The Wall Street Examiner » Must Read Get the facts. Wed, 04 Mar 2015 03:35:26 +0000 en-US hourly 1 S&P500 Index Continues To Climb As World GDP Forecast Plunges And Atlanta Fed Says Q1 Real GDP Grew At 1.2 Percent Tue, 03 Mar 2015 22:38:36 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

Time to queue the ship’s band to play “Nearer My God To Thee” from the film “Titantic.”

The S&P 500 index has continued to climb over the past year as the World GDP Forecast YoY continues to sink (like The Titanic).


And now the Atlanta Fed has joined the Titanic band and is playing a mournful tune of … Q1 2015 Real GDP growth of 1.2 percent.

gdpnow-forecast-evolutionAnd up on Constitution Avenue, The Federal Reserve swings into action!

Fortunately, Central Banks have flooded the globe with liquidity.

Maybe the Hindenburg Omen should be renamed The Titanic Omen!



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The Secret Behind The Biggest Dirty Hedge Fund Trade Since The Big Short Tue, 03 Mar 2015 22:02:23 +0000 This is a syndicated repost courtesy of Money Morning. To view original, click here.

Suppose I’m the manager of a giant hedge fund. Suppose I’m soliciting you to come into my fund with a few billion of your $100 billion net worth.

Suppose we’re good friends.

You want to come in because you trust me and you know I know how to make money.

However, you’ll only come in if I tell you how the secret trade I’m working really works.

Okay, I’ll tell you. But you can’t tell a soul. Not because what I’m doing is illegal, but because only a few other guys are doing this, and we all know each other, and we’re kind of all in this together – wink, wink – and we don’t want anyone else in our game.

Come a little closer… you’re not going to believe this…

Return of the Vultures

hedge fundFirst of all, we can’t lose money. Not only are we making money on the way up, but when the bottom drops out – and it will, we will make it drop out – we’ll make money on the other side too.

We came up with this trade after analyzing what went wrong leading up to 2008.

Here’s what we figured out.

Back in the buildup of the mortgage bubble, we knew it was a bubble, we knew it was going to break. We were all playing the game, but we didn’t realize we didn’t control the ultimate default rate, and we couldn’t time it, which was the worst thing.

We also know a couple of guys who bet against the bubble and made mega-billions. They didn’t just guess that stuff was going to crash – they had banks make crappy mortgage pools designed to crash and they bet against those. We learned from them, too.

I’ll get to that, and you’re going to love it.

So we’re doing it differently this time. Yep, you heard that right – this time is different.

You see, after the crash settled, when all the people who still had tons of money needed something to believe in, we went to them and said, “Housing.”

And they said, “What! Are you kidding?”

“Distressed housing,” we said.

And they smiled. “We love you vulture guys,” they said.

So, on account of the Federal Reserve System making the cost of borrowing essentially zero, we go out and borrow a ton of money from big banks that aren’t lending to little schmucks to buy houses, or to idiots who want a loan to start a small business that isn’t going to make it in a crappy economy, which the banks know is crappy.

They lend us a ton of money. And we also go out into the bond market and borrow really cheaply. Because, you know, those institutional investors will buy anything with a dollop of yield above what they’re getting anywhere else.

All that money we raised, that’s called leverage.

So, we take all this money and we buy up distressed housing stock around the country. We concentrate our buying in the hard-hit areas.

Now, here’s the beauty of the upside of this trade…

We’re paying cash. And the banks aren’t lending to private borrowers on account of raising their loan standards and not wanting to have to bother with them defaulting again.

So, we buy low and keep buying. You get it. We’re raising the value of the prices of the homes we’ve already bought by buying all the other distressed homes around them.

Now, get this. The people who can’t afford a house, even the ones who can afford a house but can’t get a mortgage, they have to rent. And who do they have to rent from?


The House Always Wins

We own the homes and rent them out. And we can keep raising rents because we’re taking so much of the housing stock off the market.

