by Zero Hedge - May 22nd, 2015 11:02 pm
Submitted by Tyler Durden.
“We’re not gonna make it, are we ? People, I mean.”
“It is in your nature to destroy yourselves.”
“Yeah. Major drag, huh ?”
From James Cameron’s ‘Terminator 2: Judgment Day’.
Here is a thought experiment. It is January 2000. The last wild Pyrenean ibex has been found dead, squashed by a tree. America Online has just announced an agreement to buy Time Warner for $162 billion – the largest corporate merger in history. It is all very exciting. Suddenly, a sourceless wind rises; papers blow across the pavement; windows rattle; the air fills with electrical crackling. Arnold Schwarzenegger emerges from the darkness. “It is 2015,” he tells you in his distinctive Austrian drawl. “The US unemployment rate is 5.4%. The S&P 500 is at a record high. We have record M&A activity. The corporate debt markets are booming. High end real estate is on fire. A Picasso has just broken the record for artwork sold at auction.”
“So where are US interest rates ?” you ask the Austrian Oak. “Where are Fed Funds ?”
He is impassive.
“Fed Funds are at zero. The Fed Funds Target Rate for the upper bound is 0.25%.”
“Wow,” you respond.
Too right. If you could have told anyone back in 2000 just how insane monetary policy would have become by 2015, they probably wouldn’t have believed you.
But it is what it is.
Human beings are suckers for a narrative. We love stories, perhaps more than we like reality itself. A team of equity analysts at Citigroup – no stranger to boom and bust, having gone bankrupt itself at least twice – has just published “It’s bubble time”, a note on the current madness of markets.
Citi identify four key drivers to bubble conditions:
- A ‘new paradigm’ story with convincing fundamentals
- Excess liquidity
- A demand / supply imbalance
- Business risk amongst asset managers.
Doug Noland takes up the story:
“By their nature, the final phase of an epic Bubble will indeed “destroy many contrarian investors.” There’s a confluence of important dynamics at play. First, during final Bubble phases, officials are by then responding to serious fundamental deterioration with heightened policy desperation. So-called “bears” – positioned based on negative fundamental factors – are squashed by the
by Zero Hedge - May 22nd, 2015 10:16 pm
Submitted by Tyler Durden.
Last week, Chicago got some bad news from Moody’s. On the heels of an Illinois Supreme Court decision that struck down a pension reform law, the ratings agency cut the city to junk status, triggering some $2.2 billion in accelerated payment rights for the city’s creditors and complicating Mayor Rahm Emanuel’s efforts to refinance nearly a billion in floating rate notes and borrow another $200 million to pay off the accompanying swaps.
The Moody’s downgrade in many ways punctuates what has been a rapid deterioration in state and local government finances across the country, a situation that’s forcing lawmakers to slash budgets and cut funding for a variety of state-funded programs.
As a refresher, here’s some context on Chicago’s underfunded pension problem:
In downgrading the city, Moody’s said it expected “Chicago’s credit challenges will continue, both in the near term and in the long term [as] unfunded liabilities of the Municipal, Laborer, Police, and Fire pension plans grow and exert increasing pressure on the city’s operating budget.” That looks to have been an accurate assessment, because as Bloomberg reports, Chicago’s budget gap is set to triple by 2017.
Chicago’s budget gap is expected to triple with statutory contributions to pension funds, after the city improved its fund deficit for four straight years to less than $300 million in fiscal year 2015.
“Notwithstanding the gains achieved by the city in recent years in addressing its structural budget deficit, the budget gap in coming years is likely to widen from the 2015 level due largely to growing salaries and wages and funding requirements from city pension plans,” Chicago bond documents, released yesterday, said. A budget gap of $430.2 million was projected for 2016 and $587.7 million for 2017. However, “statutory obligations to the [police pension fund] and [firemen's pension fund] will, in the absence of legislation modifying the city’s contributions to these funds, increase the projected budget gaps for 2016 and 2017 by more than $500 million,” the documents said.
