Thursday, July 24, 2014

This Time Is Not Different: 
Why The Market Is 
Heading For A Fall
"Markets have allegedly sprung loose from their moorings in the real economy owing to record corporate profits and an upward re-rating of PE multiples reflecting lower than historical interest rates. And, indeed, the raw facts can be marshaled to this end .. The robust rate of profit growth during recent years reflects a one-time gain in the profit share of factor income. This gain in all probability cannot be replicated again during the next decade, and, in fact, is extremely vulnerable to the mean reversion so evident in the historical data above .. The same can be said of low interest rates. After an unprecedented 33-year descent, the yield on the 10-year treasury benchmark has nowhere to go but higher .. No amount of money printing and financial repression by the central banks can keep yields on the current massive trove of $12 trillion of publicly held treasury debt at a negative .. rate indefinitely .. The Wall Street casino is so juiced-up on the Fed’s promise of endless liquidity and puts under the stock averages that it is uninterested in the fundamentals, and will keep buying the dips until some confidence shattering black swan comes flying in from out of the blue .. And that points to the real evil of monetary central planning and the serial financial bubbles that it inexorably produces. Bubbles are now only recognized after they burst into a flaming crash."
- David Stockman*
link here to the commentary
New Paper Discusses
Legality & Effectiveness 
Of Quantitative Easing (QE)
A new paper by Andrew Johnstone & Trevor Pugh of the legal department of the University of Sheffield discusses the legality & the effectiveness of QE & its relatives.. conclusion: "In this paper, we have seen that, while QE can be argued to amount in substance to monetary finance, it is likely that the courts would not rule it unlawful. However, if a central bank did not offer justifications couched in monetary policy terms, there would be a much more serious risk of the intervention falling foul  .. The law’s emphasis on justifications and deference to central banks may not be surprising, but it does mean that there is scope for monetary finance so long as nobody admits that that is what is happening. It also means that arguably, monetary policy is outside the rule of law. It would be better for everybody if the debate was more open." .. has it been effective: "We have serious doubts about the efficacy of QE as a means to reflating the economy in the aftermath of a debt deflation .. Increased fiscal spending by governments would be more likely to be effective, but is currently ruled out by a belief that governments must pursue austerity in order for their countries to escape the crisis."
LINK HERE to the paper
The Approaching Inevitable 
Market Reversal
Charles Hugh Smith* provides several insightful charts & perspective to indicate the stock  market may be approaching a reversal in its long-running bull market .. "Though we’re constantly reassured by financial pundits and the Federal Reserve that the stock market is not a bubble and that valuations are fair, there is substantial evidence that suggests the contrary. The market is dangerously stretched in terms of valuation and sentiment, and it does not accurately reflect fundamentals such as earnings and sales growth." .. click on above charts to enlarge
LINK HERE to the analysis
Next Credit Crisis
Forming In 
Car & Student Loans
Corporate Buyback Bubble Also Forming
Interview with Gordon T. Long* who predicts that another credit crisis is forming ... also a discussion on his work analyzing the stock-buyback bubble .. This work is starting to gain traction as well. David Stockman* had a recent article about IBM’s rampant buyback’s .. 24 minutes podcast
LINK HERE to the podcast
LINK HERE to related posting

