Today’s News June 12, 2015

• Toronto’s Epic Condo Bubble Suddenly Turns into Condo Glut

  Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

  The high-rise construction boom in Toronto has been evident for a while. It has been motivated by sky-high prices. In May, prices in Toronto rose another 5% from a year ago. For all types of homes, prices are now 42% higher than at the crazy peak of the prior bubble! And if people can’t afford to buy any longer, even with super-low interest rates, well, they can step down to a fancily equipped micro-condo, or more commonly called shoebox condo, where the dining table might fold into a bed.

  But suddenly we get a nerve-wracking disturbance in this beautiful picture:

  National Bank Financial said in a note to its clients that, based on data from Canada Mortgage and Housing Corp., the number of completed but unsold condos in Toronto spiked in May to 2,837, an all-time record high.

  So the monthly data is choppy and may not be very reliable. It’s an estimate, and estimating new and unsold condos isn’t that easy. But the magnitude of this spike far exceeds the monthly ups and downs in recent years, and exceeds even those dizzying spikes in the late 1980s and early 1990s when the Toronto condo market went completely haywire.

  But it wasn’t just one month. The count had edged up in April to hit 2,038 after having already spiked beautifully in March to the highest level since the early 1990s. This is what this phenomenon looks like:

  

  The report blamed the absorption rate, a measure of condos that have been completed during the month and were either sold or rented. It plunged to 69.5%. But don’t worry. “It would be premature to think that the absorption rate will stay low, causing persisting accelerated increases in the number of vacant completed condos,” the note said to mollify client anxieties.

  Such a spike in unsold units and such a plunge in the absorption rate would normally get folks to fret about oversupply, future pricing pressures, and other industry nightmares. Condo construction booms have a nasty tendency to flip suddenly into busts, and then no one can turn off the spigot of new units coming on the market because high-rise condos take years to plan and build, and they just keep coming.

  But don’t worry. Business News Network, in reporting on this spike, pointed out that National Bank senior economist Marc Pinsonneault “says there is no cause for concern at this point about a future condo glut driving down prices.”

  This is what he wrote in the note:

  To be sure, the situation deserves monitoring. But one month does not make a trend. According to more comprehensive data from Realnet (it includes presales and condos under construction as well as completed condos), the number of unsold new condos has been trending down since the second half of 2014.

  The gurus at BNN came out swinging to soothe our frayed nerves over a possible condo glut. There were “lots of reasons” to thing that the terrible absorption rate would not persist, they said. Based “on long-term fundamentals, everything looks like it’s in balance and fine.” In fact, it “looks like a well-behaved Toronto condo market.”

  How well-behaved?

  Canada Mortgage and Housing Corporation (CMHC), an entity of the Canadian government, just released the housing starts data. In the Toronto Census Metropolitan Area, starts of single-family detached homes edged up 6% year-to-date through May to 3,121 units. Starts of “all others,” a category that consists largely of condos in Toronto, jumped 29% year-to-date to 13,384 units. But in May alone, compared to last year, “all others” soared 80%!

  That’s the true signature of a condo construction boom. Now all we need for this condo market to remain “well-behaved,” despite soaring starts and unsold inventories, is for a lot of buyers with a lot of money to emerge very quickly from China or wherever and “absorb” these units and all the units still coming on the market. Or else, this is going to turn into one epic condo glut.

  This is the Canadian real estate environment where millennials and immigrants are “plankton” in the “food chain” for “big wales and sharks.” Read… Canadian Mortgage Insurer Tells US Hedge Funds Why Canada’s Housing Bubble Is Immortal. Hilarity Ensues

  

  
  
  

  

• Europe Gives Greece 24 Hours To Comply; Germany Draws Up Capital Control Plans

  EU officials turned up the heat on Athens Thursday after the IMF withdrew its team and sent its lead negotiators back to Washington. 

  In what can only be described as a half-hearted effort, Greek PM Alexis Tsipras submitted two three-page proposals earlier this week that were dismissed by creditors as “not serious.” We suggested that perhaps that was intentional as Tsipras, having bought Greece some time by opting for the “Zambian” IMF payment bundle, is simply keeping up appearances while the real negotiating is going on behind the scenes with Syriza party hardliners who Tsipras desperately needs to support any proposal before it goes to parliament in order to avoid what could quickly deteriorate into a political and social crisis. 

  One has to believe that Brussels understands this, but it could very well be that between Tsipras’ scathing op-ed (published two Sundays ago) and the PM’s fiery speech to parliament last Friday, creditors are becoming concerned that Tsipras might actually be starting to believe that he can effectively blackmail the EMU by threatening to prove, once and for all, that the currency bloc is in fact dissoluble no matter what manner of protestations one might hear in polite company. 

  So, with the IMF having thrown in the towel, and with German lawmakers set to rally behind the incorrigible FinMin Wolfgang Schaeuble in what amounts to a mutiny on the SS Merkel, Europe appears to have finally had enough because by Thursday evening, reports indicated that EU officials have given Greece 24 hours to come back with a proposal that includes pension reform and VAT increases. 

  Via Bloomberg:

  Greece was warned by a group of European Union officials in Brussels it had less than 24 hours to come up with a serious counter-proposal, according to a person familiar with the discussion.

   

  Greek delegate told by EU officials that a list must includes reform on pension and VAT.

   

  Greece told by the officials that they are taking seriously all scenarios.

   

  EU official didn’t specifically say what would happen to Greece if there was no plan presented tomorrow.

  And meanwhile, Reuters (citing Bild) says Germany is now engaged in “concrete” discussions over how to handle a Greek bankruptcy :

  The German government is holding “concrete consultations” on what to do in the case of a bankruptcy of the Greek state, German newspaper Bild said, citing several people familiar with the matter.

   

  This includes discussions about introducing capital controls in Greece if the crisis-stricken country goes bankrupt, Bild said in an advance copy of an article due to be published on Friday.

   

  It said a debt haircut for Greece was also being discussed, adding that government officials were in close contact with the European Central Bank on that.

   

  The German government did not, however, have a concrete plan of how it would react if Greece goes bankrupt and much would have to be decided on an ad-hoc basis, Bild cited the sources as saying.

  The takeaway here is that come hell, high water, or “Grimbo,” the EU is going to extract its pension cuts and VAT hikes from Tsipras, and not because anyone seriously thinks it will make a difference in terms of putting the country on a ‘sustainable’ path, but because the EU simply cannot afford for Syriza sympathizers in more economically consequential countries like Spain to get any ideas about rolling back austerity (of ‘fauxsterity‘ as it were) and using EMU membership as a bargaining chip. 

  The only question now is whether Tsipras has been successful at convincing party hardliners to support further concessions, because if this turns into a protracted political battle, it’s entirely possible that the country will descend into chaos, if only for a few weeks. 

  Stay tuned, and as a reminder, here’s a flowchart that outlines various political and economic ramifications as well as a guide to what’s being negotiated:

  

  

  

  

  
  
  

  

• The End Of Buybacks? Goldman Warns Political Pressure On Share Repurchases Is Rising

  While we are now well aware of the unpatriotic-ness of tax inversions, Goldman Sachs raises the red flag on another corporate action that is about to become highly politicized – share buybacks. The last (and only) pillar of buying left in the US equity markets is set to draw political attention and likely to gain prominence, particularly ahead of the 2016 election.

  As Goldman Sachs' Jan Hatzius explains,

  • Stock buybacks are likely to grow strongly again this year and the trend has begun to draw political attention. We don't expect any buyback-related rules to change in the near term, particularly in light of Republican majorities in Congress, but the subject looks likely to gain prominence, particularly ahead of the 2016 election. However, even if changes were made to discourage buybacks, it is not clear whether business investment or hiring would increase, as proponents of a change suggest.

  Stock repurchases continue to grow and have begun to attract political scrutiny. Buybacks have increased throughout the recovery, totaling over $500 billion in 2014 among S&P 500 companies and representing more than one-third of cash use and about half of earnings. Our equity strategists expect buybacks to rise to around $600 billion in 2015.

  Some lawmakers have linked share repurchases with stagnant wages and a lack of business investment and have recently begun to call for regulatory changes to constrain repurchase activity. The two most obvious avenues for policy change would be securities rules related to the transactions themselves, or tax changes that increase the relative cost to corporations of buying back their own stock instead of paying dividends or making investments in productive capital.
   

  

  Most of the political focus to date has been on securities rules. Sen. Tammy Baldwin (D-WI) sent a request for information to the Securities and Exchange Commission (SEC) in late April. Her letter requested SEC analysis on the long-term impact of the original 1982 rule providing a legal “safe harbor” for the repurchase of shares by the issuer, an accounting of investigations into violations of the buyback rules, and an assessment of the rule’s effect on capital formation. Sen. Elizabeth Warren (D-MA) has also recently raised the issue, describing buybacks as “stock manipulation” and calling on the SEC to consider changing the rules.

  Corporate income tax considerations have played a smaller role in the debate thus far. Currently, buybacks themselves are not deductible but two somewhat related practices are.

  • First, some buybacks are funded by debt issuance, the interest on which is tax deductible.
  • Second, the increased importance of compensation through stock options may have contributed to the increase in share repurchase activity, as firms repurchase stock to offset the issuance of options-related shares. Stock option related costs are often deducted from taxable income as a compensation expense.

  To our knowledge, there has been no proposal to change tax treatment of debt-financed repurchases, but Sen. Jack Reed (D-RI) has offered legislation to repeal the tax deductibility of performance based pay (e.g., stock options) in excess of $1 million per year. (Congress repealed the deduction for cash compensation greater than $1 million in 1993.) While not directly related to share repurchases, policy changes that reduce the use of stock options might also reduce the prevalence of stock buybacks.

  It is unlikely in our view that such efforts will get very far this year or next. Tax-related changes would seem to face the highest hurdle, since any significant tax change would require legislation, which seems unlikely to pass in a Republican-controlled Congress. As a procedural matter, the SEC has the ability to change some of the rules related to buyback transactions–for example, it could make changes to the rules it originally issued in 1982 that provides a "safe harbor" from legal liability for repurchases that meet certain restrictions related to manner, timing, price, and volume of purchases. However, it is not clear that the SEC would make such a change; Democratic Commissioner Stein has spoken about share repurchase policy, but the topic does not appear to be a concern for the commission more generally.

  That said, the political focus on the issue seems likely to increase further, for three reasons.

