Will ECRI's Call for Recession Prove Accurate?

Sunday, May 13th, 2012

ECRI's Lak­sh­man Achuthan was mak­ing the rounds yes­ter­day, with yet another defense of his firm's reces­sion call – the first claim which came early last fall.  I do think (from mem­ory) he has pushed out the time frame a bit from when the ini­tial call came, but since early this year has claimed we will see it by mid year.  Per­haps the very warm win­ter hurt the call as well – who knows with these black boxes.  Below we have a video with CNBC and there is one nugget in there I did not know.  Con­ven­tional wis­dom is a reces­sion is back to back quar­ters of neg­a­tive GDP… but accord­ing to the NBER (and Achuthan) that is but one of a group of poten­tial signals.

The Com­mit­tee does not have a fixed def­i­n­i­tion of eco­nomic activ­ity. It exam­ines and com­pares the behav­ior of var­i­ous mea­sures of broad activ­ity: real GDP mea­sured on the prod­uct and income sides, economy-wide employ­ment, and real income. The Com­mit­tee also may con­sider indi­ca­tors that do not cover the entire econ­omy, such as real sales and the Fed­eral Reserve's index of indus­trial pro­duc­tion (IP).

10 minute video – email read­ers will need to come to site to view

Tags: Black Boxes, Cnbc, Conventional Wisdom, Economic Activity, Economy, Federal Reserve, GDP, Lakshman, Lakshman Achuthan, Measures, Memory, Nber, Nugget, Quarters, Real Gdp, Recession, Signals, Time Frame, Video Email, Warm Winter
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Michael Pettis Revisits 12 Predictions On China

Friday, May 4th, 2012

Via Michael Pet­tis of China Finan­cial Mar­kets,

In 2006 I started mak­ing a num­ber of pre­dic­tions based on what I thought was the nec­es­sary and log­i­cal devel­op­ment of China’s growth model. Some of these pre­dic­tions seemed fairly out­landish, espe­cially to China ana­lysts – Chi­nese and for­eign – who had very lit­tle knowl­edge of eco­nomic his­tory or other devel­op­ing coun­tries, but many of them so far have turned out quite well.

As more and more ana­lysts are begin­ning to under­stand the con­straints of the Chi­nese growth model I think it might be use­ful to list some of these pre­dic­tions to get a sense of what might be still to come.? Per­haps my bet with The Econ­o­mist has caused me to throw cau­tion to the winds, since a smart econ­o­mist never makes his pre­dic­tions explicit, but here they are:

1. China will be the last major econ­omy to emerge from the global cri­sis. My basic argu­ment was that the global cri­sis was caused by the nec­es­sary rever­sal of the great trade and cap­i­tal imbal­ances of the past decade, and a coun­try can only be said to have emerged from the cri­sis when those under­ly­ing imbal­ances had been resolved.

Since China’s con­tri­bu­tion to the global imbal­ances has been its exces­sively high sav­ings rate, China could not emerge from the cri­sis until the high sav­ings rate had been reduced to a more rea­son­able level. Since 2007-08, of course, the oppo­site has hap­pened, as Bei­jing has exac­er­bated its domes­tic imbal­ances in order to keep growth rates high. But with­out infi­nite debt capac­ity this can­not go on. I think it is pretty clear that over the next few years China will be forced to address and reverse the high sav­ings rate, and it will only be after this hap­pens that China can be said to have emerged from the cri­sis. This may take a decade or more.

2. Chi­nese con­sump­tion will con­tinue to stag­nate or decline as a share of GDP until the growth model is aban­doned. By “aban­don­ing” the model I mean that trans­fers from the house­hold sec­tor to sub­si­dize rapid growth must be elim­i­nated and reversed.

This is really a con­tin­u­a­tion of the first pre­dic­tion. It is too early to say, but 2012 may be the first year in which con­sump­tion growth will out­pace GDP growth, but only if GDP growth turns out to be much lower than expected – say below 7%. As long as GDP growth rates exceed 7%, there can be no real rebal­anc­ing of consumption.

3. Although there were many fac­tors that explained both rapidly ris­ing GDP and the con­tract­ing con­sump­tion share, finan­cial repres­sion would even­tu­ally be rec­og­nized to be the key fac­tor. It took many years to make this point, but it has become pretty clear to every­one that finan­cial repres­sion is at the heart of China’s prob­lem. This may explain Pre­mier Wen’s recent and rather shock­ing attack on the banks, although in my opin­ion it will still be at least another year or two, if ever, before we see any real lib­er­al­iza­tion of inter­est rates.

Remem­ber that the more debt there is, the harder it is to raise inter­est rates, and the longer we take to raise inter­est rates, the more debt we run up. In the end I sus­pect that finan­cial repres­sion will be elim­i­nated not by an increase in nom­i­nal rates but rather by a decline in GDP growth (remem­ber that the size of the finan­cial repres­sion tax is a func­tion of the dif­fer­ence between nom­i­nal GDP growth and the nom­i­nal lend­ing rate).

4. Invest­ment is being mis­al­lo­cated on a mas­sive scale and this was not due to any spe­cial Chi­nese char­ac­ter­is­tic but was rather a fun­da­men­tal require­ment of the way the sys­tem oper­ated. Although there are still some econ­o­mists who dis­agree that invest­ment is being mas­sively wasted, I think this is so well under­stood by now that there is no need to bela­bor the point. Peo­ple respond to incen­tives, and for the last decade or longer there has been a strong incen­tive to keep invest­ment lev­els high regard­less of their returns. It would be sur­pris­ing if this did not result in a lot of wasted spending.

5. Debt is ris­ing at an unsus­tain­able pace and debt lev­els will become unsus­tain­able well before the end of the decade. This fol­lows from the above point – if invest­ment is debt funded and if it is being wasted, then by def­i­n­i­tion debt must be increas­ing at an unsus­tain­able pace – i.e. faster than debt-servicing abilities.

In the past three years this warn­ing about ris­ing debt has become much more widely accepted, espe­cially since Vic­tor Shih started count­ing local gov­ern­ment debt in late 2009. There is still some dis­agree­ment on the sus­tain­abil­ity of debt, with some ana­lysts, like Arthur Kroe­ber of Drag­o­nom­ics and the guys at The Econ­o­mist, say­ing that China doesn’t have a seri­ous debt or over-investment prob­lem. I sus­pect nonethe­less that in another year or two no one will doubt that the Chi­nese growth model tends towards unsus­tain­able debt and that we are rapidly reach­ing the limit.

6. When spe­cific debt prob­lems are inden­ti­fied, res­olute attempts by Bei­jing to resolve them would be warmly wel­comed by ana­lysts but wholly irrel­e­vant – because the prob­lem of debt was sys­temic, not spe­cific. This fol­lows from the above. The issue is not that spe­cific bor­row­ers may run into debt prob­lems. It is that the run-up in debt is sys­temic and can­not be pre­vented as long as China main­tains the exist­ing growth model.? If there is rapid GDP growth, say any­thing above 6% or 7%, debt within the sys­tem must be ris­ing at an unsus­tain­able pace.

7. Pri­va­ti­za­tion, a topic all but for­bid­den in polite com­pany, would become a very hot topic of con­ver­sa­tion by 2013–14. I have dis­cussed why in sev­eral of the more recent blog entries.

8. As some pol­i­cy­mak­ers grad­u­ally became aware of the prob­lem with the growth model and the risk of cri­sis, a fun­da­men­tal polit­i­cal split would emerge between those that demanded rapid reform and those that wanted to main­tain con­trol of resources. The prob­lem is that con­tin­u­ing the growth model will lead to a debt cri­sis, but aban­don­ing the model will lead to much slower growth, and espe­cially to much slower growth in the accu­mu­la­tion of state sec­tor assets. This is polit­i­cally very dif­fi­cult for many to accept and will lead to more polit­i­cal con­flicts over the next few years.

