Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Concentrated power and wealth are intrinsically sociopathological by their very nature.

  I have long spoken of the dangers inherent to centralization of power and the extreme concentrations of wealth centralization inevitably creates.   The Master Narrative Nobody Dares Admit: Centralization Has Failed (June 21, 2012) The Solution to Concentrated Power: Decentralize, Diffuse and Devolve Power (June 22, 2012) To Fix Healthcare, Let 100 Solutions Bloom (February 26, 2013)   Longtime contributor C.D. recently highlighted another danger of centralization: sociopaths/psychopaths excel in organizations that centralize power, and their ability to flatter, browbeat and manipulate others greases their climb to the top.   In effect, centralization is tailor-made for sociopaths gaining power. Sociopaths seek power over others, and centralization gives them the perfect avenue to control over millions or even entire nations.   Even worse (from the view of non-sociopaths), their perverse abilities are tailor-made for excelling in office and national politics via ruthless elimination of rivals and enemies and grandiose appeals to national greatness, ideological purity, etc.   As C.D. points out, the ultimate protection against sociopathology is to minimize the power held in any one agency, organization or institution:

After you watch these films on psychopaths, I think you'll have an even greater understanding of why your premise of centralization is a key problem of our society. The first film points out that psychopaths generally thrive in the corporate/government top-down organization (I have seen it happen in my agency, unfortunately) and that when they come to power, their values (or lack thereof) tend to pervade the organization to varying degrees. In some cases, they end up creating secondary psychopaths which is kind of like a spiritual/moral disease that infects people. 

If we are to believe the premise in the film that there are always psychopaths among us in small numbers, it follows then that we must limit the power of any one institution, whether it's private or public, so that the damage created by psychopaths is limited. 

It is very difficult for many people to fathom that there are people in our society that are that evil, for lack of a better term, and it is even harder for many people in society to accept that people in the higher strata of our society can exhibit these dangerous traits. 

The same goes for criminal behavior. From my studies, it's pretty clear that criminality is fairly constant throughout the different levels of our society and yet, it is the lower classes that are subjected to more scrutiny by law enforcement. The disparity between blue collar and white collar crime is pretty evident when one looks at arrests and sentencing. The total lack of effective enforcement against politically connected banks over the last few years is astounding to me and it sets a dangerous precedent. Corruption and psychopathy go hand in hand. 

A less dark reason for avoiding over centralization is that we have to be aware of normal human fallibility. Nobody possesses enough information, experience, ability, lack of bias, etc. to always make the right decisions.

Defense Against the Psychopath (video, 37 minutes; the many photos of political, religious and secular leaders will likely offend many/most; if you look past these outrages, there is useful information here)   The Sociopath Next Door (video, 37 minutes)   As C.D. observes, once sociopaths rule an organization or nation, they create a zombie army of secondary sociopaths beneath them as those who resist are undermined, banished, fired or exterminated. If there is any lesson to be drawn from Iraq, it is how a single sociopath can completely undermine and destroy civil society by empowering secondary sociopaths and eliminating or marginalizing anyone who dares to cling to their humanity, conscience and independence.   "Going along to get along" breeds passive acceptance of sociopathology as "the new normal" and mimicry of the values and techniques of sociopathology as the ambitious and fearful (i.e. almost everyone) scramble to emulate the "successful" leadership.   Organizations can be perverted into institutionalizing sociopathology via sociopathological goals and rules of conduct. Make the metric of success in war a body count of dead "enemy combatants" and you'll soon have dead civilians stacked like cordwood as proof of every units' outstanding success.   Make lowering unemployment the acme of policy success and soon every agency will be gaming and manipulating data to reach that metric of success. Make higher grades the metric of academic success and soon every kid is getting a gold star and an A or B.   Centralization has another dark side: those ensconced in highly concentrated centers of power (for example, The White House) are in another world, and they find it increasingly easy to become isolated from the larger context and to slip into reliance on sycophants, toadies (i.e. budding secondary sociopaths) and "experts" (i.e. apparatchiks and factotums) who are equally influenced by the intense "high" of concentrated power/wealth.   Increasingly out of touch with those outside the circle of power, those within the circle slide into a belief in the superiority of their knowledge, skills and awareness--the very definition of sociopathology.   Even worse (if that is possible), the incestuous nature of the tight circle of power breeds a uniformity of opinion and ideology that creates a feedback loop that marginalizes dissenters and those with open minds. Dissenters are soon dismissed--"not a team player"-- or trotted out for PR purposes, i.e. as evidence the administration maintains ties to the outside world.   Those few dissenters who resist the siren song of power soon face a choice: either quietly quit "to pursue other opportunities" (the easy way out) or quit in a blast of public refutation of the administration's policies.   Public dissenters are quickly crucified by those in power, and knowing this fate awaits any dissenter places a powerful disincentive on "going public" about the sociopathology of the inner circle of power.   On rare occasions, an insider has the courage and talent to secure documentation that details the sociopathology of a policy, agency or administration (for example, Daniel Ellsberg and The Pentagon Papers).   Nothing infuriates a sociopath or a sociopathological organization more than the exposure of their sociopathology, and so those in power will stop at nothing to silence, discredit, criminalize or eliminate the heroic whistleblower.   In these ways, centralized power is itself is a sociopathologizing force. We cannot understand the present devolution of our civil society, economy and ethics unless we understand that concentrated power and wealth are intrinsically sociopathological by their very nature.   The solution: a culture of decentralization, transparency and open competition, what I call the DATA model (Decentralized, Adaptive, Transparent and Accountable) in my book Why Things Are Falling Apart and What We Can Do About It.    

