3 Things Worth Thinking About (Vol. 22)

Jon

The Fed’s “You Say Potato; I Say Potatoe” Statement Yesterday, the Federal Reserve released their financial FOMC meeting statement for 2014. The primary focal point by the financial markets has been answering the question of WHEN the Federal Reserve will begin tightening monetary policy by hiking interest rates. Yesterday, did not answer that question as Tim Duy summed up well:
“Policymakers were apparently concerned that removal of ‘considerable time’ by itself would prove to be disruptive. Instead, they opted to both remove it and retain it:
‘Based on its current assessment, the Committee judges that it can be patientin beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.’
If you thought they would drop “considerable time,” they did. If you thought they would retain “considerable time,” they did. Everyone’s a winner with this statement.“
As I have written in the past, the Fed has lost its focus of managing for price stability and“real” full-employment by trying to appease WallStreet and keeping its member banks “fat and happy.”

This post was published at StreetTalkLive on 18 December 2014.

Dealing Desk: Volatile week for gold while silver shows weak prices

Jon

It’s been a volatile week for the yellow metal in quiet trading as global data and economic news have caused prices to pull in various directions.
Dealing Manager at GoldMoney, the online precious metals trader, Kelly-Ann Kearsey said, ‘The week started with weaker than expected Chinese factory data pushing oil prices down further, forcing Brent Crude to below $60 a barrel. This had the effect of decreasing gold prices as deflationary, rather than inflationary pressures took the helm.
Markets were waiting for news from the US Federal Reserve bank to see when they might raise interest rates. The dovish stance that was announced supported gold and hit the dollar, but that was a short-lived reprieve as the US Consumer Confidence data gave further support to the American economy and gold once more headed south.

This post was published at GoldMoney on 18 December 2014.

The “Unequivocally ‘Not’ Good” Reality Of Lower Oil Prices & Jobs

Jon

The drop in oil prices is certain to cause some incremental unemployment in the U. S. energy industry; the question is simply how much and what that means for the American economy as a whole.
To begin the search for answer, you have to go to the wellhead and consider how many individuals work in American oilfields, as well as those workers that directly support those activities. The answer here, courtesy of the Bureau of Labor Statistics, is 812,000 as of March 2014 (the most current data available). That may not sound like a lot, but at average annual wages of $99,854/worker, this small group receives $81 billion in estimated annual compensation. How bad can things get if oil prices stay low?
We actually have a recent case study in the 2008 experience, the last great crash in oil prices. The answer is a 20% headcount reduction from October 2008 to January 2010. The great wildcard for U. S. GDP is the ‘Multiplier’ effect of these jobs. The damage could be slight (at 3x just 0.3% of GDP) or large (at 10x, a full 1% cut in 2015).
Offsetting benefits will have to surmount that hurdle to make themselves useful.
You may not know the author Robert E. Howard, but you have certainly heard of his most famous character: Conan the Barbarian. The original stories predate the famous movies of the 1980s by several decades, first published in a pulp fiction magazine called ‘Weird Tales’ in 1932. If you enjoy ‘Game of Thrones’ or any sword-and-sorcery drama, you have Conan to thank, for Howard essentially created the genre and gave it its first hero.
As for the inspiration for the Conan character, a muscular loner with serious fighting skills, it helps to remember that Howard grew up central Texas in the early 1900s. His hometown of Cross Plains saw its share of the 1920s oil boom. In watching the men that worked these early finds he found the inspiration for the tough and independent Conan. Howard’s famous barbarian is really just a Texas roustabout with a loincloth and a sword.

This post was published at Zero Hedge on 12/18/2014.

A Time to Prepare

Jon

The observation of modern finance through the lens of sound money requires an onion peeler. Each time I imagine onions, I think of my soft contact lens patients; the ones who abuse them. I think of the patients who wear them too long or through periods of mild irritation or redness and practice poor hygiene.
Soft contact lenses mask normal corneal sensitivity. They act like tiny onion goggles. With soft lenses in place, one can literally chop onions and not feel the normal irritating sensation at all. The problem is they tend to be the last to know about the trouble.
They can tolerate the underling problem before it becomes a bigger issue like an infection or inflammation – which can lead to permanent damage. But when the pain breaks through it’s never pretty. Everyone is miserable. People generally consider vision one of the more important senses.
Financial ignorance will be worse.
Many are in a position to understand. They know better. They are either dependent on it muddling along or observers view the state of financial risk as an odd curiosity -a phenomenon too complex to grasp – and, therefore, outside of their control.
Something they saw or learned about in a documentary. Yet they should be hearing a voice inside blaring a warning.