9. Chi­nese gov­ern­ment debt will con­tinue to bal­loon through the rest of this decade. Pri­va­ti­za­tion is the best way to effect the trans­fer of wealth from the state sec­tor to the pri­vate sec­tor, and would be espe­cially effi­cient if pri­va­ti­za­tion pro­ceeds were used to extin­guish debt, but for the rea­sons dis­cussed above it will be extremely dif­fi­cult to do it. This means that debt build-up and the state absorp­tion of pri­vate sec­tor debt will con­tinue for many years.

10. If the tran­si­tion is not mis­man­aged, aver­age Chi­nese GDP growth rates will drop to 3% for the 2010–20 decade. As my bet with The Econ­o­mist sug­gests, this is one pre­dic­tion that is still an out­lier. The Economist(and many oth­ers) still believe that Chi­nese growth will make it the largest econ­omy in the world before the end of the decade, but much slower growth is what rebal­anc­ing requires and it is hard to make the num­bers work at growth lev­els much above 3%. By the way if I am wrong and Chi­nese growth this decade is mate­ri­ally higher than 3%, my pre­dic­tion is that the “lost decade” of much lower growth stretch out over two decades.

11. If China rebal­ances cor­rectly, then much slower GDP growth rates will be accom­pa­nied by only slightly slower growth rates in house­hold income. In that case there need be no social insta­bil­ity. The polit­i­cal risk comes from insta­bil­ity at the top, not at the bot­tom. Fac­tional dis­putes, in other words, haven’t ended with the Chongqing affair. They will persist.

12. Non-food com­mod­ity prices are set to col­lapse over the next three to four years. “Col­lapse” is not too strong a word. China’s share of global demand for such com­modi­ties as iron, cement, cop­per, etc. is com­pletely dis­pro­por­tion­ate to its size and almost wholly a func­tion of its very high growth in invest­ment. As invest­ment growth drops sharply, as it must, global demand for non-food com­modi­ties will plummet.

This is an abbre­vi­ated ver­sion of the newslet­ter that went out two weeks ago. Aca­d­e­mics, jour­nal­ists, and gov­ern­ment and NGO offi­cials who want to sub­scribe to the newslet­ter should write to me at chinfinpettis@yahoo.com, stat­ing your affil­i­a­tion, please. Investors who want to buy a sub­scrip­tion should write to me, also at that address.

Copy­right © China Finan­cial Markets

Tags: Beijing, Bet, Caution, Chinese Growth, Constraints, Consumption, Debt Capacity, Decade, Developing Countries, Economic History, Economist, Economy, Financial Markets, GDP, Global Crisis, Growth Model, Household, Little Knowledge, Logical Development, Michael Pettis
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When did Austerity Become a 4 Letter Word? (Tchir)

Friday, April 27th, 2012

by Peter Tchir, TF Mar­ket Advisors

Sud­denly, every­where you look, “aus­ter­ity” has become a 4 let­ter word. Clearly it wasn’t exces­sive spend­ing that caused too much debt. Surely we didn’t hit a finan­cial cri­sis in spite of exces­sive spend­ing, nope, it is all the fault of austerity.

In the rush to avoid sup­port­ing any­thing that could be viewed as “aus­ter­ity” we have lost sight of what aus­ter­ity is, and how it can impact the economy.

Is push­ing the retire­ment age from 55 to 57 “aus­ter­ity”? I don’t see how mak­ing deci­sions like this is bad. It has very lit­tle impact on the econ­omy today, yet is a cru­cial step to cre­at­ing long term fis­cal balance.

Is cut­ting retire­ment ben­e­fits, start­ing in 5 years “aus­ter­ity”? Once again, the near term impact is min­i­mal, and while painful, is a nec­es­sary step towards long term sustainability.

Is fir­ing gov­ern­ment employ­ees “aus­ter­ity”? While nec­es­sary in the long term, the imme­di­ate impact on the econ­omy may not be worth it. Maybe bloated gov­ern­ments need to be dealt with, but over time.

Are pro­grams designed to enforce the tax code “aus­ter­ity”? Col­lect­ing these taxes will take money out of cur­rent spend­ing, but the peo­ple hold­ing this money by not fol­low­ing the tax laws don’t deserve to have it. It is nec­es­sary to cre­ate a cul­ture of fair­ness. This is money that was sup­posed to be the government’s any­ways. You might not like what the gov­ern­ment does with the money (do any of us?), but pro­grams that enforce exist­ing tax codes should not be cancelled.

Are unem­ploy­ment ben­e­fits “aus­ter­ity”? This gets a lot trick­ier. The short term impact would be to take money out of the econ­omy, as peo­ple are likely spend­ing this money as they get it. Yet, if the ben­e­fits are too good, are peo­ple choos­ing unem­ploy­ment with ben­e­fits over work?

Are cuts to health care “aus­ter­ity”? A very touchy sub­ject, yet the real­ity is this is an area that needs to be addressed. There has to be a bal­ance between ensur­ing peo­ple can have access to great health­care and that the sys­tem is sus­tain­able and the cost/benefits don’t get out of con­trol. In Greece, doctor’s were force to file things elec­tron­i­cally or risk not get­ting paid. Funny how quickly doctor’s were able to com­put­er­ize their offices, bring­ing costs lower, in spite of what looked like an “aus­ter­ity” program.

So, let’s not let politi­cians get away with claim­ing every­thing that is “aus­ter­ity” is bad. It isn’t. Some forms of “aus­ter­ity” have min­i­mal near term impact yet are cru­cial for the long run.

Then let’s look at the long run. Dr. Krug­man had a piece today that high­lighted the cor­re­la­tion between “aus­ter­ity” and GDP growth. It showed that more “aus­ter­ity” (how­ever it was defined) meant slower growth. Doesn’t take a PhD to fig­ure out that GDP is con­sump­tion based, and a cut in spend­ing would reduce GDP.

What this chart, and so many other fails to do, is ana­lyze what the impact is two years down the road. Coun­tries were all busy spend­ing through­out the 2000′s and here we are with a debt cri­sis. Too much debt is imped­ing the abil­ity to grow. If a farmer planted a seed and the next day gave up in dis­gust because there were no crops to har­vest, we wouldn’t have any food. Pro­grams and poli­cies take time. It is obvi­ous that spend­ing pro­vides a big­ger short term boost than cut­ting spend­ing. It is far less obvi­ous, that a year from now, the adjust­ments made to deal with the spend­ing cuts won’t cre­ate a bet­ter future.

We too often con­fused “con­jec­ture” with “fact”. Lately I have seen a lot writ­ten about how much bet­ter the job sit­u­a­tion is today than it would have been with­out all the poli­cies of Obama, Gei­th­ner, and Bernanke. It is treated as fact, yet it is merely con­jec­ture. I will admit in the quar­ter the poli­cies were applied, it made the sit­u­a­tion in that quar­ter bet­ter than it was. We can­not know whether we are bet­ter off now than had we fol­lowed some alter­na­tive path. Maybe wait­ing to apply the poli­cies would have cre­ated a big­ger effect – the “wait until you see the white’s of their eyes” the­ory. Maybe allow­ing more banks to fail would have cre­ated a wave of new lend­ing insti­tu­tions that aren’t in com­pe­ti­tion with sub­si­dized zom­bie banks. We don’t know. Eco­nom­ics is guess work. There are com­pet­ing rea­sons in eco­nom­ics because with some data, some math, some sim­pli­fi­ca­tions, and some logic, both sides of a coin can sound good. The the­o­ries can’t be put to a proper test. There are no 3 iden­ti­cal economies where you can leave one alone (the con­trol) and apply the com­pet­ing the­o­ries to the other 2 economies and see which the­ory is correct.

We need to take a longer term view to deter­mine the best solu­tion and we need to crit­i­cally ana­lyze what has been done and not just assume alter­na­tive paths would have led to a worse cur­rent sit­u­a­tion.

