Around the Globe 11.07.2013

Consumer Confidence in U.S. Drops for Sixth Consecutive Week – Bloomberg.

Bloomberg Consumer Comfort Index 11.2013

The economic data remains in definitely maybe mode.  GDP grew at a decent clip close to 3% last quarter, but this does not help us answer the most important question of the day— are Americans growing more prosperous? Well, every week they are asked, and for the last six they have responded, “No.”  In fact, removing the top 10% of earners from the survey would turn these poor results into dire ones.  As usual in the New Normal, if you were rich enough to afford a Twitter allocation today, then you’re probably doing okay.  If you’re not rich, not so much.

McKinsey Says 20% of Biggest Banks May Shrink or Merge – Bloomberg.

Credit Jobs at 10-Month Low as Borrowing Slows: EcoPulse – Bloomberg.

XLF 11.07.2013

Chart from Google Finance

After outperforming the S&P 500 for years, the financial services sector ETF diverged lower in late August.  Ongoing money printing is suppressing trading volumes while higher interest rates are simultaneously driving down new lending, particularly for mortgages.  Lower activity levels point to future industry consolidation.  The only question is will this happen through the M&A process, or will Fed-sponsored private bail-out program à la Bear Stearns?

Draghi Cuts ECB Rate to Fight ‘Prolonged’ Inflation Weakness – Bloomberg.

ECB cuts rates to new low, sees protracted low inflation | Reuters.

ECB Cuts Rates Unexpectedly as Low Inflation Threatens Recovery – WSJ.com.

USDEUR Exchange Rate vs Fed to ECB Balance Sheet Ratio

Only 3 of 70 economists surveyed believed that there would be an ECB rate cut, but Draghi surprised everyone resulting in over a 150 pips drop in the USDEUR rate.  The ECB and its German overlords must be much more concerned about future growth prospects than they have been letting on.  Unfortunately for Europe, the weaker euro is temporary.  An ongoing bank deleveraging in advance of 2014 ECB stress tests is causing banks to sell overseas assets and convert the proceeds into euros.  Meanhwhile, the ECB’s failure to maintain the Fed’s torrid printing pace is raising the ECB/Fed balance sheet ratio to levels that imply a $1.54 USDEUR rate.

Once the rate cut proves ineffective, the Germans will reluctantly permit some sort of QE to maintain a favorable exchange rate, though the pretence given will have something to do with monetary transmission channels or some other wonkish nonsense.

U.S. growth picks up in third quarter as restocking offsets weak spending | Reuters.

US Retail Sales MoM

GDP rose because firms increased inventories dramatically during the 3rd quarter.  Of that 2.8% growth rate over 80bps are attributed to rising inventories.  If firms increased stocks in anticipation of more business and they are correct, then growth may even surpass 3% next quarter.  However, if the inventory surge was caused by a glut of unsold goods, then GDP growth will slow down from now until the end of the year.

I think that even the mainstream financial press is beginning to understand the economic situation.  Today reports of 2.8% should have elicited more recovery hype, but the media’s reporting on 3rd quarter growth was rather subdued.  Or, it could be that they are just too busy hyping the Twitter IPO to have paid much attention to GDP growth.

Jobless, US GDP data.

Labor Force Participation Rate vs. Fed Assets

Journalists are neither statisticians nor data experts, so they really do not understand how to read the deluge of economic data being constantly released.  Instead, they slavishly hew to a simplistic narrative involving unemployment claims and job creation. If either claims fall or there is positive job creation, the MFP consider this “improvement.”

This is the wrong way to view these numbers.  Both data sets must be placed into context and reviewed with other data in order to create a complete picture of the American labor market.  Jobless claims usually begin falling during a recession, and this is a leading indicator of recovery; however, low jobless claims in the middle of an expansion indicate that it is running out of steam.  You can look at the chart and see for yourself what happens after jobless claims trough.  (Hint: those gray columns indicate recessions)

Four Week Average Initial Claims through 09.27.2013

The MFP also draws the incorrect conclusions from job creation data.  The country needs about 200,000 new jobs per month to absorb new entrants into the labor force indicated by the red line:

US Monthly Job Creation

The chart does not show an “improving” labor market, but a stagnant one.  Essentially, after an initial burst of euphoria in 2010, the job market just got stuck.  As long as job creation lags behind new entrants to the labor force, the labor market neither is improving nor will it improve.

