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Obama's Former Chief Economist Has Some Words Of Encouragement For US Workers

The minimum-wage-hiker-in-chief will not be happy this morning. Former Obama administration economist Alan Krueger has some choice words for the hope-filled living-wage seekers of America:

  • *KRUEGER SAYS WORKERS NEED TO 'RATCHET DOWN WAGE EXPECTATIONS'

Isn't it odd how quickly the views of ethical economists change once they have tenure and the shackles of government-servitude are removed. We don't remember hearing Krueger arguing that a 'fair' wage is a little much to expect in the current environment.

It would appear Mr. Krueger should stop being cynical and just get hopey.








The Drought Goes From Bad To Catastrophic

As we previously commented, when scientists start using phrases such as "the worst drought" and "as bad as you can imagine" to describe what is going on in the western half of the country, you know that things are bad. However, in recent weeks the dreadful situation in California has gone from bad to catastrophic as the U.S. Drought Monitor reported that more than half of the state is now in experiencing 'exceptional' drought, the most severe category available. And most of the state – 81% – currently has one of the two most intense levels of drought.

 

h/t @TimOBrien

 

As WaPo reports,

While California’s problems are particularly severe, that state is not alone in experiencing significant drought right now. There are wide swaths of moderate to severe drought stretching from Oregon to Texas, with problems impacting numerous states west of the Mississippi River.

 

Some of the most severe droughts outside of California are impacting large pockets in Oklahoma, Texas and, particularly, Nevada, where more than half of the state is currently experiencing one of the two most intense drought conditions:

 

 

*  *  *

As we concluded previously,

Most people just assume that this drought will be temporary, but experts tell us that there have been "megadroughts" throughout history in the western half of the United States that have lasted for more than 100 years.

 

If we have entered one of those eras, it is going to fundamentally change life in America.

 

And the frightening thing is that much of the rest of the world is dealing with water scarcity issues right now as well.  In fact, North America is actually in better shape than much of Africa and Asia.  For much more on this, please see my previous article entitled "25 Shocking Facts About The Earth’s Dwindling Water Resources".

 

Without plenty of fresh water, modern civilization is not possible.

 

And right now, the western United States and much of the rest of the world is starting to come to grips with the fact that we could be facing some very serious water shortages in the years ahead.








5 Things To Ponder: The Interest Rate Conundrum

Submitted by Lance Roberts via STA Wealth Management,

After several months of quite complacency, investors were woken up Thursday by a sharp sell off driven by concerns over potential rising inflationary pressures, rising credit default risk and weak undertones to the economic data flows. One of the primary threats that has been readily dismissed by most analysts is the impact from rising interest rates. Last week, the following chart was circulated again which shows that stocks perform well during rising interest rate environments:

Now, this is surely clear evidence that one would want to be long stocks during a rising interest rate environment, right? Not so fast. There are a couple of important points you may want to consider before jumping on the bandwagon.  First, let's look at the specific periods analyzed. 1993-2000 was the massive "technology" driven boom which covers the entire first half of the chart.  2003-2006 was the majority of the real estate/liquidity bubble while the last two periods were during a Fed induced liquidity push. In otherwords, there is little "normalcy" during this entire period.

However, more importantly, is not what happened DURING the periods of rising rates, but rather what happened following those periods. Those mysterious dashed vertical lines on the chart above represent what is NOT being shown to you.  For clarity purposes, we need to look at the entire data series to see what the actual impact of rising rates on the financial markets has been.  I have highlighted peaks in interest rate increases and corresponding events.

The issue with rising interest rates is that higher borrowing costs lead to slower economic activity and a quelling of inflationary pressures. The Federal Reserve believes they can control the economic engine by using monetary policy as a governor. This is kind of like playing "Jango" where the object is to weaken the structure by removing supports without toppling it entirely.  Of course, like the actual game, the Federal Reserve's track record of successfully managing the economy is "poor" at best.

This weekend's reading list is a set of viewpoints on the Federal Reserve and the potential impacts from an increase in interest rates.

1) Rising Rates: The Good, The Bad...No Ugly by Doug Peebles and Ivan Rudolph-Shabinsky via Pragmatic Capitalist

[Note: This piece is really specifically talking about individual bonds versus bond funds.  Bond funds do not mature and are strictly a play on the direction and trend of interest rates. This is an important distinction and a primary reason why I continue to suggest owning bonds in portfolios, rather than bond funds, which reduce portfolio risk and volatility, provide principal conservation and an income stream.]

"By their nature, bonds are generally sensitive to interest-rate movements—when rates rise, prices typically fall. With short-term rates on the way up, other interest rates won’t stay low forever, either. But across all bond sectors, from high grade to high yield, rising rates can have positive effects. We believe investors should see a rise in rates as, ultimately, a good thing for bond portfolios. (And by ultimately, we mean just a few years.)"

"What’s the source of this higher growth? First, as you reinvest the coupon income that your portfolio pays, you’ll be able to reinvest it at higher yields. Income matters: for investors who use bonds to generate income, rising rates change from a threat to an opportunity. Second, as the bonds in your portfolio mature, their price pulls back to par, and you can reinvest their principal value in newer, higher-yielding bonds."

2) Rate Expectations by Buttonwood via The Economist

"This is a crucial question. The Federal Reserve’s benchmark rate averaged 2.96% in the first decade of the 21st century but 5.15% in the 1990s. Imagine the effect on the borrowing costs of mortgage-holders or small businesses if rates moved back to the latter level.

 

Before homeowners and small business breathe too big a sigh of relief, remember that this discussion has concerned the neutral level of rates. Rates could go higher if central banks decide they need to rein back the economy, perhaps because inflation returns. Richard Barwell of Royal Bank of Scotland says there may be too great a belief in 'the miracle of immaculate monetary exit'. This would require monetary stimulus to be withdrawn before the economy recovers, not after, and for central banks’ economic forecasts to be unerringly accurate.

 

Since central banks failed to anticipate the debt crisis of 2007-08, this is an attitude of the purest optimism. Given the debt burden still facing the rich world, the risks of policy failure are enormous."

3) Yields Likely To Keep Falling by Erik Swarts via Market Anthropology

"Despite the strong GDP print yesterday that reinvigorated the raise-rates camp and sparked an almost 4 percent rally in 10-year yields, we continue to feel these participants are once again placing the cart before the horse, when it comes to what Chairwoman Yellen has repeatedly articulated will be a "considerable time" after the QE programs are wound down this October - and when they consider their next policy response.

 

From our perspective, where the rubber meets the road with the specifics of actually raising rates is much further off in the future and only after the markets normalize to this rather significant shift in support - from both a structural and psychological point-of-view. (For more of our thoughts on the effects of this normalization and why we don't find parallels with recent history, see Here)

 

With respect to 10-year yields, the frictions from the end of QE should continue to support the Treasury market and we expect the next step lower in yields to be taken as the markets stroll into August."