So Chicago taxpayers, get ready to take one for the team, because as one muni bond analyst told the Chicago Tribune earlier this month, “raising taxes is going to have to be a part of the solution.”
* * *
by Zero Hedge - May 22nd, 2015 9:15 pm
Submitted by Tyler Durden.
Things are escalating rapidly in the South China Sea where Beijing has figured out an innovative solution to the notion of “disputed waters.”
As regular readers are by now acutely aware, China appears to have adopted the maritime boundary equivalent of the old “possession is nine tenths of the law” axiom because Chinese dredgers have been busy for some time now creating islands out of reefs in the Spratly archipelago. Once the islands are complete, China promptly colonizes them. Next comes the construction of cement plants, ports, and 10,000 ft airstrips.
Not surprisingly, Washington isn’t fond of China’s “sandcastles” and everyone from President Obama to the Pentagon is now shouting from the rooftops about territorial sovereignty and Chinese “bullying.”
The US took it up a notch this week when it flew a spy plane over Fiery Cross Reef, presumably just to see what would happen. A CNN camera crew went along for the ride. What Washington discovered is that when it comes to protecting its new islands, bashful China is not. “This is the Chinese Navy… YOU GO!” was the message that came over the radio.
The rhetoric and sabre rattling haven’t let up a bit since then and in fact, there’s been a steady stream of quotables from both sides over the past 48 hours. Here’s the latest.
The United States vowed on Thursday to keep up air and sea patrols in international waters after the Chinese navy repeatedly warned a U.S. surveillance plane to leave the airspace over artificial islands China is creating in the disputed South China Sea…
The incident, along with recent Chinese warnings to Philippine military aircraft to leave areas around the Spratly archipelago in the South China Sea, suggested Beijing is trying to enforce a military exclusion zone above its new islands there.
Some security experts worry about the risk of confrontation, especially after a U.S. official said last week that the Pentagon was considering sending military aircraft and ships to assert freedom of navigation around the Chinese-made islands.
The senior U.S. diplomat for the East Asia, Assistant Secretary of State Daniel Russel, told a media briefing in Washington the U.S. reconnaissance flight was “entirely appropriate” and that U.S. naval forces and military aircraft would “continue to fully exercise” the right to operate in international
by Zero Hedge - May 22nd, 2015 8:40 pm
Submitted by Tyler Durden.
A vision of Hell troubles our sleep.
It is the vision of what the United States will be like when the authorities have obliterated almost three millennia of monetary progress and have their boots on our necks.
Here’s Peter Bofinger, a leading German Keynesian economist, in Der Spiegelmagazine:
With today’s technical possibilities, coins and notes are in fact an anachronism. They made payments incredibly difficult, with people wasting all sorts of time at the cashier as they wait for the person ahead of them to dig through their belongings to find some cash, and for the cashier to render change (rather than, for example, waiting for someone to find the right credit card, complete the transaction, and wait for approval)
But the additional time is not the largest benefit of the elimination of cash. It dries out the markets for moonlighting and drug trafficking. Almost a third of the euro cash in circulation consists of 500-euro notes. No one needs those for shopping; light-shy figures use them for their activities. [Also] it would be easier for central banks to impose their monetary policies. At this time, they cannot push interest rates appreciably below zero because the savers would hoard cash. If there is no cash, the zero bound is eliminated.
A Slide Back into Prehistory
Yes, dear reader, it seems to be coming – a dreadful slide back beyond the darkest ages and into the mud and slime of prehistory. Back then, modern “money” had not been invented. Using rudimentary credit and barter systems, you could only trade with people you knew – and on a limited scale. Capitalism was impossible. Progress was unattainable. Wealth couldn’t be accumulated.
Then in India, in about the sixth century B.C., came silver coins – real cash. You didn’t need to know the person you were trading with. You didn’t know his family. Or his motives. Or his balance sheet.
