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Tactical Trade – Barrick

Emerging Money - Mon, 04/21/2014 - 23:25

Gold is going lower in our view, but Barrick (ABX, quote) may have near term upside as we see the following catalysts:

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Categories: blogroll

Why Indexes are Capitalization-Weighted

TheAlephBlog - Mon, 04/21/2014 - 22:19

Are index funds that are capitalization-weighted the best funds to invest in?  No.  So why do we talk about index funds so much?  Because they represent the average dollar in the market.  In principle, everyone could invest in a comprehensive index fund, and there would be no effects on the market.

But indexes can be enhanced.  Tilt your investments to:

  • Avoid the biggest firms, their growth opportunities are limited.
  • Buy cheap stocks, they out-earn growthier stocks, and have fewer disappointments
  • Buy quality stocks, again, fewer disappointments.
  • Buy stocks that have been running, they tend to do well in the future.
  • Buy stocks with conservative accounting, they tend to outperform.

But the moment you do that, you are an active manager, because not everyone can do what you are doing.  Also, each of the anomalies I have indirectly referenced can occasionally be overvalued.  As an example, the biggest stocks presently look cheap compared to smaller stocks.

Trying to create “smart beta” is interesting, but let’s just call it enhanced indexing.  And if too many people try to do enhanced indexing, guess what?  Those stocks will become overvalued, and will eventually sag, badly.

There is no magic bullet in investing.  There is the work of evaluating valuations versus future prospects, and that is a challenging task.

If you want average performance, which is better than most get, buy a broad index fund with low fees and hold it.  If you want better performance, tilt your portfolio to reflect factors that usually outperform.  If you want still better performance, ask what factors are overvalued, and remove them from your portfolio.

As for me, I am happy buying safe and cheap stocks and holding them for three years or so.  I’m happy with my picks, and so I adjust my portfolio in small ways quarterly.  No need to over-trade.  I just keep following my strategy.

Categories: blogroll

Furious Chinese Rioters Beat Corrupt Policemen To Death

Zerohedge - Mon, 04/21/2014 - 21:02

It appears, based on these extremely graphic images, that the Chinese people has a different way of dealing with corrupt officials. As Shanghaiist reports, a riot involving around 1,000 people broke out last Saturday in Cangnan county of Wenzhou city, Zhejiang province, resulting in the hospitalization of five chengguan, China's notoriously abusive and under-regulated urban enforcement officials. The alleged cause for the riots was the five's brutally killing a civilian. According to reports, the chengguan "hit the man with a hammer until he started to vomit blood, because he was trying to take pictures of their violence towards a woman, a street vendor." This man later died while being rushed to the hospital. Given the following images of civilian retribution; is it any wonder, the powers that be in China fear social unrest?


[Background: Chengguan is a name given to the City Urban Administrative and Law Enforcement Bureau, a municipality police that exists in every Chinese city. Chengguan are notorious for their brutality and generally hated far and wide for it. Their purpose is to enforce municipal bylaws, but they like to resort to violence and often use it against those with no means to fight back.]
The incident began...

Recently, a man noticed Chengguan abuse a local female vendor in Cangnan County of Wenzhou City, Zhejiang Province, and pulled out his cell phone camera to document their notorious brutality.


Chengguan didn’t like it and since they enjoy almost limitless impunity, they had the man hit in the head with a hammer.



The man was taken to a hospital where he succumbed the following day.

As Shanghaiist reports,

The following report by SCMP describes what happened immediately after the five's act of violence:


"Angered by their violence, the crowd surrounded the officials and prevented them from leaving the scene. The tension further increased after internet rumours [sic] began circulating that they had beaten an onlooker to death.



Eventually the officials were forced to seek refuge in a van, according to eyewitnesses at the scene. Members of the crowd carrying sticks and stones then smashed the van and assaulted them through windows, they told South Metropolis Daily."



According to eyewitness accounts, the crowd -- which was growing at an alarmingly rapid pace -- was shouting for the chengguan to be murdered on the spot for what they did, yelling: "Kill them! Kill them!" They proceeded to beat the five until they were bloodied and unconscious, and later collectively tipped over the ambulance that had arrived to provide medical treatment.



Source: LiveLeak


But this is not the first time...

This incident is yet another chapter in the seemingly endless saga of both chengguan brutality and corresponding civilian backlashes: The sentencing of just a few years in prison to four chengguan who collectively killed a watermelon vender in July 2013 incited widespread protests on Weibo, while a villager poured sulfuric acid on 18 chengguan in Xiamen just a few months prior. Just one month before the Xiamen incident, the execution of street vendor Xia Junfeng for killing two chengguan also sparked public outrage, with netizens comparing the severity of Xia's sentencing with the arguably unfairly lenient suspended death sentence of Gu Kailai for confessing to the murder of British businessman Neil Heywood.

As LiveLeak concluded...

This is the inevitable consequence of letting the public to lose faith in the law enforcement and the justice system, especially when dealing with wrongdoings of government officials. There are other nations headed down the same path.

Categories: blogroll

"Riders On The Storm:" A Fictional Letter Explaining What Is Going On In Russia

Zerohedge - Mon, 04/21/2014 - 20:20

Submitted by John Carter,


Hello! It’s a long time since we’ve spoken. I still remember our adventures in New York with pleasure.

Of course, we’ve noticed the posts you’ve been making recently on RSB 117. Don’t worry, you aren’t in any trouble, these are all reasonable questions to ask. Have we really thought about the long-term economic consequences of our actions? Do we actually understand the likely effects in the markets, and the way they will affect our macroeconomic stability and growth prospects? Are we really willing to sacrifice all the benefits of a convertible ruble and access to world capital markets, just for Crimea, and part of the Ukraine, and perhaps some tiny, insignificant pieces of Estonia or Moldova?

The questions are reasonable ones, but that doesn’t actually mean that we would prefer that you continue to ask them in public in such an acute and penetrating way, simply because we’d prefer that not many people deduce their correct answers at this point. So Higher has authorized me to share with you some of the actual logic of our overall strategic thinking. Of course, we must ask that you exercise the utmost in discretion, as usual. But we thought it would be useful to give you, at least, some idea of what is really going on, and where we are headed with it, as it may be necessary to turn to you, at some point, for advice on tactics.

First, the strategic objective. It’s true, as you say, that our hand has been forced by recent events, but in fact we are exploiting an unexpected opportunity, not fighting a fire, executing a contingency plan developed some time ago, one of several we have available to take advantage of likely occurrences, one that will significantly advance our long-term strategic goals. If it hadn’t been Crimea, now, it would have been something else, in the next few years.

An opportunity to do what? Our public story has always been that we are engaged in some kind of atavistic gathering of the Lands, doing our best to recreate the good old days of the vanished Soviet Union. This is a convenient belief, so we have encouraged it. It is convenient because it allowed us to establish, in Georgia and elsewhere, the principle that we could still use naked force in inter-state relations, without provoking the alarm that a more obviously open-ended program of conquest might have. But really, one should think in more ambitious terms.

Of course, the Lands must be gathered, but there are two other things driving our overall strategic approach, one a problem and one an opportunity. The problem is America. The opportunity is Europe. The moment to move against both of them is now.  This is our chance to finally break NATO. We’ll get away with it because we’re going to do it subtly, destroying the alliance by snipping threads, here and there, that will cause the whole thing to unravel under the stresses of the coming few years. Our opponents have forgotten the difference between lies and the truth, and as a result they typically have no idea, themselves when they are bluffing. It is finally time to call a bluff – the claim that NATO would defend former Soviet republics – that our opponent never knew was a bluff, and so invalidate even their more serious promises.

How? We are about to do something that we have seen the Americans do several times now, most recently against Iran; fight a largely economic and financial war. The twist is that we are by far the weaker power, so we must do it in a clever way. But our opponents are, for now, so poorly led that they have put themselves in an enormously vulnerable position. We can withstand another crash in world markets – all we’ll have to do is arrest a few people, it will be salutary – but none of our opponents will win the next election if there’s another crisis like the one in ’08, or an even worse one, so for them finding some way to accommodate us before we can bring that about is a matter of political life and death.

Of course, the real reason the markets have to crash, sooner or later, is that the Fed and the Bank of Japan and the ECB would have to keep geometrically expanding the volume of money printing to keep the bubble they’ve already blown up from bursting, but instead the Fed has already reached its limits and is starting to taper. Even if they flinch this time, and re-expand QE, as we expect them to, continued geometric increase is impractical for very long. So the effort to prevent a crash in financial markets by surrendering to our demands will ultimately fail, but before it does, we can expect our opponents to offer many valuable concessions.

