An Empty Forest Full Of Trees
By Grant Williams
October 21, 2013
"Telephone exchanges click while there's nobody there
The Martians could land in the carpark and no one would care
Close-circuit cameras in department stores
Shoot the same movie every day
And the stars of these films neither die nor get killed
Just survive constant action replay
Nothing ever happens, nothing happens at all
The needle returns to the start of the song
And we all sing along like before"
–
Things That Make You Go Hmmm...
ca·tas·tro·phe
n.
1. A great, often sudden calamity.
2. A complete failure; a fiasco.
3. The concluding action of a drama, especially a classical tragedy, following the climax and containing a resolution of the plot.
In 1710, philosopher George Berkeley formulated a proposition in his work "A Treatise Concerning the Principles of Human Knowledge," which would inspire a philosophical discussion that continues to this day — three centuries later.
Berkeley wrote:
But, say you, surely there is nothing easier than for me to imagine trees, for instance, in a park ... and nobody by to perceive them.... The objects of sense exist only when they are perceived; the trees therefore are in the garden ... no longer than while there is somebody by to perceive them.
Twenty years later, William Fossett took Berkeley's baton and ran with it:
Tease apart the threads [of the natural world] and the pattern vanishes. The design is in how the cloth-maker arranges the threads: this way and that, as fashion dictates.... To say something is meaningful is to say that that is how we arrange it so; how we comprehend it to be, and what is comprehended by you or I may not be by a cat, for example. If a tree falls in a park and there is no-one to hand, it is silent and invisible and nameless. And if we were to vanish, there would be no tree at all; any meaning would vanish along with us. Other than what the cats make of it all, of course.
But it wasn't until June 1883 that the magazine The Chautauquan posed the question more or less in the familiar form we know today:
If a tree were to fall on an island where there were no human beings would there be any sound?
The Chautauqaun answered — rather too emphatically, I thought — "No. Sound is the sensation excited in the ear when the air or other medium is set in motion." But that implies a more scientific perception of the question than the philosophical one which has intrigued thinkers through the centuries.
It was from that example that the modern-day form of the question was finally settled upon:
"If a tree falls in the forest and nobody is there to hear it, does it make a sound?"
Now, rather than take the path followed by a million tortured souls and try to answer the question, I am going to pose my own question of a similar nature and see if I can stimulate a philosophical debate that will endure through the centuries, as George Berkeley did way back in the 18th century.
If "through the centuries" is reaching a little, would you all mind doing me a favour and just pretending to discuss it until I've left the room?
Much obliged.
OK... so all that remains is for you to click here for some appropriate mood music, and off we jolly well go...
"If something bad happens but nobody reacts badly to it, did nothing bad happen?"
Deep, huh? Not what you come here for, I know, but bear with me for a moment.
I recently read an article that bemoaned the level of volatility that besets the modern world, and the piece got me thinking: how volatile is the investment world, really?
The logical first stop for someone in my line of work is, of course, the VIX Index — a chart I could draw in my sleep, frankly; but let's go the extra mile and take a look at it anyway:
Source: Bloomberg
There are several observations about this chart that leap out at me, so let's go through them one by one:
1) After the global financial crisis of 2008, when the US government had stepped in to ensure that no harm came to anybody (and thus when the Age of Moral Hazard officially began), the VIX fell steadily, with each subsequent spike in volatility less pronounced than the last.
2) The next major eruption was the European crisis that kicked-off in mid-2010. Despite the hand-wringing and acres of press coverage explaining that this, like 2008, was potentially an end-of-days scenario, the spike in the level of fear (as measured by the VIX) was around half that experienced two years earlier. Of course, this time it was Europe's turn to do "whatever it takes," and their own painless future was set in motion.
Every subsequent spike on this chart that has been driven by Europe-related concerns has peaked lower than the last.
3) The third meaningful jump in volatility, which occurred in August of 2011, is the spike I want to focus on today, because the lessons it offers are extremely instructive.
The third spike, precipitated during a disastrous series of fractious negotiations about the authority of the US government to borrow money, was, of course, caused by the possibility that the USA would default on its debt. We all breathed a sigh of relief when a resolution was reached and the US debt limit was raised, because we realized that the elected representatives of the American people would never make that mistake again.
Before we continue, a quick primer on the mechanics of the debt ceiling is in order as, with all the talk, it's easy to lose the entire wood amidst the trees:
(Wikipedia): In the United States, the federal government can pay for expenditures only if Congress has approved the expenditure in an appropriation bill. If the proposed expenditure exceeds the revenues that have been collected, there is a deficit or shortfall, which can only be financed by the government, through the Department of the Treasury, borrowing the shortfall amount by the issue of debt instruments. Under federal law, the amount that the government can borrow is limited by the debt ceiling, which can only be increased with a separate vote by Congress.
Prior to 1917, Congress directly authorized the amount of each borrowing. In 1917, in order to provide more flexibility to finance the US involvement in World War I, Congress instituted the concept of a "debt ceiling". Since then, the Treasury may borrow any amount needed as long as it keeps the total at or below the authorized ceiling. Some small special classes of debt are not included in this total. To change the debt ceiling, Congress must enact specific legislation, and the President must sign it into law.
Got it? Good. OK, so what happened allllll the way back in 2011?
Well, in May of that year, roughly 40% of total US expenditure was borrowed, and the country found itself bumping up against the ceiling (again). There ensued a fevered debate as to what concessions would be required before the ceiling could be raised. It rumbled on for a couple of months, ratcheting up in intensity as it went.
Now, at this point, I want to make one thing crystal clear: I am neither a Republican nor a Democrat. I think just about every single elected official I have seen (and not just in America) wasn't worthy of the office, so if you are tempted to read any bias into my comments, you are officially mistaken.
In May of 2011, when the US officially hit the debt ceiling, CNN explained what it meant:
Treasury Secretary Tim Geithner told Congress he would have to suspend investments in federal retirement funds until Aug. 2 in order to create room for the government to continue borrowing in the debt markets.
The funds will be made whole once the debt limit is increased, Geithner said in a letter.
Sound familiar?
Source: SadHill
Essentially, Geithner was rummaging down the back of his couch to find loose change to feed the electricity meter — scrounging tactics hardly befitting the greatest nation on earth.
On July 31st, a day before the deadline set by Geithner, Obama signed into law a bill that would raise the ceiling by between $2.1 trillion and $2.4 trillion (a nice wide range. Guess which end of it we are running up against now?), which seemed then like an awful lot of money.
In fact, it was enough to cover the country's borrowing needs until 2013 (which seemed such a long way away).
