Sunday, June 30, 2013







Each time, before you Pray or Intercede, be quiet first, and worship God in His glory, thank HIM for his mercy and grace. 

Think of what He can do, and how He delights to hear the prayers of His people. Think of your place and privilege in Christ, and expect great things!

Never will I leave you; never will I forsake you.

As ye sow, so shall ye reap.

"The Lord will give strength unto his people; the Lord will bless his people with peace."
                                                                                                                                     Psalm 29:11

"He staggered not at the promise of God through unbelief; but was strong in faith, giving glory to God; And being fully persuaded that what He had promised, He was able also to perform."
                                                                                                                         Romans 4:20-21                                                                                                                                                                                                                                                                   

And the peace of God, which passeth all understanding, shall keep your hearts and minds through Christ Jesus.
                                                                                                                                                                     Philippians 4:7

Peace I leave with you; my peace I give you. I do not give to you as the world gives. Do not let your hearts be troubled and do not be afraid.
                                                 John 14:27

Seek the Lord and His strength; Seek His face evermore!
                                                                      1 Chronicles 16:11

I can do all things through Christ which strengtheneth me.
                                                                                Philippians 4:13

For I the Lord thy God will hold thy right hand, saying unto thee, Fear not; I will help thee.
                                                                                                                                        Isaiah 41:13

Fear thou not; for I am with thee: be not dismayed; for I am thy God: I will strengthen thee; yea, I will help thee; yea, I will uphold thee with the right hand of my righteousness.
                                                                                            Isaiah 41:10

Trust in the Lord with all thine heart; and lean not unto thine own understanding. 6 In all thy ways acknowledge him, and he shall direct thy paths.

                                                         Proverbs 3:5-6

No weapon that is formed against thee shall prosper; and every tongue that shall rise against thee in judgment thou shalt condemn. This is the heritage of the servants of the Lord, and their righteousness is of me, saith the Lord.

        Isaiah 54:17

But they that wait upon the LORD shall renew their strength; they shall mount up with wings as eagles; they shall run, and not be weary; and they shall walk, and not faint.

                                                                                   Isaiah 40:31

Ask, and it will be given to you; seek, and you will find; knock, and it will be opened to you. For everyone who asks receives, and he who seeks finds, and to him who knocks it will be opened.

                                                                                                                   Matthew 7:7-8

Reach boldly for the miracle. 

God knows your gifts, your hindrances, and the condition you're in at every moment. 

Learn to feed your faith and starve your doubts.


Psalm 56:3-4

3 What time I am afraid, I will trust in thee. 
4 In God I will praise his word, in God I have put my trust; I will not fear what flesh can do unto me.

Psalm 71:1-3

1 In You, O Lord, I put my trust; Let me never be put to shame.
2 Deliver me in Your righteousness, and cause me to escape; Incline Your ear to me, and save me.
3 Be my strong refuge, To which I may resort continually; 
You have given the commandment to save me, For You are my rock and my fortress.

Psalm 25

Prayer for Guidance and for Deliverance. 
To you, O LORD, I lift up my soul.
O my God, in you I trust; do not let me be put to shame; do not let my enemies exult over me.
Do not let those who wait for you be put to shame; let them be ashamed who are wantonly treacherous.
Make me to know your ways, O LORD; teach me your paths. 
Lead me in your truth, and teach me, for you are the God of my salvation; for you I wait all day long.
Be mindful of your mercy, O LORD, and of your steadfast love, for they have been from of old.
Do not remember the sins of my youth or my transgressions; according to your steadfast love remember me,
for your goodness' sake, O LORD! 

Good and upright is the LORD; 
therefore he instructs sinners in the way.
He leads the humble in what is right, and teaches the humble his way.
All the paths of the LORD are steadfast love and faithfulness, for those who keep his covenant and his decrees.
For your name's sake, O LORD, pardon my guilt, for it is great.
Who are they that fear the LORD? He will teach them the way that they should choose.
They will abide in prosperity, and their children shall possess the land.
The friendship of the LORD is for those who fear him, and he makes his covenant known to them.
My eyes are ever toward the LORD, for he will pluck my feet out of the net. 

Turn to me and be gracious to me, for I am lonely and afflicted.
Relieve the troubles of my heart, and bring me out of my distress.
Consider my affliction and my trouble, and forgive all my sins.
Consider how many are my foes, and with what violent hatred they hate me.
O guard my life, and deliver me;do not let me be put to shame, for I take refuge in you.
May integrity and uprightness preserve me, for I wait for you.
Redeem Israel, O God, out of all its troubles. 

Psalm 91

1 He that dwelleth in the secret place of the most High shall abide under the shadow of the Almighty.

2 I will say of the Lord, He is my refuge and my fortress: my God; in him will I trust.
3 Surely he shall deliver thee from the snare of the fowler, and from the noisome pestilence.
4 He shall cover thee with his feathers, and under his wings shalt thou trust: his truth shall be thy shield and buckler.
5 Thou shalt not be afraid for the terror by night; nor for the arrow that flieth by day;
6 Nor for the pestilence that walketh in darkness; nor for the destruction that wasteth at noonday.
7 A thousand shall fall at thy side, and ten thousand at thy right hand; but it shall not come nigh thee.
8 Only with thine eyes shalt thou behold and see the reward of the wicked.
9 Because thou hast made the Lord, which is my refuge, even the most High, thy habitation;
10 There shall no evil befall thee, neither shall any plague come nigh thy dwelling.
11 For he shall give his angels charge over thee, to keep thee in all thy ways.
12 They shall bear thee up in their hands, lest thou dash thy foot against a stone.
13 Thou shalt tread upon the lion and adder: the young lion and the dragon shalt thou trample under feet.
14 Because he hath set his love upon me, therefore will I deliver him: I will set him on high, because he hath known my name.
15 He shall call upon me, and I will answer him: I will be with him in trouble; I will deliver him, and honour him.
16 With long life will I satisfy him, and shew him my salvation.