This post was published at Silver-Coin-Investor on December 18, 2014.

Massive Volume “Panic Selling” Cuts Warren Buffett’s Chinese Car Maker BYD In Half Overnight

Jon

For the second time in 2 days, a Chinese car maker’s stock has been utterly devastated overnight – on absolutely no news. Shares in BYD – the Chinese electric car maker part-owned by Warren Buffett – crashed 47% in a bout of total panic selling (before recovering modestly), just a day after Geely – another car maker – crashed 22% on an earnings warning. The reason – perhaps unsurprising – given by some is worries over Mainland China IPOs “caused a liquidity squeeze,” as the recent rally in mainland shares is led by leverage financing leading to major margin-calls on modest drops. Is it any wonder the PBOC is trying to tamp down the speculation.
As The FT reports,
Shares in BYD, the Chinese electric car company part-owned by Warren Buffett, fell as much as 47 per cent during a bout of panic selling.
BYD’s Hong Kong-traded shares rebounded partially in late trading to close down 29 per cent, at HK$25.05, on Thursday. Trading volumes were very heavy, at 40 times the previous day’s 15-day moving average, according to Bloomberg data.
In a statement issued after the market closed, the company’s board said it was not aware of any reason for the sharp sell-off.

This post was published at Zero Hedge on 12/18/2014.

Would It Be Bad for the Economy If Oil Fell to $3 a Barrel?

Jon

If the price oil fell to $3 a barrel, and it stayed there for 10 years, that would be a good thing.
What if this led to massive unemployment in the oil industry? That would be a good thing.
But isn’t the primary task of a free market economy to balance supply and demand? Yes, it is. Then isn’t it important that employment stay high, so that output can remain high? That is Keynesianism’s view. It is also mercantilism’s view. But it is the wrong question. A firm does not employ lots of people in order that output can remain high. It employs lots of people so that output meets demand at a price that is profitable for the company. If a firm continues to produce large quantities of goods that cannot be sold at a profit, it is making a horrendous mistake. It is wasting resources. The important thing at this point is for the firm to shut down operations entirely. Close up shop. Go fishing. Stop the waste.
The free market economy, according to Adam Smith, and also according to Ludwig von Mises, is supposed to produce goods in order to meet demand of customers. The free market economy’s task is not to see to it that lots of people are employed. It is not to see to it that investors receive a normal rate of return. The free market economy’s task is to see to it that, when customers go to the store, they can find whatever it is they are looking for at a price they are willing and able to pay. That is called a market-clearing price. It is the central task of entrepreneurs to create output that will be sold profitably at a market-clearing price.
What is a market-clearing price? It is the price at which nobody is waiting to sell the item, and nobody is waiting to buy the item, unless the price changes. If an entrepreneur can forecast in advance what this price will be, and then organize productive capacity in order to meet this demand at a price that produces a profit, then he is well worth his money, and he will make a lot of it.

This post was published at Gary North on December 17, 2014.

The Fed & “The Grandest Con Job In The History Of The World”

Jon

I used to get a kick out of the cute little children waiting for the Fed Chair to come and deliver presents or coal. So giddy and excited from the anticipation of not knowing who Janet thinks were good boys and girls. Who’s going to be rewarded and who disappointed? And I don’t know how many people asked me today what the Fed will do. My answer was ‘The same f@#*ing thing they always do, nothing. So stop asking’.
You see if you read some of Stanley Fischer’s early work on the rational expectation model you find thatthe key to fixing the lack of long term effectiveness to monetary policy is by confusing the working man. The idea being, people will act rationally with the information they are provided and so what typically happens is that people change their behaviour which counters the impact of the policy being implemented. The solution is to keep us guessing. And so what they have done for essentially every meeting is nothing.
However, they use the media to talk about all the things they just might do. And the pundits on television go on and on about all the things that might happen and what the follow on implications will be given those alternatives and then the moment comes and ahhh nothing, damn they fooled me again! I really thought this time was it gosh golly dang it!. I guess it was just that this or that was just slightly out of place otherwise they said they were totally gonna do this or that. So close, but ultimately they are right. Yep they made the right choice based on all the variables. They are just swell.

This post was published at Zero Hedge on 12/18/2014.

