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Trumponomics and the Stock Market

Photo by Mark Taylor | CC BY 2.0 SHARMINI PERIES: The rise of stock prices in the US stock market could be an indication of...
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Video: Cut & Crash: Trump praises US stock market gains, but Americans fear job...

Amid the current turmoil in the White House, Donald Trump is delighted with one positive development - the record gains on the American stock...

Why Controversy Over Trump Sends Shockwaves Through US Stock Markets

The US stock market has plummeted over US President Donald Trump’s alleged attempt to stop former FBI Director James Comey from investigating former National...
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Video: Keiser Report: Cognitive Dissonance in US Stock Markets (E1040)

Check Keiser Report website for more: http://www.maxkeiser.com/ In this episode of the Keiser Report, Max and Stacy discuss cognitive dissonance in US stock ... Via...

Clinton backer Soros lost $1bn in stock market surge post-Trump win – report

Billionaire hedge fund manager and avid Hillary Clinton supporter George Soros lost $1 billion dollars in...

Stock Market Metric Predicts Trump Win

Stovall said in that year, Britain and France joined with Israel in a military action against Egypt over the Suez Canal. It was...

US has ‘false economy’ & artificial stock market – Trump

Republican presidential nominee Donald Trump has described the US economy as “false,” saying that the central banking system is intentionally keeping interest rates low...

50% Stock Market Crash?

Are we about to witness one of the largest stock market crashes in U.S. history?  Swiss investor Marc Faber is the publisher of the...

What is driving the stock market panic?

Barry Grey Banks, hedge funds and governments all over the world are entering a new week of trading with fear and trepidation. The US markets...
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Video: How The Chinese Debt Bubble Led to the Stock Market Plunge

Johns Hopkins professor Ho-fung Hung says we are seeing a continuation of the stock market collapse from the summer of 2015, and executive measures...

4 Harbingers Of Stock Market Doom That Foreshadowed The 2008 Crash Are Flashing Red...

Michael Snyder (RINF) - So many of the exact same patterns that we witnessed just before the stock market crash of 2008 are playing out...

Stock markets on cusp of ‘another crash’ warn financial analysts

Financial analysts have warned of another ‘crash’ in global markets after the FTSE 100 fell 120 points in just two hours of trading on...

Stock Market Crash 2015: The Dow Has Already Plummeted 2200 Points From The Peak

Michael Snyder (RINF) - Those that watched their stocks steadily increase in value for years are now seeing...

This 2 Day Stock Market Crash Was Larger Than Any 1 Day Stock Market...

Michael Snyder (RINF) - We witnessed something truly historic happen on Friday. The Dow Jones Industrial Average plummeted 530 points, and that followed a 358...

Fake Housing Market, Fake Stock Market and Fake Millionaires

“One in 65 people is now worth seven-figures after surge in the price of property and stock markets” the newspapers have been crowing. “The...

Wall Street reporting is a joke: The Stock Market is Getting Harder to Rig

It’s entertaining to watch and to read reports in the corporate media about the current stock market decline, which over the course of the...

CNN Tells Americans That The Stock Market Is Not Going To Crash

Michael Snyder (RINF) - On Wednesday we witnessed the third largest single day point gain for the Dow...
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Video: The Sky Is Not Falling? China’s Stock Market Impact

Economist James Henry discusses China and its impact on global markets. Via Youtube
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Video: “Casino Capitalism”: Economist Michael Hudson on What’s Behind the Stock Market’s Rollercoaster Ride

DemocracyNow.org - Black Monday is how economists are describing Monday's market turmoil, which saw stock prices tumble across the globe, from China to ... Via...

The Stock Market Is Not the Economy

(cc photo: Aaron Goodman) We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the US. (Wall...

We Have Already Witnessed The First 1300 Points Of The Stock Market Crash Of...

Michael Snyder (RINF) - What has been happening on Wall Street the past few days has been nothing...
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Video: Do You Really Believe A Glitch Closed The Stock Market

Alex Jones breaks down how you are being distracted by nonsense while the globalists destroy the world. Help us spread the word about the...
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Video: Full Show – Global Stock Market Enters Free Fall – 07/08/2015

On the Wednesday, July 8 broadcast of the Alex Jones Show, US stocks slide as China faces major economic troubles, Greece receives support from...
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Video: Stock Market Hack Attack – Infowars Nightly News – 07/08/2015

On this Wednesday, July 8th Jakari Jackson breaks down the stock market "glitch, then the 2nd Amendment and how gun sales spiked in June,...
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Video: Hackers Hinted At Stock Market Crash

The hacktivist group Anonymous hinted at possible issues on Wall Street Tuesday evening nearly 12 hours before an alleged glitch halted trading on the...
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Video: Greg Palast: How The Stock Market Game Is Rigged

Investigative journalist Greg Palast joins the show to discuss the Greek economic dilemma and why the country should ultimately part ways with the Euro...

The Stock Market Will Start To Fall In July? The Dow Plummeted More Than...

By Michael Snyder (RINF) - Was last week a preview of things to come? There are quite a few people out there that believe that...
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Video: China Bails Out Stock Market with $209 Billion Stimulus, But Who’s Getting Saved?

Political economist Zhun Xu of Beijing's Remnin University says China is bailing out its own public-enterprises as part of a flawed plan to jumpstart...
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Video: How 1% fix stock markets for billions, like on 9/11 & 7/7 –...

Twitter goes up 3 billion in 20 minutes on a cheap scam! How 1% fix stock markets for billions, like on 9/11 & 7/7...

Ron Paul warns of coming stock market chaos as bottom falls out of market

Record highs or not, the stock market is in for a major crash in the near future, says former Republican presidential candidate Ron Paul....
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Video: Keiser Report: America’s Shrinking Stock Market (E784)

In this episode of the Keiser Report Max Keiser and Stacy Herbert discuss when the last ear and the last eye accessible to the...
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Video: China stock market crash: ‘Not a catastrophe, but rather very serious problem’

In China, stock markets are recovering from days of investor panic which have seen massive sell-offs. The crisis forced the country's stock exchange regulator...

Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?

Michael Snyder (RINF) - The second largest stock market in the entire world is collapsing right in front of our eyes. Since hitting a peak...

The Stock Market’s Day of Reckoning

(Real Clear Politics) “I am utterly amazed at how the Federal Reserve can play havoc with the market,” Paul said on CNBC’s “Futures Now” on...

Is The Stock Market Overvalued?

By Michael Snyder (RINF) - Are stocks overvalued? By just about any measure that you could possibly name, stocks are at historically high prices right...

Is the Stock Market Another Bubble?

The stock market has recovered sharply from the lows hit in the financial crisis. All the major indices are at or near record highs....

If Anyone Doubts That We Are In A Stock Market Bubble, Show Them This...

Michael Snyder RINF Alternative News The higher financial markets rise, the harder they fall. By any objective measurement, the stock market is currently well into bubble...

New stock market crash, a pattern?

By Wim Grommen Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last 15 years he studied transitions,...

The Insiders’ Case for a Stock Market Mini-Crash

This piece was reprinted by RINF Independent News with permission or license. The trade only works if everyone is lulled into staying on the long...

Is the NSA manipulating the stock market?

Is the NSA manipulating the stock market? By Jon Rappoport March 20, 2014 www.nomorefakenews.com Trevor Timm of the Electronic Freedom Frontier dug up a very interesting nugget. It was embedded in the heralded December 2013 White House task force report on spying and snooping. Under Recommendations, #31, section 2, he found this: “Governments should not […]

Is “Dr. Copper” Foreshadowing A Stock Market Crash Just Like It Did In 2008?

Is the price of copper trying to tell us something?  Traditionally, "Dr. Copper" has been a very accurate indicator of where the global economy is heading next.  For example, back in 2008 the price of copper dropped from nearly $4.00 to under $1.50 in just a matter of months.  And now it appears that another [...]

The Next 24 Hours Are Critical For The U.S. Stock Market (Video)

By Susan DuclosAccording to Gregory Mannarino the next 24 to 48 hours are critical for the US  stock markets, and as is shown in the video link he provides from his previous warning, he called what is happening in the markets right now, with ...

The Stock Market In Japan Is COLLAPSING

Did you see what just happened in Japan?  The stock market of the 3rd largest economy on the planet is imploding.  On Tuesday, the Nikkei fell by more than 610 points.  If that sounds like a lot, that is because it is.  The largest one day stock market decline in U.S. history is only 777 [...]

It’s Here!! Stock Market Crash, Dollar Collapse – Updated! (Videos)

By Susan Duclos


Stock markets tanked today with rising concerns being reported about global growth concerns and according to Christopher Greene in the the latest AMTV's video, this will usher in Quantitative Easing (QE) 5, another round propping up a failing economy to give the illusion that it is "recovering" just to fall harder and steeper when the illusion fades. The dollar is almost worthless now and another round of QE will assure it's collapse even sooner than some forecasters projected.


Related: Stock Market Critical: Shocking ISM Report – Gregory Mannarino


[Update] The second video below is from X22Report which sees the same signs and indicators and headlines "The Economy Is Now Showing Signs Of Collapsing."


Last but not least, in the third video Mike Maloney from Hidden Secrets of Money,  explains why it isn't a recession that is coming but "Here Comes The Next Great Depression."


Everyone sees what is coming like a train bearing down on us, yet TPTB continue to claim we are in a recovery.










Cross posted at Before It's News

Why Is Goldman Sachs Warning That The Stock Market Could Decline By 10 Percent...

Michael SnyderEconomic CollapseJanuary 14, 2013 Why has Goldman Sachs chosen this moment to publicly declare that...

90% Collapse Of The Stock Market!?! Billionaires Dumping Shares Fast (Video)

By Susan Duclos


If you want a good gauge of how bad the US economy is and how close a dollar, stock and total economic collapse is, watch the wealthy, the millionaires and the billionaires. In doing so, it is being reported that they are dumping  shares in major American corporations. In other words, they are getting out before the US economy takes them down with it.


Billionaires Warren Buffet, John Paulson and George Soros are just a few that have dumped tens of millions of shares in American companies such as Johnson & Johnson, Procter & Gamble, Kraft Foods, JPMorgan Chase, Citigroup, and Goldman Sachs.


Why?


After all, the stock market is still in the midst of its historic rally. Real estate prices have finally leveled off, and for the first time in five years are actually rising in many locations. And the unemployment rate seems to have stabilized. 
It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%. 

The illusion that has been created by bailouts and bait and switch games the Obama administration has been playing for the last fives years, is about to collapse and when the stock market crashes the whole US economy will go down with the it.


More at NewsMax and in the video below.





Cross posted at Before It's News



The Stock Market Has Officially Entered Crazytown Territory

Michael Snyder RINF Alternative News It is time to crank up the Looney Tunes theme song because Wall Street has officially entered crazytown...

Stunning Chart: Today’s Stock Market is Eerily Reminiscent of 1929…

With the Holiday shopping season off to a slow start according to preliminary retail sales numbers and with the stock market sitting near all...

Stunnning Chart: Today’s Stock Market is Eerily Reminiscent of 1929…

With the Holiday shopping season off to a slow start according to preliminary retail sales numbers and with the stock market sitting near all...

The Stock Market Bubble

Wall Street is buzzing, and it's all about bubbles. In fact, according to Google Trends, interest in the term “stock bubble” was higher in...

15 Signs That We Are Near The Peak Of An Absolutely Massive Stock Market...

One of the men that won the Nobel Prize for economics this year says that "bubbles look like this" and that he is "most worried about the boom in the U.S. stock market."  But you don't have to be a Nobel Prize winner to see what is happening.  It should be glaringly apparent to anyone [...]

Nobel Prize economist warns of U.S. stock market bubble

An American who won this year's Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial...

Warning of US stock market bubble

An American Nobel Prize-winning economist says he is worried about sharp rises in equity and property prices especially the boom in the US stock...

Thanksgiving in America — Shocking Poverty and New Records for the Stock Market

This year's Thanksgiving holiday, coming more than five years after the Wall Street crash, highlights the devastating impact of mass unemployment and budget cuts...

US stock markets drop sharply

US stocks drop amid fears of govt. shutdown Monitors above the S&P 100 Stock Index Options (OEX) pit at the Chicago Board Options Exchange...

½ UK stock market owned by foreigners

More than half of the UK™s £1.76 trillion stock market is owned by overseas investors, it has been revealed. According to the Office for National...

Stock Market Crash Just Ahead?

Robert Wenzel Lew Rockwell.com Economic Policy Journal According to Austrian Business Cycle Theory, when a central bank slows its money printing that has fueled...

This Is The Biggest Cluster Of Hindenburg Omens Since The Last Stock Market Crash

Are we heading for a major stock market decline? Warnings about a crash of the financial markets are quite common these days, and usually...

The When: “The Economic Collapse Cannot Be Predicted By Looking at Stock Market Charts,...

Most astute observers and analysts understand that the world is on the brink of a widespread economic collapse. Our debt, the expansion of the...

7 Charts That Prove That The Stock Market Has Become Completely Divorced From Reality

The mainstream media would have us believe that the U.S. economy must be in great shape since the stock market has been setting new...

Get Ready For The Next Great Stock Market Exodus

In the years 2006 and 2007, the underlying stability of the global economy and the U.S. credit base in particular was experiencing intense scrutiny...

Tehran stock market sets new record

The main index of the Tehran Stock Exchange (TSE) has set a new record, surpassing the 54,000 unit mark for the first time. In Saturdayâ„¢s...

Japanese Stock Market Bust

Recently by Peter Schiff: Tapering ...

The Stock Market Is Doomed

Rohani election boosts Iran stock market

Iran stock market has witnessed a vigorous growth over the past days following the victory of Hassan Rohani in the June 14 presidential election,...

Global Stock Markets fall after 7 percent Collapse in Japan’s Nikkei index

Stock markets posted significant losses worldwide, led by a one-day 7.3 percent drop in Japan’s Nikkei stock index, amid signs of a growing global...

Welcome to Ayn Rand Planet: Why the Rich Prosper from the Stock Market While...

On Planet Rand, the stock-market boom is a wonderful thing precisely because it rests upon the recent rise in corporate profits.

March 11, 2013  |  

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This morning I received an email blast form Amazon. It was pushing The Fountainhead and Atlas Shrugged, the old and new testament of the Ayn Rand nation, which includes much of the Tea Party and its Republican allies.

How appropriate to be promoting Ayn Rand books just as the stock market and corporate profits both reached record highs. How appropriate to think of the infamous John Galt withdrawing from society in comfort while the rest of us face high unemployment, oppressive student loans, increasing healthcare costs, upside-down mortgages, and declining real incomes. But, according to Rand's philosophy, this is as it should be -- the wealthy getting all the rewards while the rest of us get nothing.

None of this is accidental. Our two-tiered economic recovery is the direct result of policies, or the lack thereof, that flow directly from Randian principles. If we don't do something soon, we'll all be living on Planet Rand.

Who Owns the Stock Market?

Before exploring this Randian policy coup, let's be clear on who owns how much stock in America, and therefore who is benefiting most from the record rise in the equity markets.

As of 2010, the top 1 percent of households owned 35 percent of all the stocks in America while the bottom 80 percent of us owned only 8 percent. These percentages include both direct ownership of stock shares and indirect ownership through mutual funds, trusts, and IRAs, Keogh plans, 401(k) plans, and other retirement accounts. (See " Wealth, Income and Power" by G William Domhoff.) So the current market boom is extremely profitable for the well-to-do, especially the super-rich, which is precisely what an Ayn Rand true-believer would cherish. Why is that?

On Planet Rand, each individual pursues his or her own rational self-interest. That is the definition of morality. It excludes altruism, which is posited as a negative, guilt-driven trait that should be avoided at all costs. Yes, this sounds selfish, but that's a good thing on Planet Rand, because acting in your own rational self-interest leads to improvement, success, fulfillment and happiness. That's how you can become a "maker" instead of a spineless moocher. (When I hear all this talk about the "makers," the Yiddish word macher always comes to mind -- a word used to describe an ambitious, puffed-up schemer. )

So on Planet Rand, the stock-market boom is a wonderful thing precisely because it rests upon the recent rise in corporate profits. (The New York Times reports that corporate profits as a share of national income are at their highest levels since 1950.) Aren't those corporations run by the smart, successful CEOs who are society's "makers"? Aren't those CEOs applying Randian reason in pursuit of their self-interest? Surely, this is why these makers deserve everything they can get.

Why Are We Being Left Behind?

It's easy to see why the Randians would adore the super-rich. After all they're not alone in their idolization of the wealthy. It's seems like most of Congress adores the super-rich as well. But why do the Randians refer to everyone else as moochers? Why be so hard on the rest of us?

This becomes clearer when we look at two kinds of answers to the question of why most of us have been left out of the current economic recovery. The first set of answers comes from a straightforward analysis about how our economy works, and doesn't work:

  • High unemployment depresses wages of low- and middle-income wage-earners

  • Increases in the use of advanced technologies allow corporations to produce more with less labor, thereby keeping unemployment high

Japan’s Amari Backtracks On “Stock Market Targeting”, Says Government Has No Price Target For...

If anyone is confused why the BOJ refused to do anything of note until January 1, 2013 at which point it would proceed with open-ended monetization a la the Fed and the ECB's OMT, the reason is simple: it allows the country's (transitory) leaders to jawbone, threaten, cajole and coax, in what will be daily attempts to talk the currency lower without actually implementing any monetary action: just like the ECB has done so far. Case in point: the now daily speeches by Japan's economic and fiscal policy minister Akira Amari, who every single day of the past week has been talking to reporters, on many case openly contradicting himself, and whose only purpose is to spook any remaining Yen longs into submission. Sure enough here comes today's sermon:

  • AMARI: ABE CAREFULLY CONSIDERING BOJ GOVERNOR CANDIDATES
  • AMARI: ABILITY OF BOJ CANDIDATES MORE IMPORTANT THAN BACKGROUND

But funniest of all:

  • AMARI: GOVERNMENT HAS NO TARGET FOR STOCK MARKET

Wait, back up, what? It was just four days ago that Amari himself made it very clear that he would not sleep until the Nikkei hit 13,000 by the end of March. From Japan Times:

Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March.

“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech.

The Nikkei 225 stock average, which last week climbed to its highest level since September 2008, finished at 11,153.16 on Friday.

We want to continue taking (new) steps to help stock prices rise” further, Amari stressed, referring to the core policies of the Liberal Democratic Party administration — the promotion of bold monetary easing, fiscal spending and greater private sector investment.

Amari said the Nikkei’s recent surge translates into combined share appraisal gains of some ¥38 trillion among domestic corporations, including financial institutions.

The key index started rallying from around 8,600 points in mid-November when then-Prime Minister Yoshihiko Noda decided to hold a general election Dec. 16 that saw his ruling Democratic Party of Japan trounced by the LDP. Share prices have risen largely in response to the yen’s depreciation against other major currencies on expectations for aggressive monetary easing measures by the Bank of Japan since the LDP’s return to power.

Ignoring for a minute the fact that an status quo minister finally let one slip and told the truth behind all the lies of inflation, personal consumption, NGDP, and other "targeting" and admitted it really is all about "stock market targeting", it is simply humiliating and surreal that government leaders treat those who listen to their daily lies like lobotomized cattle, who can't remember what they said a few days ago. But the bigger issue here is that it appears that even the Japanese economy minister has backed off his stock market target, because suddenly he doesn't feel so confident it can be achieved.

Does this mean the Nikkei will drop, and drag the USDJPY, and the yield on the 30 Year down with it. All signs suddenly point to yes.

The only question is why the flip-flop. We hope to find out soon, although the answer may be as simple as the political pushback that Abe is getting in his pick of the next BOJ, as we explained a week ago, which as most know is Kuroda.

Should Abe's pick for his personal printing lackey not be chosen, then all bets about the Japanese reflation are immediately off as the political wedge will once again be inserted and all attempts to send domestic energy prices into the stratosphere will be crushed.

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How The Stock Market Became The “Food Stamps” for the 1%

Via Michael Krieger of Liberty Blitzkrieg blog,

The price of anything is the amount of life you exchange for it.
- Henry David Thoreau

Society is like a stew. If you don’t stir it up every once in a while then a layer of scum floats to the top.
- Edward Abbey

When the rich wage war, it’s the poor who die.
- Jean-Paul Sartre

The Stock Market:  Food Stamps for the 1%
For most of the past four or five years, I have spent the majority of my time studying the dominant forces that fuel the power structure that exists in these Unites States today, and indeed throughout the world.  My education began quite suddenly and unexpectedly in the middle of the last decade when I started understanding fiat money, Central Banking and the global monetary system.  Since then, I have expanded my understanding to mainstream media brainwashing, the military-industrial complex, the role of the political oligarchs in Washington D.C., the corruption of the food industry under the complicity of the FDA itself and much more.  The more I peered under the curtain, no matter what the industry, the clearer it became that the system had no chance of survival under its current form.  What’s worse, it became obvious that the very small 0.01% of the population that I call oligarchs (financial and political), who are actively gaming the system for their own pleasure, are well aware of the system’s terminal nature.  That’s why they are rapidly putting in place the police state grid.

That said, this article is not about the implementation of the surveillance state.  I cover that pretty much daily these days.  This post is more of a philosophical stream of consciousness; a guilty pleasure that I have not engaged in as of late.

I have mentioned many times in the past that food stamps are just a payoff to the poor.  While I think a permanent and expanding welfare state is completely and utterly destructive to an economy and culture, I do not demonize these folks.  The vast majority of them would like to work and be productive.  They are victims and this is being done to them quite intentionally.  It creates dependency.  It keeps them off the streets.  It’s an unspoken bribe plain and simple.  The oligarchs do not want angry, roving, hungry masses on the streets while they strip mine what’s left of the economy.  Food stamps, disability and all sorts of other freebies take care of this segment of the population as the oligarchs continue on with their crimes and prepare for the day of reckoning (hence the surveillance grid).

However, the oligarchs have another problem to deal with.  This problem is the huge group of people that resides in between them and the poor.  Ideally, they would like to shove all of them into the poverty category and keep them barely alive and on dole of the government.  That way, the politically connected large corporations that do not pay taxes and receive bailouts can continue to pay them peasant wages while the government takes care of the rest.  It’s a win-win.  The situation I just described is exactly what is happening as we speak and has been occurring at an ever frequent pace since the coup of 2008.  This is exactly why people are buying guns, gold and are extremely negative on the economy and the future of the United States.  I recently discussed this in my post Gallup Poll: Americans Most Negative on the Nation and Economy in 30 Years.  If you read the Gallup data in detail you will see that this level of negative readings only occur during very bad economic times.  The average person can feel themselves getting poorer despite the nonsense spewed by the mainstream media.  Their standards of living don’t lie and no amount of false statistics can change that.  As John Adams famously said:  Facts are stubborn things.

Stubborn indeed; and this is where the stock market comes into play.  Banana Ben Bernanke has not made it a secret that he is directly targeting a higher stock market with his purchasing power destroying money printing.  He has made that clear from pretty much the beginning.  The idea is that a higher market will improve the balance sheets of pensions, individual retirement accounts and also create a psychological impact that will make people feel confident and thus boost the economy.  It is the last point that is of course most important. If the latter does not happen then the boost in stock prices is merely an unsustainable bubble that will burst and all the “good” that was done to balance sheets will be undone with a vengeance at some point in the future.  The latter did not happen.

As much as people like to talk about the 1% versus the 99%, the real winners since 2008 have been the oligarchs.  The 0.01% have benefited much more than any other class in terms of both money and power.  It’s the 0.01% versus everyone else and the quicker we recognize that, stop fighting amongst ourselves, and push them aside the better it will be for our species.

As I have repeatedly stated, the oligarchs are using the current period in between financial panics to put in place the surveillance grid they plan to use on the population once the SHTF.  It is of extreme importance that the masses stay apathetic and obedient in the process.  Hence food stamps for the poor and the stock market for the 1%.

I grew up around the 1%.  It’s my socioeconomic class. I know the 1% intimately.  There’s nothing special about the 1%.  Most of them are very average and very lucky.  Of course there are many, many exceptions but there are exception in all classes.  Sure they are slightly more educated than the rest of the population, but on average are not any more intellectually curious than the 99% and are just as easily manipulated by propaganda and more importantly money.

More than any other group, the 1% has been convinced that the stock market represents some sort of leading indicator of wealth and prosperity.  Nothing could be further from the truth.  Sure, the stock market can function as such an indicator.  It is such an indicator when the rising stock market reflects a dynamic, capitalist economy where new industries and companies are rising to the top and improving standards of living for the populace.  It represents the opposite indicator when it merely reflects the ownership interests of the oligarchs in a crony-capitalist, fascist economy that is picking away at the dying carcass of what little economic freedom still remains.  This is what a rising stock market actually represents today.  When people look at it they should understand it is merely a measure of the oligarchs getting wealthier and more powerful and you becoming more of a debt slave.  It represents their interests in multinational corporations with record profit margins because they refuse to pay their employees a living wage.  A rising stock market today is actually a leading indicator of the destruction of the middle class, cultural destitution and a society in collapse.

The stock market is like slop in a pigpen.  It is a key instrument used to keep the 1% from getting antsy.  Unlike the middle class (a group that isn’t falling for any of the tricks), many of the 1% work on Wall Street or related industries and own stocks.  Many of the people in the 1% are at least wealthy and connected enough to still cause serious problems for the oligarchs.  They must be kept quiet as the coup that started in 2008 is brought to fruition.  Then they will be left high and dry like everyone else.  This is the role that the stock market is playing at the moment.

So as the 1% sits around analyzing a casino, the poor collect food stamps and the middle class dies.  Many in the 1% look upon the poor on food stamps with disdain, yet little do they realize they are on food stamps as well.  It’s called the stock market.

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The Stock Market Is Back To December 2007 Levels; Here Is What Isn’t

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Market Buzz: Global stimulus concerns drag stocks down

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There’s No ‘Free Market’ Solution to Health Care

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All stock market indexes were down in Saudi Arabia after trading time ended and the loss continued in aftermarket trading.

The fall came after the Saudi-owned Al Arabiya Hadath TV satellite channel aired videos of tanks loaded onto military trucks.

The channel claimed the tanks were "the arrival of reinforcements from the strike force to the [Yemeni] border.”

Saudi Arabia started its military aggression against Yemen on March 26 -- without a UN mandate -- in a bid to undermine the Houthi Ansarullah movement, which currently controls the capital Sana’a and other major provinces, and to restore power to Yemen’s fugitive former president, Abd Rabbuh Mansour Hadi, who is a staunch ally of Riyadh.

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HDS/SS

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His latest interview will be shown in the video below, where he assures the public that a "significant" correction for the market is long overdue, but there are a couple of other articles that preface this interview, which allows readers to understand the events that have been unfolding.
 
For example, published on May 2, 2014, at ZeroHedge, Faber predicts that a market crash is coming in the second half and says ""we have already had a big break in parts of the market... but we haven't had the big break in the overall market," adding that "it's too late to buy the US stock market."
 
Also reported on MarcFaberNews, we see he is still warning people to get their gold out of the US now.
Faber joins other names, such as Gerald Celente and many others that are all warning of what is to come. No one can give an exact date because there are a variety of methods the US can use to stave off the dollar collapse, the market collapse and therefore an entire economic collapse of epic proportions, but eventually these stalling tactics will hit the wall and then America spirals into a freefall.

These warnings should be taken seriously, protect your assets, before they are all gone.


“I prefer if investors hold physical gold in a safe deposit box, ideally outside the US, in various locations… Switzerland, Singapore, Hong Kong, Australia, Canada… I think it’s important in today’s very uncertain world to diversify, not only the various asset classes… but also the custody of your assets should be in different jurisdictions.” “I don’t trust anyone.”






Note from video interview and uploader WallStForMainSt -  
We apologize in advance for the sound quality and choppiness! We were calling Marc and he was in Asia and there was a lot of choppiness. Also, Jason's Skype went out 5 minutes into the interview.
 Cross posted at Before It's News


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Schiff:


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Celente:


This selloff in the emerging markets, with their currencies going down and their interest rates going up, it’s going to be disastrous and there are going to be riots everywhere… 
…So as the decline in their economies accelerates, you are going to see the civil unrest intensify.

Those are just samples and in the first video below, by Gregory Mannarino, more is explained about the upcoming stock market "meltdown."











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Market Euphoria During Troubled Times

Market Euphoria During Troubled Times

by Stephen Lendman

Major equity markets approach nosebleed levels. Experts disagree on whether bubble extremes approach. They're not unusual. They happen often.

The myth about markets reflecting reality is hokum. Keynes once warned about "enterprise becom(ing) the bubble on a whirlpool of (destructive) speculation." Hard times usually follows.

Easy credit fuels speculation. Euphoria follows. Greed trumps good sense. Folly pays a big price. This time is different talk proliferates. Momentum drives prices higher.

Stories of easy riches abound. Why miss out. Overvaluation leads to more of it. Fraudsters sell at the top. Greater fools buy at the wrong time. Hindsight is the best insight. Excess ends badly every time.

Downward momentum happens faster than market upswings. Years of gains are wiped out in months. Valuations evaporate rapidly.

Goldilocks economies turn rancid without warnings. Lenders remember how to say no. Reality arrives with a bang. Animal spirits disappear. Angst becomes pervasive.

This time IS different. Market appreciation is supposed to reflect good times. They go hand in hand. Ordinary people are fighting for the soul of the American dream. 

It's fast disappearing. It's dying. Main Street Depression conditions are killing it. They're at levels last seen in the 1930s.

Spin hides them. Fed governors say QE and low interest rates stimulate economic growth. It's cover for what's been ongoing since late 2008.

It artificially inflates markets. It keeps too-big-to fail banks from collapsing. It's failed to stimulate economic growth. It weakened the dollar. It created bond and equity market bubbles.

Offshoring manufacturing and professional high-pay/good benefit jobs to low wage countries prevents growth. Replacing them with low pay/poor or no benefits ones doesn't compensate.

Money printing madness isn't forever. Reality has final say. The greater the excess, the bigger the bang when it arrives. America is in decline. It's on a collision course with trouble.

Weakness defines current conditions. Markets astonishingly defy gravity. They're rising during economic decline. 

It's practically unheard of during hard times. Market declines nearly always accompany them. Not this time. Fed/Wall Street manipulation elevates them higher.

Imagine doing so during protracted economic weakness. Short-term recoveries punctuate it. Fundamental problems are unresolved.

Real investment is weak. Western unemployment and poverty remain disturbingly high. Banks aren't lending. Major ones are insolvent. Consumers are spending less. Government debt levels are rising. They're dangerously high.

In the past two decades, Japan experienced multiple recessions. Doing so reflects classic stagnation. It reflects longterm decline.

Money printing madness hasn't stimulated sustained economic growth. Since 2008, Japan experienced a triple-dip recession. Expect a fourth to follow.

Eurozone economies and Britain remain extremely troubled. Greece, Spain, Portugal, Ireland and Italy are basket cases. 

Austerity is force fed when stimulus is needed. Hard times for ordinary people go from bad to worse. Troubled banks assure continued economic weakness.

Markets are addicted to free money. Providing it comes at the expense of Main Street. Communities are wrecked. Economic growth is sacrificed. Offshoring jobs America most needs exacerbates things.

Fragility, weakness and instability characterizes economic conditions. Hard times keep getting harder. 

Markets are oblivious to what's happening. Free money keeps party time going. Perhaps another banking crash will change things. Maybe it'll be worse than before. Cassandras predict it. Maybe they're right. Hindsight explains best.

Ben Inker co-heads GMO investments Asset Allocation team. He's a GMO Board of Directors member. He believes US equity markets are about 40% overvalued.

He calls fair S&P fair value 1,100. It currently exceeds 1,800. It's in nosebleed territory. It could go much higher before topping out. Markets work that way. 

Irrational exuberance characterizes them in times like these. There's never been anything like them before in memory. Coinciding with hard times is unheard of. For how long remains to be seen.

Small cap overvaluation is even more extreme than large cap S&P equities.

"The US stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities," said Inker. 

"Our additional work does nothing but confirm our prior beliefs about the current attractiveness - or rather lack of attractiveness - of the US stock market."