Psalm 27

1The Lord is my light and my salvation; 
Whom shall I fear?
The Lord is the strength of my life; Of whom shall I be afraid?
2 When the wicked came against me To eat up my flesh, My enemies and foes,They stumbled and fell.
3 Though an army may encamp against me, My heart shall not fear; Though war may rise against me,
In this I will be confident.
4 One thing I have desired of the Lord, That will I seek: That I may dwell in the house of the Lord
All the days of my life, To behold the beauty of the Lord, And to inquire in His temple.
5 For in the time of trouble He shall hide me in His pavilion; In the secret place of His tabernacle
He shall hide me; He shall set me high upon a rock.
6 And now my head shall be lifted up above my enemies all around me; Therefore I will offer sacrifices of joy in His tabernacle; I will sing, yes, I will sing praises to the Lord.
7 Hear, O Lord, when I cry with my voice! Have mercy also upon me, and answer me.
8 When You said, "Seek My face," My heart said to You, "Your face, Lord, I will seek."
9 Do not hide Your face from me; Do not turn Your servant away in anger; You have been my help;
Do not leave me nor forsake me, O God of my salvation.

10 When my father and my mother forsake me, Then the Lord will take care of me.
11 Teach me Your way, O Lord, And lead me in a smooth path, because of my enemies.
12 Do not deliver me to the will of my adversaries; For false witnesses have risen against me,
And such as breathe out violence.
13 I would have lost heart, unless I had believed That I would see the goodness of the Lord
In the land of the living.

14 Wait on the Lord; Be of good courage,And He shall strengthen your heart;
Wait, I say, on the Lord!

Psalm 3

The Lord Helps His Troubled People

A Psalm of David when he fled from Absalom his son.
3 Lord, how they have increased who trouble me!
Many are they who rise up against me.
2 Many are they who say of me,
"There is no help for him in God." Selah
3 But You, O Lord, are a shield for me,
My glory and the One who lifts up my head.
4 I cried to the Lord with my voice,
And He heard me from His holy hill. Selah
5 I lay down and slept;
I awoke, for the Lord sustained me.
6 I will not be afraid of ten thousands of people
Who have set themselves against me all around.
7 Arise, O Lord;
Save me, O my God!
For You have struck all my enemies on the cheekbone;
You have broken the teeth of the ungodly.
8 Salvation belongs to the Lord.
Your blessing is upon Your people. Selah
The 23rd Psalm

The Lord is my Shepherd; I shall not want.
He maketh me to lie down in green pastures:
He leadeth me beside the still waters.
He restoreth my soul:
He leadeth me in the paths of righteousness for His name' sake.

Yea, though I walk through the valley of the shadow of death,
I will fear no evil: For thou art with me;
Thy rod and thy staff, they comfort me.
Thou preparest a table before me in the presence of mine enemies;
Thou annointest my head with oil; My cup runneth over.

Surely goodness and mercy shall follow me all the days of my life,
and I will dwell in the House of the Lord forever.

Fear Not!...................

Fear Not!

"And Moses said unto the people, Fear ye not, stand still, and see the salvation of the LORD, which He will show to you to day: for the Egyptians whom ye have seen to day, ye shall see them again no more for ever." 

                                                                                                                                                         Exodus 14:13

Three hundred and sixty-five times in the Bible--once for every day of the year--it says, "Fear thou not," or its equivalent, "The Lord is my helper, I will not fear what man shall do."

Sometimes we come to a place where things are out of our hands. There is nothing we can do. Oh, we hurry around, we're so busy manipulating, trying, conniving, and scheming. But finally we come to a place where God hems us in, and there is no way out but up. God places us where there is nothing we can do. There is no one to help us. God just says, "Fear not, stand still ... and see the salvation of the LORD."

Read those words again: "ye shall see them again no more forever." When you come to the place of desperation, what does God want you to do? Number one, "Fear not." God wants you to come to this place of dependence that you may learn there is nothing to fear and He may say to you, "Fear not" and "Stand still."

Just stand still. "Be still and know that I am God."

Limiting God.............

Limiting God

"But God hath chosen the foolish things of the world to confound the wise; and God hath chosen the weak things of the world to confound the things which are mighty." 

                                                                              1 Corinthians 1:27

People say, "Well, I don't believe God can use me." You're insulting God. You're limiting Him. "Well," you say, "all right then, I'll just serve God in my poor little old weak way." Quit it! He doesn't want you to serve him in your "poor little old weak way." God wants to take ordinary people and do extraordinary things through them! 

It's not your fame; it's your faith. 

It's not your scholarship; it's your relationship. 

It's not your ability; it is your availability. 

It's not who you know; it's Whose you are that counts.

God takes what the world calls a foolish message, then God takes a weak messenger, and then God compounds these two in the crucible of His love and wisdom. The result is glory to God.

Saturday, June 29, 2013



A man should realize that his decision to follow a false religion and then bring up his children in that false religion will almost certainly affect his grandchildren and great-grandchildren as well. Many of the latter will actually be children while their great-grandfather is still alive. It is a simple fact that most children (though not all) will continue in their parents' "religion." They can, if they wish, choose to leave their parents' religion and become Christians, but most will not.
What a great responsibility, therefore, each father has! 

He should quickly accept Christ (whose credentials as our Creator and Redeemer are impeccable!) as his Savior and Lord, and then diligently train his own children "in the nurture and admonition of the Lord" (Ephesians 6:4).