From Our Archives:
July 9, 2014
How IBM Is Getting 
An 11X Return On
Their Stock Buybacks
Gordon T Long* goes through the math to explain how Uncle Sam & the Federal Reserve, through their antiquated corporate tax codes & financial repression-based policies of 0% interest rates & money printing, are helping IBM to buyback their stocks & thereby make an huge return while significantly lowering their effective nominal corporate tax rate:
1. Debt Increase ($6.4B) plus Tax Reduction ($8.6B) was $15.0B on $13.9B in Buybacks.
2. 2013 Tax Savings were over 2X IBM's total Dividends paid on ALL outstanding shares.
3. IBM's reported 15.6% effective tax rate on $13.9B shares resulted in a $3.1B tax savings for these Buybacks versus dividends against those shares of $278M. This is 11X return.
LINK HERE to our prior related posting
[Cliff Comment: The Deduct-Interest-To-Retire-Stock Tax Game could be the unintended consequence that destroys whatever was left of free market capitalism .. 90% of corporate profits are going into buybacks & dividends! .. THIS IS NOT HEALTHY .. It is money that should be going into 'capital expenditure' for future growth .. The American government has been stealing from the future for decades .. Now the corporate sector is stealing from America's future .. The sector that will be left holding the bag? THE PUBLIC.]
The "Gates" Are Closing: 
SEC Votes Through 
Money Market Reform
Zero Hedge reports that the SEC has adopted the news rules designed to curb the risk of money market investor runs .. "Among the changes, funds will have to switch to a floating share price instead of the current $1/share (hence the term breaking the buck). But the key part: 'The SEC's rule will require prime money market funds to move from a stable $1 per share net asset value, to a floating NAV. It also will let fund boards lower redemption 'gates' and fees in times of market stress." .. suggests this may send money market investor rushing out & into other asset classes - the SEC, the Federal Reserve & the U.S. Treasury hope that asset class is stocks to keep the stock market rising .. "Clearly, everyone understand that the only purpose behind implementing 'gates' is to redirect the herd. And with some $2.6 trillion in assets, money markets can serve as a convenient source of 'forced buying' now that QE is tapering if only for the time being. The only question is whether the herd will agree to this latest massive behavioral experiment by the Fed, and allocate their funds to a stock market which is now trading at a higher P/E multiple than during the last market peak." .. [Cliff Comment: This move can also be directed towards financial repression whereby the money market funds may be exposed for "confiscation" by failing financial institutions as a bailin.]
LINK HERE to the commentary

From Yesterday:
SEC Applying 
Financial Repression
To Money Market Funds
The SEC is looking to drive money market funds to only government securities, especially institutional money market funds - this means money market funds will be helping to pay for the government debt ..  The SEC is also planning to allow fees and restrictions on redemptions in times of stress, but it is not clear how widely these will be applied across the money markets - FT: "Any restrictions on redemptions may not be severe at first, but the regulations will only become more restrictive over time. Don't waste time thinking you are going to monitor the situation and get out later. Get out now, when the getting is easy."
LINK HERE to related article
Financing A Planned Economy
How France Historically Used Financial Repression
Presentation by Eric Monnet of France's central bank on institutions & credit allocation in the French Golden age of growth (1954-1974), insight into how France did financial repression .. helps to understand the current actions by central banks today .. this presentation is posted on Spain's central bank website.
LINK HERE to the presentation
Are Your Savings Safe 
From Bail-Ins?
click to enlarge

Wednesday, July 23, 2014

Monet’s famous Twilight of the Bubble
How Bubble Finance 
Enveloped The World
Acting Man essay compares economics to a Monet painting .. "The painting of bubblenomics started with the Plaza Accord, September 1985, where five nations agreed to manipulate the dominant currencies at the time. Japan enjoyed a 50% devaluation of the US$ vs the yen .. The consequences of that bubble have yet to be corrected. 24 years of fiscal and monetary accommodation led Japan to sport the world’s largest public debt-to-GDP ratio .. ​The next big one was the U.S. dotcom bubble .. When that bubble burst, in came Greenspan with the mother of all bubbles – the sub-prime bubble .. ​Amazingly enough, that mother of a bubble would soon be exceeded by the Bernanke/Yellen yield bubble. In Europe the euro bubble was brewing .. This massive global bubble financing has unintended beneficiaries. China, India and other emerging markets could never have had double digit growth rates without the flood of capital from the West and the importing of jobs that were deemed unneeded by asset rich Westerners. Countries like Australia and Brazil benefited from supplying raw materials to fuel these bubbles .. ​In summary, this Monet painting is becoming quite clear. In the modern world, there are no economies, only bubbles. There is not a country in the world that is not struggling to survive on yesterday’s stimulus plan, other countries’ stimulus plans, or waiting for tomorrow’s bailout to live another day .. To anyone who is not in denial, it is obvious that no central banker has a viable solution and no one is willing to take any pain. In reality, there is no stimulus, just a continuous game of borrowing by governments and printing by central banks to keep the peasants from revolting."
LINK HERE to the commentary
click to enlarge
Some pictures tell a whole story. This story is a tragedy.
Richard Duncan*
Creditism & the threat of a
New Depression
Recovery Will Take Longer Than We Will Live
There is a reason we give economist Richard Duncan* the * beside his name. No one explains our 'Creditism' system better (We no longer have Capitalism. That system required 'capital' before new credit could be created). Once the link between dollars & gold broke, all the constraints on how much credit could be created were removed .. Total credit first went through one trillion dollars in 1964 in the United States, & over the next 43 years, it expanded from one trillion to fifty trillion .. "We had a fifty-fold expansion in credit in the United States in 43 years ... The ratio of debt to GDP went from 150%, all the way up to 370%. So it’s easy to understand how rapid credit growth drives economic growth. But the day always comes, as the Austrian economists remind us, when credit can’t expand any further, and that’s when the Depression begins, and that’s what started to occur in the financial crisis." .. Duncan emphasizes that in recent years credit has not been expanding at the same pace of the last several decades, therefore the economy has been weak .. will there be a recovery after the inevitable credit bust? .. "Well, when Rome fell, there was a recovery, but it took a thousand years. I don’t believe anyone alive today would still live long enough to see the recovery that would follow a New Depression."
LINK HERE to the commentary

