Friday, September 20, 2013

Did the Fed bailout Emerging Markets?

Has Turkey been bailed out by the Fed, the Zero Hedge inquires? (bold original)
Following the Fed's decision to not Taper, Turkish stocks were the world's best performing asset overnight. Jumping almost 8% today, the main Turkish stock index is now up over 26% in the last 3 weeks, back above its 200DMA and in bull-market territory as BAML notes "the Fed decision amounts to a bailout for Turkey." While the fundamental adjustment in current account imbalances remains unfinished, in the near term gross bearish positioning and the dovish FOMC decision are likely to support Turkey bonds... once again removing any pressure for a politician to make any hard decision anywhere in the world. How do you say "thank-you, Ben" in Turkish? (or Indonesian, Indian, Malaysian, or Thai?)
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In addition to Turkey, other EM bourses has been buoyed by the FED (including those of EM Asia as mentioned).

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Brazil’s Bovespa
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Russia’s MICEX
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Indonesia’s JCI
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Malaysia’s KLCI
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Thailand’s SETI
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The Philippine Phisix
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And another biggest beneficiary from the Fed's actions seems to be India, whose BSE-SENSEX has reached a 2011 high! See no risks of a crisis. The Fed’s magic wand shooed them away.

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The near sweeping bailout of emerging markets can be seen via the iShares Emerging Markets (EEM)

The bailout has not just been an EM affair, it has extended to developed Asia Pacific…

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Such as Singapore’s STI

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and Australia ASX 200 (at record highs)

The above equity markets began to rally in anticipation of a modest tapering by the FED. Besides with other assets down, equity markets became the only alternative or magnet for yield chasers. And the Fed's "UNtaper" served as the icing on the cake.

The only “fundamental” thing relevant to the current financial markets has been central banking bailouts.

Yet for every artificially generated boom there is eventually a corresponding...

Video: Ron Paul on the Fed's Untaper: Prepare for the destruction of the US dollar and crash of the bond markets

The great Ron Paul interviewed by Fox Business (hat tip Lew Rockwell Blog)

The untaper says Dr. Paul is a "bad sign" and that the "Fed is really worried about the economy", despite the "deception out there that everything is doing good". But "markets like it". 

In view of rising markets, Dr. Paul further asks why does the Fed have "to punish the elderly who save money?"

Asked about what to expect from Bernanke's replacement Janet Yellen, Dr Paul's response "Just prepare for the destruction of the US dollar and crash of the bond market one day" (1:48) 

He says that the "bond bubble is already weakening" and that interest rates will go up, the dollar is going to weaken, prices are going up and standard of living is going down. 

Dr. Paul also says that the "worse political problem" is the growing "discrepancy between the poor and the middle class"

Asked about housing as beneficiary of Fed Policies, Dr. Paul responds, "as long as the interest rates are artificial I think you are going to get malinvestments misdirected investments and people are going to make mistakes and you don’t when they are until the correction has to come"

It's not all bad news though, Dr. Paul is optimistic over the long term: "I think there is a lot to be optimistic about on the long run, but on the short run I think we are gonna have to go through some tough times"

Quote of the Day: The Sanctity of US Government Debts

The notion that the US government won’t default on its debt is simply historically inaccurate.

As recently as 1979 in the midst of another debt-ceiling debacle, the government failed to pay on $120 million in Treasuries according to stated terms, resulting in a class-action lawsuit Barton vs. United States.

And in 1934, FDR unilaterally abrogated the repayment terms for Liberty Bonds that were supposed to have been paid back in gold… or at least gold-backed currency.

Roosevelt refused to repay the bonds in gold, then devalued the dollar by as much as 40%, paying back bondholders in worthless paper.

But probably the most ignorant economic postulate is that the debt doesn’t matter because ‘we owe it to ourselves…’

It is accurate that only a third of the official US debt is owed to foreigners. The rest is owed to intragovernmental agencies like the Social Security Trust Fund, or to the US Federal Reserve.

But I’m mystified at how people find this comforting.

The US government fails to collect enough tax revenue to meet its mandatory entitlement spending and interest on the debt. In other words, they have to borrow more money just to be able to pay interest on what they already owe.

At some point, the music is going to stop and one of these major stakeholders will be left without a chair.

If they default on foreigners, it would destroy the foundation of the global financial system and shut the US government out of international debt markets.