Friday, June 28, 2013

Retail Investor Nightmare: The Bond Fund Rout........AN ABSOLUTE MUST READ!


Retail Investor Nightmare: The Bond Fund Rout

The bond selloff didn't surprise anyone. Investors knew that it would happen, would have to happen. Gurus of all stripes had predicted for years that it would happen, that the ridiculously low yields weren't sustainable, that the Fed would eventually have to back off – only to watch with a mix of helpless frustration and ironic bemusement as the Fed or some other central bank opened the spigot even wider. EVERY TIME THEY OPEN IT WIDER THE FINAL OUTCOME BECOMES MORE TRAGIC FOR OUR ECONOMY!

Meanwhile, investors decided to brush off the razzmatazz and just hang in there until it would happen, then get out in the nick of time. And they ran up the most gigantic bond bubble in history. But real cracks appeared in the Treasury market last fall when yields rose despite the Fed's announcement of QE infinity designed to repress yields.

So, on April 30, it became official. In light of sky-high corporate bond prices and record low yields, billionaire Wilbur Ross of WL Ross & Co. warned during a panel discussion of the long-term issues in bond la-la land. This – whatever was coming down the pike – wouldn't be just a brief dip that you could buy. A mountain of debt had been issued in recent years at artificially low rates, thanks to the Fed's machinations. It would have to be refinanced in a few years at much higher rates. "There's a tremendous amount of interest-rate refinancing risk being built up," he said. "We're just building a bigger and bigger time bomb." MUCH OF IT WILL DEFAULT.

Others chimed in. Joshua Harris, co-founder and chief investment officer of private-equity powerhouse Apollo Global Management, offered this tidbit of immortal wisdom to the still euphoric bondholders: "run – do not walk!"

And they did. All at the same time. It stopped the crazy feeding frenzy for yield. It turned the junk-bond bubble into a rout overnight. That "time bomb" would hit them the hardest. There'd be defaults. Value would just vanish. These risks are worth taking, if yields are high enough. But they weren't. As the average yield on junk bonds hit a record low of 5.24% on May 9, investors opened their eyes. By June 26, it had jumped to 7.02%. And it's just the beginning. 

The chart shows this vicious 6-week spike:

Even some of the least risky and most liquid paper out there, Treasuries, started diving in early May. Last week, the 10-year note experienced its worst selloff since June 2009 – the depth of the Financial Crisis! On Monday, yields hit 2.66% – up from 1.66% on May 2, and more than double the August low of 1.3%! Now they've settled a bit, at 2.58%. Investors are contemplating losses of over 10% since early May – in what is considered one of the most conservative investments around.

Those who own actual bonds, and don't sell them, will be able to ride out the storm – assuming the issuer doesn't default – patiently collecting puny coupon payments and allowing inflation to eat into their investment. But most retail investors, when they buy bonds, buy bond funds. And there, the massacre has been brutal: $48 billion have been yanked out of bond mutual funds so far in June.

Bond fund investors have a problem that holders of actual bonds don't have: if your bond fund gets hit by massive waves of redemptions, you can't ride out the storm without losses!

At first, a bond fund typically uses its cash cushion to deal with redemptions and then sell bonds gradually. Fund investors might not know the difference. But during big waves of redemptions, such as those recently, bond funds scramble to sell what they can sell into an increasingly illiquid market. So they're selling Treasuries and their most liquid high-quality corporates – where losses are relatively small. The best stuff first.  WHAT WILL THIS DO TO ALL OF THE CRAP ON BANK BALANCE SHEETS? BIG BANK DEFAULTS LIE AHEAD, GUARANTEED!

Even in good times, corporate bonds can be fairly illiquid. There may be days and sometimes weeks or even months between trades of a particular issue. So marking illiquid bonds to market on a daily basis, when there is no discernible market, can be tricky.  

But when bond prices drop, liquidity dries up further. The gap between what sellers want and what buyers are willing to pay becomes so wide that many bonds essentially stop trading – unless there is a forced sale! Hit with a wave of redemptions, a bond fund might have to sell less liquid bonds for whatever it can get for them – much less than the "market value" on its books. With each sale, the fund recognizes the loss. 

And as the fund dips deeper into its illiquid lower-quality bonds, particularly junk bonds, during the worst bouts of a selloff, losses accelerate. Investors get spooked and bail out. Hence, more redemptions. And more losses. It's the reverse of the Fed-inspired feeding frenzy. The reverse of the wealth effect.

In the worst cases, such as the formerly $14-billion Schwab YieldPlus Select Fund, now defunct, it ends in a bloodbath. Even well-managed bond funds can have some ripples. Bond funds that realize losses while they're forced to sell at the worst moment can't recuperate those losses even if bonds – those that don't default – rise again. Those gains go to whoever was on the other end of the transaction. And the buy-and-hold bond fund investor ends up holding the bag.

In an environment of rapidly rising interest rates, bonds with long maturities require nerves of steel and the willingness to sit on a crummy investment for years, or even decades. But bond funds can be outright treacherous – yet, in another display of Wall Street genius, it's the conservative retail investor who gets lured into them.

It was the day when Private Equity firms – the smart money, the great beneficiaries of the Fed's money-printing and bond-buying binge – announced their intentions to the rest of the world. The heavy hitters were there, and they let fly some pungent words. In short, they were "selling everything that's not nailed down." It was greeted with incredulity. Turns out, they weren't kidding. BETTER TO BE EARLY THAN LATE, AT THIS POINT IN THE GAME.

We are at the point where either one of two things are going to happen; either central banks are going to stop all this money printing, or the market is going to force them to stop it. 

