QE Forever And Ever? Submitted by Tyler Durden on 08/08/2012 17:49 -0400 Submitted by Pater Tanebrarum of Acting Man blog , The Extraordinary Becomes Normal The lunatics are running the asylum. This is the only conclusion one can come to when considering the nonchalance with which what was once considered an extraordinary policy with a firm 'exit' in mind is now propagated as a perfectly normal 'tool' to be employed at the drop of a hat. We refer of course to so-called 'quantitative easing' (QE), which really is a euphemism for money printing – even if not necessarily all of the central bank credit created ends up as part of the money supply. In fact, the experience of the Bank of Japan and the Bank of England with 'QE' was and is that it simply increases excess reserves and depresses already low interest rates a little further. Such excess reserves may be regarded as the tinder for an inflationary expansion of the money supply, but as long as no new credit is pyramided atop them, they may as well not exist. However, the Fed has been quite successful in boosting the money supply with the two iterations of 'QE' it has implemented thus far, in spite of both private sector lenders and private sector borrowers not prepared to add to the existing debt pile. We believe this is due to two factors: for one thing, the Fed also buys securities from non-banks. This not only increases bank reserves, it also increases deposit money directly. For another thing, commercial banks seem eager to increase their holdings of treasury bonds and are thus helping to finance a government that seems perfectly willing to engage in deficit spending on an astronomical scale. The banks have not only replaced the bonds they sold to the Fed during 'QE', they have expanded their holdings of treasury securities at an unprecedented pace. For a rigorous explanation of the mechanics of 'QE', we refer readers to an earlier article on the topic which discusses them in detail: ' QE Explained ' (we have written this as a reference article, as we thought at the time that many of the explanations that were forwarded elsewhere were not satisfactory). Treasury and agency (GSE) securities held by commercial banks. Since agency bonds are these days issued by state-owned entities under 'conservatorship' they are effectively liabilities of the US treasury – perhaps not de iure , but de facto . Big expansions of bank holdings of treasuries usually tend to go hand in hand with recessionary periods and heavy deficit spending by the government – click chart for better resolution. By contrast, the commercial banks have cut back on their holdings of 'other securities' since the 2008 'GFC' . The last time this happened was after the property bust of the late 1980's and the SL crisis that followed in its wake – click chart for better resolution. We have little doubt that if the Fed were to start 'QE3', it would once again succeed in boosting the rate of money supply growth. We also have little doubt that 'QE' will be tried again, even if the timing remains uncertain. One reason to expect more of the same is that in recent months, a slowdown in US true money supply growth has taken place. Not as rapid a slowdown as we thought we would see when 'QE2' ended, but that can probably be ascribed to dollars fleeing the euro area. A recent example is provided by Royal Dutch Shell's decision to remove its money from euro area banks and deposit it with US banks instead. To put numbers on this, over the past quarter growth in 'narrow' money TMS-1 has slowed to 5.9% annualized and growth in the 'broad' money measure TMS-2 has slowed to 6.6% annualized . This may strike many people as plenty of inflation, but consider that the year-on-year growth of these two money supply measures stood at 11.9% and 13.4% respectively as of June 30 (even the year-on-year growth rates, although still hefty, represent a marked slowdown from the peak). An economy that has become addicted to constant injections of new money is likely to falter very quickly once the money supply growth rate slows down . Although it is not knowable in advance what rate of money supply expansion is the new threshold for upsetting the economic apple-cart, it is probably higher than it used to be during the credit expansion of the pre-GFC boom period. At the time, the year-on-year growth of TMS-2 slowed to low single digits (slightly above 2%) before an economic crisis struck – see the chart below. What this chart also shows is that 'QE2' was preceded by a quick slowdown in money supply growth after the conclusion of 'QE1'. At the time, the ECRI WLI fell to territory that indicated an imminent relapse into recession was likely. The Fed quickly resumed its printing duties. The year-on-year growth rates of TMS-1, TMS-2 and M2, via Michael Pollaro – a slowdown is underway ever since the Fed's 'QE2' program ended, but has been mitigated by money fleeing the euro area – click chart for better resolution. Fed credit outstanding and the 12 month change in Fed credit – as can be seen, the Fed is no longer actively inflating – click chart for better resolution. 'Open-Ended QE' On Tuesday, Boston Fed president Eric Rosengren, a noted 'dove', made waves by arguing in favor of an open-ended asset purchase program by the Fed , a kind of QE of undetermined size and without an expiration date, only limited by the attainment of certain macro-economic goals. This method is to be preferred to a 'fixed limit' QE operation according to Rosengren, as it would end the 'market's fixation with when the program will end'. Rosengren has no vote at the FOMC this year, but he is still regarded as an influential member (he is slated to rotate into a voting slot next year). In fact, all the 'doves' should be considered influential considering who helms the Fed's governing board in Washington, namely Ben Bernanke and Janet Yellen (we have briefly discussed Mrs. Yellen's views yesterday ). Rosengren also argued that the Fed should not shy away from more easing just because it is an election year – a sign that the political implications of Fed action this year have been a topic of discussion at the central bank. His remark on that particular point is not without irony as can be seen below: As reported by Bloomberg : “ Federal Reserve Bank of Boston President Eric Rosengren said the central bank should pursue an “open-ended” quantitative easing program of “substantial magnitude” to boost growth and hiring amid a global slowdown. The Fed should set its guidance based on the economic outcomes it seeks and focus on buying more mortgage-backed securities, Rosengren said today in a CNBC interview. Without new stimulus, the jobless rate would rise to 8.4 percent at the end of this year and economic growth wouldn’t exceed its 1.75 percent average in the first half of the year, he said. “What I would argue for actually is to have it open-ended, that we focus on economic outcomes,” Rosengren said. “It would be setting a quantity that you’re going to continue to buy until you get the economic outcomes that you want.” “We’ve found that the economy has not grown as fast as we’d hoped and as a result I think it is an appropriate time to take stronger action,” Rosengren said. “A nonpartisan Federal Reserve should not be worried about the political cycle, it should be worried about the business cycle.” (emphasis added) This latter remark is ironic because the Fed's actions are the root cause of the business cycle – its suppression of interest rates after the bursting of the tech mania in 2000 was what set the stage for the housing boom and its aftermath. What makes it all the more astonishing to hear Rosengren articulate this latest idea of 'monetary inflation without limit' is that it is so utterly bare of introspection regarding what has happened up to the current juncture. It seems to us that it should be glaringly obvious that when the Fed boosted money growth last time around to help battle a recession, it set in motion the very boom that has cost us so dearly. And now the 'dovish' faction wants to continue doing it all over again, only on a much bigger scale? Apart from his sole focus on short term outcomes, an important point that seems not be considered by Rosengren is the question of what should happen if the 'open-ended' QE policy were to fail to achieve its stated goals. He seems to assume that it will succeed in lowering unemployment and creating 'economic growth' as a matter of course. No other outcome is apparently conceivable. However, the effects of monetary easing on the economy are circumscribed by the state of the pool of real funding. It goes without saying that money printing cannot create a single molecule of real wealth. If it could, then Zimbabwe wouldn't be a basket case, but a Utopia of riches. However, money printing does have both short and long term effects. In the short term, it can divert resources into bubble activities – all those economic activities that would not be considered profitable in the absence of monetary pumping. These activities of course create demand for factors of production, including labor, and tend to prettify the 'economic data' for a while – just as the housing bubble was widely regarded as an example of smooth 'non-inflationary' economic growth until it burst. As it were, monetary pumping can not always be expected to produce even such short term improvements in the vaunted 'data' . If the economy's pool of real funding is stagnating or shrinking, there will simply be no wealth available that can be diverted into bubble activities. All currently existing economic activity is already funded – and it is important to realize that what funds it is not 'money', but real goods. Money is merely the medium of exchange that enables both economic calculation and the smooth functioning of the market. To describe with a simple example what we mean, consider a very primitive island economy . Say that there are three fishermen who want to build a new boat to improve their productivity and hence increase their wealth. Building the boat takes time, during which they can no longer catch fish. They must therefore have enough food stored to see them through the boat building period – otherwise they will simply begin to starve and never be able to finish the project. If they hire additional helpers and pay them with money, then these helpers will also require food, shelter and so forth during the time it takes to build the boat. Unless someone else produces food in sufficient quantity to sell it to them, or they have a big enough store available, the project will come to grief. In other words, an adequate pool of real funding is a sine qua non if such an investment project is to succeed. It would obviously not help at all if these men increased the size of the money supply. It is not different in a modern complex market economy – all economic activities require real funding in the end. The allocation of these inputs will only be rational when money is sound – any interference with the money supply and interest rates by a central planning agency will by necessity falsify prices and paint a false picture of the savings and consumption schedules of consumers and the size of the pool of real savings available for investment purposes. It will therefore set bubble activities into motion – activities that fail to generate wealth, because they only appear to be profitable. If no wealth can be diverted into such activities because the pool of real funding is exhausted, then all that will happen is that additional money will raise prices, but it won't be possible to conjure even a short term mirage of an improving economy. Of course the market economy is highly flexible and new wealth is created all the time, in spite of all the obstacles the economy faces. It is conceivable though that a point in time will come when the Fed pumps and there is no longer an effect that would fit its conception of economic recovery. We must infer from Rosengren's idea of implementing open-ended QE until certain benchmarks in terms of unemployment and 'growth' are achieved, that in case they remain elusive, extraordinary rates of money printing would simply continue until the underlying monetary system breaks down. Perhaps he should be cheered on to shorten the waiting time. Boston Fed president Eric Rosengren: in favor of money printing without a fixed limit. (Photo credit: Wendy Mae Wed, 08/08/2012 - 18:00 | SwingForce Disgusting how these banksterz help each other and no one else. CREATURE FROM JEKYLL ISLAND, 5th Edition, by G. Edward Griffin. Its the best book I have ever read. It changed my life- now I just look at these bozos and laugh at how stupid the people are who let them get away with it.