E-mail: tchir@tfmarketadvisors.com

Twit­ter: @TFMkts

Tags: Austerity, Economy, Fairness, Financial Crisis, Fiscal Balance, Government Employees, Governments, Health Care, Letter Word, Nbsp, Necessary Step, Retirement Age, Retirement Benefits, Rush, Spite, Term Impact, Term Sustainability, Tf, Touchy Subject, Unemployment Benefits
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Technical Take: This Should Make You Wonder

Tuesday, April 24th, 2012

by Guy Lerner, The Tech­ni­cal Take

I think his per­son has it right when he writes: “You Won’t BELIEVE How Bear­ish Investors Are On Trea­suries”.

Barron’s con­ducted a poll of port­fo­lio man­agers ask­ing them about their out­look on the mar­kets and econ­omy.  As we can see from the table below, only 2% are bull­ish on Trea­suries and 81% are bearish.

Table 1. Barron’s Poll of Port­fo­lio Managers

The author sums this tid­bit of infor­ma­tion very nicely when he asks: “can you imag­ine any other asset that was in the midst of a 30-year bull mar­ket, that had just 2% of the invest­ing pop­u­la­tion say­ing they were bull­ish? Frankly, it’s unfath­omable.  Peo­ple have long said Trea­suries were in a bub­ble, but it’s hard to believe any bub­ble has burst with just 2% being long.”

Copy­right © The Tech­ni­cal Take

Tags: Author Information, Barron, Copyright, Economy, Guy Lerner, Imagine, Investors, Midst, Population, Portfolio Managers, S Poll, Tidbit, Treasuries
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Garbage In, Garbage Adjustments, Garbage Out (Tchir)

Friday, April 20th, 2012

by Peter Tchir, TF Mar­ket Advisors

It is hard to ignore the fact that this year is shap­ing up a lot like 2011 and 2010. I’m not a big fan of sea­sonal pat­terns, so what else could it be. Could it just be that all of our adjust­ments are a total mess?

I under­stand why we attempt to “sea­son­ally” and oth­er­wise adjust num­bers. We crave smooth data. It makes charts look bet­ter. It puts a num­ber into con­text, but what if the adjust­ments are just hor­ri­bly wrong? The mag­ni­tude of the adjust­ments is large, so even a small mis­take could have a huge impact.

Did the plunge in the econ­omy in the months fol­low­ing Lehman cause adjust­ments that con­sis­tently make the Dec-Feb period look bet­ter than it should. Did the rebound, which really started in March 2009 affect those adjust­ments so that they reduce the jobs by too much? We have gone through some vio­lent shifts in the econ­omy since at least 2008. Indus­tries like home­build­ing, which had a huge sea­sonal com­po­nent, are far less impor­tant in today’s economies. So much has gone on, and so much has changed, are the adjust­ments over­whelm­ing the data and giv­ing us bad reads? I have only picked on pay­roll, but I am becom­ing con­vinced that much of what we see as growth, fol­lowed by decline, is just bad data in the first place, fur­ther messed up by bad adjust­ments. We pre­tend like 50,000 dif­fer­ence in a month is mean­ing­ful (when even BLS says that is in their con­fi­dence error), when the data shows that prob­a­bly any­thing within 250,000 of the real job growth would be a lucky guess.

As you get ready for next week’s del­uge of data, it is worth keep­ing in mind. Expect bad data.

One last rant, I find it inter­est­ing that every Amer­i­can has to basi­cally fill in the same forms, in the same way for their taxes, and yet the half a dozen money cen­ter banks, thriv­ing on Fed sup­port, each report basi­cally every­thing in their own way, mak­ing it very hard to com­pare bank to bank or quar­ter to quar­ter. Couldn’t the SEC, Fed, OOC, or FDIC insist on a con­sis­tent sum­mary for­mat for report­ing earnings?

Mar­kets are a lit­tle bet­ter on the back of Ger­man con­fi­dence. Those ral­lies rarely last.

I would be shocked though if we don’t get some com­mit­ment to com­mit out of the G20 and IMF this week­end, so although I think we will fade a lit­tle from here, we should see some strength into the Euro­pean close as every­one gets ready for more “fire­wall” money. This meet­ing high­lights the ascent of China and the decline of the U.S. as it is Chi­nese money “com­ing to the rescue”.

Credit is very quiet this morn­ing. IG, MAIN, XOVER, and HY are vir­tu­ally unchanged. High Yield bonds remain well bid, HYG and JNK remain strong, but HY18 con­tin­ues to strug­gle. TIPS have con­tin­ued to do very well in spite of how “tran­si­tory” infla­tion is.

Tags: Confidence, Decline, Deluge, Economy, Garbage, Half A Dozen, Homebuilding, Job, Lehman, Lucky Guess, Magnitude, Mistake, Money Center Banks, Nbsp, Payroll, Plunge, Rant, Rebound, Seasonal Patterns, Tf
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Jeff Gundlach: "To QE3 or Not to QE3," That is the Question

Wednesday, April 18th, 2012

Ear­lier today, thou­sands lis­tened to Jeff Gund­lach live (if with the occa­sional flash crash) lay out his lat­est views on the econ­omy and mar­kets. For those who missed it, as well as for those who may want a refresher on why Gund­lach is slowly build­ing up a nat­gas posi­tion, or why he is buy­ing gold on dips, here is the full slid­edeck used by the Dou­ble­Line manager.

Dou­ble­Line QE3

Tags: Buying Gold, Crash, Dips, Economy, Occasional Flash, Qe3
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How Rising Rates Will Affect Stocks (Koesterich)

Wednesday, April 18th, 2012

by Russ Koes­terich, iShares

While recent mar­ket weak­ness, and the accom­pa­ny­ing bond mar­ket rally, has tem­pered fears of an immi­nent bond mar­ket melt­down, many equity investors are still con­cerned about the poten­tial impact of ris­ing rates on US and global stocks.

This year, I expect long-term rates to rise mod­estly as they appear too low. Assum­ing the US econ­omy con­tin­ues to sta­bi­lize over the course of the year, the yield on the 10-year Trea­sury will likely rise to around the 3% level, roughly where it was last summer.

How­ever, in my opin­ion, this prob­a­ble grind higher is not a major threat to US and global stocks this year for two reasons:

Low Start­ing Point: It’s impor­tant to put the cur­rent yield envi­ron­ment in con­text.  Exclud­ing the period of unusu­ally high nom­i­nal yields in the 1970s and 1980s, the long-term aver­age nom­i­nal yield for the 10-year note is still 5.25%, more than twice today’s level. As such, any rise in rates will be com­ing from his­tor­i­cally low lev­els. And a rise in rates from the absurdly low to the merely low has not, at least his­tor­i­cally, hurt stocks. Equity val­u­a­tions do con­tract when rates are ris­ing, but this rela­tion­ship typ­i­cally breaks down when rates are this low.

The Dri­ver of Ris­ing Rates: In the past, the rea­son behind why rates rise has been as impor­tant for stocks as how much rates rise. Look­ing for­ward, the com­ing rise in rates will likely be dri­ven by higher real rates, not by higher infla­tion expectations.

When inter­est rates are ris­ing due to height­ened infla­tion expec­ta­tions, stock mul­ti­ples tend to con­tract. How­ever, when ris­ing inter­est rates are due to a rise in real, or after-inflation, rates in the con­text of a strength­en­ing econ­omy, mul­ti­ples have not been hurt. In fact, over the long term, there hasn’t been a sta­tis­ti­cally sig­nif­i­cant rela­tion­ship between real yields and mul­ti­ples. If any­thing, in recent years — which have gen­er­ally been char­ac­ter­ized by too lit­tle growth, rather than too much — stock mul­ti­ples have risen with real rates.

To be sure, none of above sug­gests that equi­ties have become imper­vi­ous to higher rates. While higher real yields prob­a­bly won’t hurt mul­ti­ples, a high enough rise could dampen earn­ings. But in my opin­ion, any rate rise this year should be mod­est and likely won’t neg­a­tively impact val­u­a­tions. Look­ing for­ward, the real threat to stocks in 2012 is weak eco­nomic growth, not higher rates.

