Thursday, April 30, 2015

" 2008, QE had no discernible 2015 it is a powerful tool for lowering unemployment? What a farce!?"

Guess Who Predicted The Failure Of QE?

Janet Yellen:
"As Japan found during its quantitative easing program, increasing the size of the monetary base above levels needed to provide ample liquidity to the banking system had no discernible economic effects aside from those associated with communicating the Bank of Japan’s commitment to the zero interest rate policy.

I think my views on this mirror those that you expressed in your opening comments, Mr. Chairman."

How did that work out?
We assume principles go out the window when the orders come down from the banker-owners on high...
*  *  *
However, today we get more total hypocrisy from the newly found bond guru and hedge fund adviser via his blog...
Where [monetary policy] can be helpful is in supporting the return to full employment, and there the record has been reasonably good. Indeed, it seems clear that the Fed's aggressive actions are an important reason that job creation in the United States has outstripped that of other industrial countries by a wide margin.

The WSJ also argues that, because monetary policy has not been a panacea for our economic troubles, we should stop using it. I agree that monetary policy is no panacea, and as Fed chairman I frequently said so. With short-term interest rates pinned near zero, monetary policy is not as powerful or as predictable as at other times. But the right inference is not that we should stop using monetary policy, but rather that we should bring to bear other policy tools as well.
So while in 2008, QE had no discernible economic effects... in 2015 it is a powerful tool for lowering unemployment rates? What a farce!?

Wednesday, April 22, 2015

Retail Sales Plunging--How Long Can You Push a String? Since ~1967?

Part 1 of 2: Retail Sales Plunging.

Part 2 of 2: Explanation? (How long can you push on a string? Real median income of the bottom 90% from the Saez and Piketty data for the entire last century: Since ~1967?)

I'll Hire You.

 - Dilbert by Scott Adams via @Dilbert_Daily

Smart Money: "...readings...have b/c so extreme…they stick Wilt Chamberlain’s 4th grade class picture."

Smart Money Options Indicator Now ‘Off The Charts’ Bearish


We have mentioned the put/call ratio of open interest on S&P 100 (OEX) options a handful of times over 
the past 6 months or so. The reason is that this historically “smart money” indicator has been flashing warning signs off and on during that period. On March 3, we posted our most recent update on the indicator as it was on an unprecedented string of bearish readings. The stock market peaked simultaneously and has drifted sideways in the 6 or 7 weeks since. The bearish OEX put/call readings have not relented, however. In fact, the bearishness has accelerated. Even so, we had not intended to dedicate another post to this indicator so as not to be redundant. However, the readings over the last few days warrant an update as they have become so extreme, they stick out on the chart like a sore thumb – kind of like Wilt Chamberlain’s 4th grade class picture.
As a refresher, we typically scan for extreme readings in put/call ratios in the options market in order to fade them. For example, when a certain put/call ratio reaches what has historically been a high extreme, it is often a “buy signal” in that market as it indicates that traders have become too fearful or bearish due to their preference for puts relative to calls. One market that has historically been an exception to this “contrarian” rule is the OEX options market. For whatever reason, these traders have, more often than not, been correctly positioned at market extremes (i.e., high put/call readings near market tops). And while volume in the market has dropped significantly in the past few decades, its non-contrarian status has not seemed to change.
Since 1998, the put/call ratio on open interest in OEX options has been considered extremely elevated when it has risen above 2.00. From 1998 to 2011, there were just 6 days when the ratio got as high as 2.00. Each of those days either came in the vicinity of a significant market top or at least presented extremely limited upside in the intermediate-term. In the second half of 2014 alone, there were 8 readings. And 2015 has ratcheted up the frequency of such readings to a whole other level. There have now been no less than 34 readings above 2.00, all coming in the past 2 months.
And it hasn’t just been the frequency of the readings, but the magnitude as well. Before a week ago, the highest level of the OEX open interest put/call ratio since 1998 was 2.31 in November 1999. The past 2 days have seen readings of 2.77 and 2.79!