Have We Seen The Peak Of Employment? Submitted by Tyler Durden on 12/11/2012 20:00 -0500 Ben Bernanke BLS Bureau of Labor Statistics China Gross Domestic Product Housing Starts Monetary Policy NFIB Recession recovery Authored by Lance Roberts of StreetTalkLive , In my November 5th report on employment I stated: "...when taking into account the recent slate of economic weakness, post-election we are likely to see many of the recent job gains revised away as the data aligns itself with overall economic activity . The STA composite employment index is likewise pointing towards higher jobless claims numbers in the months ahead and falling export orders will continue to impact corporate profitability and their need to increase employment. " Since that time jobless claims did indeed rise, and with the release of the November jobs report, we saw the previous two month's gains in employment revised down by a total of 49,000. October employment of 171,000 was revised to just a 138,000 advance while September was brought down to 132,000 from 148,000. What is important to remember is that the BLS only publishes revisions to the prior two months even though it has data for months prior. This is why the annual revisions to the employment data can be significant. Furthermore, given the weakness in the employment components of the major economic surveys, as shown by my composite employment index, we should expect to see negative revisions to the 2012 data employment data next year. There has been much debate about whether the domestic economy is in a recession. A bulk of the arguments against recession are based on the four primary indicators used by the National Bureau of Economic Research (NBER) who officially date the beginning and end of recessionary periods. The inherent problem with this analysis is that the data is subject to annual revisions, which the NBER waits for before determining recessions, which potentially leads to a significant lag in the final determination of the recession. The chart below shows recessions and the announcement dates by the NBER. As you can see the bulk of the damage to investors was done prior to the official announcement by the NBER. This is why there is significant debate currently about the economic state as investors try to determine when the next recession may occur. It is the problem of the data lag that requires additional analysis of a variety of other economic indicators which have both; 1) a strong history of recession indications and, 2) are not subject to large annual data revisions. Currently, many of those indicators from the economically sensitive sectors of manufacturing and production (see here , here , and here ) are warning of economic weakness and should increase investor caution. Peak Employment? Employment, is one of those economic data series that are subject to large annual revisions. Currently, there is little argument that the economy is beginning to slow with even the major Wall Street firms ratcheting down Q4 GDP to 1% annualized growth. This brings into question the sustainability of employment in the future as businesses become more defensive to offset the impact of the ongoing recession in Europe and slowdown in China. While the most recent employment report showed gains in November this is not necessarily an indication that an economic recession has been avoided. The table below shows every Post-WWII recession and where monthly employment stood prior to the start of the recession. With the exception of 1957 employment growth was positive, and in some cases expanding, prior to the recession. The point here is that positive net changes to employment are not necessarily an indication that the economy is expanding. It is important to remember that businesses are generally reactionary, rather than proactive, about the current economic environment. Businesses make investment, and hiring decisions, on historical data from the previous month or quarter. This is why businesses are typically the last to hire and the last to fire as they react to trailing demand figures. The chart below shows the three-month net change of employment. As you can see employment tends to peak around 1,000,000 jobs. That peak was reached in 2010 and has slowly been deteriorating since. This is why Bernanke has been implementing extraordinary monetary policy in order to stimulate weak employment growth. Unfortunately, businesses do not hire employees due to monetary policy but rather increased consumer demand. The problem is that, according to the NFIB , "poor sales" remains one of the top concerns - not exactly a sign of strong end demand. While employment has grown on a monthly basis, as shown by the inset bar chart, the trend of that growth remains weak. Commercial lending trends also point to a potential peak in employment. When an economy is expanding businesses need to typically borrow money to increase facilities, production and inventories. That expansion leads to increases in employment. The chart below shows the historically high correlation between the annual changes in commercial lending and employment. While it is still very early to tell it appears that commercial lending may have recently topped and turned down. This would be consistent with the weaker economic trends seen recently which portends to weaker employment growth in the months ahead. One of the arguments that we have made repeatedly in recent months has been that the nascent housing recovery is not fueling economic growth and employment as expected . The chart below shows residential construction employment versus housing starts. In the latest report construction employment declined for the fourth month in a row and is now down 7.1% on an annualized basis. With housing only a small contributor to economic growth, roughly 2.5% of GDP, and the majority of the activity occurring in multi-family properties - the need for expanded employment has not materialized. The issue for housing remains the sustainability of economic growth which is rapidly being called into question. As the economic underpinnings continue to deteriorate, as witnessed by corporate outlooks during the recent earnings reports, the drive to expand employment weakens. As we have been discussing since the beginning of this year the rising cost pressures into production have steadily deteriorated profit margins as cost cutting measures have been exhausted. While it is too early to say that employment has peaked for this current recovery cycle - there is mounting evidence that this may indeed be the case. It will be some time before we get the final revisions to the 2012 economic data from which the NBER will be able to ascertain the official state of the economy. However, as history has shown, the damage to investor portfolios will have already been done. It is for this reason that we continue to review reports of underlying economic activity which can provide clues as to the strength, and trend, of economic growth. It is from that analysis that we can avoid a bulk of the recessionary drag before the NBER makes it official. Average: 3.857145 Your rating: None Average: 3.9 ( 7 votes) Tweet Login or register to post comments 5228 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: NFIB - Small Businesses Don't Agree With BLS Guest Post: CFNAI: Not Seeing The Growth Economists' Predict Guest Post: ISM - Outlook Declines Goldman On The Reality Of The Jobs Market John Taylor On Poor Policy And This Recovery's Broken 'Plucking' Model
Did The Philly Fed Just Signal The End Of Obama's 'Jobs' Recovery? Submitted by Tyler Durden on 07/19/2012 13:55 -0400 Philly Fed recovery Hidden under the covers of this morning's already dismal headline print in the Philly Fed data was a considerably worse than expected employment sub-index. Historically this has correlated highly with the non-farm payroll print and suggests (albeit correlation is not causation but gathering real evidence of a slowdown is) that we are heading for a negative print in the next employment report. (h/t Brad Wishak at NewEdge) Average: 4.764705 Your rating: None Average: 4.8 (17 votes) Tweet ? Login or register to post comments 14564 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Philly Fed Rises, Despite Employment Index Slide; Outlook Has Biggest Drop In 6 Months Capitalism Versus Cronyism Biderman Sums Up Europe's Problem In 30 Seconds Philly Fed Comes 6 Standard Deviations Above Expectations, Biggest Jump Since October 1980; Biggest Jump Ever In Shipments The US is Entering a Recession In the Worst State in the Post WWI Period... Right As the Fed Realizes It's Out of Ammo