Source: Bloomberg

Copy­right © Black­Rock, Inc. , iShares

Tags: 10 Year Treasury, 1970s, 1980s, Bond Market, Economy, Equity Investors, Fears, Global Stocks, Inflation Expectations, Inflation Rates, Ishares, Market Meltdown, Market Rally, Market Weakness, Nbsp, Nominal Yield, Relationship, Rising Interest Rates, Russ, Valuations
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3 Trends to Watch for Global Investors

Thursday, April 5th, 2012

Bloomberg announced over the week­end that China’s man­u­fac­tur­ing grew at the fastest pace in a year. We fol­low the government’s Pur­chas­ing Man­agers’ Index (PMI) closely, as we believe it is a bet­ter indi­ca­tor of China’s domes­tic demand than the HSBC PMI. Whereas HSBC PMI sur­veys 400 small and mid-sized com­pa­nies, which are typ­i­cally export-oriented, the government’s PMI sur­veys 820 mostly large, state-owned enter­prises across 20 indus­tries.
Though man­u­fac­tur­ing activ­ity exceeded ana­lysts’ esti­mates, some China bears focused on the fact that the March 2012 num­ber is lower than the aver­age dur­ing the third month from 2005 through 2011. What’s impor­tant for investors to con­sider is that the trend is your friend: It is the fourth month in a row where the PMI landed above the three-month PMI, and shows the econ­omy is on the right path.

Below are three addi­tional con­struc­tive trends we see in China.

1. China Returns Poised to Revert to the Mean

Over the past few years, Chi­nese stocks have lagged com­pared to their emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­kets per­fectly illus­trates how last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 per­cent.
Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing in the top half dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

2. Liq­uid­ity Cycle Could Ben­e­fit Stocks

Yet China lead­ers won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

3. Incen­tive to Main­tain Growth

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

These trends will be cov­ered in my upcom­ing web­cast on China with CLSA’s Andy Roth­man. Join us as we dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing market.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress last week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. A China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. What investors should remem­ber is that the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth.

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor. The Pur­chas­ing Manager’s Index is an indi­ca­tor of the eco­nomic health of the man­u­fac­tur­ing sec­tor. The PMI index is based on five major indi­ca­tors: new orders, inven­tory lev­els, pro­duc­tion, sup­plier deliv­er­ies and the employ­ment envi­ron­ment. The Hang Seng China Enter­prises Index is a capitalization-weighted index com­prised of state-owned Chi­nese com­pa­nies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Main­land Com­pos­ite Index).

Tags: 10 Years, China, Chinese Stocks, Commodities, Commodity, Dragon, Economy, Emerging Market, Emerging Markets, Estimates, Global Investors, Gold, History China, India, liquidity, Loser, Mining, Pace, Periodic Table, Pmi, Price Fluctuations, Principle, Purchasing Managers Index, State Owned Enterprises, Surveys, Year Of The Dragon
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Cliff Asness: Uncertainty is Not the Problem Holding Back the Economy

Monday, April 2nd, 2012

Nick Schulz, editor-in-chief of American.com, recently inter­viewed Cliff Asness, the man­ag­ing and found­ing prin­ci­pal of the hedge fund AQR Cap­i­tal Man­age­ment. Last year, Asness wrote a provoca­tive piece in the Wall Street Jour­nal about what’s hold­ing the econ­omy back, argu­ing that “Uncer­tainty is Not the Prob­lem.” He said: “Many com­men­ta­tors blame our con­tin­u­ing eco­nomic woes on ‘uncer­tainty.’ They allege that recent and antic­i­pated dra­matic pol­icy changes make busi­ness plan­ning dif­fi­cult, and that this is retard­ing growth and employ­ment. This view is not wrong—but our main prob­lem is not the uncer­tainty sur­round­ing new poli­cies. It is the poli­cies.” Schulz asked Asness to expand on this idea as shown below.

Source: The Amer­i­can, March 27, 2012.

Tags: Capital Management, Cliff Asness, Commentators, Economic Woes, Economy, Employment, Hedge Fund, Nick Schulz, Principal, Provocative Piece, Uncertainty, Wall Street, Wall Street Journal
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Fundamentals March Forward Despite Global Risks in 2012

Wednesday, March 28th, 2012

by Dou­glas Coté, Chief Mar­ket Strate­gist, ING Invest­ment Management

The Fed­eral Reserve said in Jan­u­ary that there would be no rate increase until 2014. Yes­ter­day, Chair­man Bernanke affirmed this pledge through 2014 and pre­sum­ably the market’s strong rally yes­ter­day had to do with this reit­er­a­tion of pol­icy. I don’t buy it. This is code to scare investors from the mar­ket and the code is that this mar­ket is going up due to arti­fi­cial sup­port from the Fed.

How about a health­ier view?

The Fed was wrong on the strength of the econ­omy and upgraded it to "mod­er­ate" from "mod­est" on March 13th. Eco­nomic data has been sur­pris­ing on the upside across cor­po­rate prof­its, man­u­fac­tur­ing and employ­ment. In today’s WSJ, read the vir­tu­ous cat­a­lysts for growth being dri­ven by an impor­tant tec­tonic shift in Energy includ­ing "Steel Find Shale Sweet Spot" and "Planned Pipelines to Rival Key­stone". This sim­ply means more eco­nomic growth and a lot more jobs. Please see energy’s impact in our 2012 forecast

Fun­da­men­tals March For­ward Despite Global Risks in 2012. [PDF]

Tags: Bernanke, Catalysts, Chief Market Strategist, Corporate Profits, Economic Data, Economic Growth, Economy, Federal Reserve, Global Risks, Ing Investment Management, Investors, Keystone, Pipelines, Pledge, Rally, Rate Increase, Reiteration, Shale, Sweet Spot, Wsj
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Jim Rogers on Being Successful, Investing in the Future, and Preparing for Civil Unrest

Monday, March 26th, 2012

  
Future Money Trends just released a new inter­view with investor Jim Rogers. This inter­view focuses on how to sur­vive and thrive in the cur­rent econ­omy, what degrees, what busi­ness, and what would a young Rogers do today if he wasn’t already rich, and how he would re-build his empire in today’s environment.

Source: Future Money Trends (via YouTube), March 23, 2012.

Tags: Civil Unrest, Economy, Empire, Environment, Future Trends, Investing, Investor, Jim Rogers, Money, Youtube
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The Emerging Market Growth Story Continues (ING)

Tuesday, March 20th, 2012

by Dou­glas Coté, ING

We have dis­cussed the pos­si­bil­ity, and risk, of a hard land­ing in China (growth slow­ing to less than 7%), but what has been going on in some of the other BRIC’s like India and Brazil? Right now India is in the midst of bud­get nego­ti­a­tions which would reign in its gross fis­cal deficit to 5.9% of GDP (total debt is around 50% of GDP). India’s GDP growth is expected to sub­side to 6.9% after two solid years of greater than 8% growth. A global slow­down as well as high oil prices have con­tributed to the decrease. How­ever, Indian finan­cial offi­cials expect a return to 9% plus growth in the future. Mean­while Brazil has just over­taken the U.K. to become the sixth largest econ­omy in the world. Brazil grew 2.7% in 2011 com­pared to U.K.’s mea­ger .8%. And with sub­stan­tial oil and gas reserves fuel­ing their exports, Brazil has their eye on num­ber 5. You can find some key sta­tis­tics about India and Brazil as well as other emerg­ing mar­kets on page 33 of the Global Per­spec­tives book.

Click on images below for PDF

Copy­right © ING Invest­ment Management

Tags: Brazil, BRIC, Budget Negotiations, Economy, Emerging Market, Emerging Markets, Financial Officials, Fiscal Deficit, Gas Reserves, GDP, GDP Growth, Global Perspectives, Global Slowdown, India, Ing, Ing Investment Management, Key Statistics, Midst, Nbsp, Oil and Gas, Oil Prices, risk
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The "Great Bond Selloff" of 2012

Thursday, March 15th, 2012

There has been a lot of talk since Tues­day after­noon of the "great bond sell­off"…  this started post FOMC meet­ing and sup­pos­edly was due to the Fed's "upgrade" of the econ­omy in the state­ment.  The same upgrade that will do lit­tle to stop them from con­tin­u­ing a new round of eas­ing once Oper­a­tion Twist is over.  But it has a bunch of peo­ple in a huff.