4) Investors Underestimating The Path Of Policy by Rain Capital Management

"Interest rates may be the single most powerful force in capital markets.  They are quite literally the cost of money and determine everything from the value of bonds to the price people are willing to pay for equities.  We don’t think for a second that the process of rate normalization will be as uneventful as the market seems to be pricing in.  No bell will ring or date certain set for unwinding what is now an extremely outdated policy stance.  The idea that investors can simply get out of the way when the time comes is unlikely when considering how flatfooted they have been in the midst of interest rate volatility in 2013, rate hikes in 2004, 1994, and so on.

 

Investors aren’t getting paid much to take risk, so they’re taking more risk in an attempt to make up for it.  We’d much rather use this opportunity as a pit stop; a time to fortify portfolios during which the cost of not being fully exposed is minimal but the cost of making a mistake could be large. To paraphrase Warren Buffet, reducing risk may be uncomfortable, but not as uncomfortable as doing something stupid."

5) Fed Creating Bubbles By Inflating Equity Risk Premium byAswath Damodaran via Musings On The Markets

"If you accept the notion that the Fed controls interest rates (that many investors believe and Fed policy makers promote) or even my lesser argument that the Fed has used its powers to keep rates below where they should be for the last few years, the consequences for valuation are immediate. Those lower rates will push up the valuations of all assets, but the lower rates will have a higher value impact on cash flows way into the future than they do on near-term cash flows, making the over valuation larger at higher growth companies.

 

Consequently, a reasonable argument can be made that the Fed has been an active participant in, and perhaps even the generator of, any bubbles, real or perceived, in the market. In my post on market bubbles, I did agree with Ms. Yellen on her overall market judgment (that traditional metrics are sending mixed messages on overall market valuation) and used the ERP for the market, as she did, to back my point. In particular, I noted that the implied equity risk premium for the market at about 5% was high by historical standards (rather than low, which would be a indicator of overvalued stocks). However, breaking the ERP down into an expected stock market return and a risk free rate does point to an overall disquieting trend:"

"Note that all of the expansion in ERP in the last five years has come from the risk free rate coming down and not the return on stocks going up. In fact, the expected return on stocks of 8% at the end of 2013 is a little lower than it was pre-crash in 2007 and if the risk free rate reverts to pre-2008 levels (say 4%), the ERP would be in the danger zone. Put differently, if there is a market bubble, this one is not because stock market investors are behaving with abandon but because the Fed has kept rates too low and the over valuation will be greatest in those sectors with the highest growth."

The last article is most interesting as two of the primary "bullish arguments" has been the spread between earnings yield (the inverse of the P/E ratio) and the interest yield on bonds, and the non-inversion of the yield curve.  I have argued in the past that the so-called "Fed Model" is flawed for many reasons. However, an increase in interest rates will very quickly nullify both of those bullish arguments because the denominator in both cases can rise MUCH faster than the numerator.








Stocks Suffer Worst Losing Streak Since 2011

The year's best performing major index was its biggest loser this week. Trannies tumbled almost 4% - the worst week in 22 months. The rest of the indices fell 2-3% with the Russell 2000 down 4 weeks in a row for the first time since November 2011. Dow ends -0.5% and Russell -4% for 2014. Away from stocks, Treasury yields collapsed today erasing most of the post-GDP losses and ending the week only 3-5bps wider at the long-end and 1.5bps lower at the front-end. 10Y closed under 2.5%. The USD Index mirrored bonds, surging on GDP and then plunging today to end the week up 0.35%. Gold and silver oddly decoupled today (silver lower) ending week down 1% and 2% respectively on the week. Ugly week for WTI crude, ending under $98 (Feb lows) down 4.4%.  High-yield credit spreads rose 9.7% (to over 350bps - worst since Nov 2013) for the worst non-roll week since May 2012.

 

Equities actually held gains post payrolls...

 

But end the week notably lower... Worst Dow Friday in 12 weeks...

 

Builders have tumbled to 9 month lows...

 

Equities caught down to credit's post MH17 warnings this week...

 

Big roundtrip for Treasury yields this week...

 

FX roundtripped too as GDP gains gave way to Jobs losses... still up 0.35% on the week...

 

Gold and Silver oddly decoupled today...

 

But oil prices tumbled the most - down 4.3% - the biggest drop in 7 months...

 

Charts: Bloomberg

Bonus Chart: High-Yield is flashing bright red...

 

Bonus Bonus Chart: Camera-on-a-stick down 15%...








"Genocide Is Permissible" Muses Times Of Israel, Promptly Retracts

The Times Of Israel has removed a provocatively-titled blog post after huge blowback, denunciations, and ridicule across social media. The post - "When Genocide Is Permissible" (in full below) - concludes, "Prime Minister Benjamin Netanyahu clearly stated at the outset of this incursion that his objective is to restore a sustainable quiet for the citizens of Israel. We have already established that it is the responsibility of every government to ensure the safety and security of its people. If political leaders and military experts determine that the only way to achieve its goal of sustaining quiet is through genocide is it then permissible to achieve those responsible goals?" Removal or not, we are sure this will do nothing to endear Israel to the world.

 

The Times Of Israel site Before and After...

h/t @PrisonPlanet

 

And thanks to The Way-Back Machine, here is the full article...

When Genocide Is Permissible (authored by Yochanan Gordon)

Judging by the numbers of casualties on both sides in this almost one-month old war one would be led to the conclusion that Israel has resorted to disproportionate means in fighting a far less- capable enemy. That is as far as what meets the eye. But, it’s now obvious that the US and the UN are completely out of touch with the nature of this foe and are therefore not qualified to dictate or enforce the rules of this war – because when it comes to terror there is much more than meets the eye.

 

I wasn’t aware of this, but it seems that the nature of warfare has undergone a major shift over the years. Where wars were usually waged to defeat the opposing side, today it seems – and judging by the number of foul calls it would indicate – that today’s wars are fought to a draw. I mean, whoever heard of a timeout in war? An NBA Basketball game allows six timeouts for each team during the course of a game, but last I checked this is a war! We are at war with an enemy whose charter calls for the annihilation of our people. Nothing, then, can be considered disproportionate when we are fighting for our very right to live.

 

The sad reality is that Israel gets it, but its hands are being tied by world leaders who over the past six years have insisted they are such good friends with the Jewish state, that they know more regarding its interests than even they do. But there’s going to have to come a time where Israel feels threatened enough where it has no other choice but to defy international warnings – because this is life or death.

