Sunday, March 31, 2013

O death, where is thy sting?

"O death, where is thy sting? O grave, where is thy victory?" 

                                                                               1 Corinthians 15:55

There was a great preacher once whose wife died. Their little girl didn't fully understand all that had happened. But one day while she was in the car with her father, she saw the shadow of a truck passing by. The setting sun made the shadow huge, much bigger than the truck.

The little girl said, "Daddy, look at the big shadow."

He said, "Sweetheart, would you rather be hit by the shadow of the truck or by the truck?"

"That's easy," she said, "I'd much rather be hit by the shadow."

He said, "That's right, darling. And it was only the shadow that hit Mama. The truck hit Jesus two thousand years ago at Calvary."

That's why David calls it "the valley of the shadow of death." Jesus has taken the sting out of death, the dread out of the grave! He has become our victor!

Many people fear death-- a shadow looming over each of us, representing the unknown. Yet Jesus disarmed death and took away its power. The believer in Christ can have this assurance: beyond that shadow is the sunlight of the eternal morning. Speak with the Lord right now and share with Him something you fear. He already knows about it anyway. Picture yourself giving that fear over to Him. Place it in the nail-scarred Hand. It is a risen, victorious Hand!


"Because thine heart was tender, and thou didst humble thyself before God...and didst rend thy clothes, and weep before Me; I have even heard thee also, saith the LORD." 

                                                                                                                      2 Chronicles 34:27
How many truly victorious Christians do you know? 

How many genuinely victorious churches are you aware of? 

You know the problem with many of us? We are failing, but we don't weep over it. We are not living in victory, but it doesn't seem to bother us. We know very little about victory, and we seem to be quite content to live day after day without it. We seem to think that victory is for others, but not for us.

Today's verse occurs at a time of utter devastation in Israel. Young Josiah--a mere boy--became king. He wanted to get things right with God. He humbled himself. Here is God's answer! "Because thine heart was tender, and thou didst humble thyself before God, when thou heardest his words against this place, and against the inhabitants thereof, and humbledst thyself before Me, and didst rend thy clothes, and weep before Me; I have even heard thee also," saith the Lord.

This is a beautiful chapter--one you should read today. Do you think you were behind the door when victory was passed out, and it's not your fault you live in defeat? It is your fault if you're not victorious, and you ought to be weeping over your shame and over your sin. Follow Josiah's example in this chapter and humble yourself before our great God.


"Jesus said to her, 'I am the resurrection and the life. He who believes in Me will live, even though he dies; and whoever lives and believes in Me will never die." 

                                                                                 John 11:25-26

 Do you believe this?

"We could cope—the world could cope—with a Jesus who ultimately remains a wonderful idea inside his disciples' minds and hearts. The world cannot cope with a Jesus who comes out of the tomb, who inaugurates God's new creation right in the middle of the old one." 

                                                                               N.T. Wright
You've probably heard people say that when we die, we'll go to heaven, somewhere "up there" to be with Jesus. We'll escape this corrupt world and fly around in the clouds for all eternity. There's an escapist mentality in our popular understanding of life after death that doesn't begin to capture the astounding implications of Jesus' resurrection for the here and now.

It was Sunday morning, and the Teacher that so many had followed and believed in was seemingly lost to them. Then a few of His followers discovered something remarkable— "He is not here; He has risen!" (Luke 24:6) Over the next several days, Jesus appeared to His followers. He talked with them and ate with them. He didn't appear to them simply as an ethereal ghost, but as a real person, resurrected by the power of God.

As resurrection people, who live through the very same power that Jesus was resurrected by (Ephesians 1:18-21), we are called to submit our lives to Christ and allow His Holy Spirit to do the work of Christ through us. We are His hands and feet in the world. We are still "real people" who need to engage in this world rather than look forward to escaping it. Jesus will return and restore not only souls, but all of creation (Romans 8:22-23). As we anticipate His return, let us live out our calling to operate in the same Spirit that Jesus has—to love and worship God with all that we have and to love others with the love of God.

Lord Jesus, thank You for dying on the cross for our sins. We know You didn't stay in the grave, but You defeated death. We too have the promise of resurrection and defeat over death. May everything we do reflect that glorious hope.


I Come such an hour as ye think not!

I Come Quickly

"He which testifieth these things saith, Surely I come quickly. Amen. Even so, come, Lord Jesus."

                                                                                                                                             Revelation 22:20
This is the next-to-the-last verse in the Bible, and it contains the last promise in the Bible. The final promise of the Lord is that He would come back to earth again "quickly," but it has been almost 2,000 years since He made the promise, and He hasn't come yet. Evidently, the word "quickly." as He used it, did not mean "immediately."
As a matter-of-fact, this promise appears no less than six times here in Revelation (Revelation 2:5, 16; 3:11; 22:7, 12, 20). The first three are in Christ's messages to the churches at Ephesus, Pergamos, and Philadelphia, respectively. The last three are in His final message to all churches (Revelation 22:16).
The Lord Jesus has not forgotten His promise for "all the promises of God in him are yea, and in him Amen, unto the glory of God by us" (2 Corinthians 1:20). Furthermore, many spiritual believers in every previous generation have been looking for His coming "quickly," as He promised, yet they all have died before its fulfillment.
It seems evident that "quickly" must be understood in the sense of "suddenly." It may well be "in such an hour as ye think not" (Matthew 24:44), and it will occur "in a moment, in the twinkling of an eye" (1 Corinthians 15:52), when it happens. It does seem that all the signs of the nearness of His sudden coming are being fulfilled today. 