Once the final panic in the market does get underway, we will be able to take advantage of its disorganizing effects, while they will be crippled by them. Democracies are easily distracted. Who knows how long from now that will be? Not I, or anyone. It could happen tomorrow, or not for another five years. In the meantime, it is very much in our interest to keep the threat that we will precipitate a crash alive.

We are facing opposing powers that are intrinsically much stronger than we are, governed by people with no real survival instincts, who have made no effective preparations of any kind for a military or economic conflict. In that kind of strategic environment, great things can be accomplished with slender means. Fortune favors the bold. The trick will just be keeping the conflict non-kinetic and unconventional, and achieving as much as we can before they finally wake up and make a real stand. Each action must seem independent, each move must seem like it might be the last one we’ll make. Bit by bit, step by step, we will back them into a corner, simply because their planning horizon is three days, and ours is thirty years. The risk is limited, because our opponents are desperate for peace, and will gladly let us switch off the war the minute it begins to go against us. (This is the meaning of the American president’s endless “exit ramps”; what he is actually telling us is that we can end the confrontation whenever we please.)

By now American voters are very tired of their endless imperial wars, which started so many weary years ago, and as far as they can see, have achieved exactly nothing for them. The whole project of empire has been publicly discredited, though no part of the empire has been relinquished. That’s the paradox of Obama’s presidency – he still carries on all the various wars of empire and meddling provocations, but at the same time doubts their necessity, and is constantly tempted to repudiate them. The tentacles of the jellyfish continue to sting, like independent creatures, even after the brainless animal has lost interest in the fight. He wants to overthrow several of the world’s governments, and is actively undermining them – but his heart really isn’t in it. He starts wars that he has no will to win.

This, to our minds, is a strategic vulnerability that simply has to be exploited, because it means he can be fought – and beaten – fairly easily. Nothing can enhance a state’s prestige and influence more than taking on and defeating the currently paramount power, so America’s current strategic stance – impressive means, incoherent goals, absolutely no political will to achieve them, an attention span of three days – is a standing invitation to attack. We have done quite well against them in Syria, and there is no reason to think their performance on the Ukraine will be any better. Samantha Powers will still be piously scolding us and threatening to un-friend us on Facebook as the tanks roll into Kiev; she might well go on doing the same thing if we took Warsaw, or Berlin, though of course we currently have no plans to send tanks to those two places.

The natural tendency of the American voter is isolationism – he has difficulty seeing why other peoples’ troubles should matter to him, though he’s a good fighter once he’s reluctantly become involved in them. The trick is just to find some way to tip him back into his pre-1942 state of selfish indolence without doing any actual fighting. A much higher oil price and a deeper depression might do it, at this point, so it’s fortunate that we’re in a position to bring that about. The people who make up America’s current political leadership won’t really put up much resistance – they tolerate the existence of the empire because it’s lucrative for powerful constituents, and costs them, personally, nothing, but they are presiding over an inherited political system and an inherited security architecture which they fundamentally don’t believe in, don’t understand, and have no will to defend. If they have to choose between health care and Europe’s security, of course they will choose the good they understand and believe in – freedom from pain and the postponement of personal death for as long as possible – over the one they’ve never understood or sympathized with.

If we are really determined to restore full Russian sovereignty, up to and including the right to go to war on other powers without seeking anyone’s permission, as is our sacred obligation as guardians of the security of the Russian people and nation, war with America or her proxies can’t be avoided anyway, because as things are now, we won’t ever again be able to exercise our sovereign rights to make war and peace without fighting them, they will always get involved at an early stage. Since war can’t be avoided, and we’re the weaker power, if we want to win we must attempt to control the time and circumstances of the fight. We must fight a limited war when we can win, in a clever way that allows us to win, to avoid having to fight a war when we can’t. That means we have to start the fight ourselves, instead of waiting for them to start it. We must attack, because we are the weaker party, and need to keep the strategic initiative to achieve our goals.

So much for the problem, now for the opportunity. Only a year or two ago, the European Union seemed to be teetering on the verge of dissolution. I think that it would be very much in our interests to see that actually happen, especially if NATO goes with it. (This is why Estonia is essential; NATO thinks they will defend it, we must show them that they will not. Once one NATO member has been abandoned to our mercies, the principle will have been established, and we can deal with the Poles – our single biggest problem – at our leisure.)

The EU, as it presently exists, is a relic of an American-backed project to create a European super-state, a United States of Europe, that specifically and deliberately excludes us. In any such confederation, German hegemony is virtually certain. That is intolerable. We, of course, would prefer to see a European political architecture that includes us, one in which we have a chance at playing a leading role. But only by destroying the existing EU, and NATO, and starting over from scratch will we really be able to arrive at a satisfactory outcome.

The near-dissolution of the EU a couple of years ago was the result of an economic crisis, and so the question of whether or not it is possible to bring another such crisis about naturally arises. It’s my belief, as I’ve already explained, that an eventual renewal of the crisis is not only possible, but inevitable. Given that inevitability, the only choice available to us is that of whether or not to take control of the event, and use it.

The strange thing, really, is the apparent conviction, on the part of many European and American elected officials, that another financial crisis can actually be avoided, forever. Apparently they think that they can indefinitely postpone the next recession. From the outside, however, it has become quite obvious that the “developed” economies are locked in a cycle of artificial booms and genuine busts. It’s useless to speculate on the ultimate reason – what we actually know is that this is a group of people who for more than a decade now have not achieved anything like the rates of economic growth they had expected and planned for. As any polity experiencing a growth shock of this kind would, they have been resorting to more and more desperate expedients to try to delay the day of reckoning with this huge ongoing shortfall, in the process making things worse and worse each time they lose control.

Russia, and Brazil and China for that matter, are simply carried along as passengers on this increasingly violent roller-coaster ride. If we don’t want our currencies to appreciate uncontrollably against the dollar, we have to print rubles or yuan to buy up the excess dollars the Fed is printing to try to keep the world economy from crashing, so we inflate our own economies and pile up huge reserves of foreign exchange in the upswing, and then in the downswing, when the panic finally comes, all that money tries to rush out of our economies at once, making our markets and our currencies crash.

So you see, Gennady, another crash in the ruble and the MICEX is inevitable, sooner or later, simply as a consequence of the Fed’s current policies, whether we annex parts of the Near Abroad, or not. The question is just whether we initiate it ourselves, and ride the storm, first using the threat of a global financial crisis to manipulate and damage our enemies, or else are mere passive victims of the cycle, as we were in the last two iterations. The question is whether we Russians are capable of learning anything from experience, whether we have learned not to be the greatest fools in an artificial bull market. Perhaps, if we can develop the political will to abandon convertibility quickly enough, we can even avoid being caught in the crash, this time. The reserves the Fed forced us to accumulate will allow us to postpone the decision for years, if we’d like, and in that amount of time, it may even be possible to complete the operation and escape default and devaluation. If not, well, those are both things we know how to do, and last time the pain only lasted two or three years, which is nothing.

Since another panic in world markets is inevitable sooner or later, we plan to try to use it, this time, surf on it, let it carry us to our strategic goals. In order to do that, we need to be, or at least to appear to be, in control of the timing of events. The threat of cutting off Europe’s natural gas is a threat of precipitating a European recession, which would reduce tax revenues and bring the Mediterranean bond markets back into difficulties. A shock from the price of oil at the same time would make things even worse. The Europeans will concede anything in order to avoid that, because it threatens their whole European project, for which they have already sacrificed so much. This great harm, which is actually going to befall them no matter what they do, can be made to look, for a little while, like something it is in our power to provoke or prevent. They will allow us to get away with murder, if we can just produce that illusion – and it’s our job to take as much advantage of this fleeting opportunity as we can.

In the end, though, we really may have to go so far that we do force them to give up the oil and gas, because another European recession or depression now is absolutely necessary to our longer-term strategic plans. We can promise to turn the gas back on, if they’ll just give us Ukraine, but then drag things out somehow during the negotiation of the details, insisting on various implausible principles in a tedious and impractical manner, so that the economic damage is done anyway… We ourselves are likely to get caught in the depression as well, of course, no matter what we do, war or no war – which is why we actually need an external enemy now, to justify an increase in political repression and the imposition of exchange controls. During a war, many ways of managing an economy that would be impossible during peacetime are perceived as legitimate, so a confrontation with Europe will, in some ways, give us more freedom of action.