The Stuff Is Already Hitting the Fan in the Currency Markets

Jon

Stocks are rallying hard for three main reasons:
1) Janet Yellen’s press conference managed to confuse everyone into thinking that the Fed might prop stocks up longer.
2) The Swiss National Bank cut interest rates to negative in an effort to depreciate the Franc.
3) It’s options expiration week… and Wall Street likes to push the markets higher to insure as many puts as possible expire worthless.
Let’s take a look…
Stocks rarely if ever go straight in one direction. The markets have been setting up a megaphone pattern since July. We staged a false breakout to the upside in late November. That has now reversed and we’ve broken critical support:

This post was published at GoldSeek on 18 December 2014.

The Monetary Politbureau and the Markets – A Game of Chicken

Jon

December FOMC Decree Prior to the announcement of the FOMC decision on Wednesday, it was widely expected that the verbiage in the statement would be changed so as to convey an increasingly hawkish stance. Specifically, it was expected that the following phrase, which has been a mainstay of FOMC statements for many moons, would finally be given the boot and no longer appear:
‘…it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time’
It is inter alia this bizarre focus on little turns of phrase in the FOMC statement that has caused us to compare the analysis of the actions of the monetary bureaucracy with the art of ‘Kremlinology’ of yore. The Committee is indeed reminiscent of the Soviet Politbureau in many respects. It is unelected, it is engaged in central planning, and its pronouncements are cloaked in an aura of mysticism, akin to decrees handed down from Olympus.
While it is fairly easy (and in our opinion, absolutely necessary) to make fun of this, it is unfortunately affecting the lives of nearly everyone on the planet. The only exceptions that come to mind are Indian tribes in remote areas of the rain forest, since they don’t use money and possess no capitalistic production structure.

This post was published at Acting-Man on December 18, 2014.

Housing Bubble 2: California November Home Sales Plunge to Multiyear Lows

Jon

San Francisco is known for its mind-boggling booms and breathtaking busts as the hot money from all over the world ebbs and flows amidst startup frenzies and IPO manias.
And now the hot money is flowing. It has created a delirious craziness in the housing market, surrounded by an environment where app makers without revenues but with big dreams and the word ‘disrupt’ in their description are worth billions and draw so much cash from investors that they struggle harder to burn through it all than to disrupt anything.
So I read with fatalist amusement in SF Curbed that the most expensive home on the market in early November is still on the market. At the time, SF Curbed described it this way:
Raw food chef Roxanne Klein and her entrepreneur/guitar-CEO husband, Michael Klein, have put their neoclassical-revival mega-manse on the market for $39 million. The couple have only owned the seven-bedroom, 16,000-square-foot home, located at 2701 Broadway, for two and a half years, having picked it up from real-estate mogul Ron Zeff for $27 million back in 2012…. The ask is a full $12 million above the last sale price, though the present owners haven’t so much as changed the paint in the au pair suite.

This post was published at Wolf Street on December 18, 2014.

Five Rare Birds Sing a Wise Tune

Jon

In the spirit of the holidays, I’m sharing a happy truth: many people do, in fact, retire rich. Who are these rare birds and what can they teach us?
Rich Retire #1 – The Pension Holder. If you have a large pension in 2014, you likely are or were a government employee. Many government workers receive pensions equal to 75-80% of their working salaries. In some government departments, it’s the unwritten custom for department heads to bump a worker’s salary 20% or so when he or she is a year or two from retirement. This boosts the employee’s base for his retirement pay.
Of course, in the private sector, pensions have gone the way of the slide rule. So let’s move on.
Rich Retire #2 – The Small-Business Owner. If a self-employed person builds up a small or mid-sized business that he can sell when he’s ready to retire, that can fund a comfortable lifestyle during his nonworking years. Sure, it’s not ‘retirement investing’ in the traditional sense, but it’s a path that’s worked for many entrepreneurs.
Rich Retire #3 – The exceptional investor. Investors who lock in large boom-time gains are a step ahead of most. Those who resist the ever-so-tempting urge to spend that extra dough can watch it grow, and just like that, a rich retirement is theirs for the taking.
Rich Retire #4 – The exceptional saver. A friend’s dad used to tell him, ‘Save 10% of your pay once you start working and you’ll be a millionaire by your mid-40s.’ This friend’s dad was wrong. It didn’t take him that long. Ultra-disciplined savers live their lives this way, setting themselves up to retire rich without a last-minute race to the finish line.

This post was published at GoldSeek on 18 December 2014.

