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Behind The Fed's Monetary Curtain: Wizards? Or Scarecrows Who "Do An Awful Lot Of Talking"

Zerohedge - Mon, 04/14/2014 - 15:06

Submitted by Joseph Calhoun via Alhambra Partners,

The Wizard: I AM OZ…the Great and Powerful! Who are you?

The Wizard: Pay no attention to that man behind the curtain! The Great Oz has spoken!

Dorothy: How can you talk if you haven’t got a brain?

Scarecrow: I don’t know. But some people without brains do an awful lot of talking, don’t they?

All lines from Frank Baum’s The Wizard of Oz

The last few years the underlying theme of the markets is one of central bank omnipotence. Don’t worry about X, the Fed or the ECB or the BOJ has your back and will do whatever it takes to make sure nothing bad happens. The acceptance of this meme by market players has pushed all manner of assets to prices that in more normal times would make no sense whatsoever. It has been a wholesale rejection of safety and prudence in favor of the risk taking the central banks believe is necessary for the global or local economy to improve. The BOJ has convinced not only themselves but the world that currency devaluation and inflation will cure what has ailed Japan’s economy for over two decades. The ECB has somehow convinced the world that Greece is a worthy borrower for 5 years at less than 5% per annum. And the Fed has convinced themselves and the entire world that a rising stock market is evidence that their policies are working in the real economy. No matter that the economic data doesn’t support that conclusion and that it gets the causation backward.

Of course, it hasn’t just been empty headed scarecrow talk that has produced this effect. The BOJ and the Fed (and maybe soon the ECB) have been buying assets in the open market to back up their talk and create the illusion of activity, the equivalent of the Wizard of Oz’s smoke and mirrors. In the case of the Fed, it is almost all illusion as the cash produced by QE has largely ended up back at the Fed in the form of excess reserves. The BOJ has been more aggressive, buying not just JGBs but also stocks and REITs on the stock exchange, something the Fed is prevented from doing (sarcasm alert) only by their strict adherence to the statutes that govern their behavior. For the ECB the threat of intervention has so far allowed them to avoid having to do much but recent emanations from the Draghi hint at a Yen to join the party. Leave it to the Europeans to be fashionably late and arrive just as the lampshades have become party hats.

The ability to talk markets into doing what he wanted without saying much that was comprehensible was a talent that Alan Greenspan had in spades and earned him the nickname of The Shy Wizard of Money. Ben Bernanke, even though he looks more like a garden gnome than a wizard, spent years building up something resembling credibility that he used to extend Greenspan’s powers of persuasion even through a financial crisis largely of his own making. Bernanke got the party going and like a lot of men, left the mess for a woman to clean up. So far, it seems Janet Yellen’s words don’t carry quite the same weight as her wizard predecessors and the market Toto has a firm grip on the curtain hiding the levers of monetary policy.

When language and illusion become so important to market outcomes it doesn’t take much to upset the market applecart and Yellen started her tenure with what at the time seemed a minor faux pas. Until her first press conference the accepted scenario for monetary policy was that QE would wind down and at some point in the far future, the Fed would start to normalize interest rates (whatever normal is in this economy). Her faux pas was to provide unusual clarity for a Fed chair about what the phrase “considerable period” actually means. It turns out that for Yellen that unspecified epoch of Fed tightening could be as little as six months, something the market obviously wasn’t expecting. Except for a head fake breakout in the S&P 500, it has been downhill for stocks – especially the high beta, NASDAQ momentum darlings – ever since.

Yellen has spent the intervening time trying her best to convince the market that she didn’t actually say what she so obviously did. At a Chicago event on unemployment she said the Fed’s “extraordinary commitment” to “improving the labor market is still needed and will be for some time and I believe that this view is widely held by my fellow policymakers at the Fed.” Unfortunately for Yellen, the market, at least for now, isn’t buying it and once the momentum shifts in a market driven exclusively by that ephemeral emotion it is hard to reverse. For the traders who have moved this market for years now – HFT or actual human – momentum is momentum whether it is up or down and once they get something moving in one direction they’ll push it that way as hard as they can. For the last few weeks that direction has been down and so far Yellen hasn’t been able to change that. Or maybe she doesn’t really want to – yet. After all, there has been some angst on the FOMC recently about “financial stability” or what everyone else calls bubble behavior.

As the Fed continues to wind down QE to its inevitable conclusion, the markets will be left with the reality of our current circumstances. That reality is one that is very hard to read right now with the economic data still mixed after the winter weather distortions. The problem for Yellen and the Fed is that the only thing that will be kind to the stock market is data that is not too good but also not too bad. Data that is too strong will be seen as hastening the day of reckoning while data that is too weak will raise the fears of recession and a Fed with no policy levers left to pull. Only data that continues to show an economy growing slowly but below potential keeps the Fed in the game and the stock market going higher. And that is assuming the market continues to believe Fed policy is actually effective.

Right now, I see some indications that could push the Fed to tighten even sooner than now expected and also some indications that the economy is slipping into recession. Recent data on credit indicates that banks are finally ramping up lending. Commercial and Industrial loans are rising at a double digit annual rate of change although it is unclear whether this is an indication of business optimism or stress. After all, we did see a big jump in these loans leading into the last recession. Total bank credit has also accelerated, the annualized pace roughly doubling since the beginning of the year. Again, though it is hard to say why credit is rising other than that there is obvious demand and banks are meeting it with supply.

On the flip side, the bond market and the US dollar index seem to be flashing some warning signs about future growth. I wrote a post yesterday that covers this in more detail, but the gist is that it seems highly unlikely that the long end of the bond market would be rallying so furiously if the market was expecting a burst of growth. Similarly, if the nation’s currency is a reflection of growth expectations – and I think that is certainly one thing it reflects – then the fall in the dollar index indicates that expectations for growth are, at a minimum, better outside the US than in.

So the outlook for the economy is decidedly uncertain right now and I think so is the confidence in Janet Yellen. I think the more dire outcome for stocks would be if Toto fully pulled back the curtain on monetary policy and revealed it to be nothing more than a bunch clueless economists sitting in a conference room with no ability to control the economy or the markets. If US growth disappoints after all the Fed has done, how could anyone continue to view the Fed wizards as omnipotent? That would send the stock market back over the rainbow to the reality of an economy with big structural problems that can only be solved through political negotiation, something that has been notable only by its absence over – at least – the last 6 years. Are we headed back to Kansas?

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Categories: blogroll

Guardian, WaPo Win Pulitzer For Proving Millions Of Conspiracy Theorists Right

Zerohedge - Mon, 04/14/2014 - 14:34

After years of being mocked by the establishment and the majority of the herd, today millions of "conspiracy theorists" can pat themselves on the back because this Pulitzer's for you. Well, technically it is for the Guardian and WaPo, since these were the media outlets that Edward Snowden picked to release his trove of whistleblowing treasures, which the Pulitzer committee decided were "worthy" of the prize for their "revelation of widespread secret surveillance by the National Security Agency, marked by authoritative and insightful reports that helped the public understand how the disclosures fit into the larger framework of national security."

And while Edward Snowden did not directly win anything, he did comment from his new residence - where he is not wanted for three felony counts filed by the US Department of "Justice" - a few hundred miles from the unfolding events in the Ukraine, and from the CIA director's secret weekend visit:

“Today's decision is a vindication for everyone who believes that the public has a role in government. We owe it to the efforts of the brave reporters and their colleagues who kept working in the face of extraordinary intimidation, including the forced destruction of journalistic materials, the inappropriate use of terrorism laws, and so many other means of pressure to get them to stop what the world now recognises was work of vital public importance.”

Things got a little more awkward when the media whose sole purpose is to serve the statist masters - and to lie whenever the facade of the status quo is threatened - had to chime in: "It’s clear to me that we are all better off knowing the extent of government surveillance—-even the President has, reluctantly, admitted that,” David Remnick, the editor of The New Yorker, told POLITICO. “It’s a prize well-earned, and it seems to me the Pulitzer committee came to the right decision. It’s precisely because a different kind of society—-Putin’s Russia, say—-could never imagine this kind of journalism that we should value and honor it.”

The president may indeed have reluctantly admitted that. Which perhaps explains why his response was to unreluctantly make the NSA even bigger.

As for Mr. Remnick's comment about Putin's Russia, perhaps he should check what country the person who is responsible for today's Pulitzer win is currently living in.

Others dared to suggest that had Obama made a phone call here and there, that the credibility of the Pulitzer prize would have been diminished: "There are times when a nominee is bigger than a prize. This was such a time,” Mitchell Stephens, a Professor of Journalism at New York University’s Carter Institute, said. “The Pulitzer Prizes would have been diminished had they not recognized the Snowden revelations. Fortunately, they did."