 

Most of the reports coming from Gazan officials and leaders since the start of this operation have been either largely exaggerated or patently false. The truth is, it’s not their fault, falsehood and deceit is part of the very fabric of who they are and that will never change. Still however, despite their propensity to lie, when your enemy tells you that they are bent on your destruction you believe them. Similarly, when Khaled Meshal declares that no physical damage to Gaza will dampen their morale or weaken their resolve – they have to be believed. Our sage Gedalia the son of Achikam was given intelligence that Yishmael Ben Nesanyah was plotting to kill him. However, in his piety or rather naiveté Gedalia dismissed the report as a random act of gossip and paid no attention to it. To this day, the day following Rosh Hashana is commemorated as a fast day in the memory of Gedalia who was killed in cold blood on the second day of Rosh Hashana during the meal. They say the definition of insanity is repeating the same mistakes over and over. History is there to teach us lessons and the lesson here is that when your enemy swears to destroy you – you take him seriously.

 

Hamas has stated forthrightly that it idealizes death as much as Israel celebrates life. What other way then is there to deal with an enemy of this nature other than obliterate them completely?

 

News anchors such as those from CNN, BBC and Al-Jazeera have not missed an opportunity to point out the majority of innocent civilians who have lost their lives as a result of this war. But anyone who lives with rocket launchers installed or terror tunnels burrowed in or around the vicinity of their home cannot be considered an innocent civilian. If you’ll counter, that Hamas has been seen abusing civilians who have attempted to leave their homes in response to Israeli warnings to leave – well then, your beginning to come to terms with the nature of this enemy which should automatically cause the rules of standard warfare to be suspended.

 

Everyone agrees that Israel has the right to defend itself as well as the right to exercise that right. Secretary General Ban Ki Moon has declared it, Obama and Kerry have clearly stated that no one could be expected to sit idle as thousands of rockets rain down on the heads of its citizens, placing them in clear and present danger. It seems then that the only point of contention is regarding the measure of punishment meted out in this situation.

 

I will conclude with a question for all the humanitarians out there. Prime Minister Benjamin Netanyahu clearly stated at the outset of this incursion that his objective is to restore a sustainable quiet for the citizens of Israel. We have already established that it is the responsibility of every government to ensure the safety and security of its people. If political leaders and military experts determine that the only way to achieve its goal of sustaining quiet is through genocide is it then permissible to achieve those responsible goals?

*  *  *

The author just apologized...

I wish to express deep regret and beg forgiveness for an article I authored which was posted on 5TJT.com, Times of Israel and was tweeted and shared the world over.

 

I never intended to call to harm any people although my words may have conveyed that message.

 

With that said I pray and hope for a quick peaceful end to the hostilities and that all people learn to coexist with each other in creating a better world for us all.

 

Yochanan Gordon

*  *  *

Well that's ok then...








WHO Warns Ebola Outbreak Out Of Control, "High Risk Of Spread To Other Countries"

Things just went to 11 on the Spinal-Tap amplifier of massive infectious disease outbreaks. As AP reports, the Ebola outbreak that has killed more than 700 people in West Africa is moving faster than the efforts to control the disease, the head of the World Health Organization warned. Dr. Margaret Chan pulled no punches in her direct statement, "If the situation continues to deteriorate, the consequences can be catastrophic in terms of lost lives but also severe socio-economic disruption and a high risk of spread to other countries." Time to panic?

 

As AP reports,

Dr. Margaret Chan, director-general of the World Health Organization, said the meeting in Conakry "must be a turning point" in the battle against Ebola, which is now sickening people in three African capitals for the first time in history.

 

...

 

At least 729 people in four countries — Guinea, Sierra Leone, Liberia and Nigeria — have died since cases first emerged back in March. Two American health workers in Liberia have been infected, and an American man of Liberian descent died in Nigeria from the disease, health authorities there say.

 

While health officials say the virus is transmitted only through direct contact with bodily fluids, many sick patients have refused to go to isolation centers and have infected family members and other caregivers.

 

The fatality rate has been about 60 percent, and the scenes of patients bleeding from the eyes, mouth and ears has led many relatives to keep their sick family members at home instead.

 

...

 

"Constant mutation and adaptation are the survival mechanisms of viruses and other microbes," she said. "We must not give this virus opportunities to deliver more surprises."

 

...

 

"I believe we're only seeing a small portion of the cases out there ... The virus is getting to large, dense, city areas. We're now getting samples (to test) from all over," he said Friday.

 

...

 

Meanwhile, other countries are taking precautions to prevent the spread of Ebola.

*  *  *
Interestingly, worries are spreading quickly as one Commonwealth Games competitor found:

a cyclist from Sierra Leone competed in the Commonwealth Games after being tested for Ebola. Moses Sesay, 32, was admitted to a Glasgow hospital last week after feeling unwell, and doctors tested him for various conditions including Ebola. Sesay was passed fit, and released from hospital in time to compete in the individual time trial on Thursday.

Yahoo has kindly provided this 'panic sheet' for where the nearest CDC quarantine stations are in the US...








India Slams US Global Hegemony By Scuttling Global Trade Deal, Puts Future Of WTO In Doubt

Yesterday we reported that with the Russia-China axis firmly secured, the scramble was on to assure the alliance of that last, and critical, Eurasian powerhouse: India. It was here that Russia had taken the first symbolic step when earlier in the week its central bank announced it had started negotiations to use national currencies in settlements, a process which would culminate with the elimination of the US currency from bilateral settlements.

Russia was not the first nation to assess the key significance of India in concluding perhaps the most important geopolitical axis of the 21st century - we reported that Japan, scrambling to find a natural counterbalance to China with which its relations have regressed back to World War II levels, was also hot and heavy in courting India. “The Japanese are facing huge political problems in China,” said Kondapalli in a phone interview. “So Japanese companies are now looking to shift to other countries. They’re looking at India.”

Of course, for India the problem with a Japanese alliance is that it would also by implication involve the US, the country which has become insolvent and demographically imploding Japan's backer of last and only resort, and thus burn its bridges with both Russia and China. A question emerged: would India embrace the US/Japan axis while foregoing its natural Developing Market, and BRICS, allies, Russia and China.

We now have a clear answer and it is a resounding no, because in what was the latest slap on the face of now crashing on all sides US global hegemony, earlier today India refused to sign a critical global trade dea. Specifically, India's unresolved demands led to the collapse of the first major global trade reform pact in two decades. WTO ministers had already agreed the global reform of customs procedures known as "trade facilitation" in Bali, Indonesia, last December, but were unable to overcome last minute Indian objections and get it into the WTO rule book by a July 31 deadline.

WTO Director-General Roberto Azevedo told trade diplomats in Geneva, just two hours before the final deadline for a deal lapsed at midnight that "we have not been able to find a solution that would allow us to bridge that gap."

Reuters reports that most diplomats had expected the pact to be rubber-stamped this week, marking a unique success in the WTO's 19-year history which, according to some estimates, would add $1 trillion and 21 million jobs to the world economy.