As to why the labor market remains moribund despite the best efforts of the central bank, check out this chart:

Labor Force Participation Rate vs. Fed Balance Sheet

Labor Force Participation Rate vs. Fed Assets

Must be a coincidence, huh?

Spain nears year-end funding target as industrial output grows | Reuters.

Spanish Industrial Production

 

Despite my best efforts, the MFP’s Spanish Recovery Narrative, a subplot of the Euro Recovery Narrative continues unabated. Allow me to make another attempt by explaining this Reuter’s article passage by passage:

Spanish industry grew for the first time since early 2011 in September, data showed on Thursday, keeping investor sentiment towards the country upbeat as a strong debt sale brought the government close to hitting its 2013 funding target.

1.  As long as the ECB funds virtually 100% of peripheral debt purchases practically for free, banks will continue to buy Spanish debt.  Indeed, Eurozone TBTF banks increased their sovereign debt holdings by 26% last quarter.  This is not a sign that Spain is recovering; rather, it is a sign that the ECB has a printing press.

Calendar-adjusted industrial output rose by a surprise 1.4 percent year-on-year in September, beating expectations of a 1.5 percent contraction and marking its first growth on an annual basis since February 2011.

2.  A one month change could indicate an anomalous result.  Certainly, we should expect to see several months in a row of expanding output.  A trend like that would be something to write an article about, but an isolated rise after 25 months of contractions, meh.

Meanwhile, the Treasury easily sold 4 billion euros ($5.4 billion) in mid- and long-term bonds and has now shifted 96 percent of its 121.3-billion-euro year-end target.

An improved outlook for the Spanish economy from ratings agency Fitch also boosted demand for the 2018, 2023 and 2026 bonds offered.

That helped lower the price paid by the Treasury – a trend of declining yields that seems likely to continue following Thursday’s surprise interest rate cut by the European Central Bank, which occurred after the debt sale.

The 10-year bond yielded 4.164 percent, the lowest since September 2010 and a long way from rates of over 7.6 percent hit during the height of the debt crisis in the summer of 2012.

3.  I don’t need to explain why Spanish rate optics are improving again.  See #1 above.

Spain has languished in an economic slump since a property bubble burst in 2008, dragged down by depressed consumption in the face of record high unemployment.

That led nervous investors to demand unsustainable premiums to hold Spanish paper.

But an ECB pledge to do whatever it takes to back struggling euro zone economies, expansive monetary policies in the United States and Japan and the correction of fiscal and economic imbalances in the country have helped ease concerns.

Spain’s economy registered its first expansion in over two years in the third quarter thanks to strong exports, which also boosted capital goods production and lifted the headline industrial output figure.

“All the indicators point to a turnaround, and that we’re entering into growth. The doubt remains on whether it will be strong or weak, but it’s clear we’re passing from a period of recession to a period of growth,” said Nicolas Lopez,analyst at Madrid broker M&G Valores.

4.  The passage above is an excellent nutshell review of the Spanish Recovery Narrative topped by some encouraging words from a permabull stockbroker.  Much to most Spaniards’ great chagrin, all indicators do not point to a turnaround, only those which can be manipulated by the central bank like interest rates and stock market indices.  Now, if there were only a way to teach central banks to print well-paying jobs rather than speculative cash for the TBTF banks and corporations, you wouldn’t be reading this, and more importantly, I wouldn’t be writing this.

Fitch last week raised its outlook on Spain’s debt, adding to the wave of improving sentiment and encouraging investors to bid for relatively high-yielding paper the Treasury is selling compared to many of its euro zone peers.

Debt in the euro-zone’s once-shunned peripheral economies has attracted strong demand in recent months and Spain’s auction came after Italy raised a record 22.3 billion euros from a four-year inflation-linked bond this week.

On Thursday, the Spanish Treasury sold 4.03 billion euros, beating the targeted range of between 3 billion and 4 billion euros and clearing the way for pre-financing 2014 borrowing.

While the recent economic data has helped fuel rising optimism toward Spain, some economists were more cautious about the strength of the recovery.

“This is another strong auction of Spanish debt and a confirmation, if one were needed, that Spain’s problem isn’t on the funding front, but rather on the fiscal and economic ones,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy, echoing many other analysts’ views.