And you didn’t have to keep track of who owed what to whom. You could just settle up – in specie. This made modern commerce and industry possible.
by Zero Hedge - May 22nd, 2015 7:41 pm
Submitted by Tyler Durden.
Earlier this month we learned that in 21 out of the 26 OECD member countries that have a minimum wage, working 40 hours per week at the pay floor would not be sufficient to keep one’s family out of poverty. That rather stunning revelation comes as Democrats in the US push for a $12 minimum wage by 2020 and as pressure grows on companies like McDonald’s to raise wages for its lowest-paid employees.
Of course rising minimum wages can also have the rather counterintuitive side effect of harming those they’re meant to help because after all, when the cost of labor goes up, employers may simply fire people or, as we saw yesterday when McDonald’s pledged to reduce the number of company-owned restaurants by 10% over the next several years, resort to other measures aimed at getting around pay floor hikes.
So while one can debate pros and cons of addressing abysmal wage growth by legislating a non-market-driven solution, what is not up for debate is this: it’s getting harder and harder to subsist above the poverty line for low-income workers.
In fact, as the following map shows, in no state can a minimum wage worker afford a one bedroom apartment.
Here’s some color from a study by the National Low Income Housing Coalition:
Rents for apartments have risen nationally for 23 straight quarters. As of the third quarter of 2014, rents were 15.2% higher than at the tail end of the Recession in 2009. Rising rents are an outcome of increased demand for rental housing. One recent study of 11 major cities found double-digit growth in the number of renters in nine of the 11 cities between 2006 and 2013. In the fourth quarter of 2014, the homeownership rate dropped to its lowest rate in twenty years and the rental vacancy rate fell to 7% as more households sought rental units. The downward pressure on vacancy rates directly impacts the rental housing market, making landlords less willing to offer rent concessions and more likely to increase rents. The tightening rental market has the most significant impact on low income renters.
A Glimpse At The Market Endgame: How China’s (Formerly) Richest Man Crashed His Own Stock When He Tried To Sell
by Zero Hedge - May 22nd, 2015 6:53 pm
Submitted by Tyler Durden.
On Wednesday, we reported on what was certainly the biggest market news of the week when in under one second, Chinese solar company Hanergy Thin Film crashed by nearly 50% due to what are still unknown reasons. As a reminder, before its crash and indefinite trading suspension, Hanergy’s market value was higher than all other listed Chinese solar companies combined and six times the value of First Solar, the biggest producer of thin-film solar panels.
Aside from the dramatic move, the reason why the wipeout of this tightly held stock was particularly memorable is because it took with it some $14 billion or nearly half of majority owner Li Hejun’s $30 billion fortune, who as we reported previously, is China’s richest man, having recently overtaken Alibaba’s Jack Ma. Or rather was.
A quick tangent into how Li built up his stratospheric paper wealth on very short notice.
As noted above, the bulk of Li’s fortune comes from his 80.8% stake in Hanergy, whose market cap had topped at approximately $40 billion, or greater than the market cap Sony and Twitter. Even more notable, is that the bulk of the appreciation in the stock took was a result of what appears to have been an aggressive buying campaign by none other than Li himself, who as Bloomberg recounts, was the single biggest buyer in the name as it soared since the start of January, becoming “wealthier” (on paper) by buying ever more stock, thus pushing his own net worth every higher!
From April 30, three weeks before the crash:
Hanergy Thin Film Power Group Ltd.’s executive chairman raised his stake in the Chinese solar equipment maker this month, buying 53.9 million shares as the company’s market value surged.
Li Hejun bought the shares in seven transactions at prices of HK$6.90 to about HK$6.95, with the latest purchase on April 23, according to transaction details filed in statements to the Hong Kong Stock Exchange. The company closed at a record HK$7.88 on April 23.
