Tag: news

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via Zero Hedge http://ift.tt/1ebQR0G williambanzai7

The S&P/Case-Shiller 20 City Index rose at a 13.8% annual rate in November.  This proves that the US housing market continues to recover, right?  The headlines in most news stories and economic commentaries indicate that the housing market is continuing to improve and with it the US economy.  But if you dig into the numbers a bit, the reality in the housing market is a good bit more subtle than the headlines suggest. 

Indeed, it can be argued that the US housing sector has not really recovered significantly and remains a major drag on US economic growth. Back in November 2012, I predicted that housing would be a drag on the US economy and could even drag us back into recession.  The reason?  The failure by Congress and federal regulators to restructure under water borrowers would eventually become a dead weight, limiting growth and job creation, as well as home price appreciation, as it did from the 1920s through until the early 1970s.

http://ift.tt/1nsBSls…

For example, in the second paragraph of the S&P press release it states:

For the month of November, the two Composites declined 0.1%. After nine consecutive months of gains, this marks the first decrease since November 2012. Nine out of 20 cities recorded positive monthly returns; of these nine, Boston and Cleveland were the only cities not in the Sun Belt. Minneapolis and San Diego remained relatively flat. After declining last month, Dallas edged up to set a new index high. Denver is 0.6% off of its highest level due to two consecutive months of declines.  

There are a couple of key things to remember when you are looking at the Case-Shiller Indices.  First and foremost, the price gains seen a year ago reflected the sale of foreclosed homes, what we call “REO” in the housing business for “real estate owned.”  If you take REO sales out of the numbers, then the real increase in home price appreciation or “HPA” was something more like 6-7%.  Second, the hottest housing markets are pulling the average higher while most other markets are slowing or even going down.

“November was a good month for home prices,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Despite the slight decline, the 10-City and 20-City Composites showed their best November performance since 2005. Prices typically weaken as we move closer to the winter. Las Vegas, Los Angeles and Phoenix stand out as they have posted 20 or more consecutive monthly gains.”

This week, Jeff Macke wrote an excellent analysis for Yahoo Finance showing the sharp divergence between different US housing markets.  Specifically, while about 20% of all US homes remain under water, the numbers for some states are much higher.  He noted:

December’s headline data from RealtyTrac showed the national rate slipping to 18% of homes being underwater or having negative equity (which simply means a homeowner owes more than the property is believed to be worth), but at the bottom of the scale, there are still 9.3 million “deeply underwater” homes that are in the hole by twenty five percent or more. In fact, six states that are at least ten points above the national average of 18%, including Nevada (38%), Florida (34%), Illinois (32%), Michigan (31%), Missouri (28%), and Ohio (28%).

http://ift.tt/1nsBVgQ…

“Normal real estate overhangs are created by people moving and dying,” notes a veteran real estate attorney who lives in Florida.  “In Florida, for example, the mortality rate is said by realtors to generate, on its own, a normal turnover rate of about 4-6% per annum of the total housing stock.  If 2% get wrecked for whatever reasons and 4% are built, that means about 7% or so of housing needs to sell each year, just to keep prices stable.  That’s a HUGE amount–and since we have not hit the mark, that’s why Florida prices are stuck and sometimes still sinking.”

The attorney notes that when “in-migration” to Florida stops (we close the borders to capital flight and retirees cannot sell homes elsewhere–for whatever reason–to move here), the impact is to push Florida real estate down, even when “normal” turnover begins to get covered elsewhere.  This is one reason why the State of Florida seems to LOVE developers who defraud people into buying homes.  It may be crooked, but it increases sales, thus Florida’s civil fraud laws and enforcement are among the weakest in the nation.  

Even in some of the better performing states, the degree of home price appreciation has still not nearly caught up with peak prices seen during the housing boom.  In a report this week in the Los Angeles Times, Andrew Khouri noted that despite a nearly 30% YOY increase in HPA in the Bay area, home prices are still well-below the peaks seen during the housing bubble, leading to a dearth of supply for home buyers:

Home prices in the tech-flush Bay Area continued to post strong annual gains, although at a slower pace than earlier in 2013. The median has held at about the same level since summer. Over the year, prices jumped 23.9% to $548,500 in December.  Although home prices have risen more than 20% year-over-year for 14 straight months, the median price is still far below the $665,000 peak during the housing bubble.  Besides slowing price appreciation, there were other signs the market is normalizing. Distressed sales and investor purchases both declined over the year.

http://ift.tt/1nsBSSk…

The lack of supply in markets like the Bay area are actually pushing prices higher because of the lack of available homes for sale, but not enough to get back to pre-crisis levels.  