Others were outright angry such as republican neocon Peter King who tweeted that "Awarding the Pulitzer to Snowden enablers is a disgrace." Luckily nobody cares what King thinks. 

Bottom line: as lie after lie falls to the wayside, and as factual evidence disproving what had been decades of engrained, institutionalized fraud is disclosed by disgruntled whistleblowing cogs of a corrupt, bloated government that is is cracking and falling apart under its own unsustainable weight, the winner, as the lies that have kept the broken system together for so long are revealed to all, is the average person. And, of course, all those what were formerly known as "conspiracy theorists" and knew all along just how deep the rabbit hole goes.

Categories: blogroll

Unrigged Market Soars On 3:30 PM Fundamental Bullish Catalyst

Zerohedge - Mon, 04/14/2014 - 14:05

The US open was enough of an event to decouple stocks (up) from USDJPY (down) but as we approached the crucial 330ET "fundamental" stocks had caught down to USDJPY weakness (worth noting that USDJPY tagged 102 in the pre-open and plunged). The 330 Ramp - JPY and VIX driven - was right on time getting S&P to VWAP and up to its 100DMA and Nasdaq back above 4000. Away from the roller-coaster ride in hope, faith, and BTFD charity in stocks, Treasuries leaked higher in yield all day (with 5Y underperforming and 30Y unch). The USD was bid (+0.3%) led by EUR weakness. USD strength pressured commodities but Gold was bid (closing above $1325 at 3-week highs).  All major equity indices remain red year-to-date (and negative from 3/19's FOMC). All "normal" and full of unriggedness.

V-shaped recovery on the 330 Fundamental...


Year-to-date, Stock indices all remain red...


S&P futures were ramped to VWAP...


By selling JPY and buying USD...


and selling the shit out of VIX...


Biotech bounced (as did Momos) closing just in the red...


Stocks appeared to play catch up to TSYs early weakness...


But credit markets were nothing like as exuberant about the desperate buying panic...


FX markets were volatile with the USD ending up 0.3% (on EUR weakness mostly)...


and USD strength weighed on commodities - except gold...


"Hanging on" seems to be new Bullish news...


Charts: Bloomberg

Categories: blogroll

Markets Falling? Get Your Defense Ready

Benzinga - Mon, 04/14/2014 - 13:47

The stock market is getting whacked. The question now for many investors is, ...

Categories: blogroll, Pre Market

Nasdaq Re-Loses 4,000

Zerohedge - Mon, 04/14/2014 - 13:23

Just a few short hours ago we were treated to a plethora of talking-heads proclaiming "see, this is it... the dip to be bought." But now, led by Biotechs as well as more 'growth' weakness, the Nasdaq has piled back below the critical 4000 level and broken to new cycle lows... we anxiously await the 330 Ramp to see just how much damage they can do (though stocks did catch perfectly down to USDJPY's early weakness)

New cycle lows for the Nasdaq


and violent catch-down for the S&P...

Categories: blogroll


Zerohedge - Mon, 04/14/2014 - 13:13

Submitted by Simon Black of Sovereign Man


Two bright white eyes looked at me inquisitively through the small hatch in the nondescript metal door.

I quickly glanced around the dark, empty streets of the Palermo district in Buenos Aires and whispered the password.

The door clanked open, revealing a small antechamber and a phone booth. I picked up the receiver and punched in a 4-digit code, and a second door opened.

Now I could begin to see the interior of “Frank’s”.

It was lit with elaborate chandeliers and accented with ornate leather seats, and Sidney Bechet was in full swing on his saxophone.

It was amazing, it looked just like a New York City speakeasy from the 1920s back in the days of prohibition and bootleg moonshine.

And that’s exactly what the proprietor intended—a nod to a time when an entire population was constantly having to outsmart destructive government policy.

Just to do something as simple as having a beer, people had to come up with elaborate schemes, passwords, and secret locations on nondescript streets.

Coincidentally, Frank’s is the perfect illustration, not only of New York in the 1920s, but of all of Argentina today.

Argentina is one of the places where debilitating capital controls are the rule.

The government has its ‘official’ exchange rate, and they’ve outlawed unofficial transactions with foreign currency.

But like prohibition-era bootleggers, an entire cottage industry has emerged with legions of street dealers trading currency far beyond the law.

Capital controls are only the start. This government has tried just about everything—price controls, credit controls, even people controls.

They’ve nationalized private assets. They’ve thrown dissenting economists in jail.

Now they’re going around collecting everyone’s fingerprints. They’ve just added another 100 products to the list of controlled prices.

And yet, inflation still rages. People’s standards of living are being destroyed.

The pesos that they earn are buying less and less. Despite the controls, prices are still rising much faster than wages.

All of this has led to mass poverty returning in a big way. Beggars once again line the streets in Buenos Aires. There’s been a noticeable increase just since I was here two months ago.

This is a familiar story. Argentina has spent the last several decades stumbling from crisis to crisis.

Like many countries in the West, Argentina has had a long trend of political incompetence. This once-rich nation has been ruled by those who thought that universal economic laws simply did not apply.

They thought that Argentina could live beyond its means forever… that they could borrow money to pay interest on what they’ve already borrowed.

The Argentina of today shows that there are serious consequences for nations that follow this approach… and for people who do not heed the writing on the wall.

It’s easy to pretend like everything is OK. Sometimes we’re surrounded by grandeur and opulence, and it’s easy to mistake this veneer for wealth.

It’s not. Real wealth comes from freedom, production, savings, and technology… not debt, spending, and money printing.

And though even I got lost in all the splendor of Frank’s speakeasy, I was immediately thrust back into reality when they refused to accept my credit card to settle the bill.

The difference between the official rate and black market rate is so vast, in fact, that many establishments are now refusing to accept credit card payments altogether.

The staff apologized to me profusely, embarrassed at what their country had become.

We joked about it as I pulled out a wad of cash I had recently procured from a street broker—

  • Cocktails: 175 pesos
  • Appetizers: 210 pesos
  • Capital controls: Priceless

It turns out there really are some things money can’t buy. Especially in worthless currency.

Categories: blogroll

White House Admits CIA Director Brennan Was "Secretly" In Kiev

Zerohedge - Mon, 04/14/2014 - 12:46

Late last night we asked if, as the Russian media had reported and only the Russian media, CIA director John Brennan had secretly visited Kiev over the weekend: "Brennan landed in Ukraine on Saturday under an assumed name and held a "series of secret meetings" with the country's "power bloc" Interfax reported, citing an unidentified official in the Ukrainian parliament.  The person who said this to Interfax in a phone talk added that John Brennan came to Ukraine not under his real name.  According to some yet unconfirmed information, the decision to suppress protesters in Slavyansk, a city in Ukraine's east, with force was advised to Ukraine's authorities by Brennan."

One can further admit the meeting was "secret" - if only in initial intent - not only because of Brennan's assumed fake name (why the secrecy?) but because until Russian Interfax- of all places - had reported about what is certainly a key meeting in a nation in which disinformation and counterpropganda is not only rife but the last thread the current Kiev regime is hanging by - Brennan's meeting was completely unmentioned by the US press.

Until today, when moments ago White House speaker Jay Carner confirmed that indeed the CIA director was in Kiev last weekend.

From Reuters:

"We don't normally comment on the CIA director's travel but given the extraordinary circumstances in this case and the false claims being leveled by the Russians at the CIA we can confirm that the director was in Kiev as part of a trip to Europe," White House spokesman Jay Carney told reporters.


According to media reports, Russia has urged Washington to explain what Brennan was doing in Ukraine.


"Senior level visits of intelligence officials are a standard means of fostering mutually beneficial security cooperation including U.S.-Russian intelligence collaboration going back to the beginnings of the post-Cold War era," Carney said.


"U.S. and Russian intelligence officials have met over the years. To imply that U.S. officials meeting with their counterparts is anything other than in the same spirit is absurd," he said

You know what's absurd? Iraqi weapons of mass destruction. Or YouTube clips "proving" an Assad chemical weapons attack... which was organized and executed by NATO member Turkey with the blessing of rht US. Or the same CIA director showing up in a Kiev hotel under a fake name. Or for Interfax to have more credibility than US media outlets. 

You know what isn't absurd? Speculation that just like the CIA organized the overthrow of the Yanukovich regime, which has been confirmed courtesy of the Russian secret services leaking a very inconveient recording, so the recent escalation in east Ukraine is indeed the work of the CIA.

You know what won't be abusrd? If and when the Russians release another recording, this time of Brenann, proving that all the "Russian" propaganda in fact, fact.

Categories: blogroll

Guest Post: How To Get A Job Despite The Economy

Zerohedge - Mon, 04/14/2014 - 12:21

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

An entire new feedback loop of accreditation is necessary in the economy we have, and fortunately that feedback is within our individual control.