Following the dismissal of KPMG over insider trading 'issues', Herbalife has just announced it will be hiring PricewaterhouseCoopers as their new auditor:

• *HERBALIFE HIRES PRICEWATERHOUSECOOPERS :HLF US
• *HERBALIFE SAYS PWC TO RE-AUDIT FY10, FY11, FY12 :HLF US

Indications point to a modest rise from the pre-halt close of $49.87.

Full Press Release below:

Herbalife Engages PricewaterhouseCoopers LLP As Auditors

 

May 21, 2013, LOS ANGELES—(BUSINESS WIRE)— Herbalife Ltd. (NYSE:HLF), today filed a Form 8-K indicating that the Audit Committee of its Board of Directors has engaged PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent auditors. PwC will commence work immediately to re-audit the Company’s consolidated financial statements for the fiscal years ended December 31, 2010, 2011 and 2012. PwC will also review the Company’s condensed consolidated financial statements for the first quarter of 2013. The engagement of PwC was made after an extensive evaluation process by the Company’s Audit Committee.

 

As previously announced, the change in auditors was the result of KPMG LLP’s (“KPMG”) resignation as Herbalife’s independent auditors, due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities. As stated by KPMG, their resignation was not related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management, or for any other reason.

 

“We are very pleased to have engaged PwC to serve as the Company’s independent auditor. They will begin work immediately to re-audit the Company’s December 31, 2010, 2011 and 2012 consolidated financial statements. Investors should rest assured that the Company will be working to assist PwC in any way necessary to facilitate their work,” said the chairman of Herbalife’s audit committee Leroy Barnes.

    

Two big events have occurred/ are occurring.

 

1. Charles Evans who is one of the biggest pushers for QE, stated that the Fed has “the appropriate monetary policy in place” and that the economy is “improving quite a lot.”
2.  The Bank of Japan is beginning a two-day policy meeting today.

 

Regarding #1, Evans has been one of the biggest pushers for more QE. Throughout 2011 and 2012, every time he appeared on TV he stated that the Fed should do more.

 

So for Evans to suddenly change his tune and state that the Fed’s current policy is “appropriate,” indicates a significant shift in tone. This goes along with the Fed’s recent hint at tapering QE, which we’ve noted before on these pages. It’s now becoming more and more clear that the Fed is planning on tapering QE in the coming months and is trying to manage down investor expectations.

 

Which means that stocks are going to be losing some (not all) of their life support.

 

Regarding #2, Japan is beginning a two-day monetary policy today. As noted yesterday, Japan is Ground Zero for the great QE experiment. For decades now, Bernanke and his pals have claimed that the biggest problem with the Fed’s actions during the Great Depression was that it didn’t do enough.

 

Japan, which has now engaged in NINE QE efforts, has finally hit the “enough” stage by announcing a record $1.2 trillion QE plan. To put this in perspective, Japan’s economy is $5.86 trillion, so this single QE effort is equal to 20% of their GDP.

 

If this plan fails to bring about economic growth in Japan, or worse still fails to bring about growth and unleashes inflation, then it’s GAME OVER for Central Bankers. Their one great claim “we’re not doing enough QE” will have been proven to be total bunk.

 

At that point there is literally nothing they can do.

 

We’re keeping an eye on the meeting in Japan for hints that QE isn’t working or that the Bank of Japan may attempt to taper it. If this proves to be the case, then we’re in for a truly rough time in the markets.

 

For more market insights and updates, visit us at: www.gainspainscapital.com

 

Best Regards,

 

Graham Summers

    

 

Today’s AM fix was USD 1,378.75, EUR 1,070.21 and GBP 908.39 per ounce.  

Yesterday’s AM fix was USD 1,353.75, EUR 1,051.95 and GBP 890.86 per ounce. 

Gold climbed $19.40 or 1.43% yesterday to $1,384.30/oz and silver finished 2% higher. 

Silver’s recovery yesterday from being 10% lower at one stage to recouping these losses and then rising over 2% was very positive technically. The key reversal is leading some to postulate that we may have seen the bottom or are close to a bottom. 

Spot Silver in USD, 3 Days, May 17, 20, 21 – (Bloomberg) 

This theory is bolstered by the fact that the 10% losses were due to a handful of a very large trades in a low volume session in Asia, while silver’s subsequent 12% reversal to the upside came amid extremely high trading volume with silver trading volume 82% higher than the 100 day moving average on the COMEX.

Silver's fall could have been related to the gyrating yen dollar price as some hedge funds and banks use proprietary trading systems and sharp losses in a leveraged yen dollar position could have led to forced liquidation of silver.

However, the scale of the 10% loss in the silver market, and only the silver market suffered such large losses, would suggest that it was not simply due to margin selling on yen speculation losses. 

Rather, the scale of selling suggests one or two massive sellers, likely institutional, who were determined to force the silver price lower, possibly in order to close or buy back underwater short positions.

Resistance in silver during the period March 2008 to September 2010 was $20/oz and this level provided support overnight and is an important long term support level.

While paper gold and silver is being manipulated though the use of leveraged selling on commodity exchanges and other gold and silver investment vehicles are being  liquidated – especially the ETFs, demand for physical gold and silver remains very robust as seen in high premiums internationally and lengthy waiting times for delivery.

The paper players have won the recent skirmishes but those who own gold and silver bullion and focus on the long term will win the price war.

The scale of demand from China and India continues to be underestimated and this demand has accelerated after the recent price weakness. Large buy orders from China, India and other Asian markets are pushing the physical premiums to record levels.