Turns out India was happy to disappoint the globalists: the diplomats were shocked when India unveiled its veto and the eleventh-hour failure drew strong criticism, as well as rumblings about the future of the organisation and the multilateral system it underpins.

"Australia is deeply disappointed that it has not been possible to meet the deadline. This failure is a great blow to the confidence revived in Bali that the WTO can deliver negotiated outcomes," Australian Trade Minister Andrew Robb said on Friday. "There are no winners from this outcome – least of all those in developing countries which would see the biggest gains."

Shockingly, and without any warning, India's stubborn refusal to comply with US demands, may have crushed the WTO as a conduit for international trade, and landed a knockout punch when it comes to future relentless globallization which as is well known over the past 50 or so years, has benefited the US first and foremost.

Broke, debt-monetizing Japan, which as noted previously, was eager to become BFFs with India was amazed by the rebuttal: "A Japanese official familiar with the situation said that while Tokyo reaffirmed its commitment to maintaining and strengthening the multilateral trade system, it was frustrated that such a small group of countries had stymied the overwhelming consensus. "The future of the Doha Round including the Bali package is unclear at this stage," he said."

Others went as far as suggesting the expulsion of India:

Some nations, including the United States, the European Union, Australia, Japan and Norway, have already discussed a plan to exclude India from the agreement and push ahead, officials involved in the talks said.

However, such a move would clearly be an indication that the great globalization experiment is coming to an end: "New Zealand Minister of Overseas Trade, Tim Groser, told Reuters there had been "too much drama" surrounding the negotiations and added that any talk of excluding India was "naive" and counterproductive. "India is the second biggest country by population, a vital part of the world economy and will become even more important. The idea of excluding India is ridiculous." ... "I don't want to be too critical of the Indians. We have to try and pull this together and at the end of the day putting India into a box would not be productive," he added.

And yes, the death of the WTO is already being casually tossed around as a distinct possibility:

Still, the failure of the agreement should signal a move away from monolithic single undertaking agreements that have defined the body for decades, Peter Gallagher, an expert on free trade and the WTO at the University of Adelaide, told Reuters.

 

"I think it's certainly premature to speak about the death of the WTO. I hope we've got to the point where a little bit more realism is going to enter into the negotiating procedures," he said.

But the one country that was most traumatized, was the one that has never before been used to getting a no answer by some "dingy developing world backwater": the United States, and the person most humiliated, who else but John Kerry.

"U.S. Secretary of State John Kerry told Prime Minister Narendra Modi on Friday that India's refusal to sign a global trade deal sent the wrong signal, and he urged New Delhi to work to resolve the row as soon as possible." "Failure to sign the Trade Facilitation Agreement sent a confusing signal and undermined the very image Prime Minister Modi is trying to send about India," a U.S. State Department official told reporters after Kerry's meeting with Modi.

Wrong signal for John Kerry perhaps, who is now beyond the world's "diplomatic" laughing stock and the man who together with Hillary Clinton (and the US president) has made a complete mockery of US global influence in the past 5 years. But just the right signal for China and of course, Russia.








"Sell In May" Worked After All

For mega caps (The Dow) and small caps (The Russell 2000), the old adage "Sell in May" is now working... both are in the red since the end of April (and the S&P is catching down)...

 








Humanity May Face Choice By 2040: Conventional Energy Or Drinking Water

Submitted by Andy Tully via OilPrice.com,

A set of studies based on three years of research concludes that by 2040, the need for drinking water and water for use in energy production will create dire shortages.

Conventional electricity generation is the largest source of water use in most countries. Water is used to cool power plants to keep them functional. Most power utilities don’t even record the amount of water they use.

“It’s a huge problem that the electricity sector do not even realize how much water they actually consume,” says Professor Benjamin Sovacool of Denmark’s Aarhus University, one of the institutions involved in the research. “And together with the fact that we do not have unlimited water resources, it could lead to a serious crisis if nobody acts on it soon.”

The research, which included projections of the availability of water and the growth of the world’s population, found that by 2020, between 30 percent and 40 percent of the planet will no longer have direct access to clean drinking water. The problem could be made even worse if climate change accelerates, creating more heat and causing more water evaporation.

That means humankind must decide how water is used, Sovacool says. “Do we want to spend it on keeping the power plants going or as drinking water? We don’t have enough water to do both,” he says.

The researchers, also from the Vermont Law School and CNA Corporation in the US, a non-profit research institute in Arlington, Va., focused their studies on specific utilities and other energy suppliers in four countries: China, France, India and the United States.

First, they identified each country’s energy needs, then factored in projections of water availability in each country and its population level as far as 2040. In all four cases, they discovered, there will not be enough water by then both to drink and to use at electricity-generating plants.

So how to prevent this conflict? The studies agreed on starting with the simplest solution: Alternative sources of electricity that don’t require massive amounts of water.

The recommendations are improving energy efficiency, conducting more research on alternative cooling mechanisms, logging water use at power plants, making massive investments in solar and wind energy, and abandoning fossil fuel facilities in all areas susceptible to water shortages.

This last proposal may be the most difficult to implement because parched areas now include half of Earth. But Sovacool says it would be worth the investment.

“If we keep doing business as usual, we are facing an insurmountable water shortage – even if water was free, because it’s not a matter of the price,” he says. “There will be no water by 2040 if we keep doing what we’re doing today. There’s no time to waste. We need to act now.”








Market Dip… Or the Start of Something Bigger?

The market has been so overbought for so long, that most investors were ignoring the clear warning signs that we were in trouble.

 

For instance…

 

The Russell 2000 had diverged sharply from the S&P 500:

 

 

 

The same goes for high yield credit:

 

 

There was no shortage of macro or geopolitical problems either.

 

Collectively, Central banks had tapered off their QE purchases by 66%. With Central Banks serving as the largest props for the market over the last five years, this was a massive headwind for stocks. The Russian/Ukraine conflict continued, as did the Israel/Hamas conflict, Abenomics was failing in Japan, and more.

 

Also, there was plenty of other issues to signify that the market was primed for a sell-off. Margin debt (money borrowed to buy stocks) was at a new record high. Bullishness was almost off the charts. And complacency, as measured by the VIX was the highest on record.

 

In short, the market was primed for a collapse. The question now is whether it’s just a correction or the start of something larger.

 

From a historical perspective, the market sees the most crisis in September or October.

 

This pattern (March mini Crisis, September-October BIG Crisis) has occurred in 1907, 1929, 1987, 2000, 2008, and possibly now today.

 

So the odds favor the market staging a brief correction now, with a larger crisis or more coming later this year.

 

 

Banking crises since 1970 by month.

Source: International Business Times.

 

Be prepared.

 

This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://phoenixcapitalmarketing.com/special-reports.html.

 

This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.