It looks like we may be having a juncture of both…where the Fed is getting worried…and at the same time, the market is jumping in and saying, Yes, it's insane what you're doing, and this has to end. So we may have a healthy convergence of both. And if it's not ending now, it's going to end sometime in the next year, because this cannot go on—it's too insane.

This is the first time in history where you've had all the central banks in the world printing money at the same time. Europe, Japan, America, and the UK, all, are frantically trying to debase their currencies…I'm afraid that in the end, we're all going to suffer perhaps, worse then we ever have, with resource wars, real wars, inflation, currency turmoil, and higher interest rates. As I say, this has never happened before, it's never been a good policy in the long run, so I'm afraid we're all going to suffer for the rest of this decade at a minimum, from all this crazy, crazy money printing.

The way to protect yourself is to own real assets…because that's the only thing which will protect you as currencies debase. 

If you have money in the financial system and the financial system collapses, even though you may have done nothing wrong—you may suffer because somebody else did something wrong. So you need to be very careful about where your assets are in the financial system, or have strict control over them yourself, so that you're not going to lose them.

Low Volume Stock Market Ramp as Credit Continues to Sell Off...............

As the stock market climbs on very low volume credit markets are selling off rather notably.

A 61.8% retracement of the drop...

But credit is not buying it...GUESS WHICH ONE IS TELLING YOU THE TRUTH?

The End Of QE ZIRP And The Beginning Of Rational Market Pricing..........A MUST READ!

The End Of QE ZIRP And The Beginning Of Rational Market Pricing

With rates spiking and equities dropping, all due to the long overdue realization that Bernanke can't goose the markest forever

Inflation + Deflation = Stagflation at best, the highest probability at this point is the Fed and other central banks make a huge mistake which leads to the largest financial accident in history.

Hopium and delusion are not solutions to this problem.

That visual relationship is corroborated by running the statistical correlations...

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

Where do YOU think rates are going to go from here? BY THIS TIME NEXT YEAR THEY WILL BE HEADED MUCH HIGHER.


Real Disposable Income is Falling at 2008 Rates........a truly staggering collapse in incomes.

Real Disposable Income is Falling at 2008 Rates

The most important item in the GDP report yesterday was the collapse in disposable income for Americans.

Most investors will focus on the drop in GDP growth for 1Q13 and view it as opening the door for the Fed to continue with QE 3 and QE 4 without any tapering in sight.

After all, the markets have believed that bad economic news is good news for the markets for four years based on the belief that a weak economy will mean more money printing from the Fed.

However, the real issue in the BEA's report on GDP growth was the collapse in real per capita disposable income which fell at a annualized rate of 9.21%.

That is a truly staggering collapse in incomes. The last time we say anything even close to this was in the third quarter of 2008.  

That was right after Lehman failed and the entire economy and stock market were melting down. Buckle up, things are getting worse in the US at a truly alarming rate.

I've been warning that the economy was going to turn sharply weaker this year. It's already begun.

Indeed, while most investors will look at the GDP report as indicating more QE is coming, commodities certainly didn't get that signal at all. The commodity index continues to plunge diverging wildly from the S&P 500.

One of these asset classes is completely mispricing the economy and the likelihood of more QE. Guess which one it is.


The Wealth Effect Half-Life............

The Wealth Effect Half-Life

Wild swings in asset prices have produced two recessions in the last 15 years - and, we suspect, FOMC members are keen not to see a repeat of the collapses of the last decade. As the following chart shows, measured relative to an equally nominally inflated USD-based disposable income, the wealth effect is nothing like as strong as some suggest and indeed it should be clear that time after time in the last 20 years we have seen the artificially blown 'wealth-effect-creating' bubbles implode back to what was an old-normal level of 'sustainable' wealth (and in fact the Fed is having to work harder to keep us from that level).


As Barclays notes,

There is no major asset price that could be considered depressed in any way and the rate of asset price inflation has been extremely high by any historical standard. Prior to the recent correction, household net worth as a percent of disposable income – a rough measure of asset prices – had risen by 80% as much as it did during each of the two recent asset price booms (and by twice as much as had occurred in any other post-WWII cycle).

Against a background where increasingly wild swings in asset prices have been the key factor undermining economic performance – producing two recessions in the last 15 years – it is not surprising that most members of the FOMC see that historically extreme measures aimed specifically at boosting asset prices have pretty much served their purpose and may lead to a very dangerous negative situation for the markets.



Weakness in ETFs 

Buyers of ETFs beware, as last Thursday's selling exposed a fundamental weakness in the structure of the exchange traded fund. Unlike a mutual fund, which allows the investor to buy or sell at the daily net asset value, ETFs can trade at a premium or discount to their net asset value (NAV). At any point in time, an investor can overpay for an asset (i.e. premium) or receive less than the asset is worth (i.e. discount).

These premiums and discounts can be tremendous on days with big NAV changes, as investors realized Thursday. The chart below shows the NAV trading premiums and discounts for the MSCI Emerging Markets Index ETF (EEM) over the past year. As you can see, the ETF often experienced significant premiums and discounts in this time frame, however, the discount was never as severe as it was last Thursday. As panic selling set in last week, the discount grew to be as much as 2.56 percent. Simply stated, "at the very moment of maximum selling, the ETF exacts the maximum trading cost from the seller and rewards the buyer similarly, with a discount." TELL ME WALL STREET ISN'T BIASED TOWARDS BUYING!  FREE MARKETS?

"Don't sell into a panic. ETFs are built to penalize lemmings and reward contrarians."

ETFs have relatively low expense ratios compared with actively managed funds in the same sectors, but that doesn't mean that in the end an ETF costs less to own or that an ETF generates better returns. 