To paraphrase Donald Rumsfeld, we work in the economy we have, not the economy we might want or wish to have at a later time. And what characterizes the economy we have?

It's bewildering because nothing works like it's supposed to. For example, getting a college degree was supposed to guarantee a good job and an 80% lifetime wage premium over people without college degrees.

But in the economy we have, getting a college degree no longer guarantees a good job, or indeed, a job of any kind: 53% of recent college graduates under the age of 25 are unemployed or doing work they could have done without going to college.

The payoff for getting a college degree is declining while the risks of becoming a debt-serf due to crushing student loans is rising. The big premium that once accrued to college graduates is eroding for reasons of basic supply and demand: there are far more people with college degrees than there are high-paying jobs for people with degrees--even law degrees, MBAs and PhDs.

The entire notion that a college degree "signals" something valuable to employers is breaking down. In the good old days, earning a college degree proved that a student was hard-working and conformist--just what hierarchical corporations and government agencies want in employees. (The "signaling" value of a diploma is based on work by economist Michael Spence in the 1970s. In general, the signal indicates an attribute whose value is correlated with the difficulty and cost of the signal: the harder it is to get a degree, the greater the value of the signal it sends.)

But in an economy in which education credentials are in over-supply, that signaling mechanism is running up against a basic reality: a degree accredits very little about the student's knowledge, problem-solving skills or professionalism. A degree is simply a proxy of knowledge, not evidence of knowledge or useful skills.

Indeed, the study Academically Adrift: Limited Learning on College Campuses concluded that "American higher education is characterized by limited or no learning for a large proportion of students."

Signaling an ability to grind though four or five years of institutional coursework is no longer enough; the signaling needed to indicate an ability to create value must be much richer in information density and more persuasive than a factory model diploma.

A resume is equally thin on information that accredits a worker's knowledge, useful skills and professionalism. A resume is a public-relations summary that everyone knows has been tailored to present the candidate in the best possible light. And precisely how useful and trustworthy is PR in any setting?

Put yourself in the shoes of a hiring manager or potential collaborator: there is precious little useful information in either a diploma or a resume. As a result, human resources departments have been tuned to eliminate as many candidates as possible by signal-based winnowing rather than by the collection of useful information on the skills, knowledge and professionalism of the potential employee/collaborator.

Conforming to social behavioral norms and being able to grind through mind-numbing work used to be enough to create value in the economy--but this is no longer the case for high-value (i.e. well-paid) work. The "signaling" camp holds that a degree showing the student sat through four or five years of classes is sufficient to justify hiring the person. That the student learned essentially nothing useful doesn't matter; the entire value of college is in the last class needed to get the diploma.

This was true in the long postwar boom when the number of well-paid jobs expanded at a faster rate than the number of college graduates. This is simply no longer true.

In contrast to the "signaling" theory of value, the "human capital" camp holds that working knowledge is what creates value. If the student learns little critical thinking, real skills or practical knowledge, then a college degree has little value.

What if conformity and being able to navigate formal systems/bureaucracies no longer creates value or helps people solve real-world problems? In the economy we have, the "signal" value of a college degree has sharply declined. This is why college graduates can send out hundreds of resumes and not even receive a single reply, much less an interview or job offer.

Systems analysis teaches us that changing the parameters of a system (for example, adding another line to your resume or getting another degree) does not change the system; only adding a new feedback loop can change the system.

Clearly, an entire new feedback loop of accreditation is necessary in the economy we have, and fortunately that feedback is within our individual control: it's a process I call accredit yourself. The most powerful feature of accredit yourself is the process is open to anyone: recent college graduates, those without degrees, those re-entering the workforce, those seeking to launch their own enterprises--everyone who wants an income stream in the economy we have.

I outline the process of accrediting yourself in my new book Get a Job, Build a Real Career and Defy a Bewildering Economy which is on sale through Tuesday evening (Pacific Standard time) at a 20% discount for my regular readers ($7.95 for the Kindle edition, 20% off of the list price of $9.95. The print edition is $20).

Categories: blogroll

Morning Euphoria Fizzles As Biotechs Turn Red Again

Zerohedge - Mon, 04/14/2014 - 12:04

So much hope, so much faith, so much euphoria that the early bounce in high beta crap, which sent biotechs by more than 3%, would finally stick... All for nothing.

Categories: blogroll

San Fran Fed Asks How Important Are Hedge Funds In A Crisis

Zerohedge - Mon, 04/14/2014 - 11:49

Finds the answer is: "very"

Before the 2007–09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn’t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.

It also draws a bunch of boxes with arrows between all of them:

Naturally this should come as a complete shock to those who failed kindergarten or to all those who still don't understand that Hedge Funds are merely leverage-facilitating counterparties that allow Primary Dealers to net out trillions in gross margin positions (via repo, reverse repo, securities re (and re-re-re-re) pledged as collateral vs securities received as collateral and though all the other shadow banking leverage and rehypothecation conduits that virtually nobody seems to understand even though Matt King explained it all in September 2008) to zero, even though same Primary Dealers are really on the hook for about $4 trillion in exposure at last count, none of which is reflected on their balance sheets and the clueless regulators continue this epic, undercapitalized charade to continue.

More importantly, US taxpayers just spent a few tens of thousands of dollars (fresh just created by the Fed itself so think of this as fiat recycling) on this cutting edge research: surely this will generate at least one government jobs in the next NFP report, and boost Q2 GDP by at least 0.01%.

Full San Fran Fed paper for the frontally lobotomized can be found here.

Categories: blogroll

Enlightened Self Interest and Financial Industry Hypocrisy - Chapter One of Three

Zerohedge - Mon, 04/14/2014 - 11:29

Enlightened Self Interest and Financial Industry Hypocrisy

Chapter One of Three

Benevolent Self-Deception


An Old Fashioned Rant


Cognitive Dissonance


To subscribe to 'Dispatches', a periodic newsletter from Cognitive Dissonance and TwoIceFloes Creations, please click here.


Too often we divide the world into black and white hats on good and bad people, or left and right ideology that’s right or wrong. Absolute certainties make the process of determining what to believe, to deny or just to ignore so much easier when we don’t actually need to navigate through the cognitive fog to reach critical thinking.

Sadly this duality of extremes is used as a weapon against us at every twist and turn for the benefit of the powerful. And we fall for it hook, line and sinker every single time. I’ve wanted to dig my teeth into the subject of hypocrisy as it applies to the financial ‘industry’ as well as average Joe for several years now, but have held back because the subject is extremely divisive and triggering. Now appears as good a time as any to turn the compost pile.

First let’s get the disclosures out of the way. I was ‘in the business’ for 25 years and I recently closed a small (emphasis on small) financial advisory firm. I ran small money for a living, though that hasn’t always been the case. So while I’ll point fingers and render opinions, and I am extremely critical of society in general and the financial industry in particular, until recently I was swimming in the same cesspool and faced the same ethical dilemmas. That said, while I live in a glass house I’m still going to throw a few stones. Breaking glass is extremely satisfying in a visceral kind of way.

In addition, regardless of how you may interpret what I write below, I am very optimistic that our problems can be solved, and relatively quickly once the individual and national ‘will’ finally develops. We have the power in our hands to change everything and always have. However, as has been the case for hundreds (thousands?) of years, the sole job of the magicians who cast the nation’s economic and cultural spells is to convince us on a daily basis to surrender our power to them in return for empty promises of pain free living and delayed (if ever) consequences.

Viewed from the perspective of technical analysis, it appears we are nearing the peak in the last wave of an eighty year long insanity rally. And while there is no way of knowing exactly when it will end, we do know it will end. A careful review of world history over several thousand years shows that insanity runs in cycles of intensity (but never really goes away) and we are in the final phase of this particular cycle.

When we grow up a bit more and recognize that no leader will guide us out of our own insanity, that it is up to us alone, this leg of our maturation process will be over. I see great potential, but I have low expectations that this potential will be achieved without a great deal of pain. Empires will fall, war will explode and people will die, of this I have little doubt. The death throes of self deceit are extremely destructive as the excesses of the insane asylum are discarded, then replaced just in time to start the next cycle.

With that said, please don’t make the mistake of assuming this article doesn’t apply to all of us just because ‘we’ don’t work in the ‘industry’. What is happening in the financial industry is just a symptom of global wide narcissistic naval gazing, blatant greed and overall rot that has permeated our global society.

There are no innocent bystanders in this debacle, only varying levels of involvement or passivity beginning with the ring leaders and flowing down through several layers of direct and indirect enablers. And as I will flesh out below and in subsequent chapters, I suggest it flows up as well as down in a dysfunctional and symbiotic positive feedback loop.