On the flip-side of the borrowing was a hard-fought agreement to cut $2.1 trillion in expenditures over a decade — beginning, of course, the following year. Cuts would average out at $210 billion each year for 10 years. Again, that's a lot of money.
Which was good, right?
Immediately after the bill was signed into law, on August 3rd, the US national debt rose $238 billion (which equated to roughly 60% of the new debt ceiling and slightly more than a year's worth of spending cuts) in a single day, the largest one-day increase in the history of the United States.
Perspective? OK, try this:
In a single day, the US national debt increased by more than the GDP of Pakistan... or Portugal... or the Czech Republic... or, for that matter, Uruguay, Bulgaria, Luxembourg, Croatia, and Serbia — COMBINED.
That's some pent-up spending spree.
We all know about the subsequent S&P downgrade etc., etc., so I won't go into all that because we have more important stuff to discuss; but it's the quantum of the crisis that is important, and we are coming to that shortly.
The latest debt-ceiling crisis, which ended unremarkably this past week, has crystallized my belief that the gradual erosion of any sense of collective fear on the part of the investing public is reaching incredibly dangerous levels — levels which will ultimately lead to catastrophe, though not a catastrophe in the sense that a gentleman by the name of Jack Lew used the term when he addressed Congress recently. (Apparently, Mr. Lew is the US Treasury Secretary, a position he has held since being sworn in on February 28, 2012. Lew who? Who knew? I Googled him).
In his prepared remarks, Lew said:
The Treasury Department recently released a report examining the potential macroeconomic effects of political brinksmanship in 2011 and the potential risks of waiting until the last possible moment to increase the debt limit in the current economic environment. It points to the potentially catastrophic impacts of default, including credit market disruptions, a significant loss in the value of the dollar, markedly elevated U.S. interest rates, negative spillover effects to the global economy, and real risk of a financial crisis and recession that could echo the events of 2008 or worse.
Lew was using the word catastrophic to mean either:
1) a great, often sudden calamity or
2) a complete failure; a fiasco.
I am using it in a third sense: (3) the concluding action of a drama, especially a classical tragedy, following the climax and containing a resolution of the plot.
But that catastrophe is not yet quite upon us.
In fact, what governments and central banks have done in each successive crisis (as the chart of the VIX demonstrates) is to pacify investors and remove any sense of fear over future recurrences of potentially disastrous situations. Nowhere has that been more evident than in the past few weeks of pathetic political grandstanding and red-faced wrangling over the debt ceiling.
Allow me to elaborate.
Below is a chart of the S&P 500 in the period surrounding the last manufactured political point-scoring exercise totally legitimate debate about America's addiction to borrowed money. As you can see, in the week leading up to the announcement of the last-minute deal, the S&P plunged a little over 4%. Immediately after the announcement of the deal, talk began swirling about a possible downgrade to the US credit rating, and the market dropped a further 11% on, first, the mere speculation that such an event would happen, and then upon the event itself. Catastrophe!! Shame.
Source: Bloomberg
In language that makes a mockery of their lack of foresight during the subprime crisis, S&P had this to say when lowering the credit rating of the United States to AA+:
More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
Of course, subsequent to the downgrade, S&P was heavily criticized by the White House:
(Reuters): ... the Treasury Department issued a statement critical of the decision.
“We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” said Mary Miller, assistant secretary for financial markets at the Treasury Department. And White House Council of Economic Advisers Chairman Austan Goolsbee said, “I don’t think that the S&P’s political judgment is right.”
Errr ... underestimate what now? The "ability to come together to address the difficult fiscal challenges facing the nation", you say?
My dear Mary, you COULDN'T underestimate that ability if you started at zero and went backwards.
Then, along with the other major ratings agencies, S&P was quite coincidentally hit with a major DoJ investigation — which DEFINITELY started before the downgrade.
Definitely:
(NY Times, August 17, 2011): The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.
The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations....
It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.
It didn't. But that was then. This past few weeks has been all about now.
Given the incessant din of commentary that has surrounded debt-ceiling wranglings in recent days, I'm not about to add to it. Instead I'm going to compare the market's reaction in 2013 to its reaction in 2011 — to the exact same situation. Only this time, relations between the opposing sides were far more febrile; so surely the fallout, should these knuckleheads make the same mistake AGAIN, would be absolutely certain to be of a magnitude far, far greater than it proved to be in 2011.
You'd think.
This time, as we came ever closer to Zero Hour and the rancorous divide between Republicans and Democrats steadily worsened, the VIX Index jumped once again. However, instead of the risk of default causing the barometer to hit the 48 level to which it spiked the first time around, it reached a mere 20.
Big Whoop.
Source: Bloomberg
Not only that, but it fell back straight afterwards, whereas in 2011 uncertainty lingered and the VIX remained elevated for several months.
The dollar? Well that hardly moved in 2013 either, as you can see from the chart below; only this time, in the months before the debt showdown, it just kept grinding relentlessly lower as the collective realization that QE is with us forever (or at least until the market tells the FOMC it's time to end it) dawned far and wide across the investment landscape.
Source: Bloomberg
Treasuries, too, were remarkably sanguine heading into an event which would put them in default. The very short end of the curve ticked up slightly a week before the supposed default, and we reached a point where one-month T-Bills paid more than three-month T-Bills did, though both still paid essentially zero.
The term "risk-free rate" used to represent the securities themselves — now it represents where they are priced.
Ridiculous.
Source: Bloomberg
"But what about the S&P 500?" I hear you cry.
I'm glad you asked, because the S&P's response was quite amazing and does perhaps more than anything thus far to answer my philosophical question this week.
Here is the S&P in the days leading up to, and immediately after, the dramatic conclusion of the bullsh*t negotiations in Washington:
Source: Bloomberg
Now as you can see, a mere 24 hours before the US (at least according to Jack Lew, who, as some of you may have known, is the Secretary of the Treasury of the United States of America) was going to run out of money and default on its obligations (the Lew-styled "catastrophe", which according to the great and the good would once again "bring the financial system to its knees" — how many MORE times are we going to have to listen to that, I wonder?), the S&P 500 was trading exactly 2.30% from its all-time high.
Sound like anybody was worried about financial Armageddon to you, dear reader?
Not to me, either, but here's the thing:
The danger WAS very real, as a default by the US on its debt obligations would have gone to the very heart of the "plumbing" that underlies financial markets and caused havoc in the repo market and all kinds of problems with collateral (or at least, what little collateral is allowed amongst market participants once central banks have hoovered up their ever-expanding allotments).