Another factor that analysts and investors need to remember about housing prices and the various price indices used to track HPA is that these are lagging indicators.  My friend Sam Khater and his colleagues at CoreLogic writes an excellent blog on the housing market (http://ift.tt/1fg8gBE).  He noted several months ago that home prices in the lower end of the market have been slowing for months, a leading telltale of change in what is a lagging indicator.  He noted in a recent email exchange about the deceleration in HPA: 

As for the slowdown, irrespective of methodology home prices have always a lagging indicator behind other real estate metrics. Furthermore it’s also lagging in our data (and Case Shiller) because we use a 3 month moving average of closed sales in the public record. So it takes a while for price accelerations/decelerations to show up, but we can see it in some sub-segments of price continuum, like lower end prices which have clearly decelerated.

So what are the takeaways from this analysis?  First, a large part of the improvement in US home prices seen over the past several years is due to the closing of the gap between REO sales and voluntary retail sales.  Now that the REO trade is basically done, the rate of increase in HPA is likely to fall as well – all things being equal.  

Second, the fact that many homes remain under water vs. the mortgage debt on the property is constraining supply, another near-term positive for home prices, but a negative for the US economy.  Indeed, it can be argued that the still large percentage of homes that lack at least 20%  positive equity – the minimum required for a voluntary sale without forcing the debtor to write a check at the closing – is a major obstacle to the Fed’s efforts to reflate the housing sector via low interest rates and “quantitative easing.”

Finally, the clear deceleration of home prices, especially at the low end, suggests that the summer of 2013 was really the peak in US HPA, as analysts such as Michelle Meyer at Bank America Merrill Lynch have suggested.  While many analysts continue to predict that home prices as measured by Case-Shiller and other lagging indicators will continue to rise, any increases in these averages will be a function of a few top-performing markets as opposed to a broad increase in HPA for the US as a whole.  Real estate, as the old saying goes, is a local market.

But aside from the outlook for HPA, the key issue for investors and policy makers is how to clear the huge, abnormal overhang of underwater homes that is weighing down transaction volumes and the US economy.  If a third of all US homes cannot trade due to being underwater or not sufficiently above water to clear the mortgage and closing costs for the seller, then the US economy is going to suffer – and it is suffering now, despite what you hear in the big media.  Reduced labor mobility is just one of the drags on US economic growth.  

The underwater component of the US housing stock reported in the statistics is 18% of total or 9.3 MM mortgages.  Add another ~ 5-10 million homes below the 20% equity threshold that allows them to trade without the seller writing a check or a total of 35-40% of all US homes.  That is a huge number and equals somewhere between 10 and 20 years of new home construction.  Free immigration might absorb some of that, but without forgiveness of taxation, we’d need a huge inflation cycle in housing to take that monkey off the back of the US economy.  

The last time we had a national calamity in housing like the current 1/3 overhang of underwater and barely above water mortgages was the Great Depression.  It  took until the 1970s arrival of the REIT and tax shelter craze that finally allowed states like Florida to clear the overhang of the land bust of 1927.  As we’ve noted before in ZH, everything and everyone in real estate finance simply “froze” in fear from 1929-41.  The Second World War disrupted normal economics for another decade.  It took until the 1950s and 1960s for growth to get to a point where “inflation” pushed housing up enough to free Florida and other states from the deflationary vise that started to hit it in the late 1920s.  

The Fed has tried to deal with the overhang of housing by stoking up inflation via QE, but that has clearly not worked.  The appalling volume numbers for bank mortgage lending bear grim testament to the failure of QE when it comes to housing and credit creation.  The other alternative is restructuring, but the Fed and most of the banking sector has stubbornly resisted this idea.  We need Congress to respond by changing uniform bankruptcy law and tax law.  Nobody else has the Constitutional power to do what’s needed.  Specifically, we need to remove the prohibition on federal judges restructuring mortgage loans in bankruptcy and extend the tax holiday for mortgage debt forgiveness for another five years.  But given that Congress and the Fed are in the pockets of the large banks and institutional debt investors, the chances of this happening are just about zero.  

So to answer the question, has the US housing market recovered?  Well, sort of, but not enough to make a positive impact on growth and employment.  Net, net, the US housing sector remains a net drag on the US economy.  This will not change in the near term unless a miracle occurs and the small minded men who inhabit Congress will take a lesson from the 1930s and start to aggressively restructure the millions of mortgages that remain hopelessly under water.  The incentive to do the right thing is very simple.  If we wait long enough, those under water home loans sitting inside mortgage backed securities and on the balance sheets of US banks will turn into defaults. 

www.rcwhalen.com

via Zero Hedge http://ift.tt/1hU6BDV rcwhalen

The following infographic focuses on what is probably the key issue for current
state of the physical gold-strapped market: which gold miners hold the
most (physical, not paper) supply.

Readers will note that a key tangent of the above infographic is the presentation of which miners need to add new reserves, or otherwise boost their asset base quickly, ostensibly through M&A – information that may be useful if and when the inevitable wave of consolidation in the miner space finally takes place. To provide a more in depth perspective on that issue, here is Jeff Desjardins from Visual Capitalist with additional insight.

Which Gold Miners Must Replenish Their Reserves Through M&A?

