The Wall Street Examiner » Must Read Get the facts. Fri, 25 Jul 2014 19:11:12 +0000 en-US hourly 1 But There Are A Few Differences Between Amazon and the Postal Service Fri, 25 Jul 2014 14:51:27 +0000 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

When Amazon reported second quarter earnings, or rather losses, it surprised no one, though some people were surprised that it lost that much ($126 million). To make us feel better about those losses, and to be able to beat analysts’ expectations later, it preannounced losses between $410 and $810 million for the current quarter. Analysts fell all over each other dodging the question how a company with over $19 billion in revenues could lose that much, and so consistently.

Amazon has been doing this sort of thing for years. Countless analyses have been written about how terrible its financial performance has been, and how the metrics have been deteriorating, including the operating margin that has swooned from 4.9% in Q2 2010 to a nearly invisible 0.8% now (chart). The company made a tiny bit of profit in 2012, lost money in 2013, and is starting this year out in the hole as well.

“We continue working hard on making the Amazon customer experience better and better,” explained CEO Jeff Bezos in the press release. “We’ve recently introduced Sunday delivery coverage to 25 percent of the U.S. population, launched European cross-border Two-Day Delivery for Prime….” Etc. etc.

He sounded like Patrick Donahoe, CEO of the US Postal Service. Amazon has a lot in common with USPS: they’re in the same ballpark in terms of revenues, both dominate their markets, and neither can figure out how to make money.

But there are a few differences between Amazon and USPS:

Bezos can run his show as he sees fit. OK, there is a board, but it doesn’t seem to give him a hard time about the company’s performance. As long as the stock keeps going up, who cares?

The Postal Service, which had revenues of $16.7 billion in Q2, can’t even sneeze without Congress giving it prior approval. Shutting down unneeded post offices or dropping Saturday delivery? Addressing its huge pension obligations or switching to a pension plan of the kind Amazon has (LOL)? Forget it. Not if any of it would happen inany congressional district and impact negatively any voters. A lawmaker’s sole job is to hang on to his or her job, and everything else serves to get that accomplished.

In return for its valiant service as Congressional and public punching bag, USPS is allowed to perform financially about the same as Amazon: losses as far as they eye can see.

So traders weren’t amused with Amazon’s losses, and there were some hick-ups in revenues too, and the stock plunged over 10% in after-hours trading and is now down 20% from its $400 peak at the end of last year.

Bezos doesn’t care. At least Donahoe gets grilled ceremoniously by Congress from time to time about the losses USPS generates. And when he comes up with ways to save money, lawmakers in whose districts he wants to save money in whack him over the head.

Bezos is not subject to this sort of enlightened treatment.

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(What’s Left of) Our Economy: Another Body Blow for Manufacturing Renaissance Claims Fri, 25 Jul 2014 14:38:53 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

Manufacturing & Technology News continues to be invaluable for anyone who really cares about the state of America’s industry and the rest of its productive economy. Here’s just the latest example.

President Obama, the Boston Consulting Group, and numerous other cheerleaders keep blathering on about a surging wave of manufacturing reshoring keying an historic renaissance in the sector. Reliable supporting data is nowhere to be found (quite the contrary), but this doesn’t faze many of the cheerleaders. They’re often happy to base their claims largely on surveys of what executives profess to be thinking seriously about (whatever that means) or on any other straw they can grasp. And gullible reporters are just as happy to parrot the results.

Manufacturing & Technology News just took the obvious next step and actually tried to find out what these executives actually do. And at least for (what’s left of) the American electronics industry, it turns out that although many of its leaders have said they’ve been “interested” in bringing some of their overseas production back stateside, “few companies to date have taken action,” according a follow up study conducted by an electronics industry association. The bottom line: “On-shoring is still a relatively rare phenomenon.”

Also fascinating: Of the (10!) companies that were actually found to have returned factories and jobs to the United States, half saw their production costs rise, but half saw no change, as the benefits of being closer to their customers geographically offset the generally higher level of other U.S. domestic manufacturing costs. At the same time, only two of the companies saw their sales rise.