The key clue passed most people by a week ago; but it came from, of all places, Hong Kong:
(FT): Hong Kong’s stock exchange decided the possibility of a US default had made some types of short-term Treasury bonds more risky, prompting it to force traders using the securities as collateral to provide extra backstops....
It came as the Asia Securities Industry & Financial Markets Association (Asifma), which represents banks, brokers and asset managers in the region, warned that any announcement by the US Treasury in advance of a default must arrive before the opening of the day’s trading in Asia to avoid “chaos”.
Japan’s clearing house, the Japan Securities Clearing Corporation (JSCC), said it was in “intensive discussions” to prepare for “anything that might happen”.
Hong Kong Exchanges & Clearing (HKEx) said on Thursday it had taken two measures designed to reflect the increased difficulty of valuing certain short-term US Treasuries amid the debt impasse.
First, its clearing house would apply an increased “haircut" to its valuation of US Treasuries held as collateral against futures trades. For bonds held with maturity of less than one year, that would be raised from 1 per cent to 3 per cent, effective immediately, HKEx said in a circular to members.
“This new haircut shall be applied on a daily basis to determine the value of the US Treasuries allowed to be used as cover for the margin requirements of HKCC [Hong Kong Clearing Corporation] participants,” HKEx said.
“Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the US Treasuries haircut.”
Anyone posting US Treasuries with less than a year to maturity as collateral, would need to come up with three times their current posted margin.
Not good. Not good at all. The amount of liquidity this would suck out of a fragile market would be catastrophic very bad indeed, and any forced selling on behalf of those unable to post the additional collateral would be a catastrophe major problem, leading to falling prices and spiking rates — neither of which are allowed anymore.
Now, if HKEx's move had become fashionable around the world (and it's safe to say that exchanges are very much pack animals), it would have been quite bad a catastrophe.
After a very subdued reaction to the can being kicked down the road until February debt ceiling being agreed, something rather strange happened on Thursday. See if you can identify at what point in the day it occurred:
(I should point out that the yellow overlay of the gold price looks green where it sits on top of the blue DXY chart. There are only two variables in this chart, the yellow gold price and the blue US dollar price.)
Now, there was already a clue as to what this event was, hidden away in an earlier chart, but (cue drum roll) the catalyst for the dollar's sudden drop and the sharp spike in the price of gold waaaaaaaaaaaas... THIS:
(Reuters): Chinese rating agency Dagong has downgraded the United States to A- from A and maintained a negative outlook on the sovereign's credit.
The agency suggested that, while a default has been averted by a last minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged.
"Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future," Dagong said in a press release.
Now those are the straight facts of the issue, but contained within the rest of what was a very short article are three fascinating sentences that speak to the very crux of the problem as things stand today.
The first two constituted the very next paragraph:
The first two constituted the very next paragraph:
(Reuters): Dagong's ratings are hardly followed outside of China. The agency also classifies most countries it follows very differently from major agencies such as Moody's, Standard & Poor's and Fitch.
Absolutely correct. Dagong's ratings are seen as something of a joke and very much inferior in nature to the Big Three — a poor man's Egan Jones, if you will.
BUT... a few days earlier, Fitch had put the USA on Rating Watch Negative (RWN), and nobody blinked.
Curiouser and curiouser.
Then, the final paragraph summed things up nicely as far as how the future is going to go:
(Reuters): Apart from the symbolic meaning of the downgrade, though, Dagong's move is expected to have no effect on markets.
Hmmm...
So here's where we get to the nub (finally!) of this week's philosophical wanderings.
The question I posed, all those charts ago, was this:
If something bad happens, but nobody reacts badly to it, did nothing bad happen?
Well, with each successfully navigated new crisis, the reaction of the market the next time a crisis flares up becomes more muted. We've seen the spectre of a Lehman-style collapse dealt with, and now the phrase "... could bring the global financial system to its knees..." is shrugged off with alacrity.
We've seen the spectre of a European fracture, a Grexit, a Spexit, and the end of the euro taken off the table by determined governments and central bankers; and now, each fresh outbreak of the European crisis is greeted with apathy and ennui. (I wonder if the French have a word for that.)
And now we've seen the extent of the reaction to the US debt-ceiling debacle the second time around. I would describe it as "quizzical interest" at best.
Why?
Because the Nannycrats are continually telling us that everything will be OK, that we shouldn't worry about things and ought instead to just Keep Calm and Carry On.
How bad has it gotten? Well, amidst the "hoo-ha on the Hill" recently, we saw one of the most bizarre things I've witnessed during the mayhem of recent years: Barack Obama's telling Wall Street that they SHOULD worry:
(Huffington Post): A self-described "exasperated" President Barack Obama told Wall Street CEOs on Wednesday that they should not take for granted that the Republican-led House of Representatives will raise the nation's debt ceiling by Oct. 17.
"I think this time is different," the president said, when asked by CNBC's John Harwood whether the financial markets were right to assume that the upcoming conflict would ultimately get resolved in time. "I think they should be concerned."
Barack, let me explain something to you.
The reason Wall Street WASN'T worrying is that you and Bernanke and Geithner and Paulson (not you, John — Hank) and Yellen and the rest of the Crazy Crew have gone out of your way for five years to make absolutely certain that nothing bad ever happens again. Ever.
Why the hell WOULD they worry?
It's YOUR fault that they're not. You just can't have it both ways.
That's what moral hazard looks like, I'm afrai...
(Washington Examiner): Treasury Secretary Jack Lew thinks that markets aren't worried enough about the government running out of funds with which to pay its obligations.
Speaking at a Bloomberg event in New York City on Tuesday afternoon, Lew said that investors' confidence that Congress would strike a deal to lift the debt ceiling and avoid a default is “greater than it should be.”
Sheesh! Not now, Jack, OK? Your buddy's already on it.
So, it would appear that the answer to my philosophical question is "no". If something bad happens (which it unequivocally has these past few weeks) but nobody reacts badly to it (which they didn't, despite the urging of the Mollifier-in-Chief), did nothing bad happen?
Apparently not.
Except...
There's always a crack somewhere, even in the most iron-clad assumptions, and this time we catch a glimpse of it in that Dagong downgrade — and more importantly, in the reaction to it.
Somewhere, sometime, when it makes absolutely no sense to anybody, something is going to matter to everybody; and when it does, the instability which has been magnified by means of repeated assurances that nothing bad will be allowed to happen will bring the world to its knees, I'm afraid.
It's hard to deny that the world at large is a far more dangerous place now than it was 50 years ago. Yet, as a parent, I, like others in similar circumstances, go out of my way to make the world around my own children as safe and as sound as I possibly can.