  • First, as noted above, buybacks continue to grow. This has raised concerns not just among progressive lawmakers but also among some investors and analysts who suggest that the funds might be better put to other uses.
  • Second, the White House is expected to nominate two SEC commissioners, one Republican and one Democrat, to replace two departing members. It seems likely that the nominees will be pressed on this issue among many others.
  • Third, as the 2016 presidential election campaign gets into full swing later this year, candidates will come under pressure to take positions on a number of financial regulatory issues, and this may be among them.

  In the seemingly unlikely event that restrictions on buybacks were put in place, it is unclear what effect they would have on business investment. Technical changes to share repurchase programs might not have much of an effect, as long as companies are still free to repurchase shares in some manner. Moreover, since firms can currently borrow at low rates, there may be less of a tradeoff between making profitable capital investments and returning capital to shareholders than usual.

  That said, in a normal interest rate environment, companies must choose how to allocate limited funds, and the return of capital to shareholders might constrain business investment in some cases. To investigate this, we add S&P 500 aggregate buybacks and dividends to a model of capital investment that forecasts growth in real capital spending using output growth, corporate profits, access to credit, and the capital stock. Adding various lags of aggregate S&P 500 buybacks does not improve the model's fit, but including a variable representing total return of capital to shareholders, i.e., buybacks plus dividends, explains an additional 10% of the variation in capital investment from 1990 to 2014. However, the relationship between capital return and investment in any given period is fairly loose; each percentage point increase in capital returned to shareholders is associated with 0.04pp slower capital investment growth, suggesting that the 13% increase in buybacks and dividends that our equity strategists forecast would be associated with capital investment growth roughly 0.5pp slower than if no payouts were made, or about 0.1pp slower than if companies grew combined dividends and buybacks by 10% as they did in 2014.

  Overall, corporate share repurchases look likely to draw increased political attention, but rules changes are unlikely in the near term. To the extent that any policy changes are made, the effect on business investment is unclear but seems likely to be small.

  

  

  
  
  

  

• Paul Ryan Channels Pelosi: "You Have To Pass ObamaTrade To See What’s In ObamaTrade"

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Chief Obamatrade proponent House Ways and Means Committee chairman Rep. Paul Ryan (R-WI) admitted during Congressional testimony on Wednesday evening that despite tons of claims from him and other Obamatrade supporters to the contrary, the process is highly secretive.

   

  He also made a gaffe in his House Rules Committee testimony on par with former Speaker Rep. Nancy Pelosi (D-CA)’s push to pass Obamacare, in which she said infamously said: “we have to pass the bill so that you can find out what is in it.”

   

  “It’s declassified and made public once it’s agreed to,” Ryan said of Obamatrade in Rules Committee testimony on Wednesday during questioning from Rep. Michael Burgess (R-TX).

   

  What Ryan is technically referring to is that TPP will become public if TPA is agreed to—but Congress will lose much of its ability to have oversight over and influence on the process, since TPP is, in many respects, already negotiated. It’s 800 pages long, and on fast-track, Congress will only get an up-or-down vote and won’t be able to offer amendments. The Senate vote threshold also drops down to a simple majority rather than normally having a 60-vote threshold, or in the case of treaties, a 67-vote threshold.

   

  – From the Breitbart article: Paul Ryan’s Pelosi-Esque Obamatrade Moment: ‘It’s Declassified and Made Public Once it’s Agreed To’

  If you still think that the establishment Republicans in Congress represent real opposition to President Obama’s policies, you’re either extremely brainwashed or extremely stupid.

  Honestly, I don’t know what it will take for some people to wake up. How many times do you need to be used, abused and conned by slimy politicians before you can shake off your political Stockholm Syndrome? Does John Boehner need to drive up to your front door in a motorcade and eat your first born’s liver at the dinner table with your wife’s silverware before you get it? It’s pathetic.

  The focus of today’s piece is the secretive corporatist giveaway known as the Trans Pacific Partnership, or TPP. I’ve written about this frequently as of late, see:

  Forget the TPP – Wikileaks Releases Documents from the Equally Shady “Trade in Services Agreement,” or TISA

  America’s Most Wanted Secret – Wikileaks is Raising $100K Reward for Leaked Drafts of the TPP

  Julian Assange on the TPP – “Deal Isn’t About Trade, It’s About Corporate Control”
  
  Trade Expert and TPP Whistleblower – “We Should Be Very Concerned about What’s Hidden in This Trade Deal”

  As the Senate Prepares to Vote on “Fast Track,” Here’s a Quick Primer on the Dangers of the TPP

  With the Senate having predictably passed Trade Promotion Authority, i.e., “fast track,” it now moves to the House of Representatives, where it is expected to be put to a vote tomorrow. Initially, many observers predicted fast track would have a harder time passing in the House, but fortunately for Obama, Republicans have never worked harder to push anything since the Iraq War. As I noted on Twitter earlier:

  Don’t believe me. How about this headline from the Hill earlier today: GOP, Obama on Cusp of Fast-Track Trade Victory.

  If that does’t tell you everything you need to know, I don’t know what will.

  Here are a few excerpts from that piece:

  House Republicans have set the stage for a high-stakes vote Friday to grant President Obama fast-track trade authority.

   

  While objections from some Democrats on a last-minute deal related to the trade package raised some doubts about the outcome, Obama and the GOP appear poised to earn a significant victory.

   

  White House press secretary Josh Earnest expressed confidence there would be a “bipartisan majority” behind the bill.

   

  “Outbreaks of bipartisanship in the House of Representatives in the last couple of years have not been common, so that’s why I would not characterize it as a slam dunk,” he said.

  Before you break out the champagne…

  

  All that said, this isn’t really bipartisan. It’s all about the Republicans slobbering over themselves to push this sovereignty destroying “trade” agreement into law.

  In case you still harbor any doubts as to how seriously Republican leadership is taking this whole debate, Paul Ryan made it abundantly clear when he slipped up and channeled Nancy Pelosi the other day. Breitbart reports that:

  Chief Obamatrade proponent House Ways and Means Committee chairman Rep. Paul Ryan (R-WI) admitted during Congressional testimony on Wednesday evening that despite tons of claims from him and other Obamatrade supporters to the contrary, the process is highly secretive.

   

  He also made a gaffe in his House Rules Committee testimony on par with former Speaker Rep. Nancy Pelosi (D-CA)’s push to pass Obamacare, in which she said infamously said: “we have to pass the bill so that you can find out what is in it.”

   

  “It’s declassified and made public once it’s agreed to,” Ryan said of Obamatrade in Rules Committee testimony on Wednesday during questioning from Rep. Michael Burgess (R-TX).

   

  What Ryan is trying to convince House Republicans to do is vote for Trade Promotion Authority (TPA) which would fast-track at least three highly secretive trade deals—specifically the Trans Pacific Partnership (TPP), the Trade in Services Agreement (TiSA), and the Transatlantic Trade and Investment Partnership (T-TIP)—and potentially more deals.

   

  Right now, TiSA and T-TIP text are completely secretive and unavailable for even members of Congress to read while TPP text is available for members to review—although they need to go to a secret room inside the Capitol where only members of Congress and certain staffers high-level security clearances, who can only go when members are present, can read the bill.

   

  Ryan’s exchange in which he made this gaffe came as Burgess, who opposes Obamatrade, and Rules Committee chairman Rep. Pete Sessions (R-TX), who stands with Ryan supporting it, were discussing the secrecy of the deal with him. It came right after an incredible exchange where Ryan attempted a ploy to try to save immigration provisions contained within the Obamatrade package as a whole—specifically TiSA—that were exposed by Breitbart News earlier on Wednesday, a problem for which he put forward a phony non-solution designed to get more votes for his Obamatrade agenda but not stop the immigration provisions.

  Immigration provisions? What? Yep, you read that right. More on this later.

  “And I appreciate all of that but again, you read through this language down in the secret room and I welcome the day when people can read it—“ Burgess said, before Ryan cut him off.

   

  “By the way, TPA—it’s declassified and made public once it’s agreed to,” Ryan said.

  You really can’t make this stuff up. So conservative of you Mr. Ryan.

  What Ryan is technically referring to is that TPP will become public if TPA is agreed to—but Congress will lose much of its ability to have oversight over and influence on the process, since TPP is, in many respects, already negotiated. It’s 800 pages long, and on fast-track, Congress will only get an up-or-down vote and won’t be able to offer amendments. The Senate vote threshold also drops down to a simple majority rather than normally having a 60-vote threshold, or in the case of treaties, a 67-vote threshold.

   

  Sessions then jumped in to say he and Ryan are available to answer any questions about this matter whenever anyone wants—yet Sessions’ committee staff is publicly refusing to answer any detailed questions from Breitbart News on Obamatrade at this time.

   

  Burgess noted how the process seeking fast-track in the Bush administration was much more transparent than it is now.

   

  “Thank you Mr. Chairman. I promised to be on my best behavior today and I am really trying—it took a long time for me to even be able to see the agreement down in the secret room even though I was willing to sign the release that said I wouldn’t talk about it. It took me a long time to get an audience with the U.S. Trade Representative,” Burgess said. “It should not have done that. Ten years ago we did CAFTA [Central American Free Trade Agreement], Sen. Rob Portman (R-OH) was in my office—he lived there. I couldn’t get rid of him.

   

  “This time, I couldn’t get a—it was an act of Congress literally to get him to come and talk to my subcommittee on Energy and Commerce, which is the subcommittee of Commerce, Manufacturing and Trade.

  By “him,” he seems to be referring to top U.S. Trade Representative, Michael Froman. In case you aren’t familiar with him, see: How Obama’s Top Trade Representative, Michael Froman, Received Millions from Citigroup During the Financial Crisis.

  Ryan then interrupted Burgess again to argue that his concerns over the secrecy are why Republicans should relent and support Obamatrade.

  Um, ok. Meanwhile, it appears Mr. Ryan is going out of his way to grant Obama increased immigration powers. Also from Breitbart:

  In the wake of revelations that technically a vote for Trade Promotion Authority (TPA) would be a vote to grant the executive branch massively-expanded immigration powers, the Washington establishment cooked up an elaborate ruse to try to save the flailing Obamatrade bill.