Spot Silver in USD, 2007-2013 – (Bloomberg)

India is paying a premium of nearly $40 per 10 gramme bars. Dubai buyers are paying a premium of $7-10 per kilogramme. 

Turkey is reported to be paying a premium of $25 an ounce over spot prices. 

Hong Kong and Singapore buyers are paying premium of $5 per ounce for gold bars.

Demand is not just very strong in Asia. Bullion coin and bar demand also remains very robust in the U.S. and in Europe where premiums have also risen.

Government mints in Australia, the U.S, Canada, South Africa, Austria and the UK are reporting soaring bullion coin demand and are having difficulty meeting the scale of demand. 

Silver coins, in particular, are seeing rising premiums and delays in delivery.

Also little reported is the fact that refineries in Switzerland and elsewhere are also finding it hard to cope with the scale of international demand for gold and silver bars. 

It is clear that the recent fall in gold and silver prices was triggered by speculative traders operating in the futures markets and to a lesser extent by more speculative buyers of ETFs. 

Cross Currency Table – (Bloomberg)

Their short-term view of generating a trading profit is in stark contrast to the views of long term investors and store of value buyers of gold and silver bullion, as evidenced by the massive wave of physical bullion buying that has been seen in the last month.

 

The smart money will again accumulate and dollar cost average into positions on the dip.

 

 

FREE Ebook: Guide to Buying Gold

 

NEWS
Gold rises, snapping 7-session losing streak – Market Watch

CME Halted Silver Trading 4 Times as Prices Slid 9% - Nasdaq

Gold Swings as Investors Weigh Stimulus Outlook Amid ETP Decline - Bloomberg

Silver and gold lurch higher after early dive - Reuters

COMMENTARY 
Markets are on a crazy, sugar-fuelled journey – The Telegraph

Paul Craig Roberts: No Bear Market in Gold - GoldSeek

The Last Investable Moment for Silver – SilverSeek

Barron's gets suspicious about gold market manipulation – Barron’s

For breaking news and commentary on financial markets and gold, follow us onTwitter.

 

 

 

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Yesterday we opined on the deteriorating situation surrounding the much anticipated government scramble to collect perfectly legal offshored capital, initially focusing on Apple (which having now entered the focus of the US government will be nothing but an "negative externality" free utility going forward or as long as Uncle Sam wishes it to be) but soon to turn to virtually every other multinational corporation with a hugh cash hoard and a low effective US tax rate. Today, it is Tim Cook's turn to explain why the firm is merely following clearly laid out rules and tax regulations as encoded by none other than the same people who are bringing you today's particular episode of "distract them with witchhunts."

Watch it live at the following C-Span link:

From the subcommittee:

The Permanent Subcommittee on Investigations has scheduled a hearing, “Offshore Profit Shifting and the U.S. Tax Code - Part 2 (Apple Inc.)” on Tuesday, May 21, 2013, at 9:30 a.m. in Room 106 of the Dirksen Senate Office Building.
 
The Subcommittee will continue its examination of the structures and methods employed by multinational corporations to shift profits offshore and how such activities are affected by the Internal Revenue Code and related regulations. Witnesses will include representatives from the Department of the Treasury, the Internal Revenue Service, representatives of a multinational corporation, and tax experts. A witness list will be available Friday, May 17, 2013.

The full witness list:

PANEL 1

• J. RICHARD HARVEY, Villanova University School of Law
• STEPHEN E. SHAY, Harvard Law School

PANEL 2

• TIMOTHY D. COOK, Chief Executive Officer, Apple
• PETER OPPENHEIMER , Senior Vice President & Chief Financial Officer, Apple
• PHILLIP A. BULLOCK ,Head of Tax Operations, Apple

PANEL 3

• MARK J. MAZUR, Assistant Secretary for Tax Policy, U.S. Department of the Treasury
• SAMUEL M. MARUCA, Director, Transfer Pricing Operations, Large Business & International (LB&I) Division, Internal Revenue Service

Full Tim Cook testimony:

    

Originally Posted http://www.tothetick.com/rainy-day-economics

Margaret Thatcher might have been the perfect housewife that got Britain off to a good start or at least that’s what she would have liked us all to have believed when she was in power. The prefect Grantham housewife, so simple: never spend more than you earn, the defender of good management of budgetary finances. But that was all part of the ruse, wasn’t it? We all know that what today’s financial markets are failing to realize is that economies can’t be run like households (especially these days!). A country is nothing like a household. When we realize that, we might start agreeing on the real causes of the financial crisis and how to deal with the problems that subsequently arose. The savings of a nation are not the savings that you and I put away in our Post Office accounts for a rainy day. It’s always raining these days and we need more than just an umbrella to keep us dry.

In times of trouble, we are more likely to put money away just in case the economy takes a dive and the horse starts bolting out of the stables. But, keeping the horse at home means increasing investment in a country rather than increasing domestic savings. That’s the only thing that is going to lead us into a wealthier and healthier economy in any country.

Germany’s role in the financial crisis that is currently hitting the EU seems to bring to light the fact that the Germans too made the mistake of mixing up national savings and private savings back in the late 1990s and early 2000s. They had such a level of unprecedented savings that they could not only provide the necessary financing of domestic investment on their own but also export those savings through investment abroad. Wage growth was reduced, leading to increased employment coupled with a reduction in household consumption. Wages fell from a 3.2% growth in the 1990s to just 1.1% in the next decade. This meant that the 1.7% deficit shifted to a staggering 7.5% surplus. It pushed the EU PIGS (Portugal, Italy, Greece and Spain) even deeper into decline. To all intents and purposes, it just shifted the economic decline elsewhere to those countries that didn’t have the foresight to do the same. All of the countries that were drawn into the spiral of the German surplus consequently saw their own economies run deficits. German exports were far more competitive. Money poured into those countries that were economically deficient in a bid to invest and make an extra buck. But, the Spaniards and the Greeks started to save less, believing that they were riding on the crest of the wave. It turns out it was only Germany that was surfing on that. When the economies of the world took a dive, the Germans pulled out and the PIGS were left suffering, wallowing in the cesspit that was left.