Nor does the electronics industry association expect meaningful reshoring to take off for the foreseeable future – mainly because of those higher U.S. production costs (like wages), and because (surprise!) taxes and regulations in first world America are a heavier burden on businesses than they are in third world China or Mexico. Moreover, decades of mass electronics offshoring has left the United States with a thoroughly supply chain in the sector.

Critics often complain that President Obama too often confuses talking about a problem with solving a problem. The persistence of reshoring hype shows that, when it comes to strengthening domestic manufacturing, he’s anything but alone.

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Are We Addicted to Failure? Fri, 25 Jul 2014 04:00:00 +0000 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

Like all addicts, Central Planners are confident they can manage the monkey on their back. But this is a self-serving illusion.

Addiction is many things, but beneath its complexities it is a self-destructive expression of the desire to avoid or suppress pain. The pain might be physical or the stuff of the mind, memories or inner demons or tortured misgivings about one’s choices, soul and life.

Though the self-destructive aspects of the addiction are painfully visible to observers, to the addict they represent a solution: perhaps not the ideal one or even a good one, but a solution nonetheless.

Fear plays a big part in many addictions–fear of life without the addictive salve.The fear in an addict’s eyes when the fix is not forthcoming is haunting to all who witness it.

To the non-addicted observer, addictions are not successes; they are failures of one kind or another, and those who care about the addict seek some way to extract the addict from the grip of his/her addiction, and from the fear that often drives it.

I have recently been wondering if America is addicted to failure. The oft-repeated definition of insanity is doing the same thing over and over again and expecting different results, generally attributed to Albert Einstein.

But given the right mix of blindness and fear, doing the same thing over and over again and expecting different results might not be insanity but a self-destructive addiction to failure.

In this light, please consider this chart of the broad-based U.S. stock market index, the S&P 500, which I have marked up as an addiction to failure:

The source of this addiction is a fear of life without credit/asset bubbles. Fearing life without the rush and high of asset bubbles, we see an addiction to financial bubbles as asolution in the same terrible way a heroin addict sees smack as a solution: not as a long-term solution or even a good one, but a solution nonetheless, because it makes the pain of facing life without Central Planning financial bubbles go away at least temporarily.

But bubbles inevitably leads to overdose and a subsequent self-destructive crash.Our central bankers/planners have injected enough monetary heroin into the nation to guarantee not just the rush and the high but the overdose that leads to a destructive crash.

Like all addicts, Central Planners are confident they can manage the monkey on their back. But this is a self-serving illusion; it’s the monkey who controls the addict, not the other way round.

If we’re not addicted to failure, why do we tolerate a central bank that creates one rush-high-overdose-crash after another? Perhaps it’s time to confess that we’re addicted to failure because we’re too afraid to face life without this financial addiction.

Pretty sad, huh? Like all observers, those of us without monetary heroin in our veins wonder when the poor addict will finally wake up and choose a path that isn’t self-destructive. But as many of us know from personal experience, it often takes a near-death experience to awaken the instinct for survival in the addict. Sadly, sometimes not even that is enough, and a once-great nation spirals down to ruin.
If you missed this week’s series:

The Rot Within, Part III: Our Political Order Is Defined by Favoritism and Extortion

The Rot Within, Part II: Inflation Is Not “Growth”

The Rot Within, Part I: Our Ponzi Economy


Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

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World Stock Markets Trading Discussion – Wispy wending Fri, 25 Jul 2014 01:35:22 +0000 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers undulating: Kiwis -0.1%, Aussies -0.2%, Nikkers +0.5% and Sth Korea +0.1%.

Aussie sectors dipping into the red: Gold -1.7%, Consumer Staples -0.8% and REITS -0.7%.