Real Lies


Ethics and ethical behavior, along with all its sub categories, including Enlightened Self Interest (ESI) and benevolent self deception, is not exclusive to financial professionals. In fact these moral concepts flow up from the individual into society in general and our institutions specifically. Thus if we declare our institutions corrupt we are clearly and unmistakably declaring ourselves corrupt as well. From a big picture point of view, in a representative form of government (and I would argue in any form of government) we (re)elect and/or support exactly the type of leaders we desire (notice I did not say deserve) but to which we will rarely admit any culpability.

For those who might strenuously object to that statement, let me give you an example. During the 2004 Presidential election cycle there was a voter survey conducted (very Orwellian that in the past year that poll has disappeared) asking about corrupt politicians. When asked what percentage of Senate and House congressional critters were corrupt in any way (an admittedly broad definition) the answer was 81%. Meaning 4 out of 5 were considered corrupt by those who elect them to office or who watch from the sidelines. When asked what percentage of the respondent’s own elected representatives were corrupt, the answer dropped to 19%.

Common sense dictates that if 4 out of 5 politicians in general are corrupt, on average the same percentage of our own representatives is corrupt. So why the large discrepancy? Well, if my elected representatives are corrupt it reflects poorly on me. Even if I don’t vote or care much about the issue I don’t want others (more specifically the poll taker) to think I ‘allow’ or ignore corruption after making such a strong statement about the large degree of corruption nationwide.

Thus when answering the survey questions, which are often posed by live individuals either in person or by phone, I must cover my cognitive butt and present myself as pure…..or at least more pure than the next guy who is the real idiot electing all these corrupt politicians.

The simplest way to avoid this cognitive dissonance is to lie to our ‘self’ under the cover of all kinds of slick and plausible excuses, such as bacon delivery, political clout or whatever. It doesn’t matter how I brush it away, just that I do. It’s OK to lie to myself, but I must not let anyone else see that my cognitive slip is showing.

If we wish to be lied to in order to hide from ourselves and any personal accountability or self awareness, that is exactly the style of leadership we will get. I can’t tell you how many conversations I’ve had with people from a variety of political and social convictions who will scream in outrage at this or that political transgression.

But when asked about their own faults and hypocrisies they are nearly always unable to look at themselves with an unbiased eye, never mind make any real attempt to provide a semi honest self appraisal. As I like to say, space aliens don’t drop our political and business leaders from the sky. They are all home grown 100% USDA certified Earthlings spawned from mom and dad, at least until proven otherwise.


Hypocrisy Meter


Every person carries around a bucket full of lies, half truths and self deceptions to which we add to and subtract from all the time. While many will claim this is simply human nature, I suspect it is more a cultural phenomenon than a natural tendency. If one believes we are a product of evolution, while I can see the utility of some social lies to promote harmony and cooperation, self deception is not necessarily conductive to a long life, particularly when resources are scarce.

During the present era of perceived abundance that is rapidly fading in the rear view mirror, our formerly over flowing cup might have something to do with our present day insanity. Self destructive behavior requires heaping helpings of denial front and center, and only the ideologically blinded or mentally ill can take a look around and consider the present sorry state of the human race to be the result of others and not ourselves. One of the hallmarks of insanity is the personal belief that there isn’t anything wrong with me, just everyone else.

Since by definition a culture is all encompassing and totally immersive, one cannot see ourselves for what we really are unless we make an honest and sustained effort to do so. Everything looks pretty much normal (in an insane kind of way) to the non-critical eye……which is often just the way we like it. This is where the lying and self deception comes into play.

One of the most common enabling lies we tell ourselves is that because we are more (mostly) pure of mind and deed (or at least thoroughly rationalized and justified) it is those people over there who are the real problem. So in our mind we make a generous offer and declare that we might clean up our own act, what little there actually needs to be done, once the bastards who are responsible for this mess are hung from the rafters. This is the epitome of blame shifting and magical thinking, and it is the root of the problems we all face.      

At one point or another we have all pointed our finger towards (or should I say given the finger to) the ‘bad’ guys at the Federal Reserve and on Wall Street, at the White House, Congress, the Judicial System and the huge multinational Corporations. And while you will get no argument from me that all these players are both compliant puppets and powerful puppeteers, they are all essentially powerless without our direct consent or passive agreement.

As well, while the game is obviously rigged to compel our participation, many of us roll over and concede defeat, taking the softer easier way out while claiming the moral high ground to enable our own victimization. After all ‘victims’ aren’t responsible for anything, including ourselves, because we are all……well victims, right? Don’t blame me dawg, I’m just the poor trapped soul caught in the nasty spider web.

While I am sure there will be angry comments declaring that I am unfairly blaming the victim when it is clearly those lousy bastards over there that are responsible for this mess, short of putting a gun to our heads we always have choices. And to say otherwise is bordering on the infantile. What we are really saying when we claim there is no way out or that we are powerless to stop the insanity, is that all the easy alternatives have been eliminated and the only remaining paths we perceive as available involve high levels of pain, discomfort and distress.

This is an illusion we actively encourage to enable us to remain comfortably passive within the insanity, or which we use to give us the moral green light to participate in the looting under the guise of profit, saying we’re just taking care of ourselves and our own. You know, buy the f**king dip, regardless if whether it’s stocks, bonds, CRE, distressed housing, PM’s, whatever. Or one I heard just today, where the person states that it will never change so why not position ourselves to profit from the mess.

Of course, we nearly always exaggerate potential dangers or project undesirable outcomes when facing paths we don’t wish to pursue. I can always find a reason not to act, while finding reasons to act are far and few between. This isn’t human nature alone, but just as much nurture, meaning our training and conditioning beginning with our parents. Sure there are basic tendencies to procrastinate inherent in each individual, but children of proactive and positive parents tend to be the same and vice versa.


Head in the Snow


Very early in my career I was told by a wise mentor that successful people do the things unsuccessful people don’t want to do. I was then challenged to demonstrate this with the understanding that words without action accomplishes little other than verbal and mental masturbation. This applies so well to life in general.

Bottom line, if we don’t want to do something we will find every excuse in the book not to do so. Rather than closely examine our part in this slow dance of socioeconomic death, we paper over our own involvement in the very system we claim we want radically changed or even destroyed.

Time to take a closer look at what’s really going on here because this game is exactly what many of us want to play in order to avoid dealing with the very collapse or change we say is desirable. Many of us are junk yard dogs with absolutely no desire to bite except maybe each other out of impotent frustration.

If you give it some thought, to say that we wish to see our corrupt and patently unfair financial system collapse in order to rout the bastards from our house is the functional equivalent of wishing someone would burn down our uninsured home to rid ourselves of a severe cockroach infestation. Or better yet hiring (or electing) someone(s) to do the job for us.

Yes, when all is said and done the roaches might be gone, but there were less destructive ways of removing them. Sometimes we select bad choices to hide from even more frightening ones, a personal and collective insight we carefully conceal from ourselves in order to continue with our benevolent self deception.

Alas, we will find less damaging cockroach extermination methods only if we are willing to explore all avenues, including the emotionally, physically and economically painful. In reality we don’t wish to collapse our economic system. What we desperately desire is for the thieving and insanity to end (or at least to greatly diminish) and for a return to the mythical land of the Norman Rockwell lie of milk and honey.

Can’t say I blame us, though it appears to be time to short unicorns and fairy tales and go long courage and cooperative collusion. Aside from possibly preparing ourselves for the coming collapse, what are we doing to prepare our nation, state and community for this new beginning? Is it a matter of each of us waiting for everyone else to go first? Yeah, that will work wonders when the unrest goes local.

Since we aren’t especially willing to look too closely at all aspects of the insanity for fear it might implicate us nearly as much as the bad guys, we declare we would rather watch the entire stinking mess disintegrate and then wash away with the evening tide.

This allows us to individually and collectively wash our hands of the enormous social disintegration that will result from economic collapse while emotionally and intellectually shielding us from any danger, real or imagined, that we may encounter if we were to work towards other less destructive ‘solutions’, or to help prepare our surrounding community for the storm we are forecasting.


Social Disintegration


It’s so much more comforting to suffer misery as part of the collective herd than to suffer alone while feeling vulnerable. This is one of the reasons we latch onto the “It’s just impossible to change” or even “It’s not me, it’s those damn idiots over there who aren’t doing anything about this” excuses.

The list of reasons why we should not act is as varied as our imagination. So how convenient it is that if everyone says the same thing, everyone has a wonderful excuse not to do anything yet still remain blameless. This is the collective self deception that is ostensibly benevolent to both the individual and the group, or so we wish to think.

Essentially this is a Bizzaro World Catch 22 that works to our advantage over the short term, but destroys our souls and our neighborhoods quicker than we think. However, in a world of short term thinking this doesn’t look like such a bad deal when my focus is squarely on what’s in it for me, myself and I.