But, we all know that Margaret Thatcher was just about as housewifely as a bull in a china shop. Her master art was to make us thing she was just a common housewife. Germany’s savings policies of the past two decades certainly balanced their own economy, but it did little more than push the others in the EU into decline. A strange turn of events, if the Germans actually turn out to be the cause (rather than the possible solution to) EU troubled times!

    

 

In February, when Ben Bernanke gave his report to Congress, he spoke of his concern about "Excessive risk taking". On May 10 he repeated his warning:

 

very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage.

 

So what is Ben talking about? What does it mean when he says "reach for yield"? I think I may have found a good example of what Ben is referring to. Consider this bank financing that was completed last week:

 

Borrower: KIK Custom Products

Amounts:

1st lien = $420Mn - Priced at LIBOR plus 425bp - priced at 99.

2nd lien = $220Mn - Priced at LIBOR plus 825bp - priced at 98.

Floor pricing = Minimum LIBOR was set at 1.25% (100bp over current LIBOR rate)

Company rating = Caa/B-

Fees = Undisclosed - must have been big - 3+%

Book runner = UBS

 

KIK Custom Products makes bleach and soap. The company is owned by CI Capital Partners, a NYC based LBO outfit. There is no publicly available financial information for KIK, but the pricing/rating and the sponsor tell me that this is a highly leveraged deal. What kills me is that this is a recap deal. This financing replaces the existing debt of KIK, and therefore it is on substantially better terms than what existed before the recap.

This is a junk deal. It's not suitable for widow and orphans - but that's where this paper is going to end up. This loan will work its way into the many Loan Mutual Funds that are available to retail investors. Small investors have been pouring money into bank loan funds. Every month for the past four-years money has flown into this investment class. So far this year $20Bn has found its way to junk bank loan funds. Another $900Mn came in last week.

As an ex junk guy, I have no problems with the KIK deal - provided that this dodgy paper ends up in the hands of true 'Sophisticated Investors'. But I do have a problem with the fact that this deal could not have happened were it not for Ben Bernanke and his unending squeeze on returns for small investors.

The second lien tranche of the KIK deal has a return north of 10%. The only exit strategy for this paper is another re-cap; cash flow from operations at KIK will not pay this loan down. So this is a one-way-out deal. I think deals like this must have Bernanke looking over his shoulder. He must know that this is the perfect description of investors "reaching for yield".

Some will look at the KIK deal and conclude that this is evidence of a healthy capital market. I see it it quite the opposite. This type of financing is an accident waiting to happen. The fact is that Bernanke's money policies have long since crossed over from being something that contributes to economic health and stability, to something that is adding to systemic risks and instability. I suspect that Bernanke is well aware of this fact, so are other members at the FRB. If you're looking for evidence that Bernanke has pushed the string too far, the KIK deal is all you need to look at.

If Bernanke is honest with the facts, he would wind down QE as fast as he could. If he doesn't, then his warnings over the past few months about the risks of cheap money are just a lie. So Ben has a hard choice in front of him. Either he backs off of his reckless money policy, or his legacy goes up in smoke. The bubbles are popping up all over in 2013, I don't think that Ben wants to go down in the history books as another Fed Chairman that creates bubbles that come crashing down.

I think there is a high probability that the Fed lowers the amount of QE purchases in June. That's just a few days away. The gold and bond markets have been "saying" that QE is ending for the past few months. The equity and junk markets have largely ignored the signs. June is setting up as an interesting month.

 

 

    

Whether it is algos looking for a better entry point for the inevitable green close, a market reacting to Saks disappointment, or a realization (ahead of Bernanke tomorrow) that the hawkish jawboning recently is an attempt at a soft-landing is unclear. One thing is becoming clear: the Dow Jones track record of being up 19 out of 19 consecutive weekly Tuesdays is suddenly in jeopardy...

 

Stocks are not happy...

 

and bonds are selling off too (suggesting the hawkishness)...

 

and the USD strengthening...

 

Charts: Bloomberg

    

Federal Reserve Chairman Bernanke testifies before the Joint Economic Committee of Congress tomorrow. The market is anxious for the Chairman to weigh in on the recent comments suggesting that even some like-minded regional presidents like Chicago's Evans seems to be warming to the idea of tapering off purchases.

It is one thing for the more hawkish members, several of whom have never felt comfortable with the latest iteration of quantitative easing, to talk of slowing purchases, but it is another thing for some of the more dovish members to talk in this vein. Yet we suspect there is less than meets the eye. With the stock market extending its advancing streak to near 200 days without a 5% pullback and what Bernanke has called "the reach for yield" has driven the industry index of below investment grade yields below 5% for the first time; it is incumbent on Fed officials to demonstrate their vigilance.

To this end, the leadership needs discuss the conditions that would allow it to taper off its purchases. The Fed has been reluctant to provide much guidance in this regard, unlike the inflation and unemployment thresholds cited for interest rates. How the Fed exits from QE3+ is generally understood to be a slowing of purchases, probably of the mortgage-backed securities first. In a recent much-vaunted Wall Street Journal article, how the Fed exists QE3 was said to be "careful" with "potentially halting steps".