The Americans are in a position to take a more hawkish stance than the Europeans, and they may eventually begin to agitate for that approach, as things move on. Obama is in his second term, and the Democrats might not mind being out of power for the next two years, if they are going to be really bad ones for the voter, so even higher oil prices might be tolerable as far as they are concerned, as long as the other party can be blamed for their effects. Sooner or later, wise old men like Brzezinski, who still remember what it is like to have an actual thinking opponent, will be listened to. Or perhaps not, perhaps it will simply be impossible for the current leadership to ever wrap their heads around the idea of actually getting into a fight against someone with the means to fight back.

The European leaders, in any case, are, in our judgment, such complete pacifists that instead of welcoming their assistance in a crisis, they may easily be brought to resent the Americans’ hawkish interference, which perhaps can be used to drive a wedge between the two parties. We must try our best to seem, at some crucial point, both reasonable and conciliatory to the Europeans, and utterly insane and out of control to the Americans. Given the somewhat differing character of the two ruling elites, and the in particular the rather thoughtless jingoism of the Republicans, and their great love of draconian sanctions, that shouldn’t actually be all that difficult to accomplish. Perhaps a Republican victory in the upcoming American midterm election would serve our purposes – another way a crisis in financial markets could benefit us strategically.

Our immediate objective, by first threatening and then managing an economic crisis, is, of course, to regain control of the Ukraine, the whole thing, unopposed, step by step, perhaps annexing the East if that’s convenient, and at the same time to intimidate the Europeans, force them to publicly back down, to openly beg us to turn the gas back on, and have the Americans do nothing very effective to rescue them. The cherry will be Estonia; having failed to defend Ukraine, NATO will find it hard to rally to reverse the results of yet another referendum, even one conducted on the soil of a nominal NATO member. Kerry and Merkel may well abandon the Estonians to their fate – if so, that will be the last that will be heard of the North Atlantic Treaty Organization. If not, we can always drag out the crisis, and use it to extract more concessions in other domains. At the end, we want discredited European leaders bickering with each other as the EU and NATO crumble, and an exasperated America confined to the sidelines.

This will establish a precedent – if the Americans didn’t do anything about the first act of bullying, what is going to make them do something about the next one, or the next one, or the next one after that? It will show who really has the leverage in Europe, now. At the same time, the world economy will be crashing again. Nationalists will be rising to power in European countries, and the people who run Europe now will do anything to defeat them. One side or the other will end up as our allies. We’ll simply support whichever looks weaker. Beppo Grilli as Prime Minister of Italy or Marine Le Pen as Prime Minister of France would be a political windfall beyond our wildest dreams. We think we can manipulate such a combination of circumstances to our ultimate advantage, especially if we can get the Americans out of the picture – a protracted period of chaos and disunity in Europe is exactly what we need now.

While the threat of gas and oil cutoffs and the recession and crashes those could produce are our main point of leverage, there are other tools as well. It is important to keep direct military pressure on Ukraine. We can’t afford to let the situation stabilize as it is now, and we have yet to encounter any effective resistance, so the thing is to push on as quickly as is possible without provoking a real reaction. We need to discredit the Kiev government and, eventually, replace them with our allies. Ultimately we must use as much force as is necessary to achieve that goal, even if it means shooting some rioters in the streets. But here as everywhere, we can only win by fighting smart. I think you know what I mean by that, in a Ukrainian context.

Of course, as you’ve correctly pointed out, the Ruble will eventually crash, no matter what we do, if the crisis goes on long enough. Since we didn’t want it to appreciate in a way that would kill our economy, we were forced, by QE, to accumulate huge dollar reserves, enough to accommodate years worth of capital outflows without a crash, if we choose to spend them that way. We may not need to, though, if we can impose really effective exchange controls quickly enough.

Anyway, last time the ruble crashed, things were already going back to normal two or three years later. The people who will lose the most in a ruble crash are the European banks – our oligarchs own real assets, not paper money, and they are willing to be patient for the sake of the nation, as long as we subsidize them enough to keep them from going bankrupt.

We must prepare for a temporary loss of our oil and gas export revenues, of the sort the Iranians have suffered, another reason to impose exchange controls and arrest our domestic political opponents ASAP. If the ruble does crash, the seven hundred billion dollars Russians owe European banks must of course be written off, which by itself may be enough to precipitate a financial crisis in Europe.  In either case, the end-point is, yes, Gennady, another default on our debts and a retreat from full convertibility. And about damn time, too – there are serious drawbacks to full participation in the global dollar economy, periodic economic and political shocks that make it more trouble than it’s worth. The experience of a number of countries shows that it’s possible to do well behind the barrier of a non-convertible currency, as long as you manage sensibly. India has done well. Our strategic position will be greatly improved once that transition has been accomplished – we will no longer be dependent on Fed policy and world financial markets, and will be able to conduct counter-cyclical economic policy without always having to worry about the ruble’s exchange rate against the dollar.

Militarily, we are, of course, much, much weaker than the Americans, but we also are closer to home and fighting for something we care a lot more about. If we keep thinking outside the box, we can fight an asymmetric, unconventional, non-kinetic financial and political war and win, wring political concessions from an enemy who’s too urbane and sophisticated and hip and ironic to want to risk becoming involved in an open-ended nuclear brawl. We might actually benefit from the opportunity to machine-gun some protestors, if we could do it at a time when the enemy would have trouble coming up with a coherent response, for example in the middle of a financial panic. And, again, the enemy is dying to negotiate, so we can switch the war off at any time, if it begins to go badly. Since we’re by far the weaker party, we, as always, prefer a limited conflict. In an emergency, however, the use of nuclear weapons over our own territory – say, against an overflying satellite – would freeze our gains in place, while we negotiated a de-escalation.

So you see, Gennady, we are actually quite prepared to see the stock market crash, to see all the stock markets in the world crash, and the yields on our dollar bonds rise to whatever level. We are prepared for much worse things. We may, ourselves, be in a position to bring this outcome about, in at least two different ways – cutting off the gas to Europe, and suddenly defaulting on all our bank loans - and we think it favors us strategically, so we probably will try, sooner or later. The stock market will go back up some day, whether we win or lose, and if we end up defaulting, history shows that we’ll be borrowing in world bond markets again three or four years later. We risk a brief period of manageable economic suffering, while on the other side the whole global financial and political system is at risk, along with the retirement savings and medical plans of countless voters.

The inevitable economic setback may result in some political opposition within Russia itself, but in the context of an escalating confrontation with Europe it shouldn’t be too difficult to cope with. Stalin developed some very effective techniques for managing public opinion, both inside and outside of Russia; as his heirs, we must use them. The alternative is to wait for some other falling domino – China, Turkey, Thailand, Japan – to cause the next crash in world markets, and once again be caught in it as hapless victims. It’s worth taking the risks we’re taking because the other possible worlds in which we don’t take it aren’t actually all that wonderful either, and because we’re playing for all of Europe, and therefore ultimately for the whole world.

I hope that makes things a little clearer. Yes, it is a risky strategy, but a Europe dominated by Russia, or at least detached from the United States and disunited, is a prize worth risking everything for. Beppo is worth a crash. Of course, I can’t say anything about our more detailed military plans at this point, but this should suffice to explain the overall logic behind our willingness to, yes, Gennady, sacrifice the convertible ruble and the stock market for control of the Ukraine and a tiny part of Estonia, if necessary.

Think about what I’ve said – some of it may come as a shock, but in the end, I think you’ll agree that it’s actually good news that the long tense period of waiting is finally over. We can’t win a conventional or a nuclear conflict, but this plan really might succeed. If not, well, we Russians are used to overcoming adversity. In any case, it is what Higher has decided, so it behooves us all to get behind it, and push. A word to the wise.

It would be great to get together and talk in person sometime, though I’m afraid we won’t be meeting in New York again for a while.

Gennady, I remain, sincerely

Your friend, Sasha

Categories: blogroll

Is The US Military Preparing For The Collapse Of The Dollar?

Zerohedge - Mon, 04/21/2014 - 19:46

It almost happened in 2008... but as this excerpt from Casey Research's Meltdown America documentary notes, it appears the US military is preparing for the potential collapse of the US dollar. As Scott Taylor warns, "...if the carrot (of credit worthiness) is fading, and the stick (of military threat) is weak, that empire is going to come down in a hurry..." which leaves a serial economic mis-manager only one option to 'secure' the empire.



To see what the consequences of economic mismanagement can be, and how stealthily disaster can creep up on you, watch the 30-minute documentary, Meltdown America. Witness the harrowing tales of three ordinary people who lived through a crisis, and how their experiences warn of the turmoil that could soon reach the US. Click here to watch it now.

Categories: blogroll

Uncovered California

Zerohedge - Mon, 04/21/2014 - 19:43

I've shared my gripes about Covered California before, such as here and here. I've got more to add.