On volatile days such as last week on Thursday, ETFs can be expensive to trade especially for sellers or short positions.

Thursday, June 27, 2013

The Credit Market Sees Things Differently.........AN ABSOLUTE MUST READ!

The Credit Market Sees Things Differently

Both the absolute levels and the implied volatility of credit markets are significantly divergent from the recently recovering exuberance in stocks. This cannot and will not last this time. If you 'believe' that Bernanke was bluffing and the taper is off then credit is grossly cheaper than stocks; if not, equity shorts seem an appropriate position into Q3.

Easy Come, Easy Flow...

Which leaves equities 9-sigma rich to credit... (approximately 3x HYG to 1x SPY delta)

Of course, the fund flows are affecting credit and as we saw, the selling pressure is dramatic.

There is no rotation that drives high-yield credit spreads wider without punishing equities. 

They are liabilities on the same capital structure and rise and fall in a highly correlated (well non-linear co-dependence) manner as the underlying business risk rises and falls. 

Do not, repeat do not, see high yield credit weakness as a sign of rotation to stocks - if the credit cycle has turned then stocks are set to fall, probably a long way. 

And bear in mind that while HY yields are at all-time lows, spreads are not and in fact being short stocks relative to credit makes more sense if you are a bear on the credit cycle here. 

The real problem being that the epic flows that sustained a credit market at non-economic levels for so long will exit in a hurry once it really gets going.

The Credit Cycle Has Turned.............A MUST READ!

The Credit Cycle Has Turned

No matter how much pushing on the market- or economic-string a central planner tries, eventually the risk-based pricing of credit (as opposed to nominal price based stocks) turns the corner from accepting rising leverage as potentially good thing for growth to worrying that cash flows are at risk from an over-generous management transfer to shareholders. The four-year bullish period of this credit cycle is nearing its historical average and leverage is near its cycle highs with near record numbers of firms raising leverage YoY suggesting the credit cycle is over.

Leverage is rising...

 and pretty much every other credit metric is deteriorating...

 and the credit cycle is getting long in the tooth...


It seems the only factor driving credit from not being wider based on these leverage and cycle indications is the 'flow' from the Fed. I suspect that is what has created the weakness in bonds recently. Once one of the big credit managers decides to cover instead of hedge, the small doors and large crowds will see major liquidity gaps appear in HY credit.  IT WILL BE LIKE FLUSHING A TOILET AND THE FLOW WILL BE UNENDING AND RATES WILL END MUCH HIGHER IN A VERY SHORT PERIOD OF TIME!

Five financial trends that should have you very concerned..............

Five financial trends that should have you very concerned

1. High frequency trading - It is hollowing out the structure of the markets. Trading is a zero sum game, and if they are making a billion a year, it's coming from somewhere. 

2. Too Big to Fail remains a problem. Banks should be boring, not speculative super-leveraged hedge funds. 

3. Derivatives.

4. Lack of prosecutions for fraud;

After the S&L crisis, thousands of bankers were prosecuted. Many went to jail. We failed to do that this time, and that is a slow-growing cancer.

5. Rewarding the bad actors.

As to the bad actors: When a surgery goes awry, you don't send in the same surgeons to repair the damage—you want a fresh pair of hands and eyes, cutters who have no vested interest other than saving the patient.

We failed to do that as a nation. We put the people who helped to create the problem—Tim Geithner! Larry Summers!—in charge of the solution. That is a recipe for failure.  


Is That The Sound Of Asset Bubbles Bursting?........A MUST READ!

Is That The Sound Of Asset Bubbles Bursting?

Ben Bernanke's recent press conference and China's interbank market crash may appear to have little in common but the truth is rather different. For both the U.S. and China are trying to deflate asset bubbles caused by excessive money printing and interest rates being kept too low for too long. And politics is largely behind the timing of their decisions to clamp down on these bubbles. Bernanke is desperate to avoid the mistakes of his disgraced predecessor, Alan Greenspan, whose loose money policies blew up soon after he departed the post. And China's President Xi Jinping would rather have an economic slowdown now than later on so that he can blame it on his predecessor, Hu Jintao.

The question for investors is whether Bernanke or Xi will blink, choosing to reflate their asset bubbles (the U.S. bubbles are principally in stock and bond markets while China's are more broad-based) rather than face the consequences of unwinding them. At Asia Confidential, we're not certain of anything. But our best guess is that the U.S. economy is too fragile and deflationary forces are too strong for QE tapering to take place this year. China is a different matter as we now suspect the new president may just have the political backing and will to carry out tightening measures. Either way though, the asset bubbles in both countries are likely to deflate, it's just a matter of how and when this happens.

The context to market gyrations

What's behind the wild market gyrations of the past week? It's clear that the U.S. and China are attempting to deflate their asset bubbles and markets don't like it. To better understand why this is the case though, it's important to appreciate how these bubbles developed in the first place.

And to do that, we need to step back in time. All the way back to 1994, in fact. Why this year, you ask? Well, it's then that China devalued its currency by 50%. Asia Confidential believes that this singular event has been the key driver behind events leading up to the financial crisis and thereafter.

That's because the 1994 devaluation resulted in a substantial under-valuation of the yuan. This under-valuation created the conditions by which China was able to become an exporting powerhouse.

For China to become this powerhouse though, it needed buyers. The developed world was only too happy to oblige, scooping up the cheap Chinese products. It didn't matter that consumers in the developed world didn't have enough money to purchase all of these products. They simply piled on debt to pay for them.