Make no mistake about it though, denial, both individual and collective, is so overwhelmingly powerful that not only will tortured souls self destruct and commit suicide while in its throes, but nations will rush head long into the dual abyss of self destruction via war, civil or otherwise, and economic self immolation.

However, a nation doesn’t self destruct because its land and buildings are consumed in the fires of economic hell. Nope, it is the citizens of a nation that wither away on the vine, eventually taking the physical and economic infrastructure with them into the bottomless abyss of insanity.

The only saving grace is that who can really say what is or is not insane when we are all on the same glide path to hell? That’s our own special theory of insanity relativity. The same insanity that drives nations into competing rounds of destructive currency devaluation also drives us into feeding off each other’s delusions and delirium tremens.

When a sovereign state’s currency and credit system, its blood and circulatory network, depends entirely upon the faith and belief of its captive and captivated population, stability for the most part can be manufactured simply by believing in the system. Understand though that in this case ‘belief’ can mean active or passive participation and/or dependency. This ‘belief’ also includes ignoring potential dangers to the system, especially terminal dangers of the mind numbing variety.

This explains perfectly why as the system gets closer to the edge, people can continue to go nervously about their lives. Truth be told, on some basic level most of the population already knows things are in very bad shape, but we chose to ignore it. The level of governmental and corporate corruption, the rise of the surveillance/police state, chronic unemployment, rising food and medical costs and the escalating taking of rights and freedoms are not unseen by the population at large, just desperately ignored.


RIP Constitution


What does one do and how does one act when the myth can no longer be sustained and we find out our protectors are actually the predators and our torturers? What would we do if we suddenly discovered our father was a child molester or our brother a mass murderer and we were next on the list if we attempted to expose him?

For most of us the drill would be duck and cover baby, duck and cover, then head even deeper into the mind numbing embrace of denial. Without question most of us would move to the center of the herd and act like there’s nothing wrong in the suburbs. Only we would do so quietly and with baby steps. After all, you don’t want to alert the wolves circling the herd that you are injured and ripe for the taking.

Just as the world is beginning to recognize that the efficient market theory was efficient solely in snowing people into believing logic and reason ruled the market, we should understand that much of our individual decision making process is subconscious and totally illogical. So is it really surprising that ‘We the People’ have made a mostly subconscious decision to carry on as if nothing is wrong and hope for the best? This is the childishly adult equivalent of covering our ears and repeatedly screaming ‘I can’t hear you’.

As long as the government is successful in keeping the wolves at bay, at least for the ever decreasing majority, we will happily ignore the growing desperation in the streets in exchange for some make believe ignorant bliss. Just leave me and mine alone and I will avert my eyes and hurry about my business.

Of course, this can only be accomplished if we discard critical thinking and independent thought and stick to binary input and output. If no one wishes to recognize the full insanity, all it takes to accomplish this in a leveraged fiat system is a collective and unspoken understanding to ignore the ugly truth and move along. What you don’t make ‘real’ by specifically acknowledging it just can’t hurt you, at least for today and hopefully a few more tomorrows.

As nonsensical as this might sound, we make our own emotional and intellectual reality fresh on a daily basis. While doing so, we mold our physical world to fit our belief system as we have conceived it. Do this, don’t do that, deny those, ignore them, focus of this and before you know it our world begins to conform to how we denied it. Multiple our individual effort by two or three hundred million, or two or three billion, then conjure up several hundred trillion of Federal Reserve electronic ones and zeros while casting a collective self propaganda spell of ‘all is well’ and temporary stability is created out of thin air.

The only problem is this huge edifice has no foundational support and can easily be toppled by a small percentage of bolting members of the unsettled herd. Panic is easy to generate among the hard core deniers because deep down we all know it is just a lie. All but the truly clueless stand around with their hands in their pockets, trying to look innocent and unconcerned while memorizing all the exits and escape routes. Only a fool or the hopelessly self deceived will actually drink their own Kool-Aid mix, though I am constantly amazed how many do. Mine is cherry banana by the way.

Sure the fundamentals are slowly deteriorating (again) and the second (third?) plunge appears just around the corner. Real reality will eventually re-assert itself with a vengeance because it’s not nice to fool with Mother Nature. But (sadly) not before several more revolutions of the fiat paper around the toilet bowl have been completed.

After all, to some degree or another we are all engaged in group psychological can kicking, if for no other reason than to keep the inner boogieman at bay. Binary thinking doesn’t allow for long range planning or constructive positioning, just blame shifting and avoidance, something we do with typical American arrogance and excellence.

We all have a tendency to exaggerate the value of our prior investment in our jobs, our family and ourselves. So when considering what to do or not do, often the decision we make is to make no decision at all, to go with the flow and to make no waves. We never really acknowledge that making no decision is actually a decision in and of itself, an affirmation of the status quo and the present day insanity. “Hey, it wasn’t me that made that decision. I’m not responsible.

The more out-of-control we feel our life and world is becoming, the more we will seek to avoid making any decision we (want to) believe might endanger our life or position in the social order regardless of its present state of advanced decay. Misery is always relative to those who are around us. I can be the happy king of the soup kitchen or just another miserable nobody in the corporate cafeteria.

In addition we will avoid any responsibility for decisions (or non decisions) made by ourselves or anyone else. We learn this behavior early in life, first from our family, then from our social interactions in school and later corporate life. Cover our ass begins and ends in the familiar warmth and comfort of our duplicitous mind.



Cognitive Dissonance


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They All Look the Same to Me


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Taming the Crude Oil Beast – Playing the Volatility

Emerging Money - Mon, 04/14/2014 - 11:11

WTI crude oil (USO, quote) continues its climb higher overnight to over $104.40 a barrel before settling back under  $104 handle at U.S. equities open.  Crude oil has not seen $104 handle since mid-September.

Gasbohrung_'Völkersen-Nord_Z6'_(RWE-Dea)Everywhere you turn the past 6-9 months, headlines boast how much crude oil is being found with new technologies such as fracking.  So why the run up?

As many of you know, the answer to the question is the extreme heightened political risk between Russia (RSX, quote) and Ukraine, and U.S. and European Union threats to place sanctions on Russia.

The issue escalated over the weekend when Ukraine pro-Russian separatists failed to leave government buildings by Monday’s deadline.

Reports over the weekend indicate that pro-Russian separatists are well armed, fueling speculation that Russia may have supplied weapons to the separatist, although this has yet to be proven.

This new round of heightened turmoil has pushed the U.S. to indicate it will impose additional sanctions against Russia if Russia continues to test and push for encroachments in eastern Ukraine region.

As tensions continue to mount between U.S. and Russia, companies and crude oil traders grow more and more nervous with Russia pulling its crude oil off the market.  Russia is the world’s largest energy exporter. 

Add in to the mix this weekend helping to push crude oil prices higher are reports that there will be delays in exporting Libya’s crude oil.   Market participants’ were expecting Libya to resume exporting by now.  Officials and rebels continue to fight over two of Libya’s ports to the extent that Libya’s interim Prime Minister Abdullah al-Thinni resigned late this weekend after threats were made on his family.   He was just made interim PM a month ago.

Bottom Line:  Crude Oil will remain inflated as long as Russia and Ukraine remain at odds.  Can crude oil move higher?  Sure, if Russia escalates the matter further, but Russia depends on crude oil exports when we boil all things down. 

But this does not mean we cannot play in the space. Later today we will explore how to grab the sweet spot of each morning’s move in the crude oil futures in the Emerging Money Trade Idea Section of the website.  We will also look at a way to play crude oil’s move in the equities market. Be sure to get your login now…

Categories: blogroll

When The Fed’s Refi Madness Ended, Bank Mortgage Profits Evaporated

Zerohedge - Mon, 04/14/2014 - 11:02

Submitted by David Stockman of Contra Corner

When The Fed’s Refi Madness Ended—Bank Mortgage Profits Evaporated

During the course of its massive money printing campaign after the financial crisis of 2008, the Fed drove the 30-year mortgage financing rate down from 6.5% to 3.3% at its mid-2012 low. The ostensible purpose was revive the shattered housing market which had resulted from the crash of its previous exercise in bubble finance.

But what it really did was touch off another of those pointless “refi” booms which enable homeowners to swap an existing mortgage for a new one carrying a significantly lower interest rate and monthly service cost. Such debt churning exercises have been sponsored repeatedly by the Fed since the S&L debacle of the late 1980s.

This time the Fed really outdid itself. During some periods upwards of 80% of new originations were not money purchase mortgages to finance a new home, the declared purpose of interest rate repression, but just refis of existing debt. By resorting to this maneuver to leave more money in the pocket of borrowers each month, our monetary central planners undoubtedly hoped that America’s flagging consumers would buy another flat screen TV, dinner at Red Lobster or new pair of shoes.