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The Flame-Out Of Abenomics, in One Crucial Chart Thu, 24 Jul 2014 22:58:08 +0000 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

Abenomics, the new economic religion of Japan, has kept some of its promises: It created inflation while wages stagnated, thus whittling down real incomes, further squeezed by the broad consumption tax hike. It devalued the yen by 25%, thus vaporizing a quarter of the wealth of the Japanese without having to tell them directly. And to make up for the tax increase on consumers, Abenomics elegantly cut taxes for Japan Inc. Grudging respect is due Prime Minister Shinzo Abe for these noble accomplishments.

In other areas, his record is spotty. One of the goals of his policies was to fire up exports by making them cheaper overseas and reduce imports by making them more expensive to consumers and businesses at home. It would crank up Japan’s manufacturing sector and lead to a trade surplus that would inflate GDP, make Abe a hero, and save Japan.

Exports and trade surpluses have been vital to the Japanese economy. And reconstituting them has been a cornerstone of Abenomics. But that plan has gone to heck.

Not step by step, gradually over time, but in monthly leaps, whose size surprised even Abenomics-cynics like me. And the Ministry of Finance rubbed it in today when it published the trade statistics for June.

Exports, instead of soaring due to the watered-down yen, dropped 2.0% from a year ago to ¥5.94 trillion. Imports, instead of dropping due to consumers being squeezed by higher prices and stagnating incomes, soared 8.4% to ¥6.761 trillion. The resulting goods trade deficit jumped to ¥822.2 billion.

It was the worst trade deficit for any June ever. It was over four times as bad as last year’s “worst June deficit ever.” In June 2012, Japan still had a surplus. Historically, June is one of the better months for Japanese trade. But that surplus in June 2012 was Japan’s last. What followed were 24 months of relentlessly deteriorating trade deficits. The worst series in Japan’s recorded history (far ahead of the second-worst, the 14-month period in 1979-1980).

For the first six months this year, compared to the same period last year, the trade deficit soared 57%!

Here is what the flaming success of Abenomics looks like, boiled down to one chart:


The debacle was spread across the board, starting with its largest trading partner, both in terms of exports and imports, China.

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The current ECB programs create a QE-like environment, setting up for moral hazards Thu, 24 Jul 2014 21:58:00 +0000 This is a syndicated repost courtesy of Sober Look. To view original, click here.

In spite of weakening economic growth, persistent credit contraction, and dangerously low inflation rate in a number of member states (chart below), the ECB continues to resist calls for Fed-style outright securities purchases. Instead the central bank is betting on the recently announced TLTRO program (see post).


The key reason for avoiding outright quantitative easing is, supposedly, the ECB’s fear of creating a moral hazard. With a ready buyer of government debt and low market rates, some member states would no longer focus on cutting deficits.

Natixis: – The ECB’s problem is that it does not want to create incentives for governments to refrain from correcting fiscal deficits or avoid improving their public finance situation. What is rejected by the ECB is the moral hazard that would result from the central bank buying government bonds.

Fair enough. But a recent report from Natixis argues that the combination of the TLTRO lending and the OMT backstop program creates conditions that are nearly identical to quantitative easing.

Any QE program aims to increase the monetary base (by raising banks’ excess reserves) and to push down longer term interest rates via securities purchases. As an extreme example of this, consider Japan’s massive QE effort (see post). Both objectives have been met: long-term rates are at ridiculously low levels (0.53% on 10-year JGBs) while the monetary base is at a record.

Source:, BOJ

Similarly (though not to the same extent) the ECB’s programs will mimic QE without actually buying any government securities. Here is how:

1. Long term rates across the Eurozone are already at incredibly low levels. The ECB’s forward guidance, weak growth, and recent geopolitical risks have pushed German rates to new lows (see chart). On the other hand the OMT program, often called the “Draghi put”, has suppressed periphery yields. Furthermore, with short-term rates near zero and low capital requirements to hold sovereign bonds, the euro area banks have been loading up on this paper in a massive carry trade – pushing yields even lower.


2. But what about increasing the monetary base? The expectations are that the TLTRO program will soon increase the Eurosystem balance sheet by as much as €700 billion. €300 billion of lending is expected to hit the banking system in September and the rest over the next couple of years. The monetary base will begin rising quickly.