We often hear that large gold producers are usually not the best explorers. As such, when it comes time to replenish or grow their resource base, they must look to M&A.

With the recent offer from Goldcorp to buy Osisko for $2.6 billion, we wanted to do the math and see how much gold the majors and mid-tiers actually have in the ground. In addition, we wanted to find how much of it was in undeveloped projects vs. current producing mines.

Two months ago, using data from the 2013 Gold Deposit Rankings, we completed a rough approximation of total gold for each major. However, this time we took it a step further and conducted a much more rigorous analysis. We looked at each major and mid-tier in depth, took into account joint ventures, and calculated what percentage of their gold is in undeveloped projects. Presumably, it is the companies that have nothing in the pipeline that will want to acquire more gold assets. This is especially true, given that the target companies for potential takeover offers are trading at some of their lowest valuations in years.

Note: because the 2013 Gold Deposit Rankings only deals with gold deposits above 1 million oz and with certain cutoff specifications, we haven’t included small (<1 mm oz) or very low-grades (<0.3 g/t) in this analysis. In addition, to be classified as a major or mid-tier, a company had to have at least 20 million oz Au and have at least one mine in production.

To start at a high level, here is the breakdown between how many mines are owned by big producers vs. junior miners.

Of the 2.02 billion oz Au that majors and mid-tiers have, it turns out 71.3% of projects in their portfolios are already in production.

This means that big producers have less than 30% of their total reserves and resources contained in undeveloped projects. On average, while each undeveloped project is slightly higher grade (1.27 g/t vs. 1.11 g/t), they contain less overall gold.

In fact, each average project in the pipeline has 38% less gold  than those in production:

Projects in the pipeline are both fewer and smaller in size. However, what is really interesting is that we have not even yet looked at development hurdles such as permitting or jurisdiction risk. Take the Pebble Project – this is the biggest gold project in the world (even though it is primarily copper). It holds 107 million oz of gold, and it is currently stalled by the EPA.

Of the 76 projects in the pipeline for majors and mid-tiers, how many of them will never go into production? How many of them will run into significant development challenges like Barrick’s Pascua Lama project? The math says that majors and mid-tiers have less than 30% of their gold in undeveloped projects, but this number could be even less based on these considerations.

That all said, let’s look at what is available in the junior market – this is where majors and mid-tiers would go to fill their pipeline of projects:

There are many projects, but at a much lower grade and size. About 20% are in production and 80% are in development.

The question is now: which majors are going to be the most likely to acquire new projects? In this chart, I’ll show the resources and reserves for each company. For a more detailed chart, see the infographic done through Visual Capitalist.

 

Last, but not least, here are four other companies besides Goldcorp that we think may be looking to boost their asset base: Gold Fields, Newcrest, Newmont, and Kinross.

Newcrest (ASX: NCM)

• Cash: $69 million (June financials)
• Resources currently in production: 86%
• Resources in pipeline: 14%
• Avg. grade of pipeline: 0.86 g/t

Gold Fields (NYSE: GFI)

• Cash: $1.2 billion
• Resources in production: 89%
• Resources in pipeline: 11%
• Avg. grade of pipeline: 0.63 g/t

Newmont Mining (NYSE: NEM)

• Cash: $1.5 billion
• Resources in production: 78%
• Resources in pipeline: 22%
• Avg. grade of pipeline: 1.02 g/t

Kinross Gold (NYSE: KGC)

• Cash: $950 million
• Resources in production: 66%
• Resources in pipeline: 34%
• Avg. grade of pipeline: 1.12 g/t

Note: The recent writedown of the Tasiast project may make Kinross wary of M&A for the time being.

via Zero Hedge http://ift.tt/1hU6CHU Tyler Durden

The following infographic focuses on what is probably the key issue for current
state of the physical gold-strapped market: which gold miners hold the
most (physical, not paper) supply.

Readers will note that a key tangent of the above infographic is the presentation of which miners need to add new reserves, or otherwise boost their asset base quickly, ostensibly through M&A – information that may be useful if and when the inevitable wave of consolidation in the miner space finally takes place. To provide a more in depth perspective on that issue, here is Jeff Desjardins from Visual Capitalist with additional insight.

Which Gold Miners Must Replenish Their Reserves Through M&A?

We often hear that large gold producers are usually not the best explorers. As such, when it comes time to replenish or grow their resource base, they must look to M&A.

With the recent offer from Goldcorp to buy Osisko for $2.6 billion, we wanted to do the math and see how much gold the majors and mid-tiers actually have in the ground. In addition, we wanted to find how much of it was in undeveloped projects vs. current producing mines.

Two months ago, using data from the 2013 Gold Deposit Rankings, we completed a rough approximation of total gold for each major. However, this time we took it a step further and conducted a much more rigorous analysis. We looked at each major and mid-tier in depth, took into account joint ventures, and calculated what percentage of their gold is in undeveloped projects. Presumably, it is the companies that have nothing in the pipeline that will want to acquire more gold assets. This is especially true, given that the target companies for potential takeover offers are trading at some of their lowest valuations in years.