I'm self-employed, so I get insurance through the so-called Covered California system of health insurance. California is one of the many states that decided, in its infinite wisdom, to not hang off the federal government's healthcare.gov site, but instead spend $100 million of its own to re-invent the wheel.


So instead of one wholly integrated federal health care system, we have something like 30 disparate systems, all of them expensive, and none of them perfect. Indeed, "not perfect" is an absurd understatement, roughly equal to Oprah being "not petite." Allow me to offer my own personal example.

When I initially signed up for the service in December, I decided to be cheap and buy the Bronze level of service, since my medical needs are approximately zero. The signup went decently well (although it was clear the web site was sorta kinda broken), and I was on my way. Healthnet was the private insurance carrier that provided my lame-ass Bronze coverage, and that was that.

A couple of weeks later, I decided Bronze was a pretty pathetic level, and that Silver would be a more appropriate product for me. Now, in a just and sane universe, I would have signed on to the web site, clicked the Upgrade button, agreed to the higher premium, and we would all go on with our lives. Ho ho ho! Nope. Not even close.

I debated whether or not to share with you all I went through to execute this ostensibly simple procedure, but honestly, even with the most riveting writing, I would lose all of you along the way. There were many steps, many phone conversations, and many dozens of hours expended on this ridiculous act. There were false starts, dead ends, and wrong turns. If there is a Hell, they surely will model it on my experience upgrading from Bronze to Silver.

But that was weeks ago. I'm not going to go back down that path, because, at long last, I finally got the upgrade done, and I was on my way. So what am I griping about now?

It's good that you ask, because I just happen to be typing right now, and I'd be glad to respond.

On Friday, my doctor's office contacted me to tell me they weren't getting paid, because my insurance had been cancelled. Umm..........what? Given what screw-ups both Covered California and Healthnet are, I wasn't shocked, but after spending so much time and energy finally getting upgraded, it made me sick to think I'd have to venture back into The Land That Competency Forgot to deal with this.

But, sure enough, I logged onto Healthnet and was greeting with the following:


For my convenience. For. My. Convenience. You douchenozzles! The last thing you care about in the world is my convenience!

So then I called them, and I felt kind of honored, in a way, because as luck would have it, I managed to reach the winner of the World's Most Dim-Witted Person contest to help me. What a treat! So after speaking with her at great length (because, let's face it, my time has no value), it was determined that..........my premiums were promptly paid, yes. I hadn't done anything wrong, yes. But, according to Ms. Dim, Covered California had cancelled the policy on April 3 for no reason, and that Covered California was in the process of fixing this, and it would be all just dandy in a week or ten days.

See, the beauty of the State and a Private Company partnering like this is they can always blame0421-dumbdumber one another. There's nothing easier than extending one's index finger Over There to indicate whose fault it is. I've noticed they do this a lot. And so they did it a again.

Although I could have just left it at that, I'm not naive enough to think that everything was going to work itself out, so I called Covered California (which is akin to the proverbial jumping out of the frying pan and into the fire, because let's remember, at least Healthnet is a private company). So, after a lot of waiting, I reached a human at CoveredCA and told her the situation.'

She carefully examined my records and said, nope, they didn't cancel me, and there was nothing untoward about my account at all. She had no idea what Healthnet was talking about.

Well, OK, fine. But while I had her on the phone, I explained to her that I'd like to be able to log in to my own CoveredCA account from time to time, and my username and password weren't working.

She explained to me that the username/password I had wouldn't work, but that I should create a new account, just like I did the first time, and enter a special Case Number when prompted in order to "link" to my information. OK, fine. So she told me the access code, letter by letting, emphasizing which letters were uppercase and which were lowercase. I carefully repeated it back to make sure I had it right, because getting a human on the phone is time-consuming enough.

Later on, I went to the web site, and I dutifully started to create a new account. I saw the field she mentioned, which gave me a sense of relief, because that's where I was supposed to enter my code:


I carefully entered the code and clicked the Submit button. It waited a moment, and then up came a dialog box saying that the code wasn't valid. Although I knew I entered the code carefully, I tried once again, this time, triple-checking each letter. I clicked Submit. Same deal. I tried a third time. No change.

Thus, I called them yet again. After a long while, I got another human, and I explained the situation. She said to me, and I'm not making this up: "Oh, yes, that's the correct Access Code. But those don't actually work."

It soon became evident that the entire Access Code schtick was just a sorry waste of time. It didn't work at all. And when I expressed astonishment that their $100 million site had this error, she laughed, "Oh, that's nothing! That's one of the small problems! You wouldn't believe how many glitches there are."

NEWS FLASH: I had thrown out the figure "$100 million" a couple of times, I realize. This was just a dumb guess. I took the time to actually find out what it cost, and I'm sorry I didn't do better research for my readers. Turns out the costs were $489 million. Sorry 'bout dat.

In any case, I am a healthy, relatively young person, and the preceding has been a taste of my experience. I can't imagine what someone with real health needs would go through. But I'll close by saying this: I realize I piss and moan and bitch about people who work for Goldman Sachs, or JP Morgan, or wherever else. But you know what...........they're supposed to make lots of money, and it just so happens they're very good at it. Getting hired at a place like Goldman Sachs is a very big deal, and although these people are no saints............they are good at what they do. They have to be, because private enterprise doesn't tolerate otherwise.

When you're dealing with state bureaucrats, however, it's an entirely different universe. You are dealing with some of the dumbest folks on the planet, fiercely protected by entrenched unions, and utterly devoid of incentive to do anything but punch a clock and get through their day.

The old saw, cited for years to avoid national health, about government-based health care having "the efficiency of the post office and the sensitivity of the IRS" was far too optimistic. I'm here to tell you.............it sucks out loud. So, for your own sake, don't ever get sick.

Categories: blogroll

How China's Commodity-Financing Bubble Becomes Globally Contagious

Zerohedge - Mon, 04/21/2014 - 19:09

"Marubeni [the world's largest soybean exporter to China] is deluded in thinking that payments will come once the cargoes have sailed," is the message from an increasing number of liquidity-strapped Chinese firms, "If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts." As we explained in great detail here, this is the transmission mechanism by which China's commodity-financing catastrophe spreads contagiously to the rest of the world. A glance at the Baltic Dry is one indication of the global nature of the problem (and Genco Shipping's $1 billion bankruptcy), but as Reuters reports, "If buyers cannot resolve the issue, they may also cancel future shipments."


Reuters notes that China's soybean imports in the first quarter jumped 33.5 percent, a record for the quarter and industry sources see a rush of cargoes in the second quarter. The rise comes amid an increasing use of soybeans in financing trades to secure credit.

Traders estimate more than 10 million tonnes of soybeans, out of China's imports of 63.4 million tonnes last year, are imported for financing annually.

And the lack of liquidity and forced losses means China's buyers ain't paying...

Chinese buyers may default on a further 1.2 million metric tons (1.32 million tons) of soybeans worth about $900 million being shipped from the United States and South America, to avoid incurring huge losses in a depressed local market, the country's top soy buyer said.




Honoring these deals would cause Chinese buyers to incur a loss of as much as $7 million per shipment,


"If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts," Shao said.

Of course, this odd 'beggars are choosers' almost monopoly of buying pressure dry-up means Chinese buyers can play hard-ball...

"Most of the cargoes were delivered by the seller before receiving letters-of-credit and buyers are unwilling to pay now because they will suffer massive losses," said Shao, speaking from a hotel suite he uses when in Rizhao in this eastern province.


"If buyers cannot resolve the issue, they may also cancel future shipments."




Some Chinese commodity buyers have previously threatened to default, or cancel cargoes, to force sellers to take lower prices.




"Marubeni is deluded in thinking that payments will come once the cargoes have sailed," said an industry executive also based in Shandong, who declined to be identified


With so many shipments at risk of a default, Chinese buyers now have a upper hand in bargaining for lower prices.


"Most of the cargoes will eventually be sold to China. This will force sellers to renegotiate prices, which will benefit buyers,"

And the lower prices will only exacerbate liquidity problems as collateral value tumbles on the soybean-backed loans.

And this means counterparty risk is rising broadly - which means haircuts (or Letters of Credit) soar, collapsing liquidity conditions and leading to a further vicious tightening cycle...

Banks, once content to rake in profits from the lending, have been spooked by growing losses at crushers and trading firms and have begun tightening credit.


"They are asking for more a higher deposit to opening a LC (letter of credit) nowadays; before it was set at 10 percent of the contract value but banks have gradually raised the level to between 20-30 percent," said an executive at a trading firm.


Industry sources said the hike has severely crimped traders' cash flow, with weak demand leaving them with high inventory they cannot liquidate fast enough.