Spain’s export-led recovery is weighed down by continuing dire consumer demand which is not expected to grow until record levels of unemployment are dealt with. The European Commission sees Spain’s jobless rate remaining above 25 percent to 2016 at the earliest.

“Spain, like Italy, is very much a tale of two halves: a resilient and relatively buoyant bond market and a sickly economy whose public finances are going from bad to worse,” said Spiro.

5.  Well, at last Spiro finishes up strongly for us while implying just what we explicitly stated above, specifically, that only the half of the system that can be affected by the ECB is performing adequately.

Around the Globe 10.15.2013

Fewer US homes entered foreclosure track in third quarter.

Foreclosure starts vs sales

 

The mainstream media loves its housing recovery narrative and fervently guards it against the data.  This is the lede from the article above:

The number of U.S. homes set on the path to foreclosure slid to a seven-year low in the third quarter, reflecting a gradually improving housing market and fewer homeowners falling behind on mortgage payments.

That statement is false.  Foreclosures are sliding because banks are keeping delinquent properties out of the foreclosure, whether by design to maintain higher prices or because they simply cannot work their way through the backlog.  I believe the latter explanation is more likely as incompetence trumps malevolence.  If the housing market were really on its way back to health, the number of delinquencies would have plummeted in lockstep with the foreclosures.  It hasn’t:

Mortgage Delinquency Rate

This second chart shows that defaulted mortgages have remained near recession peaks and historic highs. What is really happening here is that the zombie inventory of homes continues to grow keeping supply out of the hands of the 99% who pay inflated prices for homes and rents for apartments.

Citigroup results hit by bond trading slowdown.

Citigroup Results Hit by Weak Fixed Income Trading – WSJ.com.

Citigroup results hit by bond trading slowdown | Reuters.

Citigroup 10.15.2013

 

All of the TBTF banks are enduring lower profits due to smaller bond volumes and a decrease in mortgage applications.  This news has not mattered one iota to share prices as our chart of C shows.  A mild 50¢ sell-off at the open followed by a rally back to just about the pre-earnings level.  Corporate profits have ceased improving, so the current rally is exclusively beholden to additional multiple expansion.  The financial commentariat generally believes that this expansion is unlikely, but in light of the new Printmaster General’s dovish bonafides, I am not so sure.  The market is still far below record P/E levels, and the magic money machine isn’t finished yet:

S&P500 PE Ratio

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

Fed Balance Sheet vs. SP500 10.2013

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.

Germany digs in heels as Europe moves towards banking union | Reuters.

Total Banking Sector Balance Sheet to GDP

 

The Eurozone has created a faux banking union, which should be sufficient to keep the bond vigilantes at bay for the moment.  There are several requirements for a real banking union as currently exists in the U.S. under the auspices of the FDIC, which you can read about in more detail here:

Cosmetic, Can-Kicking Banking Union Agreement in Play | DARECONOMICS

The sticking point is the money.  The rich countries refuse to become joint and severally liable for depository insurance and resolution costs with their poorer brethren.  What this means is that a euro in Germany is much safer than a euro in Spain, because the Germans have more money to bailout its banking sector.  Hence, the current agreement does not break the pernicious bank and sovereign link.  German banks will have money to lend to businesses, and the periphery won’t, so it will remain mired in stagnation.  This Nash equilibrium will remain until one of these countries decides to gamble on a euro exit.

Around the Globe 06.21.2013

China Money-Market Turmoil Poses Test for New Leaders: Economy – Bloomberg.

Charting China’s Cash Crunch – Real Time Economics – WSJ.

What’s Really Behind China’s Cash Crunch.

China central bank holds line on shadow banking as rates spike | Reuters.

China’s Cash Squeeze Eases—for Now – WSJ.com.

China Cash Crunch 06.20.2013

The PBOC is attempting to slow the growth of credit by starving the shadow bank system of liquidity.  Chinese banks have been using loans from the PBOC and each other to speculate in financial markets, and the PBOC is not pleased with this.  In response, the PBOC ceased providing liquidity injections forcing banks to turn to the interbank market. The dearth of available overnight funds took the banks by surprise, and they bid rates up while fulfilling their liquidity requirements.