Hanergy has surged more than six-fold in the past year to a market value of about $39 billion amid questions about its valuation and revenue.
by Zero Hedge - May 22nd, 2015 6:17 pm
Submitted by Tyler Durden.
The consequence of policies that exacerbate injustice, inequality and double-bind demands is a madness that will find a social and economic outlet somewhere, sometime.
We all know crazy-makers: people who make contradictory claims about reality, who say one thing and do another, who change their stories constantly to justify their own pursuit of self-interest, who demand the impossible of others while giving themselves unlimited excuses.
When they can't change reality to suit their purposes, they change their accounts of reality, and stick with the revised stories even when they are contradictory.
This describes the entire financial structure of the U.S.: crazy-making.
We all know the U.S. economy is diseased, and the Powers That Be are attempting to mask the sickness with contradictory accounts of reality.
To get ahead, you need a 4-year college diploma. But oops, the student debt you'll need to shoulder acts as a brake on getting ahead. And it turns out many of those who became debt-serfs to get a diploma actually end up in jobs that don't require a college education.
One reality--soaring student loan debt and diminishing value of the product, a college diploma--and two contradictory stories.
Systems theorist/anthropologist Gregory Bateson developed (with others) the concept of double bind, a psychological and social conflict in which contradictory demands generate a form of schizophrenia:
Unlike the usual no-win situation, the subject has difficulty in defining the exact nature of the paradoxical situation in which he or she is caught. The contradiction may be unexpressed in its immediate context and therefore invisible to external observers, only becoming evident when a prior communication is considered. Typically, a demand is imposed upon the subject by someone who they respect (such as a parent, teacher or doctor) but the demand itself is inherently impossible to fulfill because some broader context forbids it. For example, this situation arises when a person in a position of authority imposes two contradictory conditions but there exists an unspoken rule that one must never question authority.
Consider the schizophrenia-generating contradictions underpinning all U.S. economic policy.
We have to keep interest rates near-zero forever because the economy is weak, but the economy is strong--look at the low unemployment rate.
by Zero Hedge - May 22nd, 2015 5:10 pm
Submitted by Tyler Durden.
With Apple Watches still on back-order (due to defective supply, not abundant demand) and the sell-side confused as to whether it will be a great success (Morgan Stanley's exuberant extrapolation of Google searches) or a damp squib (KGI cut estimates on demand slowing), the latest projections from Slice Intelligence suggest things are definitely going so well for the world's largest gadget-maker.
After the first minute of the first day's initial (and oh so American short-attention-span-confirming) burst of buying…
Things have tailed off dramatically… averaging under 30k per day being ordered (according to Slice Intelligence projections)
Slice Intelligence's projections are based on data that it tracks from US consumer spending through e-commerce email receipts.
Apple has taken orders for almost 2.5 million watches in the US through Monday, May 18, according to Slice’s projections, which are based on more than 14,000 online shoppers.
More than half of those orders were placed on April 10, the first day Apple accepted watch pre-orders in the US and eight other countries, according to Slice.
* * *
Perhaps, The Daily Mash's satirically-conjured man's perspective of his first day wearing the device is closer to home after all…
Sales manager Tom Logan’s new Apple Watch has been unexpectedly ridiculed by his work colleagues.
32-year-old Logan felt confident that his futuristic timepiece would attract admiring glances rather than unflattering Knight Rider comparisons.
He said: “I had it all planned out – not saying anything about it, but then somebody just notices and goes ‘is that the new Apple Watch?’. I would respond simply with a wry Clooney-esque smile and they would mouth the word ‘awesome’.
“What actually happened is somebody said ‘what the fuck’s that weird-looking thing?’
“I explained that it was the brand new Apple Watch and they went ‘HAHAHA’ in a really deliberately hurtful way. The accounts assistant said it was the opposite of a fanny magnet and everyone cracked up.
“Then everyone started pretending to talk into their watches, saying things like ‘come in KITT, I am a massive tosser, please help’.”