Turkey Looks To Join
The Anti-U.S.$ Run
It is starting to look like a stampede away from the U.S. $
Article reports that Turkey is now in discussions with Russia on the de-dollarization of their economy & international trade .. the idea would be to setup a swap arrangement between Russia & Turkey based solely on their national currencies without the need to convert these currencies into U.S.$s.
LINK HERE to the article
LINK HERE to our related posting
From Our Archives:
June 19, 2014
Putin Adviser Proposes 
"Anti-Dollar Alliance"
Zero Hedge references several sources indicating that Russian adviser Sergey Glazyev, an adviser to President Putin, is advocating for anti-U.S.$ alliance to prevent a new cold war between Russia & the U.S. .. As summarized by VoR, in his article, published by Argumenty Nedeli, Putin's economic aide and the mastermind behind the Eurasian Economic Union, argues that Washington is trying to provoke a Russian military intervention in Ukraine, using the junta in Kiev as bait. If fulfilled, the plan will give Washington a number of important benefits. Firstly, it will allow the US to introduce new sanctions against Russia, writing off Moscow's portfolio of U.S. Treasury bills. More important is that a new wave of sanctions will create a situation in which Russian companies won't be able to service their debts to European banks .. Putin's adviser proposes the creation of a 'broad anti-dollar alliance' of countries willing and able to drop the dollar from their international trade."
LINK HERE to the commentary & links
Jeremy Grantham*:
Dow 20000, Then A Crash?
Article summarizes the recent thoughts by fund manager Jeremy Grantham* .. he sees short-term gain & long-term pain .. what he sees as possible: "The Dow Jones Industrial Average soars to 20,000. The cheers echo around Wall Street. As the economy recovers, unemployment tumbles. A wave of mergers sweeps Wall Street as big companies bet on a continuing economic boom. The bears and naysayers are routed, humiliated and consigned to oblivion. Mom-and-Pop investors, terrified of getting left behind, pour money into stocks. And then, horrifyingly, it all starts to go sour, yet again. As the economy recovers, costs begin to rise. As unemployment tumbles, wages follow suit. The Fed begins hiking interest rates to stop inflation. Meanwhile companies have to slash prices to gain or keep market share against brutal competition. Earnings plunge. Stocks begin to slide. and then tumble into a terrifying smash, the third in a generation." .. NNOO
LINK HERE to the article
Top Risks In China
Dr. Marc Faber* elaborates on what he thinks are the top risks in China, points out a high debt-to-GDP ratio & a slowing economy as the key problems in the mainland .. also he emphasizes the whole global bond market is in a bubble .. 3 minutes

