ZeroHedge RSS Feed

50 Years Of Political Polarization In One Chart

King County, Texas has seen the biggest shift in political preferences of all US counties since 1960 according to WaPo; but as io9's Mark Strauss notes reveal that during the last two decades, this is not unusual - an increasing number of Americans have chosen to veer Right or Left in their political orientation - with almost no center ground. That trend becomes especially apparent when looking at U.S. election results, county-by-county, since 1960.


As WaPo reports,

We also identified the two counties that changed the most and least between 1960 and 2012. Wyoming County, N.Y., has voted 30-plus percentage points more Republican than the rest of the country in basically every election since John Kennedy first won. King County, Tex., however, has gotten remarkably more conservative.

This is how every single county in the United States has voted vs. the national average since 1960.


The redder the red, the more Republican the county voted than the rest of the country. The bluer the blue, the more Democratic it voted.

Source: The Washington Post

Salvador Dali - Central Banker?

Submitted by Monty Pelerin via Economic Noise blog,

Would Salvador Dali make a better Federal Reserve Chairman than Janet Yellen or Ben Bernanke before her?

If that seems far-fetched to you, read on to understand the benefits Salvador Dali might provide for the Fed. Yes, Mr. Dali is no longer of this earth so you should feel free to substitute someone with similar skills. The point is that a man with his talents might be a better Fed Chairman than the economic hacks that are appointed.


Few topics are less understood (and more boring) than the mechanics of banking. Anyone who has taken an economics course was exposed to the bank-multiplier effect — how banks can “create” money via lending in a fractional-reserve system. John Kenneth Galbraith, a witty economist (no, that is not an oxymoron), said of money:

The process by which banks create money is so simple that the mind is repelled.

The simplicity of this process is understood by few non-economists. For economists the process is “so simple.” Those who understand the process and its implications may be “repelled,” although it is doubtful that the creation of money was what Galbraith had in mind. As a true Keynesian, Galbraith was in favor of utilizing money, particularly its creation, to manage and manipulate macroeconomic outcomes.

Salvador Dali as Fed Chair

Analogies can be effective in communicating otherwise complex topics. Dante Bayona provides a particularly valuable one using Dali as the vehicle:

There is a story about the great Catalan surrealist painter Salvador Dali. It is said that in the last years of his life, when he was already famous, he signed checks knowing that they would not be submitted to the bank for payment. Rather, after partying with his friends and consuming the most expensive items the restaurants had to offer, he would ask for the bill, pull out one of his checks, write the amount, and sign it. Before handing over the check, he quickly turned it around, made a drawing on the back and autographed it. Dali knew the owner of the restaurant would not cash the check but keep it, put it in a frame, and display it in the most prominent place in the restaurant: “An original Dali.”

It was a good deal for Dali: his checks never came back to the bank to be cashed, and he still enjoyed great banquets with all of his friends. Dali had a magic checkbook.

Isn’t this same scheme employed by the Federal Reserve? Isn’t their scam only good for as long as the “checks” are not cashed? Mr. Bayona adds:

But what would have happened if one day art collectors concluded that Dali’s work really did not capture the essence of surrealism, and therefore that his art was not of great value? If that had happened, every autographed check would have come back to the bank (at least in theory), and Dali would have had to pay up. If Dali had not saved enough money, he would have had to find a job painting houses.

Dali was providing something of value, at least in the minds of the restaurateurs who considered his check more valuable as a  work of art than traded in for money. Would Dali’s scheme ultimately have failed? Probably. There were obvious limitations as to how far Dali could employ it. He was limited in the sense that he probably could not utilize it effectively twice in the same restaurant. How many framed objects of checks can be hung in a restaurant as “art.” There is diminishing marginal utility from more of any good. That is likely especially so for framed checks as rare art, all from the same patron.

The point is that Dali’s ability to do this was limited by supply and demand. This same constraint of supply and demand is a limiting factor on the Fed’s ability to continue their scheme, although it may be less obvious. Each dollar suffers from the same diminishing marginal utility as do Dali’s checks. It may be less obvious and take longer, but the same process applies.

 Bayona concludes:

Salvador Dali had devised an ingenious method for not paying his bills. Similar stories are told about Pablo Picasso. But the Fed does not produce tangible items that people would rather hold on to, like an original Salvador Dali. The Fed does not produce work or items of value. The Salvador Dali effect, i.e., the ability to prevent checks from being cashed by creating something of real value, does not apply to the Fed. That is why it is good to remind the Fed, and the government, to be careful with the expenditures when partying, just in case the magic checkbook disappears.

There were limiting factors on Salvador Dali’s check-writing. Similar constraints limit the Fed. It is only a question of time before their scheme fails. Perhaps that is the reason why QE is supposedly on its way out.

Jackson Hole: 'Tremendous' Downside Risks If Yellen Doesn't Go Full-Dovish

Via Citi's Steven Englander,

The consensus expectation is overwhelming that Fed Chair Yellen will deliver a dovish message at Jackson Hole. Macro investors have largely eliminated their short Treasury position and look to be long risk, particularly via equities and EM. FX positioning is long USD and long EM, the long USD largely because the euro zone economy is slipping again and the ECB is hinting at further ease. Our question is whether Yellen can be more dovish than what is now priced in, not whether she will be dovish on the Richter scale of dovishness.
We would go into this week long USDJPY.  There is upside to USDJPY if geopolitical tensions ease further or US rates back up. Given the focus on Yellen’s talk, we are also a bit worried that investors will be surprised if FOMC Minutes read somewhat hawkishly.
EM would be the big winner if Yellen succeed in surprising on the dovish side. However we worry that dovishness is increasingly anticipated and that by the time we get to her talk, anything less than 'full dovishness' will be a disappointment.
‘Full dovish’ means moving the goal posts on the targets.
Keeping the current targets, even accompanied by rhetoric and optimism, is hawkish because it suggests that normalization is coming as well get closer to the targets.
There are three ways by which Yellen can express dovishness, but only one that breaks new ground:

i) Full dovish

1) Argue that the natural rate is less than 5 ¼ -  5 ½ %


2) Advocate for a temporary overshoot of the inflation target


3) Emphasize the uncertainty around NAIRU estimates that tightening can wait till there is real evidence of accelerating inflation.


4) Introduce a soft wage target of about 3.5%, consistent with  aspirational 1.5% productivity growth and 2% unit labor cost growth

ii) Semi dovish

1) Make the case that there is no sustained inflation likely without accelerating wage growth and there is little broad evidence for such a pickup, but keep existing inflation and unemployment targets


2) Introduce a new labor market indicator that captures the slack she feels that the unemployment rate misses, but again keep to existing targets

iii) Contingent dovish

1) Forecasting a pickup in productivity and labor force participation that will limit the need for tightening

Full dovish goes beyond anything she has stated explicitly in her comments. It would give stimulus more room on unemployment, inflation or both, and  lead to yields dropping even further, taking the USD with them. There are straightforward arguments to justify full dovish, but the Chair has not advocated any of them so far, so it would clearly plant her among the most committed doves.
Semi dovish may generate a strong initial market reaction if it looks as if it is introducing new factors into the policy equation but is much more ambiguous. 'Low wages imply low inflation' is a property of most inflation models but much weaker than  saying that wage growth is now a target.  Were inflation to pick up for others reasons the Fed would still tighten, even if wages remained soft. Similarly it  is unclear what it means to say that the unemployment rate understates slack, but 5 ¼ - 5 ½% is the target anyway. While we would focus on whether the goalposts are being shifted, semi dovish can sound very dovish until it becomes clear whether there is any functional shift in the FOMC’s goals.
Contingent dovish is the argument she has put forward for a long time. It sounds more dovish than it is because no one has a real handle on the drivers of trend productivity growth and the US supply side has disappointed badly.  Both the participation rate and productivity growth are at weak levels and there is no compelling case that either will pick up.  The safest assumption is that trend productivity growth over the next three years is what it was the last three years, and that participation rates are unlikely to surge.
Moreover, if the supply side does not improve, the Fed will have to start withdrawing stimulus as soon as the inflation and unemployment targets are approached. So even though the stress on supply side response sounds dovish, at this stage of the cycle it may actually turn out to be hawkish.