Unfortunately, as they go about their days insulated from larger worries, my children's feeling of safety floats farther and farther from the reality of the dangers awaiting them in the "real world" every day.
The day that real world — the world in which mathematics and debts and credit ratings and unemployment levels and tax receipts and political stability and mathematics and free and fair markets and accountability and transparency and honesty and reality and — did I mention mathematics? — are alive and well — crashes through our gleaming soap-bubble world of reassuring illusions proffered by the likes of Obama, Merkel, Draghi, Bernanke et al, we are in for a world of hurt.
And when that something bad happens, it won't be greeted by the deafening silence of millions of trees falling in millions of deserted forests, but by the deafening noise of billions of people falling hard into reality, trying to understand why suddenly the safety their leaders had been promising them for years has vanished when they needed it most.
"The real world is where the monsters are."
–
*******
OK ... what's on the agenda this week after that ponderously philosophical introduction? Well, all sorts of uplifting things, like Dr. Lacy Hunt's explanation of why the Fed's policies are failing and the story from Germany of how a Greek whistleblower was ignored by Brussels.
Fun stuff.
We have news of JP Morgan's latest legal settlement (this one's a doozy), Alibaba's attempts to unite shopping and banking, some angry East German Amazon employees, and we learn why Japanese young people are not having sex anymore.
China's gold-gathering network is a thing of beauty and complexity; the Taper is off the table until next year (at the VERY earliest); we read how America's shambolic politicians now look more dysfunctional than their European counterparts (that's GOTTA sting); and, talking of stinging, we have the fascinating story of "L'Éxodus" as thousands of French citizens pour through Le Tunnel to go and live amongst Les Rosbifs — where, despite the awful cuisine and those loathsome English people, life is a lot better, it would appear, than in their homeland.
Charts? We've got plenty, including the Shiller P/E, the burgeoning student loan problem, and Japan's massive monetary experiment. And there are interviews with Larry Summers (relax, it's short) and yours truly (sorry, that's not quite so short) as well as an amazing look at the congressional process in the United States that shows both sides up for exactly what they are — sneaky, evasive, grandstanding, point-scoring embarrassments (though at least one of them brings big cards with writing on to belabour his point — so he's gotta be the smart one, right?).
A plague on both their houses parties.
Until Next Time...
*******
Fed QE Taper Seen Delayed to March as Shutdown Bites
The Federal Reserve will delay the first reduction in its bond purchases until March after the government shutdown slowed fourth-quarter growth and interrupted the flow of data, economists said.
Policy makers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of 40 responses in a Bloomberg News survey of economists. The 16-day budget impasse in Washington reduced growth by 0.3 percentage point this quarter, economists said in the survey.
Forecasters, surprised when the Fed opted against tapering at its Sept. 17-18 meeting, pushed out their expectations after the shutdown furloughed as many as 800,000 federal workers. The closing also disrupted collection and publication of economic reports the Fed says it needs to determine whether the expansion is strong enough to handle less monetary stimulus.
“It’s going to be harder to extract the signal from the data, and the Fed’s policies are tied to the data,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York who expects the first tapering in March. “They’re waiting for more confirmation the economy is moving in the direction of their outlook, and if we don’t have data or it’s inconclusive, then the Fed isn’t going to feel confident enough in the outlook.”
The U.S. central bank will reduce monthly purchases to a $25 billion pace by July and end the program at the October 2014 meeting, according to the survey conducted yesterday and today.
Chairman Ben S. Bernanke’s second term ends Jan. 31, and President Barack Obama has nominated Vice Chairman Janet Yellen to succeed him.
Chairman Ben S. Bernanke’s second term ends Jan. 31, and President Barack Obama has nominated Vice Chairman Janet Yellen to succeed him.
Economists had expected the central bank to reduce purchases to $80 billion last month, according to a Bloomberg survey before the September meeting.
“Conditions in the job market today are still far from what all of us would like to see,” Bernanke said at a press conference following last month’s meeting.
Economists after that focused on December as the most probable date for the Fed to begin reducing the purchases. Twenty-four of 41 economists in a Sept. 18-19 survey identified the central bank’s December meeting as the time to taper.
That was before the government shutdown, which was resolved early yesterday morning when Obama signed legislation opening the government until Jan. 15 and suspending the nation’s debt limit through Feb. 7.
Total bond buying is poised to exceed prior estimates as the Fed delays tapering to assess the shutdown. The quantitative easing program once finished would total $1.6 trillion, according to the median estimate of economists. That’s up from a projection of $1.29 trillion prior to the September meeting and $1.47 trillion in the Sept. 18-19 survey.
The policy-setting Federal Open Market Committee’s last two meetings this year are scheduled for Oct. 29-30 and Dec. 17-18.
“They’re not tapering in October, but they never were,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Conceivably, December is still on the table, although it’s possible the integrity of the October data may not be great.”...
Federal Reserve Policy Failures Are Mounting
The Fed's capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve.
However, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.
Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP):
First, the Fed's forecasts have consistently been too optimistic, which indicates that their knowledge of how LSAP operates is flawed. LSAP obviously is not working in the way they had hoped, and they are unable to make needed course corrections.
Second, debt levels in the U.S. are so excessive that monetary policy's traditional transmission mechanism is broken.
Third, recent scholarly studies, all employing different rigorous analytical methods, indicate LSAP is ineffective.
Fourth, the velocity of money has slumped, and that trend will continue—which deprives the Fed of the ability to have a measurable influence on aggregate economic activity and is an alternative way of confirming the validity of the aforementioned academic studies.
1. The Fed does not understand how LSAP operates
If the Fed were consistently getting the economy right, then we could conclude that their understanding of current economic conditions is sound. However, if they regularly err, then it is valid to argue that they are misunderstanding the way their actions affect the economy.
During the current expansion, the Fed's forecasts for real GDP and inflation have been consistently above the actual numbers. Late last year, the midpoint of the Fed's central tendency forecast projected an increase in real GDP of 2.7% for 2013—the way it looks now, this estimate could miss the mark by nearly 50%.
One possible reason why the Fed have consistently erred on the high side in their growth forecasts is that they assume higher stock prices will lead to higher spending via the so-called wealth effect. The Fed's ad hoc analysis on this subject has been wrong and is in conflict with econometric studies. The studies suggest that when wealth rises or falls, consumer spending does not generally respond, or if it does respond, it does so feebly. During the run-up of stock and home prices over the past three years, the year-over-year growth in consumer spending has actually slowed sharply from over 5% in early 2011 to just 2.9% in the four quarters ending Q2.