Market-Top Economics http://www.zerohedge.com/news/guest-post-market-top-economics Submitted by Tyler Durden on 07/19/2012 17:22 -0400 Bank of America Bank of America Cognitive Dissonance Deutsche Bank Equity Markets European Union Exchange Traded Fund Goldman Sachs goldman sachs Guest Post LIBOR M2 Market Crash MF Global New York City Reality United Kingdom Volatility Submitted by Nicholas Bucheleres of NJB Deflator blog, Market-top economics could be an entire university course, if people cared enough about such phenomena. Most only consider the signs of a market top months or years after a crash when some unyielding economics researcher puts the pieces together. As human-beings we have developed an uncanny ability to rationalize what we know to be bad news and convince ourselves, "This time is different," despite the fact that it usually never is. In a previous article I provided analysis on economic/equity decoupling (cognitive dissonance) and showed that the economy as we know it cannot persist--we are either due for a literal gap-up in leading economic conditions, or we are due for a serious correction in US equities. With today's 5.4% slip in existing home-sales, let's go with the latter. Velocity of M2 Money Stock (blue) and the SP500 (red): Inversion in the velocity SPX correlation led to a market crash in 2000 and 2007. No evidence suggests that we should break that trend this time. Market tops are classically defined by: The revelation of fraud within the financial sector: With more banks being sniffed-out by the day, it would be a crime to call the LIBOR rigging collusion anything less than criminal fraud. Fraud shakes up financial system (and the broader economy) because it redefines what was thought to be growth, revenue, and profitability as lies and untruths, and the market is eventually forced to reprice what was initially priced as success. I have found that markets have a very difficult time retroactively pricing fraud; these are the type of downward corrections that keep on falling, and falling, and falling until they bring down the entire market and forcefully purge the fraudulent behavior. Unfortunately for us law-abiding citizens who get ticketed for going a couple miles over the speed limit, banks currently involved in the LIBOR rigging scandal will likely not get more than a slap on the wrist. I don't care about justice for the sake of justice; I care about confidence within financial markets, and the notion that big banks can do whatever they want makes investors (aptly) think that they don't hold a candle to the big boys that make their own rules. Such loss of confidence is the cause of the exodus of funds from US equity markets, as shown by paltry volume, even by summer standards. The collapse of financial institutions under their own weight: When supposedly low-risk financial services institutions like MF Global (collapsed October 2011) and PFGBest (collapsed July 2012) start dropping like flies it makes people wonder: "How is my broker any different than those guys?" Further sucking confidence out of the market, the death of immoral financial institutions is not seen as a beneficial cleanse, but rather it is correctly seen as the tip of an iceberg of more deception. When money was supposed to be in one place, but really wasn't, as in the case of MF Global and PFGBest, investors want to know where that money went. What was financed with that illegal money? Again, markets struggle to price-in fraud because it is unclear what was initially priced with the blood-money. Sweeping revenue loss within the financial sector: By today it is clear that financials did not have a good Q2 2012. There were sweeping revenue forecast misses, but conveniently for shareholders, earnings per share (EPS) came in at least right-in-line estimates, and many topped estimates. With almost a dozen banks planning quadruple digit layoffs and salary cuts including Deutsche Bank, Morgan Stanely, and Bank of America it is clear that things are grim and growing darker in Midtown, Manhattan. Even Goldman Sachs is being forced to reign in salaries and bonuses...The fact that these guys aren't winning at their own game should be very alarming to everyone; indicates that there is something going on beneath the surface. SP500 (white) and financials ETF $XLF (white) show that financials have priced in a sliver of what they will be forced to. The erection of massive buildings: Tall buildings are a sign of over-ebullience and rampant speculation (hello, market top). The huge buildings are often financed heavily with credit when the market is booming and nobody worries about tomorrow, but once the market slows down a little bit and the reality of a massively over-leveraged, now-considered pile of steel is analyzed mark-to-market the results aren't pretty; the huge building that was meant to elevate society to the skies becomes an anvil on the back of a falling economy. Case and point: The Empire State building of New York City was built in 1929--the height of the pre-Great Depression bubble. "The Shard" just popped out of the ground March 30, 2012 in London and is the tallest building in the European Union. Upon unveiling the building, the architect made it a point to clarify that his creation was not meant to be considered arrogant...If you have to say it, it's probably too late. The chart below says more than I could: UK Index Fund $EWU (white): Vertical red line marks the completion of the shard...more to come out of this compression. Where there is smoke, there is fire; where there is coordinated financial fraud, there are systemic issues. In this case, it seems that the banks involved in LIBOR rigging were attempting to manipulate short-term interest rates in order to literally engineer the price of derivatives contracts. This is a scary notion, and I believe that it is apt to infer that these banks have trillions in losses on shadow derivative contracts that they have been attempting to cover up with interest rate manipulation. It seems that the gaping balance sheet holes are immune to filling and that bank executives have decided to fraudulently cover them up rather than mark them to market (assuming a market exists). SP500 (white) and $VIX (blue): True market bottoms are put in place after significant volatility driven capitulation--something that has not happened this summer. We may be gearing up for a 2007-esque double-top sell-off driven by higher-trending volatility coupled with lower lows in the equity markets. Markets are choosing to hold-off on pricing this negative news and are instead bottling it up to be released in what will surely be a "pop." Uncle Ben, will you tuck me in and read me a bedtime story? Average: 4 Your rating: None Average: 4 (9 votes) Tweet ? Login or register to post comments 10159 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: Now Playing: Cognitive Dissonance and Wishful Thinking Guest Post: Bad Economic Signs 2012 Guest Post: The Real Libor Scandal Libor Perp Walks Before the Election, but No Perp Walks for Rate Manipulation by Central Banks As Negative Gold Lease Rates Collapse, The Gold Sell Off Is Likely Coming To An End
This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The Sequel Submitted by Tyler Durden on 07/19/2012 19:05 -0400 Two years ago, in January 2010, Zero Hedge wrote " This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied " which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility , instantaneous liquidity , and redeemability ) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7 . A key proposal would give money market fund managers the option to " suspend redemptions to allow for the orderly liquidation of fund assets. " In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members ), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds ". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now . The question becomes: why now ? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat? Here is how the Fed frames the problem in the abstract: This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor’s recent balances, called the “minimum balance at risk” (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor’s MBR, creating a disincentive to redeem if the fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises. And further: This paper proposes another approach to mitigating the vulnerability of MMFs to runs by introducing a “minimum balance at risk” (MBR) that could provide a disincentive to run from a troubled money fund. The MBR would be a small fraction (for example, 5 percent) of each shareholder’s recent balances that could be redeemed only with a delay. The delay would ensure that redeeming investors remain partially invested in the fund long enough (we suggest 30 days) to share in any imminent portfolio losses or costs of their redemptions. However, as long as an investor’s balance exceeds her MBR, the rule would have no effect on her transactions, and no portion of any redemption would be delayed if her remaining shares exceed her minimum balance. The motivation for an MBR is to diminish the benefits of redeeming MMF shares quickly when a fund is in trouble and to reduce the potential costs that others’ redemptions impose on non?redeeming shareholders. Thus, the MBR would be an effective deterrent to runs because, in the event that an MMF breaks the buck (and only in such an event), the MBR would ensure a fairer allocation of losses among investors. Importantly, an MBR rule also could be structured to create a disincentive for shareholders to redeem shares in a troubled MMF, and we show that such a disincentive is necessary for an MBR rule to be effective in slowing or stopping runs . In particular, we suggest a rule that would subordinate a portion of a redeeming shareholders’ MBR, so that the redeemer’s MBR absorbs losses before those of non?redeemers. Because the risk of losses in an MMF is usually remote, such a mechanism would have very little impact on redemption incentives in normal circumstances. However , if losses became more likely, the expected cost of redemptions would increase. Investors would still have the option to redeem, but they would face a choice between redeeming to preserve liquidity and staying in the fund to protect principal. Creating a disincentive for redemptions when a fund is under strain is critical in protecting MMFs from runs, since shareholders