Posts Tagged ‘Hyman Minsky’

The Low-Interest-Rate Trap

The Low-Interest-Rate Trap

Courtesy of John Rubino of Dollar Collapse 

Cannon Beach, Oregon, USA

Pretend for a second that you recently retired with a decent amount of money in the bank, and all you have to do is generate a paltry 5% to live in comfort for the rest of your days. But lately that’s been easier said than done. Your money market fund yields less than 1%. Your bond funds are around 3% and your bank CDs are are down to half the rate of a couple of years ago. Stocks, meanwhile, are down over the past decade and way too volatile in any event. If you don’t find a way to generate that 5% you’ll have to start eating into capital, which screws up your plan, possibly leaving you with more life than money a decade hence.

Now pretend that you’re running a multi-billion dollar pension fund. You’ve promised the trustees a 7% return and they’ve calibrated contributions and payouts accordingly. But nothing in the investment-grade realm gets you anywhere near 7%. If you come up short, the plan’s recipients won’t get paid in a decade or – the ultimate horror – you’ll have to ask the folks paying in to contribute more, which means you’ll probably be scapegoated out of a job.

In either case, what do you do? Apparently you start buying junk bonds. According to Saturday’s Wall Street Journal, junk issuance is soaring as desperate investors snap up whatever paper promises to get them the yield they’ve come to depend on. Here’s an excerpt:

‘Junk’ Bonds Hit Record

U.S. companies issued risky “junk” bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

Corporate borrowers with less than investment-grade ratings sold $15.4 billion in junk bonds this week, a record total for a single week, according to data provider Dealogic. The month-to-date total, $21.1 billion, is especially high for August, typically a quiet month that has seen an average of just $6.5 billion in issuance over the past decade.

For the year, the volume of U.S.


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Why the Crisis Isn’t Going Away

Why the Crisis Isn’t Going Away

By MIKE WHITNEY at CounterPunch

Size matters. And it particularly matters when the size of the financial system grossly exceeds the productive capacity of the underlying economy. Then problems arise. Surplus capital flows into paper assets triggering a boom. Then speculators pile in, driving asset prices higher. Margins grow, debts balloon, and bubbles emerge. The frenzy finally ends when the debts can no longer be serviced and the bubble begins to crumple, sometimes violently. As gas escapes, credit tightens, businesses are forced to cut back, asset prices plunge and unemployment soars. Deflation spreads to every sector. Eventually, the government steps in to rescue the financial system while the broader economy slumps into a coma.

The crisis that started two years ago, followed this same pattern. A meltdown in subprime mortgages sent the dominoes tumbling; the secondary market collapsed, and stock markets went into freefall. When Lehman Bros flopped, a sharp correction turned into a full-blown panic.   Lehman tipped-off investors that that the entire multi-trillion dollar market for securitized loans was built on sand. Without price discovery, via conventional market transactions, no one knew what mortgage-backed securities (MBS) and other exotic debt-instruments were really worth. That sparked a global sell-off. Markets crashed. For a while, it looked like the whole system might collapse.

 The Fed’s emergency intervention pulled the system back from the brink, but at great cost. Even now, the true value of the so-called toxic assets remains unknown. The Fed and Treasury have derailed attempts to create a public auction facility--like the Resolution Trust Corporation (RTC)--where prices can be determined and assets can be sold.  Billions in toxic waste now clog the Fed’s balance sheet. Ultimately, the losses will be passed on to the taxpayer.

Now that the economy is no longer on steroids, the financial system needs to be downsized.  The housing/equities bubble was generated by over-consumption that required high levels of debt-spending. That model requires cheap money and easy access to credit, conditions no longer exist. The economy has reset at a lower level of economic activity, so changes need to be made. The financial system needs to shrink.

The problem is, the Fed’s "lending facilities" have removed any incentive for financial institutions to deleverage. Asset prices are propped up by low interest, rotating loans on dodgy collateral. While households have suffered huge losses (of nearly $14 trillion) in
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The credibility of farmers, priests and prostitutes – and bankers?

