Today’s News May 3, 2015

• EURO SPY CaM

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  THE REGISTER–According to local media reports Thursday, German intelligence agency BND (the Bundesnachrichtendienst) has helped the US National Security Agency (NSA) spy on the European Commission and French authorities since 2008.

  “When it comes to our role in the world, in a way, it’s good that people are interested in us,” said the ever-sardonic Commission spokesman Margaritis Schinas.

  

  
  
  

  

• Filipinos Asked To Turn Off Fridges To Save Power For Pacquiao-Mayweather Fight

  If there is one thing more likely to incite wide-spread social unrest in the Philippines than watching Manny Pacquiao lose to Floyd Mayweather tonight, it is Filipinos not being able to watch it all… and that is why, as The South China Morning Post reports, residents of the western Philippines are being asked to turn off their refrigerators so there will be enough electricity to watch tonight's fight. However, Rante Ramos, secretary of the electrical cooperative on the island of Palawan, warned, even with help, there is likely to remain a power shortfall and "some circuits may inevitably be switched off."

  As The South Cina Morning Post reports,

  Residents of the western Philippines are being asked to turn off their refrigerators so there will be enough electricity to watch this weekend’s fight between local boxing legend Manny Pacquiao and Floyd Mayweather Jnr.

   

  Rante Ramos, secretary of the electrical cooperative on the island of Palawan, posted the appeal on Facebook on Wednesday, saying that the area faced a power shortfall that might result in an outage on Sunday when the long-awaited fight airs in the Philippines.

   

  “Truth is, come May 3… Palawan grid would still be 2-megawatt short of power supply. Some circuits may inevitably be switched off,” he warned.

   

  “Collectively we can do something. On May 3, let’s all voluntarily switch off or disconnect as many appliances as we could,” he said, asking that about 15,000 homes switch off their refrigerators for a few hours.

   

  He also urged people not to use their washing machines, air-conditioners and irons until the fight is over.

   

  Palawan’s capital of Puerto Princesa has been suffering daily power outages lasting two to three hours due to a supply shortfall.

   

  However the entire nation is eagerly anticipating the “fight of the century” between Pacquiao, regarded as a national figure, and unbeaten American Mayweather to finally answer who is the better pound-for-pound boxer of their generation.

   

  

   

  The fight is going to be shown live in public on widescreen TVs in the city, sponsored by two candidates who are running for mayor in Puerto Princesa elections on May 8.

   

  It will also be shown on a pay-per-view basis in many bars and hotels of the popular resort city.

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  While for now the odds favor Mayweather, here are some champs explaining just how Pacquiao can pull this off…

  

  

  

  
  
  

  

• Paul Craig Roberts: "Insanity Grips The Western World"

  Authored by Paul Craig Roberts,

  Just as Karl Marx claimed that History had chosen the proletariat, neoconservatives claim that History has chosen America. Just as the Nazis proclaimed “Deutschland uber alles,” neoconservatives proclaim “America uber alles.” In September 2013 President Obama actually stood before the United Nations and declared, “I believe America is exceptional.”

  Germany’s political leaders and those in Great Britain, France, and throughout Europe, Canada, Australia, and Japan also believe that America is exceptional, which means better than they are. That’s why these countries are Washington’s vassals. They accept their inferiority to the Exceptional Country — the USA — and follow its leadership.

  It is unlikely that the Chinese think that a handful of White People are exceptional in anything except their diminutive numbers. The populations of Asia, Africa, and South America dwarf those that comprise Washington’s Empire.

  Neither do the Russians believe that the US is exceptional. Putin’s response to Obama’s claim of American superiority was: “God created us equal.” Putin added: “It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation.”

  If all countries are exceptional, the word loses its meaning. If America is exceptional, it means others are inferior for lacking this designation. Inferiors have less rights and can be bullied into submission or bombed into oblivion.

  The Exceptional Country is above all the others and, therefore, doesn’t have to be concerned about how it treats them. Obviously, Americans and their vassals think America is exceptional as the millions of people murdered, maimed, and dislocated by Washington’s wars in eight countries in the 21st century has not resulted in condemnation of Washington. Merkel, Hollande, Cameron and the puppets in Canada, Australia, and Japan still suck up, holding tight to Washington.

  Instead, Russia and Iran, countries that, unlike the US, are not militarily aggressive, are portrayed in the White People’s Media as threats and are condemned.

  The White Media claims, and has claimed since February 2014, that there are Russian tanks and troops in Ukraine. Putin has pointed out that if this indeed was the case, Kiev and Western Ukraine would have fallen to the Russian invasion early last year. Kiev has been unable to defeat the small breakaway republics in eastern and southern Ukraine and would stand no chance against the Russian military.

  Recently a brave news organization made fun of the White Media’s claim that Russian tanks have been pouring into Ukraine for 14 months. The parody pictured Ukraine at a standstill. All traffic on all roads and residential streets is blocked by Russian tanks. All parking places, including sidewalks and people’s front and rear gardens have tanks piled upon tanks. The entire country is immobilized in gridlock.

  Although a few have fun making fun of the gullible people who believe the White Media, the situation is nevertheless serious as it concerns life on planet Earth.

  There is little sign that Washington and its vassals care about life on Earth. Recently, the largest political group in the European Parliament–the European People’s Party–expressed a cavalier opinion about life on Earth. We know this, because, if we can trust Euractive, an online EU news source, the majority EU party believes that declaring the EU’s readiness for nuclear war is one of the best steps to deter Russia from further aggression. The aggression to be stopped by Europe’s declaration of its readiness for armageddon is the alleged Russian invasion of Ukraine, and the “further aggression” is Putin’s alleged intention of reestablishing the Soviet Empire.

  It must be disappointing to the Russian government to see that leaders of the European Union prefer to endorse nuclear war than to challenge Washington’s propaganda.

  When I read that the governing party in the European Parliament thought non-existent aggression had to be stopped by a declaration of readiness for nuclear war, I realized that money could buy any and every thing, even the life of the planet. The European People’s Party was speaking on behalf of Washington’s propaganda, not on behalf of Europe. Europe’s nuclear war with Russia would end instantly with the destruction of every European capital.

  The crazed vice-president of the European People’s Party, Jacek Saryusz-Wolski revealed who the real aggressor is when he declared: “Time of talk and persuasion with Russia is over. Now it’s time for a tough policy.”

  Clearly, the European Parliament is a great danger to life on the planet. Is it realistic to think that Russia will allow herself to become a concubine of Washington?

  

  

  
  
  

  

• Michael Moore: "Disarm The Police… & Release Black Inmates Jailed For Drug Offenses"

  Michael Moore took to Twitter this week to outline his list of demands following the riots in Baltimore: Disarm the police and open prisons.

  As The Washington Times reports, Moore unleashed his own brand of trolling…

  “Imprison u, shoot u, sever your spine, crush your larynx, send u to war, keep u poor, call u a thug, not let u vote. But u can sing for us,” the liberal film director tweeted to his 1.83 million followers.

   

  His comments comes amid violent unrest in Baltimore since the death of Freddie Gray, a 25-year-old black man who died after suffering a severe spinal injury while in police custody. More than 200 people were arrested in clashes with police Monday and Tuesday and more than a dozen officers injured.

   

  “Here’s my demand: I want every African-American currently incarcerated for drug ‘crimes’ or nonviolent offenses released from prison today,” Mr. Moorecontinued. “And the rest who r imprisoned- I don’t believe 50% of them did what they’re accused of. Lies. Greed. A modern day slave system. Poor whites 2.”

   

  “Next demand: Disarm the police,” he wrote. “We have a 1/4 billion 2nd amendment guns in our homes 4 protection. We’ll survive til the right cops r hired.”

   

  “Local cops now militarized. Founding Fathers said NO army policing on our soil. Why do cops have tanks? Oh, right – the Enemy: The Black Man,” Mr. Moore concluded.

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  While most responses on Twitter appeared of the “you f##king idiot”-type, one law enforcemenmt official had a more profound idea…

  @nranews @MMFlint Start pilot project by doing it in his neighborhood. Set up transitional inmate housing where he lives.

  — David A. Clarke, Jr. (@SheriffClarke) April 30, 2015

  

  

  
  
  

  

• Major U.S. Retailers Are Closing More Than 6,000 Stores

  Submitted by Michael Snyder via The Economic Collapse blog,

  If the U.S. economy really is improving, then why are big U.S. retailers permanently shutting down thousands of stores?  The “retail apocalypse” that I have written about so frequently appears to be accelerating.  As you will see below, major U.S. retailers have announced that they are closing more than 6,000 locations, but economic conditions in this country are still fairly stable.  So if this is happening already, what are things going to look like once the next recession strikes?  For a long time, I have been pointing to 2015 as a major “turning point” for the U.S. economy, and I still feel that way.  And since I started The Economic Collapse Blog at the end of 2009, I have never seen as many indications that we are headed into another major economic downturn as I do right now.  If retailers are closing this many stores already, what are our malls and shopping centers going to look like a few years from now?