As we explained previously,

While apologists of China's collapse have been quick to point out that China's credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private - corporate - debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9'ed.

And sure enough that is what Reuters reports above is happening... which means only one thing...

We explained precisely this a few days ago in "What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?" As briefly noted above, these are all the commodities that serve as conduits in China's numerous Commodity Funding Deals. Only no more.

Which means that far form merely crushing exporters who suddenly are dealing with Chinese importers who have torn apart contracts, obviously with no recourse, suddenly China's entire "hot money" laundering infrastructure (which as explained over the weekend, has gold performing an even greater role than copper) is about to collapse.

And when the counterparties of China's hundreds of billions in CCFDs decide to also get out of Dodge and unwind these deals (amounting to hundreds of billions in notional), only to find the underlying commodity has not only been re-re-rehypotecated countless times and has been sold, then there is truly no way of saying what happens next.

Categories: blogroll

Monday Humor: 33 Uncomfortably True Charts About Everyday Life

Zerohedge - Mon, 04/21/2014 - 18:36

If one picture can paint a thousand words, the following 33 images, from Danish writer/artist duo Mikael Wulff and Anders Morgenthaler, should shed serious light on the everyday struggles, irritations, and insights of their fellow Westerners.


Via DeMilked,

The duo publishes their satirical creations every day on Wumo, their webcomic and newspaper cartoon strip (formerly known as Wulffmorgenthaler). Their cartoon career started in a comic strip competition in 2001. Their victory gave them the opportunity to be published in Politiken, a national Danish newspaper, for one month. Things continued looking up when their strip became very popular and became a regular feature in several blogs and newspapers in Scandinavia and Germany. Now their comic strip is a regular in The New York Times.

Take a look at this collection of graphs – are they true for you as well?

Source: kindofnormal.com | Facebook (via)

Categories: blogroll

Shrine Visit Retribution? China Seizes Japanese Cargo Vessel (Over War-Debts)

Zerohedge - Mon, 04/21/2014 - 17:58

We noted yesterday, Japan's decision to send an Abe cabinet official to the Yasukuni shrine (home of Class A war criminals) and Abe's sending of an offering, warning it will likely see retaliation from China. We didn't have to wait long. As BBC News reports, China has seized a Japanese cargo ship (over a pre-war debt). With President Obama due to visit in days, it seems the tensions between China and Japan may force his hand to pick sides.


As BBC News reports, China's seizure of a Japanese cargo ship over a pre-war debt could hit business ties, Japan's top government spokesman has warned.

Shanghai Maritime Court said it had seized the Baosteel Emotion, owned by Mitsui OSK Lines, on Saturday.


It said the seizure related to unpaid compensation for two Chinese ships leased in 1936.


The Chinese ships were later used by the Japanese army and sank at sea, Japan's Kyodo news agency said.


"The Japanese government considers the sudden seizure of this company's ship extremely regrettable," Chief Cabinet Secretary Yoshihide Suga said on Monday.


"This is likely to have, in general, a detrimental effect on Japanese businesses working in China."

It seems the Japanese shrine visit sparked some more "war" memories for the Chinese...

The owners of the shipping company, identified by Kyodo as Zhongwei Shipping, sought compensation after World War Two and the case was reopened at a Shanghai court in 1988, China's Global Times said.


The court ruled in 2007 that Mitsui had to pay 190 million yuan ($30.5m, £18m) as compensation for the two ships leased to Daido, a firm later part of Mitsui, Global Times and Kyodo said.


Mitsui appealed against the decision, but it was upheld in 2012, Kyodo said.


Kyodo said this appeared to be the first time that a Japanese company asset had been confiscated as war-linked compensation.




Japan has always held that the issue of war-related compensation was settled by a 1972 agreement between the two sides when ties were normalised.


But now for the first time, a Chinese court has ignored that agreement - and the Chinese government appears to be giving full support, says the BBC's Rupert Wingfield-Hayes in Tokyo.

It seems China and Japan are testing their relationship with the US...

Categories: blogroll

The Earnings Season: "House Of Cards"

Zerohedge - Mon, 04/21/2014 - 17:32

Submitted by Lance Roberts of STA Wealth Management,

Just like the hit series "House Of Cards," Wall Street earnings season has become rife with manipulation, deceit and obfuscation that could rival the dark corners of Washington, D.C. From time to time I do an analysis of the previous quarters earnings for the S&P 500 in order to reveal the "quality" of earnings rather than the "quantity" as focused on by Wall Street.  One of the most interesting data points continues to the be the extremely low level of "top line" revenue growth as compared to an explosion of the bottom line earnings per share.  This is something that I have dubbed "accounting magic" and is represented by the following chart which shows that since 2009 total revenue growth has grown by just 31% while profits have skyrocketed by 253%.

As I have discussed previously:

"Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression.  The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth.  This has been achieved by increases in productivity, technology and offshoring of labor.  However, it is important to note that benefits from such actions are finite."

As we enter into the tsunami of earning's reports for the first quarter of 2014, it will be important to look past the media driven headlines and do your homework.  The accounting mechanizations that have been implemented over the last five years, particularly due to the repeal of FASB Rule 157 which eliminated "mark-to-market" accounting, have allowed an ever increasing number of firms to "game" earnings season for their own benefit.  

This was confirmed in a recent WSJ article which stated:

"If you believe a recent academic study, one out of five [20%] U.S. finance chiefs have been scrambling to fiddle with their companies' earnings.


Not Enron-style, fraudulent fiddles, mind you. More like clever—and legal—exploitations of accounting standards that 'manage earnings to misrepresent [the company's] economic performance,' according to the study's authors, Ilia Dichev and Shiva Rajgopal of Emory University and John Graham of Duke University. Lightly searing the books rather than cooking them, if you like."

This should not come as a major surprise as it is a rather "open secret." Companies manipulate bottom line earnings by utilizing "cookie-jar" reserves, heavy use of accruals, and other accounting instruments to either flatter, or depress, earnings.

"The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big "restructuring charge" that would otherwise stand out like a sore thumb.


What is more surprising though is CFOs' belief that these practices leave a significant mark on companies' reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study's respondents said it was around 10% of earnings per share."


Of course, the reason that companies do this is simple: stock based compensation. Today, more than ever, many corporate executives have a large percentage of their compensation tied to company stock performance. A "miss" of Wall Street expectations can lead to a large penalty in the companies stock price. 

As shown in the table, it is not surprising to see that 93% of the respondents pointed to "influence on stock price" and "outside pressure" as the reason for manipulating earnings figures.

Note: For fundamental investors this manipulation of earnings skews valuation analysis particularly with respect to P/E's, EV/EBITDA, PEG, etc. Revenues, which are harder to adjust, may provide truer measures of valuation such as P/SALES and EV/SALES.

So, as we head into earnings season, it is important to be aware of what is real, and what isn't. Wade Slome brought this into focus recently via the Investing Caffeine blog: where he pointed out four things to look for:

"Distorted Expenses: If a $10 million manufacturing plant is expected to last 10 years, then the depreciation expense should be $1 million per year. If for some reason the Chief Financial Officer (CFO) suddenly decided the building would last 40 years rather than 10 years, then the expense would only be $250,000 per year. Voila, an instant $750,000 annual gain was created out of thin air due to management’s change in estimates.


Magical Revenues: Some companies have been known to do what’s called 'stuffing the channel.' Or in other words, companies sometimes will ship product to a distributor or customer even if there is no immediate demand for that product. This practice can potentially increase the revenue of the reporting company, while providing the customer with more inventory on-hand. The major problem with the strategy is cash collection, which can be pushed way off in the future or become uncollectible.


Accounting Shifts: Under certain circumstances, specific expenses can be converted to an asset on the balance sheet, leading to inflated EPS numbers. A common example of this phenomenon occurs in the software industry, where software engineering expenses on the income statement get converted to capitalized software assets on the balance sheet. Again, like other schemes, this practice delays the negative expense effects on reported earnings.


Artificial Income: Not only did many of the trouble banks make imprudent loans to borrowers that were unlikely to repay, but the loans were made based on assumptions that asset prices would go up indefinitely and credit costs would remain freakishly low. Based on the overly optimistic repayment and loss assumptions, banks recognized massive amounts of gains which propelled even more imprudent loans. Needless to say, investors are now more tightly questioning these assumptions. That said, recent relaxation of mark-to-market accounting makes it even more difficult to estimate the true values of assets on the bank’s balance sheets."

For really short term focused traders none of this really matters as price momentum trumps fundamentals. However, for longer term investors who are depending on their "hard earned" savings to generate a "living income" through retirement, understanding the "real" value will mean a great deal. Unfortunately, there are no easy solutions, online tips or media advice that will supplant rolling up your sleeves and doing your homework. 