But if they default on the Federal Reserve, then it would create an unprecedented currency crisis that the United States hasn’t seen since the Confederate Dollar collapsed in 1864.

If they default on the Social Security Trust Fund, then everyone in the Land of the Free who currently receives a public pension is going to get screwed.

It’s astounding that people think this doesn’t matter, as if we could just ‘default on ourselves’ and everything will be OK.

Yet, again, through sheer repetition, this has become the truth. It’s sacrosanct. And to challenge the truth is tantamount to blasphemy. Anyone who does challenge it is ridiculed and branded a lunatic.

Such close-mindedness is dangerous, especially in economics. People’s lives and livelihoods depend on an objective understanding of the facts, not this altered reality.
This from Sovereign Man’s Simon Black

Thursday, September 19, 2013

Video: Khan Academy on the Difference between Credit Easing (US) and Quantitative Easing (Japan)

For Bernanke, according to the Khan Academy, the difference between quantitative easing and credit easing is the intent and where you direct the extra money you printed. For Japan, printing money  aimed at getting money in circulation. For Bernanke’s Fed, printing money has been targeted to increase demand for some types of securities where there is a credit logjam (Portfolio Balance channel

This is simply the same dog with different collar.




Quote of the Day: FED Policies: Hope is not a strategy

But the reality is that the economy will never regain true health as long as the stimulus is being delivered. Despite trillions already administered, the workforce is shrinking, energy usage is down, the trade balance is weakening, savings are down, inflation is showing up in inconvenient places, debt is up, and wages are flat. So while QE has succeeded in hiding the truth, it hasn't accomplished anything of substance. Unfortunately, the Fed is only interested in the headlines.

We also must understand that even if the Fed were to deliver a small reduction in bond purchases, such a move would change nothing. The Fed would still be adding continuously to its enormous balance sheet while presenting no credible plans to actually withdraw the liquidity. As I have pointed out many times, it simply can't do so without pushing the economy back into recession. Although this would be the right thing to do, you can rest assured that it won't happen.

We should also recall where this all began. When QE1 was first launched Bernanke talked about an exit strategy. At the time I maintained the Fed had no exit strategy as it had checked into a monetary Roach Motel. But now questions about an exit strategy have been replaced by much more delicate taper talk. But easing up on the accelerator without ever hitting the brakes will not stop the car or turn it around.

Bernanke has maintained that his purchases of government bonds should not be considered "debt monetization" because the Fed intends to only hold the bonds temporarily. In recent years however talk of actively selling bonds in the portfolio have given way to more passive plans to simply hold the bonds to maturity. But this is a convenient fiction. When the bonds mature, the Fed will have little choice but to roll the principal back into Treasury debt, as private bond buyers could not easily absorb the added selling that would be required to repay the Fed in cash. Judged by his own criteria then, Bernanke is now an admitted debt monetizer.

Following this playbook, the Fed will likely maintain the pretense that tapering is a near term possibility and that it has a credible plan on the shelf to bring an end to QE. In reality the Fed is stalling for time and hoping that the economy will inexplicably roar back to life. Unfortunately, hope is not a strategy.
This is from financial analyst and investment broker Peter Schiff at his company’s (Euro Pacific) blog

Asian Markets Jump on the FED’s 'Untapering' or QE extension

The mainstream meme has always been that stock market prices are driven by so-called backward looking “fundamentals” or "earnings"

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So what explains today’s massive concomitant jump in the prices of many of Asian-ASEAN equity benchmarks? (chart from Bloomberg)

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Or how about the enormous rallies  by Asian-ASEAN currencies? (Bloomberg)

Their economies suddenly boomed overnight?

Yet all these seem as in response to the FED’s calling of the taper Poker Bluff.

The reality is that all these stock market-currency market movements have been representative of the pricing of distortions brought about by FED and other central bank policies that has nurtured the market's addiction to low interest rates environment and the subsequent credit fueled asset boom that has largely little to do with “fundamentals” or the real economy.


What really has been a bubble has been misconstrued as a boom. Eventually booms end up in busts and crises as have been through history

Video: Canadian Billionaire Investor Ned Goodman: The dollar is about to be dethroned as the world’s de facto currency

In a recent speech Canadian billionaire, President and CEO of US $ 9.6 billion Dundee Capital markets sees the end of the US dollar standard. He sees a period of that would be “very inflationary” and where “Things are likely to become quite ugly”.