Note: because the 2013 Gold Deposit Rankings only deals with gold deposits above 1 million oz and with certain cutoff specifications, we haven’t included small (<1 mm oz) or very low-grades (<0.3 g/t) in this analysis. In addition, to be classified as a major or mid-tier, a company had to have at least 20 million oz Au and have at least one mine in production.

To start at a high level, here is the breakdown between how many mines are owned by big producers vs. junior miners.

Of the 2.02 billion oz Au that majors and mid-tiers have, it turns out 71.3% of projects in their portfolios are already in production.

This means that big producers have less than 30% of their total reserves and resources contained in undeveloped projects. On average, while each undeveloped project is slightly higher grade (1.27 g/t vs. 1.11 g/t), they contain less overall gold.

In fact, each average project in the pipeline has 38% less gold  than those in production:

Projects in the pipeline are both fewer and smaller in size. However, what is really interesting is that we have not even yet looked at development hurdles such as permitting or jurisdiction risk. Take the Pebble Project – this is the biggest gold project in the world (even though it is primarily copper). It holds 107 million oz of gold, and it is currently stalled by the EPA.

Of the 76 projects in the pipeline for majors and mid-tiers, how many of them will never go into production? How many of them will run into significant development challenges like Barrick’s Pascua Lama project? The math says that majors and mid-tiers have less than 30% of their gold in undeveloped projects, but this number could be even less based on these considerations.

That all said, let’s look at what is available in the junior market – this is where majors and mid-tiers would go to fill their pipeline of projects:

There are many projects, but at a much lower grade and size. About 20% are in production and 80% are in development.

The question is now: which majors are going to be the most likely to acquire new projects? In this chart, I’ll show the resources and reserves for each company. For a more detailed chart, see the infographic done through Visual Capitalist.

 

Last, but not least, here are four other companies besides Goldcorp that we think may be looking to boost their asset base: Gold Fields, Newcrest, Newmont, and Kinross.

Newcrest (ASX: NCM)

• Cash: $69 million (June financials)
• Resources currently in production: 86%
• Resources in pipeline: 14%
• Avg. grade of pipeline: 0.86 g/t

Gold Fields (NYSE: GFI)

• Cash: $1.2 billion
• Resources in production: 89%
• Resources in pipeline: 11%
• Avg. grade of pipeline: 0.63 g/t

Newmont Mining (NYSE: NEM)

• Cash: $1.5 billion
• Resources in production: 78%
• Resources in pipeline: 22%
• Avg. grade of pipeline: 1.02 g/t

Kinross Gold (NYSE: KGC)

• Cash: $950 million
• Resources in production: 66%
• Resources in pipeline: 34%
• Avg. grade of pipeline: 1.12 g/t

Note: The recent writedown of the Tasiast project may make Kinross wary of M&A for the time being.

via Zero Hedge http://ift.tt/1hU6CHU Tyler Durden

By now everyone is aware that come February, and those January electricity and heating bills arrive, a substantial portion of any discretionary income the average consumer may have had will go out the window, once again hitting the US economy where it hurts the most: the 70% of it that comprises consumption. And while the cold weather persists, there is little probability of a quick return to normalcy for natgas prices, which is where the CME comes in. Having hiked natgas margins by 20% six days ago – a move which did nothing – moments ago the mercantile exchange resorted to tactics which are all too familiar to gold bulls circa the summer of 2011 when the CME was hiking gold margin not by the day, but sometimes by the hour. Sure enough, here is the second natgas margin hike in one week, this one by 26%. It remains to be seen if this follow up attempt to spook speculators achieved much if anything.

Source: CME

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

Today’s AM fix was USD 1,254.00, EUR 922.20 and GBP 761.89 per ounce.           
Yesterday’s AM fix was USD 1,254.75, EUR 917.89 and GBP 756.42 per ounce.

Gold climbed $15.70 or 1.25% yesterday to $1,269.80/oz. Silver rose $0.20 or 1.02% to $19.78/oz.

Gold is marginally lower in most currencies today paring the first monthly advance since August. The gains yesterday came despite the U.S. Federal Reserve further reducing their massive bond buying programme to $65 billion a month.

Bullion for immediate delivery lost as much as 0.6% to $1,260.10/oz and was at $1,261.46 at 1500 in Singapore. Prices rose 0.8% yesterday on concern a rout in emerging-market assets may deepen and lead to contagion, leading to safe haven demand.

Increased physical demand in Asia has helped gold to rebound from a six-month low on December 31.

Marc Faber is back with a wide-ranging must read  interview with Barron’s. The astute investor who has a clear track record in protecting and growing wealth urged investors to own physical gold.

“Own physical gold because the old system will implode. Those who own paper assets are doomed.”