 

Best Regards

 

Phoenix Capital Research

 








President Obama To Deliver Hope For The Weekend - Live Feed

What will it be? A gloat about 6 months of 200k-plus jobs growth (but ignoring rise in unemployment and drop in wage growth)? Republican-bashing over the Border Bill? Putin-panning after their phone call this morning (better not discuss costs)? Israel-condemnation (and funding)? Why you should buy the dip because it's patriotic? Stay hopey... (not cyniccy)

 

President Obama is due to speak at 1435ET (so plan accordingly)

JOIN THE LIVE CHAT VISIT WHITEHOUSE.GOV






Fact: Bank Product Prices Rise Faster Than Income & ALL Other Expenses - Fact: YOU Can Drop Bank Product Prices Now!

In BitLicense Part 1, we explained how debilitating the proposed NYS Department of Financial Services rules on Bitcoin companies would have been had it been applied to the last major technological breakthrough - the Internet. In a nutshell, we would all be surfing to slow web pages controlled by bank portals.

In BitLicense Part 2, we clearly demonstrated that while Internet technologies have pushed the prices of practically EVERYTHING down while the performance and quality have risen, bank product pricing has literallly skyrocketed in the same timeframe with no material increase in quality. Why is that? Well...

In BitLicense Part 3, we showed all that the proposed (and applied) regulations act as a monopolistic/oligarchal barrier that prevents smaller companies from pushing innovation to increase product/service quality and from dropping prices. We even went so far as to rewrite the proposed BitLicense to prevent and avoid the inevitable "robbing" of the consumer by entities that are essentially protected by regulation and seemingly immune and definitely resistant to the (vastly consumer beneficial) advances of technological change.

Well, here, we will clearly and succinctly demonstrate exactly how much that 'inevitable "robbing" of the consumer by entities that are essentially protected by regulation and seemingly immune to technological progress actually costs over time in two very simple, but information-packed charts....

 As you can see from the chart above, banking products and services pricing has outstripped every consumer staple in price appreciation since the 1997 base year sans the two year period where the US put over $1 trillion in bailout aid into the industry (which essentially makes the services even more expensive, during said period, to the tax paying, savings orientated consumer)!

The chart above illustrates how banking product pricing growth rates outstrip income growth rates when inflation adjusted and normalized. Why haven't bank profits and revenues reflected such a stark increase in pricing? Because the monies are going to fund the (oft hidden) black holes in bank balance sheets and businesses that caused the 2008 financial crisis. 

Veritaseum's UltraCoin easily beats conventional bank product and service pricing by a magnitude. From the mundane, to the complex. I urge all to read "Using Veritaseum's UltraCoin To Take Direct, Specific Positions On The Argentine Default For As Little As $5!" for an example or download our quick start guide to get an idea of what the new wave of value transfer feels like.

Are you interested in a more competitive financial landscape that breeds better pricing and superior services? Well, now you can do something about it.

  1. Step one: Download the future of money, now! See for yourself what the banking industry is up in arms about. More importantly, witness first hand, the power of Bitcoin technology. 
  2. Step two: Stop the BitLicense proposed legislation that simply furthes the forces that allow these price increases in the face of global price deflation.  We strongly urge you to  voice your own opinions to Superintendent Lawsky, the man who has the authority to put a stop to this overpricing power (althought current actions are heading in the opposite direction) right now.
  3. Step three:Become proficient in the “new” way of performing trades of value. I’m quite confident that once investors, traders, speculators and those in need of hedging services become aware of what’s possible with programmable money, there’s no turning back – regardless of legislation. Think of how far Uber has gotten in the livery industry simply by offering superior services! Look here for a strong example, and remember this is not going though and exchange, is peer to peer, and has less credit or counterparty risk than any comparable product we can think of. Download the future of money, now and experience a new way of trading value - witness a simultaneous increase in value and decrease in price over existing finacial services by taking advantage of the Bitcoin protocol. The Bitcoin protocol is to the banking industry what the Internet protocol was to the media industry.








Why Wait For The Shoe To Hit The Floor? The Case For Selling Now

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Waiting to sell is akin to ignoring the smoke and flames in the crowded theater and hesitating until somebody yells "fire!" to rush for the now-jammed exit.

The stock market is supposed to be a discounting mechanism that anticipates and prices in developments six months out. This discounting mechanism has been broken for so long that many participants seem to have forgotten how to do anything but buy the dips, the Pavlovian response to any decline in stocks that has been rewarded with a food pellet for the past five years.   If the shoe has been dropped, why wait until it hits the floor to sell? But incredibly, that is the overwhelming bias, even after the relatively modest decline of the past week.   Even though the Federal Reserve has made it abundantly clear that it is ending its quantitative easing (QE) bond and mortgage buying program (the Fed has already slashed it from $85 billion a month to $25 billion/month), punters are anticipating a decline in October: in other words, they expect market participants to wait until the shoe hits the floor--i.e. the Fed announces the end of QE--before they dump equities.   Where is the discounting mechanism in this? Since the Fed has announced the end of QE bond purchases, and backed that up by reducing QE by 70%, what sense does it make to wait until the announcement to sell? Waiting to sell is akin to ignoring the smoke and flames in the crowded theater and hesitating until somebody yells "fire!" to rush for the now-jammed exit. If you want to get trampled to death, this is the optimal strategy. If not, it makes no sense.   The other big news is the unexpected rise in labor costs. The basic narrative here is: the Fed has a free hand in keeping interest rates low and spewing free money for financiers because inflation is (officially) tame, and the lousy job market has strangled wage inflation.   The rise in total labor costs (labor overhead and wages/salaries) throws a wrench into that narrative. As total labor costs (healthcare, pensions, taxes, etc. as well as wages) rise, companies will have to raise prices. (They've already reduced the quality and quantity of goods per package to the point that consumers can't help but notice.)   And voila, inflation's fearful form emerges from the murky swamp of officially sanctioned "low inflation forever." This means the Fed will have to allow interest rates to rise, lest a host of other unintended consequences wreak havoc on what's left of the legitimate economy.   What sense does it make to wait for the inevitable announcement that the Fed funds rate is ticking up? Why sit in your chair buying the dip while the smoke and flames spread, waiting until someone yells "fire" before heading for the exit?   Just as a refresher about how much air there is between the classic technical support of the 200-week moving average and the current discounting mechanism is broken heights:     The theater is filling with smoke; do you really want to wait until the crowd rushes for the blocked exits to sell? Why not actually use the discounting mechanism and sell now?   Sadly, there won't be much oxygen left for the buy the dip true believers who remain in their seats, mechanically hitting the "buy" button.

 








The Fed Is Not Your Friend

Submitted by David Stockman via Contra Corner blog,

During the last 64 months “buying the dips” has been a fabulously successful proposition. As shown in the sizzling graph of the NASDAQ 100 below, at it recent peak just under 4,000 this index of the high-growth, big cap non-financials stood at an astonishing 3.5X its March 2009 low. Moreover, during that 64 month period, there were but five minor market corrections—-the three largest reflecting just a 7-8% dip from the previous interim high. And as the index closed upon its current nosebleed heights, the dips became increasingly shallower, meaning that the reward for buying setbacks came early and often.