The combination of the two items above is effectively QE. So how are the Eurozone member states reacting to this? Natixis argues that the QE-like environment has already created something of a moral hazard by encouraging these governments to pay less attention to their fiscal situation. If borrowing is easy and cheap, the temptation to keep on spending is too great for many politicians. Deficits in a number of the member nations now show minimal improvements.

Source: Natixis


Natixis: – The ECB accepts to go very far in the choice of expansionary monetary policies (very long-term repos [4-year TLTRO loans], de-sterilisation of the SMP [see post], forward guidance, purchases of ABS in the future, but for the time being it rejects the idea of quantitative easing with purchases of government bonds. The explanation is the risk that, if the ECB buys government bonds, governments may be encouraged to no longer reduce their fiscal deficits.

But this explanation is of a dogmatic and not an empirical nature: the measures already taken by the ECB have already encouraged governments to no longer improve their public finances.

While optically the ECB’s programs look different from QE, in reality the central bank has already launched a QE-like set of programs, setting up for a moral hazard which it has been desperately trying to avoid.


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 distributed via and are NEVER sold or otherwise shared with anyone.

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Why Silver Prices Are Dropping Today Thu, 24 Jul 2014 18:48:39 +0000 This is a syndicated repost courtesy of Money Morning. To view original, click here.

Silver prices are taking a dive today (Thursday) on the heels of encouraging economic news, profit-taking, and anemic summer trading.

The New York spot price for an ounce of silver plunged to $20.45 a little after noon EDT, a 2.2% drop from the previous day’s close of $20.90.

One of the likely culprits was positive economic news out of the Eurozone, with the release of the Markit Flash Purchasing Manager’s Index, which tracks business activity based on output, new orders, employment, and prices across sectors. It indicated that there were better growth prospects for a region that has, for a while, been grappling with economic tumult.

Silver prices today

“Business activity picked up again in July to suggest that the economy is growing at one of the strongest rates we have seen in the past three years,” said Chris Williamson, chief economist at Markit.

While this may be encouraging for the Eurozone, it only works to diminish investors’ immediate needs for safe-haven assets, like silver. Precious metals tend to get a lot of attention from investors in times of panic, as they look for a vehicle to hedge against weakening currencies. The European credit crisis has been a big driver of silver investment since it started.

“Like other precious metals, silver will continue to benefit from concerns about European sovereign credit quality,” Alex Bryan, an analyst at Morningstar wrote. “However, as conditions in Europe improve, investment demand for silver may contract.”

More Factors Pushing Down Silver Prices

There are also encouraging developments in the U.S. job market. The U.S. Labor Department this morning released data showing that in the week ending July 19, weekly jobless claims fell to 284,000, a decrease of 19,000 and the lowest level of unemployment insurance claims since February 2006. Precious metals took cues from this positive labor market development and fell accordingly.

Another factor pushing down the price of silver was the cooling off from a six-week rally.

After bottoming out at sub-$19 lows at the beginning of June, silver rallied more than 14% to three-month highs. Many investors are simply looking to take some gains on this surge as silver trading moves into the summer doldrums.

“I have to say that I do think this is simply the market’s healthy process of profit taking,” said Money Morning Resource Specialist Peter Krauth. “It had a good run lately.”

Finally, it also may be that the period of weak summer trading that has historically characterized this time of the year is settling in. This season tends to hit silver prices from both ends of the demand spectrum.

“Investment demand and fabrication demand have strong seasonality,” Jeffrey Christian, managing partner at CPM Group told Money Morning. “You tend to see the weakest period of demand for silver in July and August both from investors and industrial users.”

Trading volume for silver is down 42% so far this week compared to last week.

“Summer is kind of steady to trending weaker just because people aren’t paying attention,” Checkan said.

Investment Demand Driving Silver Prices

Silver’s price is determined by both demand from investors and industrial users, as the white metal is a great heat conductor and very resistant to corrosion. It is a component of jewelry production, and can be found in electrical circuits and wiring, electronic screens, and photographic film.