otherwise face powerful incentives to redeem in order to simultaneously preserve liquidity and avoid losses. Basically, according to the Fed, the minimum balance would make the financial system more fair, reduce systemic risk and protect smaller investors who can be left with losses if larger investors in their fund withdraw cash first. The proposal would require a "small fraction" of each fund investor's recent balances to be segregated into a sinking fund to absorb losses if the fund is liquidated. Subsequently redemptions of these minimum balances at risk would be delayed for 30 days, "creating a disincentive to redeem if the fund is likely to have losses ." In other words: socialized losses. Where have we seen this before? But the real definition of what the Fed is suggesting is: capital controls . Once this proposal is implemented, the Fed, or some other regulator, will effectively have full control over how much money market cash is withdrawable from the system at any given moment. At $2.7 trillion in total, one can see why the Fed is suddenly concerned about this critical liquidity and capital buffer. The problem is that just as we said over two years ago, a brute force attempt to preserve a liquidity buffer is guaranteed to fail, as MMF participants will simply quietly pull their money out at the convenience when they can , not when they have to. Europe had to learn this the hard way - only after Draghi cut the deposit rates to 0% did virtually every European money market fund become irrelevant overnight, resulting in a massive pull of cash from the MMF industry. However, instead of going into equities as the Group of 30 and other central planners had hoped, the hundreds of billions of euros merely shifted into already negative nominal rate fixed income instruments. And who can blame them: money market capital does not seek return on capital but return of capital, to borrow Bill Gross' favorite line. Another clue as to why the Fed is once again suddenly interested in money markets comes from an article we wrote back in September 2009: " Rumored Source Of Reverse Repo Liquidity: Not Bank Reserves But Money Market Funds " in which we said that, "the Chairman is rumored to be considering money market funds as a liquidity source. Reuters points out that the Fed would thus have recourse to around $4-500 billion, and maybe more, of the $3.5 trillion sloshing in "money on the sidelines", roughly the same amount as MMs had just before the Lehman implosion." In a nutshell, money market funds (much more on this below), have always been one of the most hated liquidity intermediaries by the central planners: they don't go into stocks, they don't go into bonds, they just sit there, collecting no interest, but more importantly, are inert, and can not be incorporated into the rehypothecation architecture of shadow banking. And perhaps that is precisely why the Fed is pulling the scab off an old sore. Recall that for the past year, our primary contention has been that the core reason for all developed world problems is the gradual disappearance of good collateral and money good assets. Even if the MMF cash were to shift, preemptively, into bonds, or any other "safe" investments, the assets backing the cash can them enter the traditional-shadow liquidity system and buy time: the only real goal at this point. In the process, the cash itself would be "securitized" and provide at least a year or so in additional breathing room for a system that has essentially run out of good liquidity, and in Europe, out of any collateral. Expect more and more efforts to disgorge the $2.7 triliion in money market funds as the world gets closer and closer to D-Day. And what happens with MMF, will then progress to all other real asset classes as the government truly spreads out its capital controls wings. * * * For a more nuanced read through of the implications of money market redemption denials, we suggest rereading our analysis of precisely this topic from January 2010. Just keep in mind: in the interim we have had two and a half years of ZIRP and NIRP based asset depletion, which means that the marginal requirement to get MMF cash "back" into the system is now higher than ever. This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied When Henry Paulson publishes his long-awaited memoirs, the one section that will be of most interest to readers, will be the former Goldmanite and Secretary of the Treasury's recollection of what, in his opinion, was the most unpredictable and dire consequence of letting Lehman fail (letting his former employer become the number one undisputed Fixed Income trading entity in the world was quite predictable... plus we doubt it will be a major topic of discussion in Hank's book). We would venture to guess that the Reserve money market fund breaking the buck will be at the very top of the list, as the ensuing "run on the electronic bank" was precisely the 21st century equivalent of what happened to banks in physical form, during the early days of the Geat Depression. Had the lack of confidence in the system persisted for a few more hours, the entire financial world would have likely collapsed, as was so vividly recalled by Rep. Paul Kanjorski , once a barrage of electronic cash withdrawal requests depleted this primary spoke of the entire shadow economy. Ironically, money market funds are supposed to be the stalwart of safety and security among the plethora of global investment alternatives: one need only to look at their returns to see what the presumed composition of their investments is. A case in point, Fidelity's $137 billion Cash Reserves fund has a return of 0.61% YTD , truly nothing to write home about, and a return that would have been easily beaten putting one's money in Treasury Bonds. This is not surprising, as the primary purpose of money markets is to provide virtually instantaneous access to a portfolio of practically risk-free investment alternatives: a typical investor in a money market seeks minute investment risk, no volatility, and instantaneous liquidity, or redeemability . These are the three pillars upon which the entire $3.3 trillion money market industry is based. Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7 . A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to " suspend redemptions to allow for the orderly liquidation of fund assets. " You read that right: this does not refer to the charter of procyclical , leveraged, risk-ridden, transsexual (allegedly) portfolio manager-infested hedge funds like SAC, Citadel, Glenview or even Bridgewater (which in light of ADIA's latest batch of problems, may well be wishing this was in fact the case), but the heart of heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, " Sorry - your money is now frozen. Bank runs have become illegal. " This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous "extraordinary circumstances" arise. The second the game of constant offer-lifting ends, and money markets are exposed for the ponzi investment proxies they are, courtesy of their massive holdings of Treasury Bills, Reverse Repos , Commercial Paper, Agency Paper, CD, finance company MTNs and, of course, other money markets, and you decide to take your money out, well - sorry, you are out of luck. It's the law. A brief primer on money markets A very succinct explanation of what money markets are was provided by none other than SEC's Luis Aguilar on June 24, 2009, when he was presenting the case for making even the possibility of money market runs a thing of the past . To wit: Money market funds were founded nearly 40 years ago. And, as is well known, one of the hallmarks of money market funds is their ability to maintain a stable net asset value — typically at a dollar per share. In the time they have been around, money market funds have grown enormously — from $180 billion in 1983 (when Rule 2a-7 was first adopted), to $1.4 trillion at the end of 1998, to approximately $3.8 trillion at the end of 2008, just ten years later. The Release in front of us sets forth a number of informative statistics but a few that are of particular interest are the following: today, money market funds account for approximately 39% of all investment company assets; about 80% of all U.S. companies use money market funds in managing their cash balances; and about 20% of the cash balances of all U.S. households are held in money market funds. Clearly, money market funds have become part of the fabric by which families, and companies manage their financial affairs. When the Reserve fund broke the buck, and it seemed like an all-out rout of money markets was inevitable, the result would have been a virtual elimination of capital access by everyone: from households to companies. This reverberated for months, as the also presumably extremely safe Commercial Paper market was the next to freeze up, side by side with all traditional forms of credit. Only after the Fed stepped in an guaranteed money markets, and turned on the liquidity stabilization first, then quantitative easing spigot second, did things go back to some sort of new normal. However, it is only a matter of time before the patchwork of band aids holding the dam together is once again exposed, and a new, stronger and, well, "improved" run on the electronic bank materializes. It is precisely this contingency that the SEC and the administration are preparing for by " empowering money market fund boards of directors to suspend redemptions in extraordinary circumstances