So, as housing prices are rising, because we’re making them rise, and the value of our stock is going up, guess what? We can raise rents.

People think those areas are recovering and are good places to move to, so they come back in droves. And we rent to them, because they still can’t get mortgages.

I know what you’re thinking. You’re thinking, “How come they can’t get mortgages in areas where housing prices are rising rapidly? Don’t the banks want to lend to them in those areas?”

No. The prices have gone up so quickly that new buyers won’t get much appreciation out of their new purchase, because we’re ringing it all out ourselves, lifting the equity value of our stock. So the banks aren’t bending over backward to give them money.

I’m laughing because I know what you’re thinking by the way you’re looking at me.

You’re wondering how we’re going to get out of this giant million-dollar trade if there are no buyers for the houses we bought because people can’t get mortgages?

Good question.

Here’s the beauty of it. We’re packaging these rental homes and selling the securities to those institutional-investor guys looking for yield.

And the ultimate beauty – that would be the government. We own it.

Those lapdogs are doing what we want. They’re loosening up standards on Fannie Mae and Freddie Mac government-guaranteed loans, and they’ve lowered the insurance that premium buyers who go through the Federal Housing Administration have to pay.

You see, all the tough talk about the government getting out of the mortgage business after it had to bail out big Fannie and Freddie and the FHA became essentially insolvent – well, that was all talk.

You know, free-market stuff.

The truth is the government is our partner in this game. They’re making it easier for people to get mortgages again. Really soon, they’re going to make it even easier. Just wait and see.

When people can get mortgages, we’ll start selling our inflated housing stock to them.

But there won’t be any equity left to build into the value of their homes.

It’s the American Dream.

Why is it the dream? Because we’re going to short against the rental securities we sold. We’re going to buy credit default swaps (CDS), tons of them – and, man, I mean tons of them. Of course our counterparties will be all the big banks that can still trade derivatives.

You remember that, right? That was part of our plan too. We got Congress to pass a provision in the last budget funding kerfuffle that screws Dodd-Frank and lets deposit-taking banks still trade derivatives.

It’s great!

So they will be the counterparties on all our CDS, because, you know, they’re too big to fail and they’ll pay up.

Do you get it?

When everything is in place, we’ll just dump all our housing stock, whatever we have left.

Prices will crash, but we’ll make a fortune, because we’ll be short 10 times what we own.

Oh, and as far as the United States goes, don’t worry. Don’t feel bad. It will be rough for a while, but the government will just make more money available and we’ll start the trade all over again.

A Strong Dollar Is Good, Right? Since 2008 the U.S. dollar has risen against every important currency in the world. A lot of businesses, economies, and investors have benefitted from its strength. But there’s good, bad, and ugly news that comes with a strong greenback. Here’s the damage the mighty dollar could do…

The post The Secret Behind My Hedge Fund Trade on Housing appeared first on Money Morning

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Nasdaq 5,000 Is Different This Time……But Not In A Good Way! Tue, 03 Mar 2015 21:57:33 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

The robo-traders and Wall Street punters were busy painting the tape yesterday, and did bump the Nasdaq composite across the magic 5,000 threshold for the first time since March 2000. But even as Wall Street urged home-gamers to “return with us to the thrilling days of yesteryear”, the caveats about this time is different were flowing with abundance:

This time, the Nasdaq at 5,000 is underpinned by substantial companies with strong sales and credible plans for growth, not wishful schemes to “monetize eyeballs” and sell pet food online.

Not exactly. This time is very different, but, as they say, not in a good way. Not even close.

Since the two days of March 9 and 10 in the year 2000 when the Nasdaq closed over the 5,000, the financial markets have been converted into central bank managed gambling halls and the global economy has bloated beyond recognition by 15 years of non-stop financial repression. Back then, a few hundred stocks were wildly over-valued based on monetizing eyeballs; now the entire market is drastically overvalued owing to the false financial market liquidity generated by $14 trillion of central bank asset monetization—-mostly public debt— since the turn of the century.