The hawkish surprise would be an acknowledgment that they were approaching their dual mandate targets  faster than expected. Even repeating  the FOMC statement would be something of a hawkish surprise given how far markets have moved in the dovish direction. Dec 2015 and 2016 Eurodollar rates are at the low end of their range of the past 15 months so there is no market concern on the pace of tapering. Were she simply to say that the targets are the targets and they will begin to reduce stimulus as they are approached, it would be a tremendous let down and viewed as very hawkish versus expectations.
Some notes:
The case for full dovish
The full dovish case basically argues  that we do not have a direct measure of full employment or the NAIRU. It is inferred from the behavior of wages and prices. With this imprecision, the Fed should not tighten before there are indications from market-based wages and prices that the US economy is pressing against capacity limits. The NAIRU has fluctuated between around 6.5% and 4.5% over the last 50 years, but is difficult to determine ex ante and there is no reason to guess. (The counterargument is that inflation is a lagging indicator so by the time we see it, it is too late for a soft landing, but that is not the argument she is likely to make).

Productivity growth
Productivity growth has been dropping since the mid 1990s.

In fact where we are now is pretty much in line with the trend that began in 2004, and if anything the risk is that we are falling below. Most cyclical productivity gains come during the early recovery period and that was in 2009-10.

Labor force participation
The US has averaged 195k jobs for the last 40 months, so it is harder to make the case that workers are discouraged by the absence of jobs. The employment to population ratio of older works is higher than before the crisis, unlike that of so-called prime aged workers (Figure 2).

In the past we have seen labor force gains towards the end of recoveries. It is hard to pin down what drives the gains but the pickup is not so fast even in the initial stages of strong recoveries when output and employment gains are rapid. 

Figure 3 shows the participation rates of men aged 25-54 years. There has been a downward trend the last 50 years, often exacerbated by recession and with modest subsequent rebound in participation. (we use male participation rates because the influx of women into the labor force in the 1970s and 1980s would make it very hard to see the cyclical behavior.)
There is a difference between the argument that strong growth will encourages workers to rejoin the labor force and keep a lid on wages and prices and the more pessimistic argument that higher wages for everyone are needed to increase participation rates by one or two percent. The latter leads to higher unit labor costs in general, the former to lower.


*  *  *

Then again, you could just listen to Goldman...

With opinions mixed as to whether or not Jackson Hole will be the forum for Yellen to say something new, many are trying to figure out if it is a buy the rumor and then buy more after the fact event, a buy the rumor sell the fact event, or a do nothing with the rumors and then buy the fact if the USD is actually rallying after the fact event.

Got it?

*  *  *

As The WSJ reports, it's going to be hard for the Fed to justify more dovishness in light of their own exuberant slack-less data...

But we are sure they will find a way

US Attempted To Rescue James Foley, Other ISIS Hostages, Failed Because "Hostages Were Not Present"

If there was one thing the Obama administration did not need as it is careening from one international crisis to another, was compounding comparisons to the Carter administration and its botched attempt to rescue US hostages in 1980 Iran also known as Operation Eagle Claw. Well, as of moments ago, that comparison is now in play following what the Pentagon just revealed was a botched attempt to recue a number of American hostages held by ISIS, "early this summer." The reason why the mission failed: "tho hostages were not there." Why? "We don’t know. And that’s the truth. When we got there, they weren’t there. We don’t know why that is. 

From the spokesperson for the State Department Marie Harf:

The United States attempted a rescue operation recently to free a number of American hostages held in Syria by ISIL. This operation involved air and ground components and was focused on a particular captor network within ISIL. Unfortunately, the mission was not successful because the hostages were not present at the targeted location. We put the best of the United States military in harms way to try and bring our citizens home.

And from ABC:

U.S. special operations forces early this summer launched a secret, major rescue operation in Syria to save James Foley and a number of Americans held by the extremist group ISIS, but the mission failed because the hostages weren’t there, senior administration officials told ABC News today.


President Obama authorized the “substantial and complex” rescue operation after the officials said a “broad collection of intelligence” led the U.S. to believe the hostages were being held in a specific location in the embattled Middle Eastern nation.


When “several dozen” U.S. special operation members landed in Syria, however, they were met with gunfire and “while on site, it became apparent the hostages were not there,” one of the officials said. The special operators engaged in a firefight in which ISIS suffered “a good number” casualties, the official said, while the American forces suffered only a single minor injury.


The American forces were able to get back on helicopters and escape.


“Intelligence is not a perfect science,” the senior official said. As to how the intelligence failed and why the hostages were not there, the official said, “The truth is, we don’t know. And that’s the truth. When we got there, they weren’t there. We don’t know why that is.”


Much about the daring mission itself remains a secret -- officials said they did not want to reveal too much about the rescue attempt for fear of spoiling future efforts.


“It was conducted, but was not ultimately successful,” a senior U.S. official told ABC News.


The operation was what senior government officials described as a major undertaking -- involving special operations forces from multiple branches of the military, helicopters, fixed-wing airplanes, and surveillance aircraft.

One can see why the US tried to keep this mission secret, unless of course it was all fabricated overnight.

In other words, we tried to rescue some folks... from the other folks we gave weapons and training to for the past two years, the same folks we are also now trying to kill.

Here's Who Profits From The Ferguson Riots

As Smedley Butler famously wrote "War is a racket," and despite those words being said 80 years ago, the last few weeks of violence in Ferguson have shown him correct as at least two firms have benefitted greatly. As Truthout reports, the majority of the munitions being used by police against protesters are made by Combined Systems or by the Defense Technology brand of the Safariland Group. The following map explores the owners and executives of these companies...


Click image for full interactive version

Source: LittleSis

Analysis of less-lethal weapons deployed against residents of Ferguson, Missouri reveals that police are using decades-old tear gas and riot control agents that may pose health risks to the community.

Central street in #Ferguson now scattered with tear gas canisters after riot police clash with protesters yet again

— Anastasia Churkina (@NastiaChurkina) August 14, 2014

The Bond Market is taking Advantage of Janet Yellen`s Dovishness

By EconMatters


Push the Limits


It has been a common theme in financial markets to push the limits on any possible edge, so if there are restrictions on banks and financial institutions use of leverage, lobby for change, or if activity falls under a certain governmental regulation, alter the activity so that it is classified under a different interpretation so that previous limits can be exceeded.


Talk Up the Dollar ‘Treasury Speak’


It is so common for Wall Street to front run any legislative, Federal Reserve or Treasury policy agenda that policymakers have in the past always been mindful to at least talk the market out of being so blatantly one-sided that they get way offside on the trade. Think for example about the many Treasury officials who talked up the dollar saying publicly that they want a strong dollar when the markets knew that in reality the Treasury was by practice weakening the currency, and wanted to devalue the currency. But by talking up the currency Treasury officials didn`t signal a white flag, and have everybody and their mother shorting the US Dollar, as when trades are that one-sided complications arise when everybody needs to get out on a short squeeze, plus a collapse of the dollar would be highly problematic, so they needed at least a modicum of restraint by markets.