The PBOC is playing with fire.  There is a very thin line between a liquidity crunch and a full-blown market panic.  While the crunch is under control for now, this may be just a temporary respite until banks require funds prior to the end of the quarter next week.

Bullard Says New Fed QE Outlook Plan ‘Inappropriately Timed’ – Bloomberg.

Bernanke Bond Announcement Was Poorly Timed: Fed’s Bullard.

Bernanke bond announcement was poorly timed: Fed’s Bullard | Reuters.

James BullardBullard is a well-renown hawk in the circles of finance and central banking.  Indeed, he has been critical at times of the unprecedented monetary easing that has taken place since the onset of the GFC in 2008.

His resume makes him the perfect person to restate the Fed’s policy agenda in the wake of the taper tantrum of the last few days.  What Bullard said was that disinflation/deflation remains a concern and that the Fed should make it clear that they will continue easing to attain their goal of 2% inflation.  Bullard believes that monetary policy should be based on the economy and not a calendar.

No matter the reason, Bullard’s appearance throughout the financial media two days after the Wednesday debacle is meant to deliver the message that printing will continue as scheduled.

Update****Analysis: Markets Might Be Misreading Fed’s Messages – Real Time Economics – WSJ. A Hilsenrath special to save the day.  Mr. Hilsenrath is emphasizing the dovish components of the FOMC release in his piece.

 

Bernanke Makes Life Even More Difficult for the Euro – MoneyBeat – WSJ.

EURUSD 06.21.2013

In this article, the mainstream media has fully bought into the Eurozone recovery meme that it has created.  The article tells the story of a Eurozone slowly emerging from recession and financial turmoil only to have victory snatched away by the fickle hand of the Fed.  Must the Fed be blamed for everything? A more reasonable analysis of the evidence is that the Eurozone is still mired in a recession with no signs that growth is about to start.

PMIs still show a contracting economy, and well-performing markets were a result of cheap liquidity flooding the planet.  Take away the liquidity, and you’re left with a basket case.  Don’t blame Uncle Ben because the markets are once again revealing the cold, hard truth of a poorly designed currency union.

Mediobanca Shares Fall as Stake-Selling Unveiled – MoneyBeat – WSJ.

Mediobanca 06.21.2013

Mediobanca announced that it would be selling stakes of Italian companies to raise capital.  Of course, it was vague about needing capital, but the markets saw through the ruse and knocked the stock down almost 10% today.  If the recent swoon in Italian sovereign debt continues, it may have to raise even more capital.  This problem is shared by virtually every Italian and Spanish bank.  They are all stuffed to the rafters with dodgy sovereign debts, and as the sovereign deteriorates do their balance sheets.  It will be a long, hot summer for the Eurozone.

EU Finance Ministers Struggle With Bank Rules – WSJ.com.

Bank assets to GDP

Another sticking point has emerged in the endless banking union talks.  The eurocrats still have not figured out a way to pay for resolution authority and depository insurance, and now it seems that each country is attempting to water down the resolution rules so that politically preferred groups do not lose their money when the banks begin failing.

If banks resolutions are treated differently throughout the eurozone, entities will move their money to the jurisdiction with the most favorable rules and the strength to finance the consequences of those rules.  In other words, there will not be a single market for banking service, hence no banking union.

Greek Coalition Partner Pulls Cabinet Ministers – WSJ.com.

Greek party quits coalition over state TV debacle | Reuters.

Greek markets rattled by political disarray – FT.com.

GGB 06.21.2013

Greece remains dysfunctional.  The Democratic Left has withdrawn from the government removing its cabinet ministers in an empty gesture.  The grand coalition of PASOK and New Democracy will continue its Euro-1st, Greece-2nd policies as these two parties are who got the country into trouble in the first place.

A game of brinkmanship is developing regarding the next bailout payment in late July.  With each member of the troika digging in its heels, the Greek government better be strong enough for tough negotiations and more concessions over the next month.

Around the Globe 05.17.2013

Junk rating risk casts shadow over Spanish bonds | Reuters.

Spanish 10yr SB 05.17.2013

This article makes the case that the inevitable downgrade of Spanish sovereign debt will precipitate increased selling pressure and a widening of the bund/bono spread.  I agree with this hypothesis in the short-term, but the big picture still remains the same.  World central banks are simultaneously creating money, and this cash has to be invested somewhere.