As a result, the global financial system and economy are orders of magnitude more fragile and vulnerable to collapse then they were 15 years ago. Indeed, nearly all of the tail winds which managed to quickly revive markets and economic growth after the dotcom crash have now played out, and, if anything, will morph into stiff headwinds in the period immediately ahead.

For better or worse, for example, China proved to be a powerful tailwind after the turn of the century. It functioned as an enormous global locomotive that generated hyper-growth in the energy and resource industries; and which also ignited a supplier boom in a whole variety of EM industries from Brazil’s soybean and iron ore sectors to shipbuilding and semiconductor production in South Korea.

Yet this was accomplished not through healthy, balanced, market- driven investment and enterprise, but through the most spectacular credit bubble in human history. At the end of the year 2000, China’s debt was about $2 trillion and its GDP was about the same.

By contrast, today its credit market debt outstanding is about $28 trillion or 14X greater, according to McKinsey’s research. Notionally its GDP is up by 5X to about $10 trillion, but that doesn’t really mitigate the debt explosion. That’s because China’s GDP growth was a force draft concoction of state directed credit spending that resulted in massive waste and unproductive investment. Rather than catalyze permanent gains in wealth and sustainable output, its erected a phony hothouse economy which will inexorably implode and crater.

So doing, China’s imminent collapse will drive powerful waves of global deflation as its demand for iron ore, coal, petroleum, alumina, copper, manufactured components and intermediates and shipping and distribution services falters. In short, the world economy is drastically overbuilt owing to the “China bid” for materials and supplies—-meaning that what had been a source of extraordinary profits and margin expansion in the world materials and industrial economy will become a sledgehammer on prices, margins and profits in the years ahead.

At the peak in 2012-2013, upwards of 23% of S&P profits were attributable to energy and materials. But the China deflation now gaining a head of steam will vaporize these bloated profits in the years ahead, taking a huge bit out of aggregate corporate earnings.

Or take the hapless case of Europe. At the turn of the century, the single currency was an economic supernova just beginning its eruption. As is now evident, Germany’s credit rating was being seconded to inefficient, corruption-ridden welfare states all over the continent, but especially on the periphery.  And for the first decade, the resulting one-time explosion of public and private credit generated by that false credit transfer did wonders for the reported GDP numbers and the profits of global corporations that answered the EU demand call. It was a tailwind on steroids.

But as is evident from the three charts below, the one-time credit boom that accompanied the euro is over and done. Public and private debt carrying capacity is tapped out. Consequently, eurozone growth hit a peak in 2008 and has flat-lined ever since. Now Europe’s traditional welfare state and dirigisme headwinds to economic growth will be compounded by an endless struggle of aging, uncompetitive economies with peak debt.

Historical Data Chart

Historical Data Chart

Historical Data Chart

Today every European country has a total debt-to-GDP ratio in excess of 300% and many such as Portugal, Ireland and France have debt burdens above 400% of national income. And that means that Europe too will be a deflationary headwind in the years ahead. They cannot stimulate with Keynesian fiscal remedies because the have reached peak public debt; and they cannot grow out from under their crushing public debt burdens through easy money and private credit expansion because households and business in most of Europe are already at peak debt.

All that remains is for the ECB to indulge in a final burst of QE style money printing in a futile effort to reignite growth. But the Draghi monetary tsunami is nothing more than a last incendiary hurrah. It will cause the Euro to eventually plunge through parity with the dollar, meaning that the tailwind of translation gains that flattered S&P profits since the turn of the century will turn into a ferocious headlwind in the years ahead as the euro stumbles toward its final demise.