Helicopter Ben Era versus Janet Yellen Dove among Doves Era


However, with Ben Bernanke he was known as ‘Helicopter Ben’ for his dovishness, that if things got bad in the economy, he would literally throw money out of Helicopters at the economy to keep it from sliding too far into recession territory and a downward spiral. I am paraphrasing with considerable leeway here, but you get the gist.


Read More >>> Is Janet Yellen Smarter Than Me?


But even Bernanke would have balanced remarks, almost academic in nature to show that he played Devil`s advocate on the pluses and minuses of fed policy initiatives. However, Janet Yellen has taken dovishnessto an all-time high or low depending upon your perspective, there is no pretense of academic balance in her stance on monetary policy, and markets have not only picked up on this, but they are taking advantage of her dovishness to get way off sides on trades and financial markets.


Run the Fundamental Numbers


Let us just take the bond market, there are other markets that are bubbly, but let us look at the 10-year bond, as the level of irresponsible risk taking in this market is really unprecedented given the circumstances in the economy. Yes one can be irresponsible and take excessive risks in any market including those conservative bonds. We saw some of the froth come out of the high yield junk bond market last month, but treasury market speculation has been untouched, and is as one-sided as I have seen it given the fundamentals in the economy, and is really bizarre to say the least.


Read More >>> The Bond Market Explained for Mohamed El-Erian


For example, the 10-Year Bond has a yield of 2.4%, the inflation rate is somewhere in the 2% range, and going higher as some of the lower print months drop out of the annual 12 month calculation set, so the trend for inflation is a right angle on the charts, 2% and rising. The economy has been growing around 2-2.5%, and each year is slightly stronger than the previous year. The Unemployment rate is near 6%, and the economy is producing more jobs on an annual basis than at any other time since 1997, plus the amount of available job openings are at a robust 4.7 million. The most since 2001 for those who want to employ the ‘labor slack’ argument to downgrade the robust job market of 2014. Sure the economy may not be perfect but when is it ever perfect, remember a couple of years ago when a 40k employment month was the norm?


The Numbers Just Don`t Make Sense


So on a forward basis let us just say the inflation rate is 2.1%, subtract this from the 10-year yield of 2.4%, and an investor in these bonds is getting paid 30 basis points or 0.3% to hold these bonds over a ten year borrowing time frame with budgets set to soar once the entitlements kick in during this ten year borrowing window for the government. Factor in borrowing costs of 15 to 25 basis points, let us say 15 for the sake of argument, and the investor is getting paid 15 basis points for taking this kind of risk over a ten year time frame with rates by everyone`s account set to rise sooner than later, maybe as soon as the first quarter of 2015 a la James Bullard.  


Excessive Size Leads to Excessive Losses on the Backend of the Trade


The only way this trade makes any sense is if a financial institution loads up such a massive size that the arbitrage carry makes sense on a ‘short-term’ basis, and they can push bond prices higher and realize price gains on these investments. And therein lies the insane risk to the financial stability of markets that the Federal Reserve through excessive dovishness is incentivizing with these ultra-dovish market expectations that enable excessive borrowing at extra-ordinarily low rates, and buy anything with a positive yield carry trade regardless of the long term risks involved. 


Read More >>> The Oil Market QE Premium Is Coming out of Price


Have to Talk Up opposing side of Policy Agenda


This is why government officials from the Treasury on down have always talked up the other side of the trade that they are making to avoid extreme risk taking in financial markets, and what Janet Yellen has failed to master in her short stint as Chairperson. It is going to be her undoing as Chairperson, as basically Janet Yellen`s dovishness has been taken for granted to such a degree, that bond traders effectively think they can get away with murder, that is if excessive risk taking relative to the fundamentals of finance was a criminal offense. Janet Yellen is a dovish doormat for financial markets, and all one had to do is look at the fundamentals of financial markets to come to this conclusion, financial markets are taking advantage of her dovishness to take risks that just don`t make any rational, or fundamental sense from a risk reward perspective!


Bond Stampede


There is no way these bond investors are holding all these bonds for 10 years with a 15 basis point spread return, so Janet Yellen is setting the stage for the biggest stampede in the history of the bond market as the rate hike cycle begins, even the markets have the first rate coming at the halfway point of 2015 with a 50% certainty. 


Janet Yellen Needs to better Prepare Markets for Inevitable Rate Rises


The sheer size of the trade that she has encouraged, and the exodus from this non-fundamentally based trade, is going to severely, and negatively destabilize not only the bond market, but inflict major turmoil on many derivative asset classes as this massive stampede out of bonds begins. This moment is going to be unprecedented in the bond market, something that no one is prepared for, or taking any steps to hedge against, because where is the safe haven, gold – in a rising rate environment? Janet Yellen needs to start talking more hawkish just to lessen the severity and market destabilization of the stampede out of bonds to get some investors out before the stampede begins in full force. 


Bond Market Crash looks on the Horizon thanks to Federal Reserve Dovishness


At this pace the bond market could crash with a 2.4% yield and the Fed six months possibly from the first of many rate rises, she needs to better prepare financial markets for the inevitability of rate rises, as right now they are so unprepared like the village where the boy who cried wolf, when the wolf comes the village or in this case market participants are completely shocked and unprepared for the carnage that ensues. 


The stampede out of bonds is going to be unprecedented in nature because there is no fundamental reason in the economy to have a 25 basis point fed funds rate with a 6% unemployment rate, and a 2.4% yield on a 10-year bond. It is just bizarre once one does the math, it is the epitome of irresponsible risk taking by bond investors, and going to end very badly from the way interest rate expectations are being managed by the Federal Reserve. Get more Hawkish Janet Yellen, and start at Jackson Hole, as traders are already discounting this speech once again, in short they don`t respect you, and are taking advantage of your dovishness! 


The Federal Reserve cannot have their cake and eat it too on this one because on one hand they want to keep excessively dovish expectations regarding rate rises, but yet on the other hand expect markets not to have to ‘overreact’ when needing to re-price financial assets because now ‘interest rate expectations’ are behind the curve and need to catch up with the speed in which the Fed is forced to raise rates to have interest rate policy more in line with a 5.5% unemployment rate in 2015. 


© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle

Alternative Measures Suggest Weaker Economy

Submitted by Lance Roberts of STA Wealth Management,

There is much hope pinned on continuing economic recovery in the United States despite a deterioration of the global economy virtually everywhere else. According to the May 2014 Blue Chip Economic Consensus Forecasts:

"U.S. real GDP is expected to increase by 2.4 percent in 2014 as a whole, 0.5 of a percentage point lower than the 2.9 percent growth rate projected in the February 2014 forecast. For 2015 the consensus forecast now expects an overall 3.0 percent growth in U.S. real GDP, same as the February 2014 forecast."

Let's do some quick math. Real, inflation-adjusted, Gross Domestic Product (GDP) for the first quarter of 2014 was -2.13% annualized after being revised slightly higher from -2.96%. The first estimate of the second quarter's economic growth was 3.89% annualized. If we average the two together, the first half of 2014 is currently sporting an annualized growth rate of 0.88%. Got it?

Here is my point. In order for real economic growth to hit the current target of 2.4% annualized for the entire year, the final two-quarters of 2014 must hit a minimum growth rate of 3.92%. The chart below shows the history of quarterly annual growth rates of the economy since 2006.

