warsaw’s attitude towards the United States using the Polish word “murzynskosc” – roughly translated as a negro slave – “It is downright harmful, because it creates a false sense of security … Complete bullshit. We’ll get in conflict with the Germans, Russians and we’ll think that everything is super, because we gave the Americans a blow job. Losers. Complete losers.” USA – making friends wherever they go.

As The Guardian reports,

A Polish news magazine said on Sunday it had obtained a secret recording of Foreign Minister Radoslaw Sikorski, in contention for a senior European Union job, saying that Poland’s relationship with the United States was worthless.

 

The Wprost news magazine said the recording was of a private conversation earlier this year between Sikorski and Jacek Rostowski, a member of parliament with the ruling Civic Platform who until last year was finance minister.

 

…

 

Aides to Sikorski and Rostowski said they had no immediate comment. A government spokeswoman said it was hard to form a view based on a few excerpts of a conversation, but there might be a comment later.

 

According to a transcript of excerpts of the conversation that was published by Wprost on its Internet site, Sikorski told Rostowski: “You know that the Polish-US alliance isn’t worth anything.”

 

“It is downright harmful, because it creates a false sense of security … Complete bullshit. We’ll get in conflict with the Germans, Russians and we’ll think that everything is super, because we gave the Americans a blow job. Losers. Complete losers.”

 

According to the transcript, Sikorski described Warsaw’s attitude towards the United States using the Polish word “murzynskosc.”

 

That derives from the word “murzyn,” which denotes a dark-skinned person and someone who does the work for somebody else, according to the PWN Polish language dictionary.

Of course – there is no official response yet (but no denials either)…

Asked by Reuters to comment on the transcript of Sikorski’s conversation with Rostowski, foreign ministry spokesman Marcin Wojciechowski said: “We do not comment on media speculation … Possible comments will be published only after the whole magazine is published.”

 

Government spokeswoman Malgorzata Kidawa-Blonska said the government was waiting for publication of the full recordings before commenting.

We presume we will hear that these comments were taken out of context or some such excuse but we are not really sure what context they belong in that makes it all ‘acceptable’?

It appears no matter where you look; no matter how ‘allied’ a nation is, it is turning its back on the US…

The magazine did not say who recorded the conversation, or how it obtained the recording… which makes one wonder if the KGB had a hand in it? Alienating 2 key NATO players.

via Zero Hedge http://ift.tt/V2VJhw Tyler Durden

Swallowed alive with strange bedfellows… yep, that about sums it up.

Source: Sunday Funnies

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Via John Hussman's Weekly Market Comment,

There is one critical feature of the market advance of recent years that differs from prior bull market advances, and while it’s related to quantitative easing, the distinction is not quite as simple as that. In the market advances that culminated in the 1929, 1972, 1987, 2000 and 2007 pre-crash peaks, a combined syndrome of overvalued, overbought, overbullish conditions emerged in each instance. These syndromes can be defined in numerous and largely overlapping ways (see our October 2007 comment Warning: Examine All Risk Exposures for an example), but in general, once these syndromes appeared, steep market losses typically followed in fairly short order. In instances where they didn’t, the syndrome was usually a one-off outlier driven by a short spike in bullishness. Still, in no case did one observe repeated, increasingly severe overvalued, overbought, overbullish syndromes persisting entirely uncorrected and without consequence.

The fact that there have been no historical exceptions to this pattern prior to the recent half-cycle has posed quite a challenge for us in recent years. As I detailed in Formula for Market Extremes, it forced us to adapt by imposing restrictions (based on factors such as market action across a range of risk-sensitive instruments) to mute our defensiveness even in conditions where historically-informed measures of prospective market return/risk are blazing red. We don’t get to re-live the recent cycle in a way that shows the effectiveness of any of that, but I expect it to be evident enough over the completion of the present cycle and the ones that follow, even in the event quantitative easing becomes a more frequent policy (though the unwinding challenges appear likely to make the whole episode regrettable).

The Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply concluding that quantitative easing can do this forever is that even speculative assets have to compete with zero. When a safe zero return is above the medium or long-term return that one can estimate for a very risky asset, the rationale for continuing to hold the risky asset becomes purely dependent on expectations of immediate short-term price gains. If speculative momentum starts to break, participants often try to get out the door simultaneously – especially if there is some material event that increases general aversion to risk. That’s the dynamic that produces market crashes.