He believes that there is an excellent chance the “US will soon be determined in a recession” which he believes is probably here

Through history political entities (kings emperors or elected parliamentarians etc..) have “used magic money to acquire things or wage wars. And it just doesn’t work”

So far we are having asset inflation. But eventually like Mr. Goodman, I share the view that we will transition to "stagflation".  The rest will rely on how the feedback loop mechanism between political actions and market responses and vice versa. (hat tip Zero hedge)



Video: Marc Faber: The Endgame Is A Total Collapse, But From A Higher Diving Board Now

In the following video, the Bloomberg interviews Gloom Boom and Doom report’s Dr. Marc Faber on the US Federal Reserve’s largely unexpected dithering from the Taper

Dr Faber quotes (via the Zero Hedge

Taper as the Wall Street-Government Subsidy
My view was that they would taper by about $10 billion to $15 billion, but I'm not surprised that they don't do it for the simple reason that I think we are in QE unlimited. The people at the Fed are professors, academics. They never worked a single life in the business of ordinary people. And they don't understand that if you print money, it benefits basically a handful of people maybe--not even 5% of the population, 3% of the population. And when you look today at the market action, ok, stocks are up 1%. Silver is up more than 6%, gold up more than 4%, copper 2.9%, crude oil 2.68%, and so forth. Crude oil, gasoline are things people need, ordinary people buy everyday. Thank you very much, the Fed boosts these items that people need to go to their work, to heat their homes, and so forth and at the same time, asset prices go up, but the majority of people do not own stocks. Only 11% of Americans own directly shares.
Same logic applies elsewhere as in the Philippines

In a deft rebuttal to the issue raised by the interviewer who cited that mortgage and car activities as supposed beneficiaries from the FED’s actions, Dr. Faber didn’t mince words
On September 14, 2012, when the Fed announced QE3, that was then extended into QE4, and now basically QE unlimited, the bond markets had peaked out. Interest rates had bottomed out on July 25, 2012--a year ago--at 1.43% on the 10-year Treasury note. Mr. Bernanke said at that time at a press conference, the objective of the Fed is to lower interest rates. Since then, they have doubled. Thank you very much. Great success.
In short the bond vigilantes has been the unintended consequence from Fed QE3

On the endgame or consequence from total dependence on QE:
Well, the endgame is a total collapse, but from a higher diving board. The Fed will continue to print and if the stock market goes down 10%, they will print even more. And they don't know anything else to do. And quite frankly, they have boxed themselves into a corner where they are now kind of desperate.
The FED will continue to engage in Poker bluffing but will refrain from acting out ‘exit’ or even tapering measures because they have been cognizant of the dangers or the risks of high interest rates on a debt laden and debt dependent economy

On Janet Yellen as successor to Bernanke:
She will make Mr. Bernanke look like a hawk. She, in 2010, said if could vote for negative interest rates, in other words, you would have a deposit with the bank of $100,000 at the beginning of the year and at the end, you would only get $95,000 back, that she would be voting for that. And that basically her view will be to keep interest rates in real terms, in other words, inflation-adjusted. And don't believe a minute the inflation figures published by the bureau of labor statistics. You live in New York. You should know very well how much costs of living are increasing every day. Now, the consequences of these monetary policies and artificially low interest rates is of course that the government becomes bigger and bigger and you have less and less freedom and you have people like Mr. De Blasio, who comes in and says let's tax people who have high incomes more. And, of course, immediately, because in a democracy, there are more poor people than rich people, they all applaud and vote for him. That is the consequence.
Inflationism represents just one of the many slippery slope towards more interventionism (price controls, foreign exchange and capital controls, wage and labor controls, trade controls, border controls and more) and even risks of wars.

On the direction of gold prices:
When I look at the market action today, I would like to see the next few days, because it may be a one-day event. The markets are overbought. The Feds have already lost control of the bond market. The question is when will it lose control of the stock market. So, I'm a little bit apprehensive. I would like to wait a few days to see how the markets react after the initial reaction."
On the direction of the 10-year yields:
I will confess to you, longer-term, I am of course, negative about government bonds and i think that yields will go up and that eventually there will be sovereign default. But in the last few days, when yields went to 2.9% and 3% on the 10-year for the first time in years i bought some treasuries because I have the view that they overshot and that they could ease down to around 2.2% to 2.5% because the economy is much weaker than people think…I think in the next three months or so.
My take is that if the “Feds have already lost control of the bond market” and if bond markets may not just be signaling the conditions of the economy but also as backlash from FED (and other major central bank) policies “the objective of the Fed is to lower interest rates. Since then, they have doubled”, then muting the actions of bond vigilantes (which has become a global phenomenon) may not be as deep as Dr. Faber thinks.