Short term the move is rel­a­tively dra­matic for such a large and deep mar­ket.  I will use iShares Bar­clays 20+ Year Trea­sury Bond (TLT) ETF to demon­strate but there are any num­ber of matu­ri­ties I could use; this is just a widely used instru­ment so a good exam­ple.   Look­ing at a 4 month chart, a big change appears afoot.

How­ever, if we pull the chart back some to say 8 months, we sim­ply see the price has moved to the end of a longer term range.  Indeed, this ETF is not even at Octo­ber lows (remem­ber Octo­ber 2011 was one of the biggest up month's for equi­ties in many years), not to men­tion lev­els it was at last summer.

That said, it's a sharp move in the span of a few days and since U.S. Trea­suries yield so lit­tle the losses on the under­ly­ing can wipe out gains from inter­est very quickly.  On the flip side, Trea­suries were gen­er­ally an incred­i­bly lucra­tive asset class in 2011 return­ing far in excess of equi­ties.  So for now, it sim­ply looks like a give back, and not the "burst­ing of a bond bub­ble" as many are screaming.

Tags: asset class, Barclays, Economy, Few Days, Flip Side, Huff, Losses, Lot, Lows, Maturities, People, Selloff, Sharp, Span, Term Range, Tlt, Treasuries, Tuesday Afternoon, Year Treasury Bond
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Global PMI Scorecard: Services Sector Drives Acceleration in Global Growth

Monday, March 12th, 2012

Growth in global eco­nomic activ­ity con­tin­ued to accel­er­ate for the fourth con­sec­u­tive month in Feb­ru­ary. High­lights of the Feb­ru­ary PMIs are as follows:

• The JP Mor­gan Global Com­pos­ite PMI increased to 55.5 from 54.5 In January.
• The JP Mor­gan Global Ser­vices PMI jumped to a rather robust 56.5 from 55.4 in January.
• Growth in the global man­u­fac­tur­ing sec­tor slowed markedly, mostly as a result of a sharp slow­down in the U.S.
• After sta­bi­liz­ing in Jan­u­ary the Euro­zone econ­omy is slid­ing again as the sit­u­a­tion in Italy, Spain and Greece has worsened.
• Growth in the BRICS coun­tries is accel­er­at­ing, espe­cially in larger China.
• Pock­ets of robust growth are emerging:
  • U.S. non-manufacturing sector
  • India’s man­u­fac­tur­ing and ser­vices sectors
  • Brazil’s ser­vices sector
  • South Africa’s man­u­fac­tur­ing sector
  • Saudi Ara­bia’ over­all economy.

Tags: Acceleration, Brazil, Cape Town, Economy, Global Economic Activity, Global Growth, Global Services, Greece, Jp Morgan, Manufacturing Sector, Pmis, Pockets, Postcard, Robust Growth, Saudi Arabia, Scorecard Services, Services Pmi, Services Sectors, Slowdown, South Africa
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10 Things You Should Know About The Federal Reserve

Friday, March 2nd, 2012

By Michael Sny­der

What would hap­pen if the Fed­eral Reserve was shut down per­ma­nently? That is a ques­tion that CNBC asked recently, but unfor­tu­nately most Amer­i­cans don't really think about the Fed much. Most Amer­i­cans are con­tent with believ­ing that the Fed­eral Reserve is just another stuffy gov­ern­ment agency that sets our inter­est rates and that is watch­ing out for the best inter­ests of the Amer­i­can people.

But that is not the case at all. The truth is that the Fed­eral Reserve is a pri­vate bank­ing car­tel that has been designed to sys­tem­at­i­cally destroy the value of our cur­rency, drain the wealth of the Amer­i­can pub­lic and enslave the fed­eral gov­ern­ment to per­pet­u­ally expand­ing debt. Dur­ing this elec­tion year, the econ­omy is the num­ber one issue that vot­ers are con­cerned about. But instead of end­lessly blam­ing both polit­i­cal par­ties, the truth is that most of the blame should be placed at the feet of the Fed­eral Reserve. The Fed­eral Reserve has more power over the per­for­mance of the U.S. econ­omy than any­one else does.

The Fed­eral Reserve con­trols the money sup­ply, the Fed­eral Reserve sets the inter­est rates and the Fed­eral Reserve hands out bailouts to the big banks that absolutely dwarf any­thing that Con­gress ever did. If the Amer­i­can peo­ple are ever going to learn what is really going on with our econ­omy, then it is absolutely imper­a­tive that they get edu­cated about the Fed­eral Reserve. 

The fol­low­ing are 10 things that every Amer­i­can should know about the Fed­eral Reserve....
 
#1 The Fed­eral Reserve Sys­tem Is A Pri­vately Owned Bank­ing Car­tel


The Fed­eral Reserve is not a gov­ern­ment agency.
The truth is that it is a pri­vately owned cen­tral bank. It is owned by the banks that are mem­bers of the Fed­eral Reserve system.

We do not know how much of the sys­tem each bank owns, because that has never been dis­closed to the Amer­i­can people.

The Fed­eral Reserve openly admits that it is pri­vately owned. When it was defend­ing itself against a Bloomberg request for infor­ma­tion under the Free­dom of Infor­ma­tion Act, the Fed­eral Reserve stated unequiv­o­cally in court that it was "not an agency" of the fed­eral gov­ern­ment and there­fore not sub­ject to the Free­dom of Infor­ma­tion Act.

In fact, if you want to find out that the Fed­eral Reserve sys­tem is owned by the mem­ber banks, all you have to do is go to the Fed­eral Reserve web­site....

The twelve regional Fed­eral Reserve Banks, which were estab­lished by Con­gress as the oper­at­ing arms of the nation's cen­tral bank­ing sys­tem, are orga­nized much like pri­vate corporations–possibly lead­ing to some con­fu­sion about "own­er­ship." For exam­ple, the Reserve Banks issue shares of stock to mem­ber banks. How­ever, own­ing Reserve Bank stock is quite dif­fer­ent from own­ing stock in a pri­vate com­pany. The Reserve Banks are not oper­ated for profit, and own­er­ship of a cer­tain amount of stock is, by law, a con­di­tion of mem­ber­ship in the Sys­tem. The stock may not be sold, traded, or pledged as secu­rity for a loan; div­i­dends are, by law, 6 per­cent per year.

For­eign gov­ern­ments and for­eign banks do own sig­nif­i­cant own­er­ship inter­ests in the mem­ber banks that own the Fed­eral Reserve sys­tem. So it would be accu­rate to say that the Fed­eral Reserve is par­tially foreign-owned.
But until the exact own­er­ship shares of the Fed­eral Reserve are revealed, we will never know to what extent the Fed is foreign-owned.
 
#2 The Fed­eral Reserve Sys­tem Is A Per­pet­ual Debt Machine


As long as the Fed­eral Reserve Sys­tem exists, U.S. gov­ern­ment debt will con­tinue to go up and up and up.
This runs con­trary to the con­ven­tional wis­dom that Democ­rats and Repub­li­cans would have us believe, but unfor­tu­nately it is true.
The way our sys­tem works, when­ever more money is cre­ated more debt is cre­ated as well.

For exam­ple, when­ever the U.S. gov­ern­ment wants to spend more money than it takes in (which hap­pens con­stantly), it has to go ask the Fed­eral Reserve for it. The fed­eral gov­ern­ment gives U.S. Trea­sury bonds to the Fed­eral Reserve, and the Fed­eral Reserve gives the U.S. gov­ern­ment "Fed­eral Reserve Notes" in return. Usu­ally this is just done electronically.

So where does the Fed­eral Reserve get the Fed­eral Reserve Notes?
It just cre­ates them out of thin air.

Wouldn't you like to be able to cre­ate money out of thin air?

Instead of issu­ing money directly, the U.S. gov­ern­ment lets the Fed­eral Reserve cre­ate it out of thin air and then the U.S. gov­ern­ment bor­rows it.