But as Morningstar’s Bryan noted, since 2008, “nearly all of the increase in demand for silver has come from investors.”

According to The Silver Institute’s 2014 World Silver Survey, fabrication demand has been down for three straight years. With flagging industrial demand, silver prices are becoming more sensitive to investment whims.

“If investors lose interest, silver prices could fall with little warning,” Bryan wrote.

Gold is down on the day too, below the important $1,300-an-ounce benchmark to $1,290.10 for a 1.1% drop on the day. Silver tends to attract like-minded investors and will often get residual investment interest. However, its movements are generally more exaggerated because silver has a smaller footprint in the precious metals complex.

“The silver market is tiny compared to the gold market,” Richard Checkan, president and chief operating officer of Asset Strategies International told Money Morning. “It’s like throwing a rock into a lake versus a puddle, the relative splash is much bigger in the puddle.”

That’s why silver is down twice as much as gold on the day.

Despite gold and silver’s drops today, gold mining stocks are soaring in 2014. See how these investors are cashing in on 56%, 75%, and 83% gains

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10-Year TIPS Treasury Auction Results Thu, 24 Jul 2014 17:02:47 +0000 This is a syndicated repost courtesy of Treasury Auction Results. To view original, click here.

CUSIP: 912828WU0
Term and Type: 10-Year TIPS
Series: D-2024
Reopening: No
Interest Rate: 0.125%
High Yield: 0.249%
Price: $98.959115
Allotted at High: 60.46%
Total Tendered: $37,355,853,600
Total Accepted: $15,004,900,000
Auction Date: 07/24/2014
Issue Date: 07/31/2014
Maturity Date: 07/15/2024

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C’mon Alan! Bubbles Are Caused By Central Bankers, Not “Human Nature” Thu, 24 Jul 2014 15:57:50 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

Alan Greenspan just cannot give up the ghost. During his baleful 18-year reign, the Fed was turned into a serial bubble machine—and thereby became a clear and present danger to honest free market capitalism and an enemy of the 99% who do not benefit from the Wall Street casino and the vast inflation of financial assets which it has enabled.  His legacy is a toxically financialized economy that has extracted huge windfall rents from main street, and left it burdened with overwhelming debts and sharply reduced capacity for gains in real living standards and breadwinner jobs.

Yet after all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear in yesterday’s interview that the blame cannot be placed at his feet where it belongs:

I have come to the conclusion that bubbles, as I noted, are a function of human nature.

C’mon. The historical record makes absolutely clear that Greenspan panicked time and again when speculation reached a fevered peak in financial markets. Instead of allowing the free market to cleanse itself and liquidate reckless gamblers employing too much debt and too many risky trades, he flooded Wall Street with liquidity and jawboned the speculators into propping up the casino.  Within months of his August 1987 arrival, for example, he panicked on Black Monday and not only inappropriately flooded with liquidity a Wall Street that was rife with rotten speculation and a toxic product called “portfolio insurance”, but also intervened directly to garrote the markets attempt at self-correction.

In that context he sent his henchman, Gerald Corrigan who was head of the New York Fed, down to Wall Street to break arms and bust heads in an effort to insure that firms continued to trade with each other and extend credit where their own risk control managers appropriately wanted to cancel credit lines to insolvent counter-parties.  Then and there, the Greenspan “put” was born, and the stock market was en route to becoming a Fed-driven casino rather than an honest venue for real price discovery. Indeed, the entire Greenspan-Corrigan mission in the wake of Black Monday was to force Wall Street firms and banks into price “undiscovery”.

Incidentally, in yesterday’s interview Greenspan belatedly confessed that he had caused Goldman Sachs to “undiscover” that Continental Illinois was a bad credit risk, and that, instead of demanding payment, they needed to see it Corrigan’s way. Not surprisingly, Corrigan went on to become a Goldman partner in charge of hand-holding the New York Fed’s open market desk, which is to say, an exemplar of how crony capitalism is done.