A ratings downgrade will result in a temporary correction of SSBs with the inexorable march of decreasing yields resuming after a couple of weeks.  When the endgame arrives, the cause will not be so obvious as a ratings downgrade.

UPDATE 3-Slovenia issues $3.5 bln bond, buying time on reforms | Reuters.

Slovenia 10 Year Bond Yield 05.17.2013

Ratings downgrades are lagging indicators and are not as important as the laws of supply and demand for a security.  The reach for yield ensured that Slovenia was able to sell €3.5bn in bonds with a whopping €16bn in auction bids.  This debt sale delays the Slovenian bailout request by at least six months.

Stock Market Gains Show Signs of Wear.

Markets Not Spooked by Fed ‘Taper’ Talk, Yet.

Markets Insight: Phoney QE peace masks rising risk of instability – FT.com.

Morning MoneyBeat: Good Luck Shorting This Market – MoneyBeat – WSJ.

Fed QE versus SP500We all know the story.  Money printing raised stock markets and lowered volatility, but the system is growing more unstable every minute this situation persists.  One reason has to do with short sellers.  Normally, as equities rise, bears anticipate their eventual fall and open short positions.  Too much money sloshing around the system guarantees that even the dogs are rising, so it is very difficult to make money by selling short.  The bears capitulate and stop opening short positions while covering preexisting short bets feeding the rally even more.

The problem arises when the market begins to tumble.  Ever wonder who in their right mind is buying while the market is imploding 5 to 10% in a single session?  It is the bears closing their short positions by buying securities.  Since those short positions are no longer being opened, there will be no buying pressure when the market desperately needs it.

Don’t worry about that for now, just keep buying.  As long as the music plays, get up and dance.

Gold Selloff Deepens; Metal on Track for 26-Month Low – WSJ.com.

Five Reasons Why Gold Bulls Are Right – MoneyBeat – WSJ.

Gold 05.17.2013

Gold is not an investment.  It is a hedge against currency failure.  One buys gold not to become rich but to avoid becoming poor.  Speculators are leaving the gold market in droves, which means the metal will become more affordable for hedgers.  It also means that the profit making opportunities of the last decade are gone.

Gold bugs rely on increased physical purchases for their continued bullishness, but high bullion sales are actually a contra-indicator.  When the sheeple get involved, you know they are being led to slaughter.

Austrian rivals baulk at supporting Hypo Alpe Adria bad bank | Reuters.

austria-loans-to-private-sector

Austria is supposed to be on of the strong eurozone countries.  The country is enduring a recession and a low level banking crisis.  Come to think of it since the periphery is undergoing depressions and full-blown banking crises, I guess that makes Austria a strong Eurozone country.  Is it strong enough to continue bailing out its fellow Eurozone members in perpetuity?

Finnish Finance Minister Urpilainen to Continue After Reshuffle – Bloomberg.

Jutta UrpilaisenThe Finnish FM is a hardliner when it comes to these Eurozone bailouts.  Finland is another supposedly strong Eurozone country mired in a year long recession, and its assent is crucial when crafting these bailout packages.

The FM has proven to be a bailout hardliner up until the time she caves and approves whatever mischief the troika has created.

Italy’s new government takes first economic steps – FT.com.

Enrico Letta

In order to obtain Berlusconi’s support, the Italian Prime Minister agreed to fulfill Bunga’s campaign promise to eliminate this hated property tax.  Italians shouldn’t celebrate too much, because Italy will find another way to get its money.

Around the Globe 05.08.2013

Fed’s credibility tested as inflation drifts below target | Reuters.

US CPI 05.01.2013

The Fed wishes to continue its money printing experiment to maintain the asset price bubbles that the world central banks have inflated since the onset of the GFC.  The problem that they are experiencing in implementing this policy is the decreasing marginal returns of each new round.  $85bn a month may no longer be enough, so  the organization leaks stories about the labor market and low inflation to justify moar.

Not only will the current program be continued, but I bet that the amount will be raised to $100bn per month.

BofA Traders Have Perfect Quarter as Morgan Stanley Lags – Bloomberg.