There have only been 2 out of the past 34-quarters that have yielded an economic growth rate of greater than 3.92%.  There have been ZERO times that real GDP annualized growth has hit 3.92% consecutively.

While it was not surprising to see a bounce back in activity after a contractionary first quarter, there are several economic data points that suggest that sustainability of the bounce is unlikely.

Trade Deficit

The recent release of the trade deficit numbers had economists scrambling to upgrade estimates of Q2 economic growth due to a contraction in the deficit.  Net exports, exports minus imports, is one of the inputs into the calculation of GDP as follows:

GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).

Y = C + I + G + (X − M)

In Q2, exports rose by $265 million while imports declined by $2.86 billion dollars.  Therefore, given that two negatives make a positive, the net result of $3.125 billion added to economic growth estimates.

Let's step back for a moment and take a look at the what the numbers are really telling us. First, we are already aware that the Euro Area and Japanese economies are slowing markedly. Therefore, it is not surprising to see exports only increase by $265 million in the most recent quarter.

More disturbing is the drop in imports of $2.86 billion. In an economy that is almost 70% driven by consumption, IF economic strength were gaining traction in the U.S. then consumers should be buying greater amounts of "stuff" thereby increasing imports. The drop in imports suggests differently and is confirmed by weak rates of annualized retail sales growth.


In an economy where activity is beginning to surge, there should also be a pick up in the prices of commodities as demand for those base components of production increases. As shown in the chart below this is hardly the case.

If you look at the chart above you will see the relative increase in commodity prices as the economy rebounded from the lows in 2009. However, as economic growth rates peaked in 2011 and has slipped into a sluggish pattern of "bounce and decline," the demand for commodities has waned leading to a relative price decline.

You can see clearly the rebound in commodity prices following the sluggish Q1 GDP growth; however, the current resumption of weak commodity prices suggest that Q2 may be the best economic growth we see this year.

Baltic Dry Index

I recently discussed the Baltic Dry Index in relation to inflationary pressures in the economy. (Read "Inflation, Will The Fed Move Too Soon?) To wit:

"One measure of 'real activity' on a global basis can be seen in the Baltic Dry Index, which is a non-traded index of shipping prices. Increases in demand to ship dry goods globally should be reflected in higher shipping costs."

The decline in the Baltic Dry Index also suggests that economic activity globally remains very weak. This was recently confirmed, as stated above, by the recent drops in economic growth in the EuroArea and Japan. It is highly unlikely that the U.S. can rebuff the drag created by its major trading partners in the near term which suggests that lower rates of economic growth should be expected in the quarters ahead.

Interest Rates

Lastly, interest rates are directly tied to the annual rate of economic growth in the economy. During periods of increasing economic activity, where demand for credit rises, interest rates also increase. When the economy begins to slow down, interest rates decline. This is shown in the very long term chart below.

Since the beginning of this year interest rates have been on the decline which clearly suggests that real underlying economic activity is far weaker than statistical headline data suggests.

The Real Problem

While these alternative indicators all suggest that real economic activity is likely to be somewhat disappointing in the quarters ahead, there is a bigger issue that needs to realized by investors.

Throughout history, the largest corrections in equity markets have all occurred during recessions. The issue is that economists and analysts never include the potential of recessionary drags in their forecast. For example, the Congressional Budget Office, as shown in the chart below, estimates that:

"Real GDP is projected to grow by 3.1 percent this year, by 3.4 percent in 2015 and 2016, and by 2.7 percent in 2017.

Although CBO projects that GDP will expand at the same rate as potential GDP, CBO also projects, on the basis of historical experience, that the level of GDP will fall slightly short of its potential, on average, from 2018 through 2024."

The problem with the Congressional Budget Office, along with the OECD and most other economic forecasting agencies and economists, is that they never include the possibility of a recession in the forecasts even though they happen on a fairly regular basis.

For example, in 2000 the CBO estimated that the U.S. would be running a budget surplus in 2010 rather than a deficit in excess of $1 Trillion. The error that was made was not forecasting the likelyhood of a recession in their models which would have decreased economic activity and tax revenues and increased government spending.

The same error is once again being made. The current economic recovery is already the fifth longest in history. With already very sluggish growth domestically, declining economic growth internationally, and an inability to spur wage and employment growth above population increases, the risk of a recession in the next 24 months is rising. This risk begins to increase materially if the Federal Reserve does indeed begin to increase interest rates early next year.

Expectations are very likely well ahead of reality at the current time. This increases the risk of disappointment in the months and quarters ahead which could be a negative for the markets. This risk increases as the Federal Reserve winds down their monetary interventions in October. While there is currently nothing to suggest that the market is about to enter a major mean reverting correction, or any evidence of a recession immediately present, it is worth remembering that there was little evidence of those outcomes in 2000 or 2008 to those that were not paying attention.


Car Repos Soar 70% As Auto Subprime Bubble Pops; "It's Contained" Promises Fed

While on the surface the US economy has been chugging along from GDP-crashing "snow in the winter" to GDP-cratering "warmer|cooler than expected weather in the spring|summer|fall", with bouts of GDP-boosting inventory accumulation inbetween, in recent months two very disturbing trends about that all important dynamo behind the economy, the US consumer, have emerged.

On one hand we wrote three weeks ago that a "shocking" 77 million, or one third, of Americans face debt collectiors: a statistic which crushes any suggestion that US household credit is substantially improving based on trends in 30, 60, or 90-day delinquency, as it means that the real pain is not at the near-end of the default/delinquency timetable, but the far end, which incidentally has just as dire an impact on one's credit score as a plain vanilla default (and explains why none other than Fair Issac has jumped in to "adjust" its credit methodology to artificially boost FICO scores of these millions of Americans).

On the other hand, we have been closely following the ongoing deterioration of the car subprime loan bubble: something that both Bloomberg and the Fed have both also been paying close attention to recently, yet a bubble which nobody wants to burst, because as we wrote several days ago, it is none other than the subprime car loan bubble that allowed car production to surge the most last month since Obama's Cash for Clunkers capital misallocation program, in the process lifting overall manufacturing and Industrial Production, and thus GDP.

Earlier today Experian released its latest, Q2, metrics that tie these two very worrying trends together, namely the trend in delinquencies, defaults and repossessions.

As NBC summarizes: "The repo man is getting very busy as a growing number of car and truck owners are struggling to make their monthly auto loan payments. Experian, which analyses millions of auto loans, said Wednesday that the percentage of those loans that were delinquent or ended up in default with the vehicle being repossessed surged in the second quarter of this year."

Hyperbole? Hardly. In fact, the auto loan subprime bubble may be the latest to burst (after student loans) as the rate of car repossessions jumped 70.2 percent in the second quarter, with much of that increase coming from finance companies not run by automakers, banks or credit unions. The good news: the percentage of auto loans that end in default is just 0.62% of all auto loans. However, as everyone but the Fed knows, what matters is the flow, not the stock, and the direction and acceleration in defaults simply means that the maximum saturation point has been reached and going forward lenders will experience ever greater losses, which in turn will limit their willingness to offer subprime loans to US consumers desperate to find a house (because clearly one doesn't need to home when one can sleep in their Chevy Tahoe).

Experian also reported that the 30-day delinquency rate was up 0.2 percent and the 60-day rate rose 7 percent in the quarter. "We're starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time; however, we have to keep in mind that these percentages are still extremely low," said Melinda Zabritski, senior director of automotive finance for Experian Automotive.