Goldman was contemplating withholding a $700 million payment to Continental Illinois Bank in Chicago scheduled for the Wednesday morning following the crash. In retrospect, had they withheld that payment, the crisis would have been far more disabling. Few remember that crisis because nothing happened as a consequence.

Well, that’s just the point. Free markets correct their own excesses when two-way trading is permitted to run its course. At the time of Greenspan’s first panic, the financial markets were laboring under the pressure of Washington’s huge debt emissions owing to the giant Reagan deficits. In that context, interest rates wanted to soar in order to reflect the “crowding out” effect of Uncle Sam’s massive borrowing—a path that would have laid the stock market speculators low for years to come. And it would have also generated a fiscal clean-up package in Washington that would have nipped in the bud the lamentable Reagan era myth that “deficits don’t matter”.

In short, owing to his Black Monday panic Greenspan let both the Wall Street gamblers and the Washington spenders off-the-hook, and launched the nation on the road toward the debt and speculation-riven crony capitalism that prevails today. So the claim that “nothing happened as a consequence” could not be farther from the truth. What happened was the onset of a historic calamity—that is, the official repudiation of free markets, fiscal rectitude and sound money.

And there was more. As is also well known, on the next morning (Tuesday), the futures market in Chicago and stock exchanges in New York came to a dead stop and were heading for another cleansing free-fall, when suddenly massive buy orders came in from Fortune 500 companies to buy their own stock.  That didn’t happen by accident. Ayn Rand’s former disciple was busy at work over-riding the free market and jaw-booning CEO’s into their first great foray into stock buybacks—-a speculative pursuit which has now become an institutionalized disease in the C-suites.

In the years that followed the same pattern ensued at each point the markets attempted to rectify themselves. That includes 1994 when the bond market and mortgage back securities market went into a cleansing tailspin, but instead of allowing the money market rates to rise to market clearing levels, the Greenspan Fed panicked and capped the rise at just 300 basis points. That is, at a fraction of what Volcker had permitted and far below what was needed to arrest the incipient financial bubble that was already then underway.

Likewise, during the 1998 Russian and LTCM crisis, Greenspan panicked once again and slashed interest rates to save speculators in Russian securities and domestic hedge funds, and jawboned Wall Street into bailing out LTCM. Needless to say, the latter was a reckless gambling den that had been leveraged 100:1 by the very same Wall Street firms that Greenspan organized into a mafia-like cartel designed to prevent the free market from working its will, and to spare the offending Wall Street firms from taking their lumps.

By now, therefore, the “Greenspan put” was deeply implanted in the casino. That became fully evident when the market soared in 1999 after Greenspan’s late 1998 panicked rescue of the speculators. The Wall Street gamblers now understood that shorting over-bought markets was dangerous and that buying the dips was the route to fabulous riches for fast money traders. The era of one-way markets had thus been launched.

Yet by that point Greenspan had been crowned the “Maestro”, causing him to throw any remaining semblance of sound money and respect for market price discovery to the winds. Even as the NASDAQ and dotcom stocks soared to insane heights in the spring of 2000, Greenspan told a congressional committee that there was no evident financial bubble and that the Fed could not prevent one if there were. A noxious lies was thereby born.

And then it got worse after the dotcom crash. Beginning on Christmas eve 2000 the Fed began to slash interest rates, and didn’t stop its meeting after meeting cuts until it had lowered the funds rate to an unprecedented 1% by the spring of 2003.  By then, of course, the housing bubble was already galloping toward its eventual destructive demise, but the Greenspan Fed was oblivious.

Even during the first bubble of the 1990s, the home mortgage market had been reasonably well-behaved and gross mortgage originations rarely exceeded $1 trillion annually until the end of the decade. But at the time that Greenspan made the final federal funds reduction to 1.0% in Q2 2003, the annualized run-rate of gross mortgage originations had soared to the outlandish sum of $5 trillion.