Fed QE versus SP500

Res ipsa loquitor.  The thing speaks for itself.   Lest one have any doubts that the market is rigged, note this piece.  A firm should not have quarter long winning streaks in efficient markets.  The TBTF firms are the beneficiaries of the Fed’s $3tr+ in purchases since 2009.  They sell bonds to the Fed and buy stock realizing profits and inflating the value of their inventories.

When this madness ends, it will not be the Fed that lost billions of dollars but the taxpayer.  Will the banks give the profits back to help recapitalize the Fed when the time comes?

Poland Cuts Interest Rates to Record Amid Lack of Recovery – Bloomberg.

Polish Benchmark Interest Rate

A few days ago, the Polish government began selling euro membership to its wary citizens.  If the government gets it way, Poland will surrender its independence and monetary policy for nothing, and the country will no longer be able to cut interest rates to offset an economic slowdown.

China Trade Surplus Draws Doubts – WSJ.com.

China opens new front in war as yuan speculation distorts export data | Reuters.

China Export Gains Spur Renewed Skepticism of Figures – Bloomberg.

Chinese Export Growth

How do exports continue rising dramatically when China’s key trading partners reported small or flat increases in Chinese imports? Exporters are adding to invoices, particularly in Hong Kong, so that they have more clean capital that they can use to speculate in Chinese markets.

These massaged export numbers are significant.  Chinese GDP is probably not growing at the official rate of 7.7%, and this slower growth will continue to sap world demand particularly in the commodities space.

Asian Governments Take Measures to Battle Strong Currencies – WSJ.com.

JPM Asia Dollar Index

When the major central banks print money, the effect ripples throughout the world.  The initial rounds in 2009 led to food price inflation that in part caused the Arab Spring.  Currently, cheap central bank money is finding its way to every corner of the globe in its quest for yield.  This dynamic raises the demand for emerging market currencies, which appreciate slowing economic growth.  In response, EM central banks are forced to cut interest rates and sell their own currency in the markets to hold down exchange rates.  And the bubble continues to inflate.

Call to End Troika in Europe Crises – WSJ.com.

Unsustainable Bailouts

Now we all know that everyone has two reasons for adopting a course of action: the reason that they say and the real reason.  You can read all about the reasons for ejecting the IMF from the European bailout regime that the Eurocrats say in this article.

The real reason is that the IMF has begun insisting that debt restructurings are sustainable after remaining silent throughout the Portuguese, Irish and first Greek bailouts.  While the IMF supported sustainability in the third Greek bailout and the first Cyprus one, it quickly caved.

Nevertheless, the IMF seems less willing to pretend that 170% debt to GDP ratios are okay, and the rich countries refuse to any form of debt forgiveness.  If you think this policy will change after German elections, then ask yourself why the IMF is being retired.

EU Commission or ESM could wind down ailing banks: report | Reuters.

Italy, Spain NPLs as of 03.2013

This article reports more talk from the eurocrats.  In order for there to be a banking union, the rich countries must decide to become joint and severally liable for the banking systems of countries like Spain and Italy.  When the rich countries put up about €1trn to start a resolution and deposit guarantee system, then you have a banking union.  Until then, you just have talk.

McDonald’s Sales Slip 0.6% on China, Europe Weakness – WSJ.com.

McDonald’s Sales Slip 0.6% in April.

McD 05.08.2013

McDonald’s sales worldwide sales performance confirms slackening international demand led by Europe and anemic growth in the U.S.  A barely positive 0.7% rise in American sales was more than offset by a 2.4% drop in Europe, McD’s second largest market, and smaller decreases in Asia and Africa.  This has been the McD story for the last year or so, but that has not stopped the stock price from appreciating over 20% since November.  I wonder what could cause a stock with falling revenues and profits to rise so much.

Portugal Marks Return to Bond Market – WSJ.com.

Portugal 10yr Bond 05.08.2013

Portugal managed to sell bonds today in what the mainstream media has decided is an important step for the country to regain independence. Unfortunately, there is no regaining independence in the Eurozone.  A country with a tremendous debt pile and no growth is only able to sell bonds because the ECB has made vague promises about supporting the price and cheap money allows TBTF European banks to speculate in this debt free of charge.

 

 

Around the Globe 04.11.2013

Abenomics’ kimono effect: Japan spending thaws at high end | Reuters.