Finally, consider the debt-bloated US economy. At the turn of the century total public and private debt was $28 trillion and it represented 2.6X GDP. During the next 15 years total US debt erupted to nearly $60 trillion and 3.5X GDP. That latter ratio is unsustainable and a measure of the false economy embedded in the GDP numbers. By contrast, during the pre-1970 era of healthy and sustainable US economic growth, the peacetime leverage ratio against national income was never much above 1.5X.

The bottom line is that corporate sales and profit growth in the US domestic economy after the last Nasdaq bust got a booster shot from the final burst of leverage reflected in the above ratios. Yet that means that some portion of business sales and output were being stolen from the future, not erected from enhanced enterprise and productivity. Accordingly, domestic profit growth will inherently slump in the years ahead—especially because profit margins have soared far beyond any prior historical experience and have already begun to rollover.

Needless to say, the nation’s monetary politburo remains oblivious to these global realities of peak debt and the deflationary correction now emerging after nearly two decades of lunatic money printing by the central banks. The Fed’s balance sheet did indeed explode from $500 billion when the Nasdaq last crossed 5000 to $4.5 trillion today. But even Yellen’s merry band of money printers know that eruption was a one time parlor trick that has not worked. The jig is up, and the last 15 year’s egregious inflation of financial assets by means of central bank monetary expansion cannot be repeated or even sustained.

So today what is different is not the Wall Street spiel that Nasdaq is anchored by the likes of Apple rather than Webvan. What is really different is that the broad market represented by the S&P 500 is trading at the tippy top of its historic range—- 20X reported earnings—-in a world where PE multiples and profits are deeply imperiled. That is, the headwinds arising from the very central bank aberration that cushioned the collapse of Nasdaq the first time around will soon come to bear on the entire market, not just the narrow sector of high flyers that confused eyeballs with earnings.

This time is indeed different. Not in a good way. Not at all.

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What’s America’s Fragility Score? Tue, 03 Mar 2015 15:07:00 +0000 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

By this measure, the U.S. scores very poorly: 4 out of a possible 5 on the Fragility Index.

There is a certain logic to the idea that stability is a good predictor for future stability: if a nation’s economy and governance are stable and devoid of disorder, this trajectory of stability will be durable, right?
Well, actually, no. Nassim Nicholas Taleb and co-author Gregory F. Treverton argue in their essay The Calm Before the Storm: Why Volatility Signals Stability and Vice Versa that “the best indicator of a country’s future stability is not past stability but moderate volatility in the relatively recent past.”
Taleb and Treverton list five sources of systemic fragility:

“For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought, and seemingly placid states turn out to be ticking time bombs.”