Reliance on the wealth effect played a major role in the Fed's poor economic forecasts. LSAP has not been able to spur growth and achieve the Fed's forecasts to date, and it certainly undermines the Fed's continued assurances that this time will truly be different.
2. US debt is so high that Fed policies cannot gain traction
Another impediment to LSAP's success is the Fed's failure to consider that excessive debt levels block the main channel of monetary influence on economic activity. Scholarly studies published in the past three years document that economic growth slows when public and private debt exceeds 260% to 275% of GDP. In the U.S., from 1870 until the late 1990s, real GDP grew by 3.7% per year.
It was during 2000 that total debt breached the 260% level. Since 2000, growth has averaged a much slower 1.8% per year.
It was during 2000 that total debt breached the 260% level. Since 2000, growth has averaged a much slower 1.8% per year.
Once total debt moved into this counterproductive zone, other far-reaching and unintended consequences became evident. The standard of living, as measured by real median household income, began to stagnate and now stands at the lowest point since 1995. Additionally, since the start of the current economic expansion, real median household income has fallen 4.3%, which is totally unprecedented. Moreover, both the wealth and income divides in the U.S. have seriously worsened.
Over-indebtedness is the primary reason for slower growth, and unfortunately, so far the Fed's activities have had nothing but negative, unintended consequences....
JPMorgan Said to Have Reached $13 Billion U.S. Accord
JPMorgan Chase & Co. (JPM) has reached a tentative resolution of all civil mortgage-bond related matters with the U.S. Department of Justice under which the nation’s largest bank will pay a record $13 billion, a person familiar with the settlement talks said.
The amount increased from $11 billion during negotiations last night, the person said. The deal includes $4 billion for unspecified consumer relief and $9 billion in fines and other payments, another person familiar with the matter said. The $9 billion includes a $4 billion accord with the Federal Housing Finance Agency over the bank’s sale of mortgage-backed securities.
The pact, which isn’t yet final, doesn’t include a release of potential criminal liability for the bank, at the insistence of U.S. Attorney General Eric Holder, the first person said. Holder told JPMorgan Chief Executive Officer Jamie Dimon during talks that such a release wouldn’t be forthcoming as part of any deal, said the person.
The proposed accord will probably require the bank to cooperate in criminal investigations of individuals tied to wrongdoing associated with the bank’s mortgage practices, said the person, who requested anonymity because the matter isn’t public. The deal, which may be announced next week, also includes pending inquiries by New York Attorney General Eric Schneiderman, the people said.
The pact would be more than half of JPMorgan’s record $21.3 billion in profits last year. Some portions of the deal, like relief to homeowners, would probably be tax deductible.
The possible inclusion of such relief has revived concerns among mortgage-bond investors that efforts to ease the financial burdens of millions of Americans stemming from the subprime collapse of the housing market may lower the value of instruments held by Wall Street.
The Association of Mortgage Investors, representing mutual funds and pensions, urged Holder in a letter Oct. 7 not to let banks saddle them with costs associated with relief for U.S. mortgage holders while resolving probes.
JPMorgan is the target of investigations in the U.S. and abroad, including probes of its hiring practices in Asia. The bank has tapped $8 billion of $28 billion in reserves set aside since 2010 to cover its legal costs....
Brussels Ignores Tip-Offs from Greek Official
Anti-corruption officials in Brussels have failed to investigate reports of squandered EU funds at a training institute in Greece, a German paper reported Friday. Well-connected teachers were allegedly paid up to €610 per hour for up to 225 work hours per month.
The European Anti-Fraud Office (OLAF) has reportedly ignored repeated tip-offs about squandered European Union funds in Greece, according to an article in the Friday edition of the Süddeutsche Zeitung.
The German daily reports that a Greek civil servant uncovered multiple cases of nepotism and vastly inflated salaries while inspecting the finances of a vocational training institute. Officials in Brussels have apparently not acted on any of the whistleblower's suspicions, which he communicated in several letters, the paper added.
According to the newspaper report, Giorgos Boutos, a government finance official in Athens, began auditing the books of the Organization for Vocation Education and Training (OEEK) in 2006. The institute receives and distributes EU funds earmarked for vocational training in Greece. Boutros repeatedly stumbled upon irregularities and documented the cases in numerous letters to OLAF.
The suspected squandering of public funds is a particularly touchy issue, as it was considered a contributing factor in Greece's ongoing debt crisis.
The case involves at least €6 million ($8.2 million). It's not an excessive sum of money, but it is well documented. Boutos was able to substantiate the irregularities in his letters to the EU with contracts, hotel bills and bank statements. He reportedly found that 75 percent of the misappropriated money had come from the EU.
The details provided by the Süddeutsche Zeitung are sure to raise eyebrows. Some of the instructors are said to have been paid for up to 225 hours per month, even during periods when they were abroad. Hourly wages for teachers were reportedly as high as €610. The alleged corruption was compounded by apparent instances of nepotism: The son of a cabinet member taught a course on silver-plating watches, the wife of a Socialist politician led classes on both dentistry and geography, and relatives of the institute's leader held jobs there.
Boutos first sent documents about the suspected fraud to the EU in July 2010. But he heard nothing from the Greek representative at OLAF, while a letter to Director-General Giovanni Kessler went unanswered. In fact, he did not receive any response from OLAF until after he filed a complaint with the European Commission's head of cabinet. The response, however, was only a confirmation that his letter had been received and that the case had been given a file number.
It wasn't until seven months — and several more inquiries — later that Boutos received fresh news about the case. Still, that letter merely stated that OLAF was in the process of "a comprehensive reorganization," and asked him to be patient.
Meanwhile, Boutos told the newspaper, many similar cases of misspent EU funds now fall under the statute of limitations because the EU took too long to address them. Exactly €516,000 of misappropriated EU funds have been repaid. But Boutros stressed that the EU could demand that all such funds be paid back — that is, if it really wanted to.
Boutos also questioned whether investigations had been delayed because some suspected fraud cases involved relatives of government and party officials — or whether Brussels even cared at all about such instances.
"I don't know whether I should cry or laugh," he told the paper.
China’s London-Zurich-Hong Kong gold conduit — a major financial coup d’etat
The United Kingdom’s gold exports to Switzerland jumped from 85 tonnes to 1,016 tonnes in the first eight months of 2013 — a twelve times increase. Some bullion market watchers attribute the huge increase to withdrawals or sales from ETFs — an explanation that covers only half the story…….if that.