The beauty of this arrangement was that China received U.S. dollars from U.S. consumers. Its subsequent trade surplus led to the rapid accumulation of foreign exchange reserves, which China used to buy U.S. government bonds. This in turn kept U.S. bond yields and interest rates low, making it cheap for U.S. consumers to take on more debt to buy Chinese products and other things (such as local property).

But to maintain its currency peg to the U.S. dollar, China had to create yuan through the printing press. This whole process helped created inflation at home and deflation abroad.

An elegant arrangement, no? Not so much. Since 2008, this seemingly virtuous circle has slowly unravelled as the developed world pays down its excessive debt load. Meantime, political pressure to appreciate the yuan has resulted in that currency recently reaching 19-year highs versus the dollar.

You're probably wondering what all of this has to do with the events of the past week. Well, the developed world has never paid back those excessive debts as governments thought that process would be too painful for their countries to take. Instead, those governments took over the private sector debts and printed loads of money to try to inflate these debts away.

That printed money has been used to buy U.S. government debt, which has depressed U.S. bond yields and interest rates. That's hurt savers, who've searched for better returns in risk assets, such as stock markets.

There's little doubt that the U.S. Federal Reserve's solutions to the 2008 crisis have provided artificial support to stock and bond markets. And undoubtedly to the U.S. housing market too. Bernanke is clearly worried about all this and it goes some way towards explaining his push to reduce U.S. stimulus. THE MONSTER HE CREATED HAS ESCAPED HIS CONTROL.

Meanwhile, China's response to the 2008 crisis was to print 4 trillion yuan (close to US$600 million in 2009 terms) to prime its economy and prevent a downturn similar to the one which occurred in the developed world.

This pump priming went largely into fixed asset investments, financed principally via debt at the local government level. It's directly resulted in a property bubble of substantial proportions. It's also led to debt issues, with total credit to GDP in China increasing from 125% to 200% over the past five years. THIS BUBBLE WON'T POP, IT WILL EXPLODE.

China's new president came to power in March and inherited this mess. He's intent on deflating the credit bubble without crashing the economy. That intent is behind the spike in China's interbank interest rates in recent weeks. RISING RATES WILL SLOW THE MADNESS BUT WILL ALSO KILL CHINA'S ECONOMY. 

Bernanke is focused on his legacy

Why is Bernanke choosing to act now to reduce stimulus then? Before getting to that, let's take a quick look at what he actually said at his press conference post the FOMC meeting. Bernanke suggested that QE cutbacks could begin later this year if growth picks up as the Fed projects, unemployment comes down and inflation comes closer to the central bank's 2% target. If those expectations bear out, the Fed could stop QE altogether by the middle of next year, when it forecasts unemployment to drop to 7%.

In short, Bernanke thinks the economy is improving to the point that it will be able to stand on its own without the assistance of stimulus. And this line has been parroted by the vast majority of the investment community.

But there appears to be more than a few holes in this argument:

U.S. economic growth is mediocre at best, particularly when considering that it's coming out of such a deep downturn.

The majority of recent data points on the economy has disappointed, indicating a slowing growth rate in the short term.

If economic growth remains at current levels, or falls, Bernanke's unemployment targets won't be reached.

The biggest issue of all is U.S. inflation is slowing and deflation remains the primary risk right now.

Under these circumstances, QE tapering would likely undo what remains a fragile economy.

If that's the case, why would Bernanke be pushing ahead with this tapering? We suspect that politics may have something to do with it. In a recent TV interview, President Obama all but said that Bernanke won't serve a third term as Fed Chairman from January next year.

This means that Bernanke, like any good politician (central bankers are as much politicians as they are economists), has one eye on his current job and the other eye on how he'll be remembered in the history books. He won't want to become another Alan Greenspan, who left office shortly before the 2008 financial crisis that he arguably contributed too.  HE IS ALL READY ASSURED OF MAKING GREENSPAN LOOK LIKE NOTHING BUT A SENILE OLD FOOL WHO MADE A MISTAKE. BERNANKE IS ACTUALLY IS DUMB ENOUGH TO THINK WHAT HE IS DOING IS RIGHT! AND REMEMBER HE STUDIED THE GREAT DEPRESSION AT LENGTH, HE DIDN'T LEARN ANYTHING, BUT HE STUDIED LONG AND HARD. HOW STUPID DOES THAT MAKE MR. BERNANKE? HE IS POWERFUL BUT NONE TOO BRIGHT AND HE PROVES IT WITH EACH NEW FED POLICY AND UTTERANCE.   

Put bluntly, QE tapering - even a small reduction thereof - offers the chance for Bernanke to be remembered as the responsible central banker rather than the one who re-created asset bubbles that led to a further financial crisis.

Xi Jinping's iron fist

China has been the other focus of market attention, with good reason. The country's interbank market - where banks lend money to each other - essentially froze for a short period of time. And the central government initially refused to step in to provide the liquidity to get the market functioning again. It only caved in when things became critical.

Below is the Shanghai Interbank Offered Rate (SHIBOR) 

Sure, there were a number of factors which contributed to the spike in interbank rates, including:

The gradual tightening in policy this year.

A sharp fall in foreign exchange inflows in May due to a government crackdown on illicit activity.

Banks hoarding cash for seasonal reasons.

But this crisis was principally caused by the central government stepping back and refusing to inject liquidity into the market.

Is That The Sound Of Asset Bubbles Bursting?

There was a lot of commentary out of the U.S. about how this was China's "Lehman" moment - alluding to 2008, when Lehman Brothers went under, freezing U.S. credit markets. It ignored the fact that the central government largely initiated the interbank rate spike.

The obvious question is: why would the central government do this? And the logical explanation is that it wants banks to slow the pace of lending and this was its crude way of communicating the message. We think, though, that almost everyone has missed a key driver for the credit crackdown.