These principles are drawn from Taleb’s work on fragility and anti-fragility as described in his book Antifragile: Things That Gain from Disorder.
These five factors function as a rough rating system to measure a nation’s fragility.Nations with near-zero scores in all five factors are anti-fragile (i.e. durable and able to weather crises) and nations with high scores in all five are fragile, i.e. prone to instability and failure when faced with crisis.
Let’s list all five sources of fragility:
1. centralized governing system
2. undiversified economy
3. excessive debt and leverage
4. lack of political variability
5. no history of surviving recent systemic shocks
How does the U.S. stack up? Let’s go through the list.
1. Highly centralized power structure/governance: yes. Apologists can claim that government is decentralized via state and local governments, but this ignores the reality that virtually every policy of any importance is set in Washington by a relative handful of politicos, lobbyists and technocrats of the Deep State.
2. Undiversified economy: no. Despite the corrosive and venal dominance of the state, Wall Street/bank finance and the unproductive bubble-blowing FIRE economy (finance, insurance, real estate), the U.S. economy remains diverse.
3. Excessive debt and leverage: yes. One glance at this chart says it all:
4. Lack of political variability: yes. Despite the frantic claims of partisans, the Demopublicans/Republicrats are in essence one ruling party with a few cosmetic differences to fire up their proles and partisans: If You Really Think It Matters Which Party Controls the Senate, Answer These Questions (November 6, 2014)
5. No history of surviving recent systemic shocks: yes. Some will argue that the U.S. weathered the global financial meltdown of 2008-09 and so that counts as a recent shock, but I would counter that the Status Quo’s “fixes” were either half-measures that rewarded the banks for their perfidy or fake reforms that added costs and rewarded vested interests, i.e. were actually counter-productive: financial “reform,” ObamaCare, etc.
All the Status Quo did to resolve the crisis was print $4 trillion in new Federal Reserve money, borrow $8 trillion in U.S. Treasury bonds and offer guarantees of $23 trillion to banks that should have been liquidated. Absolutely no real structural changes were made to the Status Quo power structure of the nation.
While 9/11 was a shock, was it equivalent to Watergate or the Vietnam War or the civil rights movement? I would argue that 9/11 was not equivalent because it did not divide the nation politically or challenge it economically.
From this perspective, it could be argued that the U.S. has not had a systemic political or economic crisis for 40 years. That is not recent; it’s two generations ago.
Printing and borrowing trillions of dollars does not qualify as weathering a crisis. Clicking a few keys to create or borrow trillions only papers over the systemic issues that were the sources of the instability.
By this measure, the U.S. scores very poorly: 4 out of a possible 5 on the Fragility Index. The stability we see now does not guarantee stability in the future; rather, it presages disorder and instability as the “just borrow/print another couple trillion” fixes fail to repair the systemic rot.
Duct-taping a failing Status Quo together with borrowed trillions is not anti-fragility. 

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Bernanke: Presidents Should Be Able To Declare Economic Emergencies (As Yellen Pleads “Don’t Audit Me, Bro!”) Tue, 03 Mar 2015 15:00:50 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

Former Federal Reserve Chair Ben Bernanke recently suggested that The President should be able to declare ECONOMIC emergencies. What does that mean? Martial law? Prison camps? Probably not. But unlimited borrowing and spending by the Federal government to implement a recovery (and bypassing Congress) is the likely answer.

it might make sense to give “the president some ability to declare emergencies or take extraordinary actions and not put that all on the Fed,” Bernanke said at a conference. “The constitution gives the president significant flexibility to respond to military situations,” in part because they are chaotic, he noted.

This is a Keynesian’s dream! Imagine all the broken windows that will occur to justify the manufacturing and installation of new windows.

Yes and if The President can declare economic emergencies, then The President can spend unconstrained by Congress.

If this wasn’t bad enough, we have the current Federal Reserve Chair, Janet “The Shadow” Yellen screaming “Don’t audit me, Bro!” As in, DON’T audit The Fed.

Her argument? An audit would be overly political.

After I stopped laughing, I decided to lay out a few points.

First, The President nominate the Chair of The Federal Reserve Board and the US Senate confirms the nominee. The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. If this isn’t already political, I don’t know what is!

Second, losses of The Fed’s asset purchases are sent to the US Treasury for payment. As a taxpayer, I think I should be able to know what I am liable for in taxes. And since The Fed is the largest holder of US Treasury debt, I think knowing what is happening behind the curtain would be helpful.

fedholdingsThe standard comeback is “The Fed is already audited by others” and “The President would NEVER do that!” These comebacks are unconvincing.

Particularly after reading “Obama “Very Interested” In Raising Taxes Through Executive Action.”

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The Itch Is Back! Zero Down Payment Mortgages Return! (So Much For Learning Any Lesson From The Financial Crisis) Tue, 03 Mar 2015 14:27:57 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

After the financial crisis of 2008 (nicely summarized by this UK Parliament study RP09-34 (2)), the financial system vowed to return to safe underwriting standards such as 20 percent down payments on mortgages. The US financial system returned to high down payments for a while, but …. the itch is back to make zero down payments loans again.

First, of course, you have the FHA which stuck by it’s low down payment guns (3.5 percent).