  The list below comes from information compiled by About.com, but I have only included major retailers that have announced plans to close at least 10 stores.  Most of these closures will take place this year, but in some instances the closures are scheduled to be phased in over a number of years.  As you can see, the number of stores that are being permanently shut down is absolutely staggering…

  180 Abercrombie & Fitch (by 2015)

  75 Aeropostale (through January 2015)

  150 American Eagle Outfitters (through 2017)

  223 Barnes & Noble (through 2023)

  265 Body Central / Body Shop

  66 Bottom Dollar Food

  25 Build-A-Bear (through 2015)

  32 C. Wonder

  21 Cache

  120 Chico’s (through 2017)

  200 Children’s Place (through 2017)

  17 Christopher & Banks

  70 Coach (fiscal 2015)

  70 Coco’s /Carrows

  300 Deb Shops

  92 Delia’s

  340 Dollar Tree/Family Dollar

  39 Einstein Bros. Bagels

  50 Express (through 2015)

  31 Frederick’s of Hollywood

  50 Fresh & Easy Grocey Stores

  14 Friendly’s

  65 Future Shop (Best Buy Canada)

  54 Golf Galaxy (by 2016)

  50 Guess (through 2015)

  26 Gymboree

  40 JCPenney

  127 Jones New York Outlet

  10 Just Baked

  28 Kate Spade Saturday & Jack Spade

  14 Macy’s

  400 Office Depot/Office Max (by 2016)

  63 Pep Boys (“in the coming years”)

  100 Pier One (by 2017)

  20 Pick ’n Save (by 2017)

  1,784 Radio Shack

  13 Ruby Tuesday

  77 Sears

  10 SpartanNash Grocery Stores

  55 Staples (2015)

  133 Target, Canada (bankruptcy)

  31 Tiger Direct

  200 Walgreens (by 2017)

  10 West Marine

  338 Wet Seal

  80 Wolverine World Wide (2015 – Stride Rite & Keds)

  So why is this happening?

  Without a doubt, Internet retailing is taking a huge toll on brick and mortar stores, and this is a trend that is not going to end any time soon.

  But as Thad Beversdorf has pointed out, we have also seen a stunning decline in true discretionary consumer spending over the past six months…

  What we find is that over the past 6 months we had a tremendous drop in true discretionary consumer spending. Within the overall downtrend we do see a bit of a rally in February but quite ominously that rally failed and the bottom absolutely fell out. Again the importance is it confirms the fundamental theory that consumer spending is showing the initial signs of a severe pull back. A worrying signal to be certain as we would expect this pull back to begin impacting other areas of consumer spending. The reason is that American consumers typically do not voluntarily pull back like that on spending but do so because they have run out of credit. And if credit is running thin it will surely be felt in all spending.

  The truth is that middle class U.S. consumers are tapped out.  Most families are just scraping by financially from month to month.  For most Americans, there simply is not a whole lot of extra money left over to go shopping with these days.

  In fact, at this point approximately one out of every four Americans spend at least half of their incomes just on rent…

  More than one in four Americans are spending at least half of their family income on rent – leaving little money left to purchase groceries, buy clothing or put gas in the car, new figures have revealed.

   

  A staggering 11.25 million households consume 50 percent or more of their income on housing and utilities, according to an analysis of Census data by nonprofit firm, Enterprise Community Partners.

   

  And 1.8 million of these households spend at least 70 percent of their paychecks on rent.

   

  The surging cost of rental housing has affected a rising number of families since the Great Recession hit in 2007. Officials define housing costs in excess of 30 percent of income as burdensome.

  For decades, the U.S. economy was powered by a free spending middle class that had plenty of discretionary income to throw around.  But now that the middle class is being systematically destroyed, that paradigm is changing.  Americans families simply do not have the same resources that they once did, and that spells big trouble for retailers.

  As you read this article, the United States still has more retail space per person than any other nation on the planet.  But as stores close by the thousands, “space available” signs are going to be popping up everywhere.  This is especially going to be true in poor and lower middle class neighborhoods.  Especially after what we just witnessed in Baltimore, many retailers are not going to hesitate to shut down underperforming locations in impoverished areas.

  And remember, the next major economic crisis has not even arrived yet.  Once it does, the business environment in this country is going to change dramatically, and a few years from now America is going to look far different than it does right now.

  

  

  
  
  

  

• Goldman Explains The "Self-Fulfilling Loop" Driving Bund Yields

  Last week, we witnessed a rather dramatic sell-off in German Bunds. The rout was attributable to a confluence of factors including, but not limited to, data which appeared to show that euro loans to the private sector rose for the first time in three years, position squaring, the frontrunning of expected positive EGB supply in May, and the suggestion from yet another financial market heavyweight that Bunds represent a compelling short opportunity especially when you can leverage your position and achieve a positive carry along the way. 

  Despite the sell-off and despite the fact that net supply in Germany is expected to be (barely) positive in May, it will turn sharply negative to the tune of €12 billion and €15 billion in June and July, respectively, suggesting rising Bund yields may be a transient phenomenon especially considering the fact that when supply is deeply negative, private market holders should theoretically be able to charge the Bundesbank as much as they want all the way to the depo rate floor, a dynamic which should put pressure on yields (at least for maturities of 5 years and up) going forward. 

  Against this backdrop, Goldman is out summarizing the dynamics of the supply/demand equation for Bunds. Here’s more:

  Unlike other large economies, however, the German government sector was running a surplus of 0.7% of GDP in 2014. On current fiscal policies, as the economy expands this will likely expand, implying an even lower issuance of bonds and larger scarcity effects. We calculate that the Bundesbank will remove 80% of the central government’s gross issuance of government bonds over the next year, compared with 40% in Italy, Spain and France (where redemptions and the new deficit are larger). If the amount the Bundesbank removes from the bond market is couched in budget surplus equivalent terms (i.e., a reduction in net issuance of securities), it would be in the order of around 6% of German GDP. Going by historical relationships, a surplus of this size would lower 10-year Bund yields by 60-70bp, controlling for short rates and macro conditions. Even so, Bund yields should not trade lower than 50-75bp – which suggests there are also other factors depressing yields.

   

  

  
  

  PSPP then, will soak up more than three quarters of gross supply in Germany, which is twice as much in percentage terms as what NCBs will take down in Italy, Spain, and France. Meanwhile, some 40% of purchase-eligible German bonds are in foreign hands…

  The breakdown of ownership is also playing in favour of lower yields. Two-thirds of German government debt – the risk-free asset par excellence – is held by non-German residents. No official statistics are available for how the share in the hands of foreigners is divided between other residents of the Euro area and investors outside the currency union. Combining data on foreign balance sheets with anecdotal information, we believe that as much as 40% of the stock of German securities may now be held by investors residing outside EMU. A broader diversification across the Euro area sovereign markets has been held back by the large credit rating gap that still exists between the core countries and the periphery, and ongoing tensions surrounding Greece. 

  Finally, Goldman reminds us that the structure of PSPP has a tendency to create sell-fulfilling prophecies…

  Last but not least, the ECB has stated that bonds yielding less than negative 20bp (i.e., the deposit rate) would not be eligible for purchase. Alongside this, it has set constraints on how much of each specific security it wishes to own. As the decline in yields that has followed the liquidity injections has made its way to intermediate maturities, the market has extrapolated that the Bundesbank would have to purchase a larger share of longermaturity bonds to fill its quota. This is a self-reinforcing expectations loop, where lower yields beget lower yields. Given its nature, the loop can also switch direction. As yields rise, more bonds become eligible for central bank purchases, and the price action goes into reverse. What we have seen in recent days has offered a taster of these dynamics, especially at the very long end of the German yield curve. 

  We would note that this type of feedback loop could be rather dangerous in a market that is becoming structurally very thin — that is, combining collapsing market depth with a “self-reinforcing expectations loop” that can quickly push long-end yields higher at the drop of a dime seems to be a decidedly risky proposition. Combine this with the fact that supply is set to go negative again in June and July which could push yields quickly lower, and the stage is set for a volatile summer in the Bund market.

  

  

  
  
  

  

• The Secret Mountain Our Spies Will Hide In When Washington Is Destroyed

  Submitted by William M. Arkin via PhaseZero,

  

  It’s after midnight. From this mountaintop perch, he can still see the radioactive remains of what used to be Washington, D.C., illuminating the horizon as he exits the helicopter. The nuclear glow serves as stark proof that the intelligence community failed to foresee and prevent the worst, but at least someone was smart enough to build this mountain bunker in rural Virginia for him and his fellow spies to regroup and survive. He opens the reinforced steel door and begins his descent.

  This isn’t paranoid conspiracy fiction. This exact scenario was played out this week.

  America’s Preparathon, yesterday’s national pep rally—brought to you by the Department of Homeland Security—tipped me off to this real underground bunker north of Charlottesville, Virginia. The bunker’s purpose is completely secret, though I was easily able to verify that it has been expanded and spiffed up in the years since 9/11 at a cost of tens of millions of dollars. It serves as a compact parable for everything that is wrong with government.

  Yesterday’s Preparathon was described by its sponsor FEMA as “a grassroots campaign for action.” Washington’s definition of action is lining up and marching, saluting, and following orders. But there’s a secret definition, written between the lines of the Constitution and public laws: Officialdom evacuating from disorderly and disobedient America before the citizenry catches up or catches on. Countless billions have been spent on this endeavor over the years, a secret orgy of preparedness going on behind the scenes, one that ensures Washington can defend itself, take care of its own, and survive no matter what.

  

  Its called continuity of government, and it’s been refined over the years to anticipate foreign invasion, nuclear war, catastrophic accident, rioting and citizen unrest, an electromagnetic pulse above the capital, a catastrophic failure of critical infrastructure, a malicious hacking of the electrical grid, terrorist attack, hurricanes and earthquakes, an asteroid from space—you name it. The spigot opened after 9/11, gushing tax dollars into this subterranean world of never again, but just in case. If our all-seeing, all-knowing national security establishment fails…well, the White House and the Generals and the Departments large and small all have plans to depart the capital city and recover.

  But what about the spies?

  And so as it goes in Washington, the self-interested predictors of world events decided after 9/11 that they, too, needed their own continuity operation. That’s right: the very people who will fail to predict the Big One will need somewhere to go and keep writing their reports.

  Which brings us to Peters Mountain. This year, for the first time, the office of the Director of National Intelligence announced that it would be participating in the Preparathon with something called the National Intelligence Emergency Management Activity (NIEMA). The DNI merely describes NIEMA as providing “the framework, platforms, and systems to enable the Director of National Intelligence to lead an integrated and resilient [intelligence community] enterprise capable of sustaining the ‘intelligence cycle’ under any crisis or consequence management event, both at our headquarters and at our alternate operating locations” (my emphasis).