Legendary investor Jeremy Grantham co-founded GMO. Admirers call him the philosopher king of Wall Street. He operates north in Boston.

What's ongoing reflects another bubble/bust scenario. According to Grantham:

"One of the more painful lessons in investing is that the prudent investor almost invariably must forego plenty of fun at the top end of markets." 

"This market is already no exception, but speculation can hurt prudence much more and probably will." 

"Ah, that’s life. Be prudent and you'll probably forego gains. Be risky and you'll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin."

Robert Shiller popularized the Shiller P/E ratio. It's 50% above its longterm average. The US equity market is way overvalued.

Shiller's S&P ratio uses a 10-year inflation-adjusted earnings average to calculate valuation. Historically, it averaged 16.5 longterm.

Shiller's current ratio slightly exceeds 25. It's worrisome. At 28.8, it's bubble territory," he says.

Warren Buffett has his own favorite metric. He calculates market value of all publicly traded securities based on a percentage of Gross National Product (GNP). He calls it the best single valuations measure.

GNP values goods and services produced at home and abroad. According to Buffett:

"If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you." 

"If the ratio approaches 200% - as it did in 1999 and (early) 2000 - you are playing with fire."

In late November, it was 134%. It's in the 94th percentile of results over the past six decades. It's well above the 60-year average. 

It's way overvalued. It perhaps heading for 1999 levels. The fullness of time will tell.

Economic conditions then were strong. Weakness followed. Protracted hard times reflects what's ongoing now.

Markets may go higher before peaking. Or maybe not. Betting on continued advances is a fool's game. 

Winning makes investors look smart. Losing extracts pain when bubbles pop. Is this time different? We heard it lots of times before. 

It bears repeating. Hindsight is the best insight. Forewarned is forearmed.

A Final Comment

On November 25, the Washington Post headlined "Among American workers, poll finds unprecedented anxiety about jobs, economy."

John Stewart is typical of others. He's middle-aged. His job pays too little to live on. "I can't save any money," he said. He can't "buy the things (he) need(s) to live as a human being."

Over four years into so-called recovery, "American workers are living with unprecedented economic anxiety," said WaPo. Low income workers feel it most.

A recent WaPo-Miller Center poll showed over six in 10 workers fear losing their jobs. Concerns are greater than found in previous surveys dating from the 1970s.

Low income workers worry most. At the same time, angst today affects "all levels of the income ladder.

"Once you control for economic and demographic factors, there is no partisan divide," said WaPo. 

"There's no racial divide, either, and no gender gap. It also doesn't matter where you live."

At issue is protracted Main Street Depression level economic conditions. Millions of Americans are unemployed. Millions more are underemployed.

Incomes don't keep up with inflation. Job insecurity is unprecedented in modern times.

Conditions go from bad to worse. Every day reflects a struggle to survive. It's the new normal. It shows no signs of ending.

Stephen Lendman lives in Chicago. He can be reached at [email protected] 

His new book is titled "Banker Occupation: Waging Financial War on Humanity."

http://www.claritypress.com/LendmanII.html

Visit his blog site at sjlendman.blogspot.com. 

Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network.

It airs Fridays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

http://www.progressiveradionetwork.com/the-progressive-news-hour

http://www.dailycensored.com/iran-nuclear-deal-bashing/


http://www.dailycensored.com/market-euphoria-troubled-times/

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Stockman’s Rant




On the rare occasion, an article appears in the mainstream press that takes a deeper, more thoughtful view of human affairs, a document that gives a hint or glimpse of an unspoken truth beyond the pablum that occupies media puppets. Such an occasion was the publishing of The New York Times opinion piece entitled “State Wrecked: The Corruption of Capitalism in America” (3-31-2013) and authored by former Reaganite budget director, David Stockman.

Now Stockman is a renegade from corporate Republicanism; he actually believes in the ancient principles put forward by Adam Smith and other classical capitalist thinkers. While corporate Republicans cozy up to their party’s ugly, fascistic outliers, they always, in the end, make their bed with the rich and powerful. Stockman, on the other hand, actually embraces the mythical virtues of small business ownership and town hall democracy. In classical Marxist terms, he represents the ideology of the petite-bourgeoisie.
In the swamp occupied by Democratic and Republican politicos—the breeding ground for conventional politics—such views are unwelcome. Principled politics from the right or the left are alien equally to the snakes and the rats that prey on the cognitively weak and unwary.
Stockman is in a panic because he sees beyond the stock market euphoria and Pollyanna commentaries that have induced the mass delusions of the last several months. And what he sees angers him.
Stockman constructs an indictment, a list of charges against the current US economy: growth of output is woefully inadequate, jobs are both indecently scarce and low paying, the incomes and the net worth of “ordinary” citizens are dropping while poverty is on the rise. To anyone with a grip on reality, these are not signs of real economic recovery or systemic success. He notes that “we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.” And yet imagine the toll if no remedial action had been taken! Surely, this unintended critique of eighty years of state-monopoly governance counts as a devastating charge against modern capitalism. If the era of state-monopoly capitalism can do no better than produce the sad state outlined by Stockman, it is decidedly a failure.
Stockman dares speak the truth so discomforting to liberals and social democrats: [World War II] “did far more to end the Depression than the New Deal did,” though he misleadingly praises the Eisenhower years for its “sound money and fiscal rectitude.” Perhaps he is too young to remember the massive increases in military spending, the ambitious interstate highway system, and the enormous growth of public spending brought on by the Cold War and the Sputnik panic. In any case, the dose of war socialism and the “frenetic… activism” of state-monopoly capitalism kept the capitalist ship afloat, though with fewer and fewer rewards for the majority of US citizens.
Stockman correctly sees that the remedies pursued by US state-monopoly capitalism directed more and more of the lubricant of public funds towards the financial sector over the last decades: the Greenspan “put,” the Long-Term Capital Management bailout, extended ultra-low interest rates, TARP, Fed purchases of bank junk, the support of federal bond prices, and support for equity markets. He calls this, not incorrectly, “Keynesianism—for the wealthy.”
And this is a salient point. It is commonplace to express the differences between Democratic and Republican policy makers since the Reagan era as pro- and anti-Keynesianism. But this is wrong. Ironically, it was only during the Clinton administration that growth of government spending was at all curtailed and today fiscal and monetary expansion remains a ready tool of the ruling class well after Reagan's departure. Certainly Keynesian pump priming has taken new and evolving forms over decades: direct job creation, military spending, massive space programs, infrastructure projects, public-private partnerships, repair of financial institutions, and stimulation of financial demand. While one or the other may be the favored priming tool of rulers at any given time, the similarities of the forms are far more important to recognize than their differences. State intervention in markets continues to be at the core of contemporary state-monopoly capitalism. Stockman sees this; others don't.
In Stockman's account, the enabler of pump priming in all of its forms has been debt. Borrowing or printing money is the means to continue the regimen of “frenetic fiscal and monetary policy activism.” But, in his view, this regimen is running out of steam. “The future is bleak.” And the “Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German dominated euro zone is crumbling) that will soon overwhelm it...”
A bleak picture indeed, but one entrenched in reality.
So if modern capitalism-- in its state-monopoly form-- is a disaster, does that mean that Stockman advocates socialism?
Definitely not. Instead he holds out for a nostalgic return to the gold standard. Avoiding what he calls “end-state metastasis,” “would necessitate a sweeping divorce of the state and the market economy [the wholesale rejection of state-monopoly capitalism! ZZ]. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would have to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.”
 In short, Stockman advocates going back to a conjured idyllic time before state-monopoly capitalism, a time imagined by the petite-bourgeoisie as one of healthy competition, entrepreneurship, and opportunity. For him, the golden age of capitalism would be the pre-depression era of small town USA, family farms, vibrant and expansive industry and foreign policy isolationism. Of course any pretense of continuity or viability of that era was dashed by the Great Depression. In fact, the policies decried by Stockman (and associated by Marxists with state-monopoly capitalism) served as a temporary backstop to the further contraction of the capitalist system produced by that fantastic era.
Stockman may wish for a return to an earlier time just as others may wish to time travel back to the court of Louis XIV, but it isn’t going to happen. Capitalism, like any organism, has its own life span, its own history. Saved from a critical illness, capitalism passed from its laissez faire period to a period of intensifying state intervention and management. Today, that phase of capitalism’s development—state-monopoly capitalism-- is also threatened with a critical illness. I would not be so bold as to predict capitalism’s imminent death, but certainly it will not be revived by reliving its past as Stockman fantasizes.
At a time when liberals and conservatives argue pathetically over the right mix of austerity and stimulus, Stockman is a welcome mainstream herald of the profound crisis pummeling global capitalism. His anxiety and anger reflect a deeper understanding of the contradictions of the moment. His rant, spiked with sarcasm and vitriol, stands in stark relief against the smugness of the lap dog punditry.
Krugman Strides into the Ring
 The Stockman screed generated a storm of opposition. Liberals and the fuzzy, mushy left were particularly affronted. Unlike Stockman, they would like to only turn the clock back to the early seventies, another supposedly “idyllic” time when business unionism was generating satisfactory contracts, the “Great Society” programs were blooming, and war in Vietnam was winding down (at least for US combatants). The fruits of the civil rights struggles and urban uprisings were realized in the creation of programs, bureaucracies, and other buffering agents against domestic insurgency. Jobs servicing the Great Society generated a stratum of social liberals who matured into the base of a social democratic left inside and outside of the Democratic Party. For them, the world turned evil and foreboding with the Reagan “revolution,” a movement they characterize as neo-liberalism.
In the dust-up with Stockman, Paul Krugman, columnist for The New York Times, assumed the role of savior and protector of their interests and perspective. Krugman, the darling of the “respectable” left, attacked Stockman for his audacious critique of the track record of state intervention in the capitalist economy. Anyone who follows Krugman knows that his response to the crisis is a simple solution: spend more public funds and spend freely until growth perks up. The soft left finds this an agreeable solution because it promises to save capitalism (and forestall socialism!) while creating a potential material basis for pet welfare programs. It is simply the fantasy of another New Deal. And never mind that Krugman doesn’t share the fantasy!
Apparently, the Stockman-Krugman battle merited a major media appearance before the Sunday morning gasbags, the big stage for what our media passes off as intellectual fare. While I lacked the stomach to watch the sparring between the two, refereed by the likes of Huffington, van Sustern, and Will, I would commend an entertaining account of the match by Mike Whitney in Counterpunch (Krugman vs. Stockman, April 11, 2013).
The merit of Stockman’s account is that he is righteously indignant with an economic system that has failed the great majority of people and inflicted great pain and uncertainty. He goes beyond the dominant rhetoric of “we are all in this together” and “we are all at fault” to find systemic rot in capitalism. He correctly places the blame for this at the doorstep of state-monopoly capitalism, the stage of capitalism evolved to rescue the system from the accumulated contradictions of laissez faire capitalism, contradictions brought to light by the Great Depression. But he cannot go where logic would take him. He cannot entertain options that would transcend capitalism. Thus, he is resigned to a pathetic nostalgia for a bygone era where the contradictions of capitalism did not appear in such sharp focus. While he stretches the bounds of mainstream thinking, he can not see beyond markets and private ownership; he cannot see socialism.
Krugman and most of the US left are thoroughly conventional in their thinking—they offer a more “enlightened” management of the economic system and a cheerful capitalism with a human face. They would be hard pressed to point to a period when capitalism bore a human face, however. Nonetheless, they are undaunted before a rising tide of interest in the socialist option. They are resolute in their fear and rejection of real socialism.
Pressured by five years of relentless economic crisis and increasing signs of favor towards socialism, especially with the young, our feckless left offers a cold plate of empty slogans of localism, anti-consumerism, platitudinous “participatory” democracy, cooperatives, and a vacuous “new” economy. As if these are answers to the $17 trillion dollar US multinational, monopoly capital behemoth. In truth, these are simply evasions and dissemblance. 
If Stockman is right and capitalism is “state-wrecked,” then its time to leave the wreckage and turn to socialism. 
Zoltan Zigedy


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‘Medical stocks are down by 90 percent’: Greece accuses pharma giants of slashing imports

Published time: February 28, 2013 01:36

AFP Photo / Louisa Gouliamaki

The Greek government has reportedly accused 50 leading pharmaceutical companies of cutting off supplies of key medications to the country, sparking a run on pharmacies. Drug companies say the cheap medicines they supply merely get re-exported at a profit.

Pfizer, Roche, GSK and AstraZeneca are among the producers the government says have either stopped providing certain medicines to the debt-stricken country, or plan to do so, according to the UK’s Guardian newspaper. Pfizer and Roche admit that they have done so, but GSK and AstraZeneca deny that they have reduced supplies so far.

"It's a disgrace. The government is panic-stricken and the multinationals only think about themselves,” said Dimitris Karageorgiou, secretary of the Panhellenic Pharmaceutical Association.

As the news has spread, patients with prescriptions for antibiotics, statins and other medicines totalling over 200 brand names, began queuing outside pharmacies.

“I would say supplies are down by 90%,” said Karageorgiou.

“The companies are ensuring that they come in dribs and drabs to avoid prosecution. Everyone is really frightened. Customers tell me they are afraid of losing access to medication altogether.”

But the multinationals say the government’s own lack of regulation has created this crisis, which has been more than two years in the making.

Under the current system, individuals in Greece buy medicines from pharmacies, and are later reimbursed by the state, with the state setting the prices the drug stores can charge. In the wake of the country’s financial crisis, the government ordered its pharmacies to sell drugs at much lower prices, to cut down its own budget expenditure.

But as Greek prices are now 20 percent below the next-cheapest country in Europe, this has created an incentive for pharmacists to simply re-sell drugs to other countries in the EU, creating a “parallel trade”. The health ministry estimates that over 25 percent of all drugs entering Greece are then re-exported.

Pharmaceutical companies have already lowered their prices for the Greek market, but are now saying that the re-export is starting to eat into their profits in other European countries.

They also point out that as well as paying less, Greek insurance funds and hospitals owe €1.9 billion to drug manufacturers.

"We are insisting that the public hospitals fulfil their contracts and this is something we do in any country … We are withholding medicines until they meet their obligations," said Daniel Grotsky, a Roche spokesman.

The Swiss company is owed €200 million. Grotsky said Roche is still supplying individual pharmacies, and only drugs where alternatives are available have been held back.

Frouzis Konstantinos, of Novartis, another drug giant, says the government needs to pay up its existing debt, and stop squeezing the profit margins of pharmacies.

"The government needs to correct these wrong prices to avoid a surge of exportation,” he told the Guardian.

But this is unlikely.

Under the austerity budget the state’s allocation for medicines has fallen from €3.7 billion in 2011 to €2.44 last year, and the number for 2013 is likely to be even lower.

Instead, the government has banned exports of more than 60 drugs altogether, and says it will levy fines of between €2,000 and €20,000 on those pharmacies that re-export illegally. 


Market Buzz: ECB upbeat, but what do Germans think?

AFP Photo / Alexander Nemenov

AFP Photo / Alexander Nemenov

On Tuesday, investors in Russia are expected to be reflecting on a speech by the head of the European Central Bank, as well as watching for news about market sentiment in Germany.

“Having no evening trade in the US [due to celebration of President’s Day], tomorrow [Tuesday] the Russian market will be referring to Europe – the Russian market will be able to win back the reaction of European investors to the statement of Draghi to the Europarliament,” Veles Capital analysts wrote in an email.

Mario Draghi, the head of the European Central Bank (ECB), sounded positive about the outlook for the global economy in 2013, which should be a good reason for stocks to grow on Tuesday.

“Economic weakness in the early part of 2013 is expected to be followed by a very gradual recovery later in the year. Strengthening global demand, our accommodative monetary policy stance and the improvement in financial market confidence across euro area countries should all work their way through to spending and investment decisions and support the recovery,” Draghi said.

Among Tuesday news, pegs from the West would be the data on economic sentiment index in Germany, which will be closely watched to see whether the European economic powerhouse can rebound strongly from its contraction in 4Q2012. On Wednesday, the UK labor market data will also be closely watched “to see if employment can continue to surprise to the upside despite a flat lining economy,” Angus Campbell, head of market analysis at Capital Spreads, explained.

Political challenges will also play their tune during the week, with Italian general elections scheduled for February 24–25 and the March 1 deadline for sequester talks in the US looming. Back in early January 2013, US policymakers decided to delay a final decision on its ‘fiscal cliff’ issue, saying it would allow another chance to reach a compromise agreement on spending cuts.

Fiscal cliff is term is used to refer to the economic effects that could result from tax increases and spending cuts aimed at dealing with the US sky – high national debt.

On Monday, Russian stocks finished slightly higher. The RTS added 0.09% to 1,578.65, with the MICEX gaining 0.14% to 1,510.35.

December 2012 current account of the eurozone – one of the key market drivers on Monday – recorded a surplus of €13.9 billion, while analysts expected that to stand at €15.3 billion.

European markets finished Monday trading mixed as of the most recent closing prices. The DAX gained 0.46% and the CAC 40 rose 0.18%. The FTSE 100 lost 0.16%.

Japanese shares are lower on Tuesday as the Nikkei 225 falls 0.24%. The stock markets in Hong Kong and Shanghai are closed at this time.

Moscow Stock Exchange IPO twice oversubscribed

Russia's Micex-RTS stock exchange in Moscow.(AFP Photo / Alexander Nemenov)

Russia's Micex-RTS stock exchange in Moscow.(AFP Photo / Alexander Nemenov)

The volume of bids for a stake in the Moscow Stock Exchange has reached about $1bn, which is double the initially planned $500mn.

The placement price stands at about $1.83 per share, making the Stock Exchange capitalization to about $4.2bn.

There has been a lot of interest from domestic and international investors in the first placement in Russia in 2013. Among the big names are the European Bank for Reconstruction and Development (EBRD), China Investment Corporation (CIC), CartesianCapital and BlackRock funds, that were all attracted through Russia Direct Investment Fund (RDIF).

Credit Suisse, JPMorgan, Sberbank CIB and VTB Capital acted as both coordinators and book runners, with Deutsche Bank, Goldman Sachs, Morgan Stanley, Renaissance Capital and UBS just running the books.

“The interest by international investors proves the attractiveness of both the Moscow Stock Exchange and the whole Russian stock market,” said Kirill Dmitriev, CEO at Russian Direct Investment Fund (RDIF).

The Fund also participated acquiring about 4.5% of the Moscow Exchange. Retail brokers and domestic players such as Otkrytie and Finam also entered the game, Vedomosti daily added.

Experts agree the IPO looks promising, as trade volumes in a spot market are growing and the business infrastructure is being actively developed after the merger of the formerly separate RTS and MICEX floors.

Investcafe analysts expect revenues to increase by about 10% a year. But that growth could slow as uncertainty around stock operations in Russia persists.

“… development prospects for the Moscow Stock Exchange for the next 2-3 years, to our mind, look quite vague,” says Ekaterina Kondrashova of Investcafe.

“In particular, there’s no certainty about the privatization period for state assets and companies’ obligations to place in Russia. Since 2005 about 60% of issuers have preferred to place in London and there’s the risk that the tendency will continue,” Kondrashova concluded.

Market Buzz: Eurozone GDP woes bring everyone down

AFP Photo / Spencer Platt

AFP Photo / Spencer Platt

News of another consecutive contraction in Europe for Q4 2012 depressed major indices around the world on Thursday, as investors grow increasingly doubtful about a recovery in 2013.

The eurozone’s GDP contracted 0.9% year-on-year during the last quarter of 2012, while most expected it to lose only 0.7%. “This fall turned out to be a maximum one since 1Q 2009, when the world financial crisis was at its full swing. Given this the perspective, a further recovery in 2013 becomes more uncertain,” Investcafe analyst Darya Pichugina wrote in an email.

In quarter-on-quarter terms, the eurozone GDP shrank 0.6% in Q4 2012, marking the third consecutive quarter of declining growth.

Russian stocks ended Thursday trading in the red. The RTS lost 1.51% to 1,588.31 and the MICEX was down 1.22% to 1,519.22.

The contraction in Europe’s biggest economies such as Germany and France “acted as a reminder that no one is immune to the eurozone debt crisis,” said Angus Campbell, head of market analysis at Capital Spreads.

Germany’s GDP fell 0.6% quarter-on-quarter Q4 2012, but in annual terms the economy grew 0.4%. In France, the GDP was down 0.3% both from the last quarter and from a year earlier.

European markets finished broadly lower on Thursday, with shares in Germany leading the slide. The DAX lost 1.05%, while France's CAC 40 fell 0.78% and London's FTSE 100 slipped 0.50%.

On Wall Street, major indices traded mixed. The Dow Jones Industrial Average lost 0.1%, while the S&P 500 and Nasdaq grew 0.1%.

Better-than-expected figures from the US labor market almost lost their allure in the wake of the disappointing news from Europe. The Labor Department reported that the number of people in the US filing for first-time unemployment claims fell by 27,000 to 341,000 in the most recent week. Economists had predicted 365,000 claims.

Japanese shares are lower today as the Nikkei 225 fell 1.60%. Stock markets in Hong Kong and Shanghai are closed.

Market Buzz: Numbers game

RIA Novosti / Ruslan Krivobok

RIA Novosti / Ruslan Krivobok

Thursday trading is expected to be intense: Russian stocks likely to grow amid positive signs from Asia and the rising price of crude, while later in the day statistics will run the show.

­On Wednesday, Russian indices were in a bullish mood amid a positive economic background and growing oil prices. Europe’s January manufacturing statistics were published during the day, reporting an increase of 0.7%, significantly higher than market players had expected. As a result, Russian indices ended the day in positive territory, with the MICEX adding 1.7% up to 1,537.90 and the RTS growing 1.9% to 1,612.70.

Thursday will also see the release of some important news: The eurozone’s GDP for Q4 2012 and the entire last year are going to be published, as well as the GDPs of most individual eurozone countries. It is expected that in October through December of 2012, the economies of eurozone countries shrank 0.4% – up from a 0.1% contraction in the previous quarter – losing 0.7% over the year. Greek unemployment data for November is also expected, though it likely won’t bring any good news.

US stocks finished an uninspired day of trading Wednesday amid slowing retail sales and slightly upbeat earnings reports, resulting in the Dow Jones declining 0.3%, the S&P 500 rising 0.1% and the Nasdaq growing 0.3%. On Thursday, US stocks will react sharply to the forthcoming employment data. Initial unemployment claims are likely to continue their downward trend and decline 6,000 to 360,000, with official statistics to be published later in the day. Fresh data on natural gas reserves is also expected on Thursday.

Asian stocks traded in the black amid new Japanese GDP data, which decreased 0.4% in Q4 2012 compared to 3.8% in Q3. Despite expectations that the GDP figures would improve, the reaction was generally positive, and growth was also given a potential boost by decisions by the Bank of Japan on key interest rates. 

Oil prices continued to climb upwards after Wednesday’s data on US oil reserves, which saw significantly lower than expected growth. Brent closed at $118, and will likely grow on Thursday, supporting Russian stocks.

Market Buzz: Looking for positive stats from Europe and the US

AFP Photo / Daniel Roland

AFP Photo / Daniel Roland

Investors in Russia are expected to remain positive on Wednesday, with analysts expecting solid manufacturing data from Europe and retail figures from the US.

“… One should expect a minor growth of Russian shares at the start of trading, as well as significant dynamics after important macro statistics from Europe and the USA comes,” Investcafe analyst Grigoriy Birg wrote in an e-mail.

On Tuesday, Russia's key indices finished in the black: The RTS rose 0.03% to 1,582.35 and the MICEX went up 0.23% to 1,515.49.

Among important data set to be released on Wednesday are the figures for December industrial production in the eurozone, with month-to-month dynamics largely expected to show a 0.2% growth. “However, after a November 0.3% contraction this should support the markets,” Birg explained.

The US is also scheduled to produce its January retail sales figures, not including car sales. “Any information, proving growth of consumer demand in the US will cause positive investor reaction,” Birg said.

US stocks finished trading mixed on Tuesday. The Dow edged closer to a record high, underpinned by strong earnings from beauty products direct seller Avon, and luxury clothing and accessories seller Michael Kors. The Dow Jones Industrial Average rose 47.46 points to 14,018.70. The broader Standard & Poor's 500 index inched up 2.42 points to 1,519.43. The tech-laden Nasdaq composite index fell 5.51 points to 3,186.49.

The Obama Administration made it clear that the Democrats were ready to produce a game plan to escape the 'fiscal cliff,' including a combination of higher taxes and lower government spending.

“Overall, a systematic approach to resolving the problem of an excessive budget deficit and state debt is better than the alternative of an automatic $1.2trln spending cuts in the US, which could lead to catastrophic economic aftermath not just in the US but in the world,” Birg said.

European markets finished higher on Tuesday, with shares in France leading the region. The CAC 40 was up 0.99%, while London's FTSE 100 gained 0.98% and Germany's DAX added 0.35%.

Japanese shares are lower today as the Nikkei 225 fell 1.10%. Stock markets in Hong Kong and Shanghai are closed at this time.

Oil Pops, Apple Drops, And Stocks Take Out More Stops

Another low volume, low range, low average trade size day in stocks as recent high (stops) were run again with FX markets ruling the day in terms of volatility. The G-7's initial statement fell on deaf ears , after Draghi's early comments (on a higher...

Market Buzz: Looking for reference points

Russian traders are likely to be indecisive on Tuesday, as no significant news is expected that could change current economic trends.

­“Taking into account Monday’s decline, today we can expect that Russian stocks will show slight growth in the beginning, but later they can return to negative figures,” Yulia Voitovich from Investcafe said.

With no significant developments on Monday, the main indices in Moscow flipped between positive and negative territory, finishing in the red by the end of the day. The MICEX lost 0.26% and the RTS was down 0.51%. Severstal and Gazprom were among the companies that took the biggest losses.

The Russian Central Bank is holding a meeting on key interest rates on Tuesday, but no changes are expected to be made. Despite calls from both politicians and businesses, interest rates in Russia will remain high as the Central Bank fights inflation.

Deputy CEO of the Central Bank of Russia Aleksey Ulyukaev said in Davos in January that there was no point using monetary stimulation to boost the economy, as the current level of growth more or less matched the economy's potential – cutting rates would therefore produce few economic benefits.

The rates will stay unchanged, and the government statements are just a message to manufacturers and companies to support their optimism,” Natalia Orlova, chief economist at Alfa-Bank, told Finmarket earlier.

The main US stock indices ended the Monday session slightly in the red. The Dow Jones declined 0.16%, while the S&P 500 and NASDAQ fell just 0.06%.

In Europe,  the UK's FTSE100 went up 0.21%, the German DAX slid 0.24% and the CAC40 rose 0.56%.

The UK and Switzerland's Consumer Price Index (CPI) for January are set to be released on Tuesday, with a slight decline expected from last month figures, at 0.3% and 0.5% respectively. The UK will also release its Producer Price Index (PPI) for January, which is likely to rise 0.9%.

At Monday’s euro group meeting it was decided that conducting a speedy, independent audit of how banks in Cyprus were implementing anti-money-laundering laws might be on the table before a decision is made on providing an aid package.

Asia's main stocks are trading in black, with the Hang Seng growing 0.16%, the Nikkei adding 2.39% and the Shanghai Composite going up 0.57%.

Lowest Volume And Range Day In Months As Stocks Shrug Despite JPY Dump And...

Today was simply dreadful. S&P 500 futures saw their narrowest day-session range in six months and lowest day-session volume of the year. No matter what was tried today - vol compression, EURJPY (carry) ramps, Oil stop-run - equities did not respo...

Market buzz: Getting back on track

RT Photo / Irina Vasilevitskaya

RT Photo / Irina Vasilevitskaya

Russian stocks are likely to open in the black on Monday after Friday’s correction, depending though on news from European stocks. Global stocks showed moderate growth on Friday.

Taking into consideration moods at the foreign stocks, the Russian market will try to recover from Friday’s correction on Monday, and Russian stocks are very likely to start the day in the black,” Yulia Voitovich from Investcafe says. However, Monday’s dynamic will be highly dependent on incoming news and European markets’ performances.

Both key Russian indices finished the Friday session in the red. The RTS was down 0.33% to 1,590.13, and the MICEX declined 0.39% to close at 1519.91. Russia’s Transneft was among leaders of the decline, while Sberbank managed to show some growth.  Gazprom lost over 1% on Friday, as investors are still worried about decline in exports and the monopoly’s revenue, and the company’s preliminary results for 2012 are not optimistic enough.

Meanwhile, the Brent price reached its maximum in over than six months on Friday, up to US$118 a barrel, following reports on China’s trade balance and decline in production by OPEC countries. At the moment oil price indications show a minor correction, with Brent falling slightly by 0.22% and Light 0.04%.

In Europe, the Managers' Index (PMI) for France for December is expected to show 0.3% decline compared to the previous month. And the Monday’s euro group meeting, to be attended by International Monetary Fund Managing Director Christine Lagarde, will focus on the economic situation in Greece and financial aid to Cyprus. The finance ministers of the eurozone are also expected to discuss EU monetary policy.

American indices inched up on Friday with DJIA going up 0.35%, S&P500 adding 0.57% and NASDAQ – 0.91%, while major European stocks also showed positive dynamics, with FTSE100 of the UK up 0.57%, German DAX 0.81%, French CAC40 – 1.35%.

Markets got a positive lead from the US government, as record petroleum exports helped shrink the US trade deficit in December to the smallest in almost three years. The Commerce Department’s figures showed that US trade deficit narrowed to $38.5 billion in December from a revised $48.6 billion in November, versus forecasts for a deficit of $46.0 billion. According to the report, it is the smallest US trade deficit since the $37.1 billion deficit in January of 2010, and it can allow an upward revision to the disappointing Q4 GDP data. The initial report on Q4 GDP showed a 0.1% contraction compared to estimates for an increase of 1.0%.

Asian stocks are mostly up in early Monday trading, as Shanghai Composite is going up 0.57%, Hang Seng rising 0.16%, and only the Nikkei 225 dipping 1.8%.


Inflation, Mean-Reversion, And 113 Years Of Bond & Stock Returns

The baby boomers now retiring grew up in a high returns world. So did their children. But, as Credit Suisse notes in their 2013 Yearbook, everyone now faces a world of low real interest rates. Baby boomers may find it hard to adjust. However, McKinsey (2012) predicts they will control 70% of retail investor assets by 2017. So our sympathy should go to their grandchildren, who cannot expect the high returns their grandparents enjoyed. From 1950 to date, the annualized real return on world equities was 6.8%; from 1980, it was 6.4%. The corresponding world bond returns were 3.7% and 6.4%, respectively. Equity investors were brought down to earth over the first 13 years of the 21st century, when the annualized real return on the world equity index was just 0.1%. But real bond returns stayed high at 6.1% per year. We have transitioned to a world of low real interest rates. The question is, does this mean equity returns are also likely to remain lower. In this compendium-like article, CS addresses prospective bond returns and interest rate impacts on equity valuations, inflation and its impact on equity beta, VIX reversions, and profiles 22 countries across three regions. Chart pr0n at its best for bulls and bears.

Over 113 years, the relative size of world stock markets has shifted significantly...

But the changes have been very cyclical...

The last 13 years have been somewhat special... as real yields around the world have collapsed...

and that has historically tended to mean low equity returns...

The busts of the dot-com era, LTCM & Russia, and Lehman/Credit Crunch had a very different profile to previous risk flares in VIX...

and while they suggest that mean-reversion has provided upside potential for stocks (in the past, staying in stocks at the start of the year when real rates are negative has proved a better bet that exiting), the concept of a shifted world paradigm (see VIX and global real rates) suggests perhaps it is different this time.

And the argument of equities as an inflation hedge is flawed due to its non-linearity...

Though valuations at the current inflation expectations seems to be 'cheap', one can only question the actual inflation expectations... as the official spot data diverges from market expectations...

And as CS notes, extrapolating from such a successful market can lead to “success” bias. Investors can gain a misleading view of equity returns elsewhere, or of future equity returns for the USA itself.

until recently, most of the long run evidence cited on historical asset returns drew almost exclusively on the US experience. Focusing on such a successful economy can lead to “success” bias. Investors can gain a misleading view of equity returns elsewhere, or of future equity returns for the USA itself. The charts opposite confirm this concern. They show that, from the perspective of a US-based international investor, the real return on the world ex-US equity index was 4.4% per year, which is 1.9% per year below that for the USA.