So yesterday’s 2% dip will undoubtedly be construed as still another buying opportunity by the well-trained seals and computerized algos which populate the Wall Street casino. But that could be a fatal mistake for one overpowering reason: The radical monetary policy experiment behind this parabolic graph is in the final stages of its appointed path toward self-destruction.

 

In fact, this soaring index reflects the most artificial, unsustainable and dangerous Fed created financial bubble ever. That’s because its was the untoward product of a completely busted monetary mechanism.  What has happened is that the Fed’s historic credit expansion channel of monetary transmission has been frozen shut ever since day one of the massive Bernanke monetary expansion which began in August 2007, but went into warp-drive in the weeks after the Lehman event a year later.

Yet this madcap money printing campaign was a drastic error because it failed to account for the immense roadblock to traditional monetary stimulus that had been built up over the last several decades—namely, “peak debt” in the household and business sector. This condition means that monetary easing and drastic interest rate cuts have not elicited a surge of consumer borrowing and business capital spending and hiring as during past business cycle recoveries.

Instead, the entire tsunami of monetary expansion has flowed into the Wall Street gambling channel, inflating drastically every asset class that could be traded, leveraged or hypothecated. Stated differently, 68 months of zero interest rates had virtually no impact outside the the canyons of Wall Street. But inside the casino, they provided virtually free money for the carry trades, causing an endless bid for leveragable and optionable financial assets.

But now that the monetary flood is cresting, financial asset values hang in mid-air like Wile E. Coyote. Stranded there, they are nakedly exposed to market discovery any moment now that the real economy and sustainable corporate earnings dwell in a region far below.

That the credit channel of monetary expansion is busted and done is patently obvious in the data on the household sector. Below is both the current track of total household debt since the December 2007 peak, and the prior Greenspan housing bubble track. The latter  turns out to be the last hurrah for the essential Keynesian “stimulus” gambit of the last several decades, which is to say, the one-time LBO of household balance sheets.

During the 78 months since the last peak, household credit has shrunk by 5%. Nothing like this has every happened before. Not even remotely close. And in truth, the relevant shrinkage has been even greater, since more than 100% of the slight up-tick in borrowing shown in the graph for recent quarters is owing to the explosion of student debt. By contrast, the traditional source of household “borrow and spend”—-mortgage borrowings and credit card debt—-is still below its 7-year ago peak.

Needless to say, this contrasts dramatically with the 78 month path after the 2001 cycle peak. During the Greenspan housing and credit bubble, household debt soared by nearly 90%, providing a robust, if temporary, boost to the consumption component of GDP.

The reason for the sharp difference in the most recent cycle is that Keynesian stimulus was always an economic trick, not an permanently repeatable exercise in enlightened monetary management. Quite simply, the US household balance sheets—-as measured by outstanding credit market debt relative to wage and salary income—got used up during the decades after the nation’s fiat money debt binge incepted at the time of Camp David in August 1971.

Now, in fact, the household leverage ratio has rolled over and is slowly retracing toward the still dramatically lower and more healthy levels that prevailed prior to 1971. In this context, it is surely the case that household leverage will continue to fall—-zero interest rates notwithstanding—– because it is a demographic given. The 10,000 baby boomers retiring each and every day between now and 2030 will not be adding to household debt; they will be liquidating it.


Household Leverage Ratio – Click to enlarge

What this means is that the motor force of traditional Keynesian expansion is gone. Household consumption spending, perforce, can now grow no faster than household income and economic production, and likely even more slowly than that. The coming funding crisis of the social insurance entitlements—Medicare and Social Security—will surely jolt the American public into a realization that higher private savings will be essential to retirement survival. Accordingly, the household savings rate has nowhere to go but up in the years just ahead.

In any event, it is no mystery as to why business capital spending remains stuck on the flat-line. During the most recent quarter, real spending for plant and equipment was still 4% below its late 2007 peak——an outcome that is not even remotely comparable to the 10-25% surges that have occurred during comparable periods of prior business cycles.  Business is not rushing to the barricades to add to capacity because it is plainly evident that consumer demand is not growing at traditional recovery cycle rates; and that it will never again do so given the constraints of peak debt and the baby boom retirement cycle ahead.

As shown below, in fact, real net investment in CapEx—after allowance for depreciation of assets currently consumed—- is on a declining trend. Not only does this reflect the drastic downshift in the growth potential of the US economy that has set-in during the era of monetary central planning, but it also underscores that the current stock averages are capitalizing a future that is a pure chimera.

At 19.5X reported LTM earnings, the S&P 500 is at the tippy top of its historical range, and at the point that it has invariably stumbled into a deep correction. Yet why is it rational to capitalize at even historic average  PE multiples the earnings of an economy that is clearly locked into a low/no growth mode for as far as the eye can see? In truth, the market’s PE multiple should be well below the historic average generated during recent decades when Keynesian policy-makers were busy using up the nation’s balance sheets on a one-time basis in a nearly continuous campaign to stimulate credit-fueled growth.

At the end of the day, even the heavily massaged data from the Washington statistical mills cannot hide this reality. Setting aside the short-run inventory swings which cloud the headline GDP numbers each quarter, and which accounted for nearly half of the 4% gain reported for Q2, real final sales tell the true story. Notwithstanding the Fed massive balance sheet expansion since its first big rate cut in August 2007—-that is, from $800 billion to $4.4 trillion—–real final sales have grown at less than a 1% CAGR since then.

There is nothing like this tepid rate of trend growth for any comparable period in modern history. Indeed, given the clear bias toward under-reporting inflation in the BEAs GDP deflators, it is probable that during the last seven years the real economy has grown at a rate not far from zero.

All of this means that the financial markets are drastically over-capitalizing earnings and over-valuing all asset classes. So as the Fed and its central bank confederates around the world increasingly run out of excuses for extending the radical monetary experiments of the present era, even the gamblers will come to recognize who is really the Wile E Coyote in the piece.

Then they will panic.








"Costs?"

A funny thing happened since The US unleashed Russian-economy-crushing sanctions... the "costs" appear to have weighed down US and European stocks as Russian stocks gained?

 

As a reminder since the initial sanctions in March, the S&P 500 is up just over 4% and Russian stocks up just over 13% - so much for Carney's "sell" order.