The government and its new leaders are no dummies. They realise that they inherited a mammoth credit bubble that's in the process of bursting. They have two choices:

Reflate the credit bubble and risk enormous economic damage down the track.

Or acknowledge that the economy will slow as the bubble pops and attempt to manage it as best they can.

No one knows for sure, but we suspect that the interbank event signals that Xi Jinping has chosen the latter path. The reason for this suspicion is that Xi appears a pragmatic, canny politician. He would have calculated that by having a serious economic slowdown now, the blame can justifiably be pinned on his predecessor, Hu Jintao. A slowdown later on would afford him no such luxury.

In other words, Xi knows that China's credit bubble will burst. It's better to get it out of the way to preserve his authority. He can then get on with the job of introducing the crucial reforms needed to restructure the economy and drive growth over the next decade.

What happens from here?

You're probably thinking that this is all well and good, but what can we expect to happen from here? The truth is that no one knows. But here are a few tentative guesses:

In the short run, the U.S. economy is unlikely to recover, weighed down by excessive debt. And deflation will remain the primary risk.

China's economy may well have some encouraging weeks or months. For instance, upcoming data should be somewhat better given the accelerated banking lending in early June, roll out of significant infrastructure projects across several key cities and a normalisation in consumption following the Avian flu scare. However, the general economic trend will be down and it could well take a long time to recover.

It's our expectation that Xi will positively surprise when he announces broad-ranging economic reforms, likely in the second half of this year. Substantive moves toward privatising state assets may be a center piece. It won't be hard for Xi to exceed the very low market expectations on this. Any reforms will do little to mitigate the current economic slowdown though, in fact they will likely roil markets further.

In the mid to long-term, all the asset bubbles in the developed world and China will deflate in one way or another. All bubbles pop eventually and these ones will be no different. No central banker or leader can prevent this from happening. They can try, but they'll only succeed in delaying the process.

Wednesday, June 26, 2013

For Bonds, It's A Lehman Repeat..........A MUST READ!

For Bonds, It's A Lehman Repeat

There is plenty of discussion of outflows but we thought the following chart was perhaps the most insightful at why this drop is different from the last few year's corrections. 

Corporate bond managers have desperately avoided selling down their cash holdings (since they know dealer liquidity cannot support broad-based selling and its an over-crowded trade) and bid for hedges in CDS markets. But it seems, given the utter collapse in the advance-decline lines for high-yield and investment-grade bonds that the liquidations have begun. 

While the selling in high-yield bonds is on par with the Lehman liquidation levels, it is the collapse in investment grade bond demand that is dramatic and worse than Lehman levels. It's not like we couldn't see it coming at some point. 

Simply put, stocks cannot rally in a world of surging debt finance costs.

Corporate Bond Advance-Decliners lines are as liquidation-based bad as during Lehman (worse in fact for IG)...

Sure this is orderly...

The current decline in the high yield market, now at 30 trading days, has been the fastest since the end of the 2008 recession, with yields widening 159 bp. Only the July - October 2011 market decline had a greater ultimate magnitude than the current period.

Remember - and it's important - there is no rotation that drives high-yield credit spreads wider without punishing equities. They are liabilities on the same capital structure and rise and fall in a highly correlated (well non-linear co-dependence) manner as the underlying business risk rises and falls. 

Do not, repeat do not, see high yield credit weakness as a sign of rotation to stocks - the credit cycle has turned and stocks are set to fall. And bear in mind that while HY yields are at all-time lows, spreads are not and in fact being short stocks relative to credit makes more sense if you are you are a bear on the credit cycle here. 

There isn't much to interpret here. The Fed has failed miserably to generate economic growth of any significance. All it's done is create a stock market bubble while draining high quality collateral from the system. Put another way, it's created a situation in which leverage is even worse today than it was before 2008.

Bernanke knows this and is desperately trying to let the bubble down easily without it bursting. This is impossible. And as the bond and stock market action of the last week shows us, the very second the Fed backs off the entire system is at risk.

The epic flows that sustained a credit market at non-economic levels for so long will exit in a hurry.  LOOK OUT BELOW!

Nothing Says Economic Recovery Like Mass Layoffs.......A MUST READ!

Top Law Firm Weil, Gotshal & Manges Announces First Mass Layoffs in 82 Years
Nothing says economic recovery like one of the most profitable and prestigious law firms in the nation announcing mass layoffs for the first time in 82 years.  

Yep, four years after the so-called "recovery" began, things are so good that Weil, Gotshal & Manges has decided to cut 7% of its associates and slash annual compensation for 10% of its partners by hundreds of thousands of dollars.  IT COULDN'T HAPPEN TO A NICER PROFESSION!

As the article below notes, there is still massive overcapacity in the legal profession and this announcement is likely to spark a wave of layoffs in the industry.  

From the New York Times' Dealbook:

One of the country's most prestigious and profitable law firms is laying off a large number of lawyers and support staff, as well as reducing the pay of some of its partners, a surprising move that underscores the financial difficulties facing the legal profession.

Sixty junior lawyers, known in law firms as associates, will lose their jobs. That amounts to roughly 7 percent of Weil's associates. Roughly 30 of the firm's 300 partners are having their annual compensation reduced, in many cases by hundreds of thousands of dollars. And 110 staff employees – roughly half of them legal secretaries – are being let go.

Dan DiPietro, chairman of the law firm group at Citi Private Bank, said that there were too many lawyers at the country's largest firms, estimating the excess capacity at as much as 10 percent of the lawyer population. 

He believes that the profession could possibly experience a wave of job cuts.  YEA!

"Our market share has been improving, but the market has been shrinking," Mr. Wolf said.