  But job descriptions, contracting documents, insider resumes, and furtive discussions with Washington sources reveal that this little-known “activity” is a $100-million-a-year disaster playpen. At its 24/7/365 Response Operations Center (at a classified location), watch officers provide what’s referred to as “situational awareness and crisis support” to the nation’s leaders; and when that fails, they evacuate to their classified alternate facility, which sources say is in Albemarle County in central Virginia.

  There is really only one candidate—a mysterious facility atop Peters Mountain, roughly 16 miles east of Charlottesville—and it’s undergone a $61 million plus renovation since 2007.

  For decades, there’s been speculation about just what Peters Mountain is, this Cold War artifact on the outskirts of Washington, part of a string of “hardened” communications nodes built to survive nuclear war in the 1950s. It’s a favorite of internet conspiracy types, but no one seems to know what it is, other than the fact that the land it’s on is officially owned by AT&T. And if that’s not clear, there’s an AT&T logo newly installed on the top of the mountain itself, a helicopter pad built for this don’t-pay-attention-to-us blank spot on the map.

  “I always heard stories about how it was a Nuclear Missile base, or a super communications hub. But the coolest one was the rumor that on 9/12/2001 Anti-Aircraft Artillery went up the mountain and has not come down. There is a big paved road that goes to the top off of Turkey Sag Rd. [sic] which is a gravel road and tractor trailers are always going up the mountain with covered loads. There are all sorts of Gov’t signs about private property and no trespassing. From Gordonsville at night the top of the mountain is lit up like a Christmas Tree with a lot of blue lights which I thought was weird. and you can see vehicles driving around.”

  

  I went down a rabbit’s hole of research trying to confirm that this indeed is an intelligence community bunker, scouring the records of Albemarle County and pulling the planning, construction and tax records for the land parcel, which is indeed described as belonging to AT&T, though it is listed as “vacant residential land” of no value.

  

  The building permits that have been submitted to the county since 2007— B200701545AC dated 07/03/07; B201302542ATWR dated 10/29/13; and B201402314AC dated 11/12/14 — amount to $61,124,583.00 in interior and exterior alterations, including the building of that helicopter pad, a new bunker entrance, “alteration to interior spaces,” and installation of two new satellite dishes.

  So this vacant residential land of no value, which has seen tens of millions of dollars in construction activity, is obviously something other than its cover. The county itself, in its useful GIS property viewer, shows the “vacant” residential land clearly houses several buildings.

  

  

  Google and Bing each have satellite views of the mountain top, showing the same structures and the progress of construction since 2007.

  

  

  The two large structures on top of the mountain, to the left of the helicopter pad, are assumed to be vent stacks and hardened power and communications antennae. Two satellite dishes added after 9/11 are also now apparent, suggesting autonomous and enduring communications.

  

  Nothing in the federal budget or in the county records suggests any government occupation, and nothing refers to NIEMA or the intelligence community. That again comes from sources who have worked for the DNI and its continuity activity. They describe the national Warning, Alert, and Mobilization System (WAMS) which would alert a select group of civilian executives from across the intelligence community to deploy to the bunker. The alert would come from “The Communicator” Automated Notification System and would take two forms: alerts for everyone and alerts for the “core” participants. Because Washington is notorious for traffic congestion, those so-called core participants, those who have to move away from Washington within minutes of notification, would congregate and board helicopters which would take them away.

  We sent a Gawker scout out to look at Peters Mountain Road this morning, to see if indeed there were men with guns and U.S. government insignia warning hikers to stay clear.

  

  “Road closed” to him meant road closed, and he declined to drive further. County maps do not show the road as being closed or restricted in any way (bottom left hand corner, parcel 36-11A SCC). I guess that’s the prerogative of those who live in the shadows.

  

  The bunker is built. It’s regularly exercised. It’s ready to go, joining Mount Weather and Raven Rock and the Olney bunkers that dot the west, north, and east of the capital. As the government —and now the intelligence community—button-up to protect themselves during a disaster, the helicopter pilots and drivers and the guards and the rest of the unchosen (even those who work for the same organizations) are supposed to just stay outside, always a scenario I find difficult to imagine. How would this exactly work, this glorious evacuation of a select few? “Honey I’m off to a secret mountain to survive Armageddon, good luck?”

  And as for the local officials and people of Charlottesville, huddled in darkness without electricity, staring up at the blue-lit mountain glowing in the night on generator power? Well, they will just have to wait for the report to be written that it’s all clear, or for the one that says it’s all over, in which case Peters Mountain will be a lonely island, prepared for a future of nothingness. And there’s a report on that too, required to be submitted every 12 hours: It’s called the IC Health and Status report—health and status of the intelligence community, that is.

  

  
  
  

  

• 1%-ers Encounter An Unexpected Parking Problem At The Kentucky Derby

  “Sir, we know you spent $13,000 on a seat for the Derby but as you can see, we are full. Please take your Citation over to Lexington. We hear they have some spots.”

  

  Source: NBC

  

  

  
  
  

  

• Buffett Loses A Bet, Fails To Pay… Again

  On a day full of exultation for The Oracle of Omaha, we could not help but see the irony of Warren Buffett losing yet another bet and not paying up…

  The two richest men in the world face off. Buffett doesn't pay up. pic.twitter.com/m0PMUZpWWU

  — Chris Dignam (@Chris_Dignam) May 2, 2015

  Now where have seen this before? Rolfe Winkler explains… Buffett's Betrayal… (from 2009)

  When I was 14, Warren Buffett wrote me a letter.

   

  It was a response to one I’d sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style — diligent security analysis, finding competent management, patience — was immediately appealing.

   

  Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

   

  But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

   

  Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money.  The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

   

  To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)

   

  

   

  Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

   

  And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

  Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity.  With $7 billion at stake, Buffett is one of the biggest of these shareholders.

   

  He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

   

  Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

   

  “Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

   

  “Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

   

  It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

   

  Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

   

  Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

   

  And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years?  Recently Berkshire cut its stake to 16 percent from 20 percent.  Publicly, however, the Oracle of Omaha has been silent.

   

  This is remarkably incongruous for the world’s most famous financial straight-shooter. Few have called him on it, though one notable exception was a good article by Charles Piller in the Sacramento Bee earlier this year.

  Buffett didn’t respond to my email seeking a comment.

   

  What saddens me is that Buffett is uniquely positioned to lobby for better public policy, but he’s chosen to spend his considerable political capital protecting his own holdings.

   

  If we learn one lesson from this episode, it’s that banks should carry substantially more capital than may be necessary.  You would think Buffett would agree. He has always emphasized investing with a “margin of safety” — so why shouldn’t banks lend with one?

   

  Yet he mocked Tim Geithner’s stress tests, which forced banks to replenish their capital. Why? Is it because his banks are drastically undercapitalized?  The more capital they’re forced to raise, the more his stake is diluted.

   

  He points to Wells Fargo’s deposit funding model being more robust than investment banks’, but that’s no excuse for letting tangible equity dwindle to three percent of assets.  At that low level, the capital structure would have collapsed were it not for bailouts.

   

  And by the way, the strength of Wells’ funding model is a result of FDIC insurance, among the government subsidies Buffett complains about in this year’s letter.

   

  To me this feels like a betrayal.  There’s a reason he’s Warren Buffett and not, say, Carl Icahn.

   

  As Roger Lowenstein wrote in his 1995 biography of Buffett, “Wall Street’s modern financiers got rich by exploiting their control of the public’s money … Buffett shunned this game … In effect, he rediscovered the art of pure capitalism — a cold-blooded sport, but a fair one.”

   

  But there’s nothing fair about Buffett getting a bailout, about exploiting the taxpaying public for his own gain.  The naïve 14-year-olds among us thought he was better than this.

   

  What would Ben Graham say?

  *  *  *

  America, F##k Yeah!!

  

  

  

  
  
  

  

• Texas Republican Blasts Governor's "Embarrassing" & Irrational Response To Jade Helm

  On Thursday, we reviewed the official, unclassified Jade Helm 15 slide deck and remarked on some of the more amusing aspects of the US Special Operations Command’s upcoming two-month-long fake covert invasion of Texas, New Mexico, Colorado, Utah, Arizona, Nevada, and California. For those unfamiliar, Jade Helm is a training exercise wherein Green Berets, Navy SEALS, Marines, and other members of the armed forces will “practice core special warfare tasks, which help protect the nation against foreign enemies.” 

  Essentially, the states listed above were chosen because the army figures the landscape approximates the terrain and environmental conditions US armed forces may face in a modern overseas conflict, but predictably, the government didn’t do the best job of explaining things and in a particularly awkward section of the presentation entitled “Why Texas?”, the Spec Ops Command stumbled through a hilariously condescending account of why the Lone Star state was perfect for the drills. Here is how we summarized it:

  Next is the section entitled “Why Texas?” wherein the US Army Special Operations Command first explains how patriotic Texans generally are, then hilariously proceeds to suggest (in as polite a manner as possible) that the Lone Star state 1) resembles the type of desert wasteland soldiers might expect to encounter in a modern overseas conflict, 2) is just underdeveloped enough in many areas to give trainees an idea of what it might be like to be operating undercover in a hostile Middle Eastern country, 3) is home to the type of xenophobia which will make the locals approximately as skeptical of “outsiders” as the inhabitants of an occupied country might be but who are at the same time just gullible enough to be tricked into trusting the “invaders,” and best of all 4) is home to social and economic conditions that any normal American would consider “unfamiliar.” 

  Ultimately, some concerned citizens hailing from Bastrop voiced their skepticism about the exercises to Lt. Col. Mark Lastoria at an information session last Monday. Among the theories floated by the crowd: the government is preparing to confiscate Texans’ guns, the army is gathering intelligence on the way to instituting martial law in Texas, and the Special Ops Command may bring in ISIS fighters (presumably to make the exercises more realistic). In the end, Governor Greg Abbott got wind of these voters’ concerns and took the rather unusual step of calling on the Texas Guard to supervise the Jade Helm drills, prompting us to remark that “you now have a Texas governor pitting the Texas Guard against the US Special Operations Command amid fears the federal government — possibly in conjunction with Wal-Mart — is using special forces to gather intelligence on the way to taking over the state.” Our concerns about the creeping militarization of US communities notwithstanding, we can’t help but find the entire spectacle entertaining.