Japanese Retail Sales with Trend Line

A trend story weaves a few anecdotes into a narrative that ignores the big picture.  The attempt to predict the future blinds the writer to the current truth.  In this article, a guy buys his wife a new kimono, and a few retailers report better results.  These unrelated incidents are are offered to support the meme that the Japanese consumer is awakening from his torpor.  You could believe all of that, or you could look at the Japanese retail sales chart above.

Should Traders Trust Anything Goldman Says?— CNBC.

No.

These 12 Banks Got the Fed Minutes a Day Early— CNBC.

Nothing to See here

Move along folks.  Nothing to see here.

Why are lobbyists and banks receiving the Fed minutes in the same batch as Congressional staffers? The Fed’s independent structure protects it from government control.  Nature abhors a vacuum, so while the institution is unaccountable to the citizens of the U.S. it has been hijacked by the banks it is supposed to regulate.

CEOs of biggest U.S. banks to meet with Obama on Thursday: sources | Reuters.

There’s nothing to worry about here.  I’m sure that this meeting will be completely transparent, and the CEOs and president will be more than happy to answer questions about it even though everyone refused comment for the article.

Fed officials at odds over when to cut bond buys | Reuters.

Fed Balance Sheet

This headline is a bit misleading.  It should read, “Fed officials at odds over when to cut mortgage bond buys.”  The Fed will continue buying $85bn of bonds a month until 2014.  The issue at hand is the composition of the purchases not whether or not it will cease.  I do not see an end to this money printing.  If the market starts dropping towards the end of the program, they will announce a new one.

Cash boost for troubled eurozone economies | Gavyn Davies.

I do not agree that the EU is changing its crisis fighting strategy.  The basic plan is to hold the Eurozone together via the ECB’s printing press while the magic of the internal devaluations makes the periphery economies more competitive.  Austerity is still the name of the game, just at a slower pace.  Relaxing the budget requirements is moot, anyway.  After it was realized that none of the crisis countries will hit their budget targets, the goal posts were moved.

Moreover, the EU has been discussing the problem with countries not paying suppliers for years.  These arrears are not included in official budget deficit reports, which gives countries an incentive to forgo paying bills in order to massage the numbers.  Nothing has changed.

Fiduciary Standard vs. Broker’s Standard: What Every Investor Needs to Know

Tougher Dodd-Frank Fiduciary Standard for Brokers Stalled – Bloomberg.

All of the investors reading Bloomberg are trying to figure out when Uncle Ben is going to fire up the printing press, and they will probably overlook this article.

On its face, it looks very boring. I fell asleep when I got to the word “Dodd.” Nevertheless, this article is a must-read for any retail investor.

When an investor receives financial advice, the entity giving the advice will be under one of two very different standards depending on what type of business the entity practices. To make matters more confusing, the entity could practice both types of business and steer you to one or the other channel. What if a lawyer could change his legal advice to you depending on what kind of client you were? How about a doctor changing your treatment based on what kind of patient you were? This situation is normal in the financial services industry.

There are two types of firms, but they overlap. Most of the TBTF banks offer both services, and in my experience the clients do not understand which one they are  using. Let me break it down for you.

The first type is known as brokerage services. You have a stockbroker who makes recommendations to you. The stockbroker only gets paid if you make a transaction. For example, Mr. Fox gives you a call and recommends that you buy Apple. You decide to take the plunge, and he gets paid a commission based on your purchase.

The relationship between you and Mr. Fox is based on what is known as the suitability standard. All of his recommendations must suit you according to your financial circumstances and transactional history. This is a very loose standard. As long as you don’t sell people risky stocks when they have liquidity needs that require short-term treasuries, the broker should be okay.

The second type is known as advisory services. You have a financial adviser who makes recommendations to you. The financial adviser gets paid whether or not you take his advice because you are paying for the advice. The adviser will either charge you an hourly rate or a percentage of the portfolio under his management.

This relationship is a fiduciary one and carries the strictest level of professional care. The adviser cannot merely recommend investments that suit you; he must only make recommendations in your best interests. It is much easier to prove that a fiduciary standard has not been followed. Additionally, the adviser is getting paid no matter what you choose to do and has no incentive to steer you to riskier products for a larger commission. Hence, there is very little room for shenanigans here.