   

  Earlier on Wednesday, leading up to the House Rules Committee hearing where chairman Rep. Pete Sessions (R-TX) is teaming up with House Ways and Means Committee chairman Rep. Paul Ryan (R-WI), Breitbart News exposed the expansive immigration provisions inside the Obamatrade package. Specifically, secret Obamatrade documents leaked to Wikileaks show that there are provisions contained within draft Trade in Services Agreement (TiSA) text that would massively expand President Obama’s immigration authority when it comes to immigration matters.“The existence of these ten pages on immigration in the Trade and Services Agreement make it absolutely clear in my mind that the administration is negotiating immigration – and for them to say they are not – they have a lot of explaining to do based on the actual text in this agreement,” NumbersUSA director of government relations Rosemary Jenks told Breitbart News.

  Well then.

  “I understand the concerns you have expressed about including in U.S. free trade agreements any provisions related to U.S. immigration laws, particularly any provision obligating the United States to grant access or expand access to visas issued under section 101(a)(15) of the Immigration and Nationality Act (8 U.S.C. 1101 (a)(15)),” Ryan wrote to King about the agreement to put forward the King amendment. “In acknowledgement of these concerns, I would like to convey that when the Trade Facilitation and Enforcement Act of 2015 is considered in the House, I intend to seek adoption of the text of Senate Amendment 1385, offered by Senator Hatch and Senator Cruz when the Bipartisan Congressional Trade Priorities and Accountability Act was considered by the Senate last month, as well as the language you propose in your letter, to ensure that trade agreements do not require changes to U.S. immigration laws.”

   

  What Ryan is saying here — in response to concerns King raised about immigration provisions in trade agreements being fast-tracked under TPA in a previous letter to Ryan — is that Ryan will include an amendment in future legislation, not the current TPA. That means that the current TPA, if it passes the House, would still allow the immigration provisions to move forward. It also means the U.S. Senate could reject the amendment on the future legislation — which it probably will — and that if the Senate somehow does pass the legislation, Obama could veto it.

   

  That didn’t stop King from claiming — inaccurately — in a press release that this compromise with Ryan would fix the issue.

   

  Glyn Wright, the executive director of Eagle Forum, told Breitbart News in an email that this whole ruse wouldn’t fix anything:

   

  “Although American voters gave Republicans the majority in Congress to stop Obama, Republican Leadership is desperate to accomplish his top priority — the Trans-Pacific Partnership. There are a variety of concerns with the process and the policy of Trade Promotion Authority (TPA), and Leadership is currently twisting arms and making promises in a desperate attempt to limit defections of conservative Members who have legitimate concerns. Unfortunately, several Members have traded their votes for meaningless, pie-in-the-sky promises on issues like immigration, currency manipulation, anti-dumping provisions. These are legitimate issues that should be addressed in the actual text of TPA with enforceable provisions, not currently included in TPA. Instead, Chairman Ryan is promising that their concerns will be addressed in a future customs bill — the Trade Facilitation and Trade Enforcement Act. The customs bill is completely separate from TPA, and even if these concerns are addressed, it will be conferenced with the Senate where conservatives are unlikely to win. Furthermore, there is no guarantee that President Obama will sign the customs bill, even if it passes the House and the Senate. These promises will only serve to garner TPA enough votes; they will not affect the final agreement. Pew Research Center recently released a poll stating 75 percent of the Republican-leaning public want Republicans in Congress to challenge Obama more often. Instead, Republican Leadership is intent on running roughshod over conservative principles to achieve President Obama’s top priority in the name of free trade.”

   

  Cruz, of course, has previously praised this amendment that didn’t really fix the problem back in the Senate side of things. In fact, Cruz’s office—now several weeks later—still hasn’t answered detailed questions about the amendment from Breitbart News. But he did issue a statement supportive of it.

  Ah Ted Cruz, the biggest sham corporatist masquerading as a “libertarian” in Congress.

  Of course, everything Ryan said — as Glyn Wright of Eagle Forum noted previously — was untrue. But more importantly, all the politicians in Washington were happy as as Rep. Pete Sessions (R-TX) wrapped that segment of the Rules Committee hearing by saying Ryan has done “an outstanding job” putting together phony fixes to real problems.

   

  Pete Sessions’ office, despite a claim during the hearing from the chairman that he would be transparent about this matter, has explicitly refused to answer questions from Breitbart News about this matter. Cruz’s team hasn’t responded to a request for comment on record either.

  While all of this is certainly depressing, I want to end this piece on a positive note. Political change is notoriously slow, but it is happening. For evidence, see the following excerpts from a Wall Street Journal article published today:

  Tea party activists, labor unions both say Obama’s trade agenda is undemocratic and secretive.

   

  Some of the fiercest opponents of President Barack Obama’s trade policy on the left and right are sending notably similar messages in a bid to kill legislation in the House designed to expedite a major Pacific trade deal.

   

  With a deciding vote set for Friday, unions and progressive groups are emphasizing arguments that also appeal to conservative organizations, accusing the Obama administration of undue secrecy, stretching the limits of executive power and undermining U.S. sovereignty.

   

  “There are some areas where the guys on the left—unions and others—get it right, and this is one of those issues,” said Judson Phillips,head of Tea Party Nation, one of the main tea party organizations.

   

  But liberal and conservative groups are targeting a specific arbitration feature of the TPP known as investor-state dispute settlement, which allows investors from one country to sue foreign governments in an international arbitration panel rather than in national courts. The administration points out that the U.S. has never lost a case in the decades-old arbitration system, but lawmakers ranging from Sen. Elizabeth Warren (D., Mass.) to Sen. Jeff Sessions (R., Ala.) have warned the measure could undermine U.S. laws.

   

  The obscure legal provision helped bring together perhaps the biggest foe of Mr. Obama’s trade policy— Lori Wallach of the nonprofit group Public Citizen—with Mr. Phillips of Tea Party Nation.

   

  The two met at the Washington studios of Russian state television network RT, recognized a shared legal background and point of view, chatted later at a Starbucks, and appeared together at the debut of Ralph Nader’s book “Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State.”

   

  "Lori is probably the polar opposite from me, at least politically, and yet it’s very interesting the number of issues she and I agree on,” Mr. Phillips said.

  While these two working together is great, the fact one of them would still say the other is “the polar opposite from me, at least politically, and yet it’s very interesting the number of issues she and I agree on,” shows you how deep the propaganda and brainwashing runs. Judson Phillips still thinks some meaningless, outdated brand such as “Republican” or “Democrat” means something. It doesn’t. If you agree on a lot of issues, then you aren’t polar opposites politically. Stop believing the hype and come together for real. Let’s not forget:

  

  An entirely new political movement is being born, these things just take a long time to catch fire. Nothing that is done can’t be reversed, after all, look at what politicians did to the Constitution. If you’re still in doubt, see:

  A Libertarian-Liberal Alliance Forms to Tackle Criminal Justice Reform

  Thoughts on Election Day: Relax—Both Parties Are Going Extinct

  #StandwithRand: The Filibuster that United Libertarian and Progressive Activists

  Former Aide to Bill Clinton Speaks – “My Party Has Lost its Soul”

  

  

  
  
  

  

• For Millennials, The Homeownership Dream Is Dying

  We’ve talked quite a bit lately about homeownership rates in America. To recap, this month marks the 20-year anniversary of Bill Clinton’s 100-point National Homeownership Strategy which sought to raise homeownership rates in America to record levels — and it did. Unfortunately, the foundation upon which this miracle was built began to crack in mid-2007 and by the summer of 2008, the two entities which had for years underwritten the American Dream were in receivership. 

  After the crisis, PE swooped in to snap up foreclosed properties and more recently, the largest firms have set about loaning money to home flippers and aspiring landlords. Meanwhile, the housing collapse turned a nation of owners into a nation of renters and demand for rentals has of course driven up rents, making it more difficult for prospective home buyers to save enough for a down payment.

  All of this is cast against a subpar (or perhaps “non-existent” is the better term) economic recovery wherein weak demand has curtailed spending and investment, leading directly to lackluster wage growth. This of course, makes it still more difficult for would-be buyers to make a down payment and indeed it says quite a bit about the state of the economy when homeownership rates continue to hit multi-decade lows even as Fannie and Freddie are now backing loans with down payments as low as 3% while FHA has cut premiums at the same time. 

  If you’re a millennial, the situation is even more desperate. As we’ve documented extensively, new graduates are having a difficult time finding jobs that are commensurate with their education. College degrees have become so commonplace that they have largely ceased to differentiate candidates from one another and on top of that, many young job seekers are discovering that their $35,000 educations did not provide them with the skills sets employers are looking for. Speaking of $35,000 educations, student loan debt is perhaps the biggest impediment to homeownership for young Americans. 

  Combine a 14% U-6 unemployment rate for 18-29 year olds with soaring rents and a housing market that’s pricing out young adults in many of the nation’s most desirable locales and you have the recipe for historically low homeownership rates for millenials. A new study by The Urban Institute has more on homeownership by age group:

  For 30- to 34-year-olds … homeownership rose from 26 percent in 1940 to 56 percent in 1960 and continued climbing to 61 percent in 1980. The homeownership rate for adults in their early 30s then declined to 53 percent in the 1980s, grew by 1 percentage point between 1980 and 2007, and plummeted to 44 percent in 2013. Given the parallel decline in homeownership for 25- to 29-year-olds, it is unclear whether working-age Americans will ever regain 1980’s peak homeownership rate.

   

  

   

  Though the economy is solidly recovering, the mortgage credit regime remains unresolved and credit tight. The millennial generation is now ages 20 to 35, still mostly at the beginning of their delayed transition into headship and homeownership. It is a diverse generation racially and by national origin. 

   

  Millennials also have very large inequalities in income, educational backgrounds, and access to resources from parents and grandparents. These uncertainties and disparities make it difficult to project with certainty how millennials will transition into housing markets.

  The report goes on to project declining homeownership rates for working age adults all the way through 2030…

  

  …and the trends are consistent across borrowers…

  

  The Urban Institute offers some explanations for the above which should sound quite familiar to regular readers:

  Why will the overall homeownership rate continue to fall in 2020 and 2030? Possible contributors include the following:

   

  Hispanics and blacks have lower homeownership rates than whites, and both groups are growing as shares of the population. But changes in racial/ethnic and age composition alone do not account for the drop in the homeownership rate..

   

  Real wages have been very flat since 1996, and have actually declined among adults ages 25–34. This stagnation makes it much harder for people at any age, particularly the young, to save enough for down payments. Even for young adults with good jobs, low vacancy rates and high rents make it more difficult to save.