  Now at least one Texas Republican seems to think the Governor’s move might have marked Jade Helm’s full retard moment because as you can see from the following letter, 16-year Texas House member Todd Smith thinks the decision to have the state guard monitor the US military is nothing short of preposterous.

  Dear Governor Abbott, 

   

  Let me apologize in advance that your letter pandering to idiots who believe that US Navy Seals and other US military personnel are somehow a threat to be watched has left me livid. As a 16 year Republican member of the Texas House and a patriotic AMERICAN, I am horrified that I have to choose between the possibility that my Governor actually believes this stuff and the possibility that my Governor doesn’t have the backbone to stand up to those who do. I’m not sure which is worse. As one of the remaining Republicans who actually believes in making decisions based on facts and evidence- you used to be a judge?- I am appalled that you would give credence to the nonsense mouthed by those who instead make decisions based on internet or radio shock jock driven hysteria. Is there ANYBODY who is going to stand up to this radical nonsense that is cancer on our State and Party? It is alarming that our State Republican leadership is such that we must choose between DEGREES of demagoguery. I know that in many cases you are the better of the two demagogues (see the Lieutenant Governor driven nut job rant regarding your Pre-K program as a recent example). Having been there, I also know that politicians are not always able to speak their mind because they represent large groups of people and not just themselves. But this bone that you have thrown to those who believe that the U.S. Military is a threat to the State of Texas is an embarrassing distance beyond the pale. You are Governor of Texas! This is an open request—from a ghost of our State’s recent Republican past—that you act like it. Enough is enough. You have embarrassed and disappointed all Texans who are also informed, patriotic Americans. And it is important to rational governance that thinking Republicans call you out on it.

   

  Sincerely, 

  Todd Smith

   

  Below is Smith’s letter followed by the original from Abbott to Texas Guard commander “Jake” Betty.

  Letter to Governor Abbott

  Abbott Jade Helm

  

  

  
  
  

  

• Charlie Munger Compares Greece To a "Frivolous, Drunken Brother-In-Law"

  Having previously effused over gold and holocaust jews, bailouts, and handouts, Buffett & Munger took aim at Europe, well more implicitly Greece, during today’s annual octagenerian-fest.

  • Munger on Euro strains: You shouldn’t create a partnership with your drunken, shiftless brother in law.
  • And Buffett’s (implicit Grexit) retort: the euro can and probably should survive but it will take some changes…

  As he previously said, Germany must stop Greek dog peeing on its rug.

   

  

   

  Buffett added…

  • *BUFFETT SAYS EURO IN ITS PRESENT FORM WON’T WORK
  • *BUFFETT SAYS EURO IS FLAWED BUT CAN BE CORRECTED

  With just a little hard austerity or Grexit?

  *  *  *

  And here are some previous pearls of wisdom to the plebes coutesy of Chuckie Munger:

  Stop whining about bailouts: “Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens,” Munger said. “So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”

   

  Stop whining for moar handouts: “There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be…  At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’“

   

  Gold: “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939 but civilized people don’t buy gold – they invest in productive businesses.”

  *  *  *

  So they are both well worth listening to, we are sure.. since they have so much money.

  

  

  
  
  

  

• The High Cost Of Centrally Planning The Global Climate

  Submitted by Ryan McMaken via The Mises Institute,

  Since I’m not a person who follows the climate-change debate or climate science in detail, I don’t get involved in discussions over temperature readings or climate trends. On the other hand, I find it’s a very bad idea to leave the science of economics and political economy up to climate scientists and their friends in politics who tend to be woefully deficient in their knowledge of how economies work or how scarce goods and amenities can be preserved, obtained, or manufactured.

  It seems that for the global warming lobby, all that is necessary to set everything right is to hand control of the global economy over to governmental central planners. In their minds, the machinery of government only needs to be set in motion, and everything will be done with righteous precision to preserve the climatological status quo by increasing the cost of energy and cutting economic activity. The costs of such a venture, whether in money or in human lives and human comfort, need never be considered, because, we are told, the only alternative is the total destruction of planet earth.

  This “Follow Us or Die!” routine is a propagandist’s dream of course, but in real life, where more rational heads — on occasion — prevail, the costs of any proposed government action must be considered against the costs of the alternatives. Moreover, the burden of proof is on those who wish to use government, since their plan involves using the violence of the state to carry out their proposed mandates.

  For the sake of argument, let’s say that global climate change is occurring and that the sea level is rising. This still leaves several unanswered questions for the global warming enthusiasts:

  1. What is the cost of your plan to various populations in terms of the standard of living and human lives?
  2. Is the cost of your plan greater than or less than the cost of other solutions, such as the gradual relocation populations from coastal areas.
  3. Can you show that your plan has a very high probability of working, and if not, why should we implement it when we could spend those same resources on other more practical solutions and more immediate needs such as clean water, food, and basic necessities?

  All too often, the response to questions such as these are angry diatribes about how we must act now. But of course, such a position is similar to that of a person who, upon seeing that winter is approaching demands that everyone build the winter shelter his way immediately. “Can’t you people see it’s getting colder?” he says. “If we don’t build the shelter my way, we’ll all freeze.” When faced with questions of whether or not his shelter plan is really the best way to proceed, or if a different type of shelter might be more cost effective, or if others would rather build their own shelter, he angrily declares “you winter deniers don’t care if we all die.”

  Naturally, if the group then goes ahead with their belligerent companion’s shelter plan, they may find in the end that the shelter fails to keep out the cold or is structurally unsound. In that case, the group is actually much worse off because it expended large amounts of valuable resources that should have been applied elsewhere.

  The True Costs of Global Climate Regulation

  Here’s a representative paragraph from a publication that claims it disproves the “myth” that economic controls will have a negative impact on the economy:

  In the long term, unless we drastically reduce the rate at which we are still emitting greenhouse gases, we are very likely to incur huge costs as a result of climate change. Part of these costs will be in adaptation, and the inevitable disruption. In part costs will escalate due to turmoil and uncertainty throughout the economic world. There will also be costs that cannot be quantified, particularly when we try to value a human life and its loss.

  What are these “huge costs”? How many of them will come from “disruption” and how many will come from “adaptation.” If we look more deeply into the proposed plans, we find the attempts at estimating such costs are based on wildly speculative computer models. There is nothing more than the assumption that their course of action is superior to the course of action preferred by others. But again, the burden of proof is on those who wish to use government coercion against others.

  Moreover, even the mainstream research recognizes that the proposed cuts in carbon emissions, such as cutting “CO₂ emissions to 80 percent of 1990 levels,” are purely arbitrary. Indeed, they must be arbitrary because the people who advocate for such measures have no idea how much carbon emissions should be cut to accomplish their goals, or indeed, if any level of cuts would accomplish their goals, ever.

  What we do know, on the other hand, is that fossil fuel energies are behind most of the enormous progress made in the developing world. They make mechanization, transportation, and industrial economies possible. It is the rise of factories and other industrial operations that have pulled countless millions of Chinese (to name one example) out of the drudgery of low-productivity agricultural work and into factories where they can earn more than ten times as much. These workers send money back to elderly family members and they make possible the enormous savings rates that are driving the Chinese economy.

  This work is safer, more productive, and provides access to more and better food, better medical care, and better housing, than does agricultural work.

  Fossil fuel energy is a key factor in all of this, and to propose that the rug now be pulled out from under these people displays a callousness toward humanity that is truly unnerving.

  But, the global warming lobby may say, “the effects of global warming will hurt them.” Perhaps. And if so, they need to prove to us that the costs of global warming will be greater than the costs of making these people less productive, poorer, and possibly destitute.

  Less Energy Use Means Less Clean Water

  A second major factor here in the necessity of energy is fresh water. The California drought has reminded us that fresh water is a scarce resource, even if the government likes to treat it as if it were not. But even as larger populations demand more water, fresh water can be produced through the use of energy via desalinization and pump-based aqueducts.

  Today, most such schemes are still uneconomical because the problem of water scarcity can usually be solved through cheaper means such as importing food from wetter climates and through cheaper aqueduct systems that are primarily gravity-based.

  In the future, however, as water does become more and more scarce as populations grow, the most practical answer will indeed become more energy-intensive solutions.

  By centrally planning and artificially limiting energy usage, however, what the global warming lobby wants to do is raise the price of water processing, and by limiting the use of such methods, also inhibit technological progress by preventing practical experience in the use of water processing and fresh water production.

  Bizarrely, many of these same people claim that government regulation of water is necessary because “rich people” will hoard all the water, but by raising the cost of water processing, the global warming lobby is ensuring more monopolistic control over water and higher prices for everyone.

  “But global warming is causing droughts!” some will say. Perhaps. But those people still have yet to prove that their plan will end droughts and produce sufficient water for everyone. They still can’t even prove that droughts like the California drought are due to global warming. And, needless to say, the proposition that global controls on energy will make water flow from the hillsides in some distant future is pure speculation. But, in the meantime, we know the effect on the cost of living for ordinary people will be enormous. In other words, the global warming lobby wants humanity to abandon a real bird in the hand — developing technology in water production — for two very theoretical birds — a future without droughts — in the bush.

  An Experiment Built on the Backs of the Most At-Risk Populations

  Thus, a world of carbon controls and other central plans designed to prevent global warming, is a world of greater expense for everyone when it comes to food, water, and any basic necessity that involves the expenditure of energy. Which is to say, most everything. Naturally, the people in the least industrialized and poorest parts of the world will suffer the most. The global warming lobby likes to point out that their global warming policies are primarily directed at the richest countries. But if they think that will spare the developing world, they’ve only made clear that they don’t understand how global economies work. Crushing economic activity and consumption in the developed world only serves to lower wages and economic growth in the developing world.