Faber added,

“I have no faith in paper money, period. Next, insider buying is also high in gold shares. Gold has massively underperformed relative to the S&P 500 and the Russell 2000. Maybe the price will go down some from here, but individual investors and my fellow panelists and Barron’s editors ought to own some gold.”

With regards to his allocation to physical gold, Faber was as transparent and candid as ever and said that he holds about 20% of his net worth in physical gold.

Marc Faber

“About 20% of my net worth is in gold. I don’t even value it in my portfolio.”

Faber told the Wall Street Journal in December 2012 that:

“Individuals are making a mistake if they’re holding all their assets in one country.…I still have the majority of my gold in Switzerland, but I am already moving gold to Asia,” he said.

Mr. Faber said his Asian storage center of choice is the Singapore FreePort, located in its own duty-free zone near the city’s airport.

Find out why Singapore is now one of the safest places in the world to store gold in our latest gold guide – The Essential Guide To Storing Gold In Singapore

via Zero Hedge http://ift.tt/1cAPmr8 GoldCore

“Just one more roll of the dice…?”

 

 

Source: Gavekal

via Zero Hedge http://ift.tt/1bb3uWV Tyler Durden

Some very relevant observations from Louis Gave of Evergreen GaveKal

Who Will The Emerging Markets Crisis Adjust Against?

In last summer’s emerging market sell-off, India was very much at the center of the storm: the rupee collapsed, bond yields soared and equity markets tanked. The Reserve Bank of India responded by raising rates while the government introduced harsh restrictions on gold imports. Promptly, the Indian current account deficit shrank. So much so that, in the current emerging market (EM) meltdown, India has been spared relative to most other current account deficit emerging markets, whether Turkey, Brazil, South Africa or Argentina. And on this note, the inability of the Turkish lira, South African rand, Brazilian real, etc. to hold on to gains after recent hawkish moves by their central banks is problematic. Markets won’t be calmed until there is clear evidence these countries’ current account deficits can improve. But how can these adjustments happen?

The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate.

When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus.

Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia…? There are really five candidates:

• China, again? That seems unlikely. Instead, China’s policymakers continue to do all they can to deleverage, despite the cost of a slowing economic expansion. Moreover, mercantilism still rides high in the corridors of power in Beijing and so the willingness to move to a current account deficit is simply not there.
• The US, again? As discussed in our recent book (see Too Different For Comfort), the Federal Reserve’s attitude since the global financial crisis has consistently been one of: “the US dollar is our currency and your problem.” The Fed has been happy to print and devalue the US dollar, leaving other countries to deal with the consequences. The days of the US acting as the backstop in the system are now behind us.
• Oil: In the past, collapsing oil prices have come to the rescue during emerging market crises. Of course, this accentuates problems for the EMs dependent on high energy prices for their growth, but is a boon for others (including India, China, Korea, Turkey). Unfortunately, for now, energy prices are not falling, with some more localized markets, like US natural gas, seeing a surge amid record cold snaps.
• Japan: Japan, which has been such a non-player for twenty years, is once again finding its feet. However, it is doing so by exporting its deflation through a central bank orchestrated currency devaluation. How this “beggar-thy-neighbor policy” will help the struggling emerging markets is hard to see, except perhaps through a) capital flows from rich Japanese savers into by now higher yielding EM debt, or b) import substitution on the part of threatened emerging markets where the end consumers will perhaps replace high priced US dollar/euro denominated imports of manufactured goods for cheaper yen denominated ones?
• Euroland: The currency zone’s slight trade surplus is largely due to Germany. However, Germany’s exports to Turkey, Russia, Brazil, etc., will likely suffer as domestic demand implodes in these countries. In this sense—the euroland will be the likeliest candidate on the other side of the EM current account adjustment. Unfortunately, odds are this will take place through falling European exports rather than rising European imports and/or rising EM exports to the eurozone. This is not a good harbinger for global growth.

In short, either oil collapses very soon, or the US dollar shoots up (with Janet Yellen about to take the helm, is that likely?) or we could soon be facing a contraction in global trade. And unfortunately, contractions in global trade are usually accompanied by global recessions. With this in mind, and as we argued in Eight Questions For 2014, maintaining positions in long-dated OECD government bonds as hedges against the unfolding of a global deflationary spiral (triggered by the weak yen, a slowing China, busting emerging markets and an uninspiring Europe…) makes ample sense.

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

Submitted by Pater Tenebrarum of Acting Man blog,

Plans Galore

As the Bernanke era is winding down, a number of articles have appeared at Bloomberg and elsewhere in the mainstream press with authors opining on the things his successor Janet Yellen must do. That's the problem when you have a job as a central planner: everybody else thinks only their plan is the right one, and they are trying to get you to implement it. Apparently it hasn't yet occurred to anyone that central planning simply does not work. People seem to believe that the power to manipulate interest rates and the money supply somehow means one can do whatever needs doing, if only one puts one's mind to it (and preferably follows their advice).