A chart of the Y/Y change in 60-day delinquency rates as of Q1:

Zabritski added via CNBC that "The number of delinquencies and repossessions rising is what we would expect as the auto industry sells more vehicles," "But this slight uptick is one to keep an eye on." The surge in delinquencies and repossessions is being driven primarily by borrowers with subprime and deep subprime credit scores.

The main reason to keep an eye on this "slight uptick" is that the underlying notional of total auto loan balances just hit a new all time high: in the second quarter climbed 11.7 percent to an all-time high of $839 billion, according to Experian. It doesn't take much of a deterioration in payment terms and credit quality before bad loans surge when the underlying debt is hitting record notionals quarter after quarter.

Some data: the average charge-off was $8,149 in the second quarter up $932 compared to the same period of 2013, and rapidly rising.

Of course, it wouldn't be a CNBC report if it didn't end on a positive note:

Zabritski knows many people are worried the industry is creating a financial storm that will end badly, but she says subprime sales are still far below normal.


"The growth in subprime auto loans looks dramatic because it was so restricted in the last few years," she said. "But this is not mismanaged, rapid growth. We are still well below levels we saw during the recession."

Because somehow one can compare a period in which the Fed has a $4.4 trillion in balance sheet leverage with a period in which... it doesn't? Good to know then that at least consumer subprime lending is not as bad as it was then, and instead all of the Fed's proceeds have simply made their way into the bubble of a stock market.

Finally, for the curious, here are some charts from the most recent, Q1, Experian presentation on the matter. We will update these once the latest slides are unveiled by the credit company.

The average credit score on top leased models:


The average loan vs lease payment for the top 10 most popular car models.


The top New loan lenders:


And the top Used loan lenders:


But the one reason we know the subprime auto loan bubble has burst and is about to lead to another round of devastation around the nation is one simple statement: "The New York Fed dove into lending data, and its economists found that the bubble fears may be misplaced." In other words, it is "contained."

Hm... where have we heard that before?

*  *  *

Don't worry though - it's not as bas as the peak of the recession!!!

"Not being as bad yet as the last bubble peak" = the new normal.

— Rudolf E. Havenstein (@RudyHavenstein) August 20, 2014

It's Official: "We Are All Terrorists Now"

On the heels of the gruesome and disgraceful ISIS clip of the beheading of American journalist James Foley, The UK's Scotland Yard, according to The Guardian, warned the public that

"viewing, downloading or disseminating the video within the UK might constitute a criminal offence under terrorism legislation."

In other words

'if you watch terrorism, you're also a terrorist'.

*  *  * 

Of course, there is always this test...


and the definitive chart of identfying terrorists...


*  *  *

Simply put - we are all terrorists now.

Argentina Stuns Bondholders With Scorched-Earth "Cramdown" Plan

With the impasse over the latest Argentina default going nowhere fast, late last night president Kirchner stunned its creditors when she announced what amounts to a cramdown plan for holdouts, in which all bonds would be stripped of their existing indentures and converted to local law bonds. Or, as some would call it, a "scorched earth" transaction that burns all bridges, and goodwill, with the international creditor community and likely leaves Argentina unable to access global capital markets for the foreseeable future.

As part of its transaction Argentina would bypass the order issued by Judge Griesa halting payments to all creditors, not just the holdouts, and resume normalcy for the 90%+ of restructured bondholders while leaving Elliott, Aurelius and the like with little to no recourse aside from holding on to claims which would be two swaps behind, and with essentially no legal standing as it would completely bypass the Bank of New York (whom it would remove as trustee) custodian payment process and allow Argentina to make payments directly to those creditors it sees fit.

In essence, what Argentina plans to do is the opposite of what Greece did in 2012 when it defaulted on existing bonds, and swaped over into English-law bonds as an incentive for existing creditors, in effect promising it would never do it again. What Argentina has just shown is how easy it would be to "cramdown" bondholders who thought their "strong" covenants were safe when in reality all it takes is a government order to strip any and all of their indenture protection. Needless to say this has a very negative implication for Argentina's future ability to raise capital in the international arena for the near, and longer-term (at least until the ZIRP yield junkies come crawling back hoping to collect 10% if only for one year; the year after that will be some other Portfolio Manager's problem).

According to Bloomberg, the government will submit a bill to Congress that lets overseas debt holders swap into new bonds governed by domestic law with the same terms, President Cristina Fernandez de Kirchner said in a nationwide address yesterday. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp., the current trustee.

Holders of Argentina’s $30 billion of overseas bonds have been in limbo since U.S. District Court Judge Thomas Griesa blocked the nation’s attempt to pay $539 million in interest due by July 30. His ruling was meant to compel Argentina to resolve unpaid debts from its 2001 default. While most creditors agreed to provide debt relief, hedge funds led by billionaire Paul Singer’s Elliott Management Corp. refused and successfully sued for full repayment in U.S. court.


“The bigger picture hasn’t changed at all,” Will Nef, who helps manage $3.2 billion of emerging-market debt at Union Bancaire Privee in Zurich, said by phone today. “Argentina is still locked out of international credit markets because the issue with the holdouts remains unresolved.”

It may well be locked out, but if this plan goes through, it will remain in the good graces of its restructured bondholders, while taking the last bit of leverage the holdouts have. However, what is worse are the negative implications for international bondholder contractual terms.

Bloomberg has more on the details of the actual proposed swap:

Argentina plans to create a separate account for the holdout creditors such as Elliott, who own 7.6 percent of debt from 2001 and didn’t accept the government’s previous debt swaps. Payments for holdouts would be deposited under the same terms as the rest of its restructured debt, regardless of whether they decide to accept the swap. 


Creditors opting to keep their notes will also get payments locally under the plan, Fernandez said yesterday. Stephen Spruiell, a spokesman for New York-based Elliott, didn’t immediately reply to an e-mail seeking comment.


Daniel Pollack, a court-appointed mediator for the talks between Argentina and the holdouts, didn’t immediately return an e-mail seeking comment on the government’s proposal.

Curiously, alongside the announcement, with the situation suddenly quite "fluid", ISDA pushed back the date for the auction to settle Argentina’s credit-default swaps to after Sept. 2 from Aug. 21, according to its website. Argentina’s failure to pay interest on its bonds triggered a credit event and settlement of $1 billion of the default swaps.

Amusingly, as Credit Suisse's Casey Reckman summarizes, and who was quite negative on the announcement as per his overnight note, the Argentina plan would likely result in what is a contempt of court to Judge Griesa. From Bloomberg:

  • Foreign-law exchange bonds could be dropped from main Emerging Markets bond indexes if operation is completed, which could lead some investors to sell their holdings, Credit Suisse economist Casey Reckman writes in report.
  • Strategy could indicate reduced govt willingness to settle with holdout creditors once the Rights Upon Future Offers (RUFO) clause expires at year end
  • Sees increased risk that govt will leave the holdout issue for the subsequent administration to resolve
  • Debt swap would likely violate U.S. Judge Thomas Griesa’s orders against evading his pari passu ruling, which could result in Argentina being held in contempt of court
  • U.S. based financial intermediaries and investors could be wary of risking contempt themselves if they were to participate
  • While contempt of court may have few practical implications, it could further limit the already reduced potential for foreign financing flows until situation is resolved
  • Renewed motivation for settlement would probably have to be driven by economic circumstances, namely a significant decline in international reserves that threatens govt’s ability to continue servicing its USD-denominated obligations

In other words, in order to preserve some optionality, what is next on Elliott's agenda, would be nothing less than crushing the Argentina's economy, depleting the central bank's reserves, which at last check were just under $30 billion, or a little more than Elliott's AUM, and send the CFK administration packing. 