As the WSJ article concludes:

"The CFOs in the study named and ranked several red flags.


First and foremost, investors should keep an eye on cash flow: Strong earnings when cash flow deteriorates may be a sign of trouble. The advantage of this approach is that, unlike some of the other warning signs, it is easily measurable, arming the investors and analysts who do their homework with strong ammunition against management.


Secondly, stark deviations from the earnings recorded by the company's peers should also set off alarm bells, as should weird jumps or falls in reserves.


The other potential problem areas are more subjective and more difficult to detect. When, for example, the chief financial officers urge stakeholders to be wary of 'too smooth or too consistent' profits or 'frequent changes in accounting policies,' they are asking them to look at variables that don't necessarily point at earnings (mis)management.


As the quarterly ritual of the earnings season approaches, executives and investors would do well to remember the words of the then-chairman of the Securities and Exchange Commission Arthur Levitt in a 1998 speech entitled "The Numbers Game."


'While the temptations are great, and the pressures strong, illusions in numbers are only that—ephemeral, and ultimately self-destructive.'"

Couldn't have said it better myself.

Categories: blogroll

Testosterone in the Financial Markets

Zerohedge - Mon, 04/21/2014 - 17:22

Follow ZeroHedge in Real-Time on FinancialJuice

Too much testosterone in the room? Heard that all before. It’s the adolescent-like traders that were battling with levels of testosterone and cortisol, pounding on their chests like Tarzan swinging through the trees in the jungle of the financial markets that brought the world down too. It wasn’t just the crazy race for money and money-spinning winners that were never going to burst. It was proved in 2008 by the University of Cambridge that the movements of the markets are correlated to levels of those two hormones in traders’ bodies.

Testosterone is associated with aggression and sexual behavior and cortisol is a stress hormone. Two scientific researchers took swabs from saliva glands of traders over an eight-day period to show that there was a direct correlation with rises and falls in the levels of those to hormones which affected the way that they acted and reacted on the financial markets. The results showed that traders made most money when they had the highest levels of testosterone in their bodies. We get told that you have to be calm and collected and rational, a good thinker and a quick snap-second decision maker when working on the financial markets. But, the research showed that while the people might be outwardly calm, their testosterone levels inside were bubbling at boiling point. What’s worse is that prolonged levels of testosterone and cortisol lead the prefrontal cortex and the hippocampus to shrink. It’s precisely in those two areas that the brain associates factual memory and decision-making. So, traders end up with “learned helplessness”, meaning that actions taken in risky situations will have no effect on the outside world; they simply don’t matter.

Remember that the stock market ended 2013 with a confetti of champagne-popping orders to buy, buy, buy. It hadn’t been that bullish with record highs for the S&P 500 in 16 years. It was the best year for the Dow Jones Industrial Average in 18 years. What a great year it was in 2013The Federal Reserve and the economic policies of the US government have strongly shown that it is believed that the solution to macroeconomic problems in the USA are to be found in new inflationary bubble-attitude, bringing about the inflation of asset values, so that the landing from the last financial crash in 2008 would be a little bit easier. But, it’s precisely the Federal Reserve’s liquidity policies, the loose money, the free and easy Quantitative Easing that has inflated another bubble from a bubble burst. In the meantime, the testosterone levels of the traders have been shooting through the roof since they have been on a winning streak. They have definitely entered the period of “learned helplessness”. Their actions (in their opinion), doped up to the eyeballs on testosterone, allow them to believe that they will have no effect on the world.

Since the worst lows of the financial crash that were seen in March 2009 for the S&P500 Index, we sit back and witness the 180%-increase in the market. It’s been the longest and the highest bull market in history, hasn’t it? Stocks are priced to give below-average returns in the coming months and that’s a signal if ever there was one of market performance (take a look at the Shiller P/E 10 ratio; it’s above 25, while the historical average is 16.5).

Another obvious identification of testosterone and cortisol causing “learned helplessness” is the results of sentiment surveys. When sentiment surveys are in extremes, then the market tends to move in the opposite direction. Today Investors Intelligence Sentiment Poll shows that bulls outnumber bears by 45% on the financial markets these days. That’s extreme. That’s a bad sign for the financial markets. The guys believe that their actions simply don’t matter any longer.

More women and less testosterone would mean a whole lot less of “learned helplessness” on our hands. Cocaine-induced party-animals with primal instincts that have been cut off from reason because their testosterone has gone into over-drive and their cortisol has cut them off from reality all thrown into the financial markets and multiplied by thousands means that the crash-landing will be worse this time. Even Christine Lagarde of the International Monetary Fund stated that the financial crash would never have happened had the Lehman Brothers been the Lehman Sisters. The risk profile of women means that they spend less and save more. Certainly, there may be less money to be made, but there may be less to be lost too.

Maybe someone has realized that this is the case today. We’re slowly changing the way we look at women and the representation that we have of them. The financial services industry has cottoned on to that and there are more women according to researchers in financial ads these days (whether they be clients or part of the workforce). Pamela Grossman of Getty Images has shown that there is an increase of 20% of women in adverts linked to the financial sector today compared with five years ago. But, it’s not sufficient to just show cognitively-adept and good-looking women that are high-flyers in adverts related to the financial sector; that isn’t going to change anything. It’s recruiting them also in the world of finance. We haven’t done that. According to studies by the Boston Consulting Group men are interested in plain old wealth, while women are interested in long-term financial security (not only for themselves but for their families). But, the financial sector is male-dominated, testosterone-induced and helplessly rigid.

Women in advertising are just marketing techniques for the masses to fool the consumer these days; yet again. The financial markets are still testosterone-reeking bull-pits where men have lost touch with reality.

Originally posted: Testosterone in the Financial Markets

Day Trading Data Sheets Futures and Forex

Categories: blogroll

"Faith" In One Chart

Zerohedge - Mon, 04/21/2014 - 17:00

Another day, another downgrade in the expectations for US economic growth in Q1 (to a mere 1.5%). But have no fear, oh ye of little faith, for the hockey-stick of hope will refuel that exuberance by the year-end to an underwhelming 2.7% 2014 growth rate...



Crucially, GDP will always mean-revert up from a drop... but profit margins will never mean-revert down from an exuberant extreme easy-money surge.




h/t @Not_Jim_Cramer

Bonus Chart: The Death Cross of Global Rationality continues

Categories: blogroll

Japan Has Proven That Central Banks Cannot Generate Growth With QE

Zerohedge - Mon, 04/21/2014 - 16:47

The following is an excerpt from a recent client letter.


The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way.


Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.


Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.


In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…


$1.4 trillion is…


1)   The equivalent of 24% of Japan’s total annual economic output.

2)   Enough to fly every human being in Japan to California for a 2-week vacation.

3)   The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.


Moreover, with $1.4 trillion, you could…


1)   Buy Australia’s entire economy for a year.

2)   Fund NASA for the next 82 years.

3)   Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.


For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding.


Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.


To whit, since announcing this program Japan has seen:


1)   GDP growth accelerate for only two quarters before turning down again.

2)   Prices rise for nine straight months… pushing Japan’s cost of living to a five year high.

3)   Household spending crater 2.5% year over year in real terms.

4)   The Yen lose an astounding 25% of its purchasing power.

5)   Multiple new record trade deficits, with January being the worst ever January on record… ditto for October, November and December last year.

6)   Over 77% of Japanese citizens not feeling as though Japan’s economy is improving.


In simple terms, Abenomics has failed to revitalize Japan. Just as importantly, this failure is being noticed by the press (articles regarding the failure of Abenomics have emerged in Forbes, the Financial Times, and CNBC) and is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now).


Thus, the Bank of Japan’s massive QE campaign has revealed:


1)   That QE does not generate economic growth

2)   There will be political consequences for its failure


Now, Central Bankers will never openly admit that they or their policies have failed. But Japan has proved that they have. It’s only a matter of time before the world catches on.


This concludes this article, swing by www.gainspainscapital.com for a FREE investment reports Protect Your Portfolio, which outlines how to protect your portfolio from bear market collapses.


Best Regards


Phoenix Capital Research




Categories: blogroll

Japan Has Proven That Central Banks Cannot Generate Growth With QE

Zerohedge - Mon, 04/21/2014 - 16:47

The following is an excerpt from a recent client letter.


The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way.


Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.


Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.


In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…


$1.4 trillion is…


1)   The equivalent of 24% of Japan’s total annual economic output.

2)   Enough to fly every human being in Japan to California for a 2-week vacation.

3)   The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.


Moreover, with $1.4 trillion, you could…


1)   Buy Australia’s entire economy for a year.