This time we don't want to discuss far-out ideas such as the one that the Fed should use credit dirigisme to stop 'climate change' (which has to be one of the most hare-brained proposals yet).

There is of course the by now often repeated assertion that 'Yellen needs to cope with too low inflation'.  A headline of this sort generally indicates that the author knows zilch about monetary theory and doesn't realize what has actually happened over the past five or six years as a result of the Fed's ultra-loose monetary policy. There is no other explanation that is viable. The broad US money supply has increased by about 90% since 2008, and there are still people clamoring for more inflation. It simply leaves one flabbergasted. What's even more astonishing is that several Fed board members have likewise broached this idea on a number of occasions over the past year or so. It is probably an example of the Peter principle at work. How else can we explain this? The guys actually operating the levers are just as clueless as their countless armchair advisers.

Admittedly, we are armchair advisers of sorts as well, but we have only one very consistent advice and that basically is: abolish the whole enchilada and replace it with free banking and a money freely chosen by the market. We are not trying to 'make plans' for anyone, we want the planning to end.

There is no need to discuss again what the flaws of this '2% inflation targeting' policy are. Anyone who hasn't realized yet what this policy produces has likely been asleep for the past two decades or so. Let us just note here that 1. the policy has created booms and busts of rarely seen amplitude and 2. it may end up creating even worse consequences down the road. We say this because we can quite easily envisage a future situation when even this targeting of a modest rate of change in CPI is ditched because 'more urgent problems' demand to be addressed by the printing press.

And let's be clear about one thing, all the extensive blather about the 'monetary policy tool box' is  just so much smoke and mirrors. In the end it always comes down to the printing press, or its 'electronic equivalent' these days (i.e., the whole thing is far less complicated than it is made to look).

This is a good opportunity to show the most important chart in the world again, namely that of the true money supply:

 

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During Bernanke's chairmanship, the broad US money supply has roughly doubled, with the bulk of the growth spurt occurring from 2008 onward. Because Bernanke doesn't understand money, he was surprised by the bust. During his first three years on the job the annualized growth rate of TMS slowed down to less than 3% annualized from a peak of more than 20% annualized in 2001/2. It was this slowdown in monetary inflation that revealed the wealth destruction of Greenspans's echo boom/housing bubble implemented after the tech bubble went belly-up.

Note the important distinction: real wealth is actually not destroyed by the bust. The wealth destruction happens during the boom – that is when scarce capital is misallocated and consumed. When the bust begins one has arrived at the moment when perceptions change: illusory phantom wealth is no longer mistaken for the real thing. It suddenly becomes clear that economic calculation was falsified during the boom, and that what looked like profits was really an accounting chimera – click to enlarge.

 

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Anyway, we have just come across an article discussing yet another problem that Janet Yellen is supposed to tackle, which struck us as quite amusing, especially in view of the above chart (which has in a way almost crystal-ball like qualities: it cannot tell us when it will happen, but it does tell us with apodictic certainty that a denouement of major proportions is coming).

 

'Easing Bubbles'

The author starts out by naming Yellen's task, and by stating something that should be blindingly obvious, but apparently it isn't to everyone, so he feels compelled to mention it:

 

“Janet Yellen probably will confront a test during her tenure as Federal Reserve chairman that both of her predecessors flunked: defusing asset bubbles without doing damage to the economy.

 

The central bank’s easy money policies already have led to pockets of frothiness in corporate debt and emerging markets. The danger is that unwinding such speculative excesses will end up shaking the financial system and hurting growth.

 

Yellen is “going to be trying to do something that no one has ever done,” said Stephen Cecchetti, former economic adviser for the Bank for International Settlements, the Basel, Switzerland-based central bank for monetary authorities. She needs “to ensure that accommodative monetary policy doesn’t create significant financial stability risks,” he said in an interview.”

 

(emphasis added)

Sometimes we're no longer sure if we're reading Bloomberg or the Onion. Say what? Clearly, it is true that Greenspan and Bernanke have 'flunked the test' as the author avers. It is interesting that there is an almost grudging admission that there may be 'pockets of frothiness' out there, although they sure aren't in emerging markets anymore. Perhaps the author doesn't look at charts much (many EMs are looking rather frayed and have done so for some time now). The biggest bubbles seem to be in a number of developed market stock and bond markets (especially junk bonds). The admission is still remarkable because the mainstream media and central bankers alike have spent months trying to convince us that there are no bubbles in sight anywhere. Ben Bernanke himself has only recently said so again.

Other than that, what can one do aside from having a good laugh? Poor Janet Yellen! She is supposed to accomplish what simply cannot be done, namely 'unmake' the mistakes she and her predecessor have jointly committed (let us not forget, she was vice chair and never once dissented with the decision to implement an extremely loose policy). We mentioned above that it is important to keep in mind that capital consumption and wealth destruction occur during the boom, not during the bust. It is already too late in short. Someone would need to give Ms. Yellen a time machine. But even if it were possible for her to travel back into the past, why would she change anything? The current bubble has not yet burst after all and once it does, it is absolutely certain that she will be just as clueless as Bernanke was when Greenspan's bubble burst in 2007/8.