By 10am Logan had removed the watch. He explained: “It wasn’t because people were being sarcastic, I just had a hot wrist, everyone gets a hot wrist sometimes.
“People get jealous of early adopters.”
by Zero Hedge - May 22nd, 2015 4:35 pm
Submitted by Tyler Durden.
Over the last couple of months, I have regularly updated the ongoing consolidation process in the S&P 500. As I noted earlier this week, that consolidation was completed confirming the current bull trend in the market. To wit:
"I stated previously that I expected the consolidation to resolve itself to the upside due to the underlying momentum in the markets. As I discussed in this past weekends newsletter (subscribe for free e-delivery), the resolution of that consolidation has now been achieved."
"This [breakout] suggests that portfolios should remain FULLY ALLOCATED to equities for the time being as the tendency for the markets remains upwardly biased.
WARNING: This does NOT mean that this will be the case for the next three (3) months or the next year. It just means that the markets are still moving higher at the current time. However, investors should continue to monitor portfolios and manage risk going forward as things will change. As I have discussed previously, this does NOT mean that all market risk is now resolved, or that investors should return to their complacent slumber. See "Bull Market Most Overbought/Leveraged In History."
I want to be quite clear about my comments. My job is to manage portfolios in a manner to participate in markets when they are rising and protect capital when they are not. Therefore, focusing on WHY markets are rising is of little importance because portfolios are already invested. My attention needs to be directed toward WHAT may cause markets to buckle unexpectedly. It is because of that analysis that I am often viewed as a "bear." In reality, I am agnostic, and because I am discussing the markets bullish breakout it does NOT mean that I have somehow changed my views.
IT IS WHAT IT IS. Denying the fact markets are rising, and failing to participate in the short term, is just as damaging as participating in a sharp market decline. In BOTH events, I am destroying client capital."
This weekend's reading list is a compilation of opinions on the current state of the makrkets and investing. And as the old saying goes – "opinions are like ***holes, everybody's got one."
1) Investors Need To Face The Possibility Of A "Great Reset" by Mark…
by Zero Hedge - May 22nd, 2015 4:10 pm
Submitted by Phoenix Capital Research.
The 2008 Crisis was caused by too much debt/ leverage, particularly in the form of illiquid derivatives (mortgage backed securities get the most attention, but the derivatives market was well over $800 trillion at the time of the crisis).
To combat the financial crisis, the Fed did three things:
1) Cut rates to zero.
2) Abandon accounting standards.
3) Engage in Quantitative Easing/ QE.
None of these policies represented “solutions” to the crisis. In fact, you couldn’t even accurately argue that they represented “containment.” What the Fed did was permit the very cancerous securities that nearly imploded the Wall Street banks to spread beyond from the private sector onto the public’s balance sheet.
You cannot cure cancer by letting it spread from one area of the body to the next. You cannot solve a termite problem by letting the termites move somewhere else in a house. So how could one argue that you could solve a financial crisis by letting the problems spread elsewhere in the financial system?
Consider mere leverage levels. Going into the 2008 crisis, the investment banks sported leverage levels in the 30-40s. Lehman was leveraged at 31 to 1. Morgan Stanley was leveraged at 30 to 1. Merrill Lynch peaked out in the low 40s.
Today, the Fed’s has $57.6 billion in capital and $4. 4 TRILLION in assets. That represents a leverage level of 75 to 1.
The Fed will argue that this leverage does not matter because it can print money to increase its leverage levels. This is technically true, but doesn’t alter the fact that the Fed has backed itself into a corner by buying up over $3.5 trillion worth of stuff… which the Fed has no idea how to exit.
Indeed, we know that Janet Yellen was “somewhat concerned about exit strategies” back in 2009 when the Fed’s balance sheet was $2 trillion or so. Today it’s more than TWICE that. One wonders just how “concerned” she is today, with the Fed’s balance sheet larger in size than the GDP for most developed countries.