Yet two obvious questions recur. First, why does the monetary politburo think that a zero-sum shuffling of shoe purchases into the spring of 2012 and out of 2014 makes any sense? That is the implicit assumption, however, because unless the Fed was prepared to permanently peg the 3.3% refi rate at its mid-2012 level, it was only a matter of time before mortgage rates would rise and household’s buying actual new homes with purchase money mortgages would be paying 4.5% as now, or 6.5% as before the panic, and thereby have far less discretionary cash left over for a trip to Red Lobster.

This cash flow shuffle sounds perfectly silly, of course, but it is essentially what our Keynesian paint-by-the-numbers central bankers are up to because they stubbornly refuse to acknowledge the reality of “peak debt”—especially in the household sector. Yet only a permanent gain in leverage can cause consumer spending to remain elevated in response to monetary stimulus. By contrast, yo-yo-ing the mortgage rate only swaps out cash flow from one arbitrary quarter to the next.

Thus, during the four decades leading up to the financial crisis, the Fed’s interest rate “easing” maneuvers worked because they caused a steady upward ratchet in household leverage ratios. That is, there was still balance sheet space left to hypothecate.  And, as shown below, under the Fed’s post-1970 ministrations, the historically healthy ratio of about 80% debt/wage and salary income climbed parabolically until it peaked at 210% in 2008.

Household Leverage Ratio – Click to enlarge

The above graph also highlights the reason why the Fed is now enmeshed in a pointless exercise of ”yo-yo-ing” the economy in its endless pursuit of accommodation and consumer stimulus. Self-evidently, households have rolled back their leverage ratios to a still historically high and likely unsustainable level of about 180%. So by not permanently adding to their leverage ratio— but actually slowly retrenching it—households have thwarted the Fed’s maneuver to cause a permanent gain in the purchase of shoes and meals at the mall.

And properly so. A continuing rise in the household leverage ratio from the 2008 peak shown above would have led to an even more traumatic retrenchment than that which has already occurred.

But if the Fed’s arbitrary cycle of mortgage rate repression and eventual release—as metered into the financial system by the seers and forecasters resident in the Eccles Building– does not permanently levitate the Main Street economy, it nevertheless leaves an impact: namely, a huge and capricious reshuffling of wealth within both the real economy and the financial system, too. In fact, this wealth reshuffling is so massive and unaccountable that perhaps someday the question will arise as to why the Fed was ever empowered to operate a giant random wealth generator in the first place.

Within the household sector, it is obvious enough that the refi boom benefits only a tiny minority or households—most of which least need help from the state. Stated differently, of the nation’s 115 million households—perhaps 10-15 million have been the lucky recipients of the Fed’s refi maneuver. Clearly the 40 million renters didn’t benefit; nor did the 25-30 million who own their homes free and clear. And upwards of 20-25 million existing mortgage borrowers, who during most of the latest 5-year refi boom were “underwater” or did not have enough positive equity to cover transactions costs and more reasonable down-payment ratios, did not even qualify for the Fed’s lottery.

However, there was one sector that gorged itself on the ”refi” lottery big time—namely, the giant mortgage originating banks on Wall Street who ended up controlling most of the home mortgage market after the Washington assisted mergers during the crisis.  As  summarized in the Fortune article below, the mortgage originators were booking up to $3,300 of up front profit per refi.

And that was just the fee on the transaction—before booking the embedded “gain-on-sale” (often thousands more) when most of this booming mortgage volume was subsequently shuffled off to Freddie and Fannie to be packaged and resold as an MBS. Yes, and at that point, such newly minted “mortgage bonds” did flow back to Wall Street where they were doubtless churned many times over by the dealer side of the banking houses in their endless and remunerative chore of supplying “liquidity” to the homeowners of America.

So the banking side of the Fed’s refi churn did well too—–enjoying a triple profit dip along the way. But there were two untoward effects of these giant windfalls. First, they self-evidently were not a permanent source of bank earnings, as documented by the Fortune article below. JPMorgan’s fee profit per mortgage has now plummeted to a loss of $1,500 each; its mortgage volume has collapsed by upwards of 80%, meaning that fat quarterly profits from “gain-on-sale” into the GSE mills has also evaporated; and its massive trading inventories have been generating losses as often as gains—since bond prices are no longer on a one-way escalator upwards.

The point here is not to lament the resulting sharp decline in the bank earnings from  their triple-dipping mortgage businesses. The windfalls there were no more arbitrary than those captured by households fortunate enough to board the Fed’s refi train while it lasted.

The far more important point is that these were not real economic profits that added permanent value to the American economy.  They were simply central bank enabled “rents” that permitted the big banks to artificially and temporarily repair their balance sheets. The big bank mortgage operations have booked at least $50-$75 billion of this kind of bottled air since the crisis.

And that is were the evil-doing comes in. Based heavily on the windfall of mortgage and fixed income trading profits, the Fed has permitted the Wall Street banks to plunge right back into the business of paying generous dividends and undertaking heavy stock repurchases.  In a word, the very monetary politburo that now says that the solution to financial instability is tougher “prudential” regulation and supervision—rather than the honest thing of slowing down its printing presses—-has engaged in flat-out regulatory folly:  It has permitted Wall Street to re-cycle vast unearned rents to the gamblers and fast money traders who have piled into bank stocks since the crisis.

Instead, it should have been recognized that the giant Wall Street banks are wards of the state. Without access to seven years of deposit funding pegged at zero, the Fed’s discount window privilege in the event of a crisis, and trillions of taxpayer guaranteed deposits, the Wall Street conglomerate banks would not even exist in their current form. So every dime of profit booked—-genuine or windfalls like these—should have been sequestered on their balance sheets until it was truly evident that the “all clear” condition had been reached. Based on first quarter banks results this far, that hardly seems the case.

There was a government anti-drug propaganda movie in the late 1930s called “Reefer Madness”.  It would appear that our monetary politburo has been smoking the same.

By April 11, 2014: 3:37 PM ET


FORTUNE — If you are wondering why you can’t get a mortgage, here’s an answer: Every time JPMorgan Chase makes a home loan, it loses money, $1,500 on average. That might not make JPMorgan want to make so many loans.


That helps explain why banks are lending so little, and why the housing recovery, which seemed to be zooming along just a few months ago, has begun to falter. It also may say something about the sluggish economic recovery.


On Friday, JPMorgan (JPM) reported its first-quarter earnings. They were less impressive than analysts were expecting, in part because loan growth at the nation’s largest bank in the country has evaporated. JPMorgan had $730 billion in loans a year ago. It has the same now. Deposits are still rolling in. Typically, a bank makes money lending out the money it takes in from depositors and pocketing the difference. But JPMorgan is now lending out just 57% of its deposits. It used to be more like 80% a few years ago.


Signing up borrowers was never the most profitable part of the mortgage business. The bigger profits came from collecting the interest on the loans, or selling those loans off to others. But it was never a loss leader, either.


A year ago, for instance, JPMorgan made about $750 per loan. The year before that, it booked $3,300 of profits for every new loan.


But then, about a year ago, interest rates began to rise for the first time since the financial crisis. It wasn’t much, around one percentage point, but it was enough to crater one of the few businesses for the banks that had come roaring back. And the housing market remains fragile. All of a sudden, all those people who were rushing into refinance their mortgages every time rates dropped stopped coming in.


JPMorgan funded $53 billion in mortgage loans in the first three months of 2013. That shrank to $17 billion in the first three months of this year. And JPMorgan is based on being big. The result is that you don’t just make less when you make fewer loans. You make nothing. A year ago, JPMorgan earned $500 million in the first quarter from originating home loans. In the first three months of 2014, it lost $200 million.


That might not be all that bad if JPMorgan were still making good money on the other parts of the mortgage process, like collecting interest or selling off loans. But it’s not. Interest rates are still near lows. What’s more, the rise in interest rates has squeezed the difference between what banks can charge mortgage borrowers and the interest they have to promise the purchasers of those loans. That difference a year or so ago accounted for a huge source of profits.


Put it all together and JPMorgan made just $114 million in income from its entire mortgage operations in the first quarter. That was down from nearly $700 million a year ago and $1.1 billion the quarter after that. But bankers like to talk about their businesses not in total profits but the returns they generate. Three quarters ago, JPMorgan’s mortgage business had a return on investment of 23%. Last quarter, it was 3%. JPMorgan could have almost done just as well by putting all of its money in a 10-year Treasury bond and calling it a day.


And it’s not just the mortgage business. Over the past few years, consumers and businesses – some not so great – have been able to secure loans at historically low interest rates. Expectations adjust. Now, interest rates are rising, and borrowers don’t want to pay higher prices. How long will it be before borrowers adjust? If you have just refinanced your 30-year mortgage, it might be a while.