 

But Jack Lew promised:

  • *LEW: SANCTIONS WILL HAVE MINIMAL IMPACT ON U.S. ECONOMY







August 1914: When Global Stock Markets Closed

Submitted by Bryan Taylor, Chief Economist of Global Financial Data

August 1914: When Global Stock Markets Closed

This week marks the hundredth anniversary of the beginning of World War I. On June 28, 1914, Austrian Archduke Franz Ferdinand was assassinated in Sarajevo. This event led to a month of failed diplomatic maneuvering between Austria-Hungary, Germany, France, Russia, and Britain which ended with the onset of the Great War, as it was originally called.
Austria-Hungary declared war on Serbia on July 28, causing Germany and Russia to mobilize their armies on July 30. When Russia offered to negotiate rather than demobilize their army, Germany declared war on Russia on August 1. Germany declared war on France on August 3, and when Germany attacked Belgium on August 4, England declared war on Germany.  Europe was at war, and millions would die in the battles that followed.

The impact on global stock markets was immediate: the closure of every major European exchange and many of the exchanges outside of Europe. Although no one would have predicted this result at the beginning of July 1914, by the end of the month, European stock exchanges were making preparations for the inevitable war and its impact.

Never before had all of Europe’s major exchanges closed simultaneously, but then again, never had such a global cataclysm struck the world.  There had been crises before when the stock market in the United States or other countries had closed, such as the 1848 Revolution in France, or the Panic of 1873 in New York, but never had all the world’s major stock markets closed simultaneously.

Open Financial Markets Led to Closed Exchanges

Ironically, it was because of the openness of global financial markets before the war that the global closure of stock markets occurred.  At the beginning of 1914, capital was free to flow from one country to another without hindrance.  All the major countries of the world were on the Gold Standard, and differences in exchange rates were arbitraged through the buying and selling of international bonds listed on the world’s stock exchanges.  A country such as Russia would issue a bond that was listed on the stock exchanges in London, New York, Paris, Berlin, Amsterdam and St. Petersburg.  Differences in exchange rates between countries could be arbitraged by buying and selling bonds in different markets. In effect, this made European stock exchanges a single, integrated market.

In 1914, currency flowed between countries with lightning speed.  During the Napoleonic wars, money could only move as quickly as a ship could venture from one country to another.  By 1914, cables stretched across the oceans of the world, and money as well as stock orders could be wired telegraphically from one corner of the world to another in minutes.

Traders throughout the world could sell bonds and shares instantly, and it was the fear of massive selling, and the impact this would have on global markets that led to the shutdown of European exchanges.  There was a concern that investors would try to repatriate their money leading to massive selling, a sharp fall in prices, and large amounts of capital flowing out of one country and into another.

The impact of selling on brokers and jobbers was exacerbated by the way shares were traded on the London Stock Exchange.  Individual trades were made on a daily basis, then carried until Settlement Day when trades were matched and crossed.  Brokers would make up the surplus or deficit on their accounts by settling outstanding trades with cash.  As long as there were no significant swings in stock or bond prices, brokers had sufficient capital to settle their accounts.  However, since traders relied on credit, large swings in prices could and would bankrupt many of the brokers, worsening the financial panic. To avoid this problem, stock markets were closed until a solution could be found.

The War Drives Stock Prices Down

Of course, to investors not being able to buy or sell shares is even worse than selling them at a loss.  Although stocks could not be traded on the main exchanges, over-the-counter markets replaced exchanges for those who were desperate enough to sell. 

Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange.  Global Financial Data has gone back and collected stock prices during the closure of the NYSE to recreate the Dow Jones Industrial Average while the NYSE was closed.  We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices from August 24, 1914 to December 12, 1914.  This enabled us to discover that the 1914 bottom for stocks actually occurred on November 2, 1914 when the DJIA hit 49.07, over a month before the NYSE reopened.  Few people realize that stocks in the US had already bottomed out and were heading into a new bull market when the NYSE reopened on December 12, 1914. The DJIA did not revisit this level until the Great Depression in 1932. 

The graph below shows how the Dow Jones Industrial Average behaved during 1914, including the period of the NYSE’s closure.  Although the market declined with the onset of war, investors eventually realized that war in Europe would bring opportunities to American companies to sell industrial goods and war materiel. Once this fact settled in, the stock market rose steadily for the next year.

The NYSE reopened trading for bonds under restrictions on November 28th; the San Francisco Stock and Bond Exchange reopened on December 1st; and the NYSE resumed trading at pegged prices on December 12th, though the prospect of war profits soon made these restrictions irrelevant.

As the graph below shows, the Dow Jones Industrial Average almost doubled in price in the year following its bottom in November 1914. The market paused, then had another rally into 1916 before falling back once investors realized the strong profits they had predicted from the war would not be realized.

The Closure of European Exchanges

In Europe, the problem of preventing catastrophic declines in stock prices was solved by putting a floor on share prices.  Initially, stocks and bonds were not allowed to trade below the price they had been trading at on July 31, 1914.  The government also placed restrictions on capital, limiting or preventing large flows of capital out of the country for the remainder of the war.

With these restrictions in place, markets reopened in Europe.  The London Times began printing stock prices for London and Bordeaux on September 19th and for Paris on December 8, 1914.  In January 1915, all shares were allowed to trade on the London Stock Exchange, though with price restrictions.  The St. Petersburg exchange reopened in 1917 only to close two months later due to the Russian Revolution. The Berlin Stock Exchange did not reopen until December 1917.

Unlike the United States, stocks on the London Stock Exchange declined in price during World War I.  This was due not only to the decline in earnings that occurred and general selling of shares to raise capital, but just as importantly, because of the lack of new buying and the shift of capital to government war debt. British companies were allowed to issue new shares only if the issue was in the national interest, and foreign governments and companies were not allowed to issue any new shares. The British government wanted to insure that all available capital was used to fund the growing war debt.

Most of the new bonds that listed on the London Stock Exchange were British government bonds and their share of the London Stock Exchange’s capitalization rose from 9% to 33% during the war. The performance of the London Stock Exchange between 1913 and 1919 is shown below. As can be seen, stocks lost value continually during the war, hitting their bottom only in 1918, despite the general inflation that occurred in Britain during the war, which normally would have carried prices upwards.


The Long-Term Impact of World War I

World War I destroyed the global integration of capital markets.  The Gold Standard never returned despite attempts after the war to revive it.  The system of issuing bonds and shares internationally failed to recover from the war, and stock exchanges listed fewer international shares. The ownership of stocks and bonds from other countries shrank dramatically. 

Exchanges were subjected to extensive regulation that did not exist prior to the war. Germans were not even allowed to trade on the London Stock Exchange for years after the war was over.  London lost its place as the center of global finance during the war as its role as the center of global finance was passed on to New York.  Nevertheless, New York was never able to take on the pivotal role in capital markets that London held prior to World War I.

After the war was over, financial markets had to deal with the dislocations created by the war: inflation, increased government debt, reparation payments, the Russian Revolution, the creation of new countries, England’s failed attempt to return to the Gold Standard, the stock market crash of 1929, the Great Depression, debt defaults, competitive devaluations, the concentration of gold in France and the United States and a hundred other financial repercussions that resulted from World War I.