Arguably the more important issue is when and here the Wall Street Journal article was even less revealing, noting that it is still being debated. Although one non-voting Fed president talked about tapering off purchases as early as next month's meeting, this does not appear to be consensus. Instead, there is a consensus to wait for more economic data. More data seems to mean another quarter or so.

Some officials, including Chicago Fed's Evans, who was among the most dovish members, noted that the economy is "improving quite a lot", but wants to see if the economy sustains its momentum after having experienced other episodes of growth that proved temporary. Employment growth is understood to be among the most important real economy measures.

It is true that the 3-month and 6-month average non-farm payroll growth is just about the 200k threshold that Evans, among others, has cited.  However, this overstates the strength of jobs growth.  Consider that we have four months of data for this year.  In three of the months, non-farm payrolls were 165k or lower.  In one month, February, there was an outsized jump of 332k jobs, which skews the averages.  However, with the May report on June 7, the February figures drop out of the 3-month moving average calculation.

Fed officials, and especially Bernanke who as a student of the Great Depression, is particularly sensitive to deflation risks, a few more months of data on inflation measures may also be helpful.  The Fed's preferred inflation measure, the core PCE deflator stood at 1.1% in March.  Only in two of the past nine months, has the deflator risen by more than 0.1%. 

Some officials, like Evans, suggest that the decline in inflation may be transitory.   Looking at the base effect for the year-over year measure, in Q2 last year, the monthly increase averaged 0.13%.   As these drop out, the core PCE deflator will likely fall below 1%.  Such a low inflation reading would risk deflation and would seem to argue for continued easing of monetary policy.

In addition to employment and prices, there is a third consideration: fiscal policy.  Bernanke has commented previously on the fiscal drag.  However, the US budget position is improving considerably faster than expected.  Last week, the Congressional Budget Office updated its budget outlook. 

Assuming no changes in the current laws and plans regarding taxes and spending, the FY13 budget deficit is expected to now shrink to about $642 bln, the smallest since 2008 around 4% of GDP.   This is less than half the 2009 shortfall (~10.1%) and an impressive decline from the 7% shortfall in FY2012.   To appreciate this consider that the UK government which has been committed to austerity since getting elected in 2010 has seen no change in public borrowing as a percentage of GDP (~7.5%).

The US public debt/GDP ratio is projected to begin falling next year.  The CBO estimates that the FY2015 deficit will fall to almost 2% of GDP.    The less accommodative fiscal stance may also encourage the Fed's leadership to take their time.  The US economy remains fragile and reducing both monetary and fiscal accommodation at the same time may not be desired.  

Bernanke's testimony tomorrow takes place before the FOMC minutes are released.  Bernanke's comments are more important of the two events.  However, recall that the FOMC statement released on May 1 contained one notable tweak and that is that "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."  This symmetry contrasts with previous talk that focused on tapering off the purchases.  In turn, this suggests some doves pushed back. 

Data released since the meeting has generally been soft and/or disappointing.  This includes non-farm payroll report, which included a decline in aggregate hours, surveys for May, softer auto sales, industrial production and manufacturing and housing starts.  The resilience of consumer confidence and retail sales were the exception.

On balance then, we suspect Bernanke will recognize, as the FOMC statement did, that the economy is growing at a moderate pace and that decisions on the pace of asset purchases is a function of changes in employment and inflation.  It serves his interest to indicate it is data determined and that more data is needed.  If this does in fact materialize, we suspect it would be supportive for US Treasuries while weighing on the dollar.  To the extent that the FOMC minutes show that there are some at the Fed who think it should be doing more, it may also push the markets in the same direction. 

    

We are now used to the daily dispensation of deep twitsight by Pimco's head. Today's installment does not disappoint: in under 140 characters, the bond kind breaks down the now thoroughly dis-proven Efficient Market Hypothesis for the "new normal" in which both alpha and beta are purely functions of virtual central bank printers. However, his view on what happens when said virtual ink runs out (or rather if) is well-known by all at this point. The only question is when.

Gross:Alpha is gr8ly a function of beta &the levered structurs that domin8 credit mkts. No beta? Skinnier alpha ahed 4 unsuspecting investrs

— PIMCO (@PIMCO) May 21, 2013

    

Latest research figures carried out by the Bank of America Corp. are set to rock the economies around the world once again. Has China been hiding the real state of its economic data? It would seem that the PRC hasn’t been quite as honest as it might have us all believe! According to the Bank of America Corp., the Chinese trade surplus that was meant to stand at some $61 billion turns out to be a meager mere tenth of that so far this year.

The true figure amounts to only $6 billion and that means it will be the smallest Q1 figure posted since the $10.8-billion deficit in 2004. Research on calculations carried out by the head of BoA’s Greater China Division, Lu Ting, suggests that the supposed tripling of China’s surplus was nothing more than fake, and that China has been cooking the books to appear to be better off than the rest of the world. True figures point to the fact that China’s growth rate is slowing down and that the economy is being restrained rather surging ahead. There’s being growing cause for concern since January this year as it turns out that China has been fibbing about its unemployment figures as well as GDP. Growing skepticism amongst analysts has led to worldwide concern as to the ability to provide real trade data.

Some are saying that the export situation can be likened to 2008 at the very moment when the financial crisis hit the world. China too was plunged into a difficult time as exports decreased back then. Shipments plummeted and out of that panic grew illegal practices in a bid to make money. Irregularities in export data have emerged and allowed for hot-money flows.