  Like the man who hysterically demands that everyone build a winter shelter his way or die, the global warming lobby thinks that its highly speculative, unproven, massively expensive, and poverty-producing plan is the prima facie solution to everything. Naturally, they want to use the coercive power of the state to force everyone to conform to their plans as well, and if a billion poor people have to pay a steep price, well, that’s a price that wealthy and upper middle-class academics and activists are willing to have the poor pay.

   

  

  

  
  
  

  

• Did A Tap On The Shoulder "Prevent" The US Economy From Sliding Into Recession?

  The US Ministry of Truth has been hard at work the last month and nowhere is that more evident than in the blatant "tap on the shoulder" that The National Association of Credit Managers must have got this week… to revise their catastrophic indicators back to 'stable'…

   

  Two weeks ago we highlighted what was a stunningly clear indication of the looming recessionary environment (that The Atlanta Fed is now also seemingly suggesting and is consistent with the worst collapse in macro data since 2008). The largest spike in 'credit application rejections' indicated a credit crunch and "serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward."

  According to the CMI, the Rejections of Credit Applications index just crashed the most ever, surpassing even the credit crunch at the peak of the Lehman crisis.

   

  This can be seen on the chart below.

   

  

   

   

  And without any new credit entering the economy, a recession is all but assured.

  More details on what may be the most critical and completely underreported indicator for the US economy. The report continues, with such a dire narrative that one wonders how it passed through the US Ministry of Truth's propaganda meter:

  By far the most disturbing is the rejection of credit applications as this has fallen from an already weak 48.1 to 42.9. This is credit crunch territory—unseen since the very start of the recession. Suddenly companies are having a very hard time getting credit. The accounts placed for collection reading slipped below 50 with a fall from 50.8 to 49.8 and that suggests that many companies are beyond slow pay and are faltering badly. The disputes category improved very slightly from 48.8 to 49, but is still below 50. This indicates that more companies are in such distress they are not bothering to dispute; they are just trying to survive. The dollar amount beyond terms slipped even deeper into contraction with a reading of 45.5 after a previous reading of 48.4. The dollar amount of customer deductions slipped out of the 50s as it went from 51.8 to 48.7. The only semi-bright spot was that filings for bankruptcies stayed almost the same—going from 55.0 to 55.1. This is the one and only category in the unfavorable list that did not fall into contraction territory and that suggests that there are big, big problems as far as the financial security of these companies are concerned.

  Which NACM summed up thus:

  The rejections of credit applications is as miserable as it has been since the depths of the recession—going from 45.9 to 42.0.These are very bad readings and it will take a good long while to climb out of this mess.

  *  *   *

  Soon after we exposed this shocking hole in the US economic growth meme, the sell-side banks exploded into a fit of narrative recomposition and excuse-finding…

  Goldman Sachs "narrative"…

   

  Credit standards tightened sharply during the Great Recession and have gradually eased over the past few years. However, a recent sharp deterioration in the NACM Credit Managers’ Index—a series which has typically not generated much market interest—has prompted questions about whether credit standards are tightening anew.

   

  The NACM index captures terms of trade credit extended to businesses by suppliers. As such, it does not reflect directly on credit standards imposed by commercial banks on C&I, CRE, mortgage, or consumer loans. The recent downturn in the index appears to be partly related to more cautious credit extension from suppliers to smaller energy sector firms. Even so, the extent of the recent weakness is surprising.

   

  Despite a reasonable narrative for credit tightness in the energy sector, the fact that the NACM index is a diffusion index should naturally down-weight extreme changes among a limited subset of respondents. As a result, the extent of recent weakness appears surprising. According to our equity analysts, large producers of industrial machinery have generally not indicated significantly tighter terms of trade credit, and auto dealers do not seem to be facing difficulty obtaining floor plan financing (i.e. financing inventories). In addition, C&I loans—the closest analog to the coverage of the NACM index with regard to bank lending—has continued to grow at a healthy rate according to the Fed’s weekly H.8 release, although changes in credit conditions are likely to show up in loan growth only with a lag. Finally, credit-related questions in the NFIB's small business survey revealed a slight tightening in March, but not nearly as much as suggested by the NACM index.

   

  Overall, absent deterioration in the SLOOS data—which is more comprehensive and in our opinion probably more reliable—we would be reluctant to read too much into the recent volatility in the NACM index with regard to broader credit conditions.

   

  UBS "narrative" before…

   

  Credit is the lifeblood of the world economy, and we believe the retrenchment of lenders from extending new credit is a highly reliable leading indicator of future problems for borrowers and the economy at large.

   

  ...recent monthly surveys from the National Association of Credit Management’s Credit Managers Index (CMI) paint a picture in stark contrast. Simply put, measures of trade credit (the financing of receivables and inventories) have deteriorated sharply from January to March and are at their worst level since the financial crisis. We believe this data point should not be dismissed, and is an indication of the negative credit ramifications from dollar strength and falling EM demand.

   

  It may indicate that stressed borrowers are reaching for a lifeline and getting rejected. This was seen during the financial crisis when demand for trade financing increased even as banks cut supply.

   

  And UBS "narrative" after…

   

  The severe drop in the NACM credit market index has been revised away. In a recent economic comment titled "Credit Controversy", we had called attention to the National Association of Credit Management Credit Market Index, which plummeted in March. That weakness has now been partly revised away, and April data suggest stabilization. The credit market index has certainly softened, but its decline more closely resembles earlier soft spots during the current expansion. Before this revision, it had more closely resembled the runup to the credit crisis.

   

  And BofAML "narrative" destroying NACM data…

   

  Periodically an obscure economic indicator or survey pops up on the radar screen, suggesting something big is happening in the economy. The latest example is the Credit Manager’s Index.

   

  Before we hit the panic button, consider four facts. First, it only deals with trade credit – credit a firm extends to its customers (typically other firms) to facilitate sales. It is not a measure of bank credit or credit more broadly in the economy. To the extent that a lack of trade credit would ultimately hurt sales, the recent decline may be self-limiting. Second, it appears to be a relatively ad hoc survey, so it is possible that the addition or exclusion of a few key respondents could significantly move the index – although the group that puts it together suggests that is not the case.

   

  Third, it fell largely because of a collapse in just two of the ten components in this index: “amount of credit extended” and “rejection of credit applications” (where a drop in the former means less credit extended while a drop in the latter means a larger number of rejected applications). So there is apparently some sort of minicrunch in trade credit according to this sample. Finally, despite its alleged great prediction record it didn’t drop below 50 in 2008 until after the recession had started. The “rejection of credit applications” component, that is signaling disaster today, didn’t drop below 50 until the middle of the recession.

   

  In sum, like many such indicators this survey probably is useful for members of the narrow industry it covers. However, there is a good reason why macroeconomists like us had never heard of the survey.

  *  *  *

  And so – after all that – we get April's data from NACM. If ever there was a more clear indication of a firm getting a major tap on the shoulder to 'fix' the data or face 'consequences' this was it. Against a background of detrimental commentary from Goldman Sachs, BofAML, and UBS, NACM revised (massively) the last two months data, in their words, "to be "more consistent with the numbers that had been seen throughout the past year," instantly removing any looming recessionary indicator (along with any credibility they had). NACM explains their "revisions":

  The big declines in amount of credit extended in February and March have been revised from 52.1 and 46.1 respectively to 60.5 and 60.6 – more consistent with the numbers that had been seen throughout the past year.

   

  The numbers for rejections of credit applications went from 48.1 in February to 51.4 and March went from 42.9 to 2.6.

   

  The remainder of the categories were unchanged…

  NOTE: How exactly does one revise survey respondents answers from the last two months? Ask then again now how they felt in Feb? Did they lie at the time about the credit application rejections? The CMI polls 1,000 trade credit managers across the US and asks respondents to qualitatively assess changes in lending conditions from prior months. The index constructed is a diffusion index, similar to PMI indices (any readings greater than 50 indicate an economy in expansion, any readings less than 50 indicate an economy in contraction).

  This leaves us with this chart as the plainest indication yet of the smoke and mirrors bullshit being pulled on every gullible non-skeptical American about the state of their nation:

  

   

  And, for those who shrug this off as "well, it's just seasonal adjustments" or "well,  it's just Zero Hedge conspiracy stuff again," here is none other than the NACM last month destroying their own future credibility by removing any doubt that the collapse in the data was an aberration…

  We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather.

   

  There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward. These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage.

   

  The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.

  You decide – does this look like a normal 'revision' (that remember only took place in the two sub-indices that showed dramatic weakness and none of the others) – or is this a giant "tap on the shoulder" from someone to 'fix it or you're f##ked!"?

  

  

  
  
  

  

• Presenting The Most Overvalued Housing Market In The World In One Chart

  Submitted by Jeff Desjardins of Visual Capitalist

  Canada has the Most Overvalued Housing Market in World

  In every inflating bubble, there’s usually two camps. The first group points out various metrics suggesting something is inherently unsustainable, while the second reiterates that this time, it is different.

  After all, if everyone always agreed on these things, then no one would do the buying to perpetuate the bubble’s expansion. The Canadian housing bubble has been no exception to this, and the war of words is starting to heat up.

  On one side of the ring, we have The Economist, that came out last week saying Canada has the most overvalued housing market in the world. After crunching the data in housing markets in 26 nations, The Economist has determined that Canada’s property market is the most overvalued in terms of rent prices (+89%), and the third most overvalued in terms of incomes (+35%). They have mentioned in the past that the market has looked bubbly for some time, but finally Canada is officially at the top of their list.

  Of course, The Economist is not the only fighter on this side of the ring.

  Just over a month ago, the IMF sounded a fresh alarm on Canada’s housing market by saying that household debt is well above that of other countries. Meanwhile, seven in ten mortgage lenders in Canada have expressed “concerns” that the real estate sector is in a bubble that could burst at any time. Deutsch Bank estimates the market is 67% overvalued and readily offers seven reasons why Canada is in trouble. Even hedge funds are starting to find ways to short the market in anticipation of an upcoming collapse. Canada’s housing situation could give rise to the world’s next Steve Eisman, Eugene Xu, or Greg Lippmann.