I’m not saying a market crash is imminent, but it is a risk because very reliable valuation methods (that have remained reliable even in the recurring bubbles since the late-1990’s) presently estimate negative prospective nominal total returns for the S&P 500 on every horizon of 7 years or less, and an annual total return of about 1.9% over the coming decade. On the other hand, these same methods projected negative 10-year prospective returns – even on optimistic assumptions – at the 2000 peak (see the August 2000 Hussman Investment Research & Insight). While those projections turned out to be perfectly accurate (indeed, the 10-year total return of the S&P 500 was still negative even after the index had nearly doubled from its 2009 low), it also means that the overvaluation of the S&P 500 Index in 2000 was even greater than it is today. As I’ve noted before, the median S&P 500 component is more overvalued today than in 2000, and the average component is similarly overvalued. It’s only the capitalization-weighted valuation that was higher in 2000, primarily because of eye-popping valuations of large technology companies.

In any event, it’s fair to say that valuations could go higher still, and we can’t rule that out. Historically, the emergence of similarly extreme overvalued, overbought, overbullish syndromes (as we also observed in 1929, 1972, 1987, 2000 and 2007) would suggest that the possibility is negligible – but we’ve been punished for our knowledge of history in this cycle. Overvalued, overbought, overbullish syndromes have now been extended without consequence for a much longer period than at any prior speculative extreme. Once you’ve seen a single flying pig, you’re forced to conclude that it’s at least possible for a pig to fly – even if you’re fairly sure it’s only been shot out of cannon.

The best we can do here is to choose one of two courses:

a) speculate that valuations will move still higher, waiting not only for 7-year but 10-year prospective returns to go negative, understanding that those dismal long-term returns will still emerge, but hoping that we can eke out some gains before the well runs dry and we’re forced to beat millions of other speculators to the door, or

 

b) maintain a defensive stance, recognize that equity risk taken at present levels is likely to produce negative returns on horizons of 7 years and less, and that a 10-year expected annual nominal total return of 1.9% for the S&P 500 is not worth the commensurate risk, but adapt to a world of flying pigs by allowing them to float a bit more freely without raising the safety nets further.

Our choice would be b).

So yes, this time is different. It is different because the Federal Reserve’s zero-interest rate policy has starved investors of all sources of safe return, forcing them to accept risk at increasingly higher prices and progressively dismal long-term prospective returns. More importantly, this time is different because warning signs that appeared at every major pre-crash market peak have persisted and escalated, without resolution, far longer than they have done so historically. Reckless? Shortsighted? Probably. But like dot-com speculation, flipping overpriced houses, and getting a “yield pickup” by holding subprime mortgage debt on margin, reckless and shortsighted speculation always looks like enlightened investment genius until the hammer drops.

Unfortunately, what is not different is that rich valuations are predictably followed by dismal long-term returns, even if short-term consequences are held in suspended animation for a period of time. What is not different is that compressed risk-premiums have a tendency to surge abruptly on events that are either entirely unexpected or, more often, that stem from recognized sources of risk that produce outcomes decidedly more negative than investors had assumed. What is not different is the habit at market extremes for investors to assign elevated price/earnings multiples to earnings that are themselves elevated and unrepresentative of the long-term stream of cash flows their investments will deliver (see Margins, Multiples, and the Iron Law of Valuation). We made these same observations (and debated them with many of the same analysts who deny them today) at the 2000 and 2007 pre-crash peaks, just before the market lost half its value.

With the most reliable valuation measures more than 110% above their historical norms, on average (and allowing that numerous historically unreliable measures look just fine, as Janet Yellen will attest), we remain concerned that equities are no longer competitive even with a very long period of zero risk-free returns. Again, our broad measures of valuation imply a 10-year S&P 500 nominal total return averaging just 1.9% annually, and negative total returns on horizons of 7 years and less. Certain measures imply even worse, including the ratio of market capitalization to GDP, which Warren Buffett observed in a 2001 Fortune interview is “probably the best single measure of where valuations stand at any given moment.” The chart below shows that measure (left scale, log, inverted) against actual subsequent 10-year S&P 500 total returns (right scale).

For greater detail on this and other measures, see my Wine Country Conference presentation “Very Mean Reversion” – and of course, a donation in any amount to the Autism Society of America, the beneficiary of that Conference, would be greatly appreciated.

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