Will Central Banking 
Lead To Nationalization
Of Everything?
[Küle Question: They say there are none so blind as those who will not see .. none so deaf as those who will not hear. What will it take for the world to listen & to see the incredibly prophetic wisdom in a book written in the 1930s, published in the 1940s, named 'The Road to Serfdom'? Hayek warned us of the long slippery slope we were on & so much of it has come true. Power Corrupts. Humans, given the power to control the money, will eventually gain control of all the 'wealth'. The process continues .. after the American people relinquished control of the dollar, the 'road' has been leading to 'serfdom' controlled by a modern version of 'Nobles'.]
Former Banker Frances Coppola says:
"The entire financial system is becoming completely dependent on government. In our quest to make the financial system safe, we have made its very existence as a private sector function impossible. Central banks are no longer just players in a market: they dominate and control the market. And financial institutions are guaranteed, backstopped and regulated by government in every area of their business. Some parts of their business amount to public utilities, and there are growing calls for those areas to be explicitly supported or even taken over by government – I am thinking of universal payments systems, basic banking services (transaction accounts, small deposits and vanilla lending) and the money creation aspect of lending. And flows of funds around the system are routinely guaranteed by central banks, even if that means extending central bank support to non-banks. The economic cost of allowing that flow of funds to be interrupted even for a few hours or days is just too great."
Stock Bubbles & 
State/Municipal Pension Plans
Boom Bu$t .. discussion with Frances Coppola on Federal Reserve policy, rate hikes, financial warfare .. discussion also with  Anthony Randazzo of the Reason Foundation about the negative effects stock bubbles can have on state and municipal finances & pension plans .. 1/2 hour total program

- Danielle Park -
Risk vs Reward
Danielle Park emphasizes that investors should be more concerned about the return OF investment rather than the return on investment .. each day in this kind of investing environment means the risk of still being in the market goes higher .. discussion also on the work of U.S. Senator Elizabeth Warren on financial reform .. 25 minutes
LINK HERE to the podcast
One Way to Stop
U.S. Corporate Citizenship
Renunciations: Cut Taxes
Cato Institute commentary in NY Times explains how U.S. companies are at a disadvantage in the global marketplace, given the highest corporate tax rates in the developed world .. this is prompting U.S. companies to move overseas .. one example cited is Canada, where some U.S. companies have relocated to: Canada slashed its federal corporate tax rate from 28% in the 1990s to just 15% today. Businesses have responded by shifting more reported profits into Canada and boosting investment. That response has meant that Canada collects more in corporate tax revenues today (1.9% of gross domestic product) than it did in the 1990s (1.7%) when it had a higher tax rate. The government and businesses both gained from the reform .. recommendation: "The solution to the inversion problem is the same as for our economic growth problem: cut the corporate tax rate. The good news for policymakers — as Canada has shown — is that federal coffers won’t be drained with such a reform, and may even gain from it."
link here to the commentary

From Our Archives:
July 18, 2014
U.S. Corporations 
Are Renouncing Their
U.S. Citizenship In Droves
The U.S. is losing its corporate competitiveness with U.S. corporations leaving their domicile base from the U.S. to other countries like Ireland .. why? - The U.S. has the highest effective corporate income tax rate in the developed world  .. U.S. corporations are keeping over $1.9 trillion in retained earnings offshore to avoid the crippling U.S. corporate income tax .. "While the U.S. should be enacting policies that make it attractive for productive people and companies to come to the U.S.—rather than driving them away—don’t hold your breath for positive change. It’s more likely that nothing but more taxes and regulations are coming."
LINK HERE to the article

From Yesterday:
U.S. Treasury Looks To Stop 
Companies Thinking 
Of "Inverting"
Inverting is when companies look to relocating their headquarters domicile to pay less corporate taxes .. Instead of reforming corporate taxation & addressing government budget spending & deficit challenges, the U.S. Fiscal Year 2015 Budget includes a proposal "to ensure that companies could not change their corporate tax domicile without a change in control of the company itself".
LINK HERE to the U.S. Treasury Secretary's letter
Which Investments
Dr. Marc Faber* Likes Now
Dr. Marc Faber* likes gold, Chinese stocks & anything to do with agriculture .. 3 minutes