True figures seem to highlight that we have had the wool pulled over our eyes as figures show that there is a real growth of just 5% in exports, whereas the PRC has issued figures as high as 17.4%. Similarly, imports have increased by 7.6%, rather than the official government line figure of 10.6%. In a recent Bloomberg poll, investors believe that the Chinese economy is set to deteriorate in the coming year, despite what the official government figures might be stating.

But, it’s no consolation that China’s economy has also taken a downtown like the rest of us. While growth seems to be still partly there, it is definitely slowing down. That could be bad news for the rest of us, in already economic hard times, as we could see a knock-on effect around the world. That’s something we could surely do without right now! This is all in the wake of the Yuan’s all–time high. It currently stands at its highest level for almost twenty years in comparison with the Dollar. The Yen is suffering badly too from the adverse effects of never-before-seen monetary easing policies implemented by the Japanese government. Where do we go from here? Well, questions are now being raised as to how much longer China can withstand a growing Yuan in the face of a failing Dollar and troubled Yen. If it carries on much longer, China can only be on the receiving end of the adverse effects of that.

Originally posted http://www.tothetick.com/china-fakes-trade-surplus

    

It's been a wild ride in gold ($60 range) and silver ($2.50 range) in the last 2 days but for now, the precious metals have dropped back to unchanged from Friday's close.

 

 

Charts: Bloomberg

    

He's back to reprise his role as stoic 'I know nuffin' scapegoat. Former IRS boss Steve Miller faces a second round of truth-seeking, grand-standing, and extended questioning at today's Senate hearing on the IRS debacle. Scheduled to start at 10ET, Miller will be joined by Russell George (the IRS IG - full report here) and former IRS commissioner Doug Shulman. Grab the popcorn...

 

Witnesses:

Mr. Steven T. Miller, Acting Commissioner, Internal Revenue Service, Washington, DC
The Honorable J. Russell George, Treasury Inspector General for Tax Administration, United States Department of the Treasury, Washington, DC
The Honorable Douglas Shulman, Former IRS Commissioner, Washington, DC

 

Click image for live stream via CSPAN-3

    

Back in December, when HLF was trading in the mid-$20s, and long before Icahn's involvement in the situation was even remotely public, we laid out the case for what we thought would be a major short squeeze in the name upon Ackman's public announcement that he had shorted 20 million share of HLF stock. Well, judging by the 20% jump in the stock in the past two days, which has manifested in a nearly $200 million paper loss for Ackman, and which has sent the stock some 100% higher from our base level, has the time finally come for the massive 40% of the float that is short, to start to panic? Judging by the rapid move, we may be approaching that imminent moment when none other than Bill Ackman gets the infamous tap on the shoulder around 3 pm with a polite but firm request that the time to cover has come, leading to yet another crushing victory for the Icahnator.

Recent HLF stock move: oops.

    

It was a year ago that escalating labor tensions in the country of South Africa ground its mining sector to a halt, when demands from striking workers for wage hikes were met with aggressive retaliation in the form of rubber bullets first and then very real ones, leading to a tragic collapse in the already tenuous relationship between foreign corporations and domestic labor unions. Also notably, back then collapse in production of such commodities as platinum and gold was not all that confusing for the market, and led to price surges on the realization what far lower supply means for equilibrium prices. Yet while the days of violent labor escalation appear to be back, this time the Newer Normal has established itself by representing that a drop in industrial and precious metal production is somehow price negative. In fact when it comes to commodities, everything has become a negative catalyst, very much the way every update in the equity world is positive for "values."

So since Bernanke is intent on representing the complete collapse between physical supply dynamics and spot paper prices as bearish, we anticipate a major takedown in all metals once the algos grasp that the South African violence is back on the radar screen. Reuters reports that following news that the South African gold mining union demands a wage hike up to 60%, "ten striking South African miners were taken to hospital on Tuesday after being hit by rubber bullets, police said, as labor strife swells in mines and factories ahead of mid-year pay negotiations."

So much for calm negotiations.

Auto maker Mercedes-Benz said a two-day wildcat stoppage at its East London plant had ended but the National Union of Metal Workers of South Africa (NUMSA) squashed any relief with an immediate demand for a 20 percent pay rise.

 

"If our demands are not met we will have no option but to go to the streets," NUMSA national treasurer Mphumzi Maqungo told Reuters.

 

The currency extended its two-week slide after police confirmed that security guards had fired rubber bullets at stone-throwing wildcat strikers at a chrome mine near the platinum belt town of Rustenburg, 120 km (70 miles) northwest of Johannesburg.

 

The mining firm, Germany's Laxness, said the guards had fired rubber bullets in self-defence into the ground in front of protesters.

"Strike season" appears to have come early in South Africa this year:

Last week, the platinum firm Lonmin suffered a wildcat walkout at Marikana shortly after an unknown gunman shot dead a senior union official in a bar, and the National Union of Mineworkers said it would push for a pay rise of a staggering 60 percent for some categories of miner.

 

South Africa's car makers saw minor labor disruptions in 2012 but investors fear a repeat of the wage-related strikes that crippled the sector in 2010 as the economy was struggling to emerge from recession.

 

Car industry bosses said they would not entertain NUMSA's latest demands, setting the stage for a showdown when a three-year wage deal worth around 10 percent a year expires at the end of next month.

 

"It is common cause that the employers will not settle at 20 percent," said Thapelo Molapo, chairman of the Automobile Manufacturing Employers' Organisation.