"And the gospel must first be published among all nations" (Mark 13:10), "for a witness unto all nations; and then shall the end come" (Matthew 24:14).  WITH ALL OF OUR TECHNOLOGY THIS HAS BEEN DONE!
In any case, it is vitally important that we "abide in him; that, when he shall appear, we . . . not be ashamed before him at his coming" (1 John 2:28). Amen. 

Even so, come, Lord Jesus!

Friday, March 29, 2013

Good Friday Thoughts..........

"God made him who had no sin to be sin for us, so that in him we might become the righteousness of God."

   2 Corinthians 5:21

Good Friday Thoughts

They thought it was all over. Jesus' disciples had followed him faithfully. They had given up everything and devoted their lives to His cause. They were expecting a revolution, the inbreaking of God's Kingdom!

What they got was a cross. What they got was the end of their dream. It didn't matter who would be first and who would be last in the Kingdom now. Even Peter, the most passionate of Jesus' followers, the one who had walked on water, denied that he ever knew Jesus.

The book of Hebrews tells us that Jesus was able to endure the cross because of the joy set before Him. He knew that on the other side of that excruciating pain and humiliation, death would be defeated. The Kingdom of God would break through. It wouldn't look like an earthly kingdom. It would be far, far better.

On Friday, the disciples didn't see what Jesus saw. They didn't know that Sunday was coming. 

What a glorious surprise awaited them...


Russia Launches Surprise Large-Scale, 36 Warship Military Exercise In The Black Sea..........A VERY DANGEROUS WORLD!

Russia Launches Surprise Large-Scale, 36 Warship Military Exercise In The Black Sea

Many were wondering what Russia's response to Germany's deposit confiscation drill in Cyprus would be. The confusion was moderated somewhat after it was uncovered that the very Russians who were supposed to be punished, have been able to withdraw some or most of their Cyprus-based cash either before the Cyprus Deposit Confiscation-Day or during the capital controlled blackout using various disclosed loopholes. 

Yet that doesn't mean that Putin would avoid this opportunity to give the "developed world" and his closest neighbors a quick lesson in realpolitik. After all, who better than a former KGB agent understands that one should never let a crisis go to waste. Sure enough, Yesterday at 4 am, in a very surprising move, Puitin ordered the launch of large-scale Russian military exercises in the Black Sea region in a move which according to Reuters "may create tensions with Russia's post-Soviet neighbors Ukraine and Georgia." Of course, it may create tensions with our island nations reachable by the Russian naval fleet, such as Cyprus, which would naturally mean tensions with the same European (read German) forces who structured the entire Cypriot bail in.

From Reuters:

Putin issued the order to start the previously unannounced maneuvers at 4 a.m. Moscow time (12.00 a.m. EDT) as he flew back from an international summit in South Africa, his spokesman, Dmitry Peskov, told reporters by telephone.

"These are large-scale unannounced test exercises," Peskov said, adding that 36 warships and an unspecified number of warplanes would take part. "The main goal is to check the readiness and cohesion of the various units."

He did not say how long the exercises would last.

Putin has stressed the importance of a strong and agile military since he returned to the presidency last May after four years as prime minister. In 13 years in power, he has often cited external threats when talking of the need for unity in Russia.

Russia's Black Sea fleet, whose main base is in the Ukrainian port of Sevastopol, was instrumental in a war with Georgia in 2008 over the Russian-backed breakaway Georgian regions of South Ossetia and Abkhazia.

Disputes with Kiev over Moscow's continued lease of the Black Sea navy base have been a thorn in relations with its former Soviet neighbor.

Peskov said that Russia is under no obligation to warn neighbors ahead of time of plans to hold the air and sea military exercises as long as fewer than 7,000 servicemen participated in the maneuvers.

And while the proposed explanation may be valid, something tells us that in this specific case it was not the Ukraine or Georgia that were being contemplated, but the island nations in the Mediterranean, or rather nation, especially the one located in close proximity to Syria.

Keep a close eye on if and when news hits that some 36 Russian warships quietly passed through the Bosphorus in the direction of Nicosia. Perhaps if Cyprus was so quick to hand over its Russian economic interest, all that would be needed to make it flip on its dedication to the Eurozone would be a brief but insistent naval semi-blockade. After all, few things are quite as persuasive as 36 warships sitting idly by doing not much of anything.

Cyprus Could Need a Second Bailout...........

Cyprus: "The Situation Is Spiralling Down", And Why A Second Bailout May Be Needed

When the world's leading expert on Sovereign debt restructurings believes that the endgame for Cyprus might be another round of restructuring, adding that "I'm not sure this is over," it is important to listen. 

With the calmness in Cyprus today more reflective of paralysis than confidence,  Lee Buchheit senses that the parameters of how much money will be needed to recapitalize the banks have changed. He tells Bloomberg TV's Lee Pacchia in this brief clip, "the situation is spiraling down... they'll need more money because the economy is worse, tax collections less, deposits will flow out when they can flow out." 

As for which European nation will be next in need of assistance with its sovereign debt burdens? Buchheit agrees with us that while many are looking to Slovenia, he sees real economic and political problems in both Italy and Spain remaining especially since the EU "have certainly changed the rules of the game."

Video Clip  Cyprus Could Need a Second Bailout!

"Sell American. I Am."..........This isn't what anyone wants to hear right now........ but it is the truth!