   

  Student loan debt has increased from about $300 billion in 2003 to over $1.3 trillion in 2014. 

  In sum, a combination of demographics, flat wage growth, and student debt are conspiring to impede homeownership for young adults.

  Lower homeownership rates create demand for rentals which in turn drives up the cost of renting, squeezing household balance sheets further and making it still more difficult to afford a down payment, which leads to still more demand for rentals, still higher rents, and so on and so forth.

  With tuition rising and the US economy stalling out (adjustments for “residual seasonality” notwithstanding), it’s not entirely clear how these trends will reverse themselves over the medium-term and indeed, if the projections shown above are any indication, this situation is likely to persist for decades to come.

  

  

  
  
  

  

• Americans Sign Petition For "Pre-Emptive Nuclear Strike" Against Russia

  Forget Caitlyn Jenner, distracted Americans have moved on and are now gladly signing a petition to launch a pre-emptive nuclear strike against Russia “to show them who is the real super-power.”

   

   

  h/t Jim Quinn’s Burning Platform blog

  

  

  
  
  

  

• Trapped In A Bubble

  Via Golem XIV,

  When in a hole, stop digging. But when in a bubble, keep blowing.  –  Not very ancient proverb.

  I think our ruling and wealthy elite are worried that they are  stuck in their own ponzi scheme or bubble and are suffering from the general problem of all ponzis and bubbles – how to get out.

  You see bubbles and Ponzi’s are fine as long as they keep going. As long as there are ever more suckers to recruit and as long as enough of those already in, remain confident and choose to stay in, there is no real reason a ponzi cannot go on and on.  A perfect example is Madoff’s scheme. The weakness of all bubbles, ponzi or otherwise, is that all it takes is a rumour that it might be time to get out,  that it might soon get difficult to get out, or that someone ‘in the know’ wants out, and a ponzi scheme pops like a soap bubble. They are notoriously unstable.

  So if you are in one how do you get out?

  I think this question is worrying our wealthy Over Class because stock markets around the world are over-valued and its their wealth which is most  tied up in the markets. I think some of them are now rather worried that they have built themselves a luxury tower of paper wealth from which, when it catches fire, they will not all escape. I think they are right.

  So, first, are the markets a bubble or ponzi?

  Well if we look at the real economies of the West and then at the stock markets, the later have the look of a ponzi. I’m certainly not alone in thinking this. In Europe, the U.S. and Japan, over the last 6 years, in what we might call the ‘real economy’ of people making things, earning money and spending it to buy things other people have made, we have had either anaemic growth, no growth or outright contraction. And yet all the time the stock markets have roared ever higher. 

  On the ‘real’ side of things lets look at Caterpillar (CAT), the american heavy construction equipment manufacturer. It is often seen as a bellwether. CAT, as recently reported over at ZeroHedge, is now in its 28th consecutive month of declining sales. 

  

   

   

  And yet its share price is $86 not far off its record highs, up from a low of $23 to which it fell in March 2009. $86 or thereabouts  ever since 2010 despite 28 months of declining sales. 

   

  

  Is this supply and demand? I think not. Part of an explanation for this levitating share price is, as the ZeroHedge article points out, that the corporation has been buying back its own shares.

  

  CAT had been using more and more of its cash (the red bar) to buy back its own shares inflating the apparent demand for them and therefore their price. It’s not illegal, but what does it do for the idea that share price indicates what a company is worth? And where was CAT getting the money with which to buy those shares?  I doubt it was from profits given the long cumulative decline in sales. More likely it was from selling bonds i.e. using borrowed money.  And indeed that seems to be the case. In May of 2014  CAT sold $2 billion of debt some of it dated as long as 50 years.

  So let’s take a look at what we have. In May of 2014, despite having already suffered a year of declining sales, CAT shares were the second best performing shares on the Dow Jones. Who was so keen to buy all their shares? Who knows. But CAT itself had just spent 175 million in buying their own shares in the first quarter (when it was the second best performing share on the DOW) and in the last quarter of the year went on to buy another 250 million dollars worth. In fact, and perhaps most critically,  in January the CAT board had authorized $12 billion for buy-back. So the market know that a lot of shares were going to be bought up…by CAT.  And not at bargain basement price either. Take a look at the record of their share price above and you’ll see that the board had authorized using borrowed money to buy their shares at around the highest price they had ever been.  Hmm. Did buying all those shares encourage others to do likewise, especially knowing that CAT had a war chest of $12 billion earmarked for buying shares?  Any ‘investor’ would know there was a buyer in the market who would be ready and willing to buy them back from him. The upshot would be a guaranteed buoyant market in CAT shares at a time when without such a buoyant demand a year of declining sales might just possibly have led to a steep decline in share price.

  Of course the official rationale for taking on debt to buy back shares is that debt costs are now low so its a good time to do it. The problem is that while in the short term it improves the look of the company’s share price and things like return on equity, it locks CAT, and any company that does the same, in to paying out interest on debt over the long term.

  *  *  *

  The systemic problem

  If CAT were alone in being the only company whose share price looks to be over-valued based on actual profitability  it wouldn’t matter and we’d be fine. But it isn’t.

  Here is what a recent note from Goldman Sachs chief equity strategist, David Kostin says – as reported at Zerohedge.

  … in his latest weekly note to clients he said that “by almost any measure, US equity valuations look expensive.”

  In other words almost everything looks over valued.

  Mr Kostin goes on to suggest one reason for the inflated prices is that

  Corporations have so far used record profits to return cash to shareholders. S&P 500 firms have spent more than $2 trillion repurchasing shares during the past five years.

  The key for me is he puts share buy back and returning money to investors together. Companies buy back their shares. This keeps their share price inflated in a market that has forgotten to worry about underlying profit and is fixated instead on short term ‘what someone will pay me for this bit of paper’.  So the share price remain high and the experts tell us all is good. Wonderful in fact. But the money, some of it alt least, is being sucked out and given to those ‘investors’ who sold and cashed out. Now who are those people?  Well we know that the wealthiest 10% own about 75% of all measured wealth and that the bulk of that wealth is not physical stuff but held in the form of financial products

  So it looks to me that as share prices are being kept high some are cashing out. Those who stay in are feeling happy because their shares keep going up in ‘value’. But of course its not that simple because someone has to keep buying in the market. So I suspect much of the cashed out money is still flowing back in to other shares to keep the market buoyant. Plus people will look at even a rigged market and say to themselves – “hey I’m missing out if I duck out of this bull market too early.” So they stay in even knowing the risks of a rigged market. Telling themselves there will be a better time later to cash out.

  And therein lies their danger. As Mr Kostin notes,

  In 2007, companies allocated more than one-third of their cash use to buybacks ($637 billion) just before the S&P 500 plunged by 40% during the following year.

  Seems like this was a strategy they tried before. And it is not just CAT and a few others it is market wide. Mr Kostin one more time

  We forecast buybacks will surge by 18% in 2015 exceeding $600 billion and accounting for nearly 30% of total cash spending.

  I think that is a systemic problem. $600 billion keeping stock prices buoyant and above any profit based valuation.

  And I’m not alone. Nobel laureate economist Robert Shiller of Yale University in a recent interview said, referring to the persistent bubble-like pricing in not just property but in stocks and various commodities,

  “I call this this the ‘new normal’ boom — it’s a funny boom in asset prices because it’s driven not by the usual exuberance but by an anxiety,” said Shiller.

  The fact that Schiller thinks this bubble is driven by anxiety is, to me, very significant. I think he is right of course. I do think there is a palpable anxiety driving this bubble rather than the exuberant ‘animal spirits’ that Greenspan so famously identified as the cause of bubbles.  Schiller goes on to say,

  “This is an anxiety driven world — the whole world is driven by anxiety. It is anxiety about the aftermath of the global financial crisis, it’s anxiety about inequality and about computers replacing jobs,” he said.

  I agree with all those sources of anxiety. But I think he is missing out on possibly the major source which, as I’ve argued, is the anxiety of keeping your money in the market so as to maintain the inflated share prices, while at the same time trying to figure out how to get out, again, without popping the bubble. So – maintain and get out at the same time – no wonder they’re anxious.

  Round and round. Up and up.

  If you can’t get out and you are afraid there are not enough new buyers to keep your ponzi/bubble going what do you do? I think the answer is you and your friends do the buying yourself. If you and your friends are big enough players with enough to lose that defecting is really dangerous, then you actually have a workable incentive to keep playing. You buy the shares I sell and I buy yours (It doesn’t just have to be just buy-backs as per the CAT example). And I think this is what has been happening.

  Of course it only works of you are able, as a group, to have a really serious effect on the over all market. But if you think of the top 10% they certainly have that. I buy your shares and pay you your asking price. You do the same for me. Tomorrow we do it again and each time we ramp the price a little.

  The limiting factor, of course, is that we will not have enough money to buy all the shares as their price goes up and up. But that little problem can be easily solved if we have a friendly banker who will accept our shares as collateral for a loan. If our banker will extend us a loan and increase that loan periodically in line with the increase in value of the shares then all is good. Because the bank can just magic new money in to existence.

  And if anyone get a creeping feeling that the banks are getting stretched a little thin or their margins – the interest they charge us for our loans above what they pay for borrowing – are too small for their comfort, then we all just tell the central bank that some new very low interest money is needed to juice the whole system. And since most of them are former us (bankers and financiers) they will understand. Plus they don’t want a systemic crash. It’s bad for their reputation and their personal wealth.

  So with help from bankers and central bankers our cash supply will keep pace with the bubble inflation. Let’s be clear the markets tell central bankers what is needed not the other way around. It is a myth that central bankers call the tune. They don’t. Certainly central bankers sit in their central banks board rooms and ‘make’ their decisions but it is what the private banks do, how much they loan, how much they inflate the credit supply, that has the whip hand in dictating what the central banks are obliged to do in order to keep the music playing.

  Of course if everyone knows the whole thing is a bubble it might seem insane. But if your alternative is to see the bubble burst then its still a rational decision to keep playing. It will pop one day and all that paper will turn to ash. But if, in the mean time you have been siphoning off some wealth to buy up actual stuff then when the ash settles you will still own stuff. So keep playing.

  I wonder if this is why there is such a political push in the US and Europe to privatize anything and everything still in public hands?

  And this argument doesn’t even take in to account that the vast preponderance of the wealth of the top 10% is tied up in even more remote-from-reality paper. Certainly the wealthiest 10%, 5%, 1% 0.1% and 0.01% own mines and factories and land. But even those things are dwarfed by how much of the wealth is tied up in the paper wealth of derivatives, securities, loans, bonds piled on top of the inflated asset and share prices. You just have to think, for example, of the size of the OTC derivatives markets whose gross market value is somewhere around $21 trillion. A figure that is itself based upon the larger value of outstanding contracts which is about $630 Trillion. All of this would be dust, in a collapse that was not bailed out.

  Is this actually happening?

  Well price inflation certainly is. According to an article from AP a few days ago,

  …professional investors are warning that companies are presenting misleading versions of their results….What’s worse, the financial analysts who are supposed to fight corporate spin are often playing along. ”Companies are tilting the results,” says fund manager Tom Brown of Second Curve Capital, “and the analysts are buying it.”

  How bad is it?

  At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more….Quarter after quarter, the differences between the adjusted and bottom-line figures are adding up. From 2010 through 2014, adjusted profits for the S&P 500 came in $583 billion higher than net income.

  At the same time leverage is again creeping up to unwise levels. Not in the banks this time (not officially at least) but in Hedge funds where it is up to 2004 levels. It is a truism that risk never goes away it just migrates to where the regulators can’t see it or have no power to do anything about it.

  Even the slowest guys in the room, the regulators, are beginning to be worried. In March of this year,

  The Office of Financial Research, the agency tasked with promoting financial stability and keeping an eye on markets, released a paper last week stating that the stock market is dangerously overpriced, and that excessive leverage will exacerbate the next market correction.

  You can read the whole report here. The author presents good data showing inflated prices but then does his best to say it could all still be fine. Like I said, the slowest guys in the room.

  The point, however, is that there is an air of conspiracy about it. The companies (which includes financial ones) are playing around on the border between creative accountancy and fraudulent misrepresentation and the analysts and auditors are not correcting them. Much as we saw in the figures for all the banks in the run up to the crash. All of the big 4 accountancy firms were signing off on the robust financial health of  banks sometimes mere weeks before said bank then collapsed. All of the big 4 auditors subsequently found themselves in court. So to suggest that companies, analysts and auditors might be not just allowing and enabling dangerous misrepresentations but even endorsing them is not really conspiracy theory, more painful experience.

  Why is it happening?

  Obviously my argument is that its happening because the wealth and power of the Global Over Class are stuck, as they have been for a decade and more,  in a bubble of inflated prices with not easy way out. I think the longer the Bull market of the last 6 years, goes on and the more decoupled it looks from the non-recovery in the rest of the economy(the employment economy) which the rest of us live in, the more it looks to me like something that is being engineered. And of course the longer it goes on and the more decoupled the bubble gets, the more those invested in it have to lose and the more stuck they feel.  I have suggested the mechanism for maintaining the bubble this long has become the wealthy buying the financial products they all own from each other over and over. Facilitated by banks providing the necessary money supply and complicit experts covering over the yawning gap between share prices and likely profits.

  I am not suggesting an organized conspiracy so much as a system finding a new way to keep going. This might seem a herculean task of coordination till you remember that 147 companies own 40% of the wealth nominally owned by tens of thousands of companies. And 737 companies own 80%, And these are the companies that are owned and or run by the wealthiest 10 percent.

  The result is a ponzi kept alive without new entrants. The new money being supplied by the banks back-stopped by us via endless QE and back door subsidises like ultra-low interest rates.

  If this idea has any merit then our politics will now be bent to preserving this.

  One last point for those who have not yet lost the will to live.

  Price discovery

  The basis of investing used to be Price discovery. And ‘Price discovery’ used to mean discovering how profitable a company was likely to be over the next year or so. That determined what you would pay for a share in that company.  Share price and the market in shares was a reflection of the underlying reality of companies and what they did.

  But as speculation has gradually come to overshadow investing, what price discovery means has shifted.  Today, in the age of companies being worth billions one month and very little the next, share price has less and less to do with what profit the company expects to make and more to do with investing strategies (such as ‘buy the dip’), market momentum and above all the political decisions concerning how much easy money will or will not be injected in to the banks..sorry economy.  Value comes to be less about the company itself and the profit it might make and more to do with the collective beliefs and the herd behaviour of traders reacting to each other.

   As long as speculators keep looking at each other and forgetting any notion of profit based value then the  market ceases to be about any lasting physical basis of profitability and can be pulled so far from its old course of tracking ‘profit that price discovery ceases to be anything ‘real’. It becomes a fairly empty measure of …well of what?  Of market confidence? Of feeding frenzy?

  What happens in a market dominated by speculation is that the ‘game’ aspect where shares are just a convention of chips in a game has come to dominate any notion of shares representing anything real outside the game.  This is what I think is increasingly what our stock markets are. No wonder they can be so massively manipulated.

  

  

  
  
  

  

• "Buy Low, Sell High" – How China's Senior Citizens Are Learning To Trade Stocks

  Much has been said here about the relentless Chinese stock market bubble, where the Shanghai Composite closed just shy of fresh multi-year highs, and with a market cap of $10 trillion, or about 2.5x higher than where it was about one year ago, is well on its way to catching up to total US stock market capitalization; in volume terms, China has already surpassed the US. 

  

   

  A few days ago, we showed why the market in China is sucking in millions in new, inexperienced traders every week when we showed the case of one middle-aged rural Chinese “trader” who explained that “it’s easier to make money from stocks than farmwork.”

  In short: a bubble which is sucking in millions by the week, and which will end not only in tears but likely in riots and civil disobedience when the tens of millions of inexperienced traders, farmers, housewives, and unemployed lose everything once the bubble burst as it always does.

  Oh, and senior citizens.

  In a amusing (if not so much for the participants) anecdote, the FP’s Warner Brown decided to take the advice of Li Chaoli and participate in a stock-trading class.

  21-year-old Chaoli arrived in Shanghai from Yunnan province less than a month ago and knowing nothing about stocks or finance, took a job promoting Homily Stone, a software package that promises to help investors achieve easy profits by choosing fast-rising stocks. “We also offer classes to teach stock trading tips,” Li explained while trying to register the phone numbers of passersby on a notepad. “So it’s no problem if you don’t know much about stocks.” Everyone, she noted, is starting out the same way.

  Brown went to one of the free lectures in an aging Shanghai office tower on a morning in mid-May, when nearly 500 pupils filed to hear a lecture from Chen Haisheng, one of Homily Stone’s purported in-house stock experts. “An entry fee of $320 lent an air of exclusivity, but the ubiquitous fee waivers that Li and other staff members handed to virtually everyone — this writer included — suggested that Homily Stone may have had another, bigger pot of money in its sights.”

  This is how China’s army of nouveau traders is preparing for war with the upcoming market crash, but enjoying every day of the mania phase in the meantime:

  Attendees registered and found their assigned seats in a multipurpose room lined with posters showing cartoon bulls, rising trend lines, and slogans such as “Homily Stone: simple and straightforward, happy stock-trading.” The number of graying heads was conspicuous, and most of the students appeared 50 or older. Some students set up camcorders on tripods and readied binoculars before Chen took the stage. As Chen projected Homily Stone’s software on a screen and began by reviewing the basics of “buy low, sell high,” the students alternated between scribbling notes and stealing bites of steamed buns and swigs from milk cartons and thermoses of tea.

  The promises of untold riches if you just BTFATH were apparently not exciting enough for some of the senior citizens present:

  After more than two hours of Chen’s lecture, a few older people in chairs nodded off, including an elderly gentleman who took a nap on my shoulder. For the most part, though, Chen kept people’s attention, peppering his Beijing-accented talk with laugh lines, requests for the audience to repeat pithy slogans, and demonstrations of forecasting that aroused murmurs of approval.

  As for said promises, they were not exactly untold: they amount to “guaranteed” returns of 300%, but there is a catch: all these soon-to-be-millionaires need to pay $490 for a trial, not even the full version, of the company’s trading software.

  As the morning session neared its close, Chen promised more detailed stock-picking tips to those who gained admission to an afternoon class by paying $490 for a trial of Homily Stone’s software. A hush fell over the room when Chen predicted the Shanghai Composite’s 2015 bull market could reach a high of nearly 5,700 — about 33 percent above its then-level of 4,300. And when he guaranteed a 300 percent return for people who buy the program and follow his methods with recommended “dragon head” — or hot — stocks, the room erupted in applause.

  Well, considering the SHCOMP is already half way to his 5700 target, it seems to be money well spent. If, of course, the senior citizens remember to convert paper profits into real ones before one day, the bottom falls off from under the market.

  Why is Homily Stone focusing on China’s senior citizens?

  After the class, Homily Stone staff set off explosions of confetti as a group of silver and gray-haired students formed a line to sign up for the software. When asked about the audience’s age, an employee conjectured, “Older folks tend to have more free time, and their level of trust tends to be higher.” Meanwhile, Li, dressed in a pant suit, had stood by a wall watching attentively all morning. I asked her if she planned to try to get a piece of China’s bull market for herself. She seemed embarrassed. “I don’t know much about buying stocks,” she replied. “I’d like to learn some more at this company before doing any trades myself.”

  What happens next? Well, the Politburo mandated bubble will keep growing and growing and suckering in more 60 year olds with promises of untold riches, until one it all ends and most of the people in the Homily Stone conference lose their life savings… as happened in 2008 when in April 2008 the NYT wrote articles like “To See a Stock Market Bubble Bursting, Look at Shanghai.” Here are some excerpts:

  When experts periodically warned about the possibility of a bubble, prices would dip temporarily then soar even higher, breaking records and inciting another mad dash to snap up equities.

   

  The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

   

  Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

  …

  Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

   

  “I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.”

  The sequel is just a matter of time.

  But not everyone will lose all their money: Chen Haisheng and his Homily Stone “stock tip expert” coworkers, who will disappear shortly never to be heard from again, will be millionaires having risked nothing and simply taken advantage of people’s gullibility.

  

  They will be some of the very few whose life savings won’t disappear overnight.

  As for everyone else, while it is easy to feel bad for them in light of what is coming, the fact that not one person had the common sense to ask of the stock trading company why, if it is so good, does it not merely trade out of its own capital and make orders of magnitude more, sadly suggests that they all have it coming. Because while central bankers may be wrong about everything else, they are right about one thing: when it comes to greed, humans always fall for the promise of a quick buck.

  

  

  
  
  

  

• Something Doesn't Add Up: JOLTed Optimism

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The latest updates for the JOLTS showed that job openings in April surged to a new series high. Jumping by 267k (seasonally adjusted), the trend in job openings is being used as confirmation that there must be some robust underlying trend in overall payrolls despite the ubiquitous slump everywhere else. In other words, this is another series from the BLS that appears to be confirming the Establishment Survey’s view on the economic pickup.

  “This is more confirmation that the economy is indeed emerging from that soft patch in the first quarter and can still pick up even faster in the next few months,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

   

  Job openings, a measure of labor demand, rose 5.2 percent to a seasonally adjusted 5.4 million in April, the highest level since the series began in December 2000, the Labor Department said in its monthly Job Openings and Labor Turnover Survey (JOLTS).

  

  Ever since the start of 2014, weather be damned, the pace of job openings has simply decoupled from all perception except the Establishment Survey. While that offers “more confirmation” for economists, in reality it amounts to the same confirmation. The JOLTS survey is benchmarked to the BLS’s Current Employment Situation (CES), meaning that if there is a trend-cycle problem in the mainline payroll report it will passed along, directly, to JOLTS.

  From the BLS itself:

  JOLTS total employment estimates are benchmarked, or ratio adjusted, monthly to the strike-adjusted employment estimates of the CES survey. A ratio of CES to JOLTS employment is used to adjust the levels for all other JOLTS data elements.

  Given that baseline, it would be highly suspect and relevant only where the JOLTS figures diverge from the Establishment Survey. While none of the components had done so for most of 2014, that isn’t the case more recently. While Job Openings have supposedly surged, the hiring rate has not. Dating back to last October, hiring appears to have frozen if not slightly declined.

  

  If I am correct about the benchmark in trend-cycle inputting serious upward bias into the CES, that would also mean the same upward bias in JOLTS, which may further suggest that hiring is worse than even the slight downward trend shown above. The lack of inflection in job openings is puzzling, to say the least, except that job openings have always (going back to the 2000 inception) exhibited a much higher beta. Even with that in mind, the divergence in late 2014 has become almost ridiculous.

  

  That is especially true of 2015 so far, where Job Openings have no fear of anything, but hiring more than suggests the same “slump” that has appeared more universally. Economists have already come up with an “explanation” for this disparity:

  Hiring slipped to 5.0 million from 5.1 million in March. Economists say the lag in hiring suggests that employers cannot find qualified workers for the open positions.

  That proposal would tend to suggest a shortage in the labor market, an end to the “slack” that has debilitated a great deal of the recovery these same economists have been searching for. Basic economics, however, away from the econometric models, gives us the expectation for rapidly rising “P” for wherever “demand”, in this case for labor, far outstrips “supply” as it would clearly have to be doing if JOLTS presents a realistic scenario. That rising “P” would be wages, which would make sense as businesses that cannot find enough “qualified workers” in a more rapid economy will have to pay up to entice them.

  The problem with that view is, obviously, no wage growth is apparent anywhere. There has been ample time to accrue through any lags, as the jump in Job Openings far and above Hiring dates back, again, through the trend-cycle bump in early 2014.

  Beyond wages, any surge in openings would likely induce greater overall turnover. Even when there may not a huge difference in pay between an existing job and a new opportunity, a plethora of real openings and a shortage of qualified candidates would offer a compelling reason to be choosy – less likely to stick with a job demanded workers may not be satisfied with. The ratio of “quits”, the JOLTS view on just this activity, did find an increase in voluntary turnover during the middle of last year, but that trend seems to have died, again, right around September or October.

  

  In other words, if there were a sharp and fierce end to the destabilizing “slack” leftover still from the Great Recession, there is scant evidence for it aside from Job Openings that follow closely none other than the CES benchmarking itself. There is, though, one part of the JOLTS dataset that did jump up in the past few months, but it is contradictory to all the happiness over Job Openings: Discharges and Layoffs.

  

  For the first time since the 2012 slowdown, layoffs and discharges were estimated above 1.8mm for consecutive months in March and April; March’s figure of just shy of 1.9mm was the worst months since the middle of 2010! The 6-month average is up to 1.74mm, which is the highest since November 2012, about equal to the estimates for the middle of 2007.

  If you accept that the payroll figures represent a truer picture of the economy, then you must at least question what is taking place in 2015 (dating back to last autumn). If there were a robust jobs expansion starting early last year, then it must be considered more than somewhat suspect this year so far. Nonconformity in hires, quits and now layoffs call further into question both openings and the overall employment narrative, not the least of which traces back to the fact that they all share the same benchmark and subjective biases.

  The other interpretation, which I obviously favor, is that the surge last year amounts to nothing more than those subjective benchmarks, but that the turn or inflection in late 2014 and into all of 2015 is very real and therefore seriously understated – that it has shown up at all despite the obvious upward bias in chained variation is itself the most significant aspect in all of this. That view would be all the more concerning if it occurred where last year’s upside never truly did. For such a celebrated employment report here as in JOLTS for April 2015, there really isn’t much to be confident about. Job Openings were terrific, except everything else disagrees.

  

  

  
  
  

  

• 'Who' Really Runs Your State?

  A state’s economy is nothing without the businesses that call it home. However, these companies are not created equally – bigger businesses naturally have outsized influence, generating more revenue, employing more people and (at least theoretically) paying more taxes. So given that corporations are now ‘people’, who really runs your state in this crony-capitalist land of the free?

  Some may be surprising: Chevron (not Apple) runs California, Costco (not Microsoft) runs Washington, and Sands run Nevada.

  Some are less so: Berkshire Hathaway runs Nebraska, GM runs Michigan, and ExxonMobil runs Texas.

   

  

   

  As Broadview Networks explains,

  Using Hoover’s, a D&B Company, we searched through each state’s list of companies to find which had the largest revenue in the last fiscal year.  It was interesting to see how each company’s revenues have changed over the year (for better or worse) and to see if a new largest company had emerged.

   

  At first glance, you may ask, “Where are Apple and Microsoft?”  Yes, these are huge companies but this map is specifically looking at total revenue from the last fiscal year.  If we look at California with Apple vs. Chevron, there is a large discrepancy between market value and total revenues.  Apple’s market value as of March 31, 2015 was $724 billion while Chevron’s was only (and we use “only” lightly) $197 billion.  In terms of revenue, Chevron comes out on top with $203 billion in the last fiscal year while Apple had revenues of $182 billion.

  Source: Broadview Networks VoIP Blog

  

  

  
  
  

  

• If You Love America, Call Your Congress Member TODAY and Say NO TPP (Vote Is TOMORROW)

  The House of Representatives is voting tomorrow to pass Fast Track authority for the horrible TPP treaty (it already passed the Senate).  If Fast Track is approved, TPP will quickly pass without amendment.

  TPP would destroy everything that America stands for. And see this, this, this and this.

  But the mainstream media is censoring and ignoring the whole issue.

  Senator Warren says that dozens of members of congress are undecided.

  Call your Congress critter right now … and tell them no to TPP and no to Fast Track Authority!

  Postscript:  Remember, we stopped SOPA … even though they said it couldn’t be done. If everyone picks up the phone right now, we can stop TPP!

  

  
  
  

  

• The Vacant Dead: The 50 US Cities With The Most "Zombie" Foreclosures

  Over the past five years, first as a result of the 2010 robosigning scandal and then due to the natural build up of a massive backlog of cases in judicial states, which in some cases is well over 1000 days, America’s conventional house clearing mechanisms of foreclosure and bank repossessions had become clogged up to previously unseen levels.

  Which was precisely how the banks wanted it: after all, by minimizing the supply of housing for sale, this served as an aritifical subsidy to the housing market. It achieved two things: it kept housing prices artificially high, and allowed millions to live in their house mortgage-free for years, while also providing a “spending stimulus” to millions who in lieu of spending cash on rent (or mortgage) could purchase discretionary items.

  Five years later, however, with the stock market at all time highs and the housing recovery supposedly in full swing, albeit on an artificially inflated basis due to abnormally low inventory, the banks are starting to collect.

  As the following chart shows, the foreclosure completion process has suddenly soared now that banks are finally evicting deadbeats, and as a result REOs have surged 50% from a year ago to a 27 month high! Not what one would expect from a healthy, vibrant and “clearing” housing sector, it merely shows that the banks are now confident enough with the level of demand that they are happy to leak out far more of their accrued supply into the general market, something we dubbed “foreclosure stuffing” all the way back in 2012.

  

  What this means is that suddenly millions of Americans who had been allowed by their repossessing banks to squat unbothered, are about to find that in the real world if one can’t afford a house, one rents, or else finds a nice enough bridge under which to pitch a tent.

  It also means that what the NAR has been complaining about for years, namely the lack of inventory, is about to become a horn of plenty, as millions of previously unavailable houses are put on the block, pushing the price of housing lower.

  Most importantly, it means that if not done correctly the process may derail whatever vestige of a housing recovery the media wants the general population to believe is taking place, aside from Chinese hot-money launderers buying NYC triplexes all cash, sight unseen of course.

  Nowhere will this reversal be more visible than in the places where not even the prospect of living mortgage free appealed to former homeowners.  According to RealtyTrac there were some 127,021 homes actively in the foreclosure process been vacated by the homeowners prior to a completed foreclosure, representing one quarter of all 527,047 properties in foreclosure. These owner-vacated foreclosure properties will likely end up as short sales, foreclosure auction sales or bank-owned sales, also known as even more supply.

  These are the so-called “Zombie” foreclosures (not to be confused with “Vampire” foreclosures in which the owner continues to inhabit the foreclosed property).

  

  According to RealtyTrac’s Darren Blomquist “as banks push through long-deferred foreclosures that are more likely to be owner-vacated this year, we are seeing a somewhat surprising increase in zombie foreclosures in markets with overall low foreclosure rates such as Los Angeles, Houston and Boston.”  Almost as if the housing recovery was not really a recovery but a giant game of extend and pretend.

  And since Zombie foreclosures represent the purest form of housing unaffordability, one not perverted by the differential between a foreclosure start and a completion, but merely the dereliction of one’s former house without regard to one’s credit rating or any other consequences, the cities, MSAs and states where the “Zombie” problem is most acute is also those where the economic situation is getting worst the fastest.

  Not surprisingly, among the states the highest zombie foreclosure rates were in New Jersey (one in every 210 housing units), Florida (one in every 324 housing units), New York (one in every 476 housing units), Nevada (one in every 495 housing units), and Indiana (one in every 574 housing units). It also goes without saying that the accumulation of such derelict and unsupervised properties will have a substantial downward impact on home prices.

  So for those concerned if their city is among the top most frequented by this particular, and very unpleasant, breed of “zombies”, here are the top 50 cities in the US in which zombie foreclosures represent the highest percentage of all properties in foreclosure. For those readers certainly located among the Top 10, now may be a great time to hit a bid, any bid and get out while the getting is good.

  

  

  

  
  
  

  

• Investing In Gold (Because Central Bankers Will Never Get Religion)

  Submitted by Jared "The 10th Man" Dillian via MauldinEconomics,

  “A gold mine is a hole in the ground with a bunch of liars standing next to it.”

  I started investing in gold in 2005. Not a bad time, right?

  Here’s why I started: I was the ETF trader at Lehman Brothers at the time. A couple of guys came by to talk about this crazy idea they had about a gold ETF. I think one was from the World Gold Council and the other was from State Street. The WGC guy brought along a 10-ounce bar of gold. At the time, it was worth almost $6,000.

  The ETF was SPDR Gold Shares (GLD).(* Please see disclosure below)

  I ended up buying GLD, because I’m a trader. Trading stocks is what I do, so it’s easy for me to buy something with a ticker. I didn’t even know you could buy physical gold. It was 2005 or 2006, so I’m not even sure if the online bullion dealers were up and running yet. If you wanted to buy gold, you’d have to be in the know, go to some hole-in-the-wall coin dealer, get your face ripped off.

  I have owned GLD since. And along the way, I learned a lot about investing in physical gold, and I bought that, too.

  But that’s not the interesting part.

  I Loathe Gold Culture

  One of the things I figured out as I was starting to invest in precious metals is that a lot of the other guys investing in gold and silver were… not the kind of guys I really wanted to hang out with. Neckbeard McGoldbug. You know the type.

  I’m talking about the ridiculous conspiracy theories, the bizarre politics that are so far right, they’re left. The hatred toward banks. I still don’t understand it. These are supposedly right-wing guys who found themselves on the same side of most issues as Matt Taibbi and Elizabeth Warren. The apocalyptic outlook, the relentlessly bearish views, the outright refusal to participate in one of the biggest (and most obvious) stock market rallies ever.

  I am allegedly a right-wing guy—and I’ll own it—but I am not that.

  The other thing I discovered about these guys is that it’s useless to try to sell newsletters to them. They don’t believe in intellectual property.

  So part of my gold investing career has been figuring out what I am and what I’m not. I guess you could call me a classical liberal and monetarist who takes a keen interest in gold.

  Freeze It, Personalize It, Polarize It

  As the gold rally crested and rolled over, the mainstream financial media really started to go after the gold bugs. They were super annoying on the way up, and the (mostly liberal, Keynesian) pundits were crushing them on the way down. It’s gotten to the point where the only people left buying gold are… Neckbeard McGoldbug, and they’ve been thoroughly maligned for it.

  If you recall, the whole idea was that quantitative easing (printing money) was going to create a lot of inflation. Plus, the budget deficit was about $1.8 trillion at the time, so we would have to monetize the debt. It was a pretty good argument. And it worked for years.

  Then it stopped working.

  The inflation the gold bugs predicted never happened. It was the biggest hoax perpetuated on investors, ever. So the beatdown from the Keynesians continues to this day, on Twitter, on blogs, in the news.

  But maybe the gold bugs weren’t wrong—just super early.

  I’m Not an Economist, But…

  I do remember this from a class I had: the quantity theory of money.

  MV = PQ

  I’m sure this looks familiar to many of you.

  So M, the supply of money, has gone way up:

  

  But V, money velocity, has gone way down:

  

  Given constant Q (quantity of goods), P (price) remains pretty much unchanged.

  So we will eventually get our inflation—if money velocity turns around and heads higher.

  There aren’t any good theories as to why money velocity continues to plummet. At least, I haven’t read any. I think we will have a similar inability to predict when it rises.

  This is overly simplistic, but I’m a simple guy.

  Gold Is/Is Not for the Long Run

  There are people who say gold should be x percent of your portfolio in all weather. I get it. It tends to be negatively correlated with other stuff, so it reduces the volatility of a portfolio.

  And as long as central banks are doing what they’re doing, the long-term case for gold is pretty much intact, recent price action notwithstanding.

  But let me tell you this. If central banks ever got religion and pulled a Volcker and hiked rates to the moon, it would be a remarkably bad time to hold gold.

  On the other hand, throughout history, there have been times where people were very sad that they didn’t own gold. I talk about one of them here.

  It’s very real, and the history of fiat currencies is also quite sad.

  I am the furthest thing from an alarmist. I don’t think the dollar, or the euro, or any other currency is going to collapse, at least not imminently.

  But I also think the Fed doesn’t want to raise interest rates, possibly ever.

  The ECB is printing, and you have the prospect of direct monetization.

  Japan is just insane.

  Even Sweden is printing money.

  And I can see a scenario where Canada, Australia, and Norway are all doing it too.

  So: if the whole world is printing money, I’m okay with being long gold.

  But in 2015, you really shouldn’t care about what people think.

  *Disclosure: at the time of this writing, Jared Dillian was long GLD, SLV, and physical gold and silver.

  

  

  
  
  

  

• Iceland Imprisoned Its Bankers And Let Banks Go Bust: What Happened Next In 3 Charts

  This year, Iceland will become the first European country that hit crisis in 2008 to beat its pre-crisis peak of economic output. In spite of its total 180-degree treatment of nefarious bankers, the banking system, and the people of its nation when compared to America (or The UK), Iceland has proved that there is a different (better) option that western dogma would suggest. As abhorrent as this prospect is to the mainstream's talking heads and Keynesian Klowns who bloviate wildly on macro-economics and endless counterfactuals, Iceland came to that fork in the road, and took it…

   

  As The Independent reports,

  While the UK government nationalised Lloyds and RBS with tax-payers’ money and the US government bought stakes in its key banks, Iceland adopted a different approach. It said it would shore up domestic bank accounts. Everyone else was left to fight over the remaining cash.

   

  It also imposed capital controls restricting what ordinary people could do with their money– a measure some saw as a violation of free market economics.

   

  The plan worked. Iceland took a huge financial hit, just like every other country caught in the crisis.

   

  

   

  This year the International Monetary Fund declared that Iceland had achieved economic recovery 'without compromising its welfare model' of universal healthcare and education.

   

  Other measures of progress like the country’s unemployment rate, compare just as well with countries like the US.

   

  

   

  Rather than maintaining the value of the krona artificially, Iceland chose to accept inflation.

   

  This pushed prices higher at home but helped exports abroad – in contrast to many countries in the EU, which are now fighting deflation, or prices that keep decreasing year on year.

   

  

   

  With the reduction of capital controls – tempered by the 39 per cent tax – it continues to make progress.

   

  "Today is a milestone, a very happy milestone," Iceland’s finance minister Bjarni Benediktsson told the Guardian when he announced the tax.

  *  *  *

  But apart from the economics… Iceland also allowed bankers to be prosecuted as criminals – in contrast to the US and Europe, where banks were fined, but chief executives escaped punishment. The chief executive, chairman, Luxembourg ceo and second largest shareholder of Kaupthing, an Icelandic bank that collapsed, were sentenced in February to between four and five years in prison for market manipulation.

  "Why should we have a part of our society that is not being policed or without responsibility?" said special prosecutor Olafur Hauksson at the time. "It is dangerous that someone is too big to investigate – it gives a sense there is a safe haven."

  

  
  
  

  

• Political "Scandals" In Context

  It’s all relative…

   

  

   

  Source: Investors.com

  

  

  
  
  

  

• 29-Year-Old Pulls Off Biggest Biotech IPO In History With Glaxo Throwaway Drug

  In March we asked “Are We In A Biotech Bubble?.” At the time, we pointed out a number of rather alarming statistics including the fact that there were 82 biotech IPOs in 2014, eclipsing 2000’s record of 67. 

  

  We also noted that the number of biotechs with valuations that exceed $2 billion has quadrupled over the last four years alone. 

  On Thursday, we got what might fairly be characterized as definitive evidence that investors have now abandoned any pretense of sanity when it comes to chasing the next blockbuster miracle drug. 

  Enter Axovant Sciences. The company, which began trading today, is a spinoff Roivant Sciences, a shell created by 29-year old Vivek Ramaswamy after he left QVT last May. In December, Axovant bought an Alzheimer’s drug (RVT-101) that GlaxoSmithKline shelved years ago after 13 clinical trials for — get this — $5 million. So, just to be clear, Glaxo basically gave this thing away. 

  

  (Ramaswamy)

  What’s a $5 million throwaway drug worth in Janet Yellen’s “substantially stretched” biotech market? Billions, apparently. Axovant priced its (upsized, of course) offering last night at $15/share which valued the company at $1.3 billion give or take. Today, the shares have doubled.

  

  But wait, there’s more.

  According to its S-1, the company has a grand total of seven employees, two of which, FT says, are Ramaswamy’s mom and brother, who make $250,000 each and own 2 million options between them — the exercise price is $0.90, meaning the two got $58 million richer today on paper. 

  Better still, note the following passage from the S-1:

  We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in this prospectus, our periodic reports and our proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or until we are no longer an “emerging growth company.”

  And here’s a look at the balance sheet:

  

  But don’t worry about the whole zero cash thing, because thanks to Thursday’s blockbuster offering, Axovant will now have several hundred million to burn, and burn it they shall in what in all likelihood will be a futile attempt to get RVT-101 to market because after all, as one analyst told FT, phase 3 is a “graveyard for Alzheimer’s drugs.” 

  *  *  *

  As an aside, Ramaswamy’s mom and brother aren’t the only ones getting rich today. Visium Asset Management and RA Capital Management — who may have helped to create a buzz around the stock by “indicating an interest” in the shares earlier this month — apparently took down around 60% of the offering. From the company’s amended S-1:

  Visium Asset Management, LP and RA Capital Management indicated an interest in purchasing up to an aggregate of approximately $150.0 million of our common shares in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any of these entities, or any of these entities may determine to purchase more, fewer or no shares in this offering. Any shares purchased by these entities in this offering will be subject to a 90-day lock-up agreement with the underwriters.