  On the opposing side of the ring, who will contend that the Canadian housing market is just different this time? Hint: look to the banks and government.

  Stephen Harper, Canada’s Prime Minister, has tried to dispel fears. He recently told a business audience in New York that he didn’t anticipate any housing crisis in Canada.

  Just this week, the Bank of Canada also tried its best to deflate housing bubble fears. “We don’t believe we’re in a bubble,” says Stephen Poloz, the Bank’s Governor. “Our housing construction has stayed very much in line with our estimates of demographic demand.”

  Poloz suggested that housing costs do not necessarily have to contract to match the incomes of Canadians. Instead, he expects growth in the economy to raise wages and make housing more affordable.

  Strangely enough, by the Bank of Canada’s own estimate, the housing market is overvalued by as much as 30%. It is hard for housing to become more affordable when prices are rising in double digits in a year. Combine this with the fact that household debt rates keep setting new records, and one side of the fight might get tilted sooner than later.

   

  

  Courtesy of: Visual Capitalist

  

  

  
  
  

  

• The Most And Least Popular GM Car Models, And Everything Inbetween

  One month ago Zero Hedge showed “The “Mysterious” Source Of Surging Demand For GM Cars.” In short, it was the US government.

  

   

  Which is why we were eagerly looking to learn whether the Y/Y jump in GM’s April government sales would be in the 20%, 30% range or more. To our surprise, it was neither, for the simple reason that GM did not report it. One does wonder why any time this website spots a troubling trend, and shortly thereafter it is quietly pulled: first with the gold physical shortage indicator GOFO, and now this.

  Then again, perhaps it was merely an oversight and GM will promptly resume reporting the purchasing data of its single biggest customer… and rescuer: Uncle Sam.

  Until then, we will present something far more politically correct, and a series which GM can not possibly hide under the rug: the total year to date sales of its various vehicles ranked from most to least popular.

  A quick look at the list below reveals why economists are praying, for consumers’ sake, that oil and gas prices stay low and remain “unambiguously good” for all those who rushed to buy gas guzzling trucks and SUVs.

  Because if the plunge in oil and gas prices failed to spur a spending spree in the US in the first quarter, then a surge right back to historic price levels will hardly do miracles for American discretionary income once it again costs ~$100 to fill up one’s gas tank.

  

  

  

  
  
  

  

• Baltimore PD Releases Charged Cop Mugshots; Attorney Says Case Is "Politically Motivated"

  Following two weeks week of growing anger over the death of Freddie Gray which led to violent riots in Baltimore, and peaceful protests from New York and Philadelphia all the way to the West Coast, yesterday the state’s Attorney Marilyn J. Mosby charged six Baltimore officers with Gray’s death, leading to their prompt arrest, following by all just as quickly posting bail and being released. 

  The Baltimore PD released their mugshots, which reveal a rather broad racial mix: three white, two black, and one Hispanic, officer Caesar Goodson, who incidentally as the driver of the police van, is facing the most serious charge of second-degree murder. To repeat, not what one would call a racially homogeneous group.

  

   

  As noted previously, here is the breakdown of the charges against the officers:

  • Officer Caesar Goodson Jr. was charged with second-degree murder, manslaughter, second-degree assault, two vehicular manslaughter charges and misconduct in office.
  • Officer William Porter, Lt. Brian Rice and Sgt. Alicia White were all charged with involuntary manslaughter, second-degree assault and misconduct in office.
  • Officer Edward Nero was charged with second-degree assault and misconduct in office, and Officer Garrett Miller was charged with those charges plus false imprisonment.
  • Goodson, facing the most serious charges, could potentially be sentenced to as much as 63 years of prison. The others face a max sentence of between 20 and 30 years.

  They are scheduled to appear in court for a preliminary hearing in Baltimore City District on May 27, at 1:30 p.m.

  Mosby says the officers involved failed to get Gray medical help even though he requested it repeatedly after he was arrested April 12. She called Gray’s arrest illegal, saying the switchblade he was carrying in his pants was actually a legal knife.

  “I was sickened and heartbroken by the statement of charges we heard today,” Baltimore Mayor Stephanie Rawlings-Blake said. She added that there is no place for racism and corruption in the police department, and all of the officers have been suspended.

  Gray suffered a severe neck injury inside of the police van and died a week later. The state medical examiner’s office said it sent the autopsy report to prosecutors Friday morning. Gray’s death was ruled a homicide.

  Yet even this case could not avoid the taint of corruption and “political motivation”: according to WUSA9 state Attorney Mosby rejected a request from the Baltimore police officers union asking her to appoint a special independent prosecutor because of her ties to attorney Billy Murphy, who is representing Gray’s family. Murphy was among Mosby’s biggest campaign contributors last year, donating the maximum individual amount allowed, $4,000, in June. Murphy also served on Mosby’s transition team after the election.

  As The Hill reports further, an attorney for one of the six Baltimore police officers charged in the death of Freddie Gray on Friday suggested the case was politically motivated and cautioned against a “rush to judgment.”

  “I’m not going to get caught up into the politics. That’s what’s getting us, I believe, here today,” said Michael Davey, who is representing one of the officers but spoke for all those charged.

  “I believe that the publicity in this case is a driving force to a rush to judgment and causing this prosecution to move so quickly,” he added.

  Davey said the process of bringing the charges was too swift, criticizing Baltimore City State’s Attorney Marilyn Mosby.

  “In my 20-year career as a law enforcement officer and 16 years as an attorney, I have never seen such a rush to file criminal charges which I believe are driven by forces separate and apart from the application of law and the facts of this case as we’ve heard them,” Davey said.

  “Let me state in no uncertain terms that Lt. Rice and all of the officers involved at all times acted reasonably and in accordance with their training as Baltimore police officers,” he added. “No officer injured Mr. Gray, caused harm to Mr. Gray, and [they] are truly saddened by his death. These officers did nothing wrong.”

  Gray, a 25-year-old black man, suffered a fatal spinal injury while in police custody, and later died.

  Mosby’s office alleges that Gray was fatally injured when officers restrained him — using shackles and cuffs — in a police van without strapping him in with a seat belt. Six officers have been charged on a range of counts, the highest being a second-degree murder count for the driver of the van.

  Davey reiterated the union’s support for appointing a special prosecutor in the case. Mosby rejected those calls on Friday morning, saying that a special prosecutor would not be accountable to voters.

  Gene Ryan, president of the Fraternal Order of Police Baltimore City Lodge 3, was asked about reports that there is low morale among Baltimore police officers.

  “I can tell you they’re not happy,” he said. “This decision to charge the officers is going to make our job even harder.”

  The Gray case has brought longstanding concerns about how police in Baltimore treat minority communities to national attention.  In New York, the NYPD turned their back on mayor de Blasio following the shooting death of two cops in December: it remains to be seen in the Baltimore police force follows in New York’s footsteps and decides to “tone back” enforcement efforts for the next several weeks or months.

  

  
  
  

  

• A Hill Street Blues Financial World – Be Careful, Its Dangerous Out There

  Submitted by David Stockman via Contra Corner blog,

  We heard from several central banks in the last few days, and what they had to say was just one more reminder that we are in a Hill Street Blues financial world. So, hey, let’s be careful out there—-and then some!

  The Fed’s policy statement Wednesday, for example, was mainly just another trite economic weather report which could have been written after watching CNBC with the sound turned off. But the statement did hint that maybe 78 months of ZIRP won’t be enough, after all. Having stripped out all calendar references relative to the timing of its upcoming monetary body slam, whereupon Wall Street gamblers will be be charged the apparently usurious sum of 25 bps for their poker chips, it hinted at another reason for delaying the dreaded day:

  To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

  That’s right. If they don’t see enough inflation soon, they will keep Wall Street rampaging at the zero bound even beyond June. It is no longer worth mentioning that there is not a shred of evidence that the US economy would grow faster at a 2.0% CPI inflation rate versus the actual rate of 1.0% recorded over the last three years.

  Stated differently, exactly how is it that the tiny dip in the CPI owning to cheaper gasoline during the second half of 2014 once again delayed the promised nirvana of “escape velocity” for the fifth year running? Indeed, the very same Keynesian economists who insisted that the oil price collapse would cause consumer spending to surge are now urging the Fed to delay raising rates because inflation is too low and the US economy has once again stalled-out.

  

  Nor is it worthwhile to mention that the slight CPI dip shown above reflects the oil price plunge working its way through the price chain and that this short-term price shock is already abating, as reflected in the CPI upturn in March. Indeed, if you look at the Fed’s preferred index, the PCE deflator less food and energy, it has been as smooth as the skin on a baby’s bottom for years. So there is no evidence of a step-change toward some kind of drastic deflation that can possibly justify dithering even longer on the rate issue.

  In fact, the trend rate of annual change in the PCE-ex food and energy index has been 1.7% since the year 2000, and it has continued to post within a hair of that during the most recent three years. To wit, the annual increase was 1.4% during the year ending in March 2015 compared to 1.3% during the year before that and 1.4 percent during the LTM period ending in March 2013.

  So there just plain ain’t no deflation crisis, nor any change of  CPI trend other than the oil plunge, which ironically was caused by the central banks themselves. They accomplished this, first, by inflating a global boom that exaggerated the sustainable demand for oil; and then by generating a panicked scramble for yield among money mangers that led to $500 billion of cheap debt flowing down the well bores in the shale patch, and a resulting flood of excess supply on the world petroleum market.

  

  So what the Fed is doing is simply further inflating the financial  bubble on the self-serving theory that asset inflation doesn’t count. Well, it seems only yesterday that the Fed’s “maximum employment” objective was bushwhacked by the 2008 bubble meltdown on Wall Street and the Great Recession which followed.