What makes the situation more confusing is that most large firms market their advisory services to brokerage clients. Usually, it is the same person selling both. These retail clients do not see the distinction between these programs.

In order to protect investors, the SEC decided to promulgate the stricter standard. If the rule is ever adopted, the stockbroker will quickly become extinct. A broker subject to the stricter standard will not want to conduct the riskier brokerage business if he is subject to the stricter rules that come with a steadier payout.

The article claims that both Wall Street and consumer watchdog groups want this rule based on Sifma’s involvement in lobbying. This view is incredibly naive. While Sifma is lobbying for the rule to help its TBTF bank paymasters appear concerned about the plight of the common investor, these same banks are busy handing money hand over fist to Republican legislators to ensure the rule never hits the books.

The new standard would kill the business models of several brokerage firms not to mention that these firms make a killing selling financial products that would never survive a fiduciary standard. For more details, read about “structured products” and why you should never, ever buy them.

You should never use a stockbroker. Use an adviser who must adhere to the fiduciary standard. Better yet, learn about investing yourself and make your own decisions.

Bailouts for the Banks

Top Economists: Iceland Did It Right … And Everyone Else Is Doing It Wrong | ZeroHedge.

The key to understanding these bailouts is remembering that they help the bondholders, shareholders and employees of the banks to the detriment of everyone else.

These are the steps of a bank bailout:

  1. A bank’s poor lending and investment decisions lead it to go broke.
  2. None of the investors in the market want to be the last man standing on a sinking ship, so a sell-off ensues.
  3. If the sell-off leads to a market panic, then people will get nervous and demand that the government “do something.”
  4. The government intervenes with loans, extra capital and liquidity injections. These are all euphemisms for giving the banks taxpayer money.
  5. Once you start intervention, you cannot stop. Hence, the intervention continues indefinitely into the future with permanently low interest rates and cheap, no-questions-asked loans becoming part of life in the banking industry.
  6. The banks become zombies, neither vibrant, ongoing concerns nor failing entities. These zombie banks lead to a zombie economy that generally remains stagnant for years to come à la Japan.

Contrast this scenario with what happened in Iceland. These are the steps to letting the banks fail:

  1. A bank’s poor lending and investment decisions lead it to go broke.
  2. None of the investors in the market want to be the last man standing on a sinking ship, so a sell-off ensues.
  3. The government decides to let the banks fail.
  4. The country’s currency drops like a stone, markets panic, multiple institutions fail and the country enters a depression.
  5. A cheaper currency combined with the effects of getting the bad debt out of the system begin the cycle of economic growth again.
  6. New banks step in to fill the role of the failed banks.

The first scenario is what is happening in Japan (for years), the US and Europe and the second is the current situation in Iceland. Which do you prefer?

dareconomics.wordpress.com

Conflicts of Interest in TBTF Firms

Guest Post: The Biggest Conflict Of Interest In Finance? | ZeroHedge.

These conflicts of interest are permitted by regulation. Indeed, maintaining so-called “information barriers” in the firm and disclosing conflicts of interest in the fine print in the myriad documents that they make you sign to open an account absolves the firm of all responsibility, particularly with trading clients. As long as the firm’s recommendations are suitable, your salesperson can recommend that you buy XYZ while the trading desk is busily dumping it to any and all comers.

Why do people continue to do business with these firms?

 

How to Create Zombie Banks II

Hedge Funds Have $74 Billion as Europe Fire Sale Delayed – Bloomberg.

European banks are in trouble. They have virtually lost the ability to fund themselves in the open market relying on ECB loans, sovereign debt with inflated values and dodgy accounting practices including not marking loan portfolios to the market.

Logically, we expect to see these banks selling assets in order to raise capital, but this is not happening. The ECB’s liquidity programs are propping up the entire system. The problem is that all these banks do not deserve to be saved. They made poor lending decisions and should be allowed to fail. Bank failures raise the overall productivity of the entire system as the unproductive entities leave the business.

If the natural market order is disrupted, you get scads of Zombie banks dragging down GDP growth for years. Japan started printing money to prop up its banks 20 years ago. It is still doing so, and its economy has been stagnant for year with no end in sight to the malaise.

https://dareconomics.wordpress.com/2012/08/13/how-to-create-zombie-banks/