Ben Michaud, an analyst at a large, New England-based investment firm with several billion in AUM, was kind enough to share his slide deck, entitled "Sell American. I Am."

This isn't what anyone wants to hear right now........ but it is the truth!

First, Buffett's case in 2008.

Remember: "Be fearful when others are greedy, and be greedy when others are fearful."

Fast forward to now — everyone's greedy.

So if Buffett's rule still applies, it's time to be fearful.

Bottom line, the S&P is overvalued and we're still in a bear market.

Not even Buffett can say stocks are cheap anymore.

And if you look at other secular bear markets in history...

They last way longer than 5 years.

We're seeing some serious optimism right now.

The Bull Case: Stocks are cheaper than bonds, Europe is relatively calm, and QE is making equity markets stable.

But is QE really that important?

There's evidence to suggests stocks are really being supported by investor sentiment, not QE.

Draghi helped make investors optimistic by removing risk coming from Europe.

But sentiment can change, QE or no.

The risk is still there.

Timing isn't as important as you might think.

All you need to know is that there's room for another bearish run to the downside.

And that historically, this bull market has overstayed its welcome.

Overall, there could be almost four more years of bearishness to come.

So consider levering up.

And going short.

The bears are coming.

uncle sam

European Stocks End Q1 In The Red...........SURE EUROPE IS FIXED AND WE HAVE A RECOVERY!

European Stocks End Q1 In The Red

Europe's Dow-equivalent - the EuroStoxx 50 - closed today negative year-to-date. The divergence between the exuberance in the US and dysphoria in Europe reminds us of 2012 - when exactly the same thing happened. Of course, the fact that stocks are red should come as no surprise since credit markets have been markedly wider on the year for a week or two. Today started off on a bright spot (as there was no blood on the streets of Nicosia) which spurred some buying in European stocks - but into the close that faded quickly with Spain and Italy pushing back into the red (and the rest of the markets following suit). EURUSD surged all day but as Europe closed it retraced a little of the gains - unable to snag 1.2850 (but 100 pips off the lows). German bunds remain bid (2Y at -2.6bps vs Swiss at -0.02bps) as die neue safe haven remains. 

So Europe ends Q1 in the red; China ends Q1 in the red; and US credit is unchanged in Q1; but US stocks +11% - sustainable?  STUPID PEOPLE......!


as EURUSD slumps (with a small bounce today)... with it touching 4 month lows intrday...


and European stocks and bonds bounced a little but gave it all back into the close today...

Leaving Spain and Italy notably lower on the year...

and Italian bonds notably wider on the year...

and European Banks are trading at more than six month lows...

So, let's get this straight. The three pillars of US equity strength appear to be - European tail-risk is off the table (Draghi): well it appears that is not true given the blowouts in bank stocks, sovereign credit, and equity indices in general in Europe; Global growth renaissance: well that appears to be cleary untrue as Copper inventories surge in China, electricity production plunges, and their market collapses; and US earnings recovery: well yeah apart from ORCL, CAT etc... and the consistent 46 week of negative up vs down EPS revisions...

Thursday, March 28, 2013

Cyprus Banks Reopen Following Two Weeks Closure Under Armed Guard.........

Cyprus Banks Reopen Following Two Weeks Closure Under Armed Guard

Two hours ago Cyprus banks reopened, under heavy guard, without signs of a stampede. However, since as was made clear yesterday, all bank branches will serve merely as glorified ATMs, allowing for a maximum €300 cash withdrawal and practically no outbound cash transactions allowed, there has been no stampede, and no lines as the bulk of services provided legally are merely what one can find at an automated teller machine. The question is whether the five shipping container full of ECB cash delivered last night into the country will be enough to cover the cash-strapped public's demands, and for how long.

The picture below of a bank in Larnaca captures quite well that while one may not have "stampedes" at least not yet as the banks still are stocked with cash, the lines most certainly are there:

The WSJ writes: "Cyprus's banks were bracing for a stampede of nervous savers as lenders on the island reopened after a two-week long hiatus. But on the streets of the Cypriot capital early Thursday, there was little sign of panic with only a handful of depositors--mostly pensioners--waiting for the banks to formally reopen at noon (1000 GMT) local time. 

Gregos Hadjisophoklis, a retiree, was queuing outside the central branch of the Bank of Cyprus Pcl, the island's largest lender, since nine in the morning, unaware that the bank would open later than its usual business hours. But he was prepared to wait: he badly needed cash to pay his rent and buy food. 

"I have to get money because I have no cash card. It's been very difficult," Mr. Hadjisophoklis said as he stood in the pedestrian area in front of the bank astride the city's main Ledra Street shopping district. "There may be no one here at the moment but it's early; more will come." 

Naturally, the full impact of the reopening will not be made apparent for days, when the true liquidity situation of the local system is exposed.

Cyprus banks have reopened under armed guard after a long lockdown, with harsh curbs on withdrawals to stop depositors punished by a eurozone bailout from draining the island's coffers dry.

Bank tellers urged customers not to take out their frustrations when the doors swung open at noon (local time) on Thursday for the first time in 12 days, while authorities trucked in shipping containers full of euros under heavy security.

Picture of a Convoy Of Trucks Hauling Tons Of Fresh Euros As Cyprus Banks Prepare To Reopen Today...........

Convoy Of Trucks Hauling Tons Of Fresh Euros As Cyprus Banks Prepare To Reopen Today

Cypriot banks re-open from their long holiday at noon Cyprus time or 6 AM ET.