Can he do it? We eagerly await to find out. In the meantime, any Argentina "assets" abroad, be they naval or otherwise, are once again fair rehypothecation game.

Finally, keep an eye on the Argentina bond market where this development will likely play out on accelerated basis, now that Argentina has confirmed it will play "scorched earth" hardball with creditors.

Ferguson Cop Points Gun At Protesters And Press, Screams "I Will F***ing Kill You", Has Been "Relocated"

In the aftermath of recent violent events and now that even the US Attorney General has arrived, one would assume that the Ferguson police had at least some "sensitivity" training about how to approach protesters, especially those "armed" with cameras. Not in this case. The footage below out of Ferguson shows a police officer pointing his gun directly at protesters and reporters while screaming "I’m going to f***ing kill you!"

The clip shows a Ferguson officer with his gun raised pointing it directly at a citizen journalist who was live streaming at the time: the incident was witnessed by Infowars reporter Joe Biggs who was also filming the incident.

"My hands are up bro, my hands are up," states the journalist before the cop responds, "I’m going to f***ing kill you, get back, get back!"

"You’re going to kill him?” asks another individual before the journalist asks, “did he just threaten to kill me?"

When the cop is asked for his name he responds, "go fuck yourself."

It didn't end there.

As Infowars reports, "another clip shows the officer pointing his gun as protesters demand he lower the weapon. A second cop intervenes to make the officer lower his weapon as more irate demonstrators demand to know the officer’s name."

The officer’s response to people asking for his name almost immediately prompted the launch of the Twitter hashtag #officergofuckyourself.

Biggs live tweeted the incident, and also took this photograph of the cop.

The incident is certain to provoke curiosity as to just how the local Police department is handling the de-escalation of local tensions.

As for police officer #officergofuckyourself, it appears he is no longer "on location."

Quick work by ACLU: Highway patrol called. They identified the cop. He will no longer be in ferguson.

— Vanita Gupta (@ACLUVanita) August 20, 2014

One also wonders: if not in Ferguson, just where can this pleasant, if "relocated", individual be encountered?

Gold, Complacency, & Why Hookers And Bankers Share The Same Neighborhoods

Submitted by Tim Price and Simon Black of Sovereign Man blog,

Sometimes I am convinced it was completely by design, and not a weird little coincidence, that one of Germany’s most sprawling red light districts is just steps away from the European Central Bank.

This fact becomes comically obvious right around happy hour... as self-congratulatory ECB economists and their bureaucratic bank underlings crowd the bars and cafes after work which are simultaneously frequented by pimps, thugs, and other assorted low-lifes.

One would be forgiven for legitimately asking the question: which of these professions has done more damage to humanity?

My [fiat] money’s on the bankers.

These are the same financial luminaries who, recently, crowded aboard the good idea bus and decided to take interest rates NEGATIVE.

Their logic was that prices aren’t rising enough. This was actually the headline this morning that ran across the Rai (Italian news) ticker while I was consuming some egg-like substance at the hotel breakfast buffet this morning in Rome.

The newsman said something to the effect of “Low inflation makes economic problems worse in Europe.”

Ah, yes. Precisely. The problem isn’t an absurd level of over-regulation, massive unsustainable debt, insolvent banking systems, idiotic politicians, etc.

THE problem plaguing the entire continent... the problem behind sluggish growth for all these years... is that consumers aren’t getting screwed fast enough.

It’s hard to even know where to begin with such an epic level of stupidity. First of all, it’s not even true.

Having just spent the last few months traveling across most of the continent, I was astounded to see the speed with which prices had risen in many places.

I just capped off a week-long vacation with my fellow teammates at Sovereign Man in Italy... same place as last year... and I was charged a whopping 50% increase over last year’s rates.

But this sort of truth doesn’t matter to an economist who actually believes in his ‘science’. It is this ‘science’ of economics which tells us that outsized government debts are irrelevant. That awarding the power to conjure paper money out of thin air is a sound, credible system.

Yet it’s not working. Much of Europe (like Italy) has fallen back into recession.

Even here in Germany, which is supposed to be some sort of econo-mythical superhero carrying the rest of Europe around on its shoulders, the government just announced that the economy contracted last quarter.

Whatever these economic policymakers are doing, it’s obviously not working. So naturally the solution is to try more of the same. Much more.

They’ve already taken certain interest rates into negative territory. The expectation now is that they’ll ratchet rates even further into negative territory.

In doing so, they are effectively screwing hundreds of millions of people. Every single person on the continent who is a responsible saver. Every pensioner. Every retired schoolteacher. Every student. Everyone who works hard for a living and can already barely make ends meet.

Their lives are all about to get a lot more difficult.

Even for the well-heeled, life has become quite stressful. Think about it– there’s almost no place left anymore to hold your savings.

Putting cash in a bank practically GUARANTEES that you will lose money on an inflation-adjusted basis. Stocks are at precarious all-time highs. Bonds are at all-time highs. Many real estate markets are back in bubble territory.

These people have destabilized nearly every major asset class in existence.

On the balance, I’d rather deal with the seedier characters in this neighborhood rather than the suitpanted PhDs pretending to do honorable work.

I want to share more with you about this… not only my thoughts, but those of my colleague Tim Price.

Tim is a regular contributor to this column and one of the few people in professional finance for whom I have tremendous respect.

Tim joined us earlier this week on our group vacation in Italy, and I fortunately had the presence of mind to record our conversation; his insights are absolutely not to be missed.

I encourage you to give a listen here: (click image for link)

Hawkish Fed Sends USD, Bond Yields Soaring; Stocks Dump & Pump

The last 2 days have seen the USD index rise at its fastest pace in almost 4 months, closing in on 1-year highs. Led by JPY and EUR weakness, the USD is up over 1% this week (which is set for the best week in 9 months). While stocks shrugged off the hawkish minutes initial kneejerk lower and surged towards new record highs, credit markets were not as exuberant about the great suck out of liquidity (and how they'll manage to roll the wall of debt forthcoming). VIX was slammed back to one-month lows (even as the Fed admitted greater uncertainty) slamming stocks higher. Treasury yields rose notably (with the short-end underperforming) as 2Y-5Y up 5-6bps, 10-30Y up 1-3bps.  Gold and silver drifted modestly lower and oil jerked higher. Copper was up from earlier on China restocking rumors. Into the close, stocks faded quickly - rather disappointingly ruining mainstream media's "new record high" headlines. Janet, save us....

Some context...


Stocks dipped and ripped on FOMC...


Thanks to VIX...


As the USD pushed on higher


to one-year highs...


But credit wasn't buying the fed tightening


and the long-end of the bond curve weakened but bear flattened...


but the whole curve remains higher in yield on the week


Gold and silver slipped modestly, oil surged on FOMC. Copper had a big day after China restocking chatter...


Charts: Bloomberg

Bonus Chart: AAPL Hit Record Highs...

Goldman Post-Mortem: Minutes Have More Hawkish Tone

Via Goldman's Jan Hatzius,

BOTTOM LINE: The July FOMC minutes generally had a slightly hawkish tone, emphasizing that labor market slack had improved faster than expected and that the labor market was now closer to what might be considered normal in the longer run. Separately, there was an extended discussion of exit strategy, at which the Board staff laid out a framework that was well received by meeting participants.