Mr. Cecchetti from the BIS mentions en passant that “Yellen is going to be trying to do something that no one has ever done”. Well, there is a reason why 'no-one has ever done it': it can't be done. The air cannot be 'let out slowly' from a bubble. Once a bubble is underway, it keeps expanding until it doesn't anymore – and thereafter it collapses, with all the attendant unpleasantness. The idea that the central planners who have lit the fire under the bubble with their inflationary policy will somehow be able to 'fine tune' its eventual demise strikes us as utterly ludicrous.

The only question is really for how much longer and to what extent it will expand before it bursts. This is not knowable in advance. Recall our recent discussion of the 1998 to 2000 period – even a short term crash in asset prices (such as in 1998) would not necessarily constitute firm evidence that the bubble is over. It may merely be the prelude to an acceleration.

We can only make a few educated guesses regarding this point. For instance, we know that the 'tapering' of 'QE' is currently underway and that therefore the probability is very high that the recent slowdown in US money supply growth will continue (in spite of the impressive chart above, the annual rate of growth of TMS has actually slowed down even before 'tapering' began). We know for a fact that this will eventually create a major problem for currently extant bubbles. What we do not know is what lead and lag times will be involved, and what threshold the growth rate must cross before things become dicey (we regard the recent correction still only as a 'warning shot' so far, but obviously that will possibly have to be reassessed depending on developments).

We also cannot be certain yet how quickly and with what measures the Yellen Fed will react to any untoward developments in asset prices. Whether or not the bubble can be extended similar to what happened after 1998 may well depend on these factors. Once again, an educated guess partly based on experience is all we can go by (our current assumption is that they will be slow to react). None of this invalidates our central point though: there is no way for the bubble to end painlessly, regardless of when precisely it ends. All that can be said in addition regarding the timing is 'the later it happens, the worse it will be'.

The Bloomberg article provides a bit more detail and color on the monumental task awaiting Yellen (snicker):

“Yellen faces two challenges in dealing with bubbles: she has to identify and deflate them before they get too big and dangerous; and she has to manage monetary policy without causing them to burst in a way that causes havoc in financial markets and undercuts the expansion.”

 

Oh well, if that's all there is to it…

After reminding us again that both Greenspan and Bernanke have not proved to be exactly proficient in the bubble spotting department, the article also repeats the credulity-straining story about Ms. Yellen's alleged above average abilities in this regard.  A statement by president Obama is quoted in support of the idea:

“President Barack Obama spoke repeatedly last year about the need to avoid what he called “artificial bubbles.” He praised Yellen for “sounding the alarm early about the housing bubble” when he announced her nomination for the job of Fed chairman on Oct. 9. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work,” he said.”

If she is such a maven in this respect, then surely we can all breathe easier. This is because right now, she sees no bubbles anywhere, just like her soon departing predecessor. Unfortunately we think that she not only lacks a crystal ball, but several of the other attributes listed by the president as well.

“The Fed is devoting “a good deal of time and attention to monitoring asset prices in different sectors” to see if bubbles are forming, Yellen, currently Fed vice chairman, told the Senate Banking Committee on Nov. 14.

“By and large,” she said, “I don’t see evidence at this point in major sectors of asset-price misalignments, at least of a level that would threaten financial instability.”

 

(emphasis added)

The fact that she is in fact unable to recognize bubbles or evolving threats to financial stability was revealed in her refreshingly honest testimony to the Financial Crisis Inquiry Commission in 2010 (a recording of it may still be online).

“For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” Her startled interviewers noted that almost none of the officials who testified had offered a similar acknowledgment of an almost universal failure.”

(emphasis added)

We don't believe that she has acquired new bubble and stability risk recognition powers since then. We are rather inclined to agree with Mr. Stockman's assessment of the ways in which she is different from Bernanke (in no way that actually matters, that is). Stockman incidentally makes the not unimportant point that the gaggle of central planners she belongs to are all bureaucrats with not the faintest conception of capitalism and free markets.

 

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Total credit market debt in the US economy: it is the size of this debtberg – the result of unfettered money and credit creation since the early 1970s – that has made deflation into the big bogeyman. This ensures that the vicious cycle of intervention heaped upon intervention will continue to the bitter end – click to enlarge.

 

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Bernanke's Parting Error

We do get some insight into the current thinking about bubbles at the Fed, when Ben Bernanke reveals what its 'bubble prevention policy' currently consists of. In essence he simply repeats his flawed analysis of what caused the housing bubble and this analysis is what the new policy is based on (basically, bubbles have nothing to do with interest rates according to Bernanke – all we need is more regulation and especially alert, super-human regulators):

“The Fed’s zero-interest-rate policy is prompting investors to take greater risks with their money. The extra yield that buyers demand to own older, smaller junk bonds that trade infrequently shrank to an average 0.25 percentage point in the first half of this month from more than 1 percentage point a year ago, according to Barclays Plc data.

 

Bernanke, 60, has set out a two-stage process for identifying potentially dangerous buildups in speculation. First, officials try to pinpoint asset markets where prices are grossly misaligned. Then they consider whether a sudden drop in those prices would be amplified throughout the financial system, as happened during the housing bust. Such intensification could occur if the investors holding those assets were highly leveraged, illiquid or interconnected with others.

 

The Fed’s “first, second and third lines of defense” for dealing with such imbalances is to rely on supervision, regulation and so-called macro-prudential policies, such as mortgage loan-to-value restrictions, Bernanke told the Brookings Institution in Washington on Jan. 16. Only as a last resort would it consider raising interest rates.”

(emphasis added)

So let's get this straight: the zero interest rate policy is “prompting investors to take greater risks with their money” – not according to Bernanke to be sure, but according to the data and common sense.  But raising interest rates is only deemed a 'last resort' if the Fed happens to spot emerging financial system risks – which we can already guarantee it won't.

The paragraph in the middle which we highlighted is ludicrous from beginning to end: “First, officials try to pinpoint asset markets where prices are grossly misaligned.” These guys have proved over and over again that they are utterly incapable of recognizing bubbles that are staring them right in the face. It is in fact ridiculous that the same people who are responsible for the misalignment of prices are expected to 'pinpoint' said misalignment. The economy's entire structure of prices is distorted when interest rates are artificially suppressed below the natural rate dictated by society-wide time preferences. All prices are thus 'misaligned' as a result of the policy. There is no need to go out and try to 'pinpoint' anything.

“Such intensification could occur if the investors holding those assets were highly leveraged, illiquid or interconnected with others.” – So where exactly in the current bubble era are investors who are not 'highly leveraged' or 'interconnected with others'? That must be a group of investors stranded on a remote island without access to telecommunication (and presumably speculating in coconut milk futures priced in cowry shells). Even though the banking system is superficially better able to deal with bank runs than prior to 2008 because 'QE' has increased the amount of covered relative to uncovered money substitutes outstanding, there are far more deposit liabilities in existence now. Moreover, there are countless ways in which risk has been shunted into other, even more opaque corners of the financial markets. It is not even necessary to mention the endless rehypothecation chains employed by the shadow banking system or the one quadrillion dollars in outstanding derivatives notionals (in spite of netting out reducing this exposure considerably, these will in extremis depend on the ability of links in the chain to actually perform. We saw what can happen when a big link threatens to break when AIG suddenly realized that the CDS contracts it had written were bankrupting it practically overnight). Just look at this example that concerns one of the biggest currently raging bubbles (one of those neither Bernanke nor Yellen profess to be able to see):

“A U.S. bank regulator is warning about the dangers of banks and alternative asset managers working together to do risky deals and get around rules amid concerns about a possible bubble in junk-rated loans to companies.

The Office of the Comptroller of the Currency has already told banks to avoid some of the riskiest junk loans to companies, but is alarmed that banks may still do such deals by sharing some of the risk with asset managers.

 

"We do not see any benefit to banks working with alternative asset managers or shadow banks to skirt the regulation and continue to have weak deals flooding markets," said Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the OCC, in a statement in response to questions from Reuters. Among the investors in alternative asset managers are pension funds that have funding issues of their own, he said.

 

"Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy," he added.

 

The breadth of the statement from the OCC is unusual because it technically oversees banks and not asset managers. Regulators are eying a number of risks to the financial system as they aim to prevent a repeat of the mortgage bubble that spurred the 2008-2009 financial crisis. They are not comfortable with different players sharing risk if the total level of risk in the system is getting dangerously high.

 

That may be happening with leveraged loan issuance, which hit a record $1.14 trillion in the U.S. in 2013, up 72 percent from the year before, according to Thomson Reuters Loan Pricing Corp. A measure of the riskiness of these loans has also been rising – the average size of the debt for companies taking these loans in 2013 was 6.21 times a form of cash flow known as EBITDA or earnings before interest, tax, depreciation and amortization, up from 5.86 times in 2012 and the highest since 2007, LPC said.”

 

(emphasis added)  

Mind that this is just one example of how Bernanke's echo bubble has once again increased systemic risk. We would be willing to bet that no-one at the Fed has ever raised this particular issue. It is also worth pointing out that the main reason why regulators have become cognizant of this risk at all is because it is already too late to do anything about it. The fact that they have even noticed that something is possibly amiss proves ipso facto that the bubble in this corner of the financial universe has become so gargantuan that all that is left to do is to wait until it bursts and maybe say a few prayers.

 

Conclusion:

There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.

 

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Janet Yellen: I swear there's no bubble in sight anywhere!

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