It isn’t difficult to spot the “Wilt the Stilt” readings on the far right of the chart, nearly 0.50, or 20%, higher than any other reading on record. And based on historical readings above 2.00, this would appear to be a warning sign. Consider the performance of the S&P 100 following other readings above 2.00 from 1999 to 2014 (it is obviously too early to judge 2015′s readings and, additionally, the 2014 readings do not have a 1-year forward return or, for some, a 6-month return.)


Obviously, considering these returns came during a 16-year period of historically below-average returns, it’s not surprising to see them somewhat depressed. However, the negative average return out to even 6 months (-0.02% to be exact) is noteworthy. Furthermore, considering the substantial drawdowns suffered in the aftermath of several of these readings, the above returns may actually understate the risk following put/call readings above 2.00. Consider the dates of the occurrences prior to 2014, including November 1999, June 2003, May-July 2007, May 2011 and January 2012. Of those, only the 2012 occurrence did not result in either sideways action for 3 months (2003) or a major selloff (each of the others).
Of course, we cannot dismiss the occurrences since the beginning of 2014. Obviously, they have not (yet) resulted in anything close to the aftermath of most of the prior occurrences. However, even they have shown to be somewhat effective in forecasting at least short-term weakness. Of the 24 put/call readings over 2.00 since the start of 2014, only 5 really showed gains 1 month later.
The obvious question, pertinent to many of our posts over the past 12 months or so, is whether the recent market regime is here to stay or whether it is the outlier. As we stated in a previous post, we would argue that is is too soon to pass judgement on the indicator’s contemporary relevance on the intermediate to longer-term time frame. At a minimum, based only on the results over the past 8 months, we can accept that elevated readings of the OEX open interest put/call ratio suggest merely short-term negative connotations for the market.
However, given its more extensive history as a warning sign as well as the current “off the charts” magnitude of the indicator’s readings, we can’t help but wonder if there will eventually be longer-term ramifications as well.

Monday, April 20, 2015

2008 Was Just the Warm Up - Serious Food for Thought

April 20, 2015

Unfortunately, 2008 Was Just the Warm Up

"The 2008 crash was a warm up.

Many investors think that we could never have a crash again. The 2008 melt-down was a one in 100 years episode, they think.

They are wrong.

The 2008 Crisis was a stock and investment bank crisis. But it was not THE Crisis.

THE Crisis concerns the biggest bubble in financial history: the epic Bond bubble… which as it stands is north of $100 trillion… although if you include the derivatives that trade based on bonds it’s more like $500 TRILLION.

The Fed likes to act as though it’s concerned about stocks… but the real story is in bonds. Indeed, when you look at the Fed’s actions from the perspective of the bond market, everything suddenly becomes clear.

Bonds are debt.  A bond is created when a borrower borrows money from a lender. And at the top of the financial food chain are sovereign bonds like US Treasuries.

These bonds are created when someone lends the US money. Why would they do this? Because the US SPENDS more money than it TAKES IN via taxes. So it issues debt to cover its extra expenses.

This cycle continued for over 30 years until today, when the US has over $11 TRILLION in size. Because we never actually pay our debt off (or rarely do), what we do is ROLL OVER debt when it comes due, so that investors continue to receive interest payments but never actually get the money back… because the US 

Government doesn’t have it… because it’s still spending more money than it takes in via taxes.

This is why the Fed cut interest rates to zero and will likely do everything in its power to keep them low: even a small raise in interest rates makes all of this debt MORE expensive to pay off.

This is also why the Fed had the regulators drop accounting standards for derivatives… because if banks and financial firms had to accurately value their hundreds of trillions of derivatives trades based on bonds, investors would be terrified at the amount of leverage and the margin calls would begin.