"We believe that this not just a cycle but that the supply-demand balance is out of whack across the industry," he said. "If we thought this was a cycle and our business was going to pick up meaningfully next year, we would not be doing this."  OUR NATION NEEDS 50% LESS LAWYERS AT A MINIMUM, THEY ARE NOTHING BUT PARASITES!

The mass layoffs are the first in the 82-year history of Weil, which has 21 offices across the globe and headquarters high above Fifth Avenue in the General Motors building, one of New York's most coveted business addresses. Last year, the firm posted revenue of about $1.2 billion, and its profits per partner ranked 13th of all firms nationwide.

Several industry experts informed of Weil's decision applauded the move. Peter Zeughauser, a law firm consultant, said that many firms were in denial about the continued slack demand for their services, and Weil's cutbacks could pressure them into getting leaner.












The Rational Market Myth.......AN ABSOLUTE MUST READ!

The Rational Market Myth

One of the most outrageous myths of economics is that markets are rational. 

Theories are based on this assumption, and the belief that markets are rational fuels the argument against regulation. The market response to the Federal Reserve's June 19 statement that it will taper off its bond purchases if its forecast comes true is unequivocal proof that markets are irrational.

The Federal Reserve's statement that it "currently anticipates that it would be appropriate to moderate the monthly pace of purchases of bonds later this year" depends on a very big if. The if is the correctness of the Fed's forecast of moderate economic growth and employment gains.

The Fed has not stopped purchasing $85 billion of bonds each month. So nothing real has changed. Indeed, there was no new information in the Fed's statement. It has been known for some time that, according to the Fed, its bond purchases will gradually cease.

In response to this repeat of old information, the stock and bond markets sold off in a major way on June 19-20. This market response to the Fed's statement indicates that the Fed's forecast is unlikely to come true. Low interest rates and a high stock market are totally dependent on the liquidity that the Fed is injecting by printing $1,000 billion per year. If this liquidity is not injected, what will sustain the markets? If the markets crash and interest rates rise, how can the Fed expect recovery?

In other words, the participants in the stock and bond markets know that the markets are bubbles created by the printing press. There is no real basis for the high stock and bond prices. The prices are an artificial reality created by the printing press. Rational markets would take into account the printing press element and would price stocks and bonds at a much lower level.

Zero real interest rates mean that there are no risks. But how can there be no risk in Treasury bonds when the debt is growing faster than the economy?

Normally, high stock values mean strong profits from strong consumer income growth and retail sales. But we know that there is no growth in real median family income and real retail sales.

I suspect that the reason the Fed made the announcement, which seems to be derailing the Fed's forecast of recovery on which the announcement depends, is to relieve pressure on the US dollar. For several years the Fed has been printing 1,000 billion new dollars each year. There is no demand for these dollars. So far these dollars have inflated stock and bond prices instead of consumer prices. But the implication for the dollar's price or exchange value in currency markets is clear. The supply is increasing faster than the demand. If the dollar falters, the Fed would lose control. Rising import prices would soon drive domestic inflation and interest rates far higher than the Fed's targets.

Washington has succeeded in getting Japan and the EU to print yen and euros in order to eliminate the likelihood of flight to other large currency alternatives to the dollar. Smaller countries have also had to print in order to protect their export markets. With so many countries printing money, the Fed's statement implying that the US might stop printing makes the dollar look good, and, indeed, the dollar rose on the currency exchange markets.

Having neutralized the alternative currency threat to the dollar, the Fed and its agents, the bullion banks, the banks too big to fail, are still at work against the gold and silver threats to the dollar. Massive short selling of gold began at the beginning of April. Again on June 20 massive shorts of gold were sold at a time of day chosen to maximize the price decline. Only those who intend to drive down the price would sell in this way.

Since QE began, the Fed has deprived retirees of interest income and has forced retirees to spend down their capital in order to pay living expenses. Judging from the initial market response, the Fed's latest policy announcement is adversely impacting bond, stock and real estate investors, and the manipulation of the bullion markets continues to wreak destruction on wealth stored in the only known safe haven.

How can a recovery happen when the Fed is destroying wealth?

The Fed's irrational behavior could be seen as rational if the assumption is that the Fed's intent is not to save the economy but to save the banks. As the Fed is committed to saving the banks "too big to fail," it is likely that the banks know of the Fed's announcements in advance. With inside information, the banks know precisely when to short the stock, bond, and bullion markets. The banks make billions from the inside information. The billions made help to restore the banks' balance sheets.

Guy Lawson's book, Octopus (2012), shows that front-running on the basis of inside information has always been the source of financial fortunes. In order to save the banks, the Fed now supplies the inside information.

How is this going to play out? I suspect that the recovery, although officially a weak one, does not really exist. However, thanks to statistical artifacts that understate inflation and unemployment and overstate GDP growth, the Fed and the markets think that a recovery of sorts is in process and that the unprecedented money printing by the Fed will succeed in shifting the economy into high gear.

No such thing is likely to happen. Instead, as 2013 progresses, a further downturn will become visible through the orchestrated statistics. This time the Fed will have to get the printed money past the banks and into the economy, and inflation will explode. The dollar will collapse, and import prices–as globalism has turned the US into an import-dependent economy–will turn high inflation into hyperinflation. Disruptions in food and energy deliveries will become widespread, and a depreciated currency will cease to be used as a means of exchange.

I wouldn't bet my life on this prediction, but I think it is as likely as the Fed's prediction of a full recovery that allows the Fed to terminate its bond purchases and money printing by June 2014.

Americans, who have been on top of the world since the late 1940s, are not prepared for the adjustments that they are likely to have to make. And neither is their government.