Second, you have mortgage giants Fannie Mae and Freddie Mac pushing the enveloped with 3 percent down payment loans.

Third, you have this story from Housing Wire,  “BBVA Compass launches zero-percent down mortgage program.”  (Banco Bilbao Vizcaya Argentaria, a Spanish bank).

In recent months, the Obama administration has taken several steps to expand the credit box and make it easier for borrowers, especially first-time homebuyers, to buy a home. To that end, in October, Fannie Mae and Freddie Mac announced 97% loan-to-value offerings.

For some borrowers, saving up 3% for a down payment is still a hurdle they can’t quite clear. However, a new program from BBVA Compass (BBVA) will allow borrowers to put down even less for a down payment, in fact.

BBVA Compass announced the launch of a new program, called Home Ownership Made Easier or HOME for short, designed to help low- and moderate-income borrowers become homeowners by helping to overcome one of the “most significant barriers” to homeownership, the down payment.

In the HOME program, qualifying borrowers will be eligible to finance 100% of the home’s value. In addition to offering 100% LTV loans, BBVA will also contribute up to $4,500 toward “certain closing costs” associated with obtaining a home loan.

What could go wrong? 100 percent LTV lending with lenders paying $4,500 of closing costs?

Like this?

bfmB912Fourth, you have the American Enterprise Institute (AEI) repackaging the 15 year mortgage with a maximum LTV (loan-to-value ratio) of 100 percent that allows for repurposing the 5 percent in down payment funds for a 1.25 percent permanent rate buydown. The 15 year mortgage rate already available is 3.03 percent compared to a 3.85 percent 30 year fixed, so the AEI’s plan is to buy down the rate even further.

3015ratediffI am a big fan of the traditional 15 year mortgage because of it’s lower interest rate. But the 15 year mortgage also requires a larger monthly payment to amortize the mortgage over 15 years. This will raise the mortgage payment considerably and borrower’s may not be able to meet the debt-to-income (DTI) requirement, even at the lower interest rate AFTER the buydown.  AND it is a 100 percent LTV mortgage!

AND this is hardly a mortgage product for low income households. We already have a product for low-income households — it’s called RENTING.

So there you go, sports fans. The financial system is returning to 100 percent (or thereabouts) LTV lending.

And if the system crashes again, we can sing along with another Elton John song, “Saturday Night’s Alright For Fighting!”


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Those ‘tanked’ Russian Forex reserves Tue, 03 Mar 2015 13:14:00 +0000 This is a syndicated repost courtesy of True Economics. To view original, click here.

So, according to some Western media, Russian forex reserves have tanked in February 2015. What happened, folks?

At the end of January 2015, Russian forex reserves stood at USD376.208 billion. Of which USD327 was in currency and liquid assets form. The latest data, given to us is for February 20, 2015 when, according to the Russian Central Bank, the reserves dropped to USD364.6 billion – a drop of 3.11% or USD11.6 billion. That’s a lot of cash. But is not qualifying it as ‘tanked’. Here’s a chart plotting all reserves changes m/m

So (incomplete still) data for February puts drawdowns from the Forex reserves at USD11.61 billion against 12 mo running average monthly drawdown of USD10.73 billion. February marks the fourth biggest drawdown in 12 months. Again – large, significant, but ‘tanking’?!

What is more critical is the source of drawdowns: how much of this is due to repayment of corporate and sovereign debt? How much is down to changing dollar value of other assets held? How much taken in form of loans to companies and banks (at least in theory or in part – repayable)? and so on.

No, the numbers are not catastrophic. Although they are unpleasant. Just as the gloating in the media is unpleasant: if the U.S. were to cut its external deficit by 2/3rds – what would be the headlines in Western media? And now note: February drawdowns from the forex reserves marked:

  • 2/3rds reduction in drawdowns compared to December (real disaster of a month); and
  • Large chunk of these drawdowns probably (we will know later for sure) went to fund debt reductions of Russian banks, companies and sovereign.