2)   Fund NASA for the next 82 years.

3)   Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.


For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding.


Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.


To whit, since announcing this program Japan has seen:


1)   GDP growth accelerate for only two quarters before turning down again.

2)   Prices rise for nine straight months… pushing Japan’s cost of living to a five year high.

3)   Household spending crater 2.5% year over year in real terms.

4)   The Yen lose an astounding 25% of its purchasing power.

5)   Multiple new record trade deficits, with January being the worst ever January on record… ditto for October, November and December last year.

6)   Over 77% of Japanese citizens not feeling as though Japan’s economy is improving.


In simple terms, Abenomics has failed to revitalize Japan. Just as importantly, this failure is being noticed by the press (articles regarding the failure of Abenomics have emerged in Forbes, the Financial Times, and CNBC) and is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now).


Thus, the Bank of Japan’s massive QE campaign has revealed:


1)   That QE does not generate economic growth

2)   There will be political consequences for its failure


Now, Central Bankers will never openly admit that they or their policies have failed. But Japan has proved that they have. It’s only a matter of time before the world catches on.


This concludes this article, swing by www.gainspainscapital.com for a FREE investment reports Protect Your Portfolio, which outlines how to protect your portfolio from bear market collapses.


Best Regards


Phoenix Capital Research




Categories: blogroll

John Hussman On The Federal Reserve's Two Legged Stool

Zerohedge - Mon, 04/21/2014 - 16:32

Excerpted from John Hussman's Weekly Market Comment,

“Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions… Recall how this worked during the couple of decades before the crisis. The FOMC's main policy tool, the federal funds rate, was well above zero, leaving ample scope to respond to the modest shocks that buffeted the economy during that period. Many studies confirmed that the appropriate response of policy to those shocks could be described with a fair degree of accuracy by a simple rule linking the federal funds rate to the shortfall or excess of employment and inflation relative to their desired values. The famous Taylor rule provides one such formula.”


- Janet Yellen, FOMC Chair, April 16 2014

In her first public speech on monetary policy, Janet Yellen made it clear that the Fed intends to pursue a more rules-based, less discretionary policy. This is good news. The bad news, however, is that Yellen focused only on employment and inflation. In that same speech, not a single word was said about attending to speculative risks or financial instability (which are inherent in Fed-induced, yield-seeking speculation). Without attending to that third leg, the Fed is resting the fate of the U.S. economy on a two-legged stool.

The problem is this. In viewing the Fed’s mandate as a tradeoff only between inflation and unemployment, Chair Yellen seems to overlook the feature of economic dynamics that has been most punishing for the U.S. economy over the past decade. That feature is repeated malinvestment, yield-seeking speculation, and ultimately financial instability, largely enabled by the Federal Reserve’s own actions.

To overlook yield-seeking speculation as a central element connected to the Federal Reserve’s mandate is to invite a repeat of dismal economic consequences over and over again. The Fed’s mandate need not explicitly refer to financial stability – it is enough to recognize that the failure to take speculation, malinvestment, and financial stability seriously has been one of the primary causes of economic and financial crises that prevent the Fed from achieving that mandate. Indeed, the Fed has again baked such consequences into the cake as a result of its policy of quantitative easing, and an associated lack of appreciation for how equity valuations work (particularly the need to consider valuation multiples and profit margins jointly, whenever one uses earnings-based measures).

Nearly every argument that stocks are not in a “bubble” begin with an appeal to 2000, as if the most extreme valuations in history should be a upside objective, below which anything else is acceptable. As long as conditions are not as extreme as 2000, the word “bubble” presumably cannot be applied. Others might argue that the word “bubble” implies certain mathematical features, such as violations of “transversality” that are difficult to test in real-time. We clearly observed a Sornette-type bubble in the advance to what we still view as a January singularity, with slight marginal new highs since then being part of a broad topping process - as we also observed in 2000 and 2007. Still, to avoid these semantics, maybe it’s best to use the phrase “speculative extreme.”

While 2000 was certainly the most extreme period of equity speculation in U.S. financial history (taking valuations well beyond even what was observed at the 1929 peak), it is certainly not the only one that deserves that distinction. For example, in 1901, valuations reached a peak that would be followed by a 20-year period of negative real total returns. Stock prices were below the 1901 peak even two decades later. Undoubtedly 1929 would fall into the definition of a speculative extreme, as it was also followed by a 20-year period of negative real total returns. And while valuations in the mid-1960’s did not reach similar extremes, they too were followed by nearly two decades of negative real total returns, with the level of the S&P 500 little changed even 18 years later.

The chart below shows the position of valuations on the basis of Robert Shiller’s cyclically-adjusted P/E. As I’ve noted elsewhere, the reliability of the Shiller metric is greatly improved by adjusting for the implied level of profit margins (Shilller “earnings” divided by S&P 500 revenues) embedded into that P/E. At normal profit margins, the Shiller P/E would presently be above 30.

Remember also that the 2000-2002 decline wiped out every bit of S&P 500 total return, in excess of Treasury bill returns, all the way back to May 1996, and that the 2007-2009 decline wiped out every bit of the market’s excess return all the way back to June 1995. Valuations were stretched to further extremes for a few months in 1929, as well as in 2000 and 2007, but those gains were the first to be surrendered. The possibility that valuations may become stretched further in the short-term does nothing to remove concern about dismal long-term returns even if we take the Shiller P/E at face value.

On the basis of other measures that are even better correlated with actual subsequent market returns, valuations now meet or exceed the levels observed at prior market extremes in history that were followed by 18-20 year periods of negative real returns. We call these extremes not just “cyclical” but “secular” market peaks. Present market extremes can only be excluded from this class of speculative instances if we restrict the definition of "extreme" to the 2000 peak alone. Even then, the price/revenue ratio of the median stock is now higher than in 2000 (as smaller capitalization stocks were much more reasonably priced at the 2000 peak than today).

Make no mistake. The Federal Reserve’s policy of quantitative easing has starved investors of all sources of safe return, provoking them to reach for yield in more speculative assets, including equities, leveraged loans, covenant-lite debt, and other securities. Having stomped on the pedal for years, all of these asset classes are valued at levels that are strenuously elevated from a historical perspective, and as a result, offer strikingly poor prospective returns for long-term investors.

To quote a decades-old passage by economist Ludwig von Mises, and as a reminder of what we should have learned after Fed-induced yield-seeking led to a reckless expansion of mortgage debt, a bubble in housing, and the worst economic collapse in modern times:

“The recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.”

Friedrich Hayek concurred

“To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection or production, we want to create further misdirection - a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end.”

Frankly, I don’t have any strong impression that economic outcomes in the completion of the present cycle must be severe. Further policy mistakes would be required beyond a QE-induced speculative run. On the other hand, I have no doubt at all that having driven equity valuations to present levels, investors will be starved of total return – from current prices – for at least a decade (assuming valuations never move below historical norms), and possibly much longer (in the event that valuations do indeed move below historical norms 15 or 20 years from today).

Keep in mind, however, that a significant retreat in valuations even over the next couple of years could dramatically reverse this situation, creating the prospect for very good long-term investment returns from those lower price levels. I remain very optimistic that strong opportunities will emerge even over the completion of the present cycle. Given supportive conditions and the absence of extremely overvalued, overbought, overbullish syndromes, reasonable opportunities would not even require a retreat to historically “normal” valuations. It’s just that from current price levels, the prospect of adequate long-term returns is thin. In short, the same amount that investors are likely to obtain by selling equities years from now is already sitting on the table for the taking today. For investors without multi-decade horizons, it may be wise to use that opportunity.

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The IPO Window Is Closing Fast

Zerohedge - Mon, 04/21/2014 - 15:58

With a multitude of equity valuation dreams hinging on the success of Alibaba's forthcoming IPO, the following chart is likely the most frightening one for many VC companies currently. As Bloomberg notes, it's becoming much harder for companies to close IPOs successfully with only 2 companies last week raising money at an amount within the expected range. On average,  the eight companies from last week priced their offerings 12% below the mid-point of their range. As one analyst noted, "investors have more or less said "enough"."


As Bloomberg notes,

while 167 companies are still on tap to raise $12 billion through U.S. IPOs, the calendar for the rest of April looks bare with only two issuers seeking less than $100 million combined, data compiled by Bloomberg show.


That doesn’t include Alibaba Group Holding Ltd...

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Another Sign That Central Planning Works: Condom Shortage In Cuba

Zerohedge - Mon, 04/21/2014 - 15:28

Submitted by Simon Black via Sovereign Man blog,

Having traveled to well over 100 countries, I have seen some pretty shocking signs of poverty around the world.