Switzerland, according to the Koos Jansen website, has exported nearly 500 tonnes of gold to Hong Kong through July, 2013. Hong Kong, in turn, has exported over 1200 tonnes of gold to the Chinese mainland over the same period. Now, with this report of ramped-up exports from the United Kingdom, another piece of the puzzle falls into place and we begin to get a fairly clear picture what these gold mobilizations entail. Switzerland and Hong Kong are acting as a conduit of western gold on its way to China — and probably Chinese central bank reserves.
To what extent this gold mobilization is the result of some yet-to-be-identified external pressure on London’s bullion banks, or simply business as usual, remains to be determined, but gold movements of this size usually do not occur in a vacuum. Hedge funds have been in the gold ETF liquidation mode since April, at the behest, it seems, of certain bullion banks that have issued generalized ETF sell recommendations to their clientele (which includes the funds). The ETF selling has been blamed repeatedly for the rapid drop in the price. If all of this has been a ploy to drive down the price on paper and channel substantial amounts of physical gold to China, who is the winner in this game and who is the loser? And why is it being done?
The gold market is incurably opaque (no matter how diligent or persistent the arguments to the contrary that it isn’t or that it should not be), and that is probably why so many are intrigued by it. Yet, at the same time, those who innocently own gold for asset preservation purposes can rest assured that they will never become collateral damage in these affairs as long as they do not allow themselves to lose patience or forget the reasons why they purchased gold in the first place.
Gold is never sought by those who think all is well with the world. It is sought by those who believe that things could go wrong, or indeed, that things have already gone very badly. That true believer might be someone of incredible private wealth, as was the case with Bernard Baruch in the 1930s, or it might be a great nation-state like Germany or China today. When the sitting Secretary of the Treasury asked Bernard Baruch why he was buying so much gold, the reply came quickly that he “was commencing to have doubts about the currency.” China and Germany, no doubt, are acting on doubts of their own. Up until today, we were unaware of the degree to which those doubts had manifested themselves in the hidden corridors of the world gold market.... Now we know. In the first eight months of 2013 China produced 270 tonnes of gold from its mines, and theoretically almost four times that amount through its London — Zurich — Hong Kong gold conduit. In future years, this will likely be considered a major financial coup d’etat.
Worse than Europe, really
IMAGINE you are in a taxi and the driver suddenly turns violently and speeds towards a wall, tyres screeching, only to stop at the very last moment, inches from the bricks — and cheerfully informs you that he wants to do the same to you in three months time. Would you be grateful that he has not killed you? Or would you wonder why you chose his cab in the first place?
That is the journey Congress has taken the American people on over the past few weeks (see article). The last-minute deal to raise America’s debt ceiling, avoid a default and reopen the government at least until mid-January, which was signed by the president on October 16th, is welcome only compared with the immediate alternative.
For a long time American politicians have poured scorn on their European peers for failing to deal with the euro crisis. This week Washington equalled Brussels on one measure of dysfunctionality and surpassed it by another. The way in which the Democrats and Republicans, having failed to reach any agreement, decided to “kick the can down the road”, was deeply European. The deal allows the government to stay open till January 15th and the debt ceiling to be raised until February 7th. Just as America’s economy seems to be recovering, with the promise of GDP growing by 2.7% in 2014, it could face another shutdown of the kind that has just sent consumer confidence to a nine-month low and knocked back growth in the fourth quarter by an estimated 0.6 percentage points.
The way in which the Americans have surpassed the Europeans is the unreality of their discussion. The Europeans at least talk vaguely about banking unions and other solutions to their mess. In America the immediate budget deficit—at 3.4% of GDP—is smaller than that of many European countries. Indeed the danger is of too much tightening in the short term. But the country’s long-term fiscal problem is immense: it taxes like a small-government country but spends like a big-government one. Eventually demography — and the huge tribe of retiring baby-boomers who expect pensions and health care — will bankrupt the country. By the IMF’s calculation, if America is to reduce its debt to what it regards as a sensible level by 2030, allowing for all this age-related spending, it needs a “fiscal adjustment” of 11.7% of GDP—more than any other advanced country other than Japan. Yet the Republicans refuse to discuss tax rises, without which Barack Obama and the Democrats refuse to discuss cuts to entitlements: neither of those things had anything to do with the impasse of the past few weeks.
And to what end? Politically, neither Mr Obama nor the Republicans [have] much to show for their combat: the president has not persuaded his rivals to get rid of the sequester, which continues to squeeze vital functions such as defence and research, while the Republicans have to keep paying for Obamacare, the health reforms they had hoped to kill in this process. It is the political equivalent of the Somme: great damage has been done, but barely any ground gained.
The bigger losers politically, though, are the Republicans. Their demand that the Democrats rescind the key parts of many of the laws that Mr Obama has passed over the past five years was the principal reason for a debacle that has embarrassed America. Americans have noticed: the proportion who view them favourably dropped to 28%, the lowest level for either party since Gallup started asking the question in 1992.
When the Republicans are a small government party, this newspaper has much sympathy for their views. As long as they remain the no-government one, it is not inclined to take a ride in their cab again.
Alibaba Forges Ahead with Bid to Transform Banking Industry
When Jack Ma, founder and chairman of e-commerce giant Alibaba Group, vowed in 2008 to change the banking industry, the public was just beginning to understand his idea of a Net-based financial ecosystem.
Now the firm is offering small loans, securities investments and payment services. It has also ventured into insurance by co-founding a company to sell policies and settle claims online.
Few would argue that even the large banks have felt pressure to broaden and improve their services. Privately, many bankers and analysts say that the only barrier to Alibaba becoming a real bank is a license.
The company says it is not interested. Its ambition extends beyond that, an executive of the company who declined to be named said. Alibaba employees think the old way of banking is dead. The model where people must deposit their money with a bank and the bank lends to borrowers is based on a "decadent, waning philosophy of traditional finance" that has been left behind by the Internet age, he said.
The alternative that Alibaba is developing allows customers to prepay sellers for their purchases at a discount, sparing the latter the need to borrow from banks and hold inventories for a long time, the executive said. The customer-to-business (C2B) mechanism has gained ground on Alibaba's popular e-commerce websites Taobao.com and Tmall.com.
As in other services available on Alibaba's platform, data mining is all that matters in terms of discovering business opportunities and controlling risks, the executive said.
The emphasis on data has also played an important role in Alibaba's recently announced cooperation with China Minsheng Bank. The two signed a cooperation agreement in September, saying that they will jointly explore areas including wealth management, direct banking and credit card services.
Minsheng's assistant president, Lin Yunshan, said the bank most values Alibaba's platform and its data mining abilities supported by a huge client base. But they will not share existing user data.