Indeed, the whole housing bubble finance mechanism of homeowners raiding their own ATM (i.e. equity in their homes) was underway, and a debt fueled boom in housing prices was entering its final lunatic phase.  But Greenspan saw no bubbles at all. Nor did he have a clue that a giant financial crisis owing to his destruction of honest financial markets was just around the corner when he exited the Eccles Building early 2006.

Notwithstanding this sorry history, Greenspan did the world a large favor in yesterday’s interview while trying to justify his Calvinistic blame of “human nature” for financial bubbles. He claimed that the Fed tried to stop a bubble when it tightened in 1994, but that effort failed—thereby proving, apparently, that central banks are no match for human nature.

Accordingly, bubbles needed to be allowed to run their course. Henceforth, the Fed would function as a clean-up brigade with a mission to flood the market with liquidity after the fact—that is, to operate the very kind of bubble finance policy that has now become deeply and destructively institutionalized.

 The Fed tried in 1994 to defuse a bubble with monetary policy alone. We called it a boom back then. The terminology has changed, but the phenomenon is the same. We increased the federal funds rate by 300 basis points, and we did indeed stop the nascent stock-market bubble expansion in its tracks. But after we stopped patting ourselves on the back for creating a successful soft landing, it became clear that we hadn’t snuffed the bubble out at all. I have always assumed that the ability of the economy to withstand the 300-basis-point tightening revised the market’s view of the sustainability of the boom and increased the equilibrium level of the Dow Jones Industrial Average. The dot-com boom resumed.

When bubbles emerge, they take on a life of their own. It is very difficult to stop them, short of a debilitating crunch in the marketplace. The Volcker Fed confronted and defused the huge inflation surge of 1979 but had to confront a sharp economic contraction. Short of that, bubbles have to run their course. Bubbles are functions of unchangeable human nature….

No better indictment of monetary central planning and money market interest rate pegging could be delivered. Greenspan institutionalized macroeconomic management through rigid control of the funds rate and  by an intolerance for money market movements of more than 25 basis points. In the process, “price discovery” was supplanted by “price administration”.

More importantly, the single most important price in all of capitalism—-the price of hot money on Wall Street—-was shackled. The carry trades were soon off the races because cheap and predictable overnight funding costs are the mothers milk of financial speculation.

Once upon a time, Wall Street would cure its own excesses when the “call money” rate soared by hundreds of basis points during a single day, and rates sometimes reached deep into double digits when speculation got overheated. Yet it was that vital market-clearing mechanism, that instrument of financial market self-correction, which Greenspan now admits he destroyed in 1994 when he capped the funds rate rise at 300 basis points.And then he became puzzled as to why just a short time later the mania reignited.

It goes without saying, of course, that the free-market/sound money Greenspan of the days before he became head of the monetary politburo in Washington would not have been puzzled at all.

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Where to Invest: With Macroinvestors or Macroeconomists? Thu, 24 Jul 2014 14:38:00 +0000 This is a syndicated repost courtesy of Au Contrarian. To view original, click here.

Stanley Druckenmiller, the justly renowned investor, spoke at the Delivering Alpha conference on Wednesday, July 16, 2014. Quoting Druckenmiller: “As a macro investor, my job for 30 years was to anticipate changes in the economic trends that were not expected by others – and therefore not yet reflected in securities prices. I certainly made my share of mistakes over the years, but I was fortunate enough to make outsized gains a number of times when we had different views from various central banks.”

Druckenmiller went on to discuss, among much else that deserves reading, how the Fed’s emergency 1.0% fed funds rate in 2003-2004 defied conditions observed by him and his colleagues at Duquesne Capital. Where was the emergency? In short: “[W]e were confident the Fed was making a mistake, but we were much less confident in how it would manifest itself. However, our assessment by mid-2005 that the Fed was fueling an unsustainable housing Bubble, with dire repercussions for the greater economy, allowed our investors to profit handsomely as the financial crisis unfolded.”

Today, Federal Reserve Chairman Janet Yellen sounds more preposterous every time she opens her mouth. Last week, maybe it was two weeks ago, she offered America a sector analysis, proposing that small-cap and biotech stocks look overpriced. A few days later, ECB President Mario Draghi offered his opinion of no widespread asset bubbles, although some markets looked “frothy.”

It has been less than a decade since Fed chairman Greenspan declared there was no housing bubble, though he saw signs of “froth.” His weasel act warranted derision, which is just what it received, such as in the Economist’sheadline: “Frenzied Froth” (May 28, 2005). Draghi is acclaimed for his well-tailored suits but they stink of old mothballs. He’s a botoxed Greenspan.

The two of them – that would be Yellen and Draghi – have decided to let markets take their course, now that the Fed and ECB have used every possible mechanism to create mispricings in all markets. They will administer regulatory measures, if necessary.

The only such declaration of any use would be to administer the two of them, along with their supercilious staffs, out of existence. Instead, the average person who reads newspapers that include even a moderate degree of financial reporting knows multiple crashes are building.

The all-star break results are in. That is, the announcements of how first-half 2014 security issues compare to earlier years. We can congratulate ourselves. Never before has the world shown such indulgence, intemperateness, and unconscionable underwriting as in 2014.

“Megadeals… helped push the number of debt sales by highly rated companies in the U.S. to record levels in the first half of the year. These companies sold about $642 billion of debt.” That “outstrips the previous record set in 2009, when $612 billion of bonds was sold…” (Wall Street Journal, July 1, 2014) Aside from the probable default rate (where are you now, TXU?), megadeals are no friend to the workers.

“As investors scour the landscape for income, the first half of the year saw record amounts of new corporate bond issuance as well as record issuance of collateralized loan obligations. CLOs are securitized vehicles that invest in bank loans made to junk-rated companies, first pooling the loans and then dividing them into tranches to be sold to investors at varying levels of income and risk…. The $58 billion of CLO issuance in the first half of this year puts 2014 on pace to top $100 billion and break the previous single-year issuance record…set in 2007.” (Wall Street Journal, July 2, 2014) Pension plans and insurance companies are large buyers of such attempts to increase yield; an attempt to reinstitute the yield confiscated by the same central banks that have now declared their forbearance in monitoring default-prone issues.

Doug Noland, manager of the Prudent Bear Fund, in his Credit Bubble Bulletin, written on July 11, 2014, analyzed the seven-year itch, under the appropriate title: “2014 vs. 2007″:

“From my perspective, 2014 and 2007 share troubling similarities. Both periods feature overheated securities markets, replete with the rapid issuance of securities at inflated valuations. Both are characterized by investor exuberance in the face of deteriorating fundamentals – and in both cases central bank policymaking was fundamental to heavily distorted market risk perceptions. It’s no coincidence that today’s overheated backdrop – record securities issuance and meager risk premiums/record high prices – readily garner statistical comparison to 2007.

“This year’s booming M&A market has posted the strongest activity since 2007. Second quarter global M&A volume of $1.06 trillion was up 72% from the year ago period. Here at home, M&A more than doubled year-on-year to $473 billion, pushing record first-half volume to $749 billion. The proliferation of deals was fueled by the loosest credit conditions in years. First-half global corporate bond issuance hit an all-time high $2.29 trillion. A record $286 billion of junk bonds were issued globally, as average junk yields traded to the lowest level ever. At $642 billion, first-half U.S. investment-grade company bond sales easily posted an all-time high. The first six months of 2014 also saw record issuance of collateralized loan obligations (CLOs). A record number of global IPOs were sold in the first half, with $90.6 billion of offerings 54% above comparable 2013. Led by technology and biotechnology issues, U.S. IPO sales enjoyed the strongest first-half since the height of the technology bubble back in 2000. According to Dealogic, year-to-date total global sales of corporate stock and equity-linked securities reached an unmatched $510 billion, outpacing 2007′s record pace.”

It is certain such frivolities are “not yet reflected in securities prices.”

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at



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