On why the need to buy gold:
I always buy gold and I own gold. I don't even value it. I regard it as an insurance policy. I think responsible citizens should own gold, period.

Poker Bluff Called: US Federal Reserve Balks at Taper

I have been saying so. The supposed taper talk, like all the rest of “exit” talks since 2010, has all been but a poker bluff.
Given the entrenched dependency relationship by the mortgage markets and by the US government on the US Federal Reserve, the Fed’s QE program can be interpreted as a quasi-fiscal policy whose major beneficiaries have been the political class and the banking class. Thus, there will be little incentives for FED officials to downsize the FED’s actions, unless forced upon by the markets. Since politicians are key beneficiaries from such programs, Fed officials will be subject to political pressures.

This is why I think the “taper talk” represents just one of the FED’s serial poker bluffs.
The US Federal Reserve today called the bluff. The FOMC announced that they will refrain from tapering until supposed evidence will warrant it.

From Bloomberg:
Chairman Ben S. Bernanke and his policy making colleagues refrained from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of its two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

The FOMC has been debating how to scale back its $85 billion in monthly purchases of Treasury and mortgage debt aimed at stoking economic growth and reducing unemployment that was 7.3 percent in August. The Fed has held the main interest rate near zero since December 2008 and pushed its balance sheet to a record $3.66 trillion through three rounds of bond buying.
The so-called awaiting for "more evidence that progress will be sustained" seems like forever waiting for Godot who never arrives. 

The global system has been acutely hooked on steroids which will only be given up when forced upon by the markets. Such dependency will even be more entrenched.

Such actions by the FED also runs in contradiction to supposed claims of economic recovery as the Zero Hedge rightly observed (italics and bold original)
It seems the Fed is so scared about something (despite every long-only asset manager telling us day after day that the economy is recovering and the US doesn't need crisis support... oh and can withstand higher rates) that they have gone against consensus and decided that Tapering now is premature:
  • *FED REFRAINS FROM QE TAPER, KEEPS MONTHLY BUYING AT $85 BLN
  • *FED: RISE IN MORTGAGE RATES, FISCAL POLICY RESTRAIN GROWTH
  • *FED: `TIGHTENING OF FINANCIAL CONDITIONS' COULD SLOW GROWTH
  • *MOST FED OFFICIALS SEE FIRST INTEREST-RATE RISE IN 2015
And since FED policy represents a subsidy or transfer of resources to Wall Street and the government diverted from the main street, the economy will hardly post a robust real recovery. And worse, such transfers encourage malinvestments and consumption of capital.
 
Naturally markets addicted to the FED steroids went into a bacchanalia. 

The markets has turned into a full Risk ON mode

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The taper bluff reinforces the record run for the S&P 500

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…and similarly a near record for the Dow Jones

The manic phase of the US stock market bubble continues to balloon and should do so over the interim. This should resonate to stock markets around the globe.

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The calling of taper bluff saw a big rally in US Treasuries (Yields of 10 year notes fell).

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Even depressed prices of gold posted a huge one day reversal of 4.22% gains.

Rising stocks, bonds and commodities is an expression of a full risk ON mode.

QEternity in September 2012 had a 3 month effect of the tempering of bond yields. I believe that today’s confirmation of QEternity will have a shorter duration of impact. In other words, the bond vigilantes will be having a short vacation but they will back soon, perhaps in less than a month.

The vacation break by the bond vigilantes will allow for a short term continuation of the risk ON mode.   Yes current environment transforms the market into short term punters given the wild volatilities in either direction.

Nevertheless as market bubbles inexorably inflate, which will be pumped up by even more credit, markets risk will correspondingly surge.

Trade cautiously.

Wednesday, September 18, 2013

Thomas Sowell: Why the minimum wage isn’t compassion for the poor

Snippets from economist Thomas Sowell’s article entitled Minimum Wage Madness  at the lewrockwell.com

Minimum wage hurt the young and the minority:
Unemployed young people lose not only the pay they could have earned but, at least equally important, the work experience that would enable them to earn higher rates of pay later on.