The country has already announced capital controls (limits on how much money people can withdraw or transfer from their accounts) to prevent a mass exodus.

The demand for money is expected to be huge, and people are bracing for some kind of a run.

This convoy of trucks -- photographed by Reuters -- was reported by local media to be carrying tons of euros to prepare for the bank reopening.
cyprus trucks euros
A policeman stands guard in front of trucks carrying containers at the Central Bank in Nicosia March 27, 2013. The contents of the containers could not be verified by Reuters but local media reported they contained cash for the banks' reopening on Thursday. Cyprus is set to restrict the flow of cash from the island and may curb the use of Cypriot credit cards abroad as it tries to avert a run on its banks after agreeing a tough rescue package with international lenders.


Reality Vs Belief

"The sky is clear, the music is on, you become a bit hypnotized as the road stripes regularly tick by...and then - WHAM! A deer runs out in front of you."

It is much the same with the markets. As prices steadily rise - investors become lulled into a false sense of security.  Since bull markets tend to grind their way higher – investors began to believe that the rise will be unending as the mainstream analysts encourage continued risk taking.  

Each time investor's fall victim to the belief that somehow, or for some reason, this time will be different.  However, it is in this moment of extreme complacency that it always happens - "WHAM!"

The chart below shows you what I mean.

The reason that investor's perform so poorly over long periods of time is that investors continually extrapolate current trends (reality) indefinitely into the future (belief).  It is in that moment, when "contrarian investment views" are regularly disregarded as irrational fears, that a new "reality" presents itself.

In 1999 - it was the age of technology that justified lofty valuations.  Old valuation metrics no longer mattered...until they did.

In 2003 it was believed that the market would continue going down as the internet bubble collapsed from its own weight.  It didn't.

In 2007-08 it was the "Goldilocks" economy and "subprime" issues were contained while banks and hedge funds had eliminated market risks.  They weren't and they didn't.

Each time as "belief" separated from "reality" investors repeatedly made the same emotional mistakes either selling at bottoms or buying at tops.  Today is no different.  With mainstream analysts goading them forward - investors who have remained cautious, until now, are throwing in the towel.  The "belief" has now become that global liquidity injections, from the Fed to Japan to Europe, have changed the game offsetting any risks of being invested in equity related investments.   However, just as we have seen repeatedly in the past, that "belief" may be flawed and it is possible that a new "reality" may be set to form sooner rather than later.

So why do most people think they are great investors? Likely the same reason most people think they are better drivers than average, and are certainly better looking than average. It is a built in behavioral bias floating around in our genetics passed down from our ancestors many years ago.

Don't be too downtrodden; stock picking is hard, really, really, hard. The basic odds are stacked against you. My friends at Longboard Asset Management completed a study called The Capitalism Distribution that examined stock returns from the top 3000 stocks from 1983-2007. They found that:

39% of stocks were unprofitable investments.
19% of stocks lost at least 75% of their value.
64% of stocks underperformed the index.
25% of stocks were responsible for all the market's gains.

Simply picking a stock out of a hat means you have a 64% chance of underperforming a basic index fund, and roughly a 40% chance of losing money!

Not only is it hard to pick stocks, you are also up against the most talented investors in the world.

There is a famous saying in poker, 'If you sit down at the table and don't know who the fish is – you're the fish.' Most people who sit down at a poker table with a professional player will quickly lost all of their money. While luck can have an influence in the short term, eventually the outcome is near certain. Most individual investors do not know that they are the fish in the game known as Wall Street..."

Investors behave much the same way as individuals who are addicted to gambling. When they are winning they believe that their success is based on their skill. However, when they began to lose, they keep gambling thinking the next "hand" will be the one that gets them back on track.  Eventually - they leave the table broke.

It is true that bull markets are more fun than bear markets. Bull markets elicit euphoria and feelings of psychological superiority. Bear markets bring fear, panic and depression.

What is interesting is that no matter how many times we continually repeat these "cycles" – as emotional human beings we always "hope" that somehow this "time will be different."

Unfortunately, it never is, and this time won't be either.

The Stimulus Trap...........

The Stimulus Trap

For years we have been warned by Keynesian economists to fear the so-called "liquidity trap," an economic cul-de-sac that can suck down an economy like a tar pit swallowing a mastodon. They argue that economies grow because banks lend and consumers spend. But a "liquidity trap," they argue, convinces consumers not to consume and businesses not to borrow. The resulting combination of slack demand and falling prices creates a pernicious cycle that cannot be overcome by the ordinary forces that create growth, like savings or investment. They say that a liquidity trap can even resist the extraordinary force of monetary stimulus by rendering cash injections into useless "string pushing." Some of these economists suggest that its power can only be countered by a world war or other fortunately timed event that leads to otherwise politically unattainable levels of government spending.

Putting aside the dubious proposition that the human desire to strive and succeed can be permanently short-circuited by an economic contraction, and that modest expected price declines can quell our desire to consume, the Keynesians have overlooked a much more dangerous and demonstrable pitfall of their own creation: something that I call "The Stimulus Trap." 

This condition occurs when an economy becomes addicted to the monetary stimulus provided by a central bank, and as a result fails to restructure itself in a manner that will allow for robust, and sustainable, growth. The trap redirects capital into non-productive sectors and starves those areas of the economy that could lead an economic rebirth. The condition is characterized by anemic growth and deteriorating underlying economic fundamentals which is often masked by inflation or asset price bubbles.