The bond bubble is also why the Fed started its QE programs. Because by buying bonds, the Fed put a floor under Treasuries… which made investors less likely to dump bonds despite bonds offering such low rates of return.

This is also why the Fed is terrified of deflation. Deflation makes future debt payments more expensive. So the Fed prefers inflation because it means the dollars used to pay off debt down the road will be cheaper than Dollars today.

Again, when look at the Fed’s actions through the perspective of the bond market… everything becomes clear.

The only problem is that by doing all of this, the Fed has only made the bond market even BIGGER. In 2008, the bond market was $82 trillion. Today it’s over $100 trillion. And the derivatives market, of which 80%+ of all trades are based on interest rates (Treasury yields), is at $700 TRILLION.

The REAL Crisis will be when the bond bubble bursts. When this happens, it will be clear that real standards of living have been falling since the ‘70s and that sovereign nations have been papering over this through social spending and entitlements (a whopping 47% of US households receive Government benefits in some form).

Imagine what will happen to the markets when the Western welfare states finally go broke? It will make 2008 look like a picnic... ." 

Graham Summers
Phoenix Capital Research

World's Finest Thinking on Macro Rates? (EVERY SINGLE QUARTER)

"Over the more than two thousand years of economic history, a clear record emerges regarding
the relationship between the level of indebtedness of a nation and its resultant pace of economic activity..."

Friday, April 17, 2015

Precision thinking + relevant data = Gary Shilling:

"Since the U.S. began collecting data in 1967, only twice has it seen three-month stretches of waning retail sales in non-recessionary times..."

"One explanation for consumer hesitancy came in March’s payrolls report, which showed that employers created an anemic 126,000 jobs. The preceding 11-month average had been a much higher 284,000 new jobs. Most of them, however, are in low-paying sectors such as retail trade and leisure & hospitality, rather than high-paying manufacturing, utilities and information technology. Also, recent layoffs in the energy sector are of mostlywell-compensated workers..."

"Those who thought consumers would immediately spend their energy savings apparently didn’t know that the household savings rate spiked after the tax cuts and rebates in the 2008 and 2009 stimulus measures. Households only later spent some of their windfalls. That’s true today, too: The household savings rate jumped from 4.5 percent in November to 5.8 percent in February..."

".History shows that when times are tough, U.S. consumers increase, rather than decrease, their savings. Plummeting energy prices are providing the extra wherewithal. Investors who anticipated purchasing-power gains would lead to greater consumer spending must be sadly disappointed..."


Excellent Work. Congratulations to this Young Man!


2014 Second Runner Up - Essay

John Chick

Scholarship Amount: $5,000
Hometown: Blanco, TX - School: Texas A&M University

I was four years old when my dad was diagnosed with terminal lung cancer in April of 2000. My dad died two months later on July 10th, 2000. My life would be forever changed...

Monday, April 13, 2015

A Simplified Understanding of Central Banking through an Island Shell Story

Given the unconquerable human weakness to inordinate avarice...

"the inequity that is intrinsic to [the Central Banking] system is politically, socially, and financially destabilizing, and so...unsustainable."

Today's Money Regimes Are Doomed To Failure

Centrally issued money centralizes wealth and generates systemic inequality.

A Thought Experiment on Money

Let’s imagine a small mountain kingdom with only ten very scarce and thus highly valued seashells in circulation.  These few shells are certainly valuable in terms of scarcity, but there aren’t enough of them to act as a means of exchange.

One solution to this innate problem of scarcity—money has to be scarce enough to retain value but not so scarce that there isn’t enough of it in circulation to grease trade—is for the kingdom to issue 100 slips of paper for each shell, each slip of paper representing 1/100thof the shell’s value. Now there is enough money in circulation to facilitate trade and each slip retains a store of value equal to 1/100th of a shell. The slips are paper money, i.e. currency.