Central Banks Are
"Reverse Robin Hoods"
Britain's The Telegraph has an essay that explains how quantitative easing (QE) by central banks has been taking wealth from the poor & giving to the rich .. points out the work of Prof. Andrew Johnstone & Trevor Pugh, of Sheffield Institute of Corporate and Commercial Law, for a new analysis, The Law and Economics of QE, which concludes that not only has QE been largely ineffective but that it was also illegal .. "Like common brigands, central banks have been acting outside the law – their only real excuse being the supposedly higher purpose of economic necessity, a sort of Robin Hood-type operation where the ends justify the means, only with a slight flaw; by driving up the value of financial assets and real estate, QE further skews the distribution of wealth towards those with already large holdings of it. It robs from the poor and gives to the rich. Not that there is any possibility of the courts judging QE in all its various forms to be against the law, the writers concede."
[Cliff Commentary: QE is illegal? How many times, & in how many different ways do we have to make this point? How many people, including intellectuals, can not 'get it'? .. Those who write the laws are the servants to those hold the power to issue the money. In many countries the Central Bank may have to answer to the people, but in the case of the United States, that power is privately owned & controlled by a group of shrewd & wealthy 'families' who are above the law & above the government. The government is not allowed to audit the Federal Reserve .. much less, demand to know who it is that owns controlling interest in the few major banks that effectively control it's 'System'. They are a government that is above the people's government. Nomi Prins did an excellent job, in 'All The President's Bankers', by focusing on the 'families'. This is a good word to help people understand what they don't understand when we have referred to them as a 'syndicate' OR when Edward Griffin describes them as a 'consortium'. What word should you use for an entity that has purposely been designed to have their structure obfuscated? They have designed a 'System' that is not a corporation or a company or a partnership. Those are legal structures that could be easily understood by the public. If they were a corporation or other easily definable legal entity, they might be held accountable under the law. What words do you use to describe an entity that is above the law? .. a government above the government.] 
The "Volcker Rule" Has 
Sprung a Leak
[well duh ... the banks wrote their own version of the Volcker Rule]
The WSJ reports that a new working paper by economists Jussi Keppoy & Josef Kortez showing that banks whose business models traditionally have been geared toward activities limited by the Volcker Rule have reduced the size of their trading books, but have NOT cut the risks they take .. this goes against the spirit of the Dodd-Frank/Volcker Rule on proprietary trading .. "Banks have maintained their risk-taking in two ways: They have reduced the hedging of their banking books and increased the speculative uses of trading assets not limited by the Volcker rule. Those assets would include Treasuries ... That may help explain why collective holdings of Treasuries by banks have increased so much this year. In the first quarter, banks increased Treasury holdings 23%. What may have looked like caution may have actually concealed speculation. Risk at banks is like a balloon: If you squeeze one end, the other bubbles and bulges."
LINK HERE to original article

From Our Archives:
April 20, 2014
The Banks Continue To 
Fight His Rule
[& Continue To Beat It]
[Cliff Küle Note: It was such a pure & simple rule for America to establish: Keep the taxpayers protected from the bank's high risk bets!]
NY Times article on how big banks are still fighting to water down the regulation of The Volcker Rule .. the latest fight involves collateralized loan obligations (CLOs)  - banks want to own them but regulators say these holdings may be dangerous & allow risk trading to occur .. CLOs are bundles of mostly commercial loans that are sold in various pieces to investors, similar to collateralized debt obligations, or CDO.s — those instruments that imperiled so many banks during the financial crisis .. "The battle for the soul of the Volcker Rule has been lengthy and contentious, which isn’t surprising, since it goes to the heart of the too-big-to-fail debate. Clearly, large and interconnected banks like the status quo — a safety net that will rescue them if their bets go bad."
LINK HERE to the article
SEC Applying 
Financial Repression
To Money Market Funds
The SEC is looking to drive money market funds to only government securities, especially institutional money market funds - this means money market funds will be helping to pay for the government debt ..  The SEC is also planning to allow fees and restrictions on redemptions in times of stress, but it is not clear how widely these will be applied across the money markets - FT: "Any restrictions on redemptions may not be severe at first, but the regulations will only become more restrictive over time. Don't waste time thinking you are going to monitor the situation and get out later. Get out now, when the getting is easy."
LINK HERE to related article
Jim Rogers*:
"This Can’t Go On"
This interview on Chinese television (begins around minute 3 in English, but you are welcome to view from the beginning if you understand Chinese) .. Rogers sees gold prices struggling, but then skyrocketing .. advises never to sell your Chinese currency  .. gives his thoughts on the current financial markets .. 23 minutes