1. Regarding the assessment of the labor market, many Committee members agreed that a number of indicators of labor market conditions had "improved more in recent months than they had anticipated earlier." Many members further noted that the FOMC statement's "characterization of [significant] labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated." The broader set of meeting participants agreed that the rate of improvement in the labor market had been faster than anticipated, and that "conditions had moved noticeably closer to those viewed as normal in the longer run." Overall, these remarks suggest that the change in the labor market language found in the July FOMC statement—shifting focus to broader labor market indicators rather than the unemployment rate specifically—was not intended to be a dovish change, as some commentators thought at the time. To the contrary, the discussion of labor market developments in the minutes had a hawkish tilt.

2. In a similar vein, the staff revised down its estimate of potential GDP growth, in light of the continued outperformance of labor market indicators despite disappointing GDP growth. This suggests that the staff reduced their estimate for the size of the output gap, a slightly hawkish signal.

3. The discussion on inflation was less substantive than on the labor market, with "most" participants now judging that downside risks had diminished. Committee members agreed that it was appropriate to recognize that inflation had moved closer to the Committee's objective in the statement, suggesting that they viewed the recent uptick in the inflation trend as having some staying power.

4. The recovery in housing was described as "slow" by most participants, facing headwinds such as high levels of student loan debt and tight access to credit. Some felt that "factors restraining residential construction might persist, damping the housing recovery for some time."

5. On financial imbalances, participants noted some evidence of stretched valuations in specific markets, but on the whole felt that the phenomenon was not widespread and that "vulnerabilities in the financial system were at low to moderate levels." This is consistent with prior communications from Fed officials.

6. There was an extended discussion of exit strategy. The staff presented a "possible approach," for which participants "expressed general support." Key aspects of the approach apparently included: (1) continuing to target a range of 25 basis points for the federal funds rate (i.e., the first hike could be a move to a target range of 25 - 50 basis points); (2) the top of the range would be set equal to the interest rate paid on excess reserves (IOER) and the bottom of the range set equal to the rate on the fixed-rate O/N RRP facility; (3) the size of the O/N RRP facility should "be only as large as needed to effective monetary policy implementation and should be phased out when it is no longer needed for that purpose"; and (4) most favored reducing or ending portfolio reinvestment after the first increase in the target range for the fed funds rate. Some felt that the O/N RRP rate should be set below the bottom of the target range, which would further discourage use of the facility, but many participants thought such a strategy would provide insufficient control over the level of rates.

US To Sue Angelo Mozilo, Again

Nearly a decade after Countrywide was sold to Bank of America in what has become the worst M&A deal of all time, bar none, having resulted in tens of billions of legal charges for Bank of America shareholders, the most recent of which was revealed also minutes ago when Bank of America was said to reach a record $17 billion settlement with the government over the sale of mortgage-backed securities, moments ago Bloomberg announced that none other than Agent Orange himself, Angelo Mozilo, is about to be sued. Again, only this time the lawsuit may actually not be tossed or result in yet another DOJ trademark wristslap.


More from Bloomberg:

Government attorneys plan to sue Mozilo, Countrywide’s former chairman and chief executive officer, and other individuals using the Financial Institutions Reform, Recovery and Enforcement Act, said one person with knowledge of probe. The law, approved by Congress in 1989 in response to savings- and-loan scandals, gives prosecutors 10 years to bring cases and has less stringent liability requirements than criminal charges.


While U.S. prosecutors have notified lawyers that their clients are targets of civil cases, any suit against Mozilo and other individuals may be more than a month away, one of the people said.


The Justice Department has been focused on wrapping up a FIRREA settlement with Bank of America Corp. for about $17 billion over mortgage bonds inherited from its 2008 acquisition of Countrywide and 2009 purchase of Merrill Lynch & Co. The accord, which may be announced as soon as tomorrow,  will penalize the Charlotte, North Carolina-based bank for how securities were marketed to investors, people familiar with the matter have said.


Mozilo said he has “no regrets” about how he ran Countrywide, according to a June 2011 deposition he gave in a lawsuit between the mortgage lender and bond insurer MBIA Inc.     

But why wait so long? Well, before you go high-fiving Eric Holder who is about to arrive in Ferguson, it turns out that the government seemingly waited so long just so it would avoid filing a criminal case against the Moz. As it stands he will merely be slapped with a few civil charges, and promptly settle for a few basis points of what BofA paid him for Countrywide. Bloomberg explains:

More than 12 months after a deadline passed to file criminal charges, U.S. attorneys in Los Angeles are preparing a civil lawsuit against Mozilo and as many as 10 other former Countrywide employees, according to two people with knowledge of the matter.

The government is making a last ditch-effort to hold him accountable for the excesses of the past decade’s subprime-mortgage boom, using a 25-year-old law that has helped the Justice Department win billions of dollars from Wall Street banks, said the people, who weren’t authorized to discuss the case publicly.




U.S. prosecutors dropped a criminal probe of Mozilo in early 2011, a person with knowledge of the matter said at the time. Since then, President Barack Obama’s administration has faced a wave of criticism from public-interest groups, the media and lawmakers who say the government hasn’t held enough individuals accountable for causing the financial crisis.


The Citizens for Responsibility and Ethics in Washington, a watchdog group, sued the Justice Department in June to try to obtain its records detailing investigations of Mozilo and Countrywide. The group faulted the government for failing to prosecute either Mozilo or the company “despite substantial evidence of wrongdoing.”


The SEC’s lawsuit, filed 16 months earlier, accused Mozilo of reassuring Countrywide investors about the quality of the company’s loans, while knowing that its underwriting standards had deteriorated.


Until now, the harshest penalty imposed on Mozilo, 75, has been a $67.5 million accord with the U.S. Securities and Exchange Commission from 2010 to resolve allegations that he misled Countrywide investors. Mozilo agreed to settle the SEC case in October 2010 by paying a $22.5 million fine and disgorging $45 million of gains from stock sales at what the regulator said were inflated prices. Bank of America covered a portion of his penalties.


He earned $535 million from 1999 to 2008, according to compensation-research firm Equilar  Inc. The size of the sanction in the SEC case, in which Mozilo didn’t admit or deny wrongdoing, compared with his pay has fueled public anger that financial executives walked away from the housing bust enriched and mostly unscathed.

Surely the best justice M&A proceeds can buy...

The Market Reacts To The Fed's Minutes

The USD is soaring after somewhat hawkish Fed Minutes (up 1% this week) - pushing up towards critical resistance at 1-year highs. Treasury yields slammed 3-4bps higher and are holding those losses (30Y up 11bps this week). High yield credit is at the worst levels of the day as stocks retrace gains towards record highs. WTI crude jumped 1% on the minutes, back above $96 as gold slipped modestly back below $1290. Stocks, having kneejerked lower (below VWAP) have been ripped back higher by a VIX-slamming algo that decided that FOMC uncertainty is exactly the signal to buy certainty.


VIX lifting stocks...


Nothing else retracing...


and credit at lows of the day...


Charts: Bloomberg

Obama Sending More Troops To Iraq: What's Wrong With These 3 "Boots On The Ground" Headlines

On June 13th, CNN reports President Obama stated:

No troops to Iraq, but other options are being considered.


That was President Barack Obama's message Friday in response to the lightning advance by Sunni militant fighters in Iraq that could threaten the government of Shiite Prime Minister Nuri al-Maliki.


In a statement delivered from the White House South Lawn, Obama said the United States "will not be sending U.S. troops back into combat in Iraq," but that he would be reviewing a range of other options in coming days.