This system works well, but the rulers of the kingdom aspire to consume goods and services in excess of what their share of the shell-backed money can buy in the open market.  The kingdom’s leaders print another 100 slips of paper without acquiring a shell to back the new slips with intrinsic value. Nobody seems to notice, and so the leaders print another 100 slips. Note that the kingdom didn’t produce more goods and services; its leaders simply produced more money.

Eventually this excess of paper slips reduces the value of each slip in circulation. What once cost 10 slips now costs 20 slips. This reduction in the purchasing power of money is called inflation, as the price of goods inflates as the money supply is increased while the production of goods and services remains unchanged.

Let’s assume the kingdom’s leaders avoid the temptation to expand their consumption by printing money rather than first increasing the production of goods and services.

As the kingdom expands its production of goods and services and its population, the original 1,000 slips of paper are no longer enough to facilitate trade: lacking money, people revert to the clumsy alternative of bartering goods and services or issuing letters of credit.  The purchasing power of the existing money might well increase due to the imbalance between the demand for money (high) and the supply (limited); what once cost 10 slips now costs only five slips.

The value of each slip has now detached from the underlying value of the shell. It’s not the scarcity of the shell that is creating the paper’s value—it’s the scarcity of paper money itself which is creating the paper money’s store of value.

The kingdom can respond to this shortage by issuing more slips of paper.  If the kingdom only issues a sum of money that is equal to the increase in goods and services produced, demand will remain high (as trade in the expanded supply of goods and services expands) and the value of the money will remain stable as well.

This detachment of the value of the paper money from the underlying value of the scarce shells worries some in the kingdom, and they propose that the kingdom borrow ten shells from others and pay them interest for the loan of the shells. In effect, money is being loaned into existence: the kingdom borrows ten shells and issues 1,000 new slips of paper that is fully backed by the new shells.  But the kingdom has to pay interest on the loan.

One advisor has an insight: rather than actually borrow the shells, why not just borrow the money into existence by selling the kingdom’s promise of paying interest?  Why bother with the shells when the only transaction that’s needed is payment of interest on the newly created money?

And so the kingdom sells ten promises to pay interest—what we call a bond—and the buyers receive interest, just as if they’d loaned the kingdom a valuable shell.

The new money isn’t backed by shells at all; it’s backed by the interest paid on the bonds.  The kingdom sells off the original ten shells and issues ten more bonds. Now the kingdom’s money is not backed by any intrinsic store of value; it is backed entirely by the kingdom’s promise to pay interest on the bonds.

If the kingdom is prudent and only issues enough money to match an increase in the production and exchange of goods and services, the demand for money will remain in line with the supply, and the money will retain its value.

On the face of it, the kingdom’s money has no intrinsic value at all; but if we follow the example closely, we see that the money is both a store of value and a means of exchange, and its value (when priced in shells, goods or services) fluctuates with supply and demand.

The kingdom’s slips of paper fulfill all the requirements of money.

When the kingdom loaned the money into existence, the money retained its value as long as the kingdom only issued new money to match the demand for money from the expansion of production and exchange.  In other words, the supply of money rose in tandem with the expansion of the real economy’s production of goods and services.

The fact that the kingdom had to pay interest on newly issued money created a cost to issuing new money that eventually limited how much new money could be created.  Creating too much money would not only reduce its purchasing power, but the treasury of the kingdom would be drained by the interest paid on new bonds.

This raises a very interesting point: when the kingdom created new money only to match the expanding production of real-world goods and services, it didn’t matter that the new money was not backed by either shells or bonds; demand for the money alone maintained purchasing power. There was no need to back the newly issued money with scarce shells or interest-bearing bonds.

Economist Paul Samuelson observed that “money is a social contrivance.”  In other words, money exists to serve a social function—to facilitate exchange and the real-world production of goods and services to the benefit of all participants in the economy. If the supply of money is connected to the demand generated by the production and trade of goods and services, it needs no backing nor does it need to be backed by interest-bearing bonds.

Let’s now turn to the way money is issued in the present: by central banks.