7 Common Beliefs About 
Investing in Junior Resources
Casey Research Chief Energy Investment Strategist Marin Katusa clarifies what beliefs are true & what beliefs are false:
Belief 1: Investing in juniors can make you rich. True.
Belief 2: The world will require less resources and energy in the future, and therefore, the resource sector will underperform. False.
Belief 3: Investing in publicly traded resources increases good environmental practices around the world. True.
Belief 4: The average investor gets slaughtered investing in juniors because the big money is made by the insiders. True.
Belief 5: Financial statements are difficult to read and understand. True.
Belief 6: Technical analysis works for junior stocks. False.
Belief 7: Casey Research subscriptions are expensive. False.
LINK HERE to the detail
Santelli: U.S.$ Index 
Ready To Breakout?
CNBC's Rick Santelli discusses bond prices & yields .. NNOO

Tuesday, July 22, 2014

Financial War
Between U.S. & Russia
Ambrose Evans-Pritchard highlights the recent developments & potential new actions on the financial war front between the U.S. & Russia .. emphasizes how Russia is now under combined sanctions by several countries .. on the current U.S. economic sanctions: "The sanctions so far target long-term finance beyond 90 days maturity. This is slow suffocation. The International Energy Agency says Russia needs $750bn of fresh investment over the next 20 years – and imported Western technology – just to stop oil and gas output declining." .. suggests in the future: "The U.S. can at any time tighten the noose. There are reports from Washington that it may soon start to use the nuclear option of money-laundering and terrorist laws to cut off all operational finance for targeted Russian companies, effectively preventing any major bank acting as a counter-party on any transaction."
In a separate article from Bloomberg, Russia is seeking to reduce reliance on Microsoft & IBM ..
LINK HERE to commentary
Related Podcast Also Below - click on image to activate:
"Media has the power to make the innocent guilty and the guilty innocent. That's power"
Dr. Ron Paul* & Mish Shedlock*:
What U.S. Media Won’t Report 
About Malaysian Airlines Flight MH17
Dr. Ron Paul* lists several facts & events which the media will not report on the MH17 airline crash over eastern Ukraine .. here are a few he details:
* They will not report that the crisis in Ukraine started late last year, when U.S.-supported protesters overthrew the democratically elected Ukrainian president. Without U.S.-sponsored 'regime change,' it is unlikely that hundreds would have been killed in the unrest that followed. Nor would the Malaysian Airlines crash have happened.
* They will not report that the U.S. supported unelected 'coup' government in Kiev has, according to OSCE monitors, killed 250 people in the breakaway Lugansk region since June, including 20 killed as that government's forces bombed the city center the day after the plane crash! Most of these are civilians and together they roughly equal the number killed in the plane crash. By contrast, Russia has killed no one in Ukraine, and the separatists have struck largely military, not civilian, targets .. U.S. Media will not report that the U.S. has backed the Ukrainian government in these attacks on civilians, which a State Department spokeswoman called 'measured and moderate.'
* They will not report that the unelected 'coup' Ukraine government has much to gain by pinning the attack on Russia, and that their prime minister has already expressed his pleasure that Russia is being blamed for the attack.
* They will not report that the missile that apparently shot down the plane was from a sophisticated surface-to-air missile system that requires a good deal of training that the separatists do not have.
At this point it would be unwise to say the Russians did it, the Ukrainian government did it, or the rebels did it. Is it so hard to simply demand a real investigation?"
LINK HERE to the Ron Paul commentary
Mish Shedlock* also has several good questions & references to past historical events that should not be missed .. He says he is sticking with his assessment that Ukraine's unelected government is responsible, possibly in an act of 'scenario fulfillment'. "This is not an endorsement for Putin. I am quite sure he can lie just like Obama, Bush, and Poroshenko."
LINK HERE to the Mish Shedlock commentary