Talk about stupid.

When this new debt is cre­ated, the amount of inter­est that the U.S. gov­ern­ment will even­tu­ally pay on that debt is not also cre­ated.
So where will that money come from?

Well, even­tu­ally the U.S. gov­ern­ment will have to go back to the Fed­eral Reserve to get even more money to finance the ever expand­ing debt that it has got­ten itself trapped into.

It is a debt spi­ral that is designed to go on perpetually.

You see, the real­ity is that the money sup­ply is designed to con­stantly expand under the Fed­eral Reserve sys­tem. That is why we have all become accus­tomed to think­ing of infla­tion as "normal".

So what does the Fed­eral Reserve do with the U.S. Trea­sury bonds that it gets from the U.S. gov­ern­ment?
Well, it sells them off to oth­ers. There are lots of peo­ple out there that have made a ton of money by hold­ing U.S. gov­ern­ment debt.

In fis­cal 2011, the U.S. gov­ern­ment paid out 454 bil­lion dol­lars just in inter­est on the national debt.

That is 454 bil­lion dol­lars that was taken out of our pock­ets and put into the pock­ets of wealthy indi­vid­u­als and for­eign gov­ern­ments around the globe.

The truth is that our cur­rent debt-based mon­e­tary sys­tem was designed by greedy bankers that wanted to make enor­mous prof­its by using the Fed­eral Reserve as a tool to cre­ate money out of thin air and lend it to the U.S. gov­ern­ment at interest.

And that plan is work­ing quite well.

Most Amer­i­cans today don't under­stand how any of this works, but many promi­nent Amer­i­cans in the past did under­stand it.

For exam­ple, Thomas Edi­son was once quoted in the New York Times as say­ing the following....

That is to say, under the old way any time we wish to add to the national wealth we are com­pelled to add to the national debt.

Now, that is what Henry Ford wants to pre­vent. He thinks it is stu­pid, and so do I, that for the loan of $30,000,000 of their own money the peo­ple of the United States should be com­pelled to pay $66,000,000 — that is what it amounts to, with interest.

Peo­ple who will not turn a shov­el­ful of dirt nor con­tribute a pound of mate­r­ial will col­lect more money from the United States than will the peo­ple who sup­ply the mate­r­ial and do the work. That is the ter­ri­ble thing about inter­est. In all our great bond issues the inter­est is always greater than the prin­ci­pal. All of the great pub­lic works cost more than twice the actual cost, on that account.

Under the present sys­tem of doing busi­ness we sim­ply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dol­lar bond, it can issue a dol­lar bill. The ele­ment that makes the bond good makes the bill good.

We should have lis­tened to men like Edi­son and Ford.

But we didn't.

And so we pay the price.

On July 1, 1914 (a few months after the Fed was cre­ated) the U.S. national debt was 2.9 bil­lion dollars.

Today, it is more than more than 5000 times larger.

Yes, the per­pet­ual debt machine is work­ing quite well, and most Amer­i­cans do not even real­ize what is hap­pen­ing.
 
#3 The Fed­eral Reserve Has Destroyed More Than 96% Of The Value Of The U.S. Dol­lar

Did you know that the U.S. dol­lar has lost 96.2 per­cent of its value since 1900? Of course almost all of that decline has hap­pened since the Fed­eral Reserve was cre­ated in 1913.

Because the money sup­ply is designed to expand con­stantly, it is guar­an­teed that all of our dol­lars will con­stantly lose value.
Infla­tion is a "hid­den tax" that con­tin­u­ally robs us all of our wealth. The Fed­eral Reserve always says that it is "com­mit­ted" to con­trol­ling infla­tion, but that never seems to work out so well.

And cur­rent Fed­eral Reserve Chair­man Ben Bernanke says that it is actu­ally a good thing to have a lit­tle bit of infla­tion. He plans to try to keep the infla­tion rate at about 2 per­cent in the com­ing years.

So what is so bad about 2 per­cent? That doesn't sound so bad, does it?

Well, just con­sider the fol­low­ing excerpt from a recent Forbes arti­cle....

The Fed­eral Reserve Open Mar­ket Com­mit­tee (FOMC) has made it offi­cial: After its lat­est two day meet­ing, it announced its goal to devalue the dol­lar by 33% over the next 20 years. The debauch of the dol­lar will be even greater if the Fed exceeds its goal of a 2 per­cent per year increase in the price level.

 
#4 The Fed­eral Reserve Can Bail Out Who­ever It Wants To With No Account­abil­ity


The Amer­i­can peo­ple got so upset about the bailouts that Con­gress gave to the Wall Street banks and to the big automak­ers, but did you know that the biggest bailouts of all were given out by the Fed­eral Reserve?

Thanks to a very lim­ited audit of the Fed­eral Reserve that Con­gress approved a while back, we learned that the Fed made tril­lions of dol­lars in secret bailout loans to the big Wall Street banks dur­ing the last finan­cial cri­sis. They even secretly loaned out hun­dreds of bil­lions of dol­lars to for­eign banks.
 

Accord­ing to the results of the lim­ited Fed audit men­tioned above, a total of $16.1 tril­lion in secret loans were made by the Fed­eral Reserve between Decem­ber 1, 2007 and July 21, 2010.
 
The fol­low­ing is a list of loan recip­i­ents that was taken directly from page 131 of the audit report....
 
Cit­i­group — $2.513 tril­lion
Mor­gan Stan­ley — $2.041 tril­lion
Mer­rill Lynch — $1.949 tril­lion
Bank of Amer­ica — $1.344 tril­lion
Bar­clays PLC — $868 bil­lion
Bear Sterns — $853 bil­lion
Gold­man Sachs — $814 bil­lion
Royal Bank of Scot­land — $541 bil­lion
JP Mor­gan Chase — $391 bil­lion
Deutsche Bank — $354 bil­lion
UBS — $287 bil­lion
Credit Suisse — $262 bil­lion
Lehman Broth­ers — $183 bil­lion
Bank of Scot­land — $181 bil­lion
BNP Paribas — $175 bil­lion
Wells Fargo — $159 bil­lion
Dexia — $159 bil­lion
Wachovia — $142 bil­lion
Dres­d­ner Bank — $135 bil­lion
Soci­ete Gen­erale — $124 bil­lion
"All Other Bor­row­ers" — $2.639 tril­lion
 
So why haven't we heard more about this?
 
This is scan­dalous.
In addi­tion, it turns out that the Fed paid enor­mous sums of money to the big Wall Street banks to help "admin­is­ter" these nearly interest-free loans....

Not only did the Fed­eral Reserve give 16.1 tril­lion dol­lars in nearly interest-free loans to the "too big to fail" banks, the Fed also paid them over 600 mil­lion dol­lars to help run the emer­gency lend­ing pro­gram. Accord­ing to the GAO, the Fed­eral Reserve shelled out an astound­ing $659.4 mil­lion in "fees" to the very finan­cial insti­tu­tions which caused the finan­cial cri­sis in the first place.

 
Does read­ing that make you angry?
 
It should.
 
#5 The Fed­eral Reserve Is Pay­ing Banks Not To Lend Money


Did you know that the Fed­eral Reserve is actu­ally pay­ing banks not to make loans?
It is true.
 
Sec­tion 128 of the Emer­gency Eco­nomic Sta­bi­liza­tion Act of 2008 allows the Fed­eral Reserve to pay inter­est on "excess reserves" that U.S. banks park at the Fed.
 
So the banks can just send their cash to the Fed and watch the money come rolling in risk-free.
 
So are many banks tak­ing advan­tage of this?
 
You tell me. Just check out the chart below. The amount of "excess reserves" parked at the Fed has gone from nearly noth­ing to about 1.5 tril­lion dol­lars since 2008....

 
But shouldn't the banks be lend­ing the money to us so that we can start busi­nesses and buy homes?
 
You would think that is how it is sup­posed to work.
 
Unfor­tu­nately, the Fed­eral Reserve is not work­ing for us.
 
The Fed­eral Reserve is work­ing for the big banks.
 