If you want to know what higher interest rates might mean for the banks, take a look at JPMorgan’s mortgage business. It’s not good.

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As MOMO Fever Fades, These Are The Stocks Goldman Is Rolling Into

Zerohedge - Mon, 04/14/2014 - 10:32

As we reported over the weekend, a rather concerned Goldman proclaimed the great momo rally - that one that led to so much gains in 2013 and to many losses so far in 2014 - dead, and in a sign that far less euphoria is coming over the horizon, said that while momentum stocks will hardly recover their panic buying highs, suggested that the best the S&P 500 can hope for - if history is any guide - is for a 5% rise in the broader market over the next 6 months (what it didn't add is that hardly any algos, and certainly no self-respecting TBTF banker, get out of bed for a measly 1% return per month). Perhaps more imprortantly, what Goldman also remarked on was what it thought would be the stocks that should benefit from the rotation out of momo names and into slower growth, low valuation, low momentum names.

The list of S&P 500 stocks with "low momentum, low valuation, and low growth based on Goldman Sachs Micro Equity Factors as of April 10, 2014, is shown  below.

Is this merely another muppet trap as Goldman is now selling low momo stocks and buying back into the uber-high beta names, or is Goldman actually concerned about its clients' well-being this time around... speaking of which, where's Stolper? We'll let readers decided for themselves.

Categories: blogroll

Did the Department of Homeland Security Just Admit that the Government Knew about the Heartbleed Bug?

Zerohedge - Mon, 04/14/2014 - 10:23

Bloomberg reported that the NSA knew about – and exploited – the Heartbleed bug for years.

The NSA has denied it knew about the bug.

And the White House spokesman claims:

This administration takes seriously its responsibility to help maintain an open, interoperable, secure and reliable internet.




If the federal government, including the intelligence community, had discovered this vulnerability prior to last week, it would have been disclosed to the community responsible for OpenSSL.

(OpenSSL is the library infected by Heartbleed.)

But the Department of Homeland Security says:

The Federal government’s core citizen-facing websites are not exposed to risks from this cybersecurity threat.

Matt Stoller tweets:

DHS says #Heartbleed didn’t affect government websites. That is… peculiar.

Perhaps there is an innocent explanation … The government doesn’t use OpenSSL on its websites?

Nope …  Security firm Codenomicon – which discovered the Heartbleed virus – reports:

You are likely to be affected either directly or indirectly. OpenSSL is the most popular open source cryptographic library and TLS (transport layer security) implementation used to encrypt traffic on the Internet. Your popular social site, your company’s site, commercial site, hobby site, sites you install software from or even sites run by your government might be using vulnerable OpenSSL.

Did DHS just unintentionally admit that the government knew about Heartbleed years ago and patched its own websites … without telling the tech community about it?

Mother Jones points out that – whether or not the NSA knew about the bug – the Heartbleed episode makes it look bad:

I’m honestly not sure which would be worse. That the NSA knew about this massive bug that threatened havoc for millions of Americans and did nothing about it for two years. Or that the NSA’s vaunted—and lavishly funded—cybersecurity team was completely in the dark about a gaping and highly-exploitable hole in the operational security of the internet for two years. It’s frankly hard to see any way the NSA comes out of this episode looking good.

Categories: blogroll

Palladium, Gas and Wheat Surge On Supply Concerns

Zerohedge - Mon, 04/14/2014 - 10:08

Today’s AM fix was USD 1,324.50, EUR 958.05 & GBP 792.21 per ounce.               

Friday’s AM fix was USD 1,317.25, EUR 948.62 & GBP 785.71 per ounce.  

Gold dropped $0.20, or 0.015%, by close of trading on Friday to $1,317.80/oz, but showed a gain of 1.10% on the week.  Silver lost $0.10 on Friday, closing at $19.95/oz with a 0.5% loss on the day but a small gain of 0.05% on the week.

Palladium in U.S. Dollars - 20 Years  (Thomson Reuters)

Palladium surged 1.7% for a fifth straight session on Monday to its highest since August 2011 on growing fears that supply would be hurt by more U.S. sanctions on top producer Russia and prolonged labour strikes in world number two producer, South Africa.

Gold jumped to a three-week high as mounting geopolitical tensions in Ukraine curbed risk appetite, sending equities lower and boosting bullion's safe-haven appeal.

Gold, silver, palladium, platinum and oil rose while European stocks fell for a third day after Russia called an emergency session of the United Nations Security Council amid worsening violence in Ukraine and a drift towards civil war. Clashes between Ukrainian forces and pro-Russian gunmen turned deadly this morning.

Platinum gained about 1% to its highest in nearly a month as labour strikes continued in South Africa. Commodities in general climbed to a five-week high with the Standard & Poor’s GSCI gauge of 24 raw materials rising 0.6% in London, after earlier climbing to the highest level since March 3.

Palladium Mine Production By Country 2004 to April 2014 (Thomson Reuters)

U.K. natural gas, the European Union’s benchmark contract, climbed for a fourth day, surging 2.4% to the highest since march 27. Europe gets about a third of its natural gas from Russia, half of it through Ukraine.

Wheat surged 3.3%, nickel jumped to the highest since February 2013.

The Stoxx Europe 600 Index dropped 0.8% and S&P 500 Index (SPX) futures slipped 0.3%.

Palladium Supply and Demand - 2004 to April 2014 (Thomson Reuters)

Relations between Russia and the West are at their worst since the Cold War. Some Western governments believe Russia is preparing to take control of eastern Ukraine.

The United States is prepared to step up sanctions against Moscow if pro-Russian military actions in eastern Ukraine continue, a senior U.S. envoy said, with the sanctions set to target mining, banking and energy, among other sectors.

There is the real risk of a civil war where the old Cold War powers support rival factions by proxy. Another significant risk is of economic and trade war morphing into financial and currency war.

Palladium has outperformed other precious metals this year, gaining about 14% supported by fears over Russian supplies, and growing demand in the auto sector.

Gold and the precious metals are likely to see more gains as tensions over Ukraine are set to continue and look like they could deteriorate further.

Officials from the U.S. and Russia blamed each other at yesterday’s UN Security Council meeting for violence that left at least one Ukrainian serviceman dead

Five shares declined for every one that advanced in the Stoxx 600, with trading volumes 8.2% higher than the 30-day average, according to data compiled by Bloomberg. The MSCI Emerging Markets Index slid 0.6 percent, declining for a second day.

S&P 500 futures were little changed after the index slumped 2.7% last week, with the Nasdaq Composite Index losing 3.1%, the most since June 2012.

Protect And Grow Your Wealth > The Essential Guide To Storing Gold In Singapore

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Russian Fighter Jet Flies Repeatedly Within 1000 Yards Of US Warship In The Black Sea

Zerohedge - Mon, 04/14/2014 - 09:46

As we reported last Friday, a second US warship, the destroyer Donald Cook, crossed the Bosphorus last week and entered the Black Sea at precisely the time when NATO was arguing that its encroaching presence around Russia should not spook anyone. Apparently it spooked someone, namely Russia, which over the weekend decided to give the Americans a warm welcome. As AP reports, "A U.S. military official says a Russian fighter jet made multiple, close-range passes near an American warship in the Black Sea for more than 90 minutes Saturday amid escalating tensions in the region."

From AP:

The official says the fighter flew within 1,000 yards of the USS Donald Cook, a Navy destroyer, at about 500 feet above sea level, saying this prompted ship commanders to issue several radio warnings. The fighter appeared to be unarmed and the passes ended without incident.


In the first public account of the incident, the official said the Russian Fencer flew within 1,000 yards of the USS Donald Cook, a Navy destroyer, at about 500 feet above sea level. Ship commanders considered the actions provocative and inconsistent with international agreements, prompting the ship to issue several radio queries and warnings.


The fighter appeared to be unarmed and never was in danger of coming in contact with the ship, said the official, who was not authorized to talk publicly by name about the encounter so spoke on condition of anonymity. The passes, which occurred in the early evening there, ended without incident.


The official also said that a Russian Navy ship, a frigate, has been shadowing the U.S. warship, remaining within visual distance but not close enough to be unsafe.


The USS Donald Cook has been conducting routine operations in international waters east of Romania. The ship, which carries helicopters, was deployed to the Black Sea on April 10, in the wake of the Russian military takeover of Ukraine's Crimea region and ongoing unrest there.

It is unclear if Russia was simply marking what is clearly considers its own expanded territorial waters, or if the Su-24 pilots were just being friendly.

Curious where the ship is now? It is currently at anchor in the Romanian port of Constanca where it welcomed the country's president Basescu:

The forward deployed guided-missile destroyer USS Donald Cook (DDG 75) welcomed aboard Romanian President Traian B?sescu while the ship was in port in Constanta, April 14.