to protect the interests of fund shareholders ." A little more on money markets : Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds, in the United States, are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts investments in money market funds by quality, maturity and diversity. Under this act, a money fund mainly buys the highest rated debt, which matures in under 13 months. The portfolio must maintain a weighted average maturity (WAM) of 90 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements . Ironically, the proposed change to Rule 2a-7 seeks to make dramatic changes to the composition of MMs : from 90 days, the WAM would get shortened to 60 days. And this is occurring at a time when the government is desperately seeking to find ways of extending maturities and durations of short-term debt instruments: by reverse rolling the $3.2 trillion industry, the impetus will be precisely the reverse of what should be happening , as more ultra-short maturity instruments are horded up, leaving a dead zone in the 60-90 day maturity window. Some other proposed changes to 2a-7 inclu de "prohibiting the funds from investing in Second Tier securities, as defined in Rule 2a-7. Eligible securities would be redefined as securities receiving only the highest, rather than the highest two, short-term debt ratings from a requisite nationally recognized securities rating organization. Further, money market funds would be permitted to acquire long-term unrated securities only if they have received long-term ratings in the highest two, rather than the highest three, ratings categories." In other words, let's make them so safe, that when the time comes, nobody will have access to them. Brilliant. The utility of money market funds has long been questioned by such systemically-embedded financial luminaries as Paul Volcker (more on this in a minute). After all, what are money markets if merely an easy, and 401(k)-eligible option to not invest in equity or bonds, but in "paper" which is cash in all but name (maybe not so much after the proposed Rule change passes). And as money markets account for a huge portion of the $11 trillion of mutual fund assets as of November ( per ICI , whose opinion, incidentally, was instrumental in shaping future money market policy), $3.3 trillion to be precise, and second only to stock funds at $4.8 trillion, one can see why an administration, hell bent on recreating a stock-price bubble, would do all it can to make money markets extremely unattractive. In fact, the current administration has been on a roll on this regard: i) keeping money market rates at record lows, ii) removing money market fund guarantees and iii) and even allowing reverse repos to use money markets as sources of liquidity (because we all know that the collateral behind the banks shadow banking arrangement with the Fed are literally crap; as we have noted before, we will continue claiming this until the Fed disproves us by opening up their books for full inspection. Until then, yes, the Fed has lent out hundreds of billions against bankrupt company equity , as we have pointed out in the past ). Money Markets are the easiest recourse that idiotic class of Americans known as "savers" has to give the big bank oligarchs, the Fed and the bubble-inflating Administration the middle finger. As you will recall, recently Arianna Huffington has been soliciting all Americans do just that : to move their money out of the tentacles of the TBTFs . In essence, the money market optionality is precisely the equivalent of moving physical money from TBTFs to community banks in the "shadow economy." Because where there is $3.3 trillion out of $11, there could easily be $11 trillion out of $11, which would destroy the whole concept of Fed-spearheaded asset-price inflation, and would destroy overnight the TBTFs , as equities would once again find their fair value. It is no surprise then, that the current financial system, and its political cronies loathe the concept of Money Markets, and have done all they could to make them as unattractive as possible. Below is a chart of the Net Assets held by all US money market funds and the number of money market mutual funds since January 2008: Obviously, attempts to push capital out of MMs have succeeded: after peaking at $3.9 trillion, currently money markets hold a two year low of $3.27 trillion. Furthermore, the number of actual money market fund operations has been substantially hit: from 2,078 in the days after the Lehman implosion, this is now down to 1,828, a 12% reduction. At this rate soon there won't be all that many money market funds to chose from. While the AUM reduction is explicable through the previously mentioned three factors, the actual reduction in number of funds is on the surface not quite a straightforward, and will likely be the topic a future Zero Hedge post. Although, the impetus of managing money when one can return at most 0.6% annually, and charge fees on this "return" may be missing - the answer may be far simpler than we think. Why run a money market, when the Fed will be happy to issue you a bank charter, and you can collect much more, risk free, courtesy of the vertical yield curve. Yet what is strange is that even with all the adverse consequences of holding cash in Money Markets, the total AUM of this "safest" investment option is still substantial, at nearly $3.3 trillion as of December 30 , a big decline yes, but a decline that should have been much greater considering even the president since March 3 has been beckoning his daily viewership to invest in cheap stocks courtesy of low " profit and earning ratios " (that, and the specter of President's Working Group on Financial Markets ). Could this action, whereby investors will no longer have access to money that historically has been sacrosanct and reachable and disposable on a moment's notice, be the last nail in the coffin of money markets? We believe so, however, we are not sure if it will attain the desired effect. With an aging baby boomer population, which would rather burn their money than invest in the stock market again and relive the roller-coaster days of late 2008 and early 2009, the plan may well backfire, and result in even more money leaving the shadow system and entering such tangible objects as deposit accounts (at community banks, of course), mattresses and socks. And speaking of the President's Working Group... The Group of Thirty When discussing the shadow economy, it is only fitting to discuss the shadow decision-makers. In this regard, the Group of 30 , is to the traditional economic decision-making process as the President's Working Group is to capital markets. Taken from the website , the self-description reads innocently enough: The Group of Thirty , established in 1978, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers. The Group's members meet in plenary sessions twice a year with select guests to discuss important economic, financial and policy developments. They reach out to a wider audience in seminars and symposia . Of most importance to our membership and supporters is the annual International Banking Seminar. Sounds like any old D.C.-based think tank... until one looks at the roster of members: Paul A. Volcker, Chairman of the Board of Trustees, Group of Thirty, Former Chairman, Board of Governors of the Federal Reserve System Jacob A. Frenkel , Chairman, Group of Thirty, Vice Chairman, American International Group , Former Governor, Bank of Israel Jean- Clau de Trichet , President, European Central Bank , Former Governor, Banque de France Zhou Xiaochuan , Governor, People’s Bank of China , Former President, China Construction Bank, Former Asst. Minister of Foreign Tra de Yutaka Yamaguchi , Former Deputy Governor, Bank of Japan , Former Chairman, Euro Currency Standing Commission William McDonough , Vice Chairman and Special Advisor to the Chairman, Merrill Lynch, Former Chairman, Public Company Accounting Oversight Board, Former President, Federal Reserve Bank of New York Richard A. Debs, Advisory Director, Morgan Stanley, Former President, Morgan Stanley International, Former COO, Federal Reserve Bank of New York Abdulatif Al- Hamad , Chairman, Arab Fund for Economic and Social Development, Former Minister of Finance and Minister of Planning, Kuwait William R. Rhodes, Senior Vice Chairman, Citigroup , Chairman, President and CEO, Citicorp and Citibank Ernest Stern, Partner and Senior Advisor, The Rohatyn Group, Former Managing Director, JPMorgan Chase, Former Managing Director, World Bank Jaime Caruana , Financial Counsellor, International Monetary Fund, Former Governor, Banco de Espaa , Former Chairman, Basel Committee on Banking Supervision E. Gerald Corrigan , Managing Director, Goldman Sachs Group, Inc., Former President, Federal Reserve Bank of New York Andrew D. Crockett, President, JPMorgan Chase International, Former General Manager, Bank for International Settlements Guillermo de la Dehesa Romero, Director and Member of the Executive Committee, Grupo Santander , Former Deputy Managing Director, Banco de Espaa , Former Secretary of State, Ministry of Economy and Finance, Spain Mario Draghi , Governor, Banca d’ Italia , Chairman, Financial Stability Forum, Member of the Governing and General Councils, European Central Bank, Former Vice Chairman and Managing Director, Goldman Sachs International Martin Feldstein , Professor of Economics, Harvard University , President Emeritus, National Bureau of Economic Research, Former Chairman, Council