Sadly, most Amer­i­cans have no idea what is going on.
 
Another exam­ple of this is the gov­ern­ment debt carry trade.
 
Here is how it works. The Fed­eral Reserve lends gigan­tic piles of nearly interest-free cash to the big Wall Street banks, and in turn those banks use the money to buy up huge amounts of gov­ern­ment debt. Since the return on gov­ern­ment debt is higher, the banks are able to make large prof­its very eas­ily and with very lit­tle risk.
 
This scam was also explained in a recent arti­cle in the Guardian....

Con­sider this: we pre­tend that banks are pri­vate busi­nesses that should be allowed to run their own affairs. But they are the biggest scroungers of pub­lic money of our time. Banks are lent vast sums of money by cen­tral banks at near-zero inter­est. They lend that money to us or back to the gov­ern­ment at higher rates and rake in the dif­fer­ence by the bil­lion. They don't even have to make clever invest­ments to make huge profits.

That is a pretty good lit­tle scam they have got going, wouldn't you say?
 
#6 The Fed­eral Reserve Cre­ates Arti­fi­cial Eco­nomic Bub­bles That Are Extremely Dam­ag­ing
 
By allow­ing a cen­tral­ized author­ity such as the Fed­eral Reserve to dic­tate inter­est rates, it cre­ates an envi­ron­ment where finan­cial bub­bles can be cre­ated very eas­ily.
Over the past sev­eral decades, we have seen bub­ble after bub­ble. Most of these have been the result of the Fed­eral Reserve keep­ing inter­est rates arti­fi­cially low. If the free mar­ket had been set­ting inter­est rates all this time, things would have never got­ten so far out of hand.
 
For exam­ple, the hous­ing crash would have never been so hor­rific if the Fed­eral Reserve had not cre­ated such ideal con­di­tions for a hous­ing bub­ble in the first place. But we allow the Fed to con­tinue to make the same mis­takes.
 
Right now, the Fed­eral Reserve con­tin­ues to set inter­est rates much, much lower than they should be. This is caus­ing a tremen­dous mis­al­lo­ca­tion of eco­nomic resources, and there will be mas­sive con­se­quences for that down the line.
#7 The Fed­eral Reserve Sys­tem Is Dom­i­nated By The Big Wall Street Banks
 Even since it was cre­ated, the Fed­eral Reserve sys­tem has been dom­i­nated by the big Wall Street banks.
The fol­low­ing is from a pre­vi­ous arti­cle that I did about the Fed....

The New York rep­re­sen­ta­tive is the only per­ma­nent mem­ber of the Fed­eral Open Mar­ket Com­mit­tee, while other regional banks rotate in 2 and 3 year inter­vals. The for­mer head of the New York Fed, Tim­o­thy Gei­th­ner, is now U.S. Trea­sury Sec­re­tary. The truth is that the Fed­eral Reserve Bank of New York has always been the most impor­tant of the regional Fed banks by far, and in turn the Fed­eral Reserve Bank of New York has always been dom­i­nated by Wall Street and the major New York banks.

 
#8 It Is Not An Acci­dent That We Saw The Per­sonal Income Tax And The Fed­eral Reserve Sys­tem Both Come Into Exis­tence In 1913
 On Feb­ru­ary 3rd, 1913 the 16th Amend­ment to the U.S. Con­sti­tu­tion was rat­i­fied. Later that year, the United States Rev­enue Act of 1913 imposed a per­sonal income tax on the Amer­i­can peo­ple and we have had one ever since.
 
With­out a per­sonal income tax, it is hard to have a cen­tral bank. It takes a lot of money to finance all of the gov­ern­ment debt that a cen­tral bank­ing sys­tem cre­ates.
 
It is no acci­dent that the 16th Amend­ment was rat­i­fied in 1913 and the Fed­eral Reserve sys­tem was also cre­ated in 1913.
They have a sym­bi­otic rela­tion­ship and they are designed to work together.
We could fill Con­gress with peo­ple that are com­mit­ted to end­ing this oppres­sive sys­tem, but so far we have cho­sen not to do that.
So our chil­dren and our grand­chil­dren will face a life­time of debt slav­ery because of us.
I am sure they will be thank­ful for that.
 
#9 The Cur­rent Fed­eral Reserve Chair­man, Ben Bernanke, Has A Night­mar­ish Track Record Of Incom­pe­tence
 
The main­stream media por­trays Fed­eral Reserve Chair­man Ben Bernanke as a bril­liant econ­o­mist, but is that really the case?
Let's go to the video­tape.
The fol­low­ing is an extended excerpt from an arti­cle that I pub­lished pre­vi­ously....
———-
In 2005, Bernanke said that we shouldn't worry because hous­ing prices had never declined on a nation­wide basis before and he said that he believed that the U.S. would con­tinue to expe­ri­ence close to "full employment"....

"We’ve never had a decline in house prices on a nation­wide basis. So, what I think what is more likely is that house prices will slow, maybe sta­bi­lize, might slow con­sump­tion spend­ing a bit. I don’t think it’s gonna drive the econ­omy too far from its full employ­ment path, though."

In 2005, Bernanke also said that he believed that deriv­a­tives were per­fectly safe and posed no dan­ger to finan­cial markets....

"With respect to their safety, deriv­a­tives, for the most part, are traded among very sophis­ti­cated finan­cial insti­tu­tions and indi­vid­u­als who have con­sid­er­able incen­tive to under­stand them and to use them properly."

In 2006, Bernanke said that hous­ing prices would prob­a­bly keep rising....

"Hous­ing mar­kets are cool­ing a bit. Our expec­ta­tion is that the decline in activ­ity or the slow­ing in activ­ity will be mod­er­ate, that house prices will prob­a­bly con­tinue to rise."

In 2007, Bernanke insisted that there was not a prob­lem with sub­prime mortgages....

"At this junc­ture, how­ever, the impact on the broader econ­omy and finan­cial mar­kets of the prob­lems in the sub­prime mar­ket seems likely to be con­tained. In par­tic­u­lar, mort­gages to prime bor­row­ers and fixed-rate mort­gages to all classes of bor­row­ers con­tinue to per­form well, with low rates of delinquency."

In 2008, Bernanke said that a reces­sion was not coming....

"The Fed­eral Reserve is not cur­rently fore­cast­ing a recession."

A few months before Fan­nie Mae and Fred­die Mac col­lapsed, Bernanke insisted that they were totally secure....

"The GSEs are ade­quately cap­i­tal­ized. They are in no dan­ger of failing."

For many more exam­ples that demon­strate the absolutely night­mar­ish track record of Fed­eral Reserve Chair­man Ben Bernanke, please see the fol­low­ing arti­cles....
*"Say What? 30 Ben Bernanke Quotes That Are So Stu­pid That You Won’t Know Whether To Laugh Or Cry"
*"Is Ben Bernanke A Liar, A Lunatic Or Is He Just Com­pletely And Totally Incom­pe­tent?"
But after being wrong over and over and over, Barack Obama still nom­i­nated Ben Bernanke for another term as Chair­man of the Fed.
———-
 
#10 The Fed­eral Reserve Has Become Way Too Pow­er­ful
 
The Fed­eral Reserve is the most unde­mo­c­ra­tic insti­tu­tion in America.

The Fed­eral Reserve has become so pow­er­ful that it is now known as "the fourth branch of gov­ern­ment", but there are less checks and bal­ances on the Fed than there are on the other three branches.

The Fed­eral Reserve runs the U.S. econ­omy but it is not account­able to the Amer­i­can peo­ple. We can't vote those that run the Fed out of office if we do not like what they do.

Yes, the pres­i­dent appoints those that run the Fed, but he also knows that if he does not tread lightly he won't get the money from the big Wall Street banks that he needs for his next election.

Thank­fully, there are a few mem­bers of Con­gress that are com­plain­ing about how much power the Fed has. For exam­ple, Ron

Paul once told MSNBC that he believes that the Fed­eral Reserve is now actu­ally more pow­er­ful than Con­gress.....