There have been concerns that Alibaba will turn against Minsheng after it gets the knowledge and experience of operating a bank.
"Compared with banks, Alibaba is short on capital strength and financial professionalism, so currently it is unwilling to confront a bank openly and would rather cooperate," Orient Securities' analyst Jin Lin said.
A report by Haitong Securities holds the same view. It says Alibaba is easing into the banking sector through such cooperative deals in which it provides the partner financial institution customers and distribution channels in return for financing and risk management expertise.
The downside for the financial institution, however, is that it cannot build a business platform as easily as an e-commerce operator can learn banking technologies from it, Jin said. Once Alibaba masters running a bank, it may no longer need to bind itself with one....
The big grey box in Leipzig where Amazon staff have found their voice
Take a tram journey through Leipzig in the former East Germany and you might pass Bertolt-Brecht-Strasse, or Karl-Liebknecht-Strasse, named after the communist revolutionary. Or you might see a name more familiar from your internet browser: Amazonstrasse.
Added to the map in 2006, the street is home to the enormous grey shoebox that is the Amazon distribution centre — covering an area the size of 11 football pitches. Here 2,000 workers package orders for the US online retailer and send them off to buyers across Germany. It's a four-stage process, with the army of workers divided into "pickers", "packers", "receivers" and "stowers".
Amazon's logistics centres have come under increasing scrutiny in recent years. A much-shared Mother Jones report described the dehumanising working conditions at another, but similar, US firm; in a Financial Times article one employee likened Amazon's centre in Rugeley, Staffordshire, to a "slave camp". In January, German television screened a documentary showing that one centre employed security guards with neo-nazi backgrounds.
In the US, Amazon founder Jeff Bezos did respond to reports of temperatures approaching 40C in its warehouses with a $52m investment in air conditioning, but avoids paying benefits by calling staff "independent contractors".
Leipzig, the city with the highest poverty rate in Germany, is unusual in that it is the first place where the debate has been played out inside an Amazon centre. Along with another site in Bad Hersfeld, in the central Hesse region, this summer it became the first of Amazon's sites to see repeated strike action over pay and working conditions.
Earlier this month the service workers' union Verdi warned that there could be more strikes before Christmas after Amazon refused to enter negotiations about a collective wage agreement that would comply with standards in the German retail sector. Mail order businesses are supposed to pay workers between €11.47 and €11.94 an hour, at least €1 more than Amazon's German workers earn.
The following day, Amazon confirmed rumours that it was planning to open three new logistics centres in Poland — two in Wroclaw and one in Poznan, less than three hours' drive from Berlin; Polish business daily Puls Biznesu claimed that they were intended to take over work from strike-hit Germany.
Amazon said the announcement was "not intended as a counterstrike", but workers in Leipzig are now nervous: has the union overplayed its hand?
On an industrial park in the north-east of the city, next to the largest brothel in the eastern part of the country (prostitution is legal in Germany), Amazon Leipzig looks exactly like any of Amazon's 90 other logistics centres around the world.
Workers enter and leave via a yellow building they call the "banana tower", each time passing through airport-style security checks to confirm that they haven't stolen anything. The size of the building and the security measures mean that at least 10 minutes of their two breaks of 20 and 25 minutes a day are taken up with walking and queuing, according to the union.
On the day I visit Amazonstrasse 1, the smoking area inside the compound is closed because of building works. About 50 workers in high-visibility vests stand huddled in groups in the car park. Security staff in yellow vests watch over them from the banana tower.
The first group I ask about the situation at the centre respond with nervous shakes of the head and tightly closed lips. It is the same with other groups around the car park. Nobody will talk....
Why have young people in Japan stopped having sex?
Ai Aoyama is a sex and relationship counsellor who works out of her narrow three-storey home on a Tokyo back street. Her first name means "love" in Japanese, and is a keepsake from her earlier days as a professional dominatrix. Back then, about 15 years ago, she was Queen Ai, or Queen Love, and she did "all the usual things" like tying people up and dripping hot wax on their nipples. Her work today, she says, is far more challenging. Aoyama, 52, is trying to cure what Japan's media calls sekkusu shinai shokogun, or "celibacy syndrome".
Many people who seek her out, says Aoyama, are deeply confused. "Some want a partner, some prefer being single, but few relate to normal love and marriage." However, the pressure to conform to Japan's anachronistic family model of salaryman husband and stay-at-home wife remains. "People don't know where to turn. They're coming to me because they think that, by wanting something different, there's something wrong with them."
Japan's under-40s appear to be losing interest in conventional relationships. Millions aren't even dating, and increasing numbers can't be bothered with sex. For their government, "celibacy syndrome" is part of a looming national catastrophe. Japan already has one of the world's lowest birth rates. Its population of 126 million, which has been shrinking for the past decade, is projected to plunge a further one-third by 2060. Aoyama believes the country is experiencing "a flight from human intimacy" — and it's partly the government's fault.
The sign outside her building says "Clinic". She greets me in yoga pants and fluffy animal slippers, cradling a Pekingese dog whom she introduces as Marilyn Monroe. In her business pamphlet, she offers up the gloriously random confidence that she visited North Korea in the 1990s and squeezed the testicles of a top army general. It doesn't say whether she was invited there specifically for that purpose, but the message to her clients is clear: she doesn't judge.
Inside, she takes me upstairs to her "relaxation room" — a bedroom with no furniture except a double futon. "It will be quiet in here," she says. Aoyama's first task with most of her clients is encouraging them "to stop apologising for their own physical existence".
The number of single people has reached a record high. A survey in 2011 found that 61% of unmarried men and 49% of women aged 18-34 were not in any kind of romantic relationship, a rise of almost 10% from five years earlier. Another study found that a third of people under 30 had never dated at all. (There are no figures for same-sex relationships.) Although there has long been a pragmatic separation of love and sex in Japan — a country mostly free of religious morals — sex fares no better. A survey earlier this year by the Japan Family Planning Association (JFPA) found that 45% of women aged 16-24 "were not interested in or despised sexual contact". More than a quarter of men felt the same way....
Down and out: the French flee a nation in despair
A poll on the front page of last Tuesday’s Le Monde, that bible of the French Left-leaning Establishment (think a simultaneously boring and hectoring Guardian), translated into stark figures the winter of François Hollande’s discontent.
More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel’s owners.
Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes — of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year — now widen social inequalities instead of reducing them.