Governments and stock exchanges did learn their lessons from World War I.  When World War II began, the London Stock Exchange closed for only a week, and the New York Stock Exchange never closed during World War II, save for August 15th-16th, 1945 when the NYSE closed to recognize V-J Day and the end of WWII.  The Berlin Stock Exchange remained open during World War II, though price floors and capital restrictions kept the prices of shares from falling until the devaluation of 1948.

Although global stock markets reopened between 1914 and 1917, it wasn’t until the 1980s that the restrictions on financial markets that prevented the free flow of capital that had existed before 1914 were removed. Only after the fall of Communism did stock markets become as globally integrated as they had been before 1914.

Though the focus of the hundredth anniversary of World War I will be on the massive destruction of World War I, the deaths of millions, and how World War I laid the foundations for World War II, the impact on stock markets and international finance should never be forgotten.








BeHoLD THe GRiM MaRKeT ReaPer...

.

The Reaper descends from on high

The masses see death in the sky

They knew he was near

But greed outweighed fear

They blindly bought into the lie

The Limerick King








And Now Facebook Is Down

The market may rise, fall, flash crash or be halted... and most of America, or the world wouldn't care (at least not immediately). But take away their FaceBook, and watch as the great unwashed hordes arise in a uncoordinated, global panic.

Will the Syrian Electronic Army be blamed for this one too?








High-Yield Credit Crashes To 6-Month Lows As Outflows Continue

We have been warning for a while that not only is the high-yield credit market sending a warning but that it is critical for equity investors to comprehend why this is such bad news. This week has seen exuberant equity markets start to catch down to high-yield's warning but today's surge in HY credit spreads to six month wides is a rude awakening. Between outflows, a huge wall of maturities (and no Fed liquidity), and corporate leverage, the reach-for-yield just became an up-in-quality scramble. HY spreads are over 70bps wider than cycle tights implying the S&P 500 should be around 1775. When the easy-money-funded buyback party ends, will you still be dancing?

 

High-yield protection is in huge demand - credit spreads surge to 6-month wides - implying a 1775 S&P 500.

 

As outflows continue to rise...

Outflows from high yield funds and ETFs amounted to $1.69bn this week following a notable outflow of $2.46bn last week and a $1.85bn outflow in the week prior to that. The last three weeks account for the largest outflows in HY this year. The outflows are likely a result of the selloff in high yield bonds in July, as flows typically follow return.

 

You were warned:

High-Yield Bonds "Extremely Overvalued" For Longest Period Ever   High Yield Credit Market Flashing Red As Outflows Surge   Is This The Chart That Has High-Yield Investors Running For The Hills?

*  *  *

Between a sudden shift to a preference for "strong" balance sheet companies over "weak" balance sheet companies (the end of the dash for trash trade), and this rotation from high-yield to investment-grade, it is clear that investors are positioning defensively up-in-quality ending the constant reach-for-yield trade of the last 5 years.

Why should 'equity' investors care? The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering - for even the worst of the worst credit -  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

Simply put - equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... but it only ends with equity and credit weakening together. That is the credit cycle... it cycles.








Lucky Charms on Wall Street

As the slide starts and the stock markets open in the red on the 1st August , it’s now time to take into consideration what it is that will save you on the floor from losing the house, the wife and the kids because you didn’t know how to deal with the stock crash that’s on its way. Of course, study, research and believe that it’s a rocket science but we all know that it’s not. Create algorithms and use fancy computer programs, even pay someone to do the dirty investing for you. But, when it boils down to it, it’s lady luck that will make you a winner or a looser. And, I’m not the only one that thinks so. There are a good many people in the past that have used anything and everything they could lay their hands on to bring them luck in the financial world. Here are just a few of them.

The superstitious Wall Street guys

You wouldn’t have thought it in the digital age but there are some that are playing with the money of the rest of us on the stock markets using lucky charms and superstitious beliefs. Isn’t this supposed to be 2014?

There was the trader Frank ‘Tony’ Ciluffo at Steinhardt, Fine, Berkowitz that what he had for lunch had an impact on the stock market. That’s enough to give you indigestion alone, isn’t it? He had two toasted English muffins with jam for an entire year because the first day he had them he made a killing. He carried on eating them day in and day out until he’s luck bottomed out and he had to change to cream-cheese-and-olive sandwiches. Any nutritionist would be reeling by now, but investors think it’s probably good in that quirky retro way.

Apparently, you should never sell while your stock is going over $90. There’s the common belief that if it hits $90, it will hit $100 before dropping, so you might as well stick it out and make a few more dollars for the champagne parties. There’s nothing to prove it whatsoever. But, if they are all doing it, they are all increasing the stock artificially, anyway.

There are those that force their traders to take female hormones because women make better decisions that are less violent which means less viable to risk (2007, Andrew Tong that filed a lawsuit against his boss Ping Jiang). But, there are also the traders that down the testosterone boosters after they hit 30 so they can keep up with the wolves that are just entering the pack. It reduces sluggish decisions and increases stamina and nerve.

At Murray & Co there’s a trader that things that the tidier the desk he has, the more money he will make. Oh, and he never uses a red pep either, because that’ll bring bad luck and look like loss. In the real world that would be a compulsive obsession disorder, wouldn’t it? Don’t you get put under a doctor for that? But in the world of investment, it’s the norm. The mad hatters are on the inside in this story, running down a hole to catch the money at the bottom of the pit.

Then there’s the superstitious bathroom stall at the Chicago Mercantile Exchange that nobody wants to use because it leads to the trader losing money. What more can you say?

It has been proven by research that when there is an environment of risk, a perceived lack of control and high stakes that are in the bidding, then people resort to superstition. Superstition-induced behavior is and has always been part and parcel of the investors on Wall Street. There was even that Superstitious Fund started in 2012 by Shing Tat Chung. The idea was to get investors to put money into a portfolio that was completely generated and managed by a computer program that took into consideration only things that were related to superstitions. That means that the robot steered clear of Friday 13th and anything that had the number 13 in t, for example. Or, it bought when the new moon started but when it was full-moon time it stopped everything. 144 people invested £4828.88 and it traded on the FTSE100 for a year. Before you run out to buy the rabbit’s foot, remember that the Superstitious Fund closed down over 16%. There might be weirdoes out there with their quirks that always tie their shoe left shoelace before the right one and then think they are going to get the dollars pouring in, but remember, they are only better off until they start losing.

Isn’t that how banks went bankrupt, believing that they would never lose any money because they were on to a winner?

Everyone wants to be a smart trader these days.

The next Friday 13th is now February 13th 2015, so you have some time to buy those shares still.

Originally Posted: Lucky Charms on Wall Street 








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