"The reg­u­la­tions should be on the Fed­eral Reserve. We should have trans­parency of the Fed­eral Reserve. They can cre­ate tril­lions of dol­lars to bail out their friends, and we don’t even have any trans­parency of this. They’re more pow­er­ful than the Congress."

As mem­bers of Con­gress such as Ron Paul have started to shed some light on the activ­i­ties of the Fed­eral Reserve, that has caused many in the main­stream media to come to the defense of the Fed.

For exam­ple, a recent CNBC arti­cle enti­tled "If The Fed­eral Reserve Is Abol­ished, What Then?" makes it sound like there is absolutely no other ratio­nal alter­na­tive to hav­ing the Fed­eral Reserve run our economy.

But this is not what our founders intended.

The founders did not intend for a pri­vate bank­ing car­tel to issue our money and set our inter­est rates for us.

Accord­ing to Arti­cle I, Sec­tion 8 of the U.S. Con­sti­tu­tion, the U.S. Con­gress has been given the respon­si­bil­ity to "coin Money, reg­u­late the Value thereof, and of for­eign Coin, and fix the Stan­dard of Weights and Measures".

So why is the Fed­eral Reserve doing it?

But the CNBC arti­cle men­tioned above makes it sound like the sky would fall if con­trol of the cur­rency was handed back over to the Amer­i­can people.

At one point, the arti­cle asks the fol­low­ing question....

"How would the U.S. econ­omy then func­tion? Some­thing has to take its place, right?"

No, the truth is that we don't need any­one to "man­age" our econ­omy.
The U.S. Trea­sury could be in charge of issu­ing our cur­rency and the free mar­ket could set our inter­est rates.

We don't need to have a centrally-planned economy.

We aren't China.

And it goes against every­thing that our founders believed to be run­ning up so much gov­ern­ment debt.

For exam­ple, Thomas Jef­fer­son once declared that if he could add just one more amend­ment to the U.S. Con­sti­tu­tion it would be a ban on all gov­ern­ment bor­row­ing....

I wish it were pos­si­ble to obtain a sin­gle amend­ment to our Con­sti­tu­tion. I would be will­ing to depend on that alone for the reduc­tion of the admin­is­tra­tion of our gov­ern­ment to the gen­uine prin­ci­ples of its Con­sti­tu­tion; I mean an addi­tional arti­cle, tak­ing from the fed­eral gov­ern­ment the power of borrowing.

Oh, how things would have been dif­fer­ent if we had only lis­tened to Thomas Jef­fer­son.
Please share this arti­cle with as many peo­ple as you can. These are things that every Amer­i­can should know about the Fed­eral Reserve, and we need to edu­cate the Amer­i­can peo­ple about the Fed while there is still time.

About The Author — Michael Sny­der is the founder and edi­tor of The Eco­nomic Collapse

The views and opin­ions expressed herein are the author's own, and do not nec­es­sar­ily reflect those of Econ­Mat­ters.

Tags: American People, Banks, Bloomberg, Cartel, Cnbc, Congress, Currency, Economy, Election Year, Federal Government, Federal Money, Federal Reserve, Federal Reserve System, Feet, Government Agency, interest rates, Michael Snyder, Money Supply, Political Parties, Private Banking, Truth
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Barron's Confidence Index Takes a Worrying Turn

Thursday, January 19th, 2012

When report­ing on the unfold­ing of the credit cri­sis I often referred to the Barron’s Con­fi­dence Index. This Index is cal­cu­lated by divid­ing the aver­age yield on high-grade bonds by the aver­age yield on intermediate-grade bonds.

The dif­fer­ence between the yields is indica­tive of investor con­fi­dence. A ris­ing ratio indi­cates bond investors are grow­ing more con­fi­dent, in other words pre­fer­ring more spec­u­la­tive bonds over high-grade bonds. On the other hand, a declin­ing ratio indi­cates investors are demand­ing a lower pre­mium in yield for increased risk. That shows a wan­ing con­fi­dence in the economy.

Since hit­ting an all-time low in Decem­ber 2008, the Index was almost back to pre-crisis lev­els in Jan­u­ary this year as investors grew increas­ingly con­fi­dent. But that was when investors started focus­ing on sov­er­eigns that were start­ing to get into trouble.

Since the start of 2011 the Index has given up more than 40% of its gains. This puts us back at lev­els expe­ri­enced dur­ing mid-2008 – just prior to con­fi­dence falling off a cliff. Based purely on this chart, one has to con­clude that con­fi­dence remains fragile.

Source: Barron’s

Tags: Barron, Bond Investors, Bonds, Confidence Index, Credit Crisis, Crisis Levels, Economy, Investor Confidence, risk, Sovereigns
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Fed's Failure to Inspire: TrimTabs Shows Where the Real Money is Going

Friday, January 13th, 2012

As vol­umes this year in stock mar­kets remain sig­nif­i­cantly below last year's but high yield bond ETF inflows reach record highs, TrimTabs offers some con­text for the mas­sive rel­a­tive flows of real cash into check­ing and sav­ings accounts ver­sus stock and bond mutual fund and ETFs. Not-Charles-Biderman, oth­er­wise known as David Santschi of the now-infamous Bay Area back­drop, explains the incred­i­ble sta­tis­tic that in the first 11 months of last year investors poured more than eight times more money into check­ing and sav­ings accounts than into Fed-inspired risk assets in gen­eral. Even with rates ultra-low, the Fed's efforts to drive spec­u­la­tive flows is dwarfed by investors' aggre­gate sense of the real­ity of our ten­u­ous sit­u­a­tion as a mas­sive $889bn was poured care­fully into mat­tresses while a measly $109bn went into risk-worthy assets (includ­ing bonds). As Santschi con­cludes, as long as most investors keep hid­ing most of their money away, the econ­omy is unlikely to get off to the races any­time soon and while we agree from a con­sump­tive demand per­spec­tive, any recov­ery will only be truly sus­tain­able via sav­ings which are being des­per­ately drawn-down by a need to main­tain stan­dards of liv­ing that are per­haps too much to expect.

Source: TrimTabs, via Youtube, Jan­u­ary 12, 2012

Tags: Assets, Backdrop, Bonds, Economy, Eight Times, Failure, High Yield Bond, Investors, Mattresses, Mutual Fund, Perspective, Real Money, Record Highs, risk, Savings Accounts, Statistic, Stock Markets, Trimtabs, Youtube
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Goldman's Zhu Expects 30% Rise in Chinese Stocks in 2012

Wednesday, January 11th, 2012

Helen Zhu, chief China equity strate­gist of Gold­man Sachs, talks about the out­look for the nation’s stocks and econ­omy, and invest­ment strategy.

Source: Bloomberg, Jan­u­ary 11, 2012.

Tags: Bloomberg, China, Chinese Stocks, Economy, Goldman Sachs, Investment Strategy, Strategist
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David Rosenberg: U.S. Economy is Still Fragile

Tuesday, January 10th, 2012

David Rosen­berg, chief econ­o­mist and strate­gist at Gluskin Sheff & Asso­ciates, talks about the out­look for the U.S. and Euro­pean economies.

Source: Bloomberg, Jan­u­ary 9, 2012.

Tags: Amp, Chief Economist, David Rosenberg, Economy, European Economies, Gluskin Sheff, Outlook, Stocks, Strategist
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Ed Hyman and Bob Doll – How to Prosper in 2012

Monday, January 9th, 2012

On this week’s Wealth­Track, Con­suelo Mack inter­views Wall Street’s long-time num­ber one econ­o­mist Ed Hyman, Chair­man of the ISI Group, and Bob Doll, Chief Equity Strate­gist of Black­rock. They dis­cuss their expec­ta­tions for the econ­omy and mar­kets in 2012 and strate­gies to prosper.

Also, you can click here to read Doll’s 10 pre­dic­tions for 2012.

Source: Wealth­track, Jan­u­ary 6, 2012.

Tags: Blackrock, Bob Doll, Consuelo Mack, Economist, Economy, Ed Hyman, Isi Group, January 6, Long Time, Strategist, Time Number, Wall Street, Wealthtrack
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