  That seems like a pretty good deal, especially considering that 90 days is at the low-end of the range in terms of lockup periods. 

  

  

  
  
  

  

• 3 Things: Oversold Bounce, Relative Risk, More Downside Potential

  Submitted by Lance Roberts via STA Wealth Management,

  Oversold Bounce

  "Stocks have the best day since May 8th!"

  That was the headline that was plastered all over CNBC yesterday as the S&P 500 finally was able to get a bounce after days of weak performance.

  As I penned on Monday the bounce yesterday was expected:

  "On a very short-term basis, the market has gotten very oversold over the last several weeks as noted below. That oversold condition will likely facilitate a bounce in the days ahead."

  I have updated the chart below to include that expected bounce.

  

  That very oversold condition on DAILY basis provided the setup for any piece of "news" to send shorts scurrying to cover positions. These short covering rallies have been the hallmark of the markets since the beginning of the year. Importantly, the market held its 150 day moving average which has been the bullish trend support back to the beginning of 2013 as QE3 was launched. However, the market needs to move to new highs to re-establish the bullish trend.

  However, while it was certainly an impressive rally, unfortunately it did not cure the deteriorating condition below the surface. As shown in the chart below, every sector of the S&P 500 is seeing the percentage of advancing stocks on the decline.

  

  This is extremely important as a further advance of the "bull market" will be difficult until the trend of advancing versus declining issues reverses.

  Since March, there has been little reward generally for investors. The good news is that, so far, stocks have held their ground exceptionally well given the weak economic reports and the overall earnings/profits picture.

   

  Are Stocks Cheap Relative To Bonds?

  Earlier this week I took a look at the "quality" of earnings and the question of whether valuations are actually "higher" than currently stated. To wit:

  "It is worth noting that until financial engineering took hold in 1990, the economy grew faster than wages/profits. Since 2000, the wages/profits ratio has become detached from all reality."

  

  This detachment leads to another problem that is arising for investors – valuations.

   

  There is some truth to the argument that "this time is different." The accounting mechanizations that have been implemented over the last five years, particularly due to the repeal of FASB Rule 157 which eliminated "mark-to-market" accounting, have allowed an ever increasing number of firms to "game" earnings season for their own benefit. Such gimmickry has suppressed valuation measures far below levels they would be otherwise."

  The reason I reiterate this point is due to a note from John Hussman discussing the "cheapness of stocks relative to bonds."

  ""I'll repeat what I've called the Iron Law of Valuation: every security is a claim on a very long-term stream of future cash flows that will be delivered into the hands of investors over time. Given that expected stream of future cash flows, the current price of the security moves opposite to the expected future return on that security. The value of a share of stock is determined by far more than current earnings, and one's estimate of value will be ill-formed if current earnings aren't a sufficient statistic for the long-term earnings trajectory.

   

  Moreover, market valuations, prospective equity returns, and actual realized equity returns have historically been only weakly related to the level of interest rates (even long-term interest rates). The long-term rate of return priced into stocks is far less correlated and less sensitive to interest rates than investors seem to believe."

  Read: "Fallacy Of The Fed Model" For Additional Information

  "But aren't stocks "cheap relative to bonds"? Unfortunately, the evidence suggests exactly the opposite. Indeed, despite a yield to maturity of hardly more than 2% annually, Treasury bonds are still likely to outperform the total return of the S&P 500 over the coming decade. The following chart presents the difference between the estimated 10-year total return of the S&P 500 and the yield-to-maturity on 10-year Treasury bonds, compared with the actual subsequent return of the S&P 500 in excess of 10-year bond yields. We estimate that from current valuations, the S&P 500 will underperform Treasury bonds by more than 2% annually over the coming decade. We've never observed a similar level of stock vs. bond valuations without stocks actually underperforming bonds over the subsequent 10-year period. Next, look at bear market lows such as 2009, 2002, 1990, 1987, 1982, 1978, and 1974, and recognize that the completion of every market cycle in history has provided better investment opportunities, both in absolute terms, and relative to bonds, than are presently available. Frankly, history suggests that a rather ordinary completion to the present market cycle would involve the S&P 500 losing more than half of its value."

  

   

  More Downside Likely

  The recent push higher in interest rates is likely putting the Fed on the wrong side of hiking interest rates in the shorter term. With economic growth weak in the first half of this year, the surge in interest rates will likely have a rather significant short-term impact on consumer behaviors and sentiment.

  As stated above, while the overall market has held up exceptionally well so far, the risks of a deeper corrective action this summer is on the rise. This is particularly the case given the ongoing deterioration in the technical underpinnings.

  The following is a monthly chart of the market and several internal momentum/strength indicators. (Since it is monthly, only the end of month closes are important.)

  

  As of the end of May, all internal measures of the market are throwing off warning signals that have only been seen at previous major market peaks.

  These "warning" signals suggest the risk of a market correction is on the rise. However, all price trends remain within the confines of a bullish advance. Therefore, portfolios should remain tilted toward equity exposure "currently."

  The mistake that most investors make is trying to "guess" at what the market will do next. Yes, the technicals above do suggest that investors should "theoretically" hold more cash. However, as we should all be quite aware of by now, the markets can "irrational" far longer than "logic" would suggest. Trying to "guess" at the next correction has left many far behind the curve over the last few years.

  These "warning signs" are just that – "warnings." It means that we should be prepared to take action WHEN the trend of the market changes for the worse. While I agree that you "can't time the market," I do suggest that you can effectively and consistently manage the risk in your portfolio. 

  Our job as investors is to navigate the financial markets in a manner that significantly reduces the destruction of capital over time. By spending less time making up previous losses, our investments advance more quickly towards our long-term objectives.

  Currently, the markets are sending a very clear warning. When the "lights" are flashing, it has generally been a good idea to "slow down" a bit to avoid the danger that may be lurking ahead.   

  

  

  
  
  

  

• Caught On Tape: Police Beat Intoxicated, Mentally Ill Man Who Fought Mother In Street

  Salinas, California resident Jose Valesco had a tough day last Friday. 

  Police initially responded to North Main Street and Bernal Dr. after receiving complaints about a man charging in and out of the street, screaming at motorists, and leaping onto cars. By the time officers arrived at the scene, the suspect — Jose Valesco — had apparently pinned his mother to the pavement in the northbound lane after she attempted to dissuade him from running into oncoming traffic. 

  Police gave Valesco several verbal warnings before moving in to pull him away. According to a press release, the situation soon escalated when Valesco was able to wrestle a taser away from one of the arresting officers at which point the other officers drew their tasers and deployed them. 

  What they did not know was that Valesco had been drinking heavily and smoking methamphetamine (which would appear to explain the whole charging around in traffic and screaming bit) a combination which ultimately rendered the tasers ineffective. 

  That’s when the batons came out.

  What happened next was captured on the cell phone footage shown below.

  But it didn’t stop there.

  Valesco, down but certainly not out after suffering what appears to have been a severe beating at the hands of five officers, was on his way to the hospital when he grabbed an officer and a paramedic through the rails of a gurney and attempted to bite them. At that point, he was “chemically restrained.”

  In the wake of the incident, Valesco’s sister Antoinette Ramirez told The Guardian that her brother is “mentally ill.” While not disputing the claim that Valesco was assaulting his mother when officers arrived, Ramirez did note that her mom “walked away just fine.”

  Salinas Police Chief Kelly McMillin acknowledged that “out of context” the video is “horrific and inflammatory.”

  McMillin went on to say that if ever there were a case where context is key, this is surely it: “If [Valesco] is mentally ill, methamphetamine and alcohol intoxication on top of that is all a recipe for disaster.”

  “He was incredibly strong because of the methamphetamine,” he added.

  * * *

  Bonus excessive force clip:

  

  

  
  
  

  

• No LOVE For GLD

  

  Gold hasn’t been the flavor of the month for a while now, and the asset ‘managers’ at the SPDR Gold Shares ETF, trading with GLD as ticker symbol are definitely feeling the pain. From being the world’s largest ETF available just a few years ago (with a value that was even higher than the S&P ETF), GLD has seen 2/3rds of its assets under management been withdrawn.

  

  Indeed, the current total amount of gold held by the ETF is just over 700 tonnes with a total value of approximately of just $26.7B, compared to almost $80B in 2011. This means that if GLD indeed holds all the gold in physical form in its bank vaults, it sold approximately $50B worth of physical gold in the past few years. Not only does this raise the question if the most recent drop in the gold price was some sort of self-fulfilling prophecy, but it also raises the question who ended up with the gold, because, as you know ‘for every seller, there is a buyer’.

  The sentiment remained negative in the past few weeks and months as in May alone, the ETF saw an additional outflow of almost $1B. And nobody will argue with the fact the more the Gold ETF gets out of favor, the closer to the bottom we are. Remember GLD’s value peaked at almost $80B in 2011? Well, just two weeks after reaching the record high, the gold price topped and only went downhill from there on.

  

  All weak hands have now reduced their exposure to gold through the Gold Shares ETF, only the real believers are still holding the ETF, so the selling pressure should per definition decrease as there are less weak and nervous hands. On top of that, we see some positive chart-technical signs with the money flow index once again flirting with the lows we only saw before two nice break-outs in the past 12 months (see previous chart).

  The next few weeks and months will be very important for gold, as some market analysts are expecting one final dip to $1080/oz before starting to move up again. There’s only one thing you can be sure of, a lot more shit will hit the fan shortly as Greece is in a technical default, the USA still plans to increase its interest rates despite the fact the underlying economy isn’t strong at all. Throw in Russia’s and China’s continues hunger for gold in the mix and you’ll understand why we think it’s more likely gold will move up instead of down in the medium-term.

  >>> Rather own some Real GOLD? Check Out Our Latest Gold Report!

  Secular Investor offers a fresh look at investing.
  We analyze long lasting cycles, coupled with a collection of strategic
  investments and concrete tips for different types of assets. The methods
  and strategies are transformed into the Gold & Silver Report and the Commodity Report.

  Follow us on Facebook @SecularInvestor [NEW] and Twitter @SecularInvest

  

  

  
  
  

  

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