Ironically, the local instability has translated into a plunge in the local currency which recently printed at 9.50 to the dollar, the weakest since early 2009, and with the slide accelerating another 6% in the past two weeks, inflation in South Africa is set to accelerate even more, pushing for even higher wage demands, which will be met with even more hostility and resistance out of local foreign companies.

"There is no way people are going to carry on putting their money in here when there are impending strikes in one of the biggest sectors in South Africa," said Kyle Dutton, a broker at Mercato Financial Services in Johannesburg.

While for now it is the automotive sector that has seen the bulk of the wage "negotiations", expect this to spill over to all other industries, and specifically the critical mining sector, where South Africa is a sizable producer for both platinum and gold. We can't wait to see just how the spin machine justifies the halt of their production with more double digit drop in gold and/or silver, both of which are now trading with the forced credibility of pennystocks, and where 10% daily trade ranges are the real new normal.

    

Since the BoJ enunciated its actions on April 4th, the world has decided that consuming risk assets (the riskier the better) is the path to salvation. While it makes perfect sense that some level of inspiration for a global recovery makes sense (though hardly) given Japan's actions, it beggars belief that the most broke of broke peripheral European nations would see equity moves of such magnitude. On the 50th anniversary of Chaos Theory (more on this later today), it is perhaps worth remembering its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs. It appears the complex inter-related world in which we live is becoming more and more chaotically unstable at the margin and this current euphoria does not approximately determine the future.  There are more than enough variables out there – the butterflies flapping away – which can change outcomes in an instant.

 

 

Chart: Bloomberg Briefs

    

In a world in which everything is scientific and algorithmic, here is today's calculation-based, and thus 100% accurate, prediction of where the S&P will close.

h/t @Not_Jim_Cramer

    

Why Inflation Never Came

A generation of economists and students of macroeconomics were taught that the Quantity Theory of Money described the relationship between money and prices in the economy. The primary equation for the Quantity Theory of money is:Where: is the total amount of money in circulation on average in an economy during the period, say a year.

http://www.financialjuice.com/News/108633/Why-Inflation-Never-Came.aspx

Dollar firms before Bernanke, inflation dip hits sterling

The dollar firmed, gold fell and shares slipped off five-year highs on Tuesday as investors postioned for an update on the future of the U.S. Federal Reserve's stimulus programme.

http://www.financialjuice.com/News/108698/Dollar-firms-before-Bernanke-inflation-dip-hits-sterling.aspx

Is Gold Oversold?

Pessimism on gold is so extreme that sometimes even the bears worry it might be overdone. Today the price jumped a little more than 1 percent after news hit the wires that was perceived to be bullish: Moody’s Investors Service reported that U.S. policymakers must do something about the government debt to avoid a rating downgrade this year.

Contrarians see today’s bearishness as a bullish sign, reasoning that once almost everyone who used to be a bull has become a bear, gold has nowhere left to go but up. That’s why they’re called contrarians.

http://www.financialjuice.com/News/108695/Is-Gold-Oversold.aspx

Where has the smart money been buying the US Dollar?

A slow Monday in the currency market, with gentle yet consistent USD weakness the main theme. Despite the decline, it managed to maintain the very same levels of supply and demand from last week against main peers. These levels are likely to come into play as the trading week develops and risk events get released. Simplified Supply Demand Table The table below includes updated supply/demand levels as well as commentaries on the current outlook of the pair. 

http://www.financialjuice.com/News/108694/Where-has-the-smart-money-been-buying-the-US-Dollar.aspx

UK government believes it has the right economic approach

A spokesman for PM David Cameron was asked if the government would heed advice from the IMF over it’s economy. The IMF are due to release their annual UK economic report on Wednesday, which will which will no doubt be following the same line that IMF chief economist, Oliver Blanchard came out with in April where he criticised George Osborne’s strict austerity measures.

http://www.financialjuice.com/News/108690/UK-government-believes-it-has-the-right-economic-approach.aspx

Sterling and Yen Aren't Waiting for Tomorrow

The US dollar remains largely in a consolidative phase, awaiting Federal Reserve Chairman Bernanke's testimony before the Joint Economic Committee of Congress tomorrow. There has been much talk about tapering asset purchases and Bernanke's views are critical. However, comments by Japan's Amari, seemingly trying to soften yesterday's comments, after reportedly being criticized by cabinet colleagues helped lift the dollar back toward JPY103. Separately, soft UK inflation figures sent sterling back to the base it build last Friday and yesterday near $1.5165

http://www.financialjuice.com/News/108667/Sterling-and-Yen-Arent-Waiting-for-Tomorrow.aspx

US: Amateur investors tap 401(k)s to buy homes

In order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures -- like tapping their retirement accounts -- to fund the deals. "We're seeing many people cash out 401(k)s or IRAs because they want to take advantage of the market," said Sean Galaris of financial services firm LM Funding, based in Tampa. "This new scenario involves people losing significant personal funds since they are financing real estate through retirement accounts, savings and life insurance."

http://www.financialjuice.com/News/108701/US-Amateur-investors-tap-401ks-to-buy-homes.aspx

Microsoft's Innovation That Apple Missed

Windows. We've all used it. And although some of us may even hate it, it's still the most prevalent operating system on earth. Windows XP still has roughly 5 times the market share as Apple's OS X

http://www.financialjuice.com/News/108685/Microsofts-Innovation-That-Apple-Missed.aspx

    

Submitted by Mark j. Grant, author of Out of the Box,

The 100% Prediction of a Reversal
 
A reversal will come. The odds on this are 100%. You cannot have every asset class on the planet in a bubble forever. The world does not operate this way. The disconnect between economic fundamentals and the markets continues but the odds on it continuing forever is Zero. Let us begin the postulate from here.
 