  Yet the inhabitants of the Eccles Building stubbornly insist that there are no worrisome bubbles yet evident. Well, here’s one from Janet Yellen’s own backyard courtesy of Dr. Housing Bubble. The median house price in San Francisco is now $1.1 million, and it has been stair-stepping higher like clockwork during each of the Fed’s QE money printing phases.

  Indeed, if you had been idling your time in a median priced condo in San Francisco for the past 48 months you could have cashed out this winter at a 72% gain. That’s a $462,000 profit for standing around the basket during the Fed’s monumental money printing campaign.

  And yet this is about much more than windfalls to existing property owners who have been smart enough to sell before the next crash. The insane appreciation shown below is only symptomatic of what is happening in the entire US economy.

  That is to say, for every instance of windfall gains there are associated disruptions, deformations and malinvestments that reduce societal equity today and generate dead-weight economic losses tomorrow. Tens of thousands of working income families have been flushed out of San Francisco for no good reason; they just can’t afford the soaring rents. Likewise, its commercial landscape is teeming was “cash burn” startups that in due course will vacate their posh office suites and leave busted leases behind when the VC cash dries up.

  That’s what bubbles do, and San Francisco has proved that more than once in the present era of central bank driven financial inflation.

  

  There is no mystery, of course, as to where the buying power that propelled this price explosion came from. San Francisco is ground zero for the social media and biotech bubbles.

  The cascades of cash which have tumbled out of these bubbles are mind-boggling. The billions of venture capital flowing into these sectors support booming start-up payrolls, mushrooming networks of vendor support services and prodigious on-line advertising outlays. The latter generate more of the same in the next tier of startups which burn the advertising revenues that were funded by their  “advertising customers” VC cash. And when this pipeline of start-ups is eventually pushed into the delirious IPO markets, the brokerage accounts of the selling entrepreneurs are suddenly flush with cash and stock—-all the better to collateralize jumbo loans to buy condos, townhouses and lofts and renovate them in style.

  Needless to say, this is not capitalist creation at work—–even though venture capital risk-taking and homeruns for inventors and innovators are the sum and substance of real prosperity and growth.  What is wrong here is not the process or even some of the outcomes likes Apple and Google.

  The evil lies in the context in which today’s venture capitalism is being played out. Namely, an artificial financial casino fostered by central bank falsification of prices and valuations—a milieu where blind greed and mindless start-up activity run wild without the disciplining forces of honest and free capital markets.

  There could be no better illustration of this deformation than the flaming valuation mania in the biotech sector. Yes, there are plenty of interesting breakthroughs happening in the biotech world these days, but that has been true for more than a decade. It does not begin to explain how the biotech index soared by 6X since the March 2009  bottom and by nearly 300% just in the last 48 months depicted in the housing graph above.

  Here’s actually why. At its peak a few weeks ago, the NASDAQ biotech index of 150 companies was valued at nearly $1.1 trillion. Yet the LTM net income of the entire group was only $21 billion, meaning that the index was trading at 50X profits.

  And that wasn’t the half of it. Among these 150 biotechs there were just 25 companies that had any profits at all. This latter group included  big cap giants like Gilead, Amgen, Shire, Biogen, Celgene and 20 others, which among them had $30.5 billion of net income and accounted for $780 billion of the total index market cap. At the implied PE multiple of 26X, even these profitable companies were valued at pretty sporty levels.

  But there’s no denying the bubble mania when it comes to the remaining 125 companies in the index. These companies were valued at $280 billion, but posted aggregate losses of nearly $10 billion in the most recent LTM reporting period.

  So, yes, there is a stupendous bubble in biotech. In this instance, it amounts to well more than one-quarter trillion dollars of bottled air. Its a direct result of six years of free ZIRP money to the carry trade gamblers and Wall Street’s self-evident confidence that the Fed is petrified of a hissy fit and will not hesitate to keep the juice flowing indefinitely—– even if it’s called a 25 bps increase in the money market rate, eventually.
  

  IBB data by YCharts

  As to the social media stocks, the mania is even more extreme. This week three of the high flyers—–LinkedIn, Twitter and Yelp—-took a pasting because their gussied up “ex-items” results did not meet expectations and their forward guidance had a whiff of confession that beanstalks don’t grow to the sky, after all.

  But the real numbers are downright lunatic, and notwithstanding $20 billion of combined market cap loss in the last few weeks, their valuations remain in the realm of rank speculation. To wit, at their recent stock price peaks, the combined market cap of these three social media high flyers was $75 billion. Not surprisingly, in 2014 they had a combined loss of nearly $600 million, which will only get worse on an LTM basis after the further Q1 deterioration just reported.

  Moreover, during the 3-5 years for which there are filed financial statements, in fact, the three amigos have chalked up $1.6 billion in net losses. Needless to say, that makes sense only in a bubble context. The three went public during 2011-2013 as the Fed latest party started to roar, and initially were valued at about $30 billion based on virtually no revenues and deep losses. And as the losses mushroomed in the interim, their combined valuation, naturally, more than doubled!

  In fact, of course, these social media companies may or may not have a future as operating businesses, but as financial enterprises they are the very embodiment of the “cash burning machines” that have fueled the false economy of San Francisco and similar bubble finance precincts from Los Angeles to Boston and Wall Street.

  During 2014, the three social media high flyers burned nearly $3 billion in cash as measured by cash from operations less investments in CapEx and acquisitions.  That cash burn doubles to nearly $6 billion during their brief lifetimes as SEC filers.

  Only in a central bank fueled casino is a $6 billion cash burn worth $75 billion of market cap. That is, until it isn’t.

  Self-evidently, the monetary politburo is completely lost. The escape velocity that it promised is now fast turning into a flat-line at best. Based on the Atlanta Fed’s Nowcast—which was dead on during Q1, first half GDP growth will post at less than 1%, and that’s if the mountain of inventory build-up in recent quarters does not succumb to panicked liquidation orders from the C-suites in the face of an unexpected “black swan” event in the casinos.

  Perhaps it is time for the monetary politburo to throw in the towel, and admit it is clueless. If it should ever be so inclined, Pater Tenebrarum has composed a brilliantly fitting statement:

  “In spite of lots of “incoming information”, we still haven’t the foggiest clue what we are doing or what any of it means. We’re all praying that this sucker doesn’t blow up into our faces before we’ve sailed off into retirement. As to us ever shrinking the balance sheet again or actually doing something that might be remotely reminiscent of tightening, forget it dude. Do you think we want to be blamed for another crash?”

  Yet in the central bank fueled bubble category, the Fed has plenty of company around the world. Below is pictured an even bigger one—–that is, Mario Draghi’s sovereign bond bubble.

  The fact is, inflation has already bottomed in Europe, and it never was rational to price 10-year bonds based on the inflation run-rate of the last 90 days. Nevertheless, the 10-year German bund soared just two weeks ago to a bubble peak yield of 5 bps! In the last several days, however, it has “corrected” to 35 bps because some big time bond managers finally said “enough” and declared the German bund the short of a lifetime.

  It surely is, and so is the entire $100 trillion bond market of the world—including sovereigns, corporates and junk. The central banks have not repealed the law of supply and demand. But what they have done is expand their balance sheets from around $6 trillion before the 2008 financial crisis to upwards of $21 trillion today.

  Folks, that’s the fattest bid in human history. By scooping up $15 trillion of public debt and other securities with credits conjured from thin air, the central banks have given rise to price falsification on a monumental and planetary scale.

  This week Draghi said its all working because the year/year CPI in Europe came in at zero after registering a hairline negative during the precious four months. Can he spell “oil”?  Does he have a clue that his “whatever it takes”  ukase and $1.2 trillion QE campaign has generated a front-runners buying frenzy like never before—– but also one which could turn on a dime, as occurred in the German bund market this week?

  If Europe had a Sergeant Phil Easterhaus, he would now be issuing a more bracing reminder than merely to be “careful” In  fact, the $2 trillion of Eurozone sovereign debt now trading at subzero rates will soon enough comprise the subprime bonfires of the next crash.

  German 10-Year Bund Yield

  

  Travel a little north of Frankfurt and you get more of the same. This week Sweden’s exchange rate momentarily rallied because the central bank took a breather and did not lower its policy rate from (0.25%) to (0.4%).  Really? The currency market gamblers were actually buying a two-bit currency that its issuer has pledged to destroy because Sweden doesn’t have enough inflation?

  Well, does this look like a country that has been parched for lack of inflation?  The graph shows that Sweden’s consumer price level has risen by 22% since the turn of the century. Do the apparatchiks at the Riksbank actually believed that Sweden’s over-taxed citizenry has been harmed by the slight flattening of the inflation trend in recent years, which has allowed their stagnating wages to at least retain their purchasing power?

  There is danger out there, indeed.

  

  But no survey would be complete without an update on the dangerous lunacy emanating from the central bank of Japan. Having achieved exactly zero inflation since the launch of his bond buying spree in March 2013, Kuroda reiterated once again that his monetary Kamikaze campaign knows no limits:

  “The price trend is steadily improving and is expected to keep doing so,” Kuroda said at a press briefing after the decision….but reiterated he won’t hesitate to act (i.e. print even more yen) if the 2 percent target proves hard to reach.

  Faced with a flood of yen, not surprisingly the central bank of South Korea has also cut is policy rate several times in the last few months and is now on a bee-line from its current 1.75% level to the zero bound.

  And not to be daunted by its existing $28 trillion pyramid of debt, the People’s Printing Press of China this week announced that it would be taking a leaf from the ECB’s play book. That is, it would soon launch a large campaign to fund China’s bankrupt local governments with newly printed cash via direct loans against the so-called “collateral” of  newly issued local government bonds—-the proceeds of which are being used to pay off the banks and the shadow lenders, alike.