Japan has been caught in such a stimulus trap for more than a decade. Following a stock and housing market boom of unsustainable proportions in the 1980s, the Japanese economy spectacularly imploded in 1991. The crash initiated a "lost decade" of de-leveraging and contraction. But beginning in 2001, the Bank of Japan unveiled a series of unconventional policies that it describes as "quantitative easing," which involved pushing interest rates to zero, flooding commercial banks with excess liquidity, and buying unprecedented quantities of government bonds, asset-backed securities, and corporate debt. Although Japan has been technically in recovery ever since, its performance is but a shadow of the roaring growth that typified the 40 years prior to 1991. Recently, conditions in Japan have deteriorated further and the underlying imbalances have gotten progressively worse. Yet despite this, the new government is set to double down on the failed policies of the last decade.

I believe that the United States is now following Japan into the mire. After the crash of 2008, we implemented nearly the same set of policies as did Japan in 2001. In the past two years, despite the surging stock market and apparently declining unemployment rate, the size and scope of these efforts have increased. But as is the case in Japan, we can clearly witness how the stimulus has perpetuated stagnation.

In 2008, one of the country's biggest problems was that we had over-leveraged too many non-productive sectors of the economy. For instance, we irresponsibly lent far too much money to people to buy over-priced real estate. 

Since then, the problem has gotten worse. 

Currently the process of writing, securitizing, and buying home mortgages has been essentially nationalized. Fannie Mae and Freddie Mac (which are now officially government agencies) write and package the vast majority of new home mortgages, which are then guaranteed (almost exclusively) through the Federal Housing Administration, and then sold to the Federal Reserve. According to a tally by ProPublica, these government entities bought or insured more than nine out of 10 home mortgages originated last year, a $1.3 trillion business. Compare this to 2006, when the government share was only three in 10. As a result of this, our lending is far more irresponsible than it has ever been.

In the fourth quarter of 2012, 44% of all FHA borrowers either had no credit score or a score of 679 or lower. In addition, the overwhelming majority of FHA guaranteed loans are being made at 95% or greater loan-to-value. This means down payments are an afterthought. Under the FHA's Home Affordable Refinance Program (HARP), loans are now even extended to underwater borrowers whose mortgages may be worth far more than their homes. As a result, the FHA could be exposed to enormous losses in the event of future housing market downturns. Such an outcome would be likely if mortgage interest rates were ever to rise even modestly from their current low levels.

In fact, losses on low-quality mortgages have already left the FHA with $16 billion in losses. To close the gap, it has had to raise the insurance premiums it charges to borrowers. With those premiums expected to rise again next month, many fear that marginal borrowers could be priced out of the market. But rather than learning from its mistakes, the government just announced that Fannie Mae would pick up the slack, lowering its lending standards to match the ones that had led to losses at the FHA. In other words, we haven't solved the problem of bad lending - we have simply made it bigger and nationalized it.

The overall financial sector is equally addicted to cheap money. Banks have seen strong earnings and rising share prices in recent years. But their businesses have largely focused on the simple process of capturing the spread between the zero percent cost of Fed capital and the 3% yield of long term Treasury debt and government insured mortgage backed securities. As a result, banks are not making productive private sector loans to businesses. Instead, the capital is being used to pump up the already bloated housing and government sectors.

Corporate profits are indeed high at the moment, but much of that success comes from the extremely low borrowing costs and extremely high leverage. Investors chasing any kind of yield they can find are pouring money into companies with dubious prospects. This January, yields on junk rated debt fell below 6% for the first time. Currently they are approaching 5.5%. Consumers are using cheap money to buy on credit. Savings rates are now hitting post-recession lows.  AND THE HUNDRED TRILLION DOLLAR PLUS BOND MARKET IS ABOUT TO EMBARK ON A FALL FROM GRACE, A BOND MARKET THAT EVERY ONES RETIREMENT DEPENDS ON. EVERY 1% DROP WILL YIELD A TRILLION DOLLAR LOSS!

Lastly (but certainly not least), the Federal government is now totally dependent on the Fed's largess. Without the Fed buying the bulk of Treasury debt, interest rates would rise, thereby increasing the cost of servicing the massive national debt. While Congress and the media have focused on the $85 billion in annual cuts earmarked in the "Sequester," an increase of Treasury yields to 5% (3% higher than current levels) on the $16 trillion in outstanding government debt would translate to $480 billion per year of increased interest payments. 

Such an increase would force a tough choice between raising taxes, cutting domestic spending or reducing interest payments sent abroad for debt service. When foreign creditors begin to doubt that America has the resolve to make the hard choices, they will refuse to roll-over maturing obligations, forcing the government to actually repay principal. With trillions maturing each year, actual repayment is mathematically impossible.

But for now most people feel that the transition is underway to a healthy economy. The prevailing debate is when and how the Fed will let the economy fly on its own. Many of the top market analysts have great faith that Ben Bernanke can pull the monetary tablecloth off the table without disturbing the dishes. Those who hold this view fail to understand that the United States is caught in a stimulus trap from which there is no easy exit. How can the Fed wean the economy from stimulus when stimulus IS the economy? 

In truth, the trick Bernanke must actually perform is to pull the table out from beneath the cloth, leaving both the cloth and the dishes suspended in air.

What would happen to the Treasury market if the Federal Reserve, by far the biggest buyer and largest holder of Treasury bonds, became a net seller? Who will be there to keep the sell off from becoming an interest rate spiking rout? It may sound absurd to those of us who remember the economy before the crash, but our new economy can't tolerate "sky high" rates of four or five percent. What would happen to the housing market and the stock market if interest rates were to return to those traditional levels? The red ink would flow in rivers. With yields rising and asset prices falling, how long would it take before the Fed reverses course and serves up another round of stimulus? Not long at all.

That means any talk of an exit strategy is just that, talk. Not only can the Fed not exit, but it will have to delve further into the stimulus abyss. While doing so, the Fed will continuously insist that the exit lies just behind an ever moving horizon. It will repeat this mantra until a currency crisis finally forces a painful exit. GUARANTEED!

Unfortunately, the longer the Fed waits to exit, the more painful the exit will be. But trading long-term pain for short-term gain is the Fed's specialty. In the meantime, Wall Street watches in uncomprehending stupor as the economy settles deeper and deeper into the stimulus trap.




Throughout the colorful history of organized crime in the United States, periodic eruptions of inter-gang Mafia violence have dotted the criminal landscape. When turf wars broke out between competing crime families in major cities such as New York and Chicago, the combatants would conduct their warfare from unsavory redoubts such as abandoned warehouses or low-rent hotels and apartments. In such locations, the soldiers would spend their off hours sleeping on rented mattresses until the internecine conflicts had run their course; hence the expression "going to the mattresses."

Well, there is another turf war going on, a worldwide one, one that threatens the entire economic and political landscape of the planet. It is between all the hard working savers on the planet and the ever greedy criminal bankers and their cohorts in government. The real big canary singing out an extreme danger warning to all traditional savers who wish to entrust their wealth to banks and other paper vehicles – stocks, bonds, etc., is the incredible emergency banking shutdown in the tiny island nation of Cyprus. Granted, Cyprus represents only .02% of the population of the European Union. Yet what is occurring there is the harbinger of great risk to traditional savers on every continent; and equally important, there are many more scary danger signs raising their ugly heads as well.

To recap for a moment, let's briefly itemize the situation in Cyprus. Cyprus, like just about every other country on the planet, has for decades been politically committed to a socialist based economy. In this scenario, politicians have promised benefits to the various voting classes which have far exceeded their annual tax revenue. This has caused its government to continually accumulate deficits that have resulted in a very large national debt in relation to its GDP. 

This debt has been collateralized by sovereign bonds sold to and purchased by large banks in Europe and elsewhere. Now this debt has become so large the government of Cyprus can no longer afford to pay even the interest, let alone reduce principal. What happens at this juncture, is that a powerful international banking institution, in this case, the European Central Bank (substitute your favorite lender of last resort – the Federal Reserve, the IMF, the World Bank, etc., etc.), has agreed to come to the rescue of the cash strapped government and help it make its current annual debt payment.

However, this emergency funding comes with a draconian penalty for the trusting taxpaying savers. In this instance, the European Central Bank has cut a secret deal with the Cypriot government to raid the bank accounts of all the country's bank depositors, between six and ten percent. This proposed robbery, if it comes to pass, will confiscate billions from citizens and non-citizens alike who have placed their trust in the security of Cyprus's banks. What has resulted, of course, is riotous response throughout the nation and frantic sell-offs in world equity markets.

What is important to understand here, though, is that this same game plan has been occurring for several years now in many countries throughout the world. Here is the short list of some of the transgressions that unscrupulous governments, under pressure from their major bank lenders, have perpetrated, and continue to perpetrate upon unsuspecting savers.

October 2008 – Argentina's leftist government, facing a gigantic revenue shortfall, proposes to nationalize all private pensions so as to meet national debt payments and avoid its second default in the decade.

November 2010 – Headline – Hungary Gives Its Citizens an Ultimatum: Move Your Private Pension Fund Assets to the State or Permanently Lose Your Pension – This is an effective nationalization of all pensions.

November 2010 – Ireland elects to appropriate ten billion euros from its National Pension Reserve Fund to help fund an eighty-five billion euro rescue package for its besieged banks. Ireland also moves to consider a regulatory move that compels some private Irish pension funds to hold more Irish government debt, thereby providing the state with a captive investor base but hugely raising the risk for savers.

December 2010 – France agrees to transfer twenty billion euros worth of assets belonging to its Fonds de Reserve pour les Retraites (FRR), the funded portion of its retirement system, to help pay off recurring social benefits costs. No pensioners are consulted.

April 2012 – Argentina announces that its Economy Ministry has taken an emergency loan from the national pension fund in the amount of $4.3 billion. No pensioners were consulted.

June 2012 – Treasury Secretary Timothy Geithner unilaterally appropriates $45 billion from US federal pension funds to help tide over US deficits for the remainder of fiscal year 2011.

January 2013 – Treasury Secretary Geithner again announces that the government has begun borrowing from the federal employees pension fund to keep operating without passing the approaching "fiscal cliff" debt limit. The move effectively creates $156 billion in borrowing authority from federal pension funds.

March 2013 – Open Bank Resolution finance minister, Bill English, is proposing a Cyprus style solution for potential New Zealand bank failures. The reserve bank is in the final stages of establishing a rescue scheme which will put all bank depositors on the hook for bailing out their banks. Depositors will overnight have their savings shaved by the amount needed to keep distressed banks afloat.

These trends are JUST getting underway. Bank failures, sovereign bond collapses, and national government bankruptcy are just around the corner. Because of the interconnectedness of world debt markets and derivatives risk, counted in hundreds of trillions of dollars, the risk to traditional investment vehicles looms ever closer. We're at critical eleventh hour crossroads where savvy investors need to head for "the mattresses" to protect their life savings. 

The very surest and safest "mattress plan" in this extremely dangerous financial environment, is to invest in the one vehicle that has survived every crisis in recorded history, precious metals. When all else fails, gold and silver will be there to save you.

Eight Steps From The Government’s Playbook.........

Eight Steps From The Government's Playbook

To anyone paying attention, reality is now painfully obvious. These bankrupt, insolvent governments have just about run out of fingers to plug the dikes. And history shows that, once this happens, governments fall back on a very limited playbook:

Direct confiscation

As Cyprus showed us, bankrupt governments are quite happy to plunder people's bank accounts, especially if it's a wealthy minority.

Aside from bank levies, though, this also includes things like seizing retirement accounts (Argentina), increases in civil asset forfeiture (United States), and gold criminalization.


Just another form of confiscation, taxation plunders the hard work and talent of the citizenry. But thanks to decades of brainwashing, it's more socially acceptable. We've come to regard taxes as a 'necessary evil,' not realizing that the country existed for decades, even centuries, without an income tax.

Yet when bankrupt governments get desperate enough, they begin imposing new taxes… primarily WEALTH taxes (Argentina) or windfall profits taxes (United States in the 1970s).


This is indirect confiscation– the slow, gradual plundering of people's savings. Again, governments have been quite successful at inculcating a belief that inflation is also a necessary evil. They're also adept at fooling people with phony inflation statistics.

Capital Controls

Governments can, do, and will restrict the free-flow of capital across borders. They'll prevent you from moving your own money to a safer jurisdiction, forcing you to keep your hard earned savings at home where it can be plundered and devalued.

We're seeing this everywhere in the developed world… from withdrawal limits in Europe to cash-sniffing dogs at border checkpoints. And it certainly doesn't help when everyone from the IMF to Nobel laureate Paul Krugman argue in favor of Capital Controls.

Wage and Price controls

When even the lowest common denominator in society realizes that prices are getting higher, governments step in and 'fix' things by imposing price controls.

Occasionally this also includes wage controls… though wage increases tend to be vastly outpaced by price increases.

Of course, as any basic economics textbook can illustrate, price controls never work and typically lead to shortages and massive misallocations.

When the first round of price controls don't work, the next step is to impose severe penalties for not abiding by the terms.

In the days of Diocletian's Edict on Prices in the 4th century AD, any Roman caught violating the price controls was put to death.

In post-revolutionary France, shopkeepers who violated the "Law of Maximum" were fleeced of their private property… and a national spy system was put into place to enforce the measures.

Increased regulation

Despite being completely broke, governments will dramatically expand their ranks in a last desperate gasp to envelop the problem by sheer size.

In the early 1920s, for example, the number of bureaucratic officials in the Weimar Republic increased 242%, even though the country was flat broke from its Great War reparation payments and hyperinflation episode.

The increase in both regulations and government officials criminalizes and/or controls almost every aspect of our existence… from what we can/cannot put in our bodies to how we are allowed to raise our own children.

War and National Emergency

When all else fails, just invade another country. Pick a fight. Keep people distracted by working them into a frenzy.


"He who knows nothing is closer to the truth than he whose mind is filled with falsehoods and errors."
                                                                       Thomas Jefferson

Wednesday, March 27, 2013

Investors Beware: Market Risks Today Are Higher than Ever.........AN ABSOLUTE MUST READ!

Investors Beware: Market Risks Today Are Higher than Ever

After the shot across the bow in 2008, you might have expected that regulators and market participants would use the experience to change for the better, to become more prudent, and to reduce the sorts of risky behaviors that almost crashed the entire system.

Unfortunately, you'd be wrong.

LTCM and Moral Hazard

In 1998, there was a firm called Long-Term Capital Management (LTCM, as it is commonly referred to today), staffed by the best of the best, including one of the very top bond traders that Wall Street ever produced as well as two future Nobel laureates.

LTCM boasted of its use of complex models that were supposed to generate outsized returns while operating with a risk-minimizing profile that, mathematically, was only supposed to experience severe losses so infrequently that the periods between them would be measured in the thousands of years.

Unfortunately for LTCM, their models badly underestimated real risks, and their leverage was such that their original $1 billion in capital turned into total losses of $4.6 billion in a little over four years, nearly dragging down the entire financial system in the process. THINK ABOUT HOW PUNY THOSE NUMBERS ARE COMPARED TO TODAY. NO WONDER THE FED HAS PULLED ALL THE STOPS OUT. NO WONDER THAT EVEN AFTER SPENDING TRILLIONS THEIR SOLUTIONS HAVE NOT WORKED!

While this experience has much to teach us in the way of market risk, hubris, and the dangers of leverage, it really needs to be understood in terms of the rise of moral hazard on Wall Street.  The main lesson that Wall Street seems to have learned from the LTCM disaster is that if the wipe-out was big enough, the Federal Reserve would swoop in and rescue things.

Message received: Go big or go home.  Take on as much risk as possible, secure in the knowledge that if things got bad enough, the Fed would simply print up what was necessary to make all the players whole again, with perhaps one core player or institution thrown under the bus for the sake of appearances.

Fast forward to 2008, and that exact experience was replicated perfectly, thereby reinforcing Wall Street's perception that it is best rewarded by chasing big risks and big returns. And if things didn't go as hoped, the good ol' Fed would always be there to push the Reset button.

Since nobody of consequence went to prison after the overt fraud and excesses of the housing bubble were revealed, and no bank had to give back a single penny of their ill-gotten and outlandish profits related to such behaviors, one does not have to be a genius to guess what happened next.

Banks took the taxpayer funds, paid themselves gigantic bonuses, and immediately began taking on huge new risks. I mean, why not?  If you had a rich uncle that promised to let you keep any gains from your trading portfolio but would absorb any losses you might incur, you'd soon be swinging for the fences like a pro.

Back to the Future

This is why today, instead of having been reduced, financial risks loom larger than ever. It's why the next downturn will be worse than the last one. Nothing has been learned, and nothing has been changed. The most basic of human behaviors, the tendency towards moral hazard (so well understood by the insurance industry) has been completely overlooked by the Fed.  

Once again, that institution, entrusted with so much, the Fed has been exposed as being rather intellectually shallow, or at least devoid of common sense.

The very same Fed that could not and did not see that a housing bubble was forming is now equally complacent about corporate bond yields touching all-time record lows across the entire spectrum, right down to CCC junk that sits one skinny notch above default.  Stocks are for show, but bonds are for dough– and with bonds now priced for perfection if not for something even better, there's no room for error.

Even the slightest hiccup – say, one brought about by a renewed global slump as is already underway in Europe and Japan – will cause massive losses to bond portfolios, and we will, yet one more time, be reminded that indeed there is nothing new under the sun.  

Central banks cannot print us all back to prosperity, and insolvency cannot be cured with liquidity.

All that remains is to assign the losses to someone. And right now there are plenty of very well-connected and powerful individuals working feverishly to assure that those losses do not fall upon them.

That leaves you and me, otherwise known as 'taxpayers'. And 'bank account holders'. Oh, yeah – and 'Muppets.'

Big Trouble Brewing

What the Fed, in cahoots with other central banks, has managed to engineer is a spectacular rise in the price of financial assets.  Stocks, bonds, and all of their associated brethren such as options, futures, and derivatives have all been magically elevated.  IT HAS NOTHING TO DO WITH VALUATION AND EVERYTHING TO DO WITH GREED, POLITICAL EXPEDIENCY AND CORRUPTION!

To put this into context, not only are stocks at nominal all-time highs, but bonds are too.  Bonds, however, are very different from stocks, and the fact that they are also at all-time highs should really be viewed with much more concern.

The bond market is enormous and dwarfs the equity markets by over 2 to 1, or 3 to 1 if you include non-securitized loans in the mix:

But just looking at traditional bonds, what we have here is a situation where over $100 trillion in bonds are now historically badly overpriced. 

For every 1% loss on that portfolio, more than a trillion dollars will be lost.

While the value of stocks has to be carefully adjusted for inflation to determine if all-time highs have been reached (not yet, by the way), bonds are priced according to the yield they offer.  The higher the price, the lower the yield.  The yield of a bond is supposed to compensate you for the risks involved, which include inflation, default, and time.  

The worse the prospect, the higher inflation, and the longer the time to maturity the higher the yield will be.  So how important is it that bonds are now yielding record lows?  

This is perhaps the single most important factor in the financial landscape right now, because it means either one of two things:  

(1) the risks of default and inflation are at all time lows, or   

(2) bond buyers are not being adequately compensated for risk.

Here's the data for corporate bonds, but sovereign bonds are just as lofty, and the lack of yield in those securities explains the grasping for yield in corporate bonds:

Yield-to-worst in junk bond market hits record low

Mar 13, 2013

March 13 (IFR) - The yield-to-worst in the US high-yield bond market has fallen to a record lowaverage of 5.56% this week, as investors flock to higher-yielding but riskier products.

With interest rates hovering around record lows, investors have found themselves rushing down the credit ladder in search of bonds offering more return - and more risk.

CCC rated bonds - the riskiest investments at the very bottom of the credit spectrum, just one notch above default level - have rallied the most.

"It's definitely risk-on behavior, where you are trying to get exposure to the most yield possible," said Drew Mogavero, head of US high-yield trading at Barclays.

"The safer segments of the market, BBs, have rallied to pretty low-yielding levels," he said. "So people are looking out to CCCs and other higher-yielding names."

Bond yields and prices move in opposite directions. As investor demand has driven up prices, yields have tumbled. Yield-to-worst indicates the lowest potential yield on a bond without the issuer defaulting.

Lower All Over

Broken down by ratings, the yield-to-worst on the Barclays Double B index is also at its lowest ever (4.24%), as is the level on the Triple C index (7.43%).

The only segment of the market that didn't close at a record low on Tuesday was the Single B index, which is 5.46% versus the record low of 5.39% set on January 24

Again, these are record lows as in never-before-in-all-of-time records.  

To think that the Fed has all of this under control, that it can steer the consequences of an entire world of investment and speculation decisions to a normal and graceful ending, requires far more faith than I can muster. ONLY A FOOL OR COMPLETE IDIOT COULD BELIEVE THAT THE FED HAS THINGS UNDER CONTROL!

The very idea that the worst-of-the-worst credit risks in the corporate world are now yielding less than 6% is even more absurd than anything that I observed during the height of the housing bubbles. 

The tiniest hiccup will wipe out the holders of those bonds, leaving them with, at best, pennies on the dollar.

Let me be very clear here: The bond market is at least an order of magnitude riskier than anything I saw in the housing bubble, and when it pops, the effects will be far worse.