This is a noteworthy departure, in a country where the much-vaunted value of “equality” has historically been tinged with envy and resentment of the more fortunate. Less than two years ago, the most toxic accusation levied at Nicolas Sarkozy was of being “le président des riches”, favouring his yacht-sailing CEO buddies with tax breaks and sweet deals. By contrast, Hollande, the bling-free candidate, was elected on a platform of increasing state spending by promising to create 60,000 teachers’ jobs, as well as 150,000 subsidised entry-level public-service jobs for the long-time unemployed and the young — without providing for significant savings elsewhere.
By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP. In effect, just to keep in the same place, like a hamster on a wheel, and ensure that the European Central Bank in Frankfurt isn’t too unhappy with us, Hollande now needs cash. Technocrats, MPs and ministers have been instructed to find every euro they can rake in — in deferred benefits, cancelled tax credits, extra levies. As they ignore the notion of making some serious cuts (mooted at regular intervals by the IMF, the OECD and even France’s own Cour des Comptes), the result can be messy.
On the one hand, the lacklustre economy and finance minister Pierre Moscovici recently admitted that he “understood” the French’s “exasperation” with their heavy tax burden. This earned him a sharp rap on the fingers from the president and his beleaguered PM, Jean-Marc Ayrault. On the other, new taxes keep being announced, in chaotic fashion, nearly every week. “Announced” doesn’t mean “implemented”: the Hollande crowd have developed a unique Wile E Coyote-style of leaks, technical glitches, last-minute tweaks and horse-market bargaining whereby almost nobody knows, at any given time, who will be targeted by the taxman, and how. Unsurprisingly, this is liked by no one except us reptiles of the press, eager to report on the longest series of own goals in the history of government communications.
Take last year’s famous 75 per cent supertax, on individuals earning over one million euros a month. This has still not been implemented. First, it got struck down by France’s Constitutional Council on a technicality. Leaks suggested the rate would fall to 66 per cent. They were confirmed, then denied.
Hollande eventually vowed that the tax would be paid by the targeted individuals’ employers, for daring to offer such “obscenely” high salaries. This has just been approved by the National Assembly, and must still pass the Senate. So far, it is only supposed to apply to 2013 and 2014 income, but no one knows if the bill will be prolonged, killed or transformed....
Hollande eventually vowed that the tax would be paid by the targeted individuals’ employers, for daring to offer such “obscenely” high salaries. This has just been approved by the National Assembly, and must still pass the Senate. So far, it is only supposed to apply to 2013 and 2014 income, but no one knows if the bill will be prolonged, killed or transformed....
Charts That Make You Go Hmmm...
Student debt continues to gnaw away at America, and the numbers get progressively worse.
At some point down the road, the US will be forced to absorb student debt alongside all the various other forms the state has assumed in recent years. There is just no way out.
Plus, of course, at some point a politician will realize that forgiving student loans will most certainly ensure a large block of votes pretty much in perpetuity.
That's a fair exchange, no? After all, what's another few hundred billion between friends?
In the meantime, courtesy of Visual.ly and Zerohedge, pretty much everything you need to know about the current state of play is contained in this great infographic.
Japan's (Next) Bang! Moment
One look at the chart [above], which shows JPM's estimate for various central bank holdings as a percent of host nation GDP, is enough to explain why that distant giggling is Hyman Minsky warming up... and he is running for the hills.
The reason: while as a result of its recent decision to double its monetary base in (every) two years Japan's central bank now holds about 40% of local GDP on its books, it has precommited to seeing this percentage hit 60% over the next two years. But that's just the beginning.
As JPM's Mike Cembalest points out, the "contingent" line is where the BOJ's asset holdings as a % of GDP will rise to should Japan's 2% inflation goal prove elusive. Did we say "contingent" — we meant definite. And as the line shows, the Bank of Japan will, for the first time in history, "own" all of Japan's GDP on its balance sheet some time in 2018 when its "assets" as a percentage of GDP surpass 100%, and then proceed in linear fashion to add about 10% of GDP to its balance sheet with every passing year until everything inevitably comes crashing down....
Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences says US stocks are expensive. They are the most expensive relative to earnings they have been in more than five years — since the lows following the great collapse of 2007-09.
Shiller’s CAPE ratio — the cyclically adjusted price-earnings ratio — compares the Standard & Poor’s 500 Index with companies’ average profits over the prior decade. The ratio ended last month at 23.7, the highest since January 2008, according to data available from his website.
Bloomberg notes that “the September ratio was lower than a peak of 27.5 in May 2007 — and even further below a record of 44.2, set in December 1999.” Date for Shiller’s price-earnings figures go all the way back to 1881 (above chart 1900 — present).
Shiller made several other comments on equities:
“The stock market is rather highly priced. I worry that it might correct down.”
“I don’t think one should view it with alarm.”
“One could well — and probably should, in a diversified portfolio — invest in stocks.”
A far cry from his prior warnings of dot com stocks in 1999 and housing in 2006.
Source: The Big Picture
Words That Make You Go Hmmm...
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"Laws, like sausages, cease to inspire respect in proportion as we know how they are made."
So said either Otto von Bismarck or John Godfrey Saxe (depending on your source); but either way, the sentiment is absolutely correct, as this ridiculous clip from the US Congress amidst the debt ceiling debate demonstrates only too clearly ... sigh!
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The Dark Lord himself, Larry Summers, was interviewed by Charlie Rose this week on how he would fix America.
Bloomberg very kindly distilled the interview with the former front runner for Janet Yellen's new job down to its "highlights".
The video runs a minute and 28 seconds.
<Cough>
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This past week I spoke with Eric King about recent moves in the gold market, the likely ramifications of both the cancellation postponement of any taper and the debt-ceiling agreement and what the world may look like when, all of a sudden, what has been going on in the gold markets in recent years starts to matter to people.
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and finally...
The relationship between words and their meaning is a fascinating one, and linguists have spent countless years deconstructing it, taking it apart letter by letter, and trying to figure out why there are so many feelings and ideas that we cannot even put words to, and that our languages cannot identify....
No doubt the best book we've read that covers the subject is "Through The Language Glass" by Guy Deutscher, which goes a long way to explaining and understanding these loopholes — the gaps which mean there are leftover words without translations, and concepts that cannot be properly explained across cultures.
Somehow narrowing it down to just a handful, we've illustrated 11 of these wonderful, elusive, words — which have no single word within the English language that could be considered a direct translation. We will definitely be trying to incorporate a few of them into our everyday conversations, and hope that you enjoy recognizing a feeling or two of your own among them.
Hmmm...
Grant Williams
Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners’ capital across multiple strategies.
The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors.
Grant has 28 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses.
Grant has been writing Things That Make You Go Hmmm... since 2009.
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