Minorities, like young people, can also be priced out of jobs. In the United States, the last year in which the black unemployment rate was lower than the white unemployment rate — 1930 — was also the last year when there was no federal minimum wage law. Inflation in the 1940s raised the pay of even unskilled workers above the minimum wage set in 1938. Economically, it was the same as if there were no minimum wage law by the late 1940s.

In 1948 the unemployment rate of black 16-year-old and 17-year-old males was 9.4 percent. This was a fraction of what it would become in even the most prosperous years from 1958 on, as the minimum wage was raised repeatedly to keep up with inflation.

Some “compassion” for “the poor”!
Minimum wages as instruments for racial discrimination
Minimum wage laws can even affect the level of racial discrimination. In an earlier era, when racial discrimination was both legally and socially accepted, minimum wage laws were often used openly to price minorities out of the job market.

In 1925, a minimum wage law was passed in the Canadian province of British Columbia, with the intent and effect of pricing Japanese immigrants out of jobs in the lumbering industry.

A well regarded Harvard professor of that era referred approvingly to Australia’s minimum wage law as a means to “protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese” who were willing to work for less….

People whose wages are raised by law do not necessarily benefit, because they are often less likely to be hired at the imposed minimum wage rate.
Minimum wage discriminates non labor union workers and promotes the interests of union members
Labor unions have been supporters of minimum wage laws in countries around the world, since these laws price non-union workers out of jobs, leaving more jobs for union members.
Feel good policies are likely to backfire
People who are content to advocate policies that sound good, whether for political reasons or just to feel good about themselves, often do not bother to think through the consequences beforehand or to check the results afterwards.
Read the rest here

As a proverb says “the road to hell is paved with good intentions”

Video: How a Romanian Internet Campaign Undermined a UK Anti Immigration Propaganda

Cool stuff demonstrative of epic government blunder.

The British government launches a ridiculous discriminatory anti immigration campaign against Romanians and Bulgarians. In response, a Romanian company ingeniously used the internet to turn the tables on the UK government until the latter capitulates. Amusing

(hat tip Gary North) You tube GMP Bucharest link


European Economic Recovery? Car Sales Plunges to Record Low

We have been told that the Eurozone will be one major force in alleviating the plight of Asia and emerging markets. Unfortunately, it seems that Eurozone will have to fix their problems first before assisting anyone.

Despite positive surveys and all that, what people say and people actually do have been different. In the Eurozone, cars sales fell to the “lowest on record” last August. 

This compounds on the significant decline in July’s Industrial output which has been oceans away from consensus expectations

From Bloomberg: (bold mine)
European car sales fell in August, bringing deliveries this year to the lowest since records began in 1990, as record joblessness in the euro region hurt deliveries at Volkswagen AG (VOW), PSA Peugeot Citroen (UG) and Fiat SpA. (F)

Registrations dropped 4.9 percent to 686,957 vehicles from 722,458 cars a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Eight-month sales declined 5.2 percent to 8.14 million autos.

The economy of the 17 countries using the euro emerged from a record six-quarter recession in the three months through June. Aftereffects such as a jobless rate in the area that held at 12.1 percent in July led industry leaders at the International Motor Show in Frankfurt a week ago, including Peugeot Chief Executive Officer Philippe Varin, to stick to predictions of a sixth consecutive annual car-market contraction in 2013.

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"Record low" car sales appear to be undermining the supposed re-emergence from “a record six-quarter recession”.

And to think that “record recession” means soaring stock markets where the Stoxx 50 has been in the proximity of “record highs”. Economic growth drives the stock market? Duh.

Rising stocks provide mainstream media the delusion of a perpetual “recovery” that has gone amiss as signified by “record recession”. 

The reality has been that the Draghi Put (“do whatever it takes” OMT etc…) or guarantees on the markets, has been shifting resources from the main street to Europe’s Wall Street. So Europe's Wall Street feasts on the subsidies provided by the ECB. The real economy then goes only for the morsels.

Yet recent gains in car sales have been misinterpreted by the mainstream and the officialdom as sustainable. 
The European car market rose 4.9 percent in July to 1.02 million vehicles. The gain was the second this year, following a 1.7 percent increase in April that marked the first growth in European car sales in 19 months. The trade group releases July and August sales figures simultaneously each September.
One can call this a “head fake” or in chart lingo a “dead cat’s bounce”.