First, welcome to Michael Pettis.  Michael is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.  He is also Senior Associate at the Carnegie Endowment for International Peace.  Second, this is an excellent article that provides insight into the thoughts of the Chinese people. – Ilene

The credibility of farmers, priests and prostitutes – and bankers?

chinese prostitute - credibility highCourtesy of Michael Pettis at China Financial Markets

Three weeks ago China Daily published a pretty funny article about a recent survey on credibility that had taken place in China. According to the article,

At a time when shamelessness is pervasive, we are often at loss as to who can be trusted. The five most trustworthy groups, according to a survey by the Research Center of the Xiaokang Magazine, are farmers, religious workers, sex workers, soldiers and students.

A list like this is at the same time surprising and embarrassing. The sex business is illegal and thus underground in this country. The sex workers’ unexpected prominence on this list of honor, based on an online poll of more than 3,000 people, is indeed unusual.

It took the pollsters aback that people like scientists and teachers were ranked way below, and government functionaries, too, scored hardly better.  Yet given the constant feed of scandals involving the country’s elite, this is not bad at all. At least they have not slid into the least credible category, which consists of real estate developers, secretaries, agents, entertainers and directors.

I am not sure what secretaries have done to get themselves such poor rankings (could they mean party secretaries?), and I am not sure what kind of directors they mean (movie directors? managing directors?) but not everyone found this survey funny.  Last week a columnist in the People’s Daily had this to say about the same survey:

In recent years, China has already paid a high price for the prevailing credibility crisis. The annual losses caused by bad debts have reportedly amounted to about 180 billion yuan, and the direct economic losses induced by contract fraud each year is also up to 5.5 billion yuan. Besides, shoddy and fake products contribute to another great loss involving at least 200 billion yuan. Generally, credibility crisis would cost China as much as 600 billion…
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Panic!

Throw out the economic models and prepare for the next panic.  And welcome to Tim at Psy-Fi Blog 

Panic!

panic_of_1873_bank_runCourtesy of Tim at Psy-Fi Blog

Economic Stability Is Not The Norm

The exceptional market conditions of the last couple of years are a reminder that we should regard stable markets as a pleasant interlude rather than the normal state of affairs. In general, of course, people tend to expect tomorrow to be much the same as yesterday and to behave as such. It’s little wonder, then, that when everything goes wrong people start to panic, assuming the world is coming to an end.

Of course, so far, the world hasn’t come to an end – although a lot of people have lost lots of money in the meantime. What we can see from history is not that market panics are exceptional but that they’re the norm.

Kindleberger on Economic History

Every investor should read and re-read Charles Kindleberger’s seminal “Manias, Panics and Crashes’ which details the course of market disasters over a near three hundred year period. Kindleberger was an economist of a different hue to many we’ve met before: an economic historian who relied not on mathematical models – about which he was enjoyably and pointedly vague – but on historical incident and anecdote. At the very least, he argued, the various competing economic schools have to explain the happenings of the markets rather than either ignoring them, or simply claiming that they shouldn’t happen so they’re going to stick their fingers in their ears and go “tra-la-la” until they go away.

Underpinning the concept is a simple idea – people are irrational, they do the irrational things which it suits them to do and the consequences are often very nasty. What he set out to show was that the mental behaviour of market participants that we’ve recently witnessed is a perfectly normal state of affairs. Indeed, based on the historical records one ends up wondering how anything ever works at all in the markets. Everything going wrong is what happens, all the time, it seems.

The Fallacy Of Composition

However, it’s not simple irrationality that drives the market. Underlying this is a sneaky human behavioural failing known as the fallacy of composition – a trait that sees every individual acting in their own self interests yet, at the same time, acting in a


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Market News

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Financial Markets and Economy

Wealth Bubble In ‘Scary Graph’ Flashes Warning About Future U.S. Downturn (Bloomberg)

Americans are about as wealthy as they've ever been—and that's a worry?

U.S. Stocks Advance as Commodities Retreat on Dollar Strength (Bloomberg)

U.S. stocks rose, sending the S&P 500 Index to a record, and the dollar strengthened as speculation mounted that central banks from Japan to Europe won’t be in a rush to add to unprecedented stimulus. Emerging-market assets and commo...



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Zero Hedge

THE SUBPRIME U.S. ECONOMY: Disintegrating Due To Subprime Auto, Housing, Bond & Energy Debt

Courtesy of ZeroHedge. View original post here.