As AP reported on July 25th

The House overwhelmingly passed a resolution Friday that would bar President Barack Obama from sending forces to Iraq in a "sustained combat role" without congressional approval, a bill with greater symbolic than legal effect.

And today, as AP reports

WASHINGTON (AP) — US officials: Military weighs plan to send a small number of additional troops to Iraq.

*  *  *

So BOOTS WILL BE ON THE GROUND - just as President Obama had told the American people they would not be...

Of course we assume these are humanitarian assassination advising troops...

*  *  *

In addition to the fact that President Obama has basically declared war on ISIS... this just happened...


So - all war, all the time...

Hilsenrath Warns Fed Rate-Hike Timing Debate Intensifying

The Wall Street Journal's Jon Hilsenrath unleashed an instantaneous reaction to today's FOMC minutes and the message is clear - markets are much less uncertain than the Fed about the timing (sooner rather than later) of the first rate-hike. The minutes of the meeting, Hilsy notes, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices. The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony.


Via The Wall Street Journal,

Federal Reserve officials debated at their July meeting whether to move sooner than expected to start raising interest rates in light of an improving job market and rising inflation, but decided they needed more evidence before concluding that was the right approach.

The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices.

Most officials agree they are seeing progress away from high unemployment and very low inflation. Some believe this warrants moving toward tighter credit conditions but many others remain unconvinced.

"Many participants noted that if convergence toward the [Fed's] objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated," said the minutes of the July 29-30 meeting.

"Most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation," the minutes said.

Among their concerns: The economy's first-quarter contraction, though seemingly temporary, caused uncertainty about the outlook, as did turmoil in the Middle East and Ukraine, persistent weakness in the housing sector and slow-growing household incomes.

Short-term U.S. rates have been held near zero since December 2008. Most Fed officials believe they can wait until 2015 before raising rates and have encouraged a perception in markets that rate increases won't start until the middle of the year.

Fed Chairwoman Janet Yellen said in testimony to Congress in July that rate hikes might come sooner than planned if unemployment continues to fall faster than expected and if inflation—which has been below the Fed's 2% target for more than two years—moved rapidly toward the goal. The jobless rate was 6.2% in July, down from 7.3% a year earlier.

The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony. She balanced her discussion of early rate hikes by also noting rate increasess might be delayed if the economy underperforms. At the July policy meeting, however, discussion seemed to focus on the possibility of early increases and not late increases.

"Some participants viewed the actual and expected progress toward the [Fed's] goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the [Fed's] unemployment and inflation objectives over the medium term," said the minutes, which don't identify the participants by name or specify the number who held certain views.

The Fed has been saying for months it expects to keep rates near zero for a "considerable time" after it completes a bond-buying program in October. Officials who want early rate increases are pushing the central bank to drop that guidance.

"The guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate," the minutes said.

Ms. Yellen will deliver remarks at the Kansas City Fed's gathering in Jackson Hole, Wyo., on Friday, a chance for her to update the public on her views about how the job market is progressing.

While officials debate the timing of rate increases, they are making progress on ironing out details of how to raise rates. Minutes showed they agreed they will use two levers—interest they pay banks on reserves and interest they pay others such as money market mutual funds—to keep short-term rates in a gradually rising band once the time for rate increases begins.

FOMC Minutes Show Many Members Believe Rates Should Rise Sooner

These are the minutes from when the Fed toned down deflation fears and raised concerns over labor slack, and expectations going in were for a slightly more hawkish tone from the minutes (and perhaps commentary on financial stability - bubbles - and exit strategies). This is what we got:


Sounds pretty hawkish to us...

Pre-FOMC Minutes: S&P Futs 1982.5, 10Y 2.4175%, Gold $1294 , USDJPY 103.40, Oil $95.40

The key section from the minutes:

With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress  toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term. These participants were increasingly uncomfortable with the Committee’s forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate. They suggested that the guidance should more clearly communicate how policy-setting would respond to  the evolution of economic data.

Here is the Fed on the topic of labor slack, or focusing on any and every incremental weakness in the labor market now that all of the Fed's targets have been reached and it is Yellens' job to pound the table on the weaknesses to "justify" ongoing ZIRP:

... some members expressed reservations about describing the extent of underutilization in labor resources more broadly. In particular, they worried that the degree of labor market slack was difficult to characterize succinctly and that the statement language might prove difficult to adjust as labor market conditions continued to improve. Moreover, they were concerned that, despite the improvement in labor market conditions, the new language might be misinterpreted as indicating increased concern about underutilization of labor resources. At the conclusion of the discussion, the Committee agreed to  state that labor market conditions had improved, with the unemployment rate declining further, while also stating that a range of labor market indicators suggested that there remained significant underutilization of labor resources. Many members noted, however, that the characterization of labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated.

Here is the Fed on missing the winter weather forecast:

In particular, although participants generally saw the drop in real GDP in the first quarter as transitory, some noted that it increased uncertainty about the outlook, and they were looking to additional data on production, spending, and labor market developments to shed light on the underlying pace of economic growth. Moreover, despite recent inflation developments, several participants continued to believe that inflation was likely to move back to the Committee’s objective very slowly, thereby warranting a continuation of highly accommodative policy as long as projected inflation remained below 2 percent and longer-term inflation expectations were well anchored.

Here is the Fed lamenting the worst.recovery.ever. and still unable to grasp that it is the Fed's fault there is no recovery for 90% of the population:

Labor compensation was still rising only modestly. Many participants continued to attribute the subdued rise in wages to the remaining slack in the labor market; it was noted that the elevated level of relatively low-paid part-time workers was holding down overall wage increases. Several other participants pointed to reports that wage pressures had increased in some regions and occupations that were experiencing labor shortages or relatively low unemployment. However, a couple of participants indicated that the pass-through of labor costs has been more attenuated since the mid-1980s and that wage pressures might not be a reliable leading indicator of higher inflation.

And last but certainly not least, and in our opinion, most important, is the fact that the Fed still has no idea just how it will "unwind" ZIRP, let alone QE:

Most participants anticipated that, at least initially, the IOER rate would be set at the top of the target range for the federal funds rate, and the ON RRP rate would be set at the bottom of the federal funds target range. Alternatively, some participants suggested the ON RRP rate could be set below the bottom of the federal funds target range, judging that it might be possible to begin the normalization process with minimal or no reliance on an ON RRP facility and increase its role only if necessary. However, many other participants thought that such a strategy might result in insufficient control of money market rates at liftoff, which could cause confusion about the likely path of monetary policy or raise questions about the Committee’s ability to implement policy effectively.

Which leads to the following:

Participants ... stressed the importance of communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalization approach could be made as the situation changed and in light of experience. Participants requested additional analysis from the staff on issues related to normalization as background for further discussion at their next meeting. A few participants also suggested that the Committee should solicit additional information from the public regarding the possible effects of an ON RRP facility, but some others pointed out that the Committee would continue to receive such feedback informally in response to its ongoing communications regarding normalization.

Yep: the Fed will ask the banks how to exit the mess it has created to bailout the banks. In other words, don't hold you breath for a ZIRP end any time soon. But don't worry, the Fed will let you know long in advance of a rate hike it will do so:

Participants agreed that the Committee should provide additional information to the public regarding the details of normalization well before most participants anticipate the first steps in reducing policy accommodation to become appropriate.

Funny stuff, but nothing ever beats this: "As a result, they generally saw the vulnerabilities in the financial system as well contained."

Full minutes: