The Wall Street Examiner » Must Read Get the facts. Sun, 21 Dec 2014 03:07:56 +0000 en-US hourly 1 Separating Facts From Popular (But False) Narratives Fri, 19 Dec 2014 22:50:00 +0000 This is a syndicated repost courtesy of The Fat Pitch. To view original, click here.

Investors are confronted on a daily basis with an array of confusing and seemingly contradictory information. Is the economy expanding or shockingly weak? Are corporate profits improving or just the result of tricky financial engineering? Are investors buying equities or is it all just driven by the Fed and other central banks?

The picture is much less confusing if you take a step back to look at the bigger picture. Below is some suggested reading to help separate the facts from the popular but often false narratives.

The economy is expanding at a slow but fairly steady rate. Demand is growing and so is employment. The biggest weakness lies in price: inflation has been falling. More here.

It’s true that the recovery has been soft relative to recent history. But the underlying causes of the 2008-09 recession were far different than in prior recessions.  A slower recovery was therefore expected. More here.

The improving economy is feeding into corporate performance. Among S&P companies, revenue growth is accelerating and profit growth is strong. More here.

The improvement in corporate profits is not the result of financial engineering. That has been a relatively minor contributor. More here.

The rise in stock indices is not primarily the result of buying by the Federal Reserve and other central banks. Investors are buying equities. In fact, they have a high proportion of their assets in stocks, and this is a potential concern. More here and here.

The rise in stock indices has made valuations rich by historical standards. Under these circumstances, ‘buy and hold’ investing has led to below average returns going forward. More here.

It’s true that investors are not as euphoric as they became in the 1990s. But that era was the product of a unique combination of political, economic and demographic factors that are unlikely to combine again in most investors’ lifetimes. More here.

Higher equity valuations are not the result of, or justified by, low interest rates. More here.

The Fed has officially ended its Quantitative Easing (QE) program. But the end of QE on its own is not a threat to the equity market. More here.

It’s inconvenient that not all aspects of the current investment environment are perfect. They never are. The fundamentals have been improving. This might be as good as it gets, but there is, on balance, little to suggest that the tide is starting to run out.  The biggest economic threats are outside of the US and with investor sentiment that is becoming too complacent. Be on guard for the true risks and not those presented by popular but misleading narratives.

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The Keynesian PhD Brigade Strikes Again: Sweden’s Riksbank Joins The ZIRP Mania Fri, 19 Dec 2014 20:55:35 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

Folks, it’s a tyranny of the PhDs. Recently, the central bank of Sweden was subject to a withering tirade by that oracle of Keynesian rubbish, professor Paul Krugman, who accused it of “sado-monetarism” for leaving the Swedish economy exposed to the mythical economic disease of “deflation”.

So the Riksbank threw caution to the wind, and a few months ago joined the global central bank plunge into ZIRP and promised to ladle out free money until at least 2016. To leave no doubt, it is currently cranking up for direct lending, “asset purchases”, negative interest rates (N-ZIRP) and the rest of the recently invented central bankers voodoo kit. Anything to achieve its sacred 2% inflation target!

So still another central bank has been infected by the 2% inflation shibboleth—-a folly the greatest central banker of our era dispatched recently with a single sentence:

Mr. Volcker,who believes the Fed’s main goal is to defend the dollar’s stability, said he doesn’t even understand why the Fed adopted a 2% target for inflation. He asked, “Do we want prices to double every generation?”

Yes, today’s Keynesian central bankers don’t particularly care what happens in the next 30 years or even 30 months. It’s all about the noise-ridden “in-coming” data and whether the gap between actual production and employment, one the one hand, and a theoretical figment called full employment or “potential” GDP, on the other, has been closed.

It is downright amazing that the $75 trillion global economy is in thrall to the stupid math models of a couple of hundred PhDs. And these so-called DSGE models (dynamic stochastic general equilibrium) are, indeed,  just plain stupid.

Not a single major economy in the world is a closed system. Nor is the capacity to produce iron ore, petroleum liquids, sheet steel, autos, machine tools, solar panels, networking gear, server farms, e-commerce order fulfillment, warehousing services, quick-serve restaurant meals, shopping boutiques or yoga classes fixed and measureable; its a giant, swirling global flux.

Likewise, the other component of the DSGE—so-called “aggregate demand”—-is also a fairy tale. That is, “spending”, as it is computed in the Keynesian GDP accounts, and then spit back by the DSGE models which pretend to “forecast” it, is a function of either income or fiat credit.

In a stable, productive and honest system, spending always and everywhere comes from income. Workers earn incomes through the act of production, and then “spend” the major part on their current cost of living and save or pay taxes with the rest.

Likewise, businesses distribute some of their net income or profits to shareholders/owners and then reinvest the rest—along with newly raised capital obtained from household savers. Government’s also “spend” a fair amount on goods, services and transfer payments, but obtain the financing via levies on the pre-tax incomes of households and businesses.

And that’s all there is; there ain’t no more in an honest free market economic system. Investment spending is obtained from current savers; debt is one form by which savings are channeled to investors along with equities and various hybrids. Household consumption spending—the famous 70% of GDP—comes from the disbursement of labor and capital incomes to these units; and, yes, when government’s run a deficit to finance their spending in an honest system, they tap the savings pool in competition with other investors.

It goes without saying, of course, that in an honest economic system there could theoretically be a lot of debt—–that is, if households were inclined or motivated by high interest rates to save a larger portion of their incomes. The latter increment to the pre-existing savings pool, in turn, could be borrowed by businesses or governments to augment their own spending at higher levels than could otherwise be financed by post-dividend profits or tax inflows, respectively.

An honest “high debt” economy, of course, would reflect the market-clearing price of savings and debt. And, most likely, given human propensity to prefer a bird in the hand to one in the bush, it would mean a high interest rate system—-an arrangement that in and of itself would tend to curtail the level of debt.

Indeed, as in almost everything else in economics, high prices (of interest) are the best cure for high debt. But then we come to “fiat credit”—-the kind that is manufactured out of thin air by central banks when they purchase existing financial securities—mainly government debt.

Despite all of the gussied-up theories about the function and theory of central banks, the only thing they really do is introduce a deadly economic virus into the system. Namely, debt that is not funded by savings.

Needless to say, the more central banks hit the “print” button, the more the fiat credit disease flourishes, and the greater the distortions in the financial system. Central bank created fiat credit is inherently fraudulent because it amounts to “something for nothing”. And, as a practical matter, it causes debt to be underpriced because increasing demands for its issuance do not need to be greenlighted by savers asking for high interest rates in order to defer current spending.

Instead, it is greenlighted by monetary central planners who are inherently prone to an occupational disease. Namely, the unfounded belief that they can generate higher societal growth and wealth by keeping interest rates persistently and systematically below free market clearing levels.

Yes, there is an argument that private fractional reserve banks can create fiat credit, too. But what they really do is more in the nature of “maturity transformation”, which means they turn short-term liquid deposits into long-term, relatively illiquid loans. Get rid of deposit insurance, the Fed discount window and the legal shield against fraud suits—–and fiat credit out of the private banking system would not get too far. The high rollers who went all-in making loans and thereby generating “new” deposits would either crash land in insolvency eventually from bad loans; or they would be cut-off at the pass by real savers, who would take there deposits to safer and sounder institutions.

In any event, the artificial boost to credit availability and “growth” in the Keynesian GDP accounts that results from ever increasing amounts of central bank manufactured fiat credit is a one time parlor trick. At length and inevitably, it is stopped cold by the limits of “peak debt”.

Suffice it to say, that almost everywhere on the planet that condition has now been reached. The mountainous rise of total credit outstanding—household, business,government and finance— in the US economy since 1971 is not remarkable merely owing to its magnitude, as shown below.

The more relevant point is that the bottom left of the graph represented 150% of GDP—-an aggregate leverage ratio that had prevailed for a century since 1870; and which reflected either the absence of a central bank (before 1914) or the operation of the early Fed which, other than during wartime, was run by people who knew better than to sit around printing money and pretending that they were the masters of the national economy.

At the present time, that ratio is at 350% of national income, and that’s “peak debt” for all practical purposes. Try as it might—–and expanding the Fed’s balance sheet by 5X since September 2008 amounts to a whole lot of trying—the Fed has been able to only inch total credit outstanding upwards by hardly 2% per year compared to double digit rates which prevailed prior to 2008. That is, when central bankers were indulging in their one-time take-out of the economy’s natural debt service capacity against income.

In short, what the recent flattening trend in the chart below really means is that the days of turbo-charging the GDP computations via fiat credit financed “spending” are over. We are back to income based spending. And that condition surely describes most of the rest of the world–but especially Japan and Europe. In short, peak debt means that the one-time Keynesian parlor trick of fiat credit fueled GDP growth is over and done. Accordingly, actual “aggregate demand” today is nothing more or less than the spending that can be extracted from current production; and its particular mix reflects the manner in which the income from current production is whacked-up by households. business and government.

So what you see is what you get when it comes to “aggregate demand”. State differently, production comes first, income follows, and spending results. There is no meaningful boost to GDP from fiat credit. It has been a modest sideshow during QE, and now, at least for the moment there, is no boost to income-based spending at all.

That’s why the central bankers’ DSGE models are a complete crock. There is no measureable or achievable thing called “potential GDP”. There is no magic elixir called “aggregate demand” which is different from current production, and which can be goosed and “simulated” by central bankers. And there is no “gap” to fill owing to the ministrations of central bankers running a printing press.

In other words, DSGE amounts to a foolish kind of bathtub economics. That is, our benighted central bankers believe there is a full-employment line at the top of the tub; and there is a faucet that can be opened to fill that tub to the brim. Their job is to regulate the water flow through the crude tools of interest rate pegging, yield curve manipulation, wealth effects “puts” and open-mouth word cloud emissions.

Its all bunk, of course, but bathtub economics is the source of the 2% inflation target. There is not a shred of actual empirical evidence for it. Its just an made-up axiom that purports to explain why there is a “gap” between the imaginary line of potential GDP and actual production, and why more inflation is necessary in order to goose an imaginary elixir called “aggregate demand.

Indeed, the whole thing completely defies common sense and everyday observation. In a recent post, Mish Shedlock said it well. From Mish

  • If price of food drops will people stop eating?
  • If the price of gasoline drops will people stop driving?
  • If price of airline tickets drop will people stop flying?
  • If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  • If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  • If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  • Will people delay medical procedures in expectation of falling prices?
  • If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

And that gets us back to Sweden. Like the rest of Europe, it is suffering from the burden on growth and wealth that accompanies a giant welfare state and onerous burden of taxation, regulation and incentives for non-production.

Nevertheless, Sweden has experienced a moderate level of real growth and a steady 1.5% rate of inflation since the turn of the century. It is not plunging into some economic black hole, and does not face an emergency so severe that it needs to run its printing presses as if there is no tomorrow. Historical Data ChartHistorical Data ChartYet its central bank has not been penurious about expanding its balance sheet, either. The whole “crisis” which caused it to join the ZIRP money printers club is that after a burst of Riksbank credit expansion in response to the financial crisis, its central bankers made a feeble effort to slow things down. Historical Data ChartFor that act of prudence, they were fired. And now the PhD who led the charge, Dr. Henry Ohlsson is being put in charge.

Ohlsson, also a member of the board of the Swedish Public Employment Service, joins a bank that has lowered its benchmark rate to zero and this week pledged to do what’s needed to jolt the largest Nordic economy out of a deflation spiral. The Riksbank has come under fierce criticism in recent years for cutting rates too slowly to address persistently low inflation, including in June from the Economic Council of Swedish Industry of which Ohlsson was chairman.

It is a tyranny of the PhDs. It is a group-think mania that has gone global. It’s also only a matter of time before the central bankers’ money printing spree takes down the very bubble ridden financial system it has so recklessly spawned.

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There’s More To Share Outperformance Than Stock Buybacks Fri, 19 Dec 2014 19:43:00 +0000 This is a syndicated repost courtesy of The Fat Pitch. To view original, click here.

Stock buybacks have been grabbing a lot of headlines. Goldman estimates that buybacks in the S&P will amount to $600b in 2014, a 26% rise over 2013. And this comes on top of a 20% rise the year before.

Buybacks are, in a sense, the opposite of a dividend. Dividends pay investors cash and reduce the share price by the same amount. Buybacks use cash to buy shares, reducing the number of shares outstanding and thereby increasing EPS; the value of the remaining shares are meant to increase in value. Instead of getting a dividend, investors are getting a better capital gain.

In practice, the math is not so neat. A dividend is a set amount paid to each shareholder. A buyback is an indirect way to increase the share price. Whether the price increases by the amount of the buyback in the time the investor is able to realize the gain is not a given.

Another wrinkle is that companies are continually issuing shares. Most prominently, executives are often given compensation in the form of share options; buybacks have become a way for the company to mop up the resultant increase in shares. Put another way, buybacks are often a way for companies to help increase the value of share options for their employees.

So while the dollar amount of the buyback programs have grabbed the headlines, the reality is the net effect has been much less. Most of the buyback has been offset by share issuance (red line). Share buybacks might amount to $600b in 2014 but, net of issuance, it’ll be closer to $200b (blue line; chart from Ed Yardeni).

To be clear, corporate buying is a net positive for equities, but it is less than commonly assumed. The effect on per share figures, like EPS, is also often overstated. Rising EPS is driven overwhelming by better corporate results. Over the last three years, during which corporate buyback programs have totaled about $1,470b, shares outstanding have been reduced by less than 3%. That compares to an increase in EPS of about 24% (figures and chart below both from FactSet).

The chart above and those that follow below are from an excellent report on the topic from FactSet. We recommend reading it here.

Do shares of companies that have large buyback programs do better? The relationship is less clean than you might imagine.

FactSet divided the S&P into quartiles based on the size of their buyback program relative to their shares outstanding; quartile 1 had the largest buyback programs and quartile 4 the smallest. Quartile 1 companies (blue line) outperformed those in quartile 3 and 4 (red and yellow lines), as you would have guessed, but quartile 2 did better (green line). And companies that had no buybacks did the best (gray line).

These results are weighted by market capitalization, so a few big companies can skew the performance for each quartile. According to FactSet, if you equal weight companies that do buybacks, they outperform the S&P.

The main point is that there is more to share performance than simply the size and presence of a large corporate buyback program. Below are the ten largest buyback programs in 2014.

Apple and IBM rank one and two, but their share performance could not be less similar. Apple has massively outperformed the index in 2014 while IBM has underperformed. Most of the top 8 did well, but its hardly a clean profile.

Share buyback programs are a net tailwind for the market but there is much more to share performance than financial engineering.

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Why the Sony Hack Really Matters Fri, 19 Dec 2014 15:44:35 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

The most important lesson we may be learning from the hacking of Sony Corp. is also the most disturbing. From what Americans can know so far (and even officials lacking security clearances probably don’t know close to everything), it seems that the United States lacks cyber-war escalation dominance with North Korea as well as with China.

As I’ve written before, escalation dominance is strategists’ fancy way of describing retaliatory power so great that it puts an intimidating fear of God into any prospective attacker. Washington’s weakfish response to Chinese government hacking activity – mainly an offer to discuss hacking rules of the road with Beijing – certainly suggested strongly a determination that some kind of counter-hack or other punishment created too great a threat of a broader cyber-conflict that America simply could not risk waging.

The Obama administration has made no such suggestion to Pyongyang and the threats made by the hackers against prospective patrons of Sony’s “The Interview.” Indeed, the White House publicly threatened retaliation – which sounds more encouraging. So did the President’s own recommendationpeople go to the movies” (albeit with the qualifier “For now).

But other administration remarks were much more disquieting. Chief among them were White House Press Secretary Josh Earnest’s statement that the President believes that “we need a proportional response.” If history teaches anything, it’s that such a tit-for-tat strategy is a sign either of weakness or political uncertainty (see “Vietnam War”), and worse, is interpreted this way by the adversary.

Further reinforcing my fears on escalation dominance are the clear differences between U.S.-China and U.S.-North Korea relations. America’s caution re Beijing’s hacking is at least in theory also justifiable by the myriad strategic and economic interests at stake. China’s aggressive moves in the South and East China Sea, for example, might still be neutralized through diplomacy that in turn could be jeopardized by a strong U.S. hacking response (though I’m skeptical of the former). America’s allies in Asia, moreover, are as reluctant to see anything rock the U.S.-China economic policy boat as are offshoring U.S. multinational companies.

It’s hard, however, to see how North Korea could become more hostile, at least rhetorically. (Any fear of military retaliation by Pyongyang would of course strongly indicate that America has also lost strategic nuclear escalation dominance, as I’ve previously warned.) And although Washington’s regional allies are still pretty conflict-averse regarding Kim Jong Un’s regime, no commercial considerations are complicating American calculations. (For the record, it would be completely unacceptable to let the tail of alliance unity wag the dog of the kinds of core U.S. security interests at risk here.)

And another troubling aspect of American policy: Reports that Mr. Obama “lately has been discussing the issue with aides every day” carry the hint that the Korean actions have Washington by surprise, and that even though cyber-hacking is no longer a new threat, nothing like promising retaliatory plans are yet in place.

I’m not saying that dealing with cyber-hacking is easy, and that goes double for hacking sponsored by foreign governments with formidable militaries. Unquestionably, numerous competing interests need to be balanced, and miscalculations could be disastrous. But America’s responses to date make painfully clear that the administration remains far from sorting out its priorities, and that as a result, the nation remains dangerously vulnerable to cyber-hacks.

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Fog of War Fri, 19 Dec 2014 14:16:34 +0000 This is a syndicated repost courtesy of Bruce Krasting. To view original, click here.

I think this man must be worried. He has a huge weight on his shoulders. This is Thomas Jordan, the head of the Swiss National Bank.


Mr. Jordan has excellent academic credentials.  He’s a scholar, and a ‘lifer’ at the SNB:

University of Berne, PHD Economics

Department of Economics at Harvard University,three-year post-doctoral research.

1997 SNB Economic Advisor in Department 1.

On 18 April 2012, appointed Chairman of the Governing Board of the SNB.

Unfortunately, Mr. Jordan’s academic prowess is not going to be of much help with the mess now on his desk. He needs to learn how to play – and win – heads up guts poker. In my experience that’s a skill one is born with, or never acquires.

Jordan is a General who has a war on his hands. It’s a currency war; only financial blood will flow. But the stakes are high. Mr Jordan understands that more than the Swiss economy is at risk. The idea of the “All Powerful Central Bank” is being called into question. General Jordan is on the front lines of a conflict that could spread throughout Europe, and then to Japan.

Thomas Jordan has enormous power. He can print a biblical amount of money with a keystroke. He’s pledged to do exactly that. But, Jordan also has some significant strategic weaknesses:

– Jordan has no allies in this war.

* The US Treasury has put the SNB on its watch list of ‘currency manipulators’. Don’t look to the US Fed to get involved in this fight.

* The Japanese could care less about the Swiss war – they’re trying to wage their own war.

* The SNB has no friends at the ECB either. If anything, Mario Draghi is working against the SNB.

– Jordan inherited the Swiss Franc peg policy. He came in when Hildebrand was thrown out. For the first time in his tenure he’s being called to fire his guns in anger. He’s an academic, not a warrior.

– Jordan is playing defense. He has promised to hold a line in the sand regardless of the consequences. So Jordan must now stand and take on all comers. The circumstances in Switzerland are today 180 degrees opposite to that of England twenty-years ago. That said, this story is looking a hell of a lot like the devaluation of the Pound. Who can really say, “I’ll take em all on at once!”

– There is a “stink’ feature to the CHF peg policy. The benefits to the Swiss economy from the peg are at the expense of the French, Italian and Spanish economies.

– The peg policy has the support of the Swiss Parliament – for now.

– The Macro story outside of Switzerland is piling up on the SNB:

* Draghi has promised that a decent sized bazooka will go off at the next ECB meeting (1/22/15). One of Draghi’s objectives will be to cheapen the Euro – exactly what Jordan does not want to hear.

* The ongoing Russian story is a factor that increases the need for a safe haven for hot money. Zurich and Geneva have always been a destination for money looking for a safe harbor.

* Greece is going to go down to the wire on December 29 with the final vote. It will be very close. There is a real possibility that GREXIT comes back onto the table. This development would bring with it huge pressure on the EURCHF.

* The Yen is the worst place to hold reserves. Some of the money leaving Japan is headed to Switzerland. There is no safe haven left – but the CHF still comes close. All those Francs will have to be sold by Mr. Jordan – there are no other sellers.

The one thing that Jordan can’t do in this war is appear to be weak. He has to be decisive if he is to win. He has to take on the FX market and beat it to submission.  Mr. Jordan is off to a bad start – I think he pulled a weak move this morning.

The SNB announced that it was going NIRP. For a few minutes there was some market shock and awe. But the new SNB rate will be -0.5% – that’s nothing! The new SNB measures will not take effect until 1/22/15. This coincides with the Draghi bazooka. What the SNB has done is create a beacon that is shining on a date that is only sixteen trading days from today. The SNB should have made the measures immediate, and more costly if it wanted to win a skirmish in the war. But it chose to let the players off easy.

EURCHF forward swap bids got hit this morning with the news of negative interest rates. The swap is the cost of being short the EURCHF. As of the close in NY the two month forward EURCHF swap was a crummy 8 ticks!

Screen Shot 2014-12-18 at 5.26.53 PM

This is not a penalty at all. 8 ticks goes by the spot market in seconds. This cost is not going to keep the players at bay. It’s an incentive versus a disincentive. Round One was a disappointing draw for the SNB. Round Two will start in January.



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David Stockman Interview: The Case For Super Glass-Steagall Fri, 19 Dec 2014 04:01:17 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

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4-Year 4-Month TIPS Treasury Auction Results Thu, 18 Dec 2014 18:02:43 +0000 This is a syndicated repost courtesy of Treasury Auction Results. To view original, click here.

CUSIP: 912828C99
Term and Type: 4-Year 4-Month TIPS
Series: X-2019
Reopening: Yes
Interest Rate: 0.125%
High Yield: 0.395%
Price: $100.174592
Allotted at High: 10.56%
Total Tendered: $37,987,132,500
Total Accepted: $16,000,002,500
Auction Date: 12/18/2014
Issue Date: 12/31/2014
Maturity Date: 04/15/2019

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China to Foreign Tech Firms: “Get Lost” Thu, 18 Dec 2014 15:38:32 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

So much excitement (of both kinds) over the last 24 hours about President Obama’s predominantly symbolic announcement yesterday that full diplomatic relations would be restored with Cuba. And so little about a development that actually threatens America’s prosperity and national security, not to mention mountains of dollars in corporate profits:’s report that China is systematically moving to end its reliance on foreign technology products and services and replace them with domestic supplies.

No one who’s been reading RealityChek or following my previous writings will be surprised. I’ve long maintained that China’s leaders completely reject the foundational ideas of global free trade and commerce. Whereas Americans and so many others continually preach the virtues – and indeed the inescapability – of comparative advantage and specialization, Beijing therefore quite reasonably sees no need for China to rely on foreign inputs of anything that its homegrown enterprises can provide themselves.  Once this domestic capability is developed — typically by extorting technology — foreign competitors get shown the door.

Indeed, China’s reasoning is something that I’ve urged Americans to take seriously: With the world’s first or second-biggest economy (depending on how you measure it), and a huge chunk of the globe’s population, China potentially is large and diverse enough to create a critical mass of the benefits of competition within its own borders. Beijing places a heavy burden of proof on those insisting that the further advantages of buying imported goods and services outweigh the costs and risks (including the perils of using high tech hardware and software from the United States that could be bugged).

But whether the Chinese (or yours truly) are indeed right or wrong on this matters much less than their government’s determination to act on these convictions, and the Bloomberg article makes clear that Beijing’s policy of maximizing self-sufficiency is entering a new phase. The state-owned sector from which foreign technology products and services are to be barred by 2020 represents a market that reportedly was in the $180 billion neighborhood last year, and in China, the so-called private sector surely won’t be far behind. Nor is there any reason to believe that Beijing will limit its drive for self- sufficiency to information technology sectors.

The Obama administration is definitely aware of China’s techno-protectionism. Its responses? First, bring Beijing in to a global trade regime that prohibits discrimination against imports in government procurement, and second, conclude another global agreement to abolish tariffs on a wide range of high tech goods. But these approaches continue to wish away China’s long record of ignoring similar treaty obligations, and Washington’s equally long record of making only the weakest monitoring and enforcement efforts. Add to this the news that Beijing has just decided that it didn’t want to stop protecting certain key info-tech goods, thereby scuttling the new tech trade deal for the time being.

Will U.S. leaders reading the Bloomberg report recognize it as the equivalent of a two-by-four blow to Washington’s China trade delusions?  Or will they be too busy obsessing about trifles like Cuba?

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Fund Managers’ Current Asset Allocation – December Thu, 18 Dec 2014 03:32:00 +0000 This is a syndicated repost courtesy of The Fat Pitch. To view original, click here.

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.

Here’s a brief recap of the past several months:

July: fund manager equity allocations reached a bullish extreme. At +61% overweight, it was the second highest since the survey began in 2001, a clear risk to near-term equity performance (post).

August: the Euro 350 dropped 8% and SPX dropped 5%. In response, equity allocations fell and cash shot up to 5.1%, a high level associated with lows in equities (post).

September: equities in the US hit new highs; Europe rallied, but fell short of new highs. Fund managers raised their global equity exposure and reduced their cash (post).

October: equities worldwide fell more than 7-10%; most markets were, at least briefly, negative for 2014.  Bond yields made new lows. Fund managers raised their cash levels back to 4.9%. Equity allocations dropped to their lowest levels in 2 years (post).

November: new uptrend highs in the US, Japan and Germany; cash levels fell and equity allocations rose to near their prior highs.

Since then, equities have again fallen. So it’s not a surprise to see that in December, cash is now up at 5% again. This is a strong positive. But, strangely, equity allocations are also up to a 5 month high. To say that there are mixed signals is an understatement.

Let’s review the highlights from December.

Fund managers increased their cash levels to 5%. Instances are very low, but over 5% represents bearish sentiment: this is where bottoms in equities have formed in the past.  The last three times cash was over 5% was in June 2012, May 2014 and August 2014. Each time, SPX rose in the month ahead.

Strangely, global equity exposure also rose. Fund managers are now +52% overweight, an 18 percentage point increase since October. The only other time equity allocations have been this great in the past year was in July; equities fell later that month. We consider current levels to be bearish.

As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after overexposure like that seen in the past 2 years, a washout low would be marked by an equity weighting under +15-20% (green shading).


Last month, US exposure jumped to a 15 month high of +25% overweight. What is surprising is it fell in December to +16%, even though the US market has been outperforming the rest of the world. Over +20% has been over-owned in the past (green shading); it is currently neutral.

Until July, Europe had been the consensus long for 11 months in a row. Since then, the region has strongly underperformed and allocations fell as a result. Strangely, given its poor performance, allocations in December increased threefold, from +8% overweight to +26%. It’s no longer a dark horse expected to outperform.

Managers have their largest equity exposure in Japan. Allocations the past two months haven’t been this high since April 2006. It looks extreme. Managers expect both Europe and Japan to benefit from central bank liquidity.

Managers were -31% underweight EEM in March. This was a strong contrarian buy. In the ensuing months, the region strongly outperformed. In August, allocations increased to +17% overweight, the highest in 17 months. As we noted then, the fat pitch had passed. Exposure is now back to neutral. This is where bottoms form, but, in the past, it has taken more than one month for a solid low to be put in.


Remarkably, although US bonds have outperformed SPX so far in 2014, fund managers are -59% underweight. Bonds continue to be the most hated asset class and this, in large part, explains why cash balances have not been lower that 4.5% in the past year. For comparison, managers were -38% underweight in May 2013 before the large fall in bond prices. There is a lot of room for bond exposure to rise.

Fund managers are -26% underweight commodities, a new 12-month low. Managers view oil as more overvalued than at any time since early 2009. This corresponded with the low in oil, from which prices rose threefold over the following two years.

Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (technology, discretionary, banks) and underweight defensives (telecom, staples). The largest underweight is energy.

That is equally true in the US. Tech is the most favored sector, followed by pharma and banks. This has been the case for many months. Utilities, staples, telecoms (defensives) and energy remain very underweighted.
In 2014, utilities and staples, two of the least liked sectors, have strongly outperformed, along with health care (all defensives). Among cyclicals, only tech and financials have outperformed. Energy has been the obvious loser.
You can see from the data that it should mostly be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of 2013, and it was the worst performer that year. In comparison, they were 20% underweight Japan in December 2012 and it was the best equity market in 2013.

Survey details are below.

  1. Cash (+5.0%): Cash balances rose to 5.0% from 4.7% in November. Typical range is 3.5-5%. BAML has a 4.5% contrarian buy level but we consider over 5% to be a better signal. More on this indicator here.
  2. Equities (+52%): A net +52% are overweight global equities, up from +46% in November.  In July it was +61%, the second highest since the survey began in 2001. Over +50% is bearish. A washout low (bullish) would be under +15-20%. More on this indicator here.
  3. Bonds (-59%): A net -59% are now underweight bonds, a steep fall from -52% in November. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices.
  4. Regions:
  1. US (+16%): The November weighting was a 15 month high (+25%), but that fell to +16% in December. They had been +30% overweight in August 2013 (the third highest US weighting ever).
  2. Europe (+26%): Exposure to Europe jumped from +8% to +26% overweight in the last month. Before August 2014, Europe had been investors’ most most preferred region for 11 months in a row.
  3. Japan (+40%): Managers are +40% overweight Japan, down from +46% in November which was highest since April 2006. Funds were -20% underweight in December 2012 when the Japanese rally began.
  4. EEM (+1%): Managers increased their EEM exposure to +1% overweight from-5% underweight in October.


  • Commodities (-26%): Managers commodity exposure fell to -26% underweight, the lowest in one year. With the exception of August, it has been less than -15% since early 2013. Low commodity exposure goes in hand with low sentiment towards EEM.
  • Macro: 60% expect a stronger global economy over the next 12 months, an increase from 32% in October. January was 75%, the highest reading in 3 years. This compares to a net -20% in mid-2012, at the start of the current rally.


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Obama Imports and Immunizes Banksters Who Donate to the Democratic Party Thu, 18 Dec 2014 01:02:13 +0000 Obama Imports and Immunizes Banksters Who Donate to the Democratic Party

By William K. Black Bloomington, MN: December 17, 2014 President Obama and then Secretary of State Clinton decided that America has a critical shortage of banksters and decided to import some from Ecuador. The banksters showed their gratitude by showing the … Continue reading

Obama Imports and Immunizes Banksters Who Donate to the Democratic Party

This is a syndicated repost courtesy of New Economic Perspectives. To view original, click here.

Bloomington, MN: December 17, 2014

President Obama and then Secretary of State Clinton decided that America has a critical shortage of banksters and decided to import some from Ecuador. The banksters showed their gratitude by showing the Democratic Party with “donations.” Sometimes a small story reveals the core truth of large public policy issues far better than the big overall story can. The New York Times has just published an article entitled “Ecuador Family Wins Favors After Donations to Democrats.” The short-version is that Obama has decided to give what amounts to asylum to a family from Ecuador after it made large campaign donations to Democrats.

“It was one of several favorable decisions the Obama administration made in recent years involving the Isaías family, which the government of Ecuador accuses of buying protection from Washington and living comfortably in Miami off the profits of a looted bank in Ecuador.


The family, which has been investigated by federal law enforcement agencies on suspicion of money laundering and immigration fraud, has made hundreds of thousands of dollars in contributions to American political campaigns in recent years. During that time, it has repeatedly received favorable treatment from the highest levels of the American government, including from New Jersey’s senior senator and the State Department.”

And it gets better:

“The Obama administration has allowed the family’s patriarchs, Roberto and William Isaías, to remain in the United States, refusing to extradite them to Ecuador. The two brothers were sentenced in absentia in 2012 to eight years in prison, accused of running their bank into the ground and then presenting false balance sheets to profit from bailout funds. In a highly politicized case, Ecuador says the fraud cost the country $400 million.

The family’s affairs have rankled Ecuador and strained relations with the United States at a time when the two nations are also at odds over another international fugitive: Julian Assange, the WikiLeaks founder, who has taken refuge in the Ecuadorean Embassy in London.”

It’s not bad enough that Obama refuses to prosecute our banksters who grew wealthy by leading the three financial fraud epidemics that cost the U.S. over $20 trillion in lost GDP and over 10 million jobs – he’s now importing Ecuador’s banksters – even their families who were banned from entering the U.S. because they committed immigration fraud.

“MIAMI — The Obama administration overturned a ban preventing a wealthy, politically connected Ecuadorean woman from entering the United States after her family gave tens of thousands of dollars to Democratic campaigns, according to finance records and government officials.

The woman, Estefanía Isaías, had been barred from coming to the United States after being caught fraudulently obtaining visas for her maids. But the ban was lifted at the request of the State Department under former Secretary of State Hillary Rodham Clinton so that Ms. Isaías could work for an Obama fund-raiser with close ties to the administration.”

Yes, it’s the Obama/Clinton concept of good government, respect for the rule of law, and the proper response to elite white-collar criminals who loot “their” banks and cause the crises that devastate an entire nation – as they did in Ecuador in the late 1990s and the U.S. a decade later – is to ignore the crimes of the banksters. The banksters and their kin are a potential source of political contributions. Under Obama/Clinton, the U.S. is a sanctuary not just for U.S. banksters, but those from other countries who appropriately express their gratitude to the politicians who grant that sanctuary. When our leaders have contempt for our laws and knowingly choose to get in bed with the banksters and immunize their crimes, you know that crony capitalism has arrived.

Obama and Clinton’s New-“New Colossus”

President Obama and Former Secretary Clinton designed a New-“New Colossus” for the Statue of Liberty. Emma Lazurus’ words once read.

“Keep ancient lands, your storied pomp!” cries she

With silent lips. “Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!”

The Obama/Clinton New-New Colossus reads:

Send us your elite banksters yearning to keep their wealth and immunity

Have them make large political contributions to my Party’s teeming whores

I’ll let you violate U.S. and foreign laws with impunity

Douse the lamp; show us the green and we’ll secretly open the golden door

Blame it on Correa

But it was this passage from the NYT article that captures how far we have fallen under the leadership of Obama and the Clintons.

“The Isaías brothers consider themselves political exiles unfairly attacked by the Ecuadorean government and have garnered support on Capitol Hill, where sentiment against Ecuador’s leftist president runs strong.”

You see, key Democrats on Capitol Hill, Obama, and the Clintons share a common cause – they hate Ecuador’s President, Rafael Correa. Indeed, Correa is so bad that the New York Times would not even put his name in print in the article! Correa’s unforgivable sin from the perspective of Obama, and Clintons, and some Democratic Party representatives in Congress is that he successfully implements policies favored by the Democratic wing of the Democratic Party. Correa did crack down on the banksters, but that is a small part of his policy package. Correa has three paramount policies, substantially increasing spending on education, health, and infrastructure. He has done so in a manner that greatly reduced unemployment, poverty, and inequality because those three programs focused on the people most in need.

One can understand why Correa and his successful implementation of traditional Democratic Party policies would make him anathema to the Rubin wing of the Democratic Party. But understanding why the Rubin wing of the Party hates Correa with such a passion that it feels proud about helping convicted banksters and immigration frauds get away with their crimes with impunity reveals the depth of the pathologies of Obama and the Clintons.

Concentrating increased government spending on education, health, and infrastructure is a policy recommended in that notoriously “leftist” screed – the Washington Consensus. Unlike Obama and the Clintons (all lawyers), Correa is a skilled economist who did his dissertation on the Washington Consensus. The Washington Consensus urges that each of these increases in spending should be oriented towards helping those most in need – the poor. Correa did so.

It is telling that the Rubin wing of the Democratic Party is, when it comes to applying the rule of law to the banksters and increasing spending on education, health, and infrastructure (with special emphasis on serving the needs of the poor), far to the right of the infamous Washington Consensus. Note that the Rubin wing of the Democratic Party does not simply disagree with Correa on the desirability of greatly increased spending on education, health, and infrastructure with a focus on providing those benefits where they are most needed. The Rubin wing is enraged at Correa for those (successful) “leftist” policies. The “leftist” budgetary priorities that Correa created and that enrage the Rubin wing were promulgated and became a “Consensus” in “Washington” under the notorious “leftists” Presidents Reagan and Bush (I). Similarly, it was under President Bush (I) that we had our greatest success in prosecuting the U.S. banksters. It was the Clinton administration that began the gutting of financial regulation and the large scale reassignment of FBI agents and AUSAs that substantially reduced prosecutions of banksters.

It is a measure of how far to the right that Obama and the Clintons have led the Rubin wing of the Democratic Party in these contexts that Correa’s primary public policies – which were once so mainstream in both major U.S. political parties that they were presented as “consensus” views even among conservative economists – are now treated by the Rubinites as so “leftist” that their success enrages and terrifies Obama and the Clintons.


It is amusing that the New York Times’ article treated Correa as so far beyond the pale that it “dared not speak his name.” Correa’s policies of applying the rule of law and prosecuting elite bank frauds and increasing spending on education, health, and infrastructure needs with a focus on the poor are not considered remotely “leftist” positions among the Democratic Wing of the Democratic Party. They are core beliefs of the Democratic Party and they were the among the policies that made America great.

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