The car recession has not only been deep but has been widespread.
Four of Europe’s five biggest automotive markets shrank last month. Deliveries in top-ranked Germany dropped 5.5 percent to 214,044 vehicles. That compared with a 2.1 percent increase in July. The U.K. market, the region’s second biggest, expanded 11 percent to 65,937 cars in August.
Don’t worry be happy. The consensus will keep on piling onto the stock markets which it should drive to stratospheric highs, since all other alternatives (bonds, commodities and the real economy) have been down. 

As ex-Citigroup chief executive Charles O. Prince haughtily expressed during the 2007 mania:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
Despite signs of the music stopping as manifested by rising global bond yields, let’s keep dancing.

Tuesday, September 17, 2013

Amid ‘Too Few Opportunities’, Value Investor Seth Klarman Returns Money to Clients

Unlike most of the industry participants who practice consciously or unconsciously the principal agent problem by continually talking up their businesses and or take on a beta (momentum chasing) approach  regardless of the risk environment, Seth Klarman value investor,  billionaire fund manager and founder of the Baupost Group, the seventh largest hedge fund in the world with $26.7 billion in assets, takes an admirable position by announcing the voluntary return of client’s money by the yearend due to “too few opportunities”. 

From Institutional Investor’s Alpha via the Zero hedge (bold from zero hedge)
Seth Klarman’s Baupost Group has decided to return some money to investors at year-end, but it has not yet determined the amount, according to a person familiar with the firm’s plans. 

This would be only the second time Baupost returned money to investors in the Boston-based investment firm’s 31-year history. The previous time was in 2010, and Baupost subsequently raised money in early 2011.

...

In a letter dated April 29, Klarman said the goal is “to better match our assets under management with the opportunity set we see for new investments.” The decision was made, in part, after a series of discussions with clients on the firm’s quarterly webcasts with investors. The firm’s goal is to keep assets under management at $25 billion, according to the person familiar with Baupost.

...

Baupost’s performance is even more impressive given its penchant for holding large amounts of cash. It has averaged 33 percent of assets in cash, and its cash balance can reach as high as 50 percent. It is now in the mid-30 percent range, up slightly from 32 percent at year-end.

...

However, the firm does not use leverage to try to boost returns.

...

“Our willingness to invest amidst falling markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance,” Klarman explained in an investor letter earlier this year.
Why? Given perhaps Mr Klarman’s latest outlook where he said "if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing” then the action above means that he seems more concerned with the return OF investment rather than the return ON investment or even management fees. 

Mr. Klarman would rather sit on the sidelines and wait until the right moment.

For value investors, return on investments has always been from siting and waiting. 

At least Mr. Klarman has more than enough to see him through the waiting period.

US Industrial Production rise, but miss consensus forecasts

The parallel universe between stock markets and the real economy have been deepening.

In the US industrial production reportedly miss consensus estimates.

With a drop in utilities output partly offsetting a rebound in manufacturing, the Federal Reserve released a report on Monday showing that U.S. industrial production rose by slightly less than expected in the month of August.

The Fed said industrial production increased by 0.4 percent in August after coming in unchanged in July. Economists had expected production to rise by about 0.5 percent.
The reason for the above quote is to show mainstream headlines.
 
More details from the Zero Hedge (bold original)
While headlines, we are sure, will crow of industrial production's best gain in six months, the sad fact is that the market was expecting more. At +0.4% - against an expectation of +0.5% - this is the 5th month in a row of missed expectations for this significant indicator of economic health. Capacity utilization rose but also missed expectations printing at the worst 6-month rate of change in 10 months. It seems manufacturing and mining got a modest boost (the former bounced more than expected but only thanks to a notable prior revision downward) and Utilities dragged the headline index down - so we await the "it's the weather's fault" remarks.

5th miss in a row for IP...

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as the 6-month rate of change dropped to its lowest in 10 months...

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This tepid industrial production data reinforces my position that the US economic growth will hardly give a lift to the real economy of emerging markets and Asia even if we have seen a reversion to financial market risk ON frenzied yield chasing dynamic.

Nonetheless data like this, for the steroid dependent markets, means uneventful news is good news. It means more policy accommodation from the US Federal Reserve in the name of (quack) economic recovery, it also means more money printing and unseen transfers and subsides provided by main street in favor of Wall Street.