Money Issued by the Central Bank Benefits the Few at the Expense of the Many

Let’s imagine that we have a $1 billion line of credit with our central bank at an interest rate of .25%--one-quarter of 1%. We don’t need to post any collateral, and the central bank has given us whispered assurances that should we lose the money in risky gambles, the losses will be made good by the taxpayers. 

This is called moral hazard: the risks have been disconnected from the consequences.

If we make a profit with the borrowed money, it’s ours to keep. If we lose the borrowed money, the taxpayers will foot the bill.

It’s difficult to imagine a better deal: near-zero interest rate, no collateral, and no risk of having to suffer the consequences of losing the borrowed money.

But our advantages are even better than this already astonishing deal: with the magic of fractional reserve banking, we get to create $19 billion of new money with our $1 billion of borrowed central bank money.

Our options to make low-risk profits are nearly limitless.  Anything we earn beyond the annual interest of $2.5 million is ours to keep. We could invest the $1 billion in Treasury bonds yielding 2%. That would yield us an annual gain of $17.5 million for doing absolutely nothing beyond clicking a few keys to buy $1 billion Treasury bonds.

If we are willing to take on higher risk, we could buy stocks that pay dividends of 3% or more annually. If the stocks rose in value, then we’d also earn capital gains.  An annual gain of $30 million or more is easily possible in the relatively low-risk investment.

If we wanted even higher yields, we could seek out bonds in other countries that are paying 6%. If those currencies are strengthening versus the U.S. dollar, then this foreign-exchange gain could boost our total gain to 10% annually—a cool $100 million, out of which we only have to pay the central bank a modest $2.5 million in interest.

Or we could set up a bank that issues auto loans and credit cards with the $1 billion. Thanks to fractional reserve lending, our $1 billion in cash (never mind it was borrowed from the central bank—to the rest of the world, it’s cash) can leverage $19 billion in high-interest consumer loans.  If the average interest paid on our loan portfolio is 10%, we are earning $1.9 billion in gross revenues. If operating the bank costs $900 million, we net a cool $1 billion annually from the $1 billion line of credit: 100% annual return.

This is precisely how the banking system works, and it illustrates how central banks enable private banks to accrue vast profits.  Those closest to the central bank money-spigot are given an opportunity to leverage up astounding profits.

In theory, central banks claim the noble task of providing credit to the private banking sector to facilitate increased production of goods and services, but in reality central banks benefit the few with access to their credit at the expense of the many. The few can generate immense profits without producing any goods and services.

Imagine if we each had a relatively tiny $1 million line of credit at .25% interest from a central bank that we could use to issue loans of $19 million. 

Let’s say we issued $19 million in home loans with an annual interest rate of 4%. The gross revenue (before expenses) of our leveraged $1 million is $760,000 annually.  Since the accounting of the $19 million in loans is highly automated, our expenses are modest.  Let’s assume we net $600,000 per year after annual expenses of $160,000. Recall that the interest due on the $1 million line of credit is a paltry $2,500 annually.

Median income for workers in the U.S. is around $30,000 annually.  Thus a modest $1 million line of credit at .25% interest from the central bank enables us to net 20 years of a typical worker’s earnings every single year.

But central banks don’t offer this largesse to individuals or communities; these profoundly profitable privileges are only available to private banks.

Today's Money Regimes Are Doomed To Failure

I hope you now understand that the current system of issuing money and credit intrinsically benefits the few at the expense of the many. This vast privilege and the equally vast inequality that is the only possible output of the system cannot be reformed away; it is intrinsic to centrally issued money and private banking.

The problem isn’t fiat money—currency that isn’t backed by scarce commodities; it’s centrally issued money that is distributed to the few at the expense of the many. This centrally created money is issued not to facilitate the production of goods and services and the demand that naturally arises from the expansion of the real economy, but to serve the state and its cronies.