Corporations, banks, the housing market, borrowers and the securities markets have significantly benefited from the actions of the central banks. Money has been poured, dumped and shoved into the financial markets. The total exceeds $16 trillion to date and perhaps twice that amount if we were given accurate data to be able to count it. It was been a Tsunami of money.
 
Liquidity has buoyed the world as the central banks acted in concert and in a coordinated effort to provide fresh cash. The balance sheets enlarge but the money has not significantly helped anyone's economy. Europe is in a recession, America is in a muddle and the world's economies, without all of this money, would be in a sinkhole and so it continues. There is nothing else supporting the economies and the markets except the capital provided by the central banks.
 
Nothing!
 
The disparity is so large and so universal that something will break the bough as the weight eventually cannot be supported. When this happens it will be Katie bar the door. If you fall from ten feet you get hurt but if you fall from one thousand feet the consequences are quite different.
 
All of this is knowable but what is not knowable is what will cause the break. It could be the rise of nationalistic political parties in the U.K. or Germany. It could be social unrest, a major bank failure, a major hedge fund blowing up, some sovereign deciding to quit the Euro or a host of other possibilities. The odds on one item are minimal. The odds that a break will happen somewhere are 100%.
 
The creation of all of this money also has another effect. It causes stupidity. People and institutions rush around to invest their money but when there is too much easy money, such as right before our 2008/2009 debacle, really dumb things are done with money as people search for yield and appreciation. This is another 100% prediction made by me after being in the markets nearly forty years. When too much easy money floats around; stupidity takes its course.
 
Then there is the made-up fantasy data numbers. Just because you do not count liabilities, or because you do not count people not in the work force or just because you claim exports, in the case of China, that bear no resemblance to reality does not mean that the consequences of the real numbers, and not the phony numbers, do not begin to have serious effects. The lies, let's call it what it really is, that are being produced in Europe, America and in China are in lock-step with the printing of newly minted paper. More money, more lies and virtually every government on the planet hands shovels out more manure and heaps it on its citizens.
 
Now the central banks have also entered into currency manipulation. I call it "Global Thermonuclear Devaluation." Lower the value of each and every currency so that the cost of goods and services does not cause Inflation though this game is so dangerous, and having never been tried before, you could get quite serious Deflation. No one on the planet really knows how this new game will work but I can tell you this; edgy games often end in disastrous results.
 
It is quite true that we do not know the "what and the when" of it but my prediction that lacks any "If" will prove to be true. There is no longer an "If." The disparity now is just too great.
 
Play the game as long as you can. It has gone on to date right in line with the increase in the money and in the lies. Play the game. However if you are smart you will have an exit strategy and a defense lined up well in advance before the man with the scythe shows up and takes a swipe at you. I will tell you this. If you have no plan you will be in danger of losing your head when this fellow smiles at you and sluices in your direction.
 
It was January 13, 2010 when I predicted Greece would go bankrupt. I looked at the real numbers and not the drivel we were handed out and made my prediction. The yield on the Greek ten year was 4.38% on that day. This is a yield we have never seen again. Money has been made and lost here but history has borne out my prediction.
 
Later I predicted Ireland, Portugal and Spain. Each country, in my opinion, has gone bankrupt in one form or another. Yes, a giant ruse for Spain with money given to the banks and no admission of guilt from anyone but the charade does not change the reality. Each and every country went over the edge.
 
We stand on a precipice. There is an avalanche of lies, distortions and currency that has been created and is tumbling all around us. It cannot be dodged forever. Those odds are 100%. That is my prediction.

    

"Our positive 2013 outlook for S&P 500 has played out much faster than we expected." That is how the latest equity update from Goldman Sachs, which until today had an S&P target of 1625 for the year end S&P, begins. And, logically, the only option for Goldman is to hike its outlook even more, because not even the Squid apparently could anticipate how quickly the policy it forced down the throats of central banks around the world, levitated markets to surpass its old price targets. The result is David Kostin (who until December had foreseen 1250 on the S&P for the end of 2012) and company were forced to goalseek even higher targets based on tried and true excel model fudging exercises, and such "value" creation as multiple expansion and dividend payments.

To wit: "Our earnings estimates remain unchanged but we raise our dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. Our 2013 return implies a year-end P/E of 15.0x, a one multiple point premium to our fair-value estimate. We forecast dividends will rise by 30% during next two years. Dividend yield is likely to stay around 2%, in line with the 20-year average." For the record, Goldman had previously seen 1,900 in 2015. And now it sees another 200 points of value due to the magic of multiple expansion. That anyone can even pretend to forecast what happens three years into the future at a time when the central banks are injecting $160 billion (and soon $200 billion), and most likely will have to slowdown and halt such liquidity injection resulting in untold stock market carnage, is so beyond commentary we will leave it hanging for the ridiculous statement it is.

As for 2013, at least Goldman leave out any mention of 2013 consensys earnings... for good reason:

So in lieu of early Tuesday humor, here is how Goldman achieves its "target forecasts." All we can conclude from this is that neither Tepper nor Goldman are anywhere near done selling to muppets.

But don't for a second think any of this is earnings driven. As we showed last night, it isn't. It is all based on prayer that Bernanke and his central planning magicians can keep on expanding the increasingly meaningless PE multiple, which incidentally would collapse if and when rate were to go back to historical levels now that corporate debt is at unseen before levels.

We would spend a few more second reading this drivel, but we have better things to do. Anyone fascinated by wasting time with paperweight is urged to do so on their own.