  The Ponzi is breathtaking. Upwards of 40% of local government revenue in China is derived from selling land at massively inflated prices to feed China’s credit driven construction binge. Now the due bill is coming in on these white elephants and the local governments, which built endless highways, bridges, airports and high rises, cannot even remotely service the $3 trillion of debt they incurred in minting “GDP” in line with Beijing’s quotas.

  Never mind. The suzerains in Beijing are fixing to crank up the printing presses for another blistering round of credit fueled prosperity.

  Surely, the red capitalism bubble in China is ground zero for the next financial conflagration. But when it happens, even Sgt. Easterhaus would surely lose his cool and flee the station.

  

  

  
  
  

  

• Markets Are Stirring: Complacency Meets Froth

  Via Scotiabank's Guy Haselmann,

  Froth

  Peering into the froth of a cappuccino, I noticed various sized bubbles. I guess there is a fine line between froth and bubbles. As I continued my gaze, both eventually disappeared. Stirring made the frothy bubbles disappear more quickly. Markets are beginning to stir (more later). Unsustainable states ultimately end.

  Discussions about ‘froth’ are growing as financial asset price appreciations have surged with central bank stimulus programs; and now that the Fed is the first major central bank to contemplate ‘stimulus reduction’.

  • Froth-generating central banks do not have unlimited means to power markets forever (regardless of what they might say), and their efforts may even become counter-productive over time.

  The best illustration of market ‘froth’ was outlined in yesterday’s Financial Times in an article by James Mackintosh (page 13) about China.  Before I quote him directly, a few facts are helpful.  The Shanghai index is up almost 100% year-over-year.   At the current pace, the number of Chinese IPO’s could set a record this year.  There are trading rules.  IPOs are only allowed to rise a maximum of 44% when floated.  Other stocks are only allowed to rise by a daily maximum of 10%.

  Mr. Mackintosh writes that Beijing’s online video company Baofeng Technologies is “a leading example of the IPO excess”.  He writes that this IPO “jumped the maximum-allowed 44% a month ago when floated, and has risen by the daily-maximum of 10% every day since.  It has risen 17-fold in 26 trading days”. 

   

  

   

  The FT article continues, “Every one of the 29 IPOs this month has risen by the daily limit each day since.  The worst performing IPO from earlier in the year has doubled in price”

  This indiscriminate demand is reminiscent of the dotcom euphoria in 2000.  I remember many companies trading at several thousand times revenues.  A P/E could not be used for comparison, or determined, because many of those companies did not have any earnings.

   

  Central Bank Hyperactivity

  The Chinese IPO frenzy and enormous equity market gains since 2009 are the direct result of central bank uber-accommodative experimentation.  However, there is no ‘free lunch’. Whatever the benefits gained from the wealth effects of asset appreciation will have negative macro effects on the other side; when stimulus programs are withdrawn. This is one key reason why the FOMC is so fearful of raising rates despite being ‘close-enough’ to both of their dual mandates. Unfortunately, waiting longer only increases those risks. Trying to mitigate the negative macro impacts are one reason the Fed pounds the table about a slow and atypical hiking pace.

  QE works by distorting financial markets and influencing investor behavior.  In this regard, it has been wildly successful. However, increases in recent market volatility might be a warning sign of QE’s limits.  Higher volatility is signaling one of a few possibilities, such as:  a looming hike from the most important central bank in the world (the Fed); a divergence in policy actions amongst the major central banks; additional global QE has become ineffective or counter-productive; or markets have recognized a change in the skew of their risk/reward determination after years of chasing central bank policy.

  Central banks opportunistically create a perception of success, irrespective of the consequences or market direction resulting from them. Initially ECB QE was deemed successful, because the Euro weakened, yields fell and, and equities soared.  However, in the last two weeks success has been ballyhooed as markets reversed sharply.  Can both characterizations be accurate?  The former was viewed as a successful outcome due to the easing of financial conditions. The market reversal was also viewed as a successful outcome, since the reversal was explained as a rise in expectations for economic growth and inflation. 

  • Is ECB QE more or less successful if yields fall or rise?  Would a better measurement stick be the level of the Euro or the percentage change in equity markets?  Should the focus be on German indicators or those from the southern periphery countries? 

  The ECB’s QE program ran into immediate denunciation on launch. The purchase program began when yields had already fallen dramatically.  Yields fell so far in fact, that several trillion of notional debt had dipped into negative yields. The fact that the program was sized to buy twice the amount of net issuance of the Eurozone had something to do with it.  The largest amount of purchases targeted Germany who, unlike the US, does not run a budget deficit (i.e. has a negative supply of net Bunds).

  • This design also created strains in ‘repo’ markets from collateral shortages, and caused abnormal capital flight from investors not willing to accept a negative yield.  Was this the main cause of the dramatic and sharp rise in yields or was it due to better than expected economic data?

  The highly-anticipated ECB QE was announced on January 22.  The Euro and Bund moved that day from 1.16 to 1.12 and from 0.52% to 0.44%, respectively.  The 10-yr Bund moved to 0.36% the next day.  The Bund moved inside of 0.05%, but the yield soared back in the past 10 trading sessions, ironically, to 0.36%. Does that say anything about the ECB QE?   The Euro moved below 1.05 in April, but traded near 1.13 today.  The Dax returned 22.03% in Q1, but fell 4.28% in April.

   

  Volatility

  In percentage terms, a move from 0.05% to 0.36% is extraordinary and can wreak havoc on portfolios. Higher market volatilities should be expected and adjusted-for accordingly.  Volatility is likely to rise further and stay elevated for the balance of the year (particularly if/when the Fed begins ‘lift off’).

  Commodities and EM currencies have also experienced some incredible price movements this year.  In April for example, Iron Ore fell to a six-year low and then rallied 25%.  It then fell 6%, a few days ago, after China changed a tax law.

  Correlations have also broken down in the past few weeks, damaging CTA performance and causing wild price swings.  Their crowded positions in the trifecta of long dollars, long stocks, and long bonds, caused huge stop-losses to be triggered late in the month.  Poor market liquidity is exacerbating these flows.   Big losses in one area of a portfolio can often cause managers to take action in other seemingly unrelated areas.

  Given such an extended period of time of market complacency resulting from aggressive central bank accommodation (which has chased investors into similar positions), positional unwinds probably have much farther to run. 

  A strong employment number next Friday could provide such a catalyst as the market is forced to raise the odds of a June hike from its current 5% probability, to something much higher.  Markets will be cautious about such, since unemployment claims fell yesterday to a 15-year low and employment reports have consistently added over 200k jobs every month for over a year (except for a weather-distorted miss last month).

  “The line it is drawn / The curse it is cast / The slow one now / Will later be fast / As the present now / Will later be past / The order is rapidly fadin’ / For the times they are a-changin’.”  -Bob Dylan
   

  

  
  
  

  

• The Final And Ultimate Crisis Will Be a Crisis of Faith

  The final and ultimate round of the Crisis that begin in 2008 will occur when faith is lost in the Central Banks.

   

  The entire rally in stocks post-2009 has been due to Central Bank intervention of one kind or another. Whether it be by cutting interest rates, printing money, buying bonds, or promising to do more/ verbal intervention, the Fed and others have done everything they can to push stocks higher.

   

  As a result, today, more than 90% of market price action is based on investors’ perceptions of what the Central Banks will do… NOT fundamentals. For instance, if bad economic data hits the tape, the market tends to rally because investors believe this will result in the Fed having to print more money.

   

  Again, the primary driver of stocks is no longer fundamentals, but Central Bank intervention.

   

  There are many problems with this, not the least of which is the fact that we now know that Central Bankers will openly LIE about what they’re doing. Consider the recent revelations concerning ECB President Mario Draghi’s claim that he will do “whatever it takes” to hold the EU together.

   

  Geithner: [T]hings deteriorated again dramatically in the summer which ultimately led to him saying in August, these things I would never write, but he off-the-cuff – he was in London at a meeting with a bunch of hedge funds and bankers. He was troubled by how direct they were in Europe, because at that point all the hedge fund community thought that Europe was coming to an end. I remember him telling me [about] this afterwards, he was just, he was alarmed by that and decided to add to his remarks, and off-the-cuff basically made a bunch of statements like ‘we’ll do whatever it takes’. Ridiculous.

   

  Interviewer: This was just impromptu?

   

  Geithner: Totally impromptu…. I went to see Draghi and Draghi at that point, he had no plan. He had made this sort of naked statement of this stuff. But they stumbled into it.

   

  http://blogs.ft.com/brusselsblog/2014/11/11/draghis-ecb-management-the-leaked-geithner-files/

   

  Here is former Secretary of the Treasury, Timothy Geithner, stating openly that Mario Draghi had “no plan” and was simply bluffing when he claimed, “we’ll do whatever it takes.”

   

  Draghi  was not only being deceptive (he didn’t have a plan); he was actually lying in the sense that the ECB couldn’t “do whatever it takes.” The OMT policy he talked about creating is in fact illegal based on EU law. He couldn’t do anything then and he can’t now.

   

  And yet, EU stocks have rallied hard, EU sovereign bond yields have fallen, and the world has proclaimed that the EU Crisis is “over”… all based on this lie.

   

  If you think Draghi is somehow unique in this regard amongst Central Bankers, thinking again. Recently Bank of Japan Governor Haruhiko Kuroda increased the Bank of Japan’s QE program, not because it would benefit Japan’s economy, but because doing so would make his colleagues’ forecasts better match his own.

   

  Put simply, the folks who are supposed to be holding the financial system together have been caught openly lying and spending money just to suit their own egos. The consequences of this have not yet been felt. But the seeds of the next crisis have already been sown in these revelations.

   

  The next time stuff hits the fan, will the world be as trusting in Central Banker proclamations? Will we continue to believe these folks are omnipotent? Or will their phony promises accomplish nothing?

   

  We’ll find out.

   

  If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

   

  You can pick up a FREE copy at:

  http://www.phoenixcapitalmarketing.com/roundtwo2.html

   

  Best Regards

  Phoenix Capital Research

   

   

   

   

   

  

  
  
  

  

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