President B?sescu was met by members of the U.S. Embassy and Donald Cook’s commanding officer Cmdr. Scott Jones. He was then given a tour of the ship, including the Navigation Bridge, Combat Information Center and Engineering Control.





Donald Cook, the first of four Arleigh Burke-class destroyers to be forward-deployed to Rota, Spain, is serving on a scheduled patrol in the U.S. 6th Fleet area of operations as part of the President's European Phased Adaptive Approach (EPAA) to ballistic missile defense in Europe.



U.S. 6th Fleet, headquartered in Naples, Italy, conducts a full range of maritime security operations and theater security cooperation missions in concert with coalition, joint, interagency, and other parties in order to advance security and stability in Europe and Africa.

And to confirm that military overflights are hardly an isolated event around the Ukraine, moments ago photos were taken of a military helicopter flying over downtown Donestk in the east Ukraine, which as is widely known, is largely in the hands of "pro Russian separatists."

Military helicopter that just flew over downtown Donetsk. #Ukraine pic.twitter.com/ylpblgtxT2

— Alexander Marquardt (@MarquardtA) April 14, 2014

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ETF Outlook For The Week Of April 14, 2014 (XLF, FXE, RSX, XLU)

Benzinga - Mon, 04/14/2014 - 09:36

ETF Outlook for the ...

Categories: blogroll, Pre Market

Facebook Takes Life Seriously and Moves To Create Its Own Virtual Currency, Increases UltraCoin Valuation Significantly

Zerohedge - Mon, 04/14/2014 - 09:16

The Financial Times reports:

[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process. 

The authorisation from Ireland’s central bank to become an “e-money” institution would allow Facebook to issue units of stored monetary value that represent a claim against the company. This e-money would be valid throughout Europe via a process known as “passporting”.

Facebook has also discussed potential partnerships with at least three London start-ups that offer international money transfer services online and via smartphones: TransferWise, Moni Technologies and Azimo, according to three people involved in the discussions.

In the case of Azimo, Facebook offered to pay the company $10m to recruit one of its co-founders as a director of business development, according to people familiar with the situation.

 Yes, this space is heating up. It makes me feel good! You see, the Visas, Mastercards, Western Unions and Paypals of the world make a lot of money selling a relatively cheap services for a relatively large amount. BUT!!!! The Goldmans and JP Morgans of the world make much more money by selling very deep margined products and services for a lot more while paying a lot less to create them. It is here where UltraCoin has staked its ground. As the competition amongst the big boys starts to heat up, they will want to crawl up the food chain and I already have the ladder built! 

Ultracoin dektop

“Facebook wants to become a utility in the developing world, and remittances are a gateway drug to financial inclusion,” said a person familiar with the company’s strategy. Facebook recently passed 100m users in India, which is its largest national market outside the United States.


My last post on this topic illustrated how UltraCoin will operate in developing markets by allowing currency, stock and financial asset exposure trades of anywhere from $5 dollars to $5 million, as well as sending money to others for just a little more than nothing, as excerpted from "Hardware IS Dead" Thesis Has Now Torn Through All Handset Providers & Now Everyone Can Act On It:

I've created an infrastructure that significantly expands these investment markets by allowing anyone, anywhere with an Internet connection (of almost any speed) to participate in almost any of the world's public financial markets. Taking the subject matter of this article into consideration, we can short Samsung on its own home exchange of Korea for nearly any amount, from $10 million US down to $8 ...

manage currency risk in Ultracoin while using it to short Samsung

 Back to the FT article:


It also comes as other internet groups – in particular, China’s Tencent and Alibaba – race to turn their sites into mobile payment platforms.

Google has reiterated its commitment to expanding its mobile payments and wallet products, which have yet to be widely adopted by consumers. It is registered in the UK to issue electronic money, in a process similar to the authorisation which Facebook is seeking in Ireland.


In 2013, the company  [Facebook] facilitated $2.1bn worth of transactions, almost exclusively from games, according to documents filed with the Securities and Exchange Commission.

Vodafone has acquired an e-money licence for the phone company to operate financial services in Europe.

“It’s great news that non-banks are challenging the traditional banking monopoly,” said Simon Deane-Johns, a UK-based lawyer and European payments expert at law firm Keystone Law.

 It will be interesting to see how the potential bidding contest will form as these companies compete to build the next generation financial infrastructure. I believe that I am very well positioned, as excerpted from yesterday's missive:

 Related BoomBustBlog research

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Do You Belong In The Stock Market?

Zerohedge - Mon, 04/14/2014 - 09:14

Submitted by Economic Noise blog,

How bad have markets been recently? If you are watching them day by day or week by week recently, they seem severe. Is this reaction because we have been spoiled and expect markets to always go up? Or, is something else going on?

This chart shows SPY from January 2012 to the present. Each bar represents a week of activity:


Looking at the chart does not indicate anything out of the ordinary. The recent price pattern is consistent with those experienced over much of the last two-plus years — at least thus far.

The chart should dispel the notion that something out of the ordinary is occurring. Recent performance is in line with at least five other comparable dips during this period. But, should we assure ourselves in this fashion?

It may be comforting to look and say that nothing extraordinary has happened in the last couple of weeks. Thus far that is visually correct, at least for prices. The previous dips are comforting to the extent that they were brief interruptions in an upward trend. What if the current downtrend continues this week? What if it is the beginning of a new, longer-term trend downward? What if it is the early beginnings of bear market?

Will we look back at this point and say it was merely a dip? Or will we look back and recognize it as the beginning of a bear market? Or will it just be a “normal” 10 – 15% correction (pundits always use the term “normal” to describe most downturns — after all, they don’t want you running away).

No one knows where markets will go from here, although here are a few troubling issues that should be considered:

  • The Federal Reserve has announced and begun executing a taper strategy. I think they will reverse that, but what if they don’t?
  • Volume has been dropping since August of last year. Markets may be running out of buyers, at least at these levels.
  • International trends are working against equity markets. Ukraine is heating up again. Iran, Syria and other spots around the world represent threats to the US. Additionally, attacks on the dollar to dethrone it as the world’s currency are quietly underway.
  • China’s growth has slowed dramatically and there is the real possibility that much of their capital has been squandered in centrally-planned investments that will not survive a slowdown.
  • More troublesome than anything, however, is the dismal economic conditions. There has been no recovery, at least nothing that approaches a traditional one. All efforts have failed and now seem ineffective.
  • Stimuli are not forever. When they don’t work, the tendency is to double-down. That has happened, arguably several times. Resources are finite, although fiat currency is not. At some point the entire stimulus effort will be (if it has not already been) seen as a colossal failure that has seriously harmed the future of the country.
  • Inflation is inevitable if current policies continue. Economic and/or governmental collapse is possible if they don’t.

A man can drive himself crazy pondering these and other negatives. For those old enough to remember investing when it used to be investing, it seemed so much simpler. Put some money in stocks or mutual funds and forget about it. Let American ingenuity and a growing economy increase your savings/investment while you concentrated on more important things like your family and job. Th0se days are long gone in the casino that we call markets. 

Buy and hold seems to be crazy in light of the economic and financial dangers. Participating in markets at all is riskier than most would like. But, government financial repression has made it impossible to get returns elsewhere. Recently, equity markets have been the only game in town. Some day, likely sooner than most of us anticipate, the stock market bubble will burst.

There may be more upside from here, but I believe it is undersized relative to the potential downside.

If you want or need to participate in today’s markets, don’t use the techniques and strategies that worked for your father and grandfather. Today, investing is no longer investing but short-term trading. In markets like these, investors are going to get fleeced.

Within the last fourteen years, there have been two major market corrections, both of which saw drops of 55% from their highs. That, or more, is the potential for what lies ahead. For those who went through these markets, it was not enjoyable. A friend told me that he, fortunately, was talked into staying in these markets and recovering his losses. His “advisers” told him to stay. They will do so again next time, but next time the government is unlikely to be able to re-inflate the stock market bubble.

To put into perspective how lucky he was, it took 25 years for the Dow Jones to recover to its pre-crash highs after the Great Depression. Likewise, the Dow hit an intraday high of 1,000 in 1962 but never closed above 1,000 until about twenty years later.

You must decide whether these markets are for you, but if you do you had better be very agile and ready to run when the time comes. Unfortunately, most of us believe that we can get out before the disaster. History shows that thinking to be mostly wrong.

Whether recent market behavior proves to be merely a dip in the chart is almost irrelevant. The country and financial markets are nearing what could very well be an existential event.

Do not be investing like your father or grandfather. Markets today are more like casinos than a way to invest in American growth. Unfortunately, the Federal Reserve has made it impossible to go elsewhere other than your mattress.

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