Centrally issued money centralizes wealth and generates systemic inequality. This is equally true of all centrally issued currencies.  But the inequity that is intrinsic to this system is politically, socially and financially destabilizing, and so this system is unsustainable... .

Charles Hugh Smith

New homes: Supply: Up, Up, Up. Demand ??? Where do you think prices are headed?

Source: Capital Economics

"Recession 2.0: Abysmal Wholesale Sales Join Factory Orders In Confirming US Economic Contraction"

"... the all important merchant sales for February dropped for 3rd month in a row in February, the longest stretch since the last recession."

Wednesday, April 8, 2015

Student Debt...Negative Economic Effects for Years to Come?

"...government-held student debt as percentage of total consumer debt. This is going to have negative implications for the US economy for years to come. Young people are graduating with what amounts to a long-term mortgage that can not be cleared in a default." (h/t @SoberLook)

Labor Force Participation Rate: A More Sobering Measure

Tuesday, April 7, 2015

Bernanke's REAL Legacy: a Bankrupt USA

April 07, 2015

Ben Bernanke, like Alan Greenspan before him, is now concerned about his legacy.

To that end, he’s begun writing a blog that, as one would expect, is largely a defense of his actions, even though the Fed’s OWN research shows that he’s either lying or an idiot.

To that end, QE cost income-focused retirees and savers over $470 billion and, at best, lowered unemployment by 0.13%. Beyond this, the Fed’s actions under Bernanke’s leadership, ignited the biggest inflationary bubble in history.

Bernanke HATES deflation, not because he likes paying more for a house or car or food or anything else… but because DEBT deflation would render the big Wall Street Banks insolvent.

Ben, while delusional and dishonest, is not entirely dumb. He knew which side of the bread was buttered for him and his masters. So he was only too happy to inflate the heck out of the financial system to insure that Wall Street could leverage up as much as possible.

Consider what happened to prices of various assets during the Greenspan/ Bernanke fed (Bernanke was hired by Greenspan in 2002).

Here's housing:


After pricing most Americans out of the housing market, Bernanke facilitated the biggest housing Crash in 100 years.

Here’s what happened to food prices.


If you required food to live, you spent an ever larger amount of your income doing so.

Here’s what happened to oil prices. Remember, oil or oil derivatives are present in lipstick, Vaseline, solar panels, polyester (stain resistant clothes), chewing gum, crayons, Aspirin, pantyhose, sneakers, detergent, CDs, plastics of any kind, food additives, fertilizers, pesticides, candles, milk cartons, pen ink, and more. This move in prices affected ALL of those industries.

Bubbles and Crashes. But mostly bubbles.

And here’s what happened to stocks.


Bubbles and Crashes.

All of the above items indicate intense inflation, not deflation. We did have ONE deflationary period that lasted a total of 7 months, but the fact remains that Bernanke was a deflation expert who helped manufacture one of the greatest periods of inflation in history. The actual suffering unleashed by this period is staggering. You cannot argue with those charts: LIFE IN GENERAL BECAME MORE UNAFFORDABLE FOR AMERICANS under Bernanke.

Bernanke didn’t care. He had to appease his Wall Street masters… not to mention the US Government which went on an unprecedented spending spree during his tenure, racking up an unheard of $18 TRILLION in debt, with total debt TRIPLING.


In short, Bernanke bankrupted the US and most Americans in the span of ten years. He created the biggest housing bubble in 100 years and also casue the greatest Crash in 100 years. A few blog entries won’t change this.

And his actions post-2008 set the stage for an even bigger crisis than 2008. When 2008 hit, the Fed became even more aggressive in its loose monetary policy. The US now sports a Debt to GDP of over 100%. The Fed's balance sheet is over $4 trillion with no possible way of exiting (the Fed cannot transfer assets as they were bought via POMOs not repos...). The next time a crisis hits... it won't just be Wall Street that implodes. 

Graham Summers
Phoenix Capital Research