In parts of Asia, it’s not uncommon for parents in poor villages to sell their children for bags of rice… or for children to be stolen outright and sold as orphans to unsuspecting foreigners.

In Africa, I’ve seen people who are so destitute they intentionally mangle and gash their own bodies just to give themselves good cause to shock foreign tourists into donations.

But I’d have to rank poverty in Cuba as the most extreme.

Going to Cuba is like going back in time. The country lacks basic products and services, many of which we consider staples in modern life.

Most roads and buildings are in horrendous condition. And the average person in the country has to make do with just a few dollars a month.

All of this stems from a system of central planning in which government essentially owns and controls… everything. Businesses. Property. Medical services. Anything larger than a bicycle.

Teams of bureaucrats lord over the Cuban economy trying to manipulate and control every possible variable. They dole out housing allowances. They set manufacturing quotas. They control prices of goods and services.

Nevermind that any high school economics student understands why price controls don’t work… and typically lead to shortages.

That’s precisely what’s happening right now.

Cuba’s state-run condom distributor has been centrally planning safe sex for years. And, surprise, surprise, they’re not doing a very good job of it.

Condoms are now at critically low levels in Cuba. And the government’s solution is to sell expired condoms from two years ago. It’s genius.

Like the toilet paper shortage in Venezuela, the infamous electrical blackouts in Argentina, or those mythical stories of Soviet boot factories, it’s clear that central planning simply does not work. Ever.

Even in a single industry as innocuous as toilet paper or condoms, there are simply too many variables in the equation.

Taking that a step further and presuming that a government committee can centrally plan an entire economy or financial system is just ludicrous. But it doesn’t stop people from trying.

John Maynard Keynes is one of the most famous economists in history; decades ago he wrote THE economic playbook still used by governments and central banks around the world today.

His writings include such pearls of wisdom as:

“earthquakes, even wars… serve to increase wealth. . . ”

and my favorite:

“Can a country spend its way into recovery? Yes.”

Keynes was a staunch advocate of ‘state-run capitalism’, an oxymoron rivaled only by “almost pregnant” and “fight for peace”.

Keynes believed that we little people aren’t competent enough to arrange our own finances, and “the duty of ordering the current volume of investment cannot safely be left in private hands”.

He was also a staunch advocate of modern central banking– the concept of awarding a tiny unelected banking elite with total control of the money supply.

He saw it perfectly fine to have a group of men sitting in a room making monetary decisions that would literally impact the entire world… so long as it was the right men.

As he wrote, “State-run capitalism must be run by the right people.” Precisely. And everyone else is just supposed to trust them to be good guys.

Cuba may be centrally planning its condom industry. But the United States is centrally planning the entire global monetary system.

Cuba may be selling expired condoms… but the United States is selling expired credibility.

And just as in Cuba, they are creating bubbles, panics, shocks, crises, and gargantuan inefficiencies.

Like Cuba, the cracks are showing and the system is decaying rapidly. Major governments and central banks are now insolvent, particularly on a mark-to-market basis.

History shows that central planning has always had a finite shelf life. Do you really want all of your assets, savings, and income invested in this system as it collapses?

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Why Putin Is Smiling At The Bond Market's Blockade Of Russia

Zerohedge - Mon, 04/21/2014 - 15:01

One of the recurring themes the western media regurgitates at every opportunity is that while the western "diplomatic" sanctions against Russia are clearly a joke, one thing that will severely cripple the economy is the capital market embargo that has struck Russian companies, which are facing $115 billion of debt due over the next 12 months.

Recall that not a single Russian Eurobond issue has successfully priced since Russia's peaceful annexation of Crimea. Surely there is no way Russia can afford to let its major corporations - the nexus of its petroleum trade - go insolvent, which is why Putin will have to restrain himself and beg western investors to come back and chase appetiziing Russian yields (with other people's money of course). Turns out this line of thought is completely wrong.

Bloomberg explains:

Russian companies, facing $115 billion of debt due over the next 12 months, will have the funds even as bond markets shut because of the Ukraine crisis, according to Moody’s Investors Service and Fitch Ratings.


Firms will have about $100 billion in cash and earnings at their disposal during the next 18 months, Moody’s said in an analysis of 47 businesses April 11. Almost all 55 companies examined by Fitch are “well placed” to withstand a closed refinancing market for the rest of 2014, it said in a note on April 16. Banks have more than $20 billion in foreign currency to lend as the tensions prompted customers to convert their ruble savings, ZAO Raiffeisenbank said.


The amount of cash on balances of Russian companies, committed credit lines from banks and the operating cash flows they will get is sufficient for the companies to comfortably service their liabilities,” Denis Perevezentsev, an analyst at Moody’s in Moscow, said by phone on April 17.

So, Russia can comfortably extend its Ukraine campaign well into 2015? Truly great news for Kiev, which is already bankrupt, and which is scrambling to get every last bcf of gas it can get its hands on before  Gazprom finally pulls the plug in under a month.

Ah, the miracles of positive cash flow... and how quickly it eliminates any so-called political leverage the bearer of the world's reserve currency thought it may have had, leading ultimately to this.

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"Most Shorted" Stocks Outperform "The Market" Five-Fold Today!

Zerohedge - Mon, 04/21/2014 - 14:33

In case you were wondering where the ammunition for today's rally in US equities came from on a day of de minimus volume and no real support from JPY carry...


"Most shorted" stocks outperformed the market by 475% today (+1.98% vs S&P's 0.34%)... but those with shorts on from last week's highs are still winning (for now)...


Seems clear where all that pent-up POMO demand went...


Charts: Bloomberg

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Netflix Rises On EPS And Intl Sub Beat, In-Line Revenues, And Domestic Subs Miss; Price Increase

Zerohedge - Mon, 04/21/2014 - 14:19

With revenues meeting estimates to the dot, and with largely meaningless non-GAAP EPS (because after all NFLX is valued on a 2024 foward basis), Netflix is choppy after hours as algos try to determine what is more important for them:the miss in domestic subs, which rose 2.25 million on expectations of a 2.31 million increase, of the beat in international (and very much money-losing although now expected to be profitable in 2014) subs, which rose 1.75MM vs estimates of 1.64MM.

Perhaps more important was the company's announcement that it is slowly but surely proceeding with price increases:

As expected, we saw limited impact from our January price increase for new members in Ireland (from €6.99 to €7.99), which included grandfathering all existing members at €6.99 for two years. In the U.S. we have greatly improved our content selection since we introduced our streaming plan in 2010 at $7.99 per month. Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only. Existing members would stay at current pricing (e.g. $7.99 in the U.S.) for a generous time period. These changes will enable us to acquire more content and deliver an even better streaming experience.

What "generous" means for a period of time, only Janet Yellen knows.

Netflix also commented on the incursion of competitors:

We continue to see more capable Internet television devices launched. Chromecast, Roku Streaming Stick, and Amazon Fire TV (on which we expect to support voice search later this year) push the quality of experience and price points for adapter products. Smart TVs from manufacturers like Sony, Samsung, LG and Vizio are starting to evolve from Internet TV as a “bolt-on” to Internet TV as a critical and integrated part of the overall device interface. Roku TV will likely be available in the Fall as one of the first Internet-centric TVs. We expect this trend to continually decrease the friction required for our members to access Netflix and enjoy great content.


In Q1, Amazon changed strategies in the UK and Germany, closing LoveFilm as a streaming brand to compete with Netflix. They have repurposed their content deals to serve Amazon Prime Instant Video in the UK and Germany, and are investing in creating awareness of this new model. Amazon is not currently offering subscription video within Prime in Canada, France, Italy, Spain or Japan. They may choose to expand Prime Instant Video or to focus on tuning their three existing Prime Instant Video markets: U.S., UK and Germany. Since much of the content on Netflix and Amazon Prime (as well as Hulu in the U.S.) is mutually exclusive, many consumers see value in subscribing to all three networks. In general, we continue to believe that our biggest long-term competitor for entertainment time remains the MVPDs improving through TV Everywhere, as they are doing with HBO Go.

As for the topic of Net Neutrality, NFLX is "surprisingly" against the Comcast - TimeWarner merger. Why? It's called leverage:

If the Comcast and Time Warner Cable merger is approved, the combined company’s footprint will pass over 60 percent1 of U.S. broadband households, after the proposed divestiture, with most of those homes having Comcast as the only option for truly high-speed broadband (>10Mbps). As DSL fades in favor of cable Internet, Comcast could control high-speed broadband to the  majority of American homes. Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix. The combined company would possess even more anticompetitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger

Finally, on the topic of NFLX's cash flow, well - there is always next quarter... and next year.

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