But what is clear from the above charts, in the 50 years since 1963, Bond and Stock returns are far more similar than different, no matter what your RIA tells you..

Because, it's fiscally - for the USA - very different this time...


2013 Yearbook Final Web by

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Modern Market Alchemy Explained: Converting Junk Debt Into Supersafe Treasurys Out Of Thin Air

When it comes to the actual functioning of capital markets, there is always much confusion within the made for TV punditry for one simple reason: the number of people who truly understand collateral transformation courtesy of the shadow banking system, which until recently was a massive $23 trillion off the books repository of everything the banks did not want you to know about, can be counted on one hand. That certainly would explain the existence of such media trolls as "conscientious" NYT columnists, and various three letter "modern" theories explaining how money would work in a world if only all practical reality was removed.

And while we have previously explained extensively how it is that what actually happens behind the scenes is so very different from what most believe is market reality, especially with our three+ years series on shadow banking, confusion is still rampant. Which is why we hope an extract from Fed Governor Jeremy Stein's speech titled "Overheating in Credit Markets: Origins, Measurement, and Policy Responses", will finally make it sufficiently clear that when it comes to shadow banking collateral transformations, modern day alchemy does in fact work, and one can transmogrify junk bonds into Treasurys with the wave of a magic (yield) wand.

From Stein - extracted from full speech:

The maturity of securities in banks' available-for-sale portfolios is near the upper end of its historical range. This finding is noteworthy on two counts. First, the added interest rate exposure may itself be a meaningful source of risk for the banking sector and should be monitored carefully--especially since existing capital regulation does not explicitly address interest rate risk. And, second, in the spirit of tips of icebergs, the possibility that banks may be reaching for yield in this manner suggests that the same pressure to boost income could be affecting behavior in other, less readily observable parts of their businesses.

The final stop on the tour is something called collateral transformation. This activity has been around in some form for quite a while and does not currently appear to be of a scale that would raise serious concerns--though the available data on it are sketchy at this point. Nevertheless, it deserves to be highlighted because it is exactly the kind of activity where new regulation could create the potential for rapid growth and where we therefore need to be especially watchful.

Collateral transformation is best explained with an example. Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral must be "pristine"--that is, it has to be in the form of Treasury securities. However, the insurance company doesn't have any unencumbered Treasury securities available--all it has in unencumbered form are some junk bonds. Here is where the collateral swap comes in. The insurance company might approach a broker-dealer and engage in what is effectively a two-way repo transaction, whereby it gives the dealer its junk bonds as collateral, borrows the Treasury securities, and agrees to unwind the transaction at some point in the future. Now the insurance company can go ahead and pledge the borrowed Treasury securities as collateral for its derivatives trade. 

Of course, the dealer may not have the spare Treasury securities on hand, and so, to obtain them, it may have to engage in the mirror-image transaction with a third party that does--say, a pension fund. Thus, the dealer would, in a second leg, use the junk bonds as collateral to borrow Treasury securities from the pension fund. And why would the pension fund see this transaction as beneficial? Tying back to the theme of reaching for yield, perhaps it is looking to goose its reported returns with the securities-lending income without changing the holdings it reports on its balance sheet.

There are two points worth noting about these transactions. First, they reproduce some of the same unwind risks that would exist had the clearinghouse lowered its own collateral standards in the first place. To see this point, observe that if the junk bonds fall in value, the insurance company will face a margin call on its collateral swap with the dealer. It will therefore have to scale back this swap, which in turn will force it to partially unwind its derivatives trade--just as would happen if it had posted the junk bonds directly to the clearinghouse. Second, the transaction creates additional counterparty exposures--the exposures between the insurance company and the dealer, and between the dealer and the pension fund.

As I said, we don't have evidence to suggest that the volume of such transactions is currently large. But with a variety of new regulatory and institutional initiatives on the horizon that will likely increase the demand for pristine collateral--from the Basel III Liquidity Coverage Ratio, to centralized clearing, to heightened margin requirements for noncleared swaps--there appears to be the potential for rapid growth in this area. Some evidence suggestive of this growth potential is shown in exhibit 8, which is based on responses by a range of dealer firms to the Federal Reserve's Senior Credit Officer Opinion Survey on Dealer Financing Terms. As can be seen, while only a modest fraction of those surveyed reported that they were currently engaged in collateral transformation transactions, a much larger share reported that they had been involved in discussions of prospective transactions with their clients.

Mr. Stein may not have evidence... but we do. Below, direct from the NY Fed, is the total amount of collateral pledged any given month with the NY Fed, courtesy of Tri-Party repo custodian JP Morgan of course:

To summarize: the volume of "such transactions" is currently very large and rising rapidly.

Keep in mind the above is merely the base collateral: one can think of it as SM 0 (or Shadow Money 0). What must be done next is apply a specific "collateral chain" (as explained previously) to get the full level of explicit recycled collateral. The most recent estimate of the average shadow bank collateral chain from Manmohan Singh was 2.5x as of 2011. It is a certainty that this is now back to its 2007 levels of about 3x in net collateral rehypothecation. Which means that just the repo market alone allows market players to create some $6 trillion in credit money out of the Tri-Party repo alone. Add the nearly $2 trillion in hedge fund capital which is then transformed via broker-dealers in the same way, and one gets a whopping $12 trillion in buying power created by, using Stein's extreme example, using worthless collateral and converting it into pristine Treasurys, while promising pennies in front of a steamroller to all the counterparties in the collateral chain.

But wait, there's more.

Because as Matt King explained all too well back in September 2008, when the above alchemy happens, yields are created, trillions in counterparty risk is generated, collateral is transformed and can be used for fingible purchasing purposes and... nothing.

By nothing we mean there is no balance sheet entry!

Thanks to the magic of FAS 140 banks can literally transform worthless garbage into supersafe Treasurys, then use that newly transformed collateral via further repo as cash to fund simple stock purchases, and at the end of the day nobody knows where the exposure came from, who the counterparty is, and what the ultimate liability is!

And that is why in the current market, the Fed has no choice but to keep the music going, because while an unwind of traditional liabilities will result in a maximum collapse of some $13 trillion in conventional financial liabilities, it is the $15-20 trillion in shadow banking exposure which nobody knows about except for the banks themselves (we hope), and which allows banks and hedge funds to literally create purchasing power out of thin air, that once the house of out of control deleveraging cards starts falling, it is truly game over.

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Guest Post: The Next Secular Bull Market Is Still A Few Years Away

Via Lance Roberts of Street Talk Live,

There have been several articles as of late discussing that the next great secular bull market has arrived.  Historically, secular bear markets have averaged about 14 years, and considering that we began writing about the current secular bear market cycle in early 2000, that would put the current cycle about 2 years away from it historic average.  However, the reality is that this cycle is currently unlike anything that we have potentially witnessed in the past.  With massive central bank interventions, artificially suppressed interest rates, sub-par economic growth, high unemployment and elevated stock market prices it is likely that the current secular bear market may be longer than the historical average.  In either event we are likely closer to the end than the beginning and the next major stock market correction will likely be the last for this cycle.

There are several fundamental reasons from valuations to the current level of interest rates that support this viewpoint.  The first chart shows the inflation adjusted, or “real”, ratio of the stock market to the economy as measured by GDP. With the economic recovery, such as it is, currently in its fourth year, the market to GDP ratio is beginning to push levels that are normally consistent with cyclical bull market peaks rather than where secular bear markets have ended.

SP500-MarketCap-GDP-020413

Furthermore, secular bull markets do not begin when prices are already stretched well above their long term growth trend. I often use the “rubber ball” analogy to express the movement of prices relative to their trends. Like throwing a rubber ball into the air – the momentum of the throw can make it seem like it is temporarily defying the laws of gravity. However, the effect of momentum will fade as the pull from gravity increases on the ball until it reaches its maximum height. The ball will then quickly revert back to earth. The same goes for the financial markets.

The chart below shows, very importantly, that secular BULL markets do not begin when prices are already trading well above their long term growth trend. Very much like past secular bear markets – prices can remain above their long term growth trend for quite some time until they eventually “mean revert.”

SP500-price-deviationfromtrend-020413

These reversions take prices to a position that is an equal distance below the long term growth trend. As the chart shows – if you had moved out of the market in early 2000 and gone into bonds you will still be well ahead of those that had stayed in the stock market.

Not surprisingly, when prices are elevated well beyond their long term trends, valuations are at levels that are normally associated with secular bull market peaks rather than the troughs where secular bull markets are usually born.

The chart below uses the Shiller Cyclically Adjusted P/E (price to earnings) ratio which has been inflation adjusted. The immediate argument to this analysis is that some analyst on television stated the “valuations are cheap based on ‘forward earnings expectations’ which are below the long term average.” There are two huge flaws in that statement:

1) The long term median P/E as shown below is based on TRAILING REPORTED earnings. Not forward operating earnings which are full of accounting issues. This is an “apples to oranges” comparison.

2) More importantly, forward earnings are ALWAYS overly optimistic by as much as 33% historically. Therefore, the valuation argument is generally wrong at the outset.

SP500-PE-Reversions-020413

This brings us to the “stocks are cheap based on interest rates” argument. Despite the fact that prices and valuations are stretched well above their historic norms this does not deter the media from finding some other flawed argument to try and lure “suckers”… um…I mean…investors into the Wall Street casino.

The chart below is the “Fed Model” which is the basis for the “stocks are cheap because earnings yield is higher than bond yields.”

Fed-Model-020413

Following this model would have kept you out of stocks primarily when you should have been in and vice versa. This is due to the intervention by the Fed to suppress interest rates to support economic growth. These suppressions have driven interest rates consistently lower over time and have been the primary factor in the creation of one bubble after the next. Subsequently, when the Fed raises interest rates, it causes a dislocation in the markets.

The fallacy of the model is quite simple. THERE IS NO SUCH THING AS EARNINGS YIELD. The earnings yield is simply the inverse of the P/E ratio whereby corporate earnings are divided by the price of the market. However, as an investor in a stock you do not receive the earnings yield in the form of a cash payment.   However, YOU DO receive the interest yield from bonds.

This is a very, very flawed analysis and one that should be forever stricken from your investment valuation models.

Nothing Organic About It

No matter how you slice the data - the simple fact is that we are still years away from the end of the current secular bear market. The mistake that analysts, economists and the media continue to make is that the current ebbs and flows of the economy are part of a natural, and organic, economic cycle. If this was the case then there would be no need for continued injections of liquidity into the system in an ongoing attempt to artificially suppress interest rates, boost housing or inflate asset markets.

Nothing shows this more clearly than the amount of excess bank reserves, which is the direct byproduct of QE programs, which exploded higher last week by $46.4 billion.

QE-Fed-BalanceSheet-SP500-020413

These liquidity pushes directly correlate with market ramp ups – not improving economics or fundamentals.

Of course, this is also why each time these programs come to an end the financial markets face steep corrections and economic growth plunges.

Into The Danger Zone

It is with this background that we continue to harp upon the dangers that are currently building in the markets. While no two market cycles are ever the same - they generally behave similarly over time. I have posted the following chart several times lately showing the high degree of correlation between the market bubble prior to 2007 and currently.

I expect that the chart will begin to decouple somewhat in the months ahead as there is not a relative crisis immediately available.   However, come May when the debt ceiling issue resurfaces, or there is a resurgence of the Eurozone crisis, or some other exogenous event crops up – stock prices are likely to correct very sharply.

SP500-2004-2008-vs-2009-Replay-020613

Using a weekly analysis, to slow down the day to day volatility of the market – the market currently cannot achieve a higher level of its overbought status. It is “pegged out”, “maxed,” or whatever other term you want to use to describe the extreme nature of the overbought condition that currently exists.

WilliamsR-Analysis-020413

The chart on the next page overlays this overbought/oversold long term weekly indicator with a weekly chart of the S&P 500.

WilliamsR-Analysis-020413-2

See the potential problem here?

The next chart shows the STA Risk Ratio indicator which is a composite index of the rate of change in the S&P 500, bullish versus bearish sentiment, the volatility index, and a ratio of new highs to new lows.   Currently, that index is approaching levels normally only seen at very significant market tops.

STA-RiskRatio-020413

I could show you chart after chart after chart. They all say the same thing – the market is extremely overbought and is currently pushing the limits of the current upside advance.

What I Am NOT Saying

The bulk of the mainstream media’s, and analyst’s, blathering is more akin to a parade of idiots rather than something you should actually spend your time paying attention to. Pay attention to the data.

While I have spilled an exorbitant amount of ink this week on all the reasons why the market is getting extremely overbought and into very dangerous territory – I am not saying that you should sell everything and hide in cash.

This may sound very counter-intuitive but the markets are being driven by the expansion of the Fed’s balance sheet. Therefore, due to this artificial influence, the market can move higher, for longer, than you can possibly fathom. It will end, eventually, and it will end badly.

However, in the meantime, this is how to approach the current market.

1) Do not add to equity exposure at this time no matter how emotionally conflicted you become. Emotions lead to bad investment decisions - always.

2) Sell some, not all, of positions that are speculative in nature and have a lot of volatility. When the correction comes these will be hit the hardest.

3) Increasing stock markets suppress bond prices. Therefore, rotate some money into bonds which will benefit from a stock market correction – “Buy where the money ain’t goin’.”

4) Hoard cash – you can’t be a buyer when things get “cheap” when you don’t have any cash to buy with.

5) Rotate from very aggressive equity exposure to more defensive positions that have an income stream. (ie utilities, staples, and healthcare) However, these positions WILL lose money when the market corrects – just not as much.

6) Beware of high-dividend plays particularly REITS and MLP’s. The majority of these positions are GROSSLY overbought and overvalued and a correction of magnitude will lead to larger losses than you can currently comprehend.

7) Fundamental valuations HAVE NO bearing on a stock market correction. No matter how fundamentally strong you think your investments are they will generally correct as much, or more, than the market. Fundamental value is only effective for eliminating bankruptcy risk. In a market environment driven primarily by programmed trading it is only PRICE ANALYSIS that matters.

8) Did I mention hoarding cash?

9) Pay attention to the trend. The trend is currently positive and we want to mindful of that. It will require a VERY substantial price correction at this point before a SELL signal is issued. This is why profit taking, and keeping new savings in cash, is the best way to stay invested but reduce overall portfolio risk.

10) Just because you take profits, or sell a position today, DOES NOT mean that you can’t buy it back after it corrects.   That is just a good portfolio management practice. There IS NO successful investor – ever in history – that only “bought and held.”

There will be corrections which are buying opportunities and there will be corrections that aren't.  Unfortunately, you will never know which is which until it is too late.  This is why employing rudimentary rebalancing processes, or even basic risk management tools, to your investment portfolio will work to protect your investment principal overtime.  Are you going to get out at the tops and in at the bottoms? No.  Are you going to be the next great market timer?  No.  Will you keep from setting yourself back years from reaching your retirement goals?  Definitely.

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Tale Of Two Markets (Again)

The US equity market continues to boldly go where no other market is willing to go (Dow outperforming EuroStoxx by 850bps this year). European stocks and bonds (+30-45bps) are down notably on the week (and year in some cases); Treasury yields are 4-6b...

Guest Post: Stocks, Money Flows, And Inflation

Via Pater Tenebrarum of Acting-Man blog,

Sentiment Goes Nuts

Mish reports that this week's Barron's cover looks like a pretty strong warning sign for stocks (but not only the cover as he points out, but also what's inside). However, there may be an even more stunning capitulation datum out there, in this case a survey that we have frequently mentioned in the past, the NAAIM survey of fund managers. This survey has reached an all time high in net bullishness last week, with managers on average 104% long (this is to say, including the bears, the average response results in a leveraged net long position, a first).


NAAIM

A new record high in the net bullish percentage of the NAAIM survey of fund managers – click for better resolution.

However, that is not all. NAIIM asks fund managers to relate their positioning as a range bounded by “200% net short” to “200% net long”, in other words, even fully leveraged net long and net short positions are considered.

The survey keepers also relate where the most extreme replies are situated within this range. Naturally, the most bullish manager(s) have been between 180% and 200% long for some time. So that number is actually only of concern if it shrinks, which has  in fact done (slightly) last week.

However, here is the stunner: the most “bearish” fund manager is now 60% net long! That has also never happened before – in effect, there not only are no bears left, there is also no-one left who's merely “neutral” on the market – the bullish consensus is now effectively 100% in the sense that not a single manager among those surveyed is left with an open net short position, not even a tiny one. Two weeks earlier, the most bearish respondent was still 200% short, and one week earlier 125%.

NAAIM response range

The NAAIM response range. The red ellipses show the new all time high in net bullish positioning, as well as the stance taken by the most “bearish” manager in the survey, who's now 60% net long.

That should be good for at least a two to three percent correction one would think, probably intraday (i.e., to be fully recovered by the close).

“Money Flows”

The nonsense people will talk – people who really should know better -  is sometimes truly breathtaking. Recently a number of strategists from large institutions, i.e., people who get paid big bucks for coming up with this stuff, have assured us that “equities are underowned”, that “money will flow from bonds to equities”, and that “money sitting on the sidelines” will be drawn into the market.

What are “underowned” equities, precisely? Are there any stocks that are not yet owned by someone, so to speak orphans, that are flying around in the Wall Street aether unsupervised? If so, give them to us please. Since apparently no-one owns them, they should presumably come for free.

And how exactly does money “flow from bonds to stocks”, pray tell? There may well be bondholders crazy enough to sell their bonds so they can buy into a stock market that's already 130% off the lows, but then someone else will have to buy their bonds, and someone will have to sell them his stocks. If that happens, someone will end up the patsy, but no money has “flowed” from one market to another. All that has happened is that the ownership of bonds, stocks and cash has changed. The same holds of course for so-called “money on the sidelines”.

Admittedly, the stock of money is indeed growing, courtesy of the Federal Reserve's virtual printing press. At the moment it increases at an 11.2% annual pace (broad money TMS-2) respectively a 9.3% annual pace (narrow money TMS-1), which is admittedly none too shabby and undoubtedly a major reason why stock prices have held firm. However, what that mainly  tells us is that money is now worth less, because there is more of it. Which prices in the economy will rise when the money supply is increased is never certain, but it is certain that some prices will rise.

Other than that, all stocks, all bonds and all cash are always held by someone. The only orphaned cash that is truly “on the sidelines” are banknotes people have lost on the street. Probably not enough to push equities even higher, but you never know.

John Hussman has also written about this very topic again last week (Hussman is  among the handful of people actually getting this right) and has raised a further interesting and logical point in this context. He explains why the weighting of bonds versus equities at pension funds and other institutional investors has been altered toward a larger percentage of bonds:

“Quite simply, the reason that pension funds and other investors hold more bonds relative to stocks than they have historically is that there are more bonds outstanding, relative to stocks, than there have been historically. What is viewed as “underinvestment” in stocks is actually a symptom of a rise in the gross indebtedness of the global economy, enabled and encouraged by quantitative easing of central banks, which have been successful in suppressing all apparent costs of that releveraging.”

(emphasis added)

There you have it – all it means at this juncture is that there is more debt extant than before. In fact, a lot more – as Hussman also remarks:

“[...] the volume of U.S. government debt foisted upon the public (even excluding what has been purchased by the Fed) has doubled since 2007, not to mention other sources of global debt issuance, while the market capitalization of stocks has merely recovered to its previously overvalued highs.”

(emphasis in the original)

The above facts have been pointed out over and over again, by Hussman and a few others (to our knowledge, Mish, Steven Saville and yours truly. If we forgot to mention anyone, then only because we haven't come across their writings yet). And yet, the fallacy keeps being repeated by people all over Wall Street.

Stocks  and “Inflation”

As noted above, there is currently (and has been for the past 4 &frac12; years), plenty of inflation. The money supply is inflated at breakneck speed, after all, the 10% and higher annualized growth rates we have experienced are compounding. We keep hearing from various sources that stocks are expected to be acting as a “hedge” when the time comes when a decline in money's purchasing power becomes evident by dint of rising indexes of the “general price level”, such as CPI. For instance, Kyle Bass last week reminded us of the excellent performance of Zimbabwe's stock market during the hyperinflation period by noting:

Zimbabwe's stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs"

He's quite right, but it would actually be a mistake to compare the current market situation and the situation we will likely have the opportunity to observe should CPI actually ever rise again, with the Zimbabwe situation (at least initially).

Let us explain: right now, the “inflation” backdrop is a kind of sweet spot for stocks. There is plenty of monetary inflation, but the officially reported decline in money's purchasing power is very small, which helps to keep bond yields at a low level. “Inflation expectations”, i.e., expectations regarding future CPI, have risen, but not by enough to disturb this happy state of affairs.

It should be clear that the chance to go from “almost no inflation” (let's call that state “A”) directly to “hyperinflation” (which we will call state “C”)  is non-existent. Again, this is in the sense of rising consumer prices and disregarding the fact that the officially reported data are somewhat suspect. We are also disregarding the fact that the decline in money's purchasing power cannot be “measured” anyway.

So even to those who insist that stocks will protect one against the ravages of sharply rising prices of goods and services, it should be clear that things won't simply go from “A” to “C” in one go, but will first proceed to “B” (note, we are also leaving a deflationary contraction of the money supply aside here, which everyone agrees will result in falling stock prices. As long as there are Bernanke & co. at the helm, it isn't going to happen anyway).

“B” is the state of affairs that pertained in the 1970s: high levels of CPI, close to and intermittently even exceeding double digits, but not hyperinflation. What would stocks likely do if we were visited by such a state “B” in spite of the valiant efforts to keep CPI as low as possible by means of an ever changing calculation method?

Both logic and experience tell us that their valuations will be compressed, this is to say, p/e ratios will decline, very likely into single digits. This is because high levels of CPI will raise bond yields considerably, and the future stream of earnings will have to be discounted by higher interest rates.  Stock prices will also reflect the then presumably much higher inflation expectations. If nominal economic growth does not exceed the increase in CPI, then neither will earnings. The 1970s have in fact already shown what happens in such an environment: the stock market tends to decline.

So what if hyperinflation were to break out one day? In Zimbabwe even the nominal prices of stocks of companies that were effectively put out of business because they could no longer pay for inputs (due to a lack of foreign exchange) soared.

However, Kyle Bass is correct: the devaluation of money in the wider sense was even more pronounced than the increase in stock prices. Stocks did not protect anyone in the sense of fully preserving one's purchasing power. It was clearly better to hold stocks than cash or bonds in the hyperinflation period, but still your portfolio would 'only buy you three eggs' when all was said and done (while cash holdings bought absolutely nothing anymore in the end). 

The only things that actually preserved purchasing power were gold, foreign exchange and assorted hard assets for which a liquid market exists. We have put gold in first place because it not only preserved purchasing power during the hyperinflation in Zimbabwe, it actually increased it.  Stocks did no such thing.


zimbabwe stock market

The ZSE Industrial Index – impressive, right? Not so fast…..(via Random Thoughts) – click for better resolution.

709px-ZWDvUSDchart

The Zim$-USD exchange rate, official, parallel market, and the 'OMIR' rate (which is probably the most exact one: “…the Old Mutual Implied Rate (OMIR) was calculated by dividing the Zimbabwe Stock Exchange price of shares of the insurance company named "Old Mutual" by the London Stock Exchange Price for the same share.” – click for better resolution.

Zimbabwe's estimated inflation rate (from a report by the CATO institute, pdf):

Zim-inflation-1

Zimbabwe's hyperinflation progression

Hyperinflation episodes compared:

Zim-inflation-2

The time it took for prices to double, several hyperinflation episodes compared.  As can be seen, the rise in Zimbabwe's stock market was no match for the decline in money's purchasing power.

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The Second Housing Bubble Ends With A Bang, Not A Whimper, David Stockman Warns

Following our earlier discussion of the echo-boom in housing, David Stockman appeared on Yahoo's Daily Ticker with Lauren Lyster to pour come much-needed cold water 'reality' onto the hopes of an increasingly sheep-like investing public. Homebuilder stocks up 100%-plus simply reflects that "we are in a bubble once again." The former CBO Director added that "in a world of medicated money by the central bank, things aren't what they appear to be," as he explained there is "no real organic sustainable recovery."

Stockman further contends, "It's happening in the most speculative sub-prime markets, where massive amounts of 'fast money' is rolling in to buy, to rent, on a speculative basis for a quick trade. And as soon as they conclude prices have moved enough, they’ll be gone as fast as they came." Critically, he points out we live in a world of boomers looking to be trade-down sellers, not one of trade-up buyers, as "the fast money will sell as quickly as they can and the bubble will pop almost as rapidly as it’s appeared.

He concludes that the American Dream of home-ownership 'forced' upon the citizens was a huge policy mistake as he chides, "let the market decide," as he clearly sees Bernanke recreating yet another speculative bubble.

Click image for full clip (no embed):

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Guest Post: The Echo Boom In Housing-Recovery Stocks

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is housing in an echo boom? Though the jury is still out, it seems a risk-on speculative fever has returned to some housing-related equities.

Speculative bubbles often produce an "echo boom" a few years after the bubble has burst, as the cultural/institutional memories of the asset's spectacular gains remain operative long after the initial boom/bust. Is the much-hyped housing recovery an organic, sustainable trend, or is it merely a speculation-driven echo boom that is doomed to fade?

Given the unprecedented stimulus that the Federal Reserve has applied to the housing sector via multi-trillion dollar purchases of mortgages and its gargantuan money-printing/bond-buying efforts to suppress interest rates, it is not really possible to claim housing is in an organic trend; that would first require an end to Fed support and a normalization of the mortgage market and interest rates.

Housing bulls claim upticks in sales and household formation are evidence that pent-up demand is driving the market higher. Skeptics suggest the real driver is not higher demand but lower supply as lenders restrict inventory (homes for sale on the open market): The Real Housing Recovery Story.

Roughly a third of all existing home sales in many markets is not organic demand by households, it is speculation by flippers or investors chasing yield in a near-zero (real) yield environment. High levels of speculative activity could be nurturing a false confidence in permanently rising demand that is actually temporary.

Let's start with new home sales, the barometer of new construction. The 20% rise from 2011 is impressive, but this is off a very low base--a mere 306,000 new homes sold, less than a third of the 2006 level. (Courtesy of Calculated Risk)

For context, recall that there are about 75 million homeowners, about 50 million with mortgages, and over 19 million vacant dwellings in the U.S. In this context, 60,000 dwellings is statistical noise.

Annual New Home Sales
Year Sales (000s) Change in Sales
2005 1,283 6.7%
2006 1,051 -18.1%
2007 776 -26.2%
2008 485 -37.5%
2009 375 -22.7%
2010 323 -13.9%
2011 306 -5.3%
20121 367 19.9%
1 Estimate for 2012

Next up: the housing bubble in home prices, using the San Francisco Bay Area as an example:

The initial $1.1 trillion in Fed mortgage purchases and massive home-buying subsidies issued by the Federal government triggered an echo boom in 2010 that soon rolled over. The current uptrend started in early 2012, when lenders began restricting inventory by keeping foreclosed and defaulted houses off the market.

Is this uptick a speculative "echo boom" that is not sustainable? Charts of housing-sector stocks may offer some clues.

XHB is an exchange-traded fund (ETF) of homebuilders. This has roughly tripled off its lows and almost regained the lower boundary of its bubble-top price range in 2006.

Drywall/sheetrock manufacturer USG is a proxy of demand for construction materials. USG traced a classic bubble spike and collapse in 2006, and has recently risen to 2005 levels around $30, roughly triple its lows.

Weyerhaeuser Co. is another proxy of demand for construction materials. WY has returned to its bubble-top highs reached in 2007. This raises a question: can demand for lumber be equal to the 2007 levels when only 1/3 as many new homes are being built?

Sherwin-Williams also reflects construction/renovation demand. SHW exceeded its housing-bubble levels back in 2010, and has followed an exponential line higher since January 2012.

It certainly appears that some housing-related stocks have reached heights that far exceed the modest uptick in new-home sales. Is this the market forecasting stronger profits ahead and speculators front-running the housing recovery? Has the speculative push outrun the modest gains of actual home construction and sales?

Though the jury is still out, it seems a risk-on speculative fever has returned to some housing-related equities, and that euphoria generally ends badly for those coming late to the party.

Your rating: None Average: 3.5 (2 votes)

Guest Post: The Echo Boom In Housing-Recovery Stocks

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is housing in an echo boom? Though the jury is still out, it seems a risk-on speculative fever has returned to some housing-related equities.

Speculative bubbles often produce an "echo boom" a few years after the bubble has burst, as the cultural/institutional memories of the asset's spectacular gains remain operative long after the initial boom/bust. Is the much-hyped housing recovery an organic, sustainable trend, or is it merely a speculation-driven echo boom that is doomed to fade?

Given the unprecedented stimulus that the Federal Reserve has applied to the housing sector via multi-trillion dollar purchases of mortgages and its gargantuan money-printing/bond-buying efforts to suppress interest rates, it is not really possible to claim housing is in an organic trend; that would first require an end to Fed support and a normalization of the mortgage market and interest rates.

Housing bulls claim upticks in sales and household formation are evidence that pent-up demand is driving the market higher. Skeptics suggest the real driver is not higher demand but lower supply as lenders restrict inventory (homes for sale on the open market): The Real Housing Recovery Story.

Roughly a third of all existing home sales in many markets is not organic demand by households, it is speculation by flippers or investors chasing yield in a near-zero (real) yield environment. High levels of speculative activity could be nurturing a false confidence in permanently rising demand that is actually temporary.

Let's start with new home sales, the barometer of new construction. The 20% rise from 2011 is impressive, but this is off a very low base--a mere 306,000 new homes sold, less than a third of the 2006 level. (Courtesy of Calculated Risk)

For context, recall that there are about 75 million homeowners, about 50 million with mortgages, and over 19 million vacant dwellings in the U.S. In this context, 60,000 dwellings is statistical noise.

Annual New Home Sales
Year Sales (000s) Change in Sales
2005 1,283 6.7%
2006 1,051 -18.1%
2007 776 -26.2%
2008 485 -37.5%
2009 375 -22.7%
2010 323 -13.9%
2011 306 -5.3%
20121 367 19.9%
1 Estimate for 2012

Next up: the housing bubble in home prices, using the San Francisco Bay Area as an example:

The initial $1.1 trillion in Fed mortgage purchases and massive home-buying subsidies issued by the Federal government triggered an echo boom in 2010 that soon rolled over. The current uptrend started in early 2012, when lenders began restricting inventory by keeping foreclosed and defaulted houses off the market.

Is this uptick a speculative "echo boom" that is not sustainable? Charts of housing-sector stocks may offer some clues.

XHB is an exchange-traded fund (ETF) of homebuilders. This has roughly tripled off its lows and almost regained the lower boundary of its bubble-top price range in 2006.

Drywall/sheetrock manufacturer USG is a proxy of demand for construction materials. USG traced a classic bubble spike and collapse in 2006, and has recently risen to 2005 levels around $30, roughly triple its lows.

Weyerhaeuser Co. is another proxy of demand for construction materials. WY has returned to its bubble-top highs reached in 2007. This raises a question: can demand for lumber be equal to the 2007 levels when only 1/3 as many new homes are being built?

Sherwin-Williams also reflects construction/renovation demand. SHW exceeded its housing-bubble levels back in 2010, and has followed an exponential line higher since January 2012.

It certainly appears that some housing-related stocks have reached heights that far exceed the modest uptick in new-home sales. Is this the market forecasting stronger profits ahead and speculators front-running the housing recovery? Has the speculative push outrun the modest gains of actual home construction and sales?

Though the jury is still out, it seems a risk-on speculative fever has returned to some housing-related equities, and that euphoria generally ends badly for those coming late to the party.

Your rating: None Average: 3.5 (2 votes)

The Un-Manipulated Market That Keeps Merkel Awake At Night

It would appear that either Germans have stopped using electricity (now that is some severe austerity) or the 'real' economy in the core powerhouse of Europe's growth is struggling notably more than the nominal price of its stock market would imply. A...

The Market’s Schizophrenic Reaction To Payrolls

The markets cannot make up their mind what to make of the Payrolls data this morning. Gold (and Silver) spiked and are holding gains; Treasury yields plunged and are trading lower in yield on the week now; EURUSD spiked then faded rapidly (not helped ...

Gold Market: What determines the Price of Gold

gold

In this interview for Matterhorn Asset Management, Robert Blumen discusses some important but widely misunderstood elements acting on the gold price. He explains that frequently cited gold demand statistics have no relationship to the gold price. In addition, he explains that the annual gold mine production is of very little influence, as gold is hoarded, not consumed like other commodities.

Robert_Blumen

Lars Schall: Mr. Blumen, how did you become interested in the subject of gold in general?

Robert Blumen: There were two main influences when I was growing up in the 1970s and 80s. We went through a period of very high inflation in the United States. President Nixon imposed wage and price controls in a misguided, or perhaps very cynical, attempt to fight inflation. And Nixon’s successor, President Ford, handed out these silly little lapel buttons that said “Whip Inflation Now”. I remember seeing a young man on the TV news who had reported a chain store for the economic crime of raising the price of one of their products. He was being given some kind of award for this.

The second historical event was the gold bull market of the late 70s. Then Reagan came in along with Paul Volker who he inherited from the former president, Carter. I wasn’t paying much attention at the time but it stuck with me that gold had made this huge move.

Those two things came together and had a life-long influence on me. From that time I took away a curiosity about inflation. And that led me eventually to be curious about the whole field of economics. I was lucky that I came upon the Austrian School of Economics. I started reading Austrian economics in high school. The Austrian School emphasized gold as the basis of the monetary system and how well that has worked out over the course of human history.

L.S.: The growing interest in gold was underlined recently in a report that was published by the Official Monetary and Financial Institutions Forum (OMFIF), which has the title “Gold, the renminbi and the multi-currency reserve system“. (1) I think that this report is quite remarkable for various reasons. Do you agree?

R.B.: The report suggests that the international monetary system will accept gold in a more recognized way as a reserve asset. I think that this is already true, informally. There are many signs of this. Central banks have gone from selling to buying in recent years.

On the intellectual plane, I think there the consensus of many decades, namely that gold had been permanently removed from its monetary role, is changing. There is increasing discussion gold as a monetary metal among the elites. Several years ago, Benn Steil, a CFR economist wrote an opinion piece for the Financial Times (excerpted here) suggesting that the global gold standard worked better than the current system of floating rates. Robert Zoellick, who was president of the World Bank at the time, wrote a gold-friendly op-ed also in the FT a couple of years ago.

L.S.: What is your overall view on China?

R.B.: The popular perception of China an economic juggernaut on a path to eclipse the economies of the developed world. And how did that happen? Because their wise central planners chose an export-driven growth strategy. Many people now think that this strategy has gotten them to a point where they are deficient in domestic consumption, so they need to switch to a consumption-driven mode of economic growth; and that this also will be accomplished by the same wise central planners through a series of carefully designed five-year plans.

I think almost everything about this view is wrong; it is still largely a centrally planned economy and we know from the economics of the Austrian economist Ludwig von Mises, central planners cannot allocate resources.

L.S.: Why not?

R.B.: Mises wrote a paper in 1920, which became quite a famous and very controversial thesis in economics that was debated for decades. His paper was called Economic Calculation in the Socialist Commonwealth and you can find it for free at the Mises site.
economicCalculation

If you have a very simple economy where people make consumption goods with their bare hands, this can be done with central planning. But Mises was trying to explain the economic growth that has occurred in the world from small villages to vast modern economies with millions of goods and a complex division of labor. How could this type of growth occur? The process requires the development of a complex inter-relationship of capital goods, natural resources, and division of labor.

In a modern economy, the number of things that could be produced is nearly unimaginably large. And the number of different production methods for even a single good is incalculable. Take gold for example – finding a deposit is quite complex. There are many ways to look for it. Magnetic fields, chemistry, electrical, drilling. How much drilling and where? And then, when you have the deposit, should it be open pit or underground? Should a resource estimate be established first or start mining and follow the vein? And what about the metallurgy, the chemistry? What type of electrical power? What types of labor? Refine the ore on site, or partially refine? Build roads, rail, or ship the ore? There are millions of decisions and each one needs to be fully answered down to the hire or purchase of specific pieces of capital and individual workers.

Mises’ point was that all of these production decisions, not only what gets produced and what does not, but how it’s done, can only be decided on the basis of prices. In particular Mises noted that the prices of capital goods are crucial to production decisions. Contrary to what you read endlessly in the financial news about consumption driving the economy, spending on capital goods is the major part of total spending.

Only with prices can you have accounting, which is the ability to calculate profit and loss. In a market economic system, the important decisions are made on the basis of an anticipated profit and loss, which is the difference between the expected prices received on sales and the costs.

Mises had the insight that prices of capital goods are only a meaningful tool for resource allocation if they are established by a competitive bidding process among entrepreneurs. Entrepreneurs must choose how much they are willing to pay to acquire a specific capital asset and hire the skilled workers they need. Entrepreneurs are people who put at risk their own capital, and will either earn a profit or suffer a loss.

The diversity of entrepreneurs is a key part of this. Each business firm or company founder has a unique view of their own market, which may be highly detailed and based on years of experience. Mises also noted that each entrepreneur has his idea about what the customer will want. The market is a decentralized process in which the entrepreneur who has the best plan for each particular asset, along with some cash, will end up in a position to choose how that asset gets used.

In my own former job, I worked for a company that was in a small sub-sector of a sub-sector. There are perhaps half a dozen people in the world who truly understood our industry, maybe fewer. The entire world is full of experts like this, people who understand a particular industry or product really well.

Can you imagine, for example, that we would have iPhones or Kindles if the technology industry was planned by a central committee? Before the iPhone, competition in the mobile industry was primarily over how many minutes per month you got on weekdays or weekends. When Steve Jobs decided to develop the iPhone, he risked $150 million of his shareholder’s money and took on the US mobile industry, who did not want a disruptive phone taking away the spotlight from their monthly plans.

Central planning means the abolition of this type of competition. And that is the problem that Mises identified. There is no way to replace this competitive bidding process with a single planner or a planning committee. The central committee cannot bid against itself for the opportunity to acquire specific capital goods and labor. That would be nothing more than the left hand bidding against the right hand. They could assign fake prices to resources and pretend to calculate the best projects, but the numbers that would come out of this process would not be prices, they would be arbitrary numbers that did not reflect the best possible use of scarce productive resources. Mises showed that a central planner has no basis for making economic decisions, even if the process did not become entirely politicized, as it always does.

L.S.: So how does that apply to China’s growth prospects?

R.B: The China bull story as far as I can tell is based on the growth rate of GDP. Their economy is allegedly growing at 9%, if you believe the number. But the GDP number is more of a measure of spending. You can go along spending money for quite a while, but that doesn’t mean that it’s a useful allocation of resources in the face of scarcity. In the end if you have nothing that people want to show for it, it was wasted. And GDP does not capture that distinction.

chinagdpgrowth

The idea of export driven growth, it’s a contradictory concept. Economic growth means the ability of an economic system to produce more goods and services that people want and are willing to pay for, at a higher price than it cost to produce them. What they call export-driven growth is really a policy of holding their own currency exchange rate below the market rate in order to reduce the domestic monetary costs of their export industries. This creates a misallocation of labor and capital and a relative over-productive of export goods at the cost of fewer imports and fewer goods for domestic consumption.

If the cost of China’s policy were properly accounted for, it would be evident that the marginal export goods that is apparently produced at a profit (under the phony accounting of depreciating money) is in reality produced at a loss. But this loss is hidden because it is distributed over the entire population by reducing the purchasing power of their currency. And that impacts their ability to buy imported goods, or, as many domestically produced goods that have an import component.

They have a huge infrastructure bubble. They are building far more roads, bridges, power plants in relation to the rest of their capital structure. Bridges and roads to nowhere show up as GDP because spending is required to create them. But not all spending is created equal. Spending on thinks you don’t need or things that cost too much to produce is waste and it moves resources away from where they are needed to create real growth.

A lot of the writers in the West are in awe of China’s centrally planned economic system. A friend of mine, the American investment writer Chris Meyer, sent me news story a few years about the highly reputed UK fund manager Antony Bolton who had come out of retirement to manage a new China fund. Bolton cited the advantages of central planning compared to a market economy as one of his reasons for his enthusiasm. Things didn’t work out so well for Bolton. The fund has under-performed, which can happen for a lot of reasons besides believing in an incorrect political-economic theory. But I think that he came in right near the top of China’s planning bubble.

Economist Brad Setser wrote a paper around 2006 about the Chinese banking system. In his paper, he went back a number of years into the history of their banking system. Setser found that during this time, interest rates had been set at below-market levels by the central planners. This of course meant more demand for loans than banks could supply. Rather than rationing by price, resource allocation had been largely driven by political favoritism. Not surprisingly, most of the loans from this period went bad. The entire banking system eventually became nothing but a sea of bad loans. Then there was a bail-out, putting all of the bad loans in a bad bank. And then, they started over from zero and rebooted the whole system. But by the end of the time that Setser covered in his research, they had gotten right back where they started, full of bad loans again. More recently Edward Chancellor and Mike Monelly of the respected value investing firm GMO have produced a research piece saying more or less the same thing.

Overall they have a completely dysfunctional capital allocation process. That’s why I’m a bit of a skeptic on China.

L.S.: Last year the Austrian gold analyst Ronald Stöferle mentioned you in an interview with me for GoldSwitzerland. (2) Mr. Stöferle, in my opinion one of Europe’s best men in this field, said that you belong to the crème de la crème when it comes to the issue of price formation, and that you have something original and unique to say in your writings. So I am curious about this. But let’s begin the discussion with a more general question: In your opinion, where do you think that many analysts go wrong in their understanding of the gold market?

R.B.: I see four problems but in a way they are all different versions of one problem.

The first is a focus on the annual statistics. Whatever happened in the last year is not that significant because most of the gold that exists at the end of one year was there at the beginning of that year.

The second problem, which you could argue is a subset of the first one, is the emphasis mine supply. While a lot of ink or electrons are spilt on mine production, it has very little impact on the gold price.

The third is the vast amount of brainpower that goes into quantifying gold flows into market segments, such as industry, jewelry, coins, and funds. These quantities may be interesting for some purposes, but they’re not really that relevant if what you’re trying to do is understand the gold price, because there is not a connection between quantities and price in the way that most people think there is.

The last problem is the idea in some circles that there is a gold supply deficit. If you really look at the market, the concept doesn’t make sense. It’s based on a strange way of lining up the numbers to produce something like an optical illusion. The gold market, structurally, cannot be in a deficit in the way that any other commodity market could be in a deficit.

L.S.: We will discuss the last point in detail later. — As already mentioned, in the past you have written several pieces about the price formation mechanism in the gold market. Why have you chosen to focus on this area?

R.B.: I think the reason I have chosen to focus on this is that I see a lot of misunderstanding about this topic, and since very few people are active in this area, I have decided to take it on. I am hoping that through my writing and through interviews such as this one, I can play some part in shifting the thinking of the gold community.

There are a few others who get it. Stöferle who you mentioned has covered this in his gold report. Paul Mylchreest wrote about this exact issue when he was at Chevreux/Credit Agricole. Acting-man, a site that covers the Euro market, has some excellent content looking at gold and the price system from the correct perspective. James Turk and the people at GoldMoney are quite friendly to this concept. And I recall reading something by the fund manager John Hathaway in which he seemed to be saying approximately the same thing. I hope that I haven’t left anyone out.

I believe that the tide is slowly turning on this issue. While the incorrect view still predominates, increasingly the correct understanding is beginning to be expressed more frequently. A report such as Stöferle’s from a prominent research firm is a good sign.

L.S.: How does your view of gold price formation differ from the views of most analysts of the gold sector?

R.B.: I think I need to start out by giving a little background, and then proceed to directly answer your question. I am going to start by talking about where the wrong thinking comes from so you can see that it might make sense to someone to think that way. Then I will show where they go wrong and then, the correct way to think about it.

There are two different kinds of commodities and we need to understand the price formation process differently for each one. The first one I’m going to call, a consumption commodity and the other type I’m going to call an asset.

A consumption commodity is something that in order to derive the economic value from it, it must be destroyed. This is a case not only for industrial commodities, but also for consumer products. Wheat and cattle, you eat; coal, you burn; and so on. Metals are not destroyed but they’re buried or chemically bonded with other elements making it more difficult to bring them back to the market. Once you turn copper into a pipe and you incorporate it hull of a ship, it’s very costly to bring it back to the market.

People produce these things in order to consume them. For consumption goods, stockpiles are not large. There are, I know, some stockpiles copper and oil, but measured in terms of consumption rates, they consist of days, weeks or a few months.

Now for one moment I ask you to forget about the stockpiles. Then, the only supply that could come to the market would be recent production. And that would be sold to buyers who want to destroy it. Without stockpiles, supply is exactly production and demand is exactly consumption. Under those conditions, the market price regulates the flow of production into consumption.

Now, let’s add the stockpiles back to the picture. With stockpiles, it is possible for consumption to exceed production, for a short time, by drawing down stock piles. Due to the small size of the stocks, this situation is necessarily temporary because stocks will be depleted, or, before that happens, people will see that the stocks are being drawn down and would start to bid the price back up to bring consumption back in line with production.

Now let’s look at assets. An asset is a good that people buy it in order to hold on to it. The value from an asset comes from holding it, not from destroying it. The simplest asset market is one in which there is a fixed quantity that never changes. But it can still be an asset even when there is some production and some consumption. They key to differentiating between consumption and asset is to look at the stock to production ratio. If stocks are quite large in relation to production, then that shows that most of the supply is held. If stocks are small, then supply is consumed.

Let me give you some examples: corporate shares, land, real property. Gold is primarily an asset. It is true that a small amount of gold is produced and a very small amount of gold is destroyed in industrial uses. But the stock to annual production ratio is in the 50 to 100:1 range. Nearly all the gold in the world that has ever been produced since the beginning of time is held in some form.

indiagoldjewelry

Even in the case of jewelry, which people purchase for ornamental reasons, gold is still held. It could come back to the market. Every year people sell jewelry off and it gets melted and turned into a different piece of jewelry or coins or bars, depending on where the demand is. James Turk has also pointed out that a lot of what is called jewelry is an investment because in some parts of the world there’s a cultural preference for people to hold savings in coins or bars but in other areas by custom people prefer to hold their portable wealth as bracelets or necklaces. Investment grade jewelry differs from ornamental jewelry in that it has a very small artistic value-added on top of the bullion value of the item.

So, now that I’ve laid out this background, the price of a good in a consumption market goes where it needs to go in order to bring consumption in line with production. In an asset market, consumption and production do not constrain the price. The bidding process is about who has the greatest economic motivation to hold each unit of the good. The pricing process is primarily an auction over the existing stocks of the asset. Whoever values the asset the most will end up owning it, and those who value it less will own something else instead. And that, in in my view, is the way to understand gold price formation.

Many of the people who follow and write about this market look at it as if it were a consumption market and they look at mine supply and industrial fabrication as the drivers of the price as if it were tin, or coal, or wheat. People who look at gold as if it were a consumption market are looking at it the wrong way. But now you can see where the error comes from. In many financial firms gold is in the commodities department, so a commodities analyst gets assigned to write the gold report. If the same guy wrote the report about tin and copper, he might think that gold is just the same as tin and copper. And he starts by looking at mine supply and industrial off-take.

I wonder if more equity analysts or bond analysts were active in the gold area, if they would be more likely to look at it the same way they look at those assets.

L.S.: In your writings, you mention quite often the marginal price theory. Where does this theory originate and what is it all about?

R.B.: Marginal price theory has been part of economic theory for well over a hundred years. Most historians of the field of economics itself see the so-called marginal revolution as the boundary between the classical school of economics and modern economics. I learnt marginal price theory from Murray Rothbard‘s book, Man, Economy and State, but it’s something you could learn in any course on economics.

Marginal price theory was developed to answer a question a lot like what we are discussing today. It was known as the diamond-water paradox. The question that classically economists could not answer is, “Why do diamonds cost so much more than bread when bread is necessary for human life and diamonds are a luxury?” The problem was that classical economists did not think in terms of individual units. The breakthrough was the realization that we need to think about economic action in terms of individual units. A marginal theory says that human action acts on individual units of a good. The last unit that you buy or sell is always the marginal unit. As an economic actor you’re thinking, “What do I want to do with this next dollar? Do I want one more unit, one more dollars’ worth of diamonds or one more dollars’ worth of bread?

L.S.: How does that apply to the gold market?

R.B.: Gold is an asset. People buy it in order to hold it. The price of gold is set as people balance, at the margin, the amount of additional units of gold they want to hold against additional units of other assets or cash they want to hold, or consumption.

If you think of the possible gold buyer as the guy who is saying, “Do I want to hold one more ounce of gold or this $1,800 that I have?” The answer to his question is going to be different for each person and for each additional ounce. You might say “yes, I want one more ounce of gold instead of $1,800”. Now, you have an ounce of gold and if I ask you the question again you might say, “No, now that I have bought that additional ounce, I’ve got enough gold”.

On the supply side, are the people who own gold. From their point of view they have to answer the question, “Do I want to keep holding this ounce of gold or do I want to sell it on the market and have $1,800?” That $1,800 might stay in cash or maybe they have another use in mind for it. The supply side is everyone who has any gold and the buy-side of the market is anyone who has any money that they might want to put into gold.

Now, we can eliminate people who don’t know what gold is, the ones don’t know where to buy it or how to buy it, and those don’t want any because they don’t understand it, or maybe they do understand it but they don’t like it. But that still leaves a large number of people who might add to their position some quantity of gold at the right price. The people who already own gold, they could be active on either side of the market as a buyer or a seller. I want to emphasize that everyone who owns any gold at all is part of the supply-side of the market, not all at the current price, but at some price.

In micro-economics there’s a nice formalism where they use supply and demand curves. If you took a micro course you would have seen those. Many people might feel more familiar with these concepts if they can see the curves. You can do a lot with these curves but you can’t forget that they supply and demand curves are a way of aggregating of the preferences of all the individuals in the market. Murray Rothbard does a great job of explaining this.

In the market, people rebalance between gold and dollars until they’re happy with what they own. At that point there will be no more trading if no one ever changed their mind. But now and again people do change their mind; they realize they want more of one thing and less of another thing. Then you have more trading to bring the market back into balance.

In finance there is a similar concept called, optimal portfolio theory in which they see portfolio management in terms where people are trying to hold the ideal amount of each different form of savings. The portfolio manager rebalances based on the expected properties of each asset until they have the right mix.

L.S: Is it realistic to assume that everyone is willing to sell their gold? The gold buyers are perceived as very strong hands with long time horizon, people who hoard for a crisis.

R.B.: Many of the people who have bought gold in the last few years are not remotely interested in selling at the current price or even double the current price, but there is always a price or some combination of price and circumstances where somebody would put some of their gold on sale — maybe not all of it but some of it. And people on the money side of the market are asking the same question in relation to gold. The market balances all of those choices out and you have a price that brings out the quantities on both sides of the market into balance.

Maybe that’s not totally true, maybe some gold is held by people who wouldn’t sell it for any reason. But I think that the concept of the gold bug who plans to take it all to the grave is over-stated. I asked a person the gold business whether gold retail trade is all selling and no buying. He told me, “No of course not, there are always buyers and sellers”. After all, what is the point of having a store of value if you never use the value? That is John Maynard Keynes and his parable of the cake that is never eaten. But Keynes was really painting a caricature of the capitalist system which encourages saving for the future. The future does arrives at some point, whether it is old age or emergency, and at that time, the value of additional saving is diminished relative to spending.

And it is important to understand the cost of owning gold is not necessarily the amount of money you could get by selling it. Prices are only a way of quantifying true costs. The cost of owning an ounce of gold is whatever other sort of economic opportunity that you are sacrificing by owning the gold instead. People who own gold are every day looking at “what other economic opportunities am I giving up by holding this ounce of gold?” and then “Do I want to shift the next ounce of gold somewhere else that will give me a better return or a better consumption experience?”. If you could swap an ounce of gold for one unit of the American Dow Stock Average that was at the time yielding 12% then the cost of owning an ounce of gold is not owning a unit of the DJIA. The cost of owning gold is the opportunity cost, of which holding cash instead is only one possible choice.

Let me give you another example; if the price of a new car that you like is twenty ounces of gold, you might prefer the gold. The cost of owning the gold is 1/20th of a car. But if the price of that car in gold ounces dropped to one ounce, you might say, “Nineteen ounces of gold is enough and I’d like to have that new car”. And at that point it makes sense to swap a single ounce of gold for a car. You still have nineteen ounces of gold, so you haven’t sold all of your gold, but at the margin, you have sold the least valued ounce for something that became more attractive.

L.S.: So your view is basically that of portfolio balancing. Do you see the price mechanism in the gold market as similar to the share market?

R.B.: Yes, in terms of the formal model of how pricing works it is similar. You see you have a relatively fixed quantity of a good and people are bidding the price up or down, based on who is the most motivated to hold that good, who is most willing to sacrifice the opportunity to hold a different asset or to increase their consumption.

Now, gold is different than shares in that gold is more of a cash-like asset whereas with shares you are buying an actual business that has a management team, products, and a financial statement. So, in that way it’s different. But in terms of the pricing process it’s quite similar.

L.S.: You use in your writings also the concept of “reservation demand”. Can you explain this further, please?

R.B.: There are two different expressions of demand for a good. If I trade with you, I supply one apple and I demand one banana and you do the opposite. We each demand something by offering something in supply. When there’s a buyer and a seller, the buyer demands and the seller supplies. That is exchange demand.

The concept of reservation demand is where you demand something by holding onto it rather than selling it. This concept might sound unfamiliar but it is very relevant to everyone’s life. We all have reservation demand for many goods. I have reservation demand at the moment for an auto, a dining room table, a couch, a mobile phone, and so forth. My reservation demand for cash in my pocket is $20. Any good that you’re any holding onto rather than selling, you are exercising reservation demand.

Most of the market research about gold deals with exchange demand, which has the advantage that you can measure it. But reservation demand is far more relevant to the price. The profile of reservation demand among people who own gold is the main determinant of the gold price from the supply side.

A very closely-related concept is reservation price. This is the price where you would be willing to sell a good that you currently hold. In the gold market, you can think of every ounce with a price tag on it. Or maybe today, it would be a QR code instead of a tag. That price depends on who owns that ounce of gold and their reason for holding it. Short-term traders might take a position for five minutes looking for a small move. If they got their $10 move they would sell and lock in a profit. You have other people who have a much longer time horizon, years or even decades, and a much higher expectation of where they’re going to sell. And even the same person will have a different price tag on each ounce. The first ounce you might be more willing to sell than your last ounce. It is important to understand that reservation prices are not necessarily money prices; they may be construed more broadly in terms of economic opportunities as I described just a moment ago.

You also might object that a lot of people may not know exactly what their reservation price is in money terms because it is impossible to know accurately what the purchasing price of money will be at a time when you might want to sell. And this is true. Many gold buyers are envisioning that we are going to experience hyper-inflation in some countries and their plan might be to look for distressed assets that go on sale during a hyperinflation. That would be the time to sell their gold, or more accurately, to swap their gold for assets. This type of person may conceive of the reservation price as, “When I can buy a small business, like a cleaners, for five ounces of gold” or “when I can buy a rental apartment for 10 ounces of gold”. People conceive of the reservation price more broadly in terms of what is going on in the world around them.

There is reservation demand on the money side of the market as well. Why does everyone not spend all of their money? Because we have reservation demand for money. The reason that you have any money at all and you haven’t spent it is you see some potential use for that money, possibly when you see something you need or want at a low enough price, that the good comes in ahead of your reservation price in so you buy the good.

The bid and ask that you see in the gold market at any point in time is the price offered by the marginal non-buyer and the price asked by the marginal non-seller. The marginal non-buyer is the person whose reservation price for their money is just below the ask and the marginal non-seller is the person whose reservation price for that ounce of gold is just above the bid. The equilibrium of the market is that you have the bid and the ask which are the best reservation prices are on each side.

L.S. Why do you object to the emphasis on annual statistics in looking at this market?

R.B: What I want people to take away from this interview is that the gold price is not primarily a way of rationing gold that was mined during the last year, it’s a way of rationing all of the gold in the world because all of the gold is held and everyone who holds it cares about the price one way or the other.

The gold market is not segregated into one market for the gold that was mined this year and another market for gold that was mined in past years. The buyer doesn’t care whether he’s buying a newly mined ounce of gold or buying from somebody who had purchased gold that was mined 100 years ago. All of the buyers are competing to buy and all of the sellers are competing to sell.

I think that the focus on annual numbers is another residual of the domination of this space by commodities-type thinking.

L.S. You have stated that mine supply is not a key factor driving the gold price. Most gold analysts would not agree with you. Please explain your view on this.

If you pick up a typical research report on a gold market from a research firm or a bank, you will find that the main portion of the report is about annual quantities. Annual mine production is the most important followed by the jewelry melted, jewelry bought, coin and bar sales, dental, industrial, and central bank. And these quantities are thought by most analysts to be critically important in determining the gold price but that is just not the case.

Gold is always owned by whoever has puts greatest value on it. The ask price is the value placed on gold by the individual who values their last ounce the least of anyone who owns gold, compared to the last buyer who got rationed out of the market, the guy who values gold the most of anyone who does not own that last ounce.

Mining add about 1% to the total supply each year. If the total amount of gold is 5.05 billion ounces rather than 5.0 billion, that allows a few more of what were the marginal non-buyers to become buyers.

I think of the miners and the gold destroyers – such as dentists and the electronics industry, as a small delta on top of the price formation process that is mainly about who is willing to bid the most to hold all of the gold. Mine supply is only a small share of all gold.

The only difference between a miner and someone else who owns the same amount of gold is that the miners pretty much have to sell because they are businesses and they have to cover costs. The investor who owns some gold doesn’t necessarily have to sell, they can hold as long as they want to or until they have a better place for their savings than gold. You can say that they are price takers.

You can think of the miner as coming in to that market and selling down into the bid side of the market a little bit. Of course the miner is going to enable some people to get into the market at a lower price than without the miner because those buyers are not forced to go up higher into the ask side of the market in order to buy their gold.

A lot of analysts go even further down the road to absurdity by looking at the growth rate of gold mining. If you start out from year 1 where mine supply is, let’s say 2000 tonnes, and in year 2 mine supply is 2,500 tonnes, that is an increase of 20%. So the thinking goes, if supply is up by 20%, then demand also has to go up by 20% and that looks like a lot. If buyers bought 2000 tons last year and this year you are asking them to buy the same and then 20% more, how is that going to happen? It’s really not a big influence. In math terms, mine supply is the first derivative and now we are talking about second derivatives.

L.S.: You have given your reasons for thinking that the impact of mining on the gold price is small. Do you have any way of quantifying that?

R.B.: I can’t say for sure but there are some ways to make an educated guess.

One is that mine supply only adds around 1% or 2% to the total stockpile of gold. You can think of mining as a form of gold inflation with a rate of around 1-2%. If we were looking at the supply of money in a country or shares of a stock we would expect the value to be diluted by something close to the growth rate. Miners are diluting the value of the existing gold stock by 1%. If this is correct, and if everyone who owned gold was trying to maintain a constant amount of gold in purchasing power terms, then all other things being equal, a 1% dilution would have a 1% impact on price.

Another way of looking at it is when the supply of gold is 5 billion ounces there is a price quotation, which is the best ask. Now one year later mining has brought us up to 5.05 billion ounces. A group of buyers was able to come in and buy the additional 50 million ounces. Where do those new buyers value gold? If we assume static preferences, maybe slightly above their buy price. Not a lot above their buy price or they would have become buyers the year before. So that would suggest a slightly lower price, depending on how deep you have to go down into the bids to fill the additional ounces.

I looked at some figures from geologist Brent Cook showing that all of the gold mined in any one year is about equal to a few days volume on the LBMA. And the LBMA is not the only market where gold is traded in the world. I’m not saying that the difference due to mining is equal to the ratio of trading days to volume. But the point is, selling the mined gold onto the market is a very small part of the market activity. It’s easily absorbed into a liquid market.

L.S.: In your most recent article you argue that many analysts are incorrectly bullish or bearish, because their data does not support their price outlook. Is that so?

R.B.: You see every day in the media statements like “Gold investment demand is up by 20 percent this year” and that’s supposed to be very bullish. Or “investment demand was down by 15 percent” and that is supposed to be bearish.

There is also I remember a wave of stories in the early 90s as the gold industry was increasing up exploration and bringing new properties on line, where it was popular to say, “Gold mine supply was 2000 tons this year and it’s going to be 2500 tons next year”. That is an increase of 25 percent in supply, and wow, that sounds like a big, big increase in supply. To keep up, the demand side of the market has to step up by 500 tons this year otherwise the price is going to be much-much lower. That would be a huge increase in demand. Where is all that demand going to come from to keep up with supply?

When you see statement like that, what does that mean, exactly? It means something like this. If investors as a sector had a net addition to their portfolio of 50 million ounces one year and the next year they added 60 million ounces they’re calling that a 20 percent increase in demand. And that’s supposed to be very bullish.

This way of thinking about the market is not logical. What they call “supply” and “demand” is the amount of gold that got moved around the market. And that is fine as far as it goes. The problem is when they go from the number to the price. Those numbers do not characterize the forces of supply and demand that do set the price.

L.S.: Then what do they mean by supply and demand? And why do you dislike their definitions?

R.B.: Let me explain how they come up with these numbers and what they’re supposed to mean and then, where they go wrong.

What analysts typically do is divide the market up into sectors such as mines, investment, jewelry, industrial and central banks and maybe funds or ETFs get their own sector. Often a country like China is considered a sector. They want to measure the amount of gold that was bought and sold that year by individuals or actors within each sector. Those are gross amounts. From grosses you can compute net amounts. The net is the difference between the gross bought and sold quantity for that sector. There’s always a net outflow from the mine sector because they’re in business to sell. For any other sector, the net might be a positive or a negative number during a year because people may have bought more jewelry than they sold, or the opposite. During any given year investors might on net have added to their positions or diminished their holdings.

When you read “supply” or “demand” in the financial media, the definition is not consistent from one place to the next. There are a lot of ways people slice and dice all of the numbers. Everyone does not do it the say way. However you do it, you have a number made by adding up some gross and net quantities. For example, one report might say that supply is mine supply plus gross jewelry scrap. Someone else might include gross investment purchases, and someone else might count only net investment as part of the demand number. When you read that demand is up, what they mean is that one of these contrived Rube Goldberg definitions that has the misleading name “demand” has changed from one year to the next.

Let me give you one example. The CPM Group (a research consultancy that produces in-depth reports on the gold and silver markets) does it like this: they define supply as the all of following: mine supply, the gross industrial sales, and gross jewelry sold. CPM defines demand as the sum of all of these: gross industrial purchases, gross jewelry purchases, net central bank activity and net investor activity.

CPM uses a mix of gross quantities and net quantities. This definition by itself strikes me as quite eccentric because of the mixture grosses and nets into the same aggregate. Gross quantities measure a flow, while nets are the change in magnitude of a stock. What happens when you add grosses and nets together? I have no idea. This reminds me of breaking the rules of dimensional consistency, something that the physics faculty at my university prohibited.

Now let’s delve into these net quantities a bit more. To simplify the situation, suppose there are only two sectors in the market. Let’s call those two sectors “mines” and “everyone else”. Then the relationship between the quantities is very simple. Whatever the miner sold somebody bought. There’s always a market for gold at some price. An ounce of gold is worth more than zero. Any quantity of gold that someone offers on the market will find a buyer at some price and that gold will end up in someone’s portfolio or maybe consumed. Mine supply gross (or net) sold is equal to everyone else net purchased. That is a simplified understanding of a two-sector market.

Now let’s complicate the model a bit more to get it closer to reality. If you have three sectors, mines, jewelry and investment, then you can have a net outflow from jewelry one year and that would have to show up as a net inflow into investment because all the quantities have to balance out. Everything still has to net out to zero across all sectors. The gold miners are always sellers but any other sector could be a net buyer or a net seller in any one year period.

You can keep making the model more complex by adding more and more sectors. Each time you add another sector to your model, that sector has inflows and outflows. But this doesn’t change the fundamental logic which is that every ounce that is sold in one place is purchased in another place. All of the flows have to balance out to the net change in the world’s total position, which is mine supply less destruction. And that is always a positive number as long as anyone has been counting.

Now, I’ve been saying that this is at best, not very useful, and at worst, misleading. By now you probably want to know, “what is the problem?” The problem is that these quantities and these flows have no causal relationship with the gold price. All we have done is to add up some of the volume in the market and shifts in aggregate holdings. But we are still no closer to the price because neither the volume of trading, nor position changes as are causes of the price. Quantities are not the cause of the gold price. Gross quantities are not the cause of the gold price. Net quantities are not the cause of the gold price. And so it must also be true that any Frankenstein monster number you invent, even if you give it a familiar name, like “supply” and “demand” also does not cause the gold price.

Suppose I tell you that there was a net flow of gold from sector A to sector B last year, then what is the impact on the gold price? There is no way to say. The gold price could be higher, lower or unchanged when gold moved from A to B. If the gold moved from A to B because the buyers on the A side were more aggressive and raised their bid prices, then you would see a higher price. If gold flowed because the people in B valued it less, so they were willing to let it go for less in return, then you would see a lower price. If both of those things happened, there would be a lot of trading but the price might end up about the same.

A price is a quantity of money that is exchanged for a quantity of gold. In these voluminous reports about mine supply and jewelry and everything, they’re only looking at quantities of gold. There is no way that looking at quantities alone can tell you anything about price because there is no money involved. It’s sort of like the is-ought problem in philosophy, which says that you cannot derive a sentence containing “ought” from any number of propositions that contain only “is”. You cannot make any conclusions about money if you do not have money in your premises. No matter how hard you study these quantities it won’t tell you anything about the price. Whatever the driver is of the price, it has to involve both gold and money.

L.S.: If not cause and effect, is there any relationship between these quantities and the gold price?

R.B. : Yes, it’s almost the opposite of what most people think. The gold price is formed by a balancing process, as investors shift different assets in order to hold the amount of gold, cash, and other assets they want. These quantities come about because of discrepancies between what people own, what they want, and the collective preferences of the rest of the market. These discrepancies are resolved by exchanging and that gets counted as a quantity. But these quantities do not drive the price. The more preference changes among the buyers and sellers, the greater the volume of trading required to get back to an equilibrium.

I recall Warren Buffet describing a cartoon of a financial news anchor with the caption, “There was no volume on the market today because everyone was happy with what they own”. This is quite funny but the serious point is that buying and selling comes about because there are people who wish to change their position in a way that is complementary to what someone else wants, so they are both able to change their positions to something that they like better. The one side wants more cash, less god; the other wants the opposite.

The volume of buying and selling shows how far out of adjustment people are between their own positions and the preferences of other people in the market which is what creates the opportunity to trade. Buying and selling as such do not cause the price, buying and selling come about because of a preference disequilibrium. That disequilibrium requires trading to equilibrate but it does not tell us at what price the trading occurs.

There might be a statistical correlation between, for example, a net inflow into one sector and higher (or lower) prices. If someone has a statistical model that works, that is great. But it’s not causal.

But it seems to me that even if someone has discovered correlations like that, they will be coincident with the price, rather than predictive. In order to forecast the price, you need an indicator that moves in advance of the price. You read all the time how bullish it is that people bought so many coins, or bars or whatever, but buying that was the cause of the price going up, then it would have already gone up due to the buying. That would not help you forecast at all.

L.S.: You say that the way supply and demand are reported in the financial media is confusing. Please explain to our readers your thought process in more detail.

demandsupplycurve

R.B.: When the average reader, or even the quite sophisticated reader sees the word “supply” and “demand” they don’t think to ask, “what is definition of that word” because we already have a good intuitive feeling about what those words mean. And we all know that an increase in demand drives the price higher, while an increase in supply sets us up for a lower price. And that is true if you use the terms “supply” and “demand” correctly to mean as the intensity of investor preferences on each side of the market.

If the author got all their numbers right – and some of these firms go to a lot of trouble to count up every microgram of gold dust in the entire world – then these statements are accurate in a very limited sense. But it is not true that a quantity made out of the sum of various flows and position shifts has any relationship to the forces that set the market price.

Everyone will agree: “The price of gold is set by supply and demand”. But what does did we all just agree on? Correctly understood, this statement means that the price balances out the overall the set of choices people make to offer on their desired terms from each side of the market. The price results from balancing those two sides.

Suppose that instead of “supply” and “demand” these aggregates were called X and Y, if you like algebra. Now if I change my statement to say “The price of gold is set by X and Y” you are immediately going to ask “what do you mean by X and Y?” And when you find that X = A + B + (C – D) + (E – F), etc. and Y is something similar it starts to make a lot less sense. At that point your head will probably start exploding. When you use X and Y in place of “supply” and “demand”, you no longer have a true statement.

The problem happens by starting out from truth and then changing the definitions of terms so the statement looks the same but it is no longer means the same thing and the thing that it now means is not true. By using words that have a clear meaning in our minds, but using them to mean something else this creates immense confusion. And hardly anyone realizes this when they are reading an innocent-looking statement.

L.S.: If not by quantities, then can the gold price otherwise be analyzed quantitatively?

R.B.: The gold price is set by investor preferences, which cannot be measured directly. But I think that we understand the main factors in the world that influence investor preferences in relation to gold. These factors are the growth rate of money supply, the volume and quality of debt, political uncertainty, confiscation risk, and the attractiveness (or lack thereof) of other possible assets. As individuals filter these events through their own thoughts they form their preferences. But that’s not something that’s measurable.

I suspect that the reason for the emphasis on quantities is that they that can be measured. Measurement is the basis of all science. And if we want our analysis to be rigorous and objective, so the thinking goes, we had better start with numbers and do a very fine job at measuring those numbers accurately. If you are an analyst you have to write a report for your clients, after all they have paid for it, so they have to come up with things that can be measured and the quantity is the only thing that can be measured so they write about quantities.

And in the end this is the problem for gold price analysts, you’re talking about a market in which it’s difficult to really quantify what’s going on. I think that looking at some broad statistical relationships over a period of history, like gold price to money supply, to debt, things like that, might give some idea about where the price is going. Or maybe not, maybe you run into the problem I mentioned about synchronous correlations that are not predictive.

Part of the problem is that statistics work better the more data you have. But we really don’t have a lot of data about how the gold price behaves in relation to other things.

Market Buzz: Waiting with bated breath ahead of jobs reports

RIA Novosti / Ruslan Krivobok

RIA Novosti / Ruslan Krivobok

Global investors are currently holding off on making any drastic moves as they await a series of labor reports later this week.

"People are reluctant to pull the trigger one way or the other until we get more clarity," J.J. Kinahan, chief derivatives strategist at TD Ameritrade, told CNN Money.

A Federal Reserve meeting scheduled for this week may also serve as another motivating factor for investors, Liliya Brueva of Investcafe added.

On Monday, Russian stocks closed on a positive note: The RTS rose 1.03% to 1,635.50 and the MICEX moved up 1.22%to finish at 1,562.93.

“Our [Russian] trading received a growth impulse from the positive news from China, where industrial companies have registered increased income for the fourth consecutive month,” Brueva explained.

Industrial earnings in China surged 20.4% in Q4 after negative growth over the first three quarters, according to the country’s National Bureau of Statistics.

Trading on Wall Street was mixed on Monday: The Dow Jones declined 0.1% and the S&P 500 lost 0.2%, while the Nasdaq added 0.1%.

Earlier gains on US floors, which hit new five-year highs on the back of strong corporate earnings, were hampered by “some conflicting economic data showing worse than expected pending home sales data, which came after some strong durable goods data that had initially given markets a bit of a boost,” explained Angus Campbell, head of market analysis for Capital Spreads.

The Census Bureau reported that orders for durable goods rose 4.6% in December, an increase over the 1.6% growth forecast by economists. The index of pending home sales also fell 4.3% during the same period; the index is based on the number of hosing contracts signed in a month, but does not measure actual closings.

European stocks closed mixed on Monday: The FTSE 100 gained 0.16%, the CAC 40 rose 0.07% and the DAX lost 0.32%.

Asian markets also finished mixed: The Shanghai Composite added more than 2%, closing at its highest level since June, while the Nikkei lost about 1%. The Hang Seng in Hong Kong also traded slightly higher.

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Market Buzz: US ‘stats of the nation’ drive bourses

Russian investors are expected to be looking overseas, where the US stats are set to be a major newsmaker during the entire week. On Monday the world’s biggest economy will release its December durables figures.

“During the day Russian floors will be mostly focusing on an overall news environment and the way foreign investors behave,” according to Yulia Voitovich, an analyst at Investcafe.

As for the US durable report, analysts expect a 1.8% month-to-month increase of the December figure. “Excess of the actual reading above the expected could support the world stock indicators,” she added.

And given positive closure of Friday trading in the US and mostly in Asia, Russian stocks may also open higher on Monday, Voitovich said.

Domestic markets were positive on Friday. The RTS added 0.01% to 1, 618.84 and the MICEX was up 0.88% to 1,618.84.

Asian stocks are mostly up in early Monday trading, with Shanghai Composite going up 1.5%, Hang Seng rising 0.51% and just Nikkei going down 0.08%.

In Wall Street news, the most anticipated block of unemployment data is set to be released on Friday. The Labor Department releases its first monthly employment report for 2013.

Overall, unemployment is now one of the key economic issues the US authorities target. So far the unemployment rate has remained above and beyond a desirable figure. Last year it held steady at about 7.8%, while 6.5% serves is the target.

Stocks in the US ended last week on a positive note, with the Dow Jones adding 1.8%, the S&P rising 1.1% and Nasdaq going up 0.5%.

European markets finished broadly higher on Friday, where Germany leads the region. The DAX was up 1.42% while France's CAC 40 added 0.69% and London's FTSE 100 rose 0.31%.

Trading The Macro-Market Disconnect

As we recently noted, the US Macro picture is considerably less sanguine than every talking head would have you believe. Not only are earnings for Q4 coming in notably weak, but the top-down macro picture is its worst in almost five months - and turned negative this week. Of course, the fact that our 'market' is dislocated from any sense of reality will come as no surprise to anyone; but, the chart below provides some, perhaps useful, insight into how to trade this disconnect (and its inevitable convergence). To add a little more impetus to this decision, the past two weeks have seen the US macro picture drop at its fastest rate since June 2011 - right before the last debt-ceiling debate, which was followed by a quite notable decline in stocks.

While not perfect, the combination of the 20/100 DMA with the fact that US ECO has turned negative is a strong indication of a short-term correction in stocks

What could generate a correction now? We see the following near term concerns:

1. A complacent ECB. Whereas the Fed and BoJ are adding to asset purchases, and the BoE may do so soon judging by the King Speech Tuesday night, the ECB will likely (continue to) contract its balance sheet as LTROs are repaid and does not seem in the mood to cut rates either. This might present most problems via the currency. But if the ECB makes the same mistakes by tightening policy as under Trichet in mid 2011, European stocks could really suffer. Since our economists expect instead further cuts eventually, and OMT activation could generate balance sheet expansion, our base case is underperformance, not Armageddon, in European equities. But it is worth noting that a theme in meetings in 7 European financial capitals over the past couple of weeks has been: why shouldn’t European equities do better this year? This suggests that investors are already positioned for gains/ outperformance.

2. Another concern is Japan. Well before Elections in Japan on 16 December last year, aggressive investors built short JPY (and long NKY) positions anticipating pressure for easier monetary policy from Japan. While the Election outcome and subsequent BoJ decisions (more QE, higher CPI inflation target) have to a large degree validated these expectations, we think this move might have run its course for now. In part this reflects the slightly disappointing BoJ decision to postpone further balance sheet expansion to 2014. And in part recent official comments that JPY rapid depreciation may have downside risks. There may be pressure from trading partners if Japanese government spokesmen return to too explicit a policy of talking the JPY lower. The JPY/ NKY move may have another leg when the BoJ Governorship changes on 8 April but we have cut our tactical position to zero for now. If the market confuses JPY short term strength/ NKY weakness for a general risk off move, this could also cause near term volatility more generally.

3. Another investor focus is the recent softness of the data, particularly in the growth outperformers. In very recent days, better than expected European data have kept our G10 ESI from falling further though zero. But the US index remains soft and so does the EM overall index. On the US ESI, after 4.5 months in positive territory, the index has moved negative, partly because of the way it is designed to mean revert over time. Positive surprises last year decay out of the index over 3 months and at an accelerating rate. This may lead to some participants citing ESIs as a concern for risk assets. Our own Risk-On/ Risk-Off (RORO) rule for markets based on ESIs was triggered on 17 January - as seen above.

Of course, there is all the other usual stuff too such as the debt ceiling deadlines, politics in Europe and elsewhere, deleveraging etc. However, the three concerns listed are where we would see a more serious setback coming if it did.

Source: Citi

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Marc Faber Fears 1987 Redux As “Markets Will Punish Interventionists”

"Regardless of what the markets do near-term, a correction is overdue," Marc Faber tells Bloomberg TV's Betty Liu. From discussing Europe's 'apparent' stabilization - "anything can go up when you print money"; to US equity exuberance - "a correction is overdue and February is a seasonally weak month"; Faber sees no change from Geithner's handover to Lew as he opines: "The only thing I know is one day the markets will punish the interventionists, the Keynesians and the monetary policy that the Federal Reserve and ECB has enforced because the markets will be more powerful one day. How will this look like? Will the bond market collapse or equity markets become a bubble, which would be embarrassing for the Fed's sake if the U.S. market became a gigantic bubble and at the same time the economy does not recover."

Faber: on whether he agrees with George Soros that Europe has been stabilized:

"It has been stabilized for now, but the big question as he said is the imbalances have not been solved and these could come back and harm the markets and the euro at some point in the future. In terms of stock markets, I have advocated one year ago between April and June of last year to buy European stocks in Portugal, Spain, Italy, Greece and France because they were extremely depressed. Since then, the markets have rallied very sharply. Greece is up from the lows by 100%. That tells you anything can go up when you print money."

On whether he's getting out of European markets:

"Not really because we made the secular low roughly one year ago, but I have argued that it is the time right now to reduce equity positions. I think the markets are at the difficult juncture between overbought and a euphoric state. I am not ruling out that they could go up somewhat more like in 1987, going up 40% between January and August, but we also fell 40% in two months' time. So the gains were wiped out quickly. In March of 2009 we are close to 1500. We had already a huge bull market, and a lot of the good news has been discounted already."

On whether there will be a correction on the S&P:

"I think regardless of what the markets do, near-term, a correction is overdue and usually February is a seasonally weak month…It will be interesting to see how the correction unfolds."

On why he's not going big on any short in the market:

"The problem with shorting the markets nowadays is that you have this huge intervention by governments. Look at bonds of Italy Portugal and Spain--they rallied last year, there was a huge profit opportunity, and I admit that I missed it, but the profit opportunity came about as a result of government intervention. I feel the markets are -- some people say it is intervention. I can call it manipulation. If manipulation continues, you do not know how far they will go. The only thing I know is one day the markets will punish the interventionists, the Keynesians and the monetary that the Federal Reserve and ECB has enforced because the markets will be more powerful one day. How will this look like? Will the bond market collapse or equity markets become a bubble, which would be embarrassing for the Fed's sake if the U.S. market became a gigantic bubble and at the same time the economy does not recover."

On Tim Geithner's legacy and whether anything will change under Jack Lew:

"I doubt there will be much change. To be fair to Mr. Geithner, he inherited a colossal mess. he is involved in politics and he has to listen to what the politicians want to do. He did an ok job. Where it is not ok is that basically nobody that has committed financial fraud or contributed to the fraud was prosecuted."

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Market Buzz: No stimulus for growth

John Moore / Getty Images / AFP

John Moore / Getty Images / AFP

Russian markets are expected to open in the red following a rather controversial trading day on Thursday. Both key Russian indices dropped, with the RTS lowering by 0.04% and the MICEX sliding by 0.24%.

Friday’s trading will greatly depend on external moving factors as no major corporate news is expected in Russia. It’s most likely the market will show slight correction due to lack of significant reasons for the growth, which, however, may appear at the beginning of next week.

European markets finished mostly higher on Thursday. The FTSE 100 was up 1.09%, while France's CAC 40 is up 0.70% and Germany's DAX was up 0.53%.

North American markets finished mixed to lower. The Dow Jones rose by 0.33%, while the S&P 500 closed unchanged.

The US market will also depend on the statistics coming throughout the day. Real estate market data is expected to arrive with predicted increase in new homes sales to grow from 377,000 in November to 388,000 in December. However, investor sentiment will largely depend on the issuing of annual corporate reports. Consumer companies are expected to share their data, including a much-anticipated report from P&G.

Asian markets are mixed. The Nikkei 225 is trading 2.28% higher, while the Hang Seng is leading the Shanghai Composite lower. They are down 0.32% and 0.22% respectively.

Most Asian and European stocks fall on Apple’s Q4 results

People walk in front of the 5th avenue Apple store on January 14, 2013 in New York City. (Spencer Platt/Getty Images/AFP)

People walk in front of the 5th avenue Apple store on January 14, 2013 in New York City. (Spencer Platt/Getty Images/AFP)

Apple’s worse than expected fourth quarter earnings cause a negative push on the major European and Asian stock exchanges on Thursday.

­Apple’s net profits in October-December 2012 stood at $13.1 billion with revenues of $54.5 billion which showed an 18% increase over the same quarter last year. However analysts expected profits to be at $13.53 billion mark and revenues to reach $54.9 billion.

The shares have dropped by 10.5% following the arrival of the quarter earnings and are trading at $461.3 per share. The capitalization loss accounts for $50 billion and the shares have slid by 30% comparied to September 2012. There are fears Apple Inc can lose its unique dynamic and its spot as the biggest company in the world – ExxonMobil is only $20 billion behind. 

Europe’s consolidated index of the biggest corporations slid by 0.20% on Thursday with major indices dropping. The S&P is lower by 0.4% and the MSCI Asia Pacific is down by 0.2%.

Most Asian markets ended lower Thursday amid the gloom over earnings reports from Apple Inc. South Korea’s Kospi and China’s Shanghai Composite Index lost 0.8% each, Taiwan’s Taiex declined 0.6% and Hong Kong’s Hang Seng Index slipped 0.2%.

Market Buzz: Russia looks outwards

Reuters/Jose Manuel Ribeiro

Reuters/Jose Manuel Ribeiro

Russian indices are expected to grow further on Thursday following a successful trading day earlier. The RTS grew by 1.3% and the MICEX gained 0.8%.

­The majority of Russian blue chips were also on the rise with Norilsk Nickel in the lead with +1%, Sberbank, Gazprom and Lukoil stocks rose 0.95%, 0.55% and 0.09% respectively.

No major corporate events are expected today in Russia and stocks will primarily focus on foreign colleagues when determining the motion vector for the day.

European stock exchanges closed in the mix on Wednesday. The FTSE 100 gained 0.30% and the DAX rose 0.15%, the CAC 40 lost 0.40%.

Markets in Asia are also in mixed territory. The Nikkei 225 is higher by 0.81%, while the Shanghai Composite is leading the Hang Seng lower. They are down 0.17% and 0.16% respectively.

North American stocks showed positive trading with the Dow Jones gaining 0.49%, the S&P rising by 0.15% and the NASDAQ climbing up by 0.33%. American indices gained support from the ongoing season of annual corporate reports. Data posted by Google, IBM and McDonalds came in higher than expected, which stimulated the trading of some indices. Miscrosoft, Starbucks and Xerox are expected to deliver their reports later today. Also the US is to publish unemployment index and oil reserve data on Thursday.

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Market Buzz: Looking for an upside

(Reuters / Mohamed Abd El Ghany)

(Reuters / Mohamed Abd El Ghany)

Russian markets are most likely to open with slight decline after finishing in negative territory on Tuesday.

­Both Russian indices closed in the red, with the RTS dropping 0.7% and the MICEX sliding down 0.8%.

European markets finished lower as well on Tuesday, despite some good news being released. Germany posted its Zew Indicator of Economic sentiment, which came in higher than expected, and eurozone finance ministers approved the next tranche of emergency aid for Greece. The DAX is down 0.68%, France's CAC 40 is lower by 0.59% and London's FTSE 100 is lower by 0.03%.

North American stocks closed in mixed territory with the Dow Jones and the S&P gaining 0.5% and 0.4% respectively, with the NASDAQ dropping 0.1%.

Asian markets are trading low today with all the key indices in red territory. Hong Kong’s Hang Seng is down 0.2%, Japan’s Nikkei is sliding more than 1% and China’s Shanghai Composite is lower by 0.4%.

Brent crude oil is reduced to $ 112.1 this morning, after it overcame a price of $ 112.5 per barrel on the previous day’s trading. An improved macroeconomic situation in Europe, as well as expectations of growth in US oil and petroleum reserves supports the price.

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Overnight Summary: Market Fades Open-Yended Monetization

The two month wait is over and the most overtelegraphed central bank news since November 2012 finally hit the tape when the BOJ announced last night what everyone knew, namely that it would proceed with open-(y)ended asset purchases and a variety of economic targets, key of which was 2% inflation. However, the response so far has been one of certainly selling the pent up news, especially since as was further detailed, the BOJ will do virtually nothing for 12 months, except to increase the size of its existing QE (is the current episode QE 10 or 11?) by another €10 trillion for the Bills component. The USDJPY dropped as much as 170 pips lower than its overnight kneejerk highs hit just after the news.

Turning to Europe, where the EURUSD so far has been a bigger beneficiary of the BOJ action than the JPY, as apparently news of open-yended purchases are yen positive and dollar negative, a scary episode took place just around 4 am Eastern when the bottom suddenly seemed to fall out of German risk, especially financial stocks, spreading to the EUR, following a report from the Boersen Zeitung that a Bafin model was simulating a split of the largest German banks - Deutsche Bank and Landesbank Baden-Wuertenberg, due to their size relative to German GDP. Why Germany may be contemplating or even modeling a split of DB is unclear - it is likely that the biggest European bank will ever voluntarily split itself into two separate parts. Luckily fears of the scray reality were prmptly forgotten when one hour later the latest German ZEW sentiment index came out at a ridiculous print of 31.5 for January, up from 6.9, and above expectations of 12.0. Whether this is due to the official negative German GDP print, or to sliding German exports, or both, is unknown. It is also unknown how as part of the survey, the majority of the respondents said they did not believe the economy would change and only a minority see improvement, adding that if some banks gave back LTRO money that would be a sign that the crisis is not worsening. What is known is that once again, optimism and outlook is supposed to trump reality, and so it does, as the EURUSD promptly reverts back to its baseline in the mid-1.33 range, where it continues to be a drag on German and Spanish exports as reported yesterday.

And speaking of Spain, the pain for the insolvent country with the 26% unemployment, rages on following a report that in Q4 house prices fell another 9.8% from a year ago, with the Y/Y deteriorating following "only" a -9.3% drop in Q3, a -2.2% sequential drop from Q3 to Q4. Expect this too to be spun somehow.

Below is a quick post-mortem on the BOJ action from Goldman:

BoJ adopts a 2% inflation target - as expected

Today’s BoJ announcement was the most widely anticipated in a long time, as markets waited to see the steps that the BoJ would take in conjunction with the new administration’s desire to overcome deflation.

As widely flagged, the BoJ adopted a 2% inflation target. Ahead of the meeting, the Japanese media had debated the timeframe over which this target would be reached. In the event, the BoJ specified that it would pursue monetary easing and aim to “achieve this target at the earliest possible time”. However, it went on to suggest that this will take ‘a considerable time’. The BoJ’s forecasts, which were refreshed at this meeting, foresee that core CPI excluding the effects of the consumption tax hike will range between +0.5% and +1% in FY2014 (with a median estimate of 0.9%). While this is a move towards positive inflation rates, it is clearly still a long way from its new objective, underscoring that it will take a considerable time to reach inflation at 2%.

The BoJ increased its APP by JPY10trn to JPY111trn, mostly in JGBs and T-bills, and shifted to open-ended purchases (from 2014, there will be monthly purchases of JPY2trn JGBs and JPY10trn T-bills). The BoJ's announcement states that the monthly JPY2trn JGB + JPY10trn T-bill purchase will increase the APP balance by JPY10trn in 2014, and then maintain the balance thereafter from 2015. We think the Bank is committing to at least maintain the balance, with the possibility of increasing the APP program if necessary as it goes along.

By contrast, the Fed has committed to an increase of its balance sheet by USD85bn per month until certain macro conditions are met (the BoJ’s Rinban operations also increase the bank's balance sheet, but the BoJ has not chosen to ease policy by increasing the Rinban program). At this point, the Fed is continuing to ease more aggressively than the BoJ both in word and deed, and this continues to leave us sceptical about the ability of the Yen to weaken significantly further from here. Today’s BoJ announcement is likely to disappoint foreign investors who are holding relatively stretched short Yen positions, according to the IMM data. It will also be interesting to see what the Japanese investors make of today’s decision; they could be positively surprised by the decision to maintain the size of balance sheet.

The BoJ did not cut IOER, neither did it extend the maturity of bonds purchased under the APP, thus the actions taken were relatively muted considering the adoption of the 2% inflation target, but they were probably the most we could expect given limited room for manoeuvre. Ultimately, today’s announcement means that we will need to wait for the new governor to take over at the end of April and show his stripes.

The market reaction was relatively muted. The Yen is a shave stronger at 89.17, compared with the 89.50 levels ahead of the meeting, suggesting that the market was positioned for a modestly more dovish outcome. JGBs are basically flat and the Nikkei has recovered to flat after selling off slightly as the market digested the outcome. Possibly the most interesting market to watch from here is the Japanese inflation market. While this asset class is very illiquid owing to the lack of inflation-linked issuance since 2008, break-even inflation did rise steadily following the introduction of the 1% inflation goal in February 2012 and the introduction of a 2% inflation target may well push this move further after the pause since last summer. Outside of Japanese assets, the BoJ's decision has pushed the Euro stronger, but the reaction elsewhere was fairly muted.

And a complete event recap of the past 24 hours, as is customary, from DB's Jim Reid:

The two-month wait is finally over with the Bank of Japan announcing overnight that it will formally adopt a 2% inflation target and introduce anopen-ended asset purchase program starting from January 2014, after the current purchase program has concluded. In a 12-page announcement, the BoJ said monthly asset purchases will be targeted at 13trn yen from January 2014, consisting of 2trn in JGB purchases and 10trn in t-bills purchases. As a result of these measures, the total size of the asset purchase program will be increased by 10trn yen in 2014 after accounting for maturities.

The announcement also included a highly-anticipated joint statement from the Government and BoJ in which both parties agreed to strengthen policy coordination and work together to “overcome deflation early”. The joint statement also says that the BoJ will pursue monetary easing to achieve the inflation target at the “earliest possible time”. Meanwhile, the government will “promote measures aimed at establishing a sustainable fiscal structure” and formulate measures for “strengthening competitiveness” such as “concentrating resources on innovative research and development, and carrying out bold regulatory and institutional reforms”. As was expected, the overnight call rate was left unchanged at zero to 0.1%. Board members voted to adopt the above measures with a 7-2 majority vote.

In terms of the market reaction, the Nikkei and USDJPY went into the BoJ announcement trading 0.7% and 0.5% higher respectively, steered by widespread pre-empting of the new measures from domestic media in the hours prior to the formal BoJ announcement. Perhaps in a case of “sell the fact”, the Nikkei and USDJPY have more than retraced those moves and are now are sitting on losses of 0.40% and 0.45% for the day respectively. Across other assets, 10yr JGB yields are unchanged on the day after having been 2bp higher prior to the BoJ announcement, the TOPIX is down 0.7% (or a -0.9% move lower post-BoJ) and S&P futures have pared earlier gains to trade 0.2% higher overnight.

Outside of Japan, most Asian equities are trading marginally firmer overnight although earlier gains have been pared. The Hang Seng, ASX200 and KOSPI are 0.15%, +0.03% and 0.3% higher on the day respectively. Responding to the recent appreciation of the KRW against the USD and JPY,  South Korea’s finance minister said that the government would increase support for exporters, citing that gains in the won were causing damage to companies such as automakers.

Returning to yesterday’s session, the EuroStoxx 600 finished with a gain of 0.26% bringing it to just a few points shy of its four-year high of 291. With US markets closed for Martin Luther King Day, there was little news flow or volume to move markets in either direction. In the US, House Republican leaders have scheduled a vote on a near-four-month extension of the debt ceiling for this Wednesday.

In an interesting twist, the House bill is not expected to specify a hard dollar increase in the debt ceiling, but will instead suspend (rather than lift) the debt ceiling until May 19th, after which the debt limit will be automatically increased from $16.4trn to accommodate whatever additional borrowing the Treasury had done during that time frame. According to the Hill, the bill was designed to allow Republicans to avoid having to vote on a specific dollar increase in the debt ceiling that could be used against them in later election campaigns (The Hill).

Elsewhere in Washington, Obama’s inauguration contained no major surprises from a markets point of view, but the President outlined pledges to preserve health-care programs, pressed for gun controls and an overhaul of the tax code (WSJ).

Turning to Europe now and the first Eurogroup meeting of 2013 concluded with Dutch finance minister Jeroen Dijsselbloem confirmed as the new President of the Eurogroup. Other items on the agenda last night included direct ESM bank recaps, to which there appeared to continued disagreement on the treatment of “legacy assets”, and Cyprus where a decision on a bailout has been pushed back to at least March. The Eurogroup did manage to agree on one thing though, authorising the next EUR9.2bn bailout disbursement to Greece. The payment will be broken into a EUR7.2bn for bank recaps and a EUR2bn for government budget needs.

In other headlines, Spain is reportedly planning to issue a new 10yr bond in the next week which would be the first benchmark 10 year bond issue since November 2011. The news perhaps explained some of the weakness in Spanish yields yesterday with the 10yr yield closing 8.5bp higher at 5.163%.

Turning to the day ahead, the highlights on the data front are Germany’s ZEW survey for January and existing home sales in the US. Eurozone finance ministers reconvene today for the ECOFIN meeting in Brussels. On the earnings docket, Unilever will be reporting annual results this morning London time. In the US, Johnson & Johnson and Texas Instruments report before the opening bell while Google and IBM report after the close.

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The One Chart That Explains the Massive Risk of Investing in Gold & Gold...

chart of S&P performance v. gold & gold stocks from 2001 to 2012

Viewing the chart above, a six-year old child could tell you that investing in physical gold and gold mining stocks (as indicated by the AMEX HUI gold bugs index) yielded returns from 2001 to 2012 far superior to the returns of the US S&P 500 Index over the same time period. In fact, the truth of this statement is so self-evident, that if this same child was asked what asset classes he should have been invested in over the past decade by viewing the above chart, the simplicity of that question might lead him to think that one is asking a trick question. So why is it that all the leading Wall Street investment firms stated during the visible onset of the global financial crisis in 2008 (versus the real onset of the global financial crisis quite a few years earlier) that gold was one of the riskiest assets in which one could possibly invest? The simple answer, of course, is that if they were the ones involved in the scam to take gold and silver prices down, then certainly they would not tell you that the steep, rapid (but short-lived) drop in gold/silver prices was a massive buying opportunity. However, if a six-year old can see what is so obvious, then why should a man of Warren Buffet’s prominence continue to slander gold and why does his right-hand man, Charlie Munger, make idiotic statements like “gold is a great thing to sew in your garments if you’re a Jewish family in 1939” but not to own, instead of just stating the truth that “physical gold (and physical silver) was one of the best assets to build wealth since 2001”? And if a six-year old can look at the above chart and immediately know that he or she should have beeen invested in gold and gold assets, why, according to the World Gold Council, is still only 1%, or $146 billion of the $146 trillion investable global assets, invested in gold, and 9.1% invested in money markets, 48.7% in fixed income, 37.2% in equities and 4.0% in alternative investments? (though these most recent statistics are from the end of 2010, it is doubtful that these statistics have changed much in the past two years.)

One of the main reasons why it is still likely that only 1% of all global invested assets are invested in gold is the psychological hatchet job that Wall Street and the global banking industry has performed on gold and gold stocks. For decades, bankers have repeated their false mantra that “gold and silver are incredibly risky”, using the strategy that if you tell a lie often enough, it may just be accepted as truth by the masses. The fact that millions of investors today still won’t even consider buying the top performing asset classes for more than the past decade (physical gold and physical silver, NOT the GLD and SLV), serves as testimony to the success of the bankers’ anti-gold, anti-silver propaganda campaign. Thus, the reason why just a piddling amount of investors around the world have allocated a substantial amount of their resources to gold, silver and PM stocks as of today is due to, quite simply, investor psychology. The commercial banking industry spends billions of dollars every year in marketing campaigns (exclusive of their investor relations budget), influencing and shaping investors’ beliefs into accepting a heaping pile of false beliefs. For example, according to Forbes Magazine, Bank of America spent $2 billion and Citigroup spent $1.6 billion in 2010 marketing expenses, and the biggest banks spent even far more for their annual advertising budget in recent years. As a result, bankers have been able to convince their clients that what is right for them (physical gold, silver and PM stocks) is wrong, and what is wrong for them (investing in global developed stock markets) is right.

Why else would anyone stay invested in the US S&P 500, an index, that from 2001 to the start of 2012, was still in the red (not even accounting for the effects of inflation), but for one’s blind obedience to one’s investment adviser that sells his clients on that moronic 100-year chart of US stock returns that shows an upward progression of US stocks over an entirely irrelevant 100-year period, and keeps telling his clients to be patient, because the “US market, in the long-run, has always returned a phenomenal yield”? So here is how investment advisers, all over the world, convince their clients to ignore a chart, that in plain sight, tells them that being invested in gold & gold stocks (and silver & silver stocks) for the last 12 years over any of the developed broad stock market indexes in the world was clearly the unequivocal correct decision.

Below are the four methods global investment bank investment advisers employ to convince their clients to keep doing what is best for himself and his firm (earning the firm management fees) and what is worst for themselves (degrading their investment portfolios and wealth):

(1) Frame stock market and PM stock volatility in a biased, skewed and unforthcoming manner that sells their mission while ignoring reality.

For example, when the S&P 500 index crashed, US investment advisers used the bounce from 666.79 in March, 2009 to a high of 1219.80 in April, 2010 to falsely promote the “soundness” of the US stock market like ravenous hyenas that had stumbled upon an abandoned lion kill. In other words, they ignored the “bad” volatility of a 57.69% crash to take the S&P500 down to 666.79 level and repeatedly promoted the fact that the 82.94% increase in the S&P500 was “one of the best in history” over and over and over again on television, radio and newspapers, even though the S&P 500 has still failed to regain its previous high of 1576.09 prior to the crash in October of 2007. Furthermore, though gold stocks had crashed too during this time, all global bank advisers absolutely ignored the much more significant 343% increase of the HUI gold mining index between October 24, 2008 from 150.27 to a high of 516.16 on December 2, 2009. Forget that over this same time period, gold stocks outperformed the US S&P 500 index by 313%. How many people knew that gold stocks rose 343% during this time? Probably less than 1% of all investors. The focus of global investment advisers is to bury statistics like this that compete with their precious legalized casinos called stock markets and to keep their clients invested in their legalized casinos that are stacked against their clients even when far better opportunities exist.

(2) Frame performance in a manner that again sells only their desire to keep their clients invested in global stock markets and keeps the management fees rolling in.

For example, there have been tons of articles written over the last 3-years that have titles like “What’s Wrong With Gold and Gold Stocks?” and “Why You Should Not Invest in Gold or Gold Stocks”. Commercial investment advisers are amazingly keen to talk about holding on to stocks for a long period of time because they state that one can’t judge performance over a 2-3 year period when stocks are not performing. Yet when broad stock markets go through flat periods, as the US stock market has been trapped in a 12-year period now with virtually no gains, you will never ever, not once in a blue moon, not in a million years, see a blizzard of articles shouting, “What’s Wrong With the US Stock Market!" Yet, bankers ensure that the mass media is flooded with articles about flat or poor performance of gold and silver stocks during the past three years to keep their clients away from PM stocks and they harp incessantly about this matter while completely ignoring multi-year trends in gold and silver mining stocks and keeping this information buried as well. So let’s look at both asset classes and compare performance over a reasonable 12-year investment period, not the ridiculous 100-year chart investment advisers are so keen to use. If one looks at a reasonable 12-year period between 2001 and 2013, the S&P 500 has not even returned a piddling 9% during this period, while gold has returned a whopping +524.77% (silver also returned a phenomenal yield over this same period as well). And what about gold stocks even when including the very flat last three years of performance? An almost unfathomable +1009.86% return when compared to the US S&P 500’s anemic return of 8% and change.

(3) Sell rubbish diversification strategies as “expert” advice when it is the worst advice in the world.

A great many people are afraid to concentrate their assets in gold and silver, among the best performing assets of the last 12 years, because for decades, the commercial investment industry has pounded into their brains that anything but diversification when it comes to investing is unsafe, unsound and risky. Yet diversification is a rubbish strategy used by all commercial investment advisers precisely because they lack the expertise and knowledge to know how to concentrate a portfolio properly without excessive amounts of risk. If you have the expertise, you can utilize concentration without increasing the risk of a portfolio. That’s why for years, we’ve been advocating our clients to invest very substantial amounts of their portfolio into physical gold and physical silver because frankly, despite the notorious volatility of gold and silver, we just didn’t consider gold and silver risky when they were respectively $560 a troy ounce and $9 a troy ounce. In fact, every year for the past 12 years, gold and silver has fallen, at some point during each year, to price ranges that marked solid entry prices that were low-risk, high-reward. The artificial banker-created volatility through manipulation of gold and silver prices ensured this.

A recent study by Nobel Laureate Daniel Kahneman tracked a group of 25 wealth advisers/portfolio managers and the variance of their portfolio yields over an 8-year period. At the end of his study, Kahneman stated that he was “shocked” to discover almost no variance in the portfolio performance over the group of managers, simply because he believed that portfolio management was a task that depended upon skill and expertise. Consequently, Kahneman expected wide-variance among the managers as far as performance yields over an 8-year period were concerned. Instead, he discovered that the variances among the performance yields suggested that portfolio management was not a skilled job but one that nearly entirely revolved around blind luck. My first reaction to Kahneman’s study was that he should have started his study by sitting in an office of Goldman Sachs or JP Morgan for 3-months and he would have learned within 3-months what it took him 8-years to conclude - that Portfolio Managers have no skill and that they all use the terrible strategy of diversification to cover up their severe skill deficiencies rather than diversification being a strategy that allows them to demonstrate their skill. How many US clients were protected by the strategy of diversification in 2008 when US markets collapsed by 38.50%? By the anecdotal information I gathered, all my contacts at the big US global investment firms told me that nearly all their clients were down the same 35% to 40% that year as the S&P 500 Index. Therefore, diversification did nothing but assure that nearly all clients suffered the same uniform losses as the major global developed indexes that year. In fact, diversification is a protective strategy embraced by the global investment industry as insurance against "client flight". In other words, if all client portfolios show remarkably similar losses across multiple commerical investment firms during poor years of stock performance, the risk of client flight is small.

On the contrary, we at SmartKnowledgeU, have always taken the strategy of concentration over diversification, and in 2008, though it was a nominal gain, we still managed to yield nominal positive returns in our newsletter investment portfolio despite massive losses in all developed global stock markets. Massive outperformance can, and often, will be the result when skill and expertise, instead of luck, is applied to investment strategies. If concentration is so dangerous, and if diversification is a far superior strategy as nearly all investment advisers claim, then it may be possible for one fluke year to occur. But it is near impossible for five fluke years to occur. However, we at SmartKnowledgeU have been concentrating our Crisis Investment Opportunities portfolio since mid-2007 when we first launched, every year now for more than five years. Over that 5-&frac12; year period, we’ve outperformed the S&P 500 by +161.95% and even outperformed the HUI gold bugs index by +120.80% due to the strategies we use to take advantage of the banker-induced volatilty in gold and silver markets. So much for diversification and buy & hold being wise investment strategies.

(4) Sell “volatility” as “dangerous & risky” even though this simply is not true.

The reason some of you may be shocked by the chart I’ve presented above is not only due to the tactics of #1 to #3 employed by the global investment industry, but also because of one additional key factor. Many of you may think that gold & gold stocks are way more volatile than my chart above shows, and you would be correct. I’ve only plotted the beginning price level of each asset above at the beginning of each year to smooth out all the interim volatility, so that everyone can clearly see the trends of each asset, even in the notoriously volatile gold (& silver) mining stocks. The reason I’ve stripped out the volatility in the above chart is because anyone that has studied the price behavior of gold & silver assets knows that Central Banks and bullion banks deliberately introduce volatility into gold & silver assets to intimidate gold & silver newbie investors into terrible decisions of selling all their gold & silver assets, or to scare off potentially new gold & silver buyers from ever buying. Though a commercial investment adviser would never tell you this secret, the evidence of this is overwhelming and since I’ve blogged many times about this very topic over the past 7 years, I’m not going to go into detail about the mechanisms by which the banking industry deliberately creates volatile prices in gold and silver assets in this article. However, since the banking industry has already sold the masses of the very false mantra that “volatility = risk”, by artificially and deliberately causing short-term volatility every year in gold and silver assets, commercial investment advisers can show their clients charts of gold, silver and mining stocks with all intra-day, intra-month or intra-year volatility, and keep convincing their clients that gold and silver are the riskiest assets in the entire investment universe while convincing them that broad stock market indexes are the safest arenas in which to invest, when indeed, the exact opposite has been true for 12 years, and will likely be true for the next decade as well.

Sure, one has to understand how and why the bankers create volatility in gold and silver assets to ensure that one enters these assets at low-risk, high-reward price points instead of high-risk, low-reward price points in order to be successful, but anyone that has studied gold and silver price behavior and understands how bankers manipulate gold and silver prices should now have the expertise to do provide this guidance. If one doesn't understand what drives gold and silver prices and one enters at a high-risk, low-reward entry price, then certainly, one could have been taken to the cleaners after banker conducted raids against gold and silver executed in the paper markets, despite what the above chart illustrates. In addition, bankers also attempt to keep people out of buying physical gold and silver and PM mining stocks by painting charts to drive and intensify fear of gold and silver collapses during their multiple, annual banker raids on gold and silver prices. Every year, after there is intense short-term volatility in gold & silver in the form of a 3-5% drop in gold and/or silver in just a couple days, more than a handful of technical chartists will come out of the woodwork to predict massive collapses of silver and gold. Last year, when these situations occurred, more than a few chartists unnecessarily stoked fires of panic by predicting imminent collapses of silver to $20 an ounce and gold back to $1200 an ounce (or even lower). And every year, these predicted collapses of a gold “bubble” and silver “bubble” never materialize. But these false predictions gain enough publicity to keep many too scared from buying their first ounce of physical gold, physical silver or their first PM mining stock. Again, remember that bankers deliberately paint these gold and silver charts to give the appearance of an imminent collapse in prices even though the underlying, undiscussed fundamentals of the physical bullion world often directly contradict the price action of gold and silver during banker-executed raids on the PMs. This is why I have maintained for many years that technical analysis in gold and silver (and even in the highly rigged stock markets) is quite useless if conducted in a vacuum. However, if one uses technical analysis in conjunction with analyzing the underlying fraudulent mechanisms of what is causing great volatility in gold & silver markets, then one is much more likely to accurately assess these rapid declines in gold and silver price as buying opportunities as opposed to fostering clients to panic sell their PMs like fleeing lemmings off a cliff's edge.

As Nobel Laureate Daniel Kahneman recently discovered, and as we’ve been stating at SmartKnowledgeU for nearly a decade now, the entire financial industry is built upon deception and rigging of markets. Their entire existence as ongoing, viable entities is based upon the creation and maintenance of an illusion among all their clients that they know what they are doing even though they do not, and even though they have recommended the same course of action for the past 12-years that has greatly failed. As long as the commercial investment industry can keep this illusion going, they can keep convincing their clients that gold and gold stocks (as well as silver) are the riskiest investments ever and simultaneously prevent their clients from realizing the simple truth self-evident in my one chart above and escaping the inertia of their poor advice.

Furthermore, since the conditions that launched this present gold & silver bull are even stronger and more favorable today than at the start of this PM bull, the reasons to be invested in gold (silver) and gold stocks (& silver stocks) are even stronger today than they were 12 years ago. In conclusion, ignore the simplicity of the above chart at grave risk to your own future financial health and security.

About the author: JS Kim is the Founder & Managing Director of SmartKnowledgeU, a fiercely independent investment research & consulting firm with a mission of education and helping Main Street beat the corruption of Wall Street. SmartKnowledgeU was the first company in the west to move to a gold standard of pricing, a pricing mechanism to which the firm has remained firmly committed, even when gold prices have been moved lower by bankers as in recent times. Currently, we are offering a 5% to 10% discount on all SmartKnowledgeU services until the end of January only, a discount that when combined with our significant discount in prices due to current lower gold prices, will almost assuredly mark our lowest prices of the year for 2013. Follow us on twitter @smartknowledgeu.

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Market Buzz: High Zews is good news

RIA Novosti / Ruslan Krivobok

RIA Novosti / Ruslan Krivobok

Russian indices are expected to open in the black on Tuesday following a day of slight decline in trading. On Monday the MICEX lost 0.19% and the RTS dropped 0.21%.

­European stocks, to the contrary, showed positive dynamics on Monday with shares in Germany leading the region. The DAX was up 0.61%, France's CAC 40 gained 0.57% and London's FTSE 100 rose by 0.43%.

Asian markets are mixed and mainly in negative territory Tuesday. The Hang Seng is up 0.21%, while the Nikkei 225 and the Shanghai are down 0.56% and 0.13% respectively.

Oil indices show mild growth, with Brent gaining 0.20% and Light 0.01%.

“Given the European stocks finishing positively and the dynamics of oil indices, the Russian stock exchange might open in the black, but further trading will much depend on macroeconomic data report and general news background,” Yulia Voytovich from Investcafe says.

Tuesday is set to be particularly interesting in terms of macroeconomic data reports. The UK government’s net borrowings in December are expected to be published, predicted to be lower than in November and stand at 13.4 billion pounds.

The Zew Indicator of Economic sentiment is due to be posted on Tuesday. The forecast stands at 12.2 points and if the index goes higher this may see a positive reflection in world markets.

American bourses were closed on Monday due to a public holiday.

Market Update: “Logic Has Been Replaced by Fear, By Panic”

Diversification during times of uncertainty and instability means different things to different people. For most of us looking to keep our eggs in different baskets, hard asset are a primary investment vehicle. As more dollars are printed by our central bank and more debt is borrowed to cover our government’s expenditures, there’s one thing we can be sure off: prices for essential resources are going up.

As our paper currencies lose value against the things that really matter, and the political situation takes a turn for the worse through more domestic taxation and regulation, it becomes difficult to discern where we can ‘park’ our money to keep it safe.

For many preparedness-minded individuals the survival instinct kicks in and the first thing we do is stock up on the essentials which will either disappear at the first signs of emergency or rise in value as crisis grips the world. That means things like food, precious metals, firearms, farmland and other important supplies and resources that will matter when the system as we know it comes unhinged. This is a prudent strategy to be sure, and those who invested in such assets before the 2008 financial crisis have seen positive investment gains employing it – not to mention the security of knowing you have a backup should things spiral out of control.

And, while it’s prudent to plan for the worst and have direct access to physical assets and commodities, an equally important consideration is how to properly diversify the funds we hold in our money market accounts, cash savings, 401k’s or IRA retirement accounts. Millions of Americans have their life savings in these types of accounts, and most of them are depending on a stable and fair ‘free market’ to keep that money safe.

But, as Casey Research Chief Strategist Marin Katusa notes, we’re not exactly operating in a free market, or a stable environment, for that matter:

That is exactly the market we are in right now, where people are scared. Where people are selling on emotion. Where the logic has been replaced by fear, by panic.

Emotion is leading the market, and that’s where the level-headed logical buyer is going to make a fortune in the years coming by basing their investments on a fundamental 8 P’s principle - on people.

For those looking to expand their portfolios and diversify their assets in ways your financial adviser doesn’t even have a clue exist, listen to the complete interview from Future Money Trends and Marin Katusa, who discusses strategies for investing in physical precious metals, international precious metals exploration and mining, energy resources and other non-traditional investment vehicles.

When we talk about worst-case-scenario diversification, we need to look at investment opportunities in a different light, often counter to traditional expert analysis. Long known for their ability to foresee crisis situations, Doug Casey and his team, which includes Marin Katusa who manages the firm’s KCR Fund, have been guiding investors for decades and were well ahead of the curve during the first stage of the global collapse we experienced over the last decade. They, like many of those who understand what’s coming our way, have been investing heavily into resources like physical commodities, precious metals, technology and land, much of it internationally to escape the draconian intervention of the U.S. government.

In the coming years we will see strife and financial destruction unlike anything in history. But during times of panic and fear, certain assets will always come out ahead.

I really believe by the end of 2013 we will see [gold] touch and cross $2000 [per ounce]. It may come back, and then settle back again.

You’ll see this is a huge psychological barrier.

And I think that the mainstream media, that the mainstream retail investors, until it breaks that $2000 it won’t attract that mass media attention. But I think 2013 is a critical year.

Look what’s going on with the fiscal cliff. Look what’s going on in Europe. Look at Asia, India, all these places.

And, gold is the real currency.

As Doug Casey recently noted, “we are living in the middle of the biggest bubble in history.”

This means we need to be looking at ways to shield ourselves and our assets from a complete collapse of the system as we have come to know it.

Market Buzz: A rather laid-back Monday

No sudden moves are expected today on the markets as investors worldwide will mainly focus on general news background.

­Russian markets are expected to open in the red despite having closed in positive territory on Friday. Two key Russian indices finished in the green, with the RTS gaining 1.14% and the MICEX up 1.10%.

Asian markets are higher today as Chinese and Hong Kong shares show gains. The Shanghai Composite is up 0.23% and the Hang Seng rose 0.01%. The Nikkei 225 is closed for a holiday.

Oil prices slid on Monday, with Brent losing 0.27% and Light down 0.34%.

“Weak dynamics in Asian markets and a decline in world oil prices traditionally affect Russian stock exchanges, so I expect Russian indices to open with losse,” Yulia Voytovich of Investcafe explained.

However, European markets traded mixed. The FTSE 100 gained 0.36%, while the DAX dropped 0.43% and the CAC 40 lost 0.07%.

North and South American stocks also failed to show positive dynamics, but managed to finish mainly in green. The Dow Jones and the S&P 500 gained 0.39% and 0.34%, respectively, while the NASDAQ slid 0.04%.

“Today will not bring much in macroeconomic statistics, so no sudden moves on the markets are expected. Investors worldwide will mainly focus on general news background,” Voytovich said.

What Was The Fed Thinking The Last Time Stocks Were Here?

Sometimes it is useful to reflect back more than a nanosecond to check one's anchoring bias. With US equities back at 2007 levels, we thought it may be instructive to look at what the Fed was thinking - and what the FOMC was looking at - to be better able to judge their 'forecasts' now. To wit Q4 2007, FOMC... "Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance." The reflexivity of the use of market-based measures to preempt their actions is very clear from the presentation materials, as, just like now, there was falling current year EPS expectations but a phoenix-like resurrection due in 2008 based on analyst's expectations. Furthermore, the expectations for rate changes from Q4 2007 to Q4 2008 was remarkably modest (even as they had all the data on subprime delinquencies soaring and monolines collapsing) - and of course, turned out to be absolutely and utterly incorrect. And yet, we listen intently to every forecast word they utter?

From Oct 2007 FOMC:

"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."

From Mr. Dudley's Presentation Materials at the December FOMC:
Earnings are down but have no fear - they will rise again next year..

And the market is not expecting rate cuts so things can't be that bad - or the efficient market would have priced it in?

And then finally, the 3 versions of the December 2007 FOMC statement - where the Fed seems to congratulate itself on noticing the weakness, and the proclaims that its actions will save the day (even though there are some 'downside risks'.

Remind us again, why we pay any attention to the forecasts of this motley crew?

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Market Buzz: Small gains expected worldwide as positive signs emerge

Traders work on the floor of the New York Stock Exchange (NYSE) in New York.(AFP Photo / Stephen Chernin)

Traders work on the floor of the New York Stock Exchange (NYSE) in New York.(AFP Photo / Stephen Chernin)

Russian indices are expected to make slight gains on Friday after macroeconomic data from the US and China inspired investors the previous day.

­

“[The] Friday trading session in Russia is most likely to show a mild growth. Given positive dynamics in Asian floors and a close of US trading in the ‘green zone,’ one could expect Russian markets to open in the black, with falling oil prices still pressing the indices,” Darya Pichugina of Investcafe wrote in an email.

On Thursday, both key Russian indices finished trading in positive territory. The RTS rose 0.91% to 1,585.44 and the MICEX was up 0.59% to 1,523.74. This upbeat sentiment came mostly on the back of positive statistics from the US, Pichugina added.

Despite the upbeat macroeconomic data from China and the US, as well the military conflict currently raging in north Africa, oil prices are declining: Brent lost 0.14% and the WTI dropped 0.32%, Pichugina said.

China reported better-than-expected economic growth for Q4 2012, with its GDP rising 7.9% during the period compared to a 7.4% growth in the previous quarter.

The number of new homes being built in the US in December rose sharply, according to official figures. Investors were also cheered by good news in the job market, where first-time claims for unemployment benefits fell to a five-year low last week. The declining number of unemployment claims sowed hopes that the world’s largest economy is gaining traction, CNN Money reported, quoting Chief Market Strategist Doug Roberts of Channel Capital Research.

Corporate earnings in the US offered a mixed picture, with Bank of America posting quarterly earnings slightly better that analysts had expected, while Citigroup fell short of expectations.

Asian markets have generally risen today, with Japanese shares leading the region. The Nikkei 225 is up 2.46%, while Hong Kong's Hang Seng added 0.75% and China's Shanghai Composite went up 0.56%.

The Dow Jones, the S&P 500 and the Nasdaq all rose more than 0.6%, with the S&P 500 closing at a five-year high.

European markets finished higher on Thursday with shares in France leading the region. The CAC 40 is up 0.96%, while Germany's DAX is up 0.58% and London's FTSE 100 is up 0.46%.

Market Buzz: Protracted uncertainty prevails

AFP Photo / Yoshikazu Tsuno

AFP Photo / Yoshikazu Tsuno

Global floors remain sluggish as traders register disappointment with the World Bank’s forecast of weaker-than-expected economic growth in 2013, and as US debt ceiling negotiations draw nearer.

Russian indices are expected to produce another day of slow trading on Thursday, as uncertainty prevails on international floors, according to Darya Pichugina of Investcafe. Russian stocks traded mixed Wednesday, with the RTS declining 0.34% to 1,571.15, and the MICEX rising 0.12% to 1,516.67.

Asian floors also began Thursday trading with mixed sentiments: The Nikkei has gained 0.15% and the Shanghai Composite has gone down 0.78%, Pichugina added.

The debate over the US debt ceiling is heating up as Washington is expected to reach its borrowing limit in February. Should the country fail to resolve the issue, the world’s largest economy could default, Fed chief Ben Bernanke and US Treasury Secretary Timothy Geithner have warned.

The debt ceiling is expected to dominate investor attention after the reporting period in the US concludes, J.J. Kinahan, chief derivatives strategist at TD Ameritrade, told CNN Money.

"We may have a bit of a pause after earnings season ends and we head into debt ceiling negotiations," Kinahan said. "That's when you might see people start to hold back. For now, people are trading earnings as if it's a normal market."

The World Bank report was another point of concern for investors, as the Washington-based bank projected that the world economy would expand 2.4% in 2013, down from a June forecast of 3%, after growing 2.3% in 2012. The lowered expectations are due largely to austerity measures, high unemployment and low business confidence weighing down economies in developed nations, the World Bank said.

“Doubts have been growing that the strength in equities can be sustained as fears of the outlook for the global economy re-emerged after the World Bank downgraded its forecast for global GDP leading to some investors banking recent profits,” Angus Campbell, Head of Market Analysis at Capital Spreads, wrote in an email.

On Wall Street, the Dow Jones fell 0.2% on Wednesday, with Boeing leading the decline. The S&P 500 closed almost flat, while the Nasdaq gained 0.2%. Boeing shares fell 3.4% as its ‘Dreamliner’ jet continued to disappoint. Two Japanese airlines grounded their fleets of the 787 aircraft after one of All Nippon Airways' Dreamliners had to make an emergency landing.

European markets traded mixed as of the most recent closing prices. The CAC 40 gained 0.30% and the DAX rose 0.20%, while the FTSE 100 lost 0.22%.


Market Buzz: No major moves as world awaits US corporate earnings reports

AFP Photo / Stephen Chernin

AFP Photo / Stephen Chernin

Global investors are expected to hold off on major action until corporate reports from the US give an indication of the state of the world’s largest economy. Uncertainty around the US debt ceiling has added to an overall market malaise.

“In the near future they expect quarterly reports of American banks to be released, with their success now likely to become the only notable growth stimulus. And so far a Russian market seems to freeze up pending developments on global floors,” Liliya Brueva of Investcafe wrote in an email to RT.

Russian stocks closed mixed after Tuesday’s session: The RTS lost 0.86% to end at 1,576.54, and the MICEX climbed 0.11% to 1,516.92.

International investors generally held off on big moves until a clearer picture emerges of US corporate profits. Goldman Sachs and JPMorgan Chase will report their results Wednesday, while Intel, Bank of America and General Electric are due later in the week.

The unresolved issue of raising the US debt ceiling is another source of investor uncertainty. Fed chief Ben Bernanke and US Treasury Secretary Timothy Geithner offered sharp commentaries on the issue; Geithner argued that unless the debt ceiling is raised, the US may default on its debts as early as the end of February, Brueva said.

“If you thought the US fiscal cliff worries were over think again, as markets were shrouded in more uncertainty about the outcome of future negotiations in respect of the US debt ceiling,” said Angus Campbell, head of market analysis at Capital Spreads.

The Dow Jones Industrial Average and S&P 500 closed up between 0.1% and 0.2% on Tuesday. The Nasdaq dipped 0.2%.

Asian markets also traded mixed: Japan's Nikkei advanced 0.7% after being closed Monday for a holiday, the Shanghai Composite added 0.6% and the Hang Seng declined 0.1%.

European markets finished mixed as of the most recent closing prices. The FTSE 100 gained 0.15%, while the DAX led the CAC 40 lower, falling 0.69% and 0.29% respectively.

Scratchy investment: Cat trumps finance gurus at stock-picking

Want to increase your investment portfolio? Better ask your cat than a professional stockbroking team, the Observer's share portfolio challenge has revealed.

­The challenge pitted professionals Justin Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick & Co, and Schroders fund manager Andy Brough against students from John Warner School in Hoddesdon, Hertfordshire. The third contestant group had only one member – a ginger feline named Orlando, the Guardian reported.

Each team was allowed to invest a notional $8,000 in any five companies from the FTSE All-Share index at the beginning of 2012. Every three months they could exchange their stocks, replacing them with others from the index.

While the professionals used their investment experience and traditional stock-picking methods, Orlando’s selections were guided by him pushing his favorite toy mouse over a grid of numbers associated with different companies.

By the end of September, the professionals had generated $802 of profit compared to the $471 earned by Orlando. However, fortunes changed in the fourth quarter: Lucky investment choices saw the cat increase its portfolio by an average of 4.2 percent to finish at year’s-end with $8,946, compared to the professionals' $8,355.

All but one of Orlando's stocks made gains during the last three months of the year, including Filtrona, which Orlando had hastily swapped for the underperforming Scottish American Investment Trust in September, the Guardian reported.

The professionals declined to swap out any stocks at the end of the third quarter, and later were poorer for it. British Gas and Imagination Technologies dragged their portfolio down by an average 7.1 percent, with British Gas sinking by 19 percent and Imagination Technologies falling 16.8 percent. At the same time, the students performed best in the final quarter, increasing their portfolio by an average of 5.4 percent, though they finished in last place. 

The stock market is notoriously difficult to predict, and the results of the challenge show that the random selection of stocks used as a strategy by Orlando could give even better results than professional skills and knowledge. The ‘random walk hypothesis’ was popularized by economist Burton Malkiel; it claims that share prices move completely at random, making stock markets entirely unpredictable. It may be wise to ask your cat for investment advice after all!

Market Buzz: Apple and the Fed in the limelight

Traders work on the floor of the New York Stock Exchange (NYSE) in New York.(AFP Photo / Stephen Chernin)

Traders work on the floor of the New York Stock Exchange (NYSE) in New York.(AFP Photo / Stephen Chernin)

Russian markets are expected to react sharply to comments by US Federal Reserve Chair Ben Bernanke, while gains in China are likely to boost indices.

­Russian indices moved higher Monday, supported by strong corporate results in the retail and resource sectors. The MICEX and the RTS both jumped 1.2%.

European stock markets closed in the red Monday as investors awaited a speech by US Fed Chief Ben Bernanke on the country’s monetary policy. The Stoxx Europe 600 fell 0.4% and the German DAX 30 rose 0.2%, led by gains of chemicals group BASF SE. The French CAC 40 rose 0.1%, supported by banking.

US stocks closed mostly lower on Monday after Apple announced a cut in iPhone production. Bernanke’s pledge that the Fed’s easing policy has a low risk of inflation also failed to cheer investors. The Dow Jones itched 0.1%, the S&P 500 shed less than 0.1% and the Nasdaq Composite lost 0.3%. Shares of Apple fell 3.6% in a $17bn selloff after the WSJ reported that LCD panel producers cut output for Apple amid slower-than-expected global sales of the iPhone 5.

Asian stocks traded mixed Tuesday, supported by Japanese gains on the weaker yen; losses by Apple also hit the tech sector. Japan’s Nikkei rose 0.7% to its highest level since the end of April 2010. Hong Kong’s Hang Seng Index shed 0.3% and the Shanghai Composite added 0.4%, extending gains on speculation that mainland China would open stock markets to foreign investors. Australia’s S&P/ASX 200 declined 0.3%, and South Korea’s Kospi shed 0.9%.

Chinese Officials Hint at Easier Access to Mainland Markets

The Chairman of China Securities Regulatory Commission (similar to the US SEC) said that China can increase by 10-fold the size of the two main channels by which foreign investors buy mainland financial assets.   

It can, Guo Shuqing said, increase quotas under the Qualified Foreign Institutional Investors and the Renminbi Qualified Foreign Institutional Investors.  The latter would make it easier for the yuan in Hong Kong (CNH) to be used to purchase Chinese securities.    

This hint helped lift China shares by over 3%, their largest gain in a month.  The Shanghai Composite's 3% rise brings the gain to 19% off the multi-year low near 1949 (the year of China's Revolution) in early December. 

China has gradually eased some capital market access rules.  At the end of last year, China removed a ceiling on sovereign wealth funds and central banks ownership of Chinese securities.  It also indicated it will launch an experimental program that would make it easier for some to buy foreign stocks and bonds.

Separately, China State Administration of Foreign Exchange (SAFE) indicated that it establish a new office that will channel some of the more than $3.3 trillion of reserves into supporting Chinese companies foreign direct investment.  Data suggest Chinese companies are rapidly expanding their overseas presence.  Direct investment rose by a quarter in the Jan-Nov 2012 period.

These developments say nothing about the near term direction of the yuan. The dollar fell about 3% against the yuan in the second half of 2012 and has since consolidated mostly between CNY6.21 and CNY6.24, with a brief and shallow push through CNY6.25 in mid-December.  We suspect, if risk comes off, the dollar can recover to re-test those mid-December highs.

Some observers have suggested that through the yen's depreciation, it will export inflation to China.  The higher inflation would be a reason that officials will angle for a stronger yuan.                                        

We are skeptical.  The main factor behind the recent jump in Chinese inflation was vegetables and pork and is clearly more weather than currency related.  Japan has not inflation to export.  The persistence of deflation is one of the drivers behind the LDP push for a weaker yen.

The macro-economic consideration of a weaker yen is about competitiveness. Just as Chinese officials do not want to see the US dollar decline, they do not want their regional rival (Chinese and Japanese fighter jets were shadowing each other in the region of the disputed islands) to gain a competitive advantage by depreciating the yen.

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Market Buzz: Results season sows hope

Traders work on the floor of the New York Stock Exchange.(AFP Photo / Spencer Platt)

Traders work on the floor of the New York Stock Exchange.(AFP Photo / Spencer Platt)

Corporate results – both Russian and foreign – will be have a major impact on markets on Monday. Economic data from overseas will add to the trading mix, analysts say.

In corporate Russia, coal miner Raspadskaya and Uralkali, the world’s largest potash producer, are set to produce their 4Q 2012 operational results. Both companies suffered from lower prices for their produce in the previous periods.

On Wall Street, the Bank of America, JPMorgan Chase, Citigroup , Goldman Sachsand Morgan Stanley are all on tap to report this week, following the period of corporate reporting in the US.

Among foreign news due out on Monday is the December index of wholesale prices in Germany, which is expected to add 0.5% to November’s result. November industrial production figures for Italy will also have its say in market movements on Monday, with the figure expected to lose about 0.1% from the previous month. However, November industrial production in the eurozone as a whole is set to go up 0.2%, according to Julia Voitovich of Investcafe.

Given all the above, “I expect the Russian share market to open slightly higher,” Voitovich said.

On Friday Russian floors closed trading mixed. The RTS was down 0.02% to 1, 571.73, with the MICEX adding 0.24% to 1,510.84.

Asian markets are higher today as Chinese and Hong Kong shares show gains. The Shanghai Composite is up 2.06% while the Hang Seng is up 0.68%. The Nikkei 225 is not trading.

European markets finished higher on Friday with shares in London leading the region. The FTSE 100 was up 0.33% while Germany's DAX added 0.09% and France's CAC 40 increased 0.08%.

In the US, the Dow and the Nasdaq rose 0.1%, while the S&P 500 shed less than 1 point. In weekly terms, all key indices were up for the second consecutive week, with the Dow and S&P 500 adding 0.4% for the week, and the Nasdaq rising 0.8%. That’s after Wells Fargo, the first major bank to report quarterly results, produced a profit during the period, exceeding expectations.

The History of the London Inter-Bank Offer Rate (Libor): Financial Fraud and Market Manipulation

Sandwiched between revelations of mounting losses ($5.8 billion and rising) at JP Morgan in the face of bungled bets by a trader known as the London Whale, and allegations of money laundering for Mexican drug cartels and breaches of U.S. sanctions by HSBC, the disclosures of deliberate rigging of the Libor rate by Barclay’s Bank might appear mundane and a trifle boring in comparison. It is, however, this scandal about an arcane interest rate that most starkly exposes the rotten core of the global financial system.

Barclays paid a fine of $450 million and saw the ignominious exit of its CEO Bob Diamond in a deal with U.S. and British regulatory agencies that involves an agreement to defer prosecution and drop criminal charges in two years if the bank does not commit any federal crimes “after the execution of this agreement.” But this might just be the tip of the iceberg. About twenty other global banks are currently being probed, and the full scale of the scandal is yet to be seen. The Economist, while decrying the “casual dishonesty” revealed in the email exchanges of the “banksters” (including promises of expensive champagne in return for favors!), pronounced this global finance’s “tobacco moment,” when it is forced to acknowledge its destructive practices, with potentially huge settlement costs, reminiscent of the settlements of around $200 billion made by U.S. tobacco companies in 1998 following a protracted lawsuit.1 But the scandal is not simply one of colossal greed and hubris. It is about systemic failure. It is about the fictions and illusions that form the basis of today’s complex global financial system.

The Libor is the London Inter-Bank Offer Rate—the rate at which leading banks can borrow from each other in the London markets. It is, however, not simply the banking system’s cost of borrowing or obtaining funds; it has emerged as the anchor of about $800 trillion worth of international financial transactions.2 A brief outline of the history of the process by which the Libor has become a fulcrum of the global financial system is necessary if we are to understand the significance of the current scandal.

The Libor and the Dawn of Neoliberalism

The origin of the Libor is rooted in the explosion of private financial flows in the international monetary system and more specifically the Eurodollar market (constituted by dollar-denominated bank deposit liabilities held in foreign banks or foreign branches of U.S. banks) in the 1970s. This explosion was itself an outcome of the resurgence of finance and the rise of neoliberalism. The sharp hike in interest rates in the United States in 1979—the Volcker anti-inflation shock, aimed in part at lowering wage rates by increasing unemployment—signaled the aggressive promotion of financial openness and integration as a way out of the crisis of the 1970s.3 This agenda served to buttress the growing power of U.S. corporate and financial capital globally. This “coup of finance” hinged on preserving and extending the pivotal place of the United States in international financial markets, and securing the global hegemony of the dollar after the collapse of the Bretton Woods system of fixed exchange rates.4

The Eurodollar market emerged even as the U.S. government was attempting to restrict capital outflows to reduce growing balance of payments deficits. U.S. banks resorted to the Eurodollar markets (primarily in London) as a way of evading restrictive capital controls and protecting their earnings. This offshore market was also a profitable place for Germany and Russia to park their dollar surpluses. Although international financial business was now based more on dollars than sterling, Eurodollar deposits helped to preserve London as a financial center in the face of the erosion of sterling’s importance as an international reserve. At the same time, its ties to the international hegemony of the dollar were cemented5 and the United Kingdom was drawn more closely “into the American imperial embrace.”6

The Big Bang reforms of 1986 in Britain were an important milestone in this process. In the United States, financial deregulation had been set in motion with the Deregulation of Monetary Control Act of 1980. This culminated almost two decades later with the final dismantling of the regulatory framework of the Glass-Steagall Act (legislated in response to the Great Depression, it had separated commercial from investment banking) by means of the Gramm-Leach-Bliley Act of 1999, giving legislative sanction to the erosion of the regulatory firewall between security traders and deposit bankers. This deregulatory agenda was echoed in the Big Bang reforms of banking in Britain in 1986. These reforms blurred the distinction between stockbrokers, investment advisers, and “jobbers” who created the markets in shares. Britain’s permissive regime brought an influx of U.S. banks and huge bonanzas for bankers. The stodgy world of banking was transformed into a heady world of cutthroat deal-making.

Through the 1970s, the oil surpluses of the OPEC countries were channeled through the Eurodollar markets and recycled to developing countries, especially Latin America, in the form of syndicated offshore dollar loans. The floating of the dollar in 1973 also fostered the growth of futures and swaps: derivatives that allowed international investors to hedge the risks of exchange rate and interest rate fluctuations. The investors and bankers who sought to rake in earnings and fees in these rapidly growing markets for new and exotic instruments of loan syndication and financial derivatives found themselves in desperate need of a benchmark against which to price their deals. The payments in the syndicated sovereign loan market, for instance, were based on some measure of a benchmark risk-free borrowing rate plus a risk premium based on assessments of the borrowing country’s capacity to repay the loan.

A key requirement of a benchmark is that it must bear a stable relationship to the prices of other securities and that it be liquid.7 The U.S. Treasury bill rate was one such price, but the volatility of this market in the late 1970s, a period of high inflation in the United States, prompted a search for new benchmarks around which bankers could structure their deals. Futures contracts on the three-month U.S. Treasury bill were introduced in this context as a way to tame the turbulence of the U.S. Treasury bill markets. Even as the Latin American debt crisis brought the bonanza of syndicated sovereign loans to an abrupt halt in the 1980s, U.S. financial markets were further jolted by the failure of the Continental Illinois Bank in 1984. The sudden surge in demand for safe U.S. Treasury bills led to huge losses for those who had used them as hedges for their purchases of private financial assets (since the price of Treasury bills rose while that of private financial assets fell). Such episodes underscored finance’s search for an alternative benchmark more aligned with the prices of private assets.8

Eurodollar futures contracts had begun to be traded in London in the early 1980s. In 1982 the volume of three-month Eurodollar futures transactions (at around $8 billion) was about one-third the volume of futures transactions in three-month U.S. Treasury bills (around $25 billion). By 1986 the volume of Eurodollar futures had risen to about $50 billion (about ten times the volume of corresponding U.S. Treasury bill futures transactions).9 The percentage share of Eurodollar transactions to all money market transactions—from where the wider financial system draws its short-term liquidity funds—rose from less than 5 percent in 1980 to about 50 percent by 1985.10 Since Eurodollar deposits were emerging as a major source of short-term funding for banks, the offshore Eurodollar borrowing rate emerged as an obvious anchor (the risk-free rate) for the proliferating financial trading. Particularly since financial institutions were finding that the prices of derivatives based on these offshore Eurodollar rates were closely aligned to their own borrowing costs. But in the early 1980s, there were not enough trades for a market-based index for Eurodollar deposits, and the Federal Reserve could not set and enforce targets for this rate like it could for the Federal Funds rate (the rate at which banks could borrow reserves overnight from each other). International financial markets felt hampered by a lack of standard reference rates. The solution was found through the offices of the British Bankers’ Association (BBA), the leading lobbying group of London Banks, with the blessing of the Bank of England.

In 1986, the BBA introduced a new benchmark rate, based on the average of daily estimates from the leading banks. The primary purpose of this new benchmark, the Libor, was to set a rate for dollar deposits held outside the United States and also to serve as a reference rate for a range of securities. Banks seeking to reduce their risk in a context of volatile interest rates found a closer approximation to their actual borrowing costs in this benchmark. The newly introduced standard came to be adopted as the basis of a variety of securities and derivatives (like interest rate swaps) that the banks used to hedge their risky portfolios. It was also adopted as the basis for the resetting of rates on long-term loans in line with the banks’ actual variable costs of funds. The volume of three-month Eurodollar futures contracts doubled between 1986 and 1988 to about $100 billion, while the share of Eurodollar transactions in short-term money market activity crossed 75 percent.11 Facilitated by the surge in Eurodollar lending in the syndicated loans market, the huge interest rate swap market, and later the markets for newer and more complex securities and derivatives got a huge boost.

And so, privately mediated financial instruments came to eclipse the publicly issued U.S. Treasury bill as the source of unregulated liquidity generation for the bloating global financial system. This is not to suggest that the U.S. Treasury bill was completely displaced. As the credit crisis of 2008 revealed, it remained the safe haven when the privately mediated mechanisms of liquidity generation and funding crashed in the wake of the collapse of Lehman Brothers.12 It is at the apex of the monetary hierarchy. In fact, a key indicator of financial distress is the difference between the interest rate banks charge each other on three-month loans (the three-month Libor) and the interest rate on three-month U.S. Treasury bills. A widening spread reflects the higher costs of unsecured interbank lending in a situation of evaporating confidence and growing uncertainty. At the peak of the credit crisis in 2008, this spread had risen to about 450 basis points (4.5 percent) from normal levels of between fifty and one hundred basis points (0.5–1 percent). Banks were finding it harder and harder to borrow from other banks, and interbank lending, which is not based on collateral, dried up. The Federal Reserve had to step in to fund the failing banks and restore lending. Even though private agents are a primary driving force in the money market, these decentralized parallel monetary mechanisms are, in the final instance, backstopped by the state and the market for U.S. Treasury bills.

The Emperor Has No Clothes!

So how is the Libor actually set? There are now rates set for deposits in ten currencies with fifteen maturity periods, for a total of 150 Libor rates. The borrowing rate is set daily by the BBA, on the basis of submissions by a panel of banks, for each of these ten currencies and fifteen maturities. The three-month dollar Libor is one of the most important of these rates. It is supposed to indicate what a bank would pay to borrow dollars for three months from other banks, at 11:00 AM on the day it is set. There are currently eighteen banks on the dollar Libor panel (including Citibank, JP Morgan, and Bank of America).

Each participating bank has to answer the question: At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size, just prior to 11:00 AM? The top quarter and bottom quarter estimates are then discarded, and the Libor is the trimmed average of the remaining submissions, (also known as fixings) calculated and posted by Thomsons-Reuters, the leading business data provider. The idea is that this process of trimming will get rid of outliers and rogues, and the number churned out will be a reasonably accurate gauge of the market. Libor thus claims to measure the rate at which banks can borrow from one another.

But in the real world, banks do not generally lend to each other for longer periods without adequate collateral. Interbank lending takes place through money market funds, but only for short periods. This means that quotes for longer periods are based on estimates and not on actual flows. The submissions are the banks’ own estimates of what they think they would have to pay to borrow if they needed money, and the body charged with collecting this information is not an independent regulatory agency but the banking sector’s own lobby group—the BBA. The calculation is undertaken by a data provider that derives huge chunks of its earnings from the same banking sector! The Libor is an accurate reflection of the state of funding liquidity only if most of the banks submit an honest assessment of the rate at which they believe they can borrow on a given day. The self-regulatory process of rate setting itself provides no checks and balances but relies on the integrity and discipline of markets to ensure the calculations are in line with real market conditions.

What the Barclays settlement has shown is that the bank’s submissions “were over a long period tainted by self-interest, whether to help some of its derivatives traders or out of a desire to protect its reputation in the market.”13 Groups of traders actively conspired with brokers to influence the banks’ rate submissions for the London rate. Banks colluded to push the rates in desired directions. The BBA, a group that had in its 2011 internal newsletter bragged about its lobbying victories and spent an estimated $8 million on lobbying in 2011, is hardly a body that would crack the whip on the sector it represents.14

What this boils down to is the mind-boggling revelation: this crucial rate that is the pivot of trillions of dollars worth of derivatives and loans is in a sense a fiction. “There simply is not enough trading, particularly at longer six-month and twelve-month lending periods, to be sure that the rate genuinely reflects the market.”15 As a senior trader said, “you have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”16 To make things even murkier, those involved in setting the rates had every incentive to lie, since not only did their banks stand to profit or lose, depending on the level at which the Libor was set each day, their own earnings hinged on these numbers. The Financial Services Authority “has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that.”17 A former trader at the London office of Morgan Stanley has suggested that such misreporting of rates was fairly common practice even in 1991, a mere five years after the system was put in place.18

There have been, broadly speaking, two kinds of manipulations. The first category was designed to bolster traders’ profits. Traders nudged the money market desks of their banks to massage submissions in order to rake in the gains from deals they brokered. Requests were also passed on to these desks in collusion with counterparts at other banks. So a trader could ask the submitter of the fixings to keep the “fixings” high (or low) until certain deals went through. By keeping rates artificially raised or lowered, traders were guaranteed to make money on these deals. Where the income they paid out was fixed to the Libor, a lower rate reduced the payout; where their earnings were linked to the rate, a hike boosted these earnings. Far from being a manifestation of rogue trading, this pervasive rigging is a reflection of monopoly and cartel-like practices in the closed, clubby world of financiers.

A second category of manipulations, which emerged in the wake of the subprime market collapse, was the submission of artificially low rates. The motivation here was more complicated. Banks that were vulnerable sought to protect their reputations and their continued access to credit by obfuscating the actual difficulties they faced in borrowing. High borrowing costs signaled lack of credit worthiness. In fact, the persistently high Libor rates in 2008 were a sign of credit market distress. But, given the fragile state of investor confidence, persistently high Libor rates were seen, both by banks, regulators, and the central banks as an obstacle to restoring the credit engine.

Barclays’ high Libor submissions as the crisis was unfolding had thus prompted serious concern at the Bank of England. The recent travails of Royal Scotland bank had sent jitters though the financial markets, and Barclays was widely perceived to be the next to fail. The high rates were a signal of Barclays’ growing difficulties in borrowing from the market. There were numerous discussions between Bank of England officials and Barclays’ management (including the controversial phone conversations between bank managers and Paul Tucker, the deputy governor of the Bank of England) through this period. In May 2008, there were some reports of banks low-balling their borrowing rates to avoid looking desperate for cash. Timothy Geithner, who was then head of the New York Federal Reserve, sent a memo to Governor of the Bank of England Mervyn King outlining concerns (though no allegations of outright rigging) about the Libor and making recommendations to beef up its credibility. Given the close connections between private banks, central banks, and regulatory agencies, it is hardly credible that the scale of Libor manipulations caught the central bankers and regulators by surprise. The complete failure of the Central Bankers and regulators to respond reflects the structural stranglehold of private finance.

The relation between the state and the financial system erected on the complex interaction of private and public liquidity generation is fraught with contradiction. There has been a ratcheting up of state support of the banking system not just over the past three years or even the past few decades, but over the past century. However, the bulging safety net stokes even greater speculative and risk-taking behavior. Government interventions that rescue banks from their follies in order to restore stability, in effect, revive and reinvigorate the speculative juggernaut. The state again intervenes to rescue the financial institutions in the wake of the catastrophic bust that inevitably follows. The concentration and growing size of the institutions that need to be bailed out give rise to a dramatic scaling-up of central bank support to the financial system, even as regulatory control is being systematically weakened. As the bets keep increasing in size, the scope of the necessary intervention also grows, so that the cost of each successive meltdown becomes even larger. This destructive relationship has been christened “the doom loop.”19 In the process the state and central banks get more deeply implicated in the imperative to shore up the financial system and become hostage to the actions of private finance.

It is not surprising, given the immense control exercised by the Banking lobby, that any attempt at regulatory reform is resisted and stymied. The fundamental weakness of the Libor seems to have been ignored in the interests of protecting the financial system. It has been argued that the easing of the Libor rates late in 2008 was for the greater public good—a sort of collateral cost of preventing the complete collapse of the financial system. The truth is that it is simply testimony to how the power and influence of Wall Street continued to shape the response of the major central banks—the Bank of England and the Federal Reserve—even after its actions brought the global economy to the brink.

The deep ties and interpenetration between the government and financial sector also forged a common worldview that served the imperatives of finance and the neoliberal distaste for hindering, in any way, its forage for profits. The irony is that the neoliberal rhetoric of free markets that is deployed to justify obscene levels of profiteering and deter any forms of regulation is promoting a financial system where markets and market discipline have been banished! It is bad enough that in the world of exotic custom-built financial products and over the counter derivatives, the “models” spawned by the industry have completely usurped the role of the “market” that economic theory celebrates. As the conjurors of these models reaped fat profits from transactions that were conducted without any transparent process of price discovery through a market mechanism, they were immunized from the consequences of their actions. What we now know is that even these models are built around a notional price where no real market exists. Key features of a “properly functioning market”—wide and free participation and genuine price discovery—are conspicuously absent in the setting of the Libor. Pricing is based on private, self-reported quotes of a small clique of powerful banks without any reference to tangible financial transactions. These same banks also controlled the BBA, the organization that actually posts the daily Libor. While vociferously maintaining that self–regulation and unregulated market forces are the most effective form of discipline for this ballooning sector, the financial oligarchy colluded to preempt any genuine competitive process, or any form of accountability.

Equally blatant forms of collusion have recently come to light in the context of the municipal bond-rigging scam involving major banks, including J. P. Morgan Chase, Bank of America, UBS, Lehman Brothers, and Bear Stearns, who conspired and colluded to deliberately rig the public bids on municipal bonds, a business worth about $3.7 trillion. Towns and municipalities that borrow by issuing municipal bonds to finance various projects have also turned to brokers on Wall Street to handle investment of some of this money instead of keeping it idle over the course of the project. The bonds are supposed to be submitted to a competitive auction (of at least three bids), but what the brokers actually did was allow the bankers to collude to carve out chunks of business. The brokers charged with getting municipalities the best deal actually let the pre­arranged “winner” have a “last look” at the bids of the competitors, thus allowing the bank to make the lowest possible winning bid. “By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals,” while the broker collected not just fees and commissions but also a fat bribe. Four banks that took part in the scam (UBS, Bank of America, Chase, and Wells Fargo) have agreed to pay $673 million in damages. This is likely to be just a fraction of the actual sums skimmed from public projects all over the United States. Yet for the bankers concerned, this was a perfectly fair auction, since, despite the fact that the secret collusion resulted in lower returns to the municipalities, they still got the highest of the bids. The sharing of the extra margins between the colluding bankers was just extra topping on the cake!20

This same hubris of the financial oligarchs at the center of the complex financial infrastructure, who are in effect deciding market prices in a manner that leaves their clients with as bare a minimum as they can get away with, is evident in the Libor riggings. Bob Diamond, the Barclays CEO, complained in a memo to the staff after the fines scandal hit the headlines that, “We all know these events are not representative of our culture…on the majority of days, no requests were made at all.” Behind this arrogance is a perverse sense of entitlement to immunity from the disciplining ravages not simply of the law but of the market. Instead of the competitive markets espoused in the neoliberal dogma, the field was a hotbed of moral hazard, conflict of interest, and outright criminal fraud.

The Libor scandal is not about the risky bets or bad judgment of rogue traders, but the deliberate strangling of market forces in the pursuit of profits. The story of how such an obviously flawed rate came to enjoy such a central place in the global financial system is in the end a story about how corporate, financial capital was powerful enough to set in place institutional mechanisms to ensure the deliberate subversion of any efforts or any market forces that would stifle their pursuit of profits.

A Fantasy Built on Fiction, Breeding Illusion

Although the difference between the reported Libor rate and the actual borrowing costs might seem small, the total amount of money involved is huge, given that Libor rates affect contracts worth hundreds of trillions of dollars. The rate with which the traders and bankers were playing determines the prices that people and corporations around the world pay for loans or receive for their savings. And the mechanism set up allowed the bankers to dictate the rate, which was a pivotal determinant of their earnings, by conjuring these numbers literally out of thin air!

Adjustable-rate mortgages had been allowed in the U.S. mortgage sector after the St Germaine Depository Institutions Act of 1982. Today, about 90 percent of U.S. commercial and mortgage loans are linked to the Libor.21 In 1999, following the urgings of banking lobbies, the U.S. Student Loan Marketing Agency switched from pricing loans off the Treasury bill rates to using the Libor as a benchmark for loans. It is used as a benchmark to set payments on about $350 trillion worth of derivative contracts.22 The Libor, a fictional number based on good faith estimates of those whose earnings fluctuate dramatically with miniscule gyration of this same rate, is now an integral part of the hardwire of the financial system.

And while the banking system has raked in vast sums due to these manipulations, those on the wrong side of these deals have faced huge losses. Among those who have been defrauded through such deliberate rigging are municipalities like Baltimore. Bankers have embedded interest-rate swaps in many long-term municipal bonds, persuading municipalities and states to issue bonds and simultaneously enter into swaps. In these arrangements, the banks agreed to make variable-rate payments to the issuers, and the issuers, in turn, agreed to make fixed-rate payments to the banks involved. The City of Baltimore had entered into interest rate swaps worth $100 million, swapping fixed interest payment to banks for variable Libor-linked receipts. “Forty U.S. states currently allow municipalities to enter into swap agreements. The total estimated amount in 2010 was between $250–500 billion.”23 The artificial low-balling of the Libor after 2008 meant losses of millions of dollars annually to these government bodies. Such losses deprived these agencies of money at a time of prolonged recession and acute fiscal crisis, exacerbating job losses, and strangling public services. Pension funds that were entrusted with household savings were also ripped off though such manipulations.

And if that was not bad enough, after the crisis, when the State was forced to step in to shore up collapsing financial markets, the Treasury bailout programs used this artificially low Libor as the basis for lending to the banks under the Term Asset Backed Securities Loan Facility. And this despite the misgivings expressed by Timothy Geithner in his email to Mervyn King just a few months earlier! Not only did the structurally flawed rate receive further official sanction, but the rescued banks also ended up getting money at excessively cheap rates, skimming off the public exchequer. Meanwhile, families facing foreclosures of their homes or debts in significant excess of the value of their homes received no such relief.

The British government has announced a review of the Libor-setting process, to investigate ways of improving regulation and governance. Under consideration are recommendations like expanding the panel of banks submitting rates and exploring the possibility of a credible third party to monitor and collate submissions. Alternatives to Libor are being discussed. The bankers, however, do not see either the U.S. Treasury bill rate or the U.S. federal funds rate as a suitable benchmark for the parallel shadow financial system of derivatives and financial engineering, tethered as they are to state policy. An alternative that is finding favor with the bankers is an overnight index rate based on the weighted average of the interest rates paid each day on General Collateral Finance Repurchase Agreements (Repos), using the most traded collateral repos like U.S. government securities. This index will be given a further boost by U.S. Treasury Department moves to offer new floating-rate securities based on this index, as it attempts to maintain surging investor demand for government bonds. These proposals seek a patchwork fix of a system that has been usurped by the financial oligarchy for its own unfettered enrichment, when what is needed is an overhaul! The parties involved are, in the end, only trying to replace the fiction at the center without dispelling the neoliberal illusion that fostered the speculative juggernaut that enriched finance.

Even as the Libor scandal has turned the spotlight on the fundamentally flawed mechanisms of rate setting, Wall Street has been waging its battle against transparency in price setting on other fronts. This can be seen, for instance, in the strong pushback from the bank lobby against the Commodity Futures Trading Commission’s proposal that derivative trading facilities provide market participants with easily accessible prices on a centralized electronic screen and eliminate the one-to-one dealings between traders and investors. While espousing the neoliberal credo, and celebrating the virtues of “self-regulation,” the financial oligarchy continues to resist any attempt to curb its monopolistic stranglehold. Not only is regulatory control being preempted, the financial oligarchy also seeks immunity from market discipline.

The absence of the force of market discipline was, paradoxically enough, part of the argument against the socialist planning project, during a debate that took place before the Second World War between the advocates of capitalist markets and the defenders of planning—the “socialist calculation debate.” Ludwig Von Mises, an economist and philosopher of the Austrian school, argued that even if planners sought to mimic price signals, they could not create a disciplining mechanism analogous to the market, and could not therefore capture capitalism’s socially beneficial dynamism.24 It would seem that neoliberal orthodoxy and the hegemony of market fundamentalism has been instrumental in bringing into being a system plagued by this very failing!

Footnotes

  1. Syndicated loans are provided by a group or syndicate of banks to a borrowing sovereign or corporation. The rate on the loan is the benchmark rate plus some risk premium.
  2. Interest rate swaps allow two parties to negotiate a “swap” of payments from fixed rate and floating rate contracts. The floating rates are normally calculated on the basis of a benchmark like the Libor.
  3. A repo (repurchase agreement) is a method of short-term borrowing. The borrower “sells” a security to the lender with the understanding that the asset would be bought back at a higher price. The higher price represents the interest rate on the loan.

Ramaa Vasudevan is an assistant professor of economics at Colorado State University. She is a member of the Union for Radical Political Economics and an associate of the Dollars and Sense Collective.

Notes

  1. The LIBOR Affair: Banksters” (online video), Economist blogs, July 7, 2012, http://economist.com
  2. The LIBOR Scandal: The Rotten Heart of Finance,” Economist, July 7, 2012, http://economist.com.
  3. Gerard Dumenil and Dominique Levy, The Crisis of Neoliberalism (Cambridge, MA: Harvard University Press, 2010) and Capital Resurgent (Cambridge, MA: Harvard University Press, 2004).
  4. Ramaa Vasudevan, “Finance Imperialism and the Hegemony of the Dollar,” Monthly Review 59, no.11 (April 2008): 35–50.
  5. Ibid.
  6. Leo Panitch and Sam Gindin, “Finance and the American Empire,” in Leo Panitch and Colin Leys, eds., Socialist Register 2005: The Empire Reloaded (New York: Monthly Review Press, 2005), 54.
  7. Jacob Wintellberg and Phillip Woolridge, “Interbank Rate Fixings During the Recent Turmoil,” BIS Quarterly Review, March 2008, http://bis.org.
  8. Robert N. McCauley, “Benchmark Tipping in the Money and Bond Markets,” BIS Quarterly Review, March 2001, http://bis.org.
  9. Ibid.
  10. Ibid.
  11. Ibid.
  12. Ramaa Vasudevan, “The Credit Crisis: Is the International Position of the Dollar at Stake?Monthly Review 60, no.11 (April 2009): 24­–35.
  13. Fixing Libor,” Financial Times, June 27, 2012, http://ft.com.
  14. Melanie Newman, “British Bankers Association Claimed Key Lobbying Victories,” Guardian, July 9, 2012, http://guardian.co.uk.
  15. Michael Mckenzie and Brooke Masters, “After Libor—The Search for a New Benchmark,” Financial Times, July 10, 2012, http://ft.com.
  16. “The LIBOR Scandal: The Rotten Heart of Finance.”
  17. Ibid.
  18. Douglass Keenan, “My Thwarted Attempts to Tell of LIBOR Shenanigans,” Financial Times, June 26, 2012, http://ft.com.
  19. Andrew Haldane and Piergiorgio Allessandri, “Banking on the State, Presentation at Federal Reserve Bank of Chicago,” September 2009, http://bis.org.
  20. Matt Taibbi, “The Scam Wall Street Learned from the Mafia,” Rolling Stone, July 5, 2012, http://rollingstone.com.
  21. Mariane Ojo, “LIBOR, EURIBOR and the Regulation of Capital Markets: The Impact of Eurocurrency markets on Monetary Setting Policies,” Munich Personal REPEC Archive Paper No 42093, October 20, 2012, http://mpra.ub.uni-muenchen.de.
  22. Gillian Tett, “Libor Affair Shows Banking’s Big Conceit,” Financial Times, June 28, 2012, http://ft.com.
  23. The Libor Probes: An Expensive Smoking Gun,” Economist, April 14, 2012, http://economist.com.
  24. Ludwig Von Mises, “Economic Calculation in the Socialist Commonwealth,” in Freidrich Von Hayek, ed., Collectivist Economic Planning (London: Routledge and Kegan Paul, 1935).

Market Buzz: ECB and China fail to stir things up

RT Photo / Irina Vaseivitskaya

RT Photo / Irina Vaseivitskaya

Russian stocks are expected to open slightly higher on Friday amid driving oil prices, but mixed statistics from China would cap the indices.

­Russian indices showed mixed picture Thursday in low-volume trading with the MICEX shed 0.3% and the RTS itched 0.2%.

European stocks traded mixed Thursday as the European Central Bank and the Bank of England both left monetary policy unchanged, while successful debt auctions in Spain and Italy supported the indices. The Stoxx Europe 600 fell 0.3%. France’s CAC 40 shed 0.4% and Germany’s DAX 30 lost 0.2%, while Italy’s FTSE MIB gained 0.7% and Spain’s IBEX 35 index  rose 0.2%.

US stocks rose on Thursday after December exports data from China beat expectations, bolstering investor sentiment. The Dow Jones gained 0.6%, the S&P 500 added 0.8% and the Nasdaq Composite rose 0.5%.

Asian stocks mostly moved lower Friday after data showed an increase in Chinese inflation. Hong Kong’s Hang Seng slipped 0.1%, erasing early gains of 0.2%, while the Shanghai Composite declined 0.5% consumer prices’ data slightly exceeded consensus estimates. South Korea's Kospi slipped 0.5%, while Australia’s S&P/ASX 200 index gave up 0.15%.But Japan’s Nikkei Stock added 1.5% supported by the tech sector and a weaker yen.

A Record $220 Billion “Deposit” Injection To Kick Start To The 2013 Market

When people talk about "cash in the bank", or "money on the sidelines", the conventional wisdom reverts to an image of inert capital, used by banks to fund loans (as has been the case under fractional reserve banking since time immemorial) sitting in ...

Market Buzz: Russia back in the ranks

(Reuters / Brendan McDermid)

(Reuters / Brendan McDermid)

Russian stocks, back to normal trading schedule after New Year holidays, are expected to be looking westward for good news. That’s after the country’s key indices went up on Tuesday, upbeat about developments over the ‘fiscal cliff’ issue.

The November index for industrial production in Germany will become the most important market driver on Wednesday, Grigory Birg of Investcafe told RT via email. The indicator lost 2.6% in October, with a further decline likely to have a negative impact on a share market.

Tuesday marked the first working day for Russian floors in 2013 after a 10–day pause for traditional New Year celebrations. Both the RTS and the MICEX had a good start to the year, rising 3.22% and 2.72% respectively. This is because the floors were winning back the news that the US has so far managed to escape the fiscal cliff.

In the early hours of 2013, US politicians finally agreed a deal on tax and spending, stipulating raising income tax for individuals making $400,000 and coupling earning $450,000 from 35% to 39.6%, as well as permanently extending Bush-era tax cuts for those earning less than $400,000 annually.

On top of that, the legislation proposes a one-year extension on unemployment insurance benefits, which are about to expire for 2 million people. The bill doesn’t include any cuts to entitlement programs such as social security or Medicare. It also does not tackle the issue of raising the debt ceiling from the current limit of $16.4 trillion, which the US is about to cross. At present, the US national debt stands at $16.438 trillion.

In the US, the stocks were in the red for the second consecutive day on Tuesday. That’s at a time when aluminum giant Alcoa opened a reporting season for corporate America with better-than-expected quarterly results. The company reported sales of $5.9 billion in Q4, above analysts' estimates of a drop to $5.6 billion. The Dow Jones Industrial Average, S&P 500, and Nasdaq closed down between 0.2% and 0.4%, bouncing back from steeper declines ahead of the close.

European markets finished mixed as of the most recent closing prices. The CAC 40 gained 0.03%, while the DAX led the FTSE 100 lower. They fell 0.48% and 0.18% respectively.

Asian markets were mixed on Tuesday. The Nikkei 225 was up 0.89% while the Hang Seng gained 0.36% and the Shanghai Composite lost 0.03%.

Market Buzz: Russia back in the ranks

(Reuters / Brendan McDermid)

(Reuters / Brendan McDermid)

Russian stocks, back to normal trading schedule after New Year holidays, are expected to be looking westward for good news. That’s after the country’s key indices went up on Tuesday, upbeat about developments over the ‘fiscal cliff’ issue.

The November index for industrial production in Germany will become the most important market driver on Wednesday, Grigory Birg of Investcafe told RT via email. The indicator lost 2.6% in October, with a further decline likely to have a negative impact on a share market.

Tuesday marked the first working day for Russian floors in 2013 after a 10–day pause for traditional New Year celebrations. Both the RTS and the MICEX had a good start to the year, rising 3.22% and 2.72% respectively. This is because the floors were winning back the news that the US has so far managed to escape the fiscal cliff.

In the early hours of 2013, US politicians finally agreed a deal on tax and spending, stipulating raising income tax for individuals making $400,000 and coupling earning $450,000 from 35% to 39.6%, as well as permanently extending Bush-era tax cuts for those earning less than $400,000 annually.

On top of that, the legislation proposes a one-year extension on unemployment insurance benefits, which are about to expire for 2 million people. The bill doesn’t include any cuts to entitlement programs such as social security or Medicare. It also does not tackle the issue of raising the debt ceiling from the current limit of $16.4 trillion, which the US is about to cross. At present, the US national debt stands at $16.438 trillion.

In the US, the stocks were in the red for the second consecutive day on Tuesday. That’s at a time when aluminum giant Alcoa opened a reporting season for corporate America with better-than-expected quarterly results. The company reported sales of $5.9 billion in Q4, above analysts' estimates of a drop to $5.6 billion. The Dow Jones Industrial Average, S&P 500, and Nasdaq closed down between 0.2% and 0.4%, bouncing back from steeper declines ahead of the close.

European markets finished mixed as of the most recent closing prices. The CAC 40 gained 0.03%, while the DAX led the FTSE 100 lower. They fell 0.48% and 0.18% respectively.

Asian markets were mixed on Tuesday. The Nikkei 225 was up 0.89% while the Hang Seng gained 0.36% and the Shanghai Composite lost 0.03%.

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Can Malaysia withstand the next financial crisis?

As developed economies of the world still continue their struggle to recover from the global financial crisis in 2008, the lack of confidence in global economic stability has placed greater demand on emerging markets to cushion themselves for the next crash. While woefully unsustainable debt levels deepen and weak regulatory oversight persist, the lack of tangible reforms creates an imperative for countries like Malaysia to stay ahead of the curve.

This was the theme of the Perdana Leadership Foundation’s sixth CEO Forum held in Kuala Lumpur last week, where more than thirty panelists analyzed the shaky state of the global economy and offered insights into Malaysia’s strengths and vulnerabilities, as well as the country’s susceptibility to external economic turbulence. In addition to market-related vulnerabilities, panelists also identified inter-religious anxieties between communities as factors that could put national unity and political stability at risk. 

Tan Sri Dato’ Dr. Lin See Yan, a trustee of the Tan Sri Jeffrey Cheah Foundation, identified how high fences built to withstand economic shocks and de-risk the financial system are seldom designed for all possibilities. He branded the European Union as the weakest link in the global financial system, noting that the bloc’s debt problems kept growing, austerity has proven to be counter productive, the euro currency remains overvalued, and the European Central Bank (ECB) has stagnated in the midst of its bond-buying strategy.

Lin also noted the possibility of another crisis originating from within the United States due to vulnerabilities posed by the country’s ballooning $17 trillion debt levels, the growing housing bubble, and the persistence of trading high-risk financial products backed by complex securitizations. He also raised concerns over recent data on the Chinese economy, which has shown a decline in fixed asset investments, raising speculation about whether or not the Chinese authorities would introduce a stimulus package. 

Tan Sri Azman Yahya, executive chairman of Symphony Life, believes that growth in China will continue to be on the upswing despite concerns of deceleration, even without significant investment, by virtue of Beijing’s prudent economic reforms. China has already announced at the recent G20 meeting of finance ministers that it will not make major policy adjustments in the form of stimulus despite slightly lower growth indicators. Reforms will be prioritized to stabilize employment and contain systemic risks such as widespread default. 

High government deficits, unprecedented government and private sector debt levels, and low household savings are deeply worrying trends in mature economies, according to Yahya, who claims that eventual tapering by the US Federal Reserve to cease quantitative easing (QE) measures could trigger a loss of confidence in the US dollar, causing an offloading and crash of US securities capable of tanking global markets. 

Yahya identified the risks posed by the lack of tangible financial sector reforms, the unsustainable US debt bubble, the growing loss of confidence in the US dollar, and surmised that the next crisis may strike within five years. He identified the high growth levels of Asia-Pacific countries as a buffer to crises emanating from stagnate western economies, noting how China’s middle class is set to expand to one billion by 2025, while growth will be increasingly be powered by consumption. 

Panelists at the forum generally agreed that the Asia-Pacific region is in a far healthier state today in comparison to the 1997 crisis, as China’s growth strategy moves away from the investment-driven template to more sustainable consumption-led expansion. Countries in the ASEAN region are also cooperating at higher levels. Analysts agree that Malaysia has proven to be fairly resilient and adept at crisis management, as it managed to navigate through treacherous economic periods while retaining consistently healthy growth levels over the past two decades. 

The country defied the IMF’s economic orthodoxy and introduced capital control measures during the 1997 Asian financial crisis to counter the short selling of the Malaysian ringgit by currency speculators, which triggered dramatic depreciation and rapid falls in stock market capitalization. Malaysia recovered faster than its neighbors and consolidated its banking system, putting buffers in place by introducing broader market regulations and strengthening banks to withstand shocks. 

During the global financial crisis in 2008, triggered by the bursting of the US housing bubble and the subsequent collapse of large financial institutions trading toxic mortgage-related financial products, the country found itself better prepared. The way the crisis struck in 1997 took Malaysian policymakers totally off guard. The country’s economy was highly stable and experiencing growth at 8 percent; loans were being repeatedly prepaid and Malaysia was stepping in rescue Thailand after attacks on the baht.

The current scenario also demands that countries expect the unexpected. The general consensus among panelists the Perdana forum was that a new financial crisis could present itself at some point within the next eighteen months to five years, with the potential for several mini-crises to bubble up and trigger recessionary depression. It is nearly impossible to accurately pinpoint when the next crisis will hit, but there are numerous flashpoints to consider.

In addition to vulnerabilities stemming from uncontrolled derivative trading and speculative hot money flows, debt and bubbles loom. During the 2008 crisis, insolvent private banks and lending institutions were deemed too-big-to-fail, but today, central banks are on the road to inheriting that status. Debt levels have ballooned to unprecedented levels driven by QE and low interest rates. Stagnate wages and easy credit has goaded consumers to keep borrowing to maintain consumption.

Both the United States and the United Kingdom are experiencing high unemployment levels and dramatic income inequality, giving rise to greater levels of social unrest while the stock markets of both countries have performed above par – surpassing the highs of pre-crisis levels. The sharp ascent of share prices, which has been heralded as proof of an economic recovery, does not correlate with rising activity in the productive economy or with per capita income.

The distinguished economist Ha-Joon Chang has referred to these developments as ‘the biggest stock market bubble in modern history.’ It is clear that share prices do not reflect real economic activity. The core of the problem is that successive rounds of QE have increased liquidity rates and fuelled asset bubbles rather than being channeled into productive assets.

Panelists addressed how many of the new jobs being created in mature economies are low-wage positions that offer little career mobility. The broad appeal of protest campaigns organized by fast-food workers to demand a living wage is a testament to the strains on ordinary people who are unable to meet the cost of living. Americans are pessimistic about their nation’s economic recovery policies because many find themselves facing more trying domestic circumstances.

Tun Dr. Mahathir Mohamad attended the Perdana forum to give the closing keynote address, where he likened the implementation of solutions to avert economic crises to a medical doctor treating a patient, stressing the need to understand the systemic contradictions of the global financial system. Dr. Mahathir denounced fractional reserve banking practices, which result in banks lending far greater amounts of money than they actually possess in cash reserves, and the leveraging practices taken advantage of by currency speculators and hedge funds.

The former Malaysian prime minister accused Europe and the US of being in a state of denial as to how markets are manipulated, primarily because the political classes themselves benefit from speculation. Dr. Mahathir believes that the role of the financial sector is overemphasized in national economies and advised greater market regulation. Governments must be ready to step in to limit the abuses of the banking system, according to Mahathir, who characterized the inherent inequality of the modern age as one where 99 percent of people are beholden to the ultra-wealthy 1 percent, citing the slogan popularized by the Occupy Wall Street protest movement.

Mass protest movements demanding accountability from Wall Street have remained potent because the underlying conditions that generated the crisis have not been addressed in any meaningful way. Instead of steering monetary policies in a sensible direction and broadening regulatory oversight to identify risky financial products and prevent predatory speculation, the banking lobby has strong-armed western politicians into accepting a growth model where short-term profits for the few take precedence over long-term investments in productive assets for the many.

Elsewhere in the world, the economic power and political autonomy of BRICS countries and their plans to establish a development bank to finance infrastructure growth throughout the developing world offers a far more sustainable investment model. To offset the risks of future crises, it is imperative to find the political courage to reduce the importance of the non-productive financial sector in national economies in favor of investments into productive assets that create infrastructure and job opportunities.

Panelists at the Perdana forum argued that even if measures are taken to bolster productive assets, financial and economic crises may strike in unexpected ways: resulting from cyber threat vulnerabilities, sudden geopolitical instability, conflicts over resources and the pricing of resources, and complications that can result from the use of non-traditional currencies.

Malaysia is considered a safe investment destination due to its political stability and imperviousness to natural disasters; the country’s competent young workforce is eager to enter innovative service sector positions, a major asset in contrast to other Asian countries struggling to maintain population growth. To meet the present development aspirations, it is necessary for the country to protect against both external and internal crises.

The Malaysian leadership faces a difficult balancing act on all fronts. It must do more to improve inter-communal harmony without rolling back civil liberties. Despite the country’s strong performance legitimacy, trust and confidence in the government and the integrity of institutions remains low due to endemic corruption. There is a need for a comprehensive social safety net system to address rising income inequality on a needs-basis.

Simultaneously, economic circumstances demand that developing countries remove energy and social subsidies in order to increase efficiency and become a more attractive destination for capital. Navigating through the crises ahead will require bold leadership. Malaysia will be in a better position to withstand turbulence if it takes meaningful steps to reduce income disparities and pursues inclusive social policies that will restore grassroots trust in the leadership.

This article appeared in the September 29, 2014 print edition of The Malaysian Reserve newspaper.

Nile Bowie is an independent journalist and political analyst based in Kuala Lumpur, Malaysia. His articles have appeared in numerous international publications, including regular columns with Russia Today (RT) and newspapers such as the Global Times, the Malaysian Reserve and the New Straits Times. He is a research assistant with the International Movement for a Just World (JUST), a Malaysian NGO promoting social justice and anti-hegemony politics. He can be reached at [email protected].

Six months after MH370, Boeing & Inmarsat need to explain themselves

Six months have passed since the disappearance of Malaysia Airlines flight MH370 in March, which took off from Kuala Lumpur carrying 239 people en route to Beijing. The aircraft veered wildly off course while flying over the South China Sea before turning back over the Malaysian peninsula toward the Indian Ocean, where it is presumed to have crashed.

Despite the largest multinational search and rescue effort ever conducted, not a trace of debris from the aircraft has been found, nor has the cause of the aircraft’s erratic change of trajectory and disappearance been established. The case of MH370 has proven to be the most baffling incident in commercial aviation history and one of the world's greatest aviation mysteries.

Malaysia Airlines has suffered the two worst disasters in modern aviation less than five months apart, following the tragic demise of flight MH17 in July, forcing the company to slash its staff numbers by a third as part of a major restructuring effort. The state has announced plans to take full ownership of the national carrier following the collapse of its share price and its subsequent removal from the stock market.

After a fruitless search in the southern Indian Ocean where the plane is believed to have ditched, investigators established a new search area that has been mapped by Chinese and Australian ships since June. The next stage of the investigation has been given a provisional 12 months, and a Dutch contractor, Fugro Survey, will conduct an underwater search beginning this month.

It is hoped that once the wreckage is discovered, the aircraft’s black boxes, cockpit voice recordings and flight data will help investigators explain the incident, as well as give closure to the families of the victims. There is still little consensus among investigators and experts as to what actually happened on board the doomed flight.

Read the full story on RT.com

Nile Bowie is a columnist with Russia Today, and a research affiliate with the International Movement for a Just World (JUST), an NGO based in Kuala Lumpur, Malaysia. He can be reached at [email protected].

Buying Up the Planet: Out-of-control Central Banks on a Corporate Buying Spree

Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means?                                                                                       — Dr. Michael Hudson, Counterpunch, October 2010

When the US Federal Reserve bought an 80% stake in American International Group (AIG) in September 2008, the unprecedented $85 billion outlay was justified as necessary to bail out the world’s largest insurance company. Today, however, central banks are on a global corporate buying spree not to bail out bankrupt corporations but simply as an investment, to compensate for the loss of bond income due to record-low interest rates. Indeed, central banks have become some of the world’s largest stock investors.

Central banks have the power to create national currencies with accounting entries, and they are traditionally very secretive. We are not allowed to peer into their books. It took a major lawsuit by Reuters and a congressional investigation to get the Fed to reveal the $16-plus trillion in loans it made to bail out giant banks and corporations after 2008.

What is to stop a foreign bank from simply printing its own currency and trading it on the currency market for dollars, to be invested in the US stock market or US real estate market?  What is to stop central banks from printing up money competitively, in a mad rush to own the world’s largest companies?

Apparently not much. Central banks are for the most part unregulated, even by their own governments. As the Federal Reserve observes on its website:

[The Fed] is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

As former Federal Reserve Chairman Alan Greenspan quipped, “Quite frankly it does not matter who is president as far as the Fed is concerned. There are no other agencies that can overrule the action we take.”

The Central Bank Buying Spree

That is how “independent” central banks operate, but it evidently not the US central bank that is gambling in the stock market. After extensive quantitative easing, the Fed has a $4.5 trillion balance sheet; but this sum is accounted for as being invested conservatively in Treasuries and agency debt (although QE may have allowed Wall Street banks to invest the proceeds in the stock market by devious means).

Which central banks, then, are investing in stocks? The biggest player turns out to be the People’s Bank of China (PBoC), the Chinese central bank.

According to a June 15th article in USA Today:

Evidence of equity-buying by central banks and other public sector investors has emerged from a large-scale survey compiled by Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group. The OMFIF research publication Global Public Investor (GPI) 2014, launched on June 17 is the first comprehensive survey of $29.1 trillion worth of investments held by 400 public sector institutions in 162 countries. The report focuses on investments by 157 central banks, 156 public pension funds and 87 sovereign funds, underlines growing similarities among different categories of public entities owning assets equivalent to 40% of world output.

The assets of these 400 Global Public Investors comprise $13.2 trillion (including gold) at central banks, $9.4 trillion at public pension funds and $6.5 trillion at sovereign wealth funds.

Public pension funds and sovereign wealth funds are well known to be large holders of shares on international stock markets. But it seems they now have rivals from unexpected sources:

One is China’s State Administration of Foreign Exchange (SAFE), part of the People’s Bank of China, the biggest overall public sector investor, with $3.9 trillion under management, well ahead of the Bank of Japan and Japan’s Government Pension Investment Fund (GPIF), each with $1.3 trillion.

SAFE’s investments include significant holdings in Europe. The PBoC itself has been directly buying minority equity stakes in important European companies.

Another large public sector equity owner is Swiss National Bank, with $480 billion under management. The Swiss central bank had 15% of its foreign exchange assets – or $72 billion – in equities at the end of 2013.

Public pension funds and sovereign wealth funds invest their pension contributions and exchange reserves earned in foreign trade, which is fair enough. The justification for central banks to be playing the stock market is less obvious. Their stock purchases are justified as compensating for lost revenue caused by sharp drops in interest rates. But those drops were driven by central banks themselves; and the broad powers delegated to central banks were supposed to be for conducting “monetary policy,” not for generating investment returns. According to the OMFIF, central banks collectively now have $13.2 trillion in assets (including gold). That is nearly 20% of the value of all of the stock markets in the world, which comes to $62 trillion.

From Monetary Policy to Asset Grabs

Central banks are allowed to create money out of nothing in order to conduct the monetary policies necessary to “regulate the value of the currency” and “maintain price stability.”  Traditionally, this has been done with “open market operations,” in which money was either created by the central bank and used to buy federal securities (thereby adding money to the money supply) or federal securities were sold in exchange for currency (shrinking the money supply).

“Quantitative easing” is open market operations on steroids, to the tune of trillions of dollars. But the purpose is allegedly the same—to augment a money supply that shrank by trillions of dollars when the shadow banking system collapsed after 2008. The purpose is not supposed to be to earn an income for the central bank itself. Indeed, the U.S. central bank is required to return the interest earned on federal securities to the federal government, which paid the interest in the first place.

Further, as noted earlier, it is not the US Federal Reserve that has been massively investing in the stock market.  It is the PBoC, which arguably is in a different position than the US Fed. It cannot print dollars or Euros. Rather, it acquires them from local merchants who have earned them legitimately in foreign trade.

However, the PBoC has done nothing to earn these dollars or Euros beyond printing yuan. It trades the yuan for the dollars earned by Chinese sellers, who need local currency to pay their workers and suppliers. The money involved in these transactions has thus doubled. The merchants have been paid in yuan and the central bank has an equivalent sum in dollars or Euros. That means the Chinese central bank’s holdings are created out of thin air no less than the Federal Reserve’s dollars are.

Battle of the Central Banks?

Western central banks have generally worked this scheme discreetly. Not so much the Chinese, whose blatant gaming of the system points up its flaws for all to see.

Georgetown University historian Professor Carroll Quigley styled himself the librarian of the international bankers. In his 1966 book Tragedy and Hope, he wrote that their aim was “nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.” This system was to be controlled “in a feudalist fashion by the central banks of the world acting in concert by secret agreements,” central banks that “were themselves private corporations.”

It may be the Chinese, not acting in concert, who break up this cartel. The PBoC is no more transparent than the US Fed, but it is not an “independent” central bank. It is a government agency accountable to the Chinese government and acting on its behalf.

The Chinese have evidently figured out the game of the “independent” central bankers, and to be using it to their own advantage. If the Fed can do quantitative easing, so can the Chinese – and buy up our assets with the proceeds. Owning our corporations rather than our Treasuries helps the Chinese break up US dollar hegemony.

Whatever power plays are going on behind the scenes, it is increasingly clear that they are not serving we-the-people. Banks should not be the exclusive creators of money. We the people, through our representative governments, need to be issuing the national money supply directly, as was done in America under President Abraham Lincoln and in colonial times.

_______________________________

Ellen Brown is an attorney, founder of the Public Banking Institute and the author of twelve books, including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally.

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The Practical Choice: Not American Capitalism or “Welfare State Socialism” but an Economy...

For years Americans have assumed that our hard-charging capitalism  is better than the soft-hearted version found in Canada and Europe. American capitalism might be a bit crueler but it generates faster growth and higher living standards overall. Canada’s and Europe’s “welfare-state socialism” is doomed.  

It was a questionable assumption to begin with, relying to some extent on our collective amnesia about the first three decades after World War II, when tax rates on top incomes in the U.S. never fell below 70 percent, a larger portion of our economy was invested in education than before or since, over a third of our private-sector workers were unionized, we came up with Medicare for the elderly and Medicaid for the poor, and built the biggest infrastructure project in history, known as the interstate highway system.

But then came America’s big U-turn, when we deregulated, de-unionized, lowered taxes on the top, ended welfare, and stopped investing as much of the economy in education and infrastructure.

Meanwhile, Canada and Europe continued on as before. Soviet communism went bust, and many of us assumed European and Canadian “socialism” would as well.

That’s why recent data from the Luxembourg Income Study Database  is so shocking.

The fact is, we’re falling behind. While median per capita income in the United States has stagnated since 2000, it’s up significantly in Canada and Northern Europe. Their typical worker’s income is now higher than ours, and their disposable income – after taxes – higher still.

It’s difficult to make exact comparisons of income across national borders because real purchasing power is hard to measure. But even if we assume Canadians and the citizens of several European nations have simply drawn even with the American middle class, they’re doing better in many other ways.

Most of them get free health care and subsidized child care. And if they lose their jobs, they get far more generous unemployment benefits than we do. (In fact, right now 75 percent of jobless Americans lack any unemployment benefits.)

If you think we make up for it by working less and getting paid more on an hourly basis, think again. There, at least three weeks paid vacation as the norm, along with paid sick leave, and paid parental leave.

We’re working an average of 4.6 percent more hours more than the typical Canadian worker, 21 percent more than the typical French worker, and a whopping 28 percent more than your typical German worker, according to data compiled by New York Times columnist Nicholas Kristof.

But at least Americans are more satisfied, aren’t we? Not really. According to opinion surveys and interviews, Canadians and Northern Europeans are.

They also live longer, their rate of infant mortality is lower, and women in these countries are far less likely to die as result of complications in pregnancy or childbirth.

But at least we’re the land of more equal opportunity, right? Wrong. Their poor kids have a better chance of getting ahead. While 42 percent of American kids born into poor families remain poor through their adult lives, only 30 percent of Britain’s poor kids remain impoverished – and even smaller percentages in other rich countries.

Yes, the American economy continues to grow faster than the economies of Canada and Europe. But faster growth hasn’t translated into higher living standards for most Americans.

Almost all our economic gains have been going to the top – into corporate profits and the stock market (more than a third of whose value is owned by the richest 1 percent). And into executive pay (European CEOs take home far less than their American counterparts).

America’s rich also pay much lower taxes than do the rich in Canada and Europe.

But surely Europe can’t go on like this. You hear it all the time: They can no longer afford their welfare state.

That depends on what’s meant by “welfare state.” If high-quality education is included, we’d do well to emulate them. Americans between the ages of 16 and 24 rank near the bottom among rich countries in literacy and numeracy. That spells trouble for the U.S. economy in the future.

They’re also doing more workforce training, and doing it better, than we are. The result is more skilled workers.  

Universal health care is another part of their “welfare state” that saves them money because healthier workers are more productive.

So let’s put ideology aside. The practical choice isn’t between capitalism and “welfare-state socialism.” It’s between a system that’s working for a few at the top, or one that’s working for just about everyone. Which would you prefer?

Raising Taxes on Corporations that Pay Their CEOs Royally and Treat Their Workers Like...

Until the 1980s, corporate CEOs were paid, on average, 30 times what their typical worker was paid. Since then, CEO pay has skyrocketed to 280 times the pay of a typical worker; in big companies, to 354 times.

Meanwhile, over the same thirty-year time span the median American worker has seen no pay increase at all, adjusted for inflation. Even though the pay of male workers continues to outpace that of females, the typical male worker between the ages of 25 and 44 peaked in 1973 and has been dropping ever since. Since 2000, wages of the median male worker across all age brackets has dropped 10 percent, after inflation.

This growing divergence between CEO pay and that of the typical American worker isn’t just wildly unfair. It’s also bad for the economy. It means most workers these days lack the purchasing power to buy what the economy is capable of producing — contributing to the slowest recovery on record. Meanwhile, CEOs and other top executives use their fortunes to fuel speculative booms followed by busts.

Anyone who believes CEOs deserve this astronomical pay hasn’t been paying attention. The entire stock market has risen to record highs. Most CEOs have done little more than ride the wave.

There’s no easy answer for reversing this trend, but this week I’ll be testifying in favor of a bill introduced in the California legislature that at least creates the right incentives. Other states would do well to take a close look.

The proposed legislation, SB 1372, sets corporate taxes according to the ratio of CEO pay to the pay of the company’s typical worker. Corporations with low pay ratios get a tax break.Those with high ratios get a tax increase.

For example, if the CEO makes 100 times the median worker in the company, the company’s tax rate drops from the current 8.8 percent down to 8 percent. If the CEO makes 25 times the pay of the typical worker, the tax rate goes down to 7 percent.

On the other hand, corporations with big disparities face higher taxes. If the CEO makes 200 times the typical employee, the tax rate goes to 9.5 percent; 400 times, to 13 percent.

The California Chamber of Commerce has dubbed this bill a “job killer,” but the reality is the opposite. CEOs don’t create jobs.Their customers create jobs by buying more of what their companies have to sell — giving the companies cause to expand and hire.

So pushing companies to put less money into the hands of their CEOs and more into the hands of average employees creates more buying power among people who will buy, and therefore more jobs.

The other argument against the bill is it’s too complicated. Wrong again. The Dodd-Frank Act already requires companies to publish the ratios of CEO pay to the pay of the company’s median worker (the Securities and Exchange Commission is now weighing a proposal to implement this). So the California bill doesn’t require companies to do anything more than they’ll have to do under federal law. And the tax brackets in the bill are wide enough to make the computation easy.

What about CEO’s gaming the system? Can’t they simply eliminate low-paying jobs by subcontracting them to another company – thereby avoiding large pay disparities while keeping their own compensation in the stratosphere?

No. The proposed law controls for that. Corporations that begin subcontracting more of their low-paying jobs will have to pay a higher tax.  

For the last thirty years, almost all the incentives operating on companies have been to lower the pay of their workers while increasing the pay of their CEOs and other top executives. It’s about time some incentives were applied in the other direction.

The law isn’t perfect, but it’s a start. That the largest state in America is seriously considering it tells you something about how top heavy American business has become, and why it’s time to do something serious about it.

The Distributional Games

Every year I ask my class on “Wealth and Poverty” to play a simple game. I have them split up into pairs, and imagine I’m giving one of them $1,000. They can keep some of the money only on condition they reach a deal with their partner on how it’s to be divided up between them. I explain they’re strangers who will never see one other again, can only make one offer and respond with one acceptance (or decline), and can only communicate by the initial recipient writing on a piece of paper how much he’ll share with the other, who must then either accept (writing “deal” on the paper) or decline (“no deal”). 

You might think many initial recipients of the imaginary $1,000 would offer $1 or even less, which their partner would gladly accept. After all, even one dollar is better than ending up with nothing at all. 

But that’s not what happens. Most of the $1,000 recipients are far more generous, offering their partners at least $250. And most of partners decline any offer under $250, even though “no deal” means neither of them will get to keep anything. 

This game, or variations of it, have been played by social scientists thousands of times with different groups and pairings, with surprisingly similar results. 

A far bigger version of the game is now being played on the national stage. But it’s for real — as a relative handful of Americans receive ever bigger slices of the total national income while most average Americans, working harder than ever, receive smaller ones. And just as in the simulations, the losers are starting to say “no deal.” 

According to polls, they’ve said no deal to the pending Trans Pacific Trade Agreement, for example, and Congress is on the way to killing it. 

It’s true that history and policy point to overall benefits from expanded trade because all of us gain access to cheaper goods and services. But in recent years the biggest gains from trade have gone to investors and executives while the burdens have fallen disproportionately on those in the middle and below who have lost good-paying jobs.

By the same token, most Americans are saying “no deal” to further tax cuts for the wealthy and corporations. In fact, some are now voting to raise taxes on the rich in order to pay for such things as better schools, as evidenced by the election of Bill de Blasio as mayor of New York.

Conservatives say higher taxes on the rich will slow economic growth. But even if this argument contains a grain of truth, it’s a non-starter as long as 95 percent of the gains from growth continue to go to the top 1 percent – as they have since the start of the recovery in 2009.

Why would people turn down a deal that made them better off simply because it made someone else far, far better off?

Some might call this attitude envy or spite. That’s the conclusion of Arthur Brooks, president of the American Enterprise Institute, in a recent oped column for the New York Times. But he’s dead wrong.

It’s true that people sometimes feel worse off when others do better. There’s an old Russian story about a suffering peasant whose neighbor is rich and well-connected. In time, the rich neighbor obtains a cow, something the peasant could never afford. The peasant prays to God for help. When God asks the peasant what he wants God to do, the peasant replies, “Kill the cow.” 

But Americans have never been prone to “kill the cow” type envy. When our neighbor gets the equivalent of new cow (or new car), we want one, too.

Yet we are sensitive to perceived unfairness. When I ask those of my students who refuse to accept even $200 in the distribution game why they did so, they rarely mention feelings of envy or spite. They talk instead about unfairness. “Why should she get so much?” they ask. “It’s unfair.”

Remember, I gave out the $1,000 arbitrarily. The initial recipients didn’t have to work for it or be outstanding in any way.

When a game seems rigged, losers may be willing to sacrifice some gains in order to prevent winners from walking away with far more — a result that might feel fundamentally unfair.  

To many Americans, the U.S. economy of recent years has become a vast casino in which too many decks are stacked and too many dice are loaded. I hear it all the time: The titans of Wall Street made unfathomable amounts gambling with our money, and when their bets went bad in 2008 we had to bail them out. Yet although millions of Americans are still underwater and many remain unemployed, not a single top Wall Street banker has been indicted. In fact, they’re making more money now than ever before. 

Top hedge-fund managers pocketed more than a billion dollars each last year, and the stock market is higher than it was before the crash. But the typical American home is worth less than before, and most Americans can’t save a thing. CEOs are now earning more than 300 times the pay of the typical worker yet the most workers are earning less, and many are barely holding on. 

In 2001, a Gallup poll found 76 percent of Americans satisfied with opportunities to get ahead by working hard, and only 22 percent were dissatisfied. But since then, the apparent arbitrariness and unfairness of the economy have taken a toll. Satisfaction has steadily declined and dissatisfaction increased. Only 54 percent are now satisfied, 45 percent dissatisfied.

According to Pew, the percentage of Americans who feel most people who want to get ahead can do so through hard work has dropped by 14 points since about 2000.

Another related explanation I get from students who refuse $200 or more in the distribution game: They worry that if the other guy ends up with most of the money, he’ll also end up with most of the power. That will rig the game even more. So they’re willing to sacrifice some gain in order to avoid a steadily more lopsided and ever more corrupt politics. 

Here again, the evidence is all around us. Big money had already started inundating our democracy before “Citizens United vs. Federal Election Commission” opened the sluice gates, but now our democracy is drowning. Only the terminally naive would believe this money is intended to foster the public interest. 

What to do? Improving our schools is critically important. Making work pay by raising the minimum wage and expanding the Earned Income Tax Credit would also be helpful. 

But these are only a start. In order to ensure that future productivity gains don’t go overwhelmingly to a small sliver at the top, we’ll need a mechanism to give the middle class and the poor a share in future growth. 

One possibility: A trust fund for every child at birth, composed of an index of stocks and bonds whose value is inversely related to family income, which becomes available t