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Sober Look says the Eurozone is on the road to recovery but with a lingering risk Tue, 03 Mar 2015 02:37:00 +0000 This is a syndicated repost courtesy of Sober Look. To view original, click here.

Back in September the idea that the Eurozone’s economy could potentially undergo a recovery (see post) was met with some skepticism. And yet here we are. The EuroStoxx50 index is up 14% for the year while the Dow is up 2.5%. We now see plenty of indicators showing strengthening economy in the euro area.

To begin with, the area’s credit conditions continue to improve as loan growth is about to turn positive for the first time since the middle of 2012.

Source: ECB,

Corporate and household loan expansion, while still terrible relative to the US, is on the right path. This is particularly true after the conclusion of the ECB’s stress tests (which were a major source of uncertainty in 2013).

Source: ECB

The area’s bank deleveraging is ending (see post) and the strongest evidence of that can be seen in the acceleration of the broad money supply growth. The M3 expansion trend has been fairly consistently beating economists’ forecasts.

Source: ECB/

Both business and consumer sentiment surveys, which soured significantly after the Russia sanctions went into effect, showed marked improvements recently. Part of the reason is the decline in fuel prices.

Source: TradingEconomics

Moreover, the labor markets are exhibiting signs of stabilization. Just to be clear, the declining unemployment is highly uneven across the various states and nobody claims the job situation in the Eurozone is in good shape.

By any measure, the job markets in some of the periphery nations are dreadful. But on a relative basis, hiring across the euro area has been improving.

RBS: – Baby steps. The Spanish labour market has enjoyed its best year since 2007 – a start on a 23.4% unemployment rate.

Source: RBS

A number of these surprises to the upside are reflected in the Citi Economic Surprise Index, which shows the Eurozone diverging from the US.

Source: ‏ @sobata416, @valuewalk, @HedgeLy

Going forward, the sharp deterioration of the euro and the ECB’s expected massive bond buying program should halt deflationary pressures (although just as the case in Japan, inflation is likely to remain below the ECB’s target for a while). Weaker euro may also help the area’s exporters.


But the euro area’s economy is not out of the woods yet. The greatest and the most immediate risk to the recovery remains the developments in Greece. While the Eurogroup has kicked the can down the road, the situation could deteriorate quickly even before the bridge financing matures. Depositors are continuing to withdraw money out of Greek banks.

Source: @Schuldensuehner

Nobody wants to get caught with a Cyprus type situation where people’s property was confiscated by the state via deposit haircuts. An even worse scenario would be having deposits forcibly converted into drachmas that will find no bid in the FX market. The Greek government is already taunting the Eurogroup with creative drachma notes designs (Greece will need take lessons from Zimbabwe and add a few zeros to some of these notes).

Source: @AmbroseEP

As these deposits leave, Greek banks lose their limited sources of private funding and increasingly rely on the Bank of Greece for the emergency liquidity assistance (ELA) loans. In fact investors have little confidence that the banks are sufficiently capitalized after the last bailout to withstand this transition. That’s why today alone, the banking sector took a 10% hit.

Why does this relatively small nation present such a risk to the Eurozone’s nascent recovery? The ELA loans are financed via Target2 as the Bank of Greece borrows from the Eurosystem. In a Grexit scenario the Bank of Greece will be unable (or unwilling) to repay these loans, forcing the Eurosystem (the ECB) to take a significant hit.

There is no question that the EMU will easily withstand such an event – it’s not a great sum of money in the larger scheme of things. But the loss of confidence and the political nightmare associated with recapitalizing the ECB as well as the fears of contagion to other periphery nations may send the euro area back into recession. Will depositors in Italy, Portugal, and Spain begin to move their deposits out as well in order to avoid being “drachmatized”? Economists often forger, it’s less about the specific euro amounts and more about the psychology of fear.