of Economic Advisers Roger W. Ferguson, Jr., Chief Executive, TIAA-CREF, Former Chairman, Swiss Re America Holding Corporation, Former Vice Chairman, Board of Governors of the Federal Reserve System Stanley Fischer, Governor, Bank of Israel, Former First Managing Director, International Monetary Fund Philipp Hildebrand, Vice Chairman of the Governing Board, Swiss National Bank, Former Partner, Moore Capital Management Paul Krugman , Professor of Economics, Woodrow Wilson School, Princeton University, Former Member, Council of Economic Advisors Kenneth Rogoff , Thomas D. Cabot Professor of Public Policy and Economics, Harvard University, Former Chief Economist and Director of Research, IMF and, of course: Timothy F. Geithner , President and Chief Executive Officer, Federal Reserve Bank of New York, Former U.S. Undersecretary of Treasury for International Affairs Lawrence Summers, Charles W. Eliot University Professor, Harvard University, Former President, Harvard University, Former U.S. Secretary of the Treasury and many more. Given the choice of being a fly on the wall at a G7 meeting or that of the "Group of 30", we would be very curious to see who would pick the former over the latter. These are the people, whose "reports" and groupthink determines the financial fate of the world: their vested interest in perpetuating the status quo is second to none. Which is why we read with great interest a recent paper from the Group of 30: Financial Reform, A Framework for Financial Stability , released on January 15, 2009, deep in the heart of the crisis. While the paper has enough insight for many, non-related posts (we are already working on several), we will focus on the policy recommendations presented for money market funds. Money Market Mutual Funds and Supervision Recommendation 3: a. Money market mutual funds wishing to continue to offer bank-like services, such as transaction account services, withdrawals on demand at par, and assurances of maintaining a stable net asset value (NAV) at par should be required to reorganize as special-purpose banks, with appropriate prudential regulation and supervision, government insurance, and access to central bank lender-of-last-resort facilities. b. Those institutions remaining as money market mutual funds should only offer a conservative investment option with modest upside potential at relatively low risk. The vehicles should be clearly differentiated from federally insured instruments offered by banks, such as money market deposit funds, with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV. Money market mutual funds should not be permitted to use amortized cost pricing, with the implication that they carry a fluctuating NAV rather than one that is pegged at US$1.00 per share. The phrasing of " with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV " should be sufficient to whiten the hairs of every proponent of money markets as a "safe" investment alternative. Yet what the SEC has done, is to take the Group of 30 recommendation, and take it to the next level: not only will funds not have explicit assurance of any kind vis -a- vis funding, but in fact, the redemption of said funds would be legally barred upon "extraordinary circumstances." Rule 22e-3 From the SEC : Proposed rule 22e–3(a) would permit a money market fund to suspend redemptions if: (i) The fund’s current price per share, calculated pursuant to rule 2a–7(c), is less than the fund’s stable net asset value per share; (ii) its board of directors, including a majority of directors who are not interested persons, approves the liquidation of the fund; and (iii) the fund, prior to suspending redemptions , notifies the Commission of its decision to liquidate and suspend redemptions , by electronic mail directed to the attention of our Director of the Division of Investment Management or the Director’s designee . These proposed conditions are intended to ensure that any suspension of redemptions will be consistent with the underlying policies of section 22(e). We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares. Accordingly, our proposal is limited to permitting suspension of this statutory protection only in extraordinary circumstances. Thus, the proposed conditions, which are similar to those of the temporary rule, are designed to limit the availability of the rule to circumstances that present a significant risk of a run on the fund. Moreover, the exemption would require action of the fund board (including the independent directors), which would be acting in its capacity as a fiduciary. The proposed rule contains an additional provision that would permit us to take steps to protect investors . Specifically, the proposed rule would permit us to rescind or modify the relief provided by the rule (and thus require the fund to resume honoring redemptions ) if, for example, a liquidating fund has not devised, or is not properly executing, a plan of liquidation that protects fund shareholders. Under this provision, the Commission may modify the relief ‘‘after appropriate notice and opportunity for hearing,’’ in accordance with section 40 of the Act. Lots of keywords there: "fiduciary", "impose hardships" but most notably "permit us to take steps to protect investors." Uh, SEC, no thanks. We can protect ourselves. Your protection so far has resulted in the Madoff scandal, the BofA fiasco, billions in insider trading profits and not one guilty person, who did not manage to escape unscathed with merely a wrist slap in the form of some pathetic fine. With all due respect, SEC, any proposal that involves you acting to "protect" us should be immediately banned and any further discussion ended. Especially in this case: what the SEC is proposing is simple - the entire market structure has been converted to a hedge fund. When investors hear the word "suspend redemptions " they envisioned a battered, pro-cyclical, leveraged, permabullish hedge fund, that suddenly "found itself" down 30, 40, 50 or more percent, and to avoid instantaneous liquidation, had to bar redemptions . Forgive us, but is the SEC confirming that the entire market is now one big casino, one big government subsidized hedge fund, where as long as things go up, all is good, but the second things take a leg down, just like any ponzi , nobody will be allowed to pull their money? Maybe Madoff should have created the same redemption suspension: his fund would still be alive and thriving, now that the government has become the biggest ponzi conductor of all time. And nobody would have been the wiser. But instead, the Securities and Exchange Commission, in discussions with the Group of 30, Barney Frank, and any other conflicted individuals who only care about protecting their own money for one more year, has decided, in its infinite wisdom, to make money markets a complete scam. And this is the gist of regulatory reform in America. Conclusion At this point it is without doubt that even the government understands that when things turn sour, and they will, the run on the bank will be unavoidable: their solution - prevent money from being dispensed, when that moment comes. The thing about crises, be they liquidity, solvency, or plain-vanilla, is that "price discovery" occurs all at once, and at the very same time. And all too often, investors "discover" they were lied to, as the emperor, in any fiat system , always has no clothes. Just like in September 2008, when the banks were forced to look at each-others' balance sheet and realize that there are no real assets on the left backing up the liabilities on the right, so the moment of enlightenment occurs are the most importune time: just ask Hank Paulson . Had he known his action of beefing up Goldman's FICC trading axes would have resulted in the "Ice- Nine'ing " (to borrow a Mark Pittman term) of money markets, who knows- maybe Lehman would have still been alive. Perhaps risking the cash access of 20% of US households and 80% of companies was not worth the few extra zeroes in Goldman's EPS. But we will never know. What we will know, is that now i) the government is all too aware that the market has become one huge ponzi , and that all investment vehicles , even the safest ones, are subject to bank runs, and ii) that said bank runs, will occur. It is only a matter of time. And just as the president told everyone directly to buy the market on March 3, so the SEC, the Group of 30, and Barney Frank are telling us all, much less directly, to get the hell out of Dodge. Alternatively, the game of "last fool in", holding the burning hot potato, can continue indefinitely, until such time as the marginal utility of each and every dollar printed by Ben Bernanke is zero. Average: 4.965515 Your rating: None Average: 5 ( 58 votes) Tweet Login or register to post comments 32132 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied Europe's Problems - US Money Funds and Politics US MM Funds - The dumbest money of all Here Comes Europe's Hail Mary - Presenting The "Redemption Fund" Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote
Guest Post: Corporate Profits Surge At Expense Of Workers Submitted by Tyler Durden on 07/19/2012 15:23 -0400 Ben Bernanke Fail Guest Post New Normal NFIB Reality Recession recovery Reuters Testimony Unemployment Submitted by Lance Roberts of StreetTalk Live , There was an interesting article out this morning from Reuters stating: "From the companies' point of view, it makes perfect sense these days to hoard cash. First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens. Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows." There is a very interesting, albeit disturbing, contradiction in the statement above. The initial assumption would be that if companies are having a hard time putting cash to work, because there is less demand for products and services, this would infer lower revenues. The chart shows the change in reporting earnings and sales (top line revenue) for the SP 500. Since the beginning of 2009 the total growth in sales per share has been 21% as compared to a 206% increase in reported earnings. This confirms our assumption that lower revenues and demand is behind the historically high levels of corporate "cash hoarding." However, if revenue growth is weak then how are real pretax corporate profits soaring? The answer comes down cost controls and productivity. The single biggest expense to any company is full-time employees due to payroll, taxes and benefits. While the economy has grown since the depths of the last recession - demand has remained weak in terms of sales growth. The lack of demand has kept businesses on the defensive with a focus on maximizing profitability of each dollar of revenue. During the recession, and recovery, businesses have kept very tight controls on costs by reducing inventory levels, cutting budgets and maximizing productivity per employee. This has also led to massive changes in hiring and employment. Temporary hires (which have lower wages and no benefit costs) have substantially outpaced permanent employment since the end of the last recession. Since the first quarter of 2009 part-time employment has increased by more than 1.5 million while full-time employment is still lower by 1.25 million. The analysts and media have been quick to jump to the idea that temporary jobs will ultimately turn into full-time employment. However, in an economy that is growing at a sub-par rate with a large and available labor pool - the use of temporary versus full-time employment may well be the "new normal" . This also explains why dependence on "food stamps" have surged by over 14 million participants during the same period. In order to see the impact more clearly we need only to look at the levels of corporate after-tax profits to employees. In 2009, coming out of the recession, the ratio of corporate profits to employees was 0.90. Today, that ratio has soared to 1.50. The reason for this is twofold. First, while employment has recovered, real unemployment still remains very high. In the most recent employment report while 84k new jobs were created - 85k people went on disability. Out of the 84k new jobs more than 1/3 were temporary with the bulk of the remainder in lower paying service related jobs. This is not the kind of employment picture that leads to long term increases in end demand. Furthermore, over the past decade the demand on businesses to increase profits, from shareholders and Wall Street, has driven productivity higher and wages lower. Real wages are well below the long term trend due to the large, and available, labor pool which keeps wages and salary levels suppressed. Lower wages are double edged sword for businesses. In the short run lower wages increase profitability. In the longer term, as wages fail to keep pace with inflation, consumers struggle to maintain their standard living which forces them to cut back on consumption eroding end demand on businesses. The cycle, which is deflationary in nature, is very difficult to break. While it is enticing to want to force corporations to deploy the cash and create jobs - the unfortunate situation is that it is the very demands to maintain profitability that keeps them on the defensive. Secondarily, let's not forget that we live in a free market economy and businesses are in the "business" of making profits. As Bernanke stated, in his recent testimony to Congress, it is imperative that Congress acts with fiscal policy changes that promotes real, organic, economic growth. Corporations will not increase hiring, and ultimately wages, until end demand substantially increases. Consumers can not increase demand until they have more money to spend. This "chicken and egg" syndrome is indicative of the problem that faces an economy trapped in a deflationary cycle. Fiscal policy that leads to productive investment, removes uncertainty about future regulatory and tax implications, and provides an environment that allows cash to be invested at profitable rates of return will ultimately break the blockade the economy currently faces. However, until then, businesses have no incentive to release their "cash hoards" as long as "poor sales" , as shown in the recent NFIB report , remain their primary concern. For investors, the continued increases in profitability, at the expense of wages, is very finite. It is revenue that matters in the long term - without subsequent increases at the top line; bottom line profitability is severely at risk. The stock market is not cheap, especially in an environment where interest rates are artificially suppressed and earnings are inflated due to "accounting magic." This increases the risk of a significant market correction particularly with a market driven by "hopes" of further central bank interventions. This reeks of a risky environment, which can remain irrational longer than expected, that will eventually revert when expectations and reality collide. Average: 5 Your rating: None Average: 5 ( 7 votes) Tweet Login or register to post comments 7485 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: Income Disparity Solution: Restore The Minimum Wage To 1969 Levels Real U-3 Unemployment Rate: 11.6% Guest Post: Dear Person Seeking a Job: Why I Can't Hire You Layoffs, Layoffs, Everywhere You Look There Are Layoffs When The White House Touts Falling Wages
The Abysmal Earnings Season Explained In Two Charts Submitted by Tyler Durden on 07/21/2012 10:55 -0400 Lehman The following two charts show just why any hopes that corporate earnings can mask the US economic deterioration this year, as they did in 2011 (probably the first and only way in which 2012 is not a carbon copy of 2011 so far), should be promptly dashed. Basically revenue growth is abysmal. But no surprise there - after all we have been warning for nearly a year that with the Fed intervening directly in corporation cash allocation decisions (via ZIRP), management teams are much more eager to hand out retained earnings in the form of dividends than reinvest via CapEx - an extremely short-sighted strategy and one that backfires immediately with cash-generating assets around the world already at record old age. (for more read: " How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement "). And with revenue growth absent, EPS can only grow if corporations cut even deeper into the muscle and let even more workers off, since employee pay is already abnormally low and can not realistically be cut any more. Sure enough, ex-financials, Year over Year EPS growth is now at 0% for the first time since the Lehman collapse! In other words, corporations have already extracted all the growth they could courtesy of ZIRP. It is all downhill from here, as only the negative consequences of the Fed's disastrous policies now predominate in finance and the economy. As an appendix, here is a full summary of the earnings season to date : Average: 4.75 Your rating: None Average: 4.8 ( 8 votes) Tweet Login or register to post comments 8800 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Bank Of America Continues Firesales To Shore Up Liquidity, Sells Canadian Credit Card Business To TD Group V-Shaped Revenue Recovery Combined With L-Shaped CapEx Growth The China Bubble’s Coming — But Not the One You Think How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement Equity Market Observations From Rosenberg
Guest Post: Why Is The Fed Not Printing Like Crazy? Submitted by Tyler Durden on 07/21/2012 11:10 -0400 Submitted by John Aziz of Azizonomics Guest Post: Why Is The Fed Not Printing Like Crazy? I try to read all sides of the economics blogosphere, and try and grasp the ideas of even those who I would seem to radically disagree with. One thing that the anti-Fed side of the economics blogosphere seems to not fully appreciate is the depth of disappointment with Ben Bernanke from the pro-Fed side. For every anti-Fed post bemoaning Bernanke’s money printing, there is a pro-Fed post bemoaning Bernanke for not printing enough. Bernanke, it seems, is tied to everybody’s whipping post. And in fairness to the pro-Fed side, the data shows that the Fed is not printing anywhere near as much as its own self-imposed interpretation of its mandate demands. (Of course, I fundamentally disagree that price stability should be interpreted as consistent inflation, but that is an argument for another day ). Scott Sumner notes : Recall that the Fed tries to keep inflation close to 2.0% and unemployment close to about 5.6% (the Fed’s current estimate of the natural rate.) One implication of the dual mandate is that they should try to generate above 2% inflation during periods of high unemployment, and below 2% during periods of low unemployment. In July 2008 unemployment rose above 5.6%, and it’s averaged nearly 9% over the past 46 months. So the Fed’s mandate calls for slightly higher than 2% inflation during this 46 month slump. Last month I reported that the headline CPI had risen 4.6% in the 45 months since July 2008. Now we have the May data, and the headline CPI has gone up 4.3% in the 46 months since July 2008. So the annual inflation rate over that nearly 4 year period has fallen from a bit over 1.2%, to 1.1%. Raw data: Note that downward slope in inflation into 2012? That’s the Fed not doing QE3 when everyone ( e specially gold prices ) expected them to, and when their own self-imposed interpretation of their mandate calls for them to inflate more. And nobody can say that the Fed is out of bullets; central banks are never out of bullets — there was a time when a central bank was limited to the number of zeroes it could fit on a banknote, but in the era of digital currency, even that limit has been removed. Here’s the younger Bernanke’s views on the subject: Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take — namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment — in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetaryauthorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan. And here’s Paul Krugman pulling a Bernanke on Bernanke: Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different. Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation. It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama. I am fairly certain the answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics. Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable. Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status ( the first such deal in history ), cutting Wall Street’s bond flippers out of the deal? As John Huntsman (in his days as ambassador to China) reported in a cable back to Washington , China is keen to stop buying low-yield treasuries and start buying other assets, but the US is desperately pushing China back toward treasuries: The Shanghai-based Shanghai Media Group (SMG) publication, China Business News: “The United States provoked a trade war again by imposing high anti-dumping duties on Chinese-made gift boxes and packaging ribbon. China has become the biggest victim of the U.S.’s abusive implementation of trade remedy measures. The United States no longer sits still; it frequently uses evil tricks to force China to buy U.S. bonds. A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold. Today when theUnited States is determined to beggar thy neighbor, shifting its crisis to China, theChinese must be very clear what the key to victory is.It is by no means to use new foreign exchange reserves to buy U.S. Treasury bonds. The issues of Taiwan, Tibet, Xinjiang, trade and so on are all false tricks, while forcing China to buy U.S. bonds is the U.S.’s real intention. ” And that, in a nutshell, is why Bernanke is not printing nearly as much as Krugman wishes . In my view only a brutal 2008-style collapse can bring on the kind of printing — QE3, NGDP targeting and beyond — that the pro-Fed blogosphere wishes to see, because it is only under those circumstances that China and other creditors will happily support it. To a heavily-indebted nation, creditors have big leverage on monetary policy. 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Guest Post: Explaining Wage Stagnation Submitted by Tyler Durden on 07/19/2012 21:40 -0400 Guest Post Reality http://azizonomics.com/2012/07/19/explaining-wage-stagnation/ Submitted by John Aziz of Azizonomics , Why? Well, my intuition says one thing — the change in trajectory correlates very precisely with the end of the Bretton Woods system. My intuition says that that event was a seismic shift for wages, for gold, for oil, for trade. The data seems to support that — the end of the Bretton Woods system correlates beautifully to a rise in income inequality , a downward shift in total factor productivity , a huge upward swing in credit creation , the beginning of financialisation , the beginning of a new stage in globalisation ,and a myriad of other things. Some, including Peter Thiel and James Hamilton, have suggested that there is data to suggest that an oil shock may have been the catalyst that put us into a new trajectory. Oil prices: And that this spike may be related to a fall in oil prices discoveries: I certainly think that the drop-off in oil discoveries was a huge psychological factor in the huge oil price spike we saw in 1980. But the reality is that although production did fall, it has recovered: The point becomes clearer when we take the dollar out of the equation and just look at oil priced in wages: Oil prices in terms of US wages ended up lower than they had been before the oil shock. What happened in the late 70s and early 80s was a blip caused by the (very real) drop-off in American reserves , and the (in my view, psychological — considering that global proven oil reserves continue to rise to the present day ) drop-off in global production. But while oil production recovered and prices fell, wages continued to stagnate. This suggests very strongly to me that the long-term issue was not an oil shock, but the fundamental change in the nature of the global trade system and the nature of money that took place in 1971 when Richard Nixon ended Bretton Woods. Average: 3.6 Your rating: None Average: 3.6 ( 10 votes) Tweet Login or register to post comments 10866 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Today Is The 40th Anniversary Of Nixon Ending Gold Standard And Creating Modern Fiat Monetary System Guest Post: We're All Nixonians Now Complete Statement By Euroheads And IIF Press Releases On European Bailout Guest Post: Global Reality - Surplus Of Labor, Scarcity Of Paid Work Herman Cain InTrade Nomination Odds Experience Terminal Flash Crash, Ron Paul Benefits
Revenues And Earnings: Another "Decoupling" Submitted by Tyler Durden on 07/18/2012 09:37 -0400 Unemployment As we approach 'peak earnings reporting' in the next two weeks, a quick glance at the state of the 65 companies of the SP 500 that have reported so far may be useful. In yet another miracle of modern-day accounting, and just when you thought there was no more fat to cut, staff to lay-off, or Capex to cut, 73% of companies reporting have surprised positively on EPS while 65% have surprised negatively on Revenues . Industrials stand out in the liberal sprinkling of accounting fairy dust with 100% of the firms having missed top-line while 88% beat bottom-line. Is it any wonder that unemployment is rising once again and CapEx is falling? 65% Revenue misses versus 73% earnings beats... The accounting fairies have been busy meeting and beating those expectations... and the reaction - as expected - earnings beats have tended to outperform - but some beats have been sold (outlooks) - though at a sector level they have all risen (floated by the market)... and revenue misses and beats are much more in line with performance over the two-dayts post announcement... Charts: Bloomberg Average: 5 Your rating: None Average: 5 ( 5 votes) Tweet Login or register to post comments 5468 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: V-Shaped Revenue Recovery Combined With L-Shaped CapEx Growth WATCH PRICE TARGET - Briggs Stratton Corp BGG 8 7/8 02/2011's With 20% Of SP Reporting, YoY Ex-Fin Revenue Growth Is... Negative Accounting Gimmicks Have Boosted The Collective SP 500 Cash Balance By Over $150 Billion Since The Start Of The Crisis Goldman Summarizes Q3 Earnings' Key Themes As CEO Confidence Ebbs
So Much For "Housing Has Bottomed" - Shadow Housing Inventory Resumes Upward Climb Submitted by Tyler Durden on 07/18/2012 08:57 -0400 default Foreclosures headlines Housing Inventory Housing Starts RealtyTrac RealtyTrac Appropriately coming just after today's Housing Starts data, which captured MSM headlines will blast was "the highest since 2008" is the following chart from this morning's Bloomberg Brief, which shows precisely the reason why "housing has bottomed" - and it has nothing to do with organic demand rising. No, it has everything with excess inventory once again starting to pile up, which means that the imbalance in the supply and demand curves is purely a function of shadow inventory being stocked away, and that there is once again no true clearing price. From Bloomberg: The shadow inventory of homes – those in foreclosure plus those 90 days late on mortgage payments – is on the rise again, a further indication that the supply side has not yet healed. Accoring to RealtyTrac, foreclosure starts jumped 6 percent on a year ago basis in the second quarter, the first year-over-year increase since 2009. There are roughly 4.16 million homes that could begin to flow to market. Once one takes the number of homeowners 30- to 90-days late on their mortgage payments and includes the likely default of those that have negative equity on their homes, there is a strong possibility more than 6.5 million additional foreclosures will enter the pipeline. The addition of homes that banks may be holding back suggests a much larger number. Laurie Goodman of Amherst Securities Group has testified before Congress that it could be as high as between 8 and 10 million. And scene. Average: 5 Your rating: None Average: 5 ( 7 votes) Tweet Login or register to post comments 10012 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: March Foreclosures Surge To Absolute Record, At 369,491, 19% Jump from February RealtyTrac Reports 2.8 Million Foreclosures In 2009, "Would Have Been Worse If Not For Delays In Processing Delinquent Loans" Q3 Foreclosure Activity Increases 5% in Q3, Highest Ever Recorded By RealtyTrac Charting Foreclosure Basics Will The Housing Market Continue To Decline?
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