Curiously even superficial events like the withdrawal of Larry Summers as a contender for the FED chairmanship has been powerful enough to electrify markets US-European markets to milestone highs, as well send shockwaves to Asia and emerging markets stock markets, creating the impression that risks have all vanished.

Ironically there hardly has been any nuance between the key contenders of the FED. As economist Gary North points out
So, if we are to believe this, Yellen is a “dove.” Summers is a “hawk.” But there is no evidence that Summers is now, or ever has been, a hawk. He is a standard Keynesian. They both want more fiat money.
The return to the risk ON environment seem increasingly like signs of desperation by the global yield chasers given the narrowing breadth of assets producing positive returns (bond markets and commodities have down year to date). 

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10 year US notes has only been partly affected by yesterday’s so-called Summer led monster equity market rallies as shown by the yield (TNX candle) and the inverse, the price (UST line chart). 

The impact looked more like a technical correction or an oversold bounce for USTs or overbought retracement for the TNX yields, than a convincing return to zero bound environment.

Central banks will continue to inflate bubbles as the real economy flails along due to the former's transfer of resources to asset market holders. 

Markets are likely to remain buoyant in anticipation of the FOMC meeting today and tomorrow.

Remember in the current casino like environment volatility excesses can go in both ways. Trades today have become 'short term', hoping that lady luck will be on your side.

Caveat emptor

Monday, September 16, 2013

Quote of the Day: The Myth of “Failed” Policies

Many people, for good reason, have concluded that the surest test of whether a politician or public official is lying is to ask, Are his lips moving? An equally simple test may be proposed to determine whether a seemingly failed policy is actually a success for the movers and shakers of the political class. This test requires only that we ask, Does the policy remain in effect? If it does, we can be sure that it continues to serve the interests of those who are actually decisive in determining the sorts of policy the government establishes and implements. Now, as before, “failed” policies are a myth in regard to all policies that persist beyond the short run. The people who effectively run the government, whether from inside or outside the beast, do not run it for the purpose of hampering the attainment of their own interests; on the contrary. Everything else in the policy process is, as Macbeth would put it, “a tale told by an idiot [augmented by economists, lawyers, and public-relations flacks], full of sound and fury signifying nothing.”
(bold mine)

This is from Austrian economist Robert Higgs at the Independent Institute Blog

China’s Bubbles are Unintended Consequences of Financial Repression Policies

This article tries to pin the blame on underdeveloped markets as culprit for China’s runaway property bubbles.

From Bloomberg:
The willingness of people like Zhou to shun other investments in favor of property shows why residential prices have defied a more than three-yearlong government campaign to rein them in and is among the forces crippling efforts by the central government to deal with an expanding housing bubble. New home prices in major cities, including Beijing and Shanghai, rose more than 10 percent in July from a year earlier, compared with a more than 10 percent drop in the benchmark Shanghai Composite Index (SHCOMP) during that period.

“Prices have been rising because China doesn’t have developed financial markets,” Yao Wei, a China economist at Societe Generale SA, said in an interview in Hong Kong. “Now, with the economy slowing, that has worsened as other investments don’t yield good returns compared with property.”
This essentially mistakes effects for the cause.

The same article says that the incumbent leadership will not tolerate a growth lower than a self-imposed target
Li, who signaled in July he won’t tolerate a slowdown beyond a 7 percent bottom line, has come up with no new measures to rein in property prices since his predecessor in March, underscoring the role real estate plays in the world’s fastest-growing major economy. Property, construction and related industries account for about 20 percent of gross domestic product, according to Societe Generale.
So basically we have a Chinese version of ECB’s Draghi of "do whatever it takes" to push up statistical growth” for political goals.

Yet this one wrongly blames it on the lack of welfare state...
Traditionally, because of social welfare and pension systems that aren’t as advanced as in developed countries, the Chinese have felt safer buying real estate, said Liu Yuan, a Shanghai-based researcher at Centaline Property Agency Ltd., the country’s biggest real-estate brokerage.
The reality is that underdeveloped markets have not been ‘market failures’ as portrayed, but have been part of the political institutional architecture for the political class to wangle money out of their constituents. This is called Financial repression

From Carmen Reinhart and Kenneth Rogoff [This Time Is Different (p. 143)] (bold emphasis mine) I previously quoted them here.
Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payment system. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. Of course, in cases in which the banks are run by the government, the central government simply directs the banks to make loans on it.

Governments frequently can and do make the financial repression tax even larger by maintaining interest rate caps while creating inflation.
As one would note, underdeveloped markets exist BY DESIGN and has not emerged out of a vacuum.
 
For instance, the Chinese government has promised to liberalize interest rates.

From China Daily: (bold mine)
China is actively developing rules to establish a deposit-insurance system and to manage financial institutions' bankruptcies - two steps widely believed to herald the final interest rate liberalization, a senior official said on Saturday…

China's government has long maintained controls over banks' lending and deposit rates. It has placed a ceiling on what banks can pay on deposits and a floor on what they can charge on loans.
Exactly how financial repression works. So China's political class has deliberately kept the status quo and has delayed reforms because it has benefited them. But the risks of imploding bubbles jeopardizes their political tenure and privileges which is why the promised measures of reforms.

Finally skyrocketing prices will also not exist if these has been financed only by savings. 

This means that credit is ultimate fuel for runaway markets. And which entity is responsible for the origination of credit? 

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Well the PBOC and their agents the China’s banking and financial industry.

The PBOC’s assets has shot to the moon with an explosive growth from about USD $.3 trillion in 2002 to about $5 trillion today or 15.7 times in 11 years (chart from Yardeni.com)

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Such explosion in PBOC assets has also been reflected on China’s formal banking system where loan exposure has exploded from 90% of the GDP to 240% and counting.(chart from Zero Hedge)

With a growth quota in mind of the leadership, the already precarious debt level conditions will deteriorate further with the government owned banks dispensing more loans as part of the stealth stimulus to prop up the statistical economy.

So the runaway bubbles we are seeing today in China represents unintended consequences from deliberate policies implemented.

Lawrence Summers Out, Wall Street Cheers

Wall Street cheers the withdrawal of Lawrence Summers as contender for the US Federal Reserve chairmanship. 

With Summer out, who has been perceived as an obstacle to easy money,  Wall Street celebrates the extension of subsidies and transfer they and their global counterparts have benefiting courtesy of main street.

Proof of the chronic addiction to steroids

From Bloomberg:
U.S. stock and Treasury futures rose, with the Standard & Poor’s 500 contract gaining the most in almost a month, and the dollar fell after Lawrence Summers withdrew from the race to be the next Federal Reserve chairman.

S&P 500 futures gained 1 percent as of 9:46 a.m. in Singapore, heading for the biggest advance since Aug. 22. Ten-year U.S. bond contracts jumped the most in six weeks, climbing 31/32, or $9.69 per $1,000 face amount, to 124 17/32, based on electronic trading on the Chicago Board of Trade. The greenback slumped against all of its Group of 10 currency peers, losing 1 percent against the Australian dollar.

Summers withdrew from contention before a two-day meeting starting tomorrow, at which the central bank is forecast to begin paring unprecedented bond purchases, known as quantitative easing. Summers would tighten policy more than Janet Yellen, who was his main rival to replace Chairman Ben S. Bernanke, according to a Bloomberg Global Poll of investors, analysts and traders last week.

“Investors are saying that QE may not be as aggressively dialed back under Yellen, who is now the front-runner,” Walter “Bucky” Hellwig, who helps manage $17 billion of assets at B&T Wealth Management in Birmingham, Alabama, said in a telephone interview. “QE is still a very important factor in the minds of investors and we can see this in the potential movement of the stock and bond markets.”
ASEAN gains too

From another Bloomberg article;
Thailand’s baht gained toward a three-week high after overseas funds added to holdings of the nation’s assets and Lawrence Summers withdrew in the race for the next Federal Reserve chairman, sending the dollar lower.

Foreign investors bought $342 million more Thai shares than they sold last week, the biggest net purchases since November, stock exchange data show. Summers was perceived as being less in favor of quantitative easing than Janet Yellen, another candidate to replace Ben S. Bernanke when his term ends in January, Mitul Kotecha, the global head of currency strategy in Hong Kong at Credit Agricole SA, wrote in a research note.
This represents a short term reaction

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As one would note, rising 10 year US yields commenced in July of 2012. Ben Bernanke’s September QEternity tempered rising yields for only about 3 months. Combined with Abenomics and the ECB’s do whatever it takes and forward guidance, 10 year yields have skyrocketed.

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So far this has been ‘Summer premium’ as 10 year yields have been down by about 5 basis points. Unlike the manic stock market, bond market investors appear to be unconvinced.