If however the Eurogroup manages to somehow stabilize the Greek situation, a steady economic recovery could be in store for the Eurozone. The next few months will be crucial.

Sign up for Sober Look’s daily newsletter called the Daily Shot. It’s a quick graphical summary of topics covered here and on Twitter (see overview). Emails are NEVER sold or otherwise shared with anyone.

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Bubble Driver: This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis(?) Mon, 02 Mar 2015 22:00:11 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

Forbes Magazine has an interesting piece entitled “This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis.”

The vastly worse Libor “scandal” that I am referring to is the fact that the Libor has stayed at record low levels for the past half-decade, which is helping to fuel a massive economic bubble around the entire world that will end in a devastating financial crisis that will be even worse than the Global Financial Crisis. Instead of causing a few tens of billions of dollars worth of losses like the Libor rate-fixing scandal, the “Libor Bubble” will gut the global economy by trillions of dollars.

Here the the 1 month LIBOR rate compared to The Fed Fund target rate.

libor1mthfedOther than brief episode in September 2008, The Fed seems to be driving 1 month LIBOR.


To quote Robert DeNiro from Taxi Driver, “Are you looking at me?”

U.S. Federal Reserve Chair Yellen testifies before a House Financial Services Committee hearing on Capitol Hill in Washington



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Bengladeshi Butter Production Flashing Major Buy Signal for US Stocks Mon, 02 Mar 2015 21:46:29 +0000 This is a syndicated repost courtesy of Economy and Markets. To view original, click here.

Get ready to buy.

Our most reliable technical indicator — one that has historically been 99% accurate — is suggesting that stocks are poised for a major breakout.

Bangladesh butter production surged in February, as moderating grain prices allowed Bangladeshi dairy farmers to boost production by getting higher milk yields from their existing stock of cows. Meanwhile, butter production in neighboring India dropped significantly in February, as a change in government farm subsidies forced Indian dairy farmers to cull their herds.

With Bangladeshi butter production set to rise further, we should be looking at a massive rally in the S&P 500 throughout March and April.

By now, I sincerely hope you realize I’m joking.

Whether the S&P 500 goes up, down or sideways over the next two months will have absolutely nothing to do with Bangladeshi butter production. But in a paper published two decades ago, David Leinweber and Dave Krider found that butter production in Bangladesh had the tightest correlation to the S&P 500 of any data series they could find.

It wasn’t GDP growth and it wasn’t earnings… it was Bangladeshi butter, which explained 99% of the S&P 500’s movements.

Image For Trading Strategies: Do You Know Your Bread From Your Butter?

The authors weren’t quacks. They knew the correlation was a random coincidence and completely meaningless. But they published the paper to get a good laugh.

Stay with me here… they wanted to make an important point about number crunching. Correlation does not mean causation and if your model doesn’t make intuitive sense… it’s probably bogus.

I’m not bashing quantitative models here. Done right, they can help you build a really solid trading system. Various value and momentum models have been proven to work over time.

But the trading system needs to reflect some sort of fundamental reality or it’s one small step removed from voodoo.

Adam touched on the same idea two weeks ago in Economy and Markets. As Adam wrote, “Computers, databases and statistically sound algorithms can only refine the discovery and implementation of a fundamentally sound investment strategy. At the end of the day, computer algorithms or not, you still need a rock-solid investment strategy.”

The model isn’t the strategy. It’s a tool to help you execute… nothing less, nothing more.

Whenever you see someone touting a trading strategy, ask for an explanation of why it works. Back-tested returns aren’t good enough. If they can’t explain the fundamentals behind their model, it’s probably just a matter of time before they blow up.

Oh, and one more thing about Bangladeshi butter. Leinweber wrote in Forbes a few years ago that he still gets phone calls — 20 years later — asking for current butter production figures.

Image For Trading Strategies: Do You Know Your Bread From Your Butter?

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