By the SRSrocco Report,

The U.S. financial system continues to disintegrate even though most Americans hardly notice.  The system is being gutted from the inside out... much the same way a chronic disease weakens a patient even before any symptoms are felt.  However, we are already experiencing painful symptoms as U.S. economic indicators continue to weaken.

Here are just a few of the recent headlines:

...



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Chart School

Best Stock Market Indicator Update

Courtesy of Doug Short's Advisor Perspectives.

We continue to receive requests for updates to the "Best Stock Market Indicator", which used to be a regular guest post from John Carlucci. Here is an update of the "Carlucci" indicator along with a summary of John's explanation on how he uses it.

As John described it: "The $OEXA200R (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com used to find the "sweet spot" time period in the market when you have the best chance of making money."

Latest Indicator Position

According to this system, the market ...



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Phil's Favorites

Stocks' Streak Of New Highs Hits Rarefied Air - What Happens Next?

Courtesy of Dana Lyons

The Dow just scored 7 straight all-time highs; are there more on the way, or is the air getting too thin?

When the major U.S. stock averages broke out to new highs earlier this month, the key consideration became would the breakout fail or would the new highs stick? Well, 10 days later the breakout gets high marks for follow through. This is particularly so in the case of the Dow Jones Industrial Average (DJIA). As many averages have spent the past several days digesting recent gains, the DJIA has continued its ascent. In the process, the index has recorded 7 straight all-time highs.

While the streak is not unprecedented, it is just the 12th such run in the past 10...



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ValueWalk

Relypsa Inc (RLYP) Soars On Galenica Bid

By Jacob Wolinsky. Originally published at ValueWalk.

Relypsa Inc (NDAQ:RLYP) — to be acquired by Galenica AG (VTX:GALN) for $32 per share in cash is soaring this morning up about 58 percent at the time of this writing in early morning. On the other hand shares of Galenica are down on the announcement by about 8 percent. What are the details of the deal? Here is what the sell side analysts are saying about the pharma news.

Relypsa Inc (NDAQ:RLYP) bid – analysts react

Cantor Fitzgerald

Relypsa will be acquired by Galenica for $32 per share, a 59% premium over the last closing price. We have thought that Relypsa would likely be acquired at some point, given the opportunity to grow Veltassa to be a significant commercial brand, ...



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Kimble Charting Solutions

Doc Copper going to peak again at 200 Day moving ave?

Courtesy of Chris Kimble.

Doc Copper is often viewed as a leading indicator, for global growth or lack of.

The 200 day moving average is often viewed as the line in the sand to determine if an asset is in an up or down trend.

Is Doc Copper climbing above its 200 day moving average a good or bad sign?

Below looks at Doc Copper over the past decade with the 200 MA applied.

CLICK ON CHART TO ENLARGE

Copper peaked in 2011 and since, has continued to create a series of ...



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Digital Currencies

Demystifying the blockchain: a basic user guide

 

Demystifying the blockchain: a basic user guide

By Philippa Ryan, University of Technology Sydney

Companies around the world are exploring blockchain, the technology underpinning digital currency bitcoin. In this Blockchain unleashed series, we investigate the many possible use cases for the blockchain, from the novel to the transformative.

Most people agree we do not need to know how a television works to enjoy using one. This is true of many existing and emerging technologies. Most of us happily drive cars, use mobile phones and send emails without knowing how they work. With this in mind, here is a tech-free user guide to the blockchain - the technology infrastructure behind bitcoin...



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OpTrader

Swing trading portfolio - week of July 18th, 2016

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Mapping The Market

No wonder Saudis are selling as much as they can!

Courtesy of Jean-Luc

We are getting much more energy efficient – no wonder Saudis are selling as much as they can! Who wants to be the one with trillions of dollars of oil in the ground unwanted:

http://arstechnica.com/science/2016/07/the-amount-of-energy-needed-to-run-the-worlds-economy-is-decreasing-on-average/#p3

...

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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Biotech

This Is Why Biotech Stocks May Explode Again

Reminder: Pharmboy and Ilene are available to chat with Members.

Here's an interesting article from Investor's Business Daily arguing that biotech stocks are beginning to recover from their recent declines, notwithstanding current weakness.

This Is Why Biotech Stocks May Explode Again

By 

Excerpt:

After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.

...



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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!




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