The Price of Gold and the Art of War Part III

Jon

If you wait by the river long enough, the bodies of your enemies will float by
Sun Tzu, The Art of War, fifth century BC
When growth slows in capital markets, the bankers’ daisy-chain of credit and debt breaks down; setting in motion defaulting debt which ends in recession, deflation or, in extreme cases, a deflationary depression.
A deflationary depression is a fatal monetary phenomena where the velocity of money – circulating credit and debt – falls so low capital markets are no longer self-sustaining. This happens after the collapse of massive speculative bubbles such as the collapse of the 1929 US stock market bubble which resulted in the world’s first deflationary depression, the Great Depression of the 1930s.
Throughout history, gold and silver have offered safety in times of economic chaos. Today is no different. What is different is the response of governments and bankers to the collapse of the current economic paradigm – the bankers’ war on gold.
In the midst of the Great Depression, the US passed the 1934 Gold Reserve Act which prohibited the ownership of gold by US citizens, forcing Americans to keep their wealth invested instead in capitalism’s paper assets.
The Gold Reserve Act outlawed most private possession of gold, forcing individuals to sell it to the Treasury, after which it was stored in United States Bullion Depository at Fort Knox and other locations. The act also changed the nominal price of gold from $20.67 per troy ounce to $35. This price change incentivized foreign investors to export their gold to the United States, while simultaneously devaluing the U. S. dollar in an attempt to spark inflation.

This post was published at GoldSeek on 18 December 2014.

Where The “Great Recovery” Is 25% Worse Than The “Great Recession”

Jon

There was some hope last month that, after falling for two straight months at a -10% Y/Y pace, there would finally be some demand for the products of the one company that symbolizes (or at least used to) the strength of global industrial demand: Caterpillar, when it reported its first single-digit decline since July. Or, as the case may be weakness, because according to the just released November retail statistics, in the last month Caterpillar reverted to its double-digit declining ways, when not only did the dead cat bounce in the US end, with the Y/Y increase slumping back down to only 5% – the lowest since February 2014 – but the carnage in both Asia/Pac (i.e., China) and Latin America (i.e., Brazil) just got even worse, with retail sales crashing by 24% and 37% respectively.

This post was published at Zero Hedge on 12/18/2014.

Financial Market Manipulation Is The New Trend: Can It Continue?

Jon

A dangerous new trend is the successful manipulation of the financial markets by the Federal Reserve, other central banks, private banks, and the US Treasury. The Federal Reserve reduced real interest rates on US government debt obligations first to zero and then pushed real interest rates into negative territory. Today the government charges you for the privilege of purchasing its bonds.
People pay to park their money in Treasury debt obligations, because they do not trust the banks and they know that the government can print the money to pay off the bonds. Today Treasury bond investors pay a fee in order to guarantee that they will receive the nominal face value (minus the fee) of their investment in government debt instruments.
The fee is paid in a premium, which raises the cost of the debt instrument above its face value and is paid again in accepting a negative rate of return, as the interest rate is less than the inflation rate.
Think about this for a minute. Allegedly the US is experiencing economic recovery. Normally with rising economic activity interest rates rise as consumers and investors bid for credit. But not in this ‘recovery.’
Normally an economic recovery produces rising consumer spending, rising profits, and more investment. But what we experience is flat and declining consumer spending as jobs are offshored and retail stores close. Profits result from labor cost savings from employee layoffs.
The stock market is high because corporations are the biggest purchases of stock. Buying back their own stock supports or raises the share price, enabling executives and boards to sell their shares or cash in their options at a profitable price. The cash that Quantitative Easing has given to the mega-banks leaves ample room for speculating in stocks, thus pushing up the price despite the absence of fundamentals that would support a rising stock market.
In other words, in America today there are no free financial markets. The markets are rigged by the Federal Reserve’s Quantitative Easing, by gold price manipulation, by the Treasury’s Plunge Protection Team and Exchange Stabilization Fund, and by the big private banks.
Allegedly, QE is over, but it is not. The Fed intends to roll over the interest and principle from its bloated $4.5 trillion bond portfolio into purchases of more bonds, and the banks intend to fill in the gaps by using the $2.6 trillion in their cash on deposit with the Fed to purchase bonds. QE has morphed, not ended. The money the Fed paid the banks for bonds will now be used by the banks to support the bond price by purchasing bonds.
Normally when massive amounts of debt and money are created the currency collapses, but the dollar has been strengthening. The dollar gains strength from the
rigging of the gold price in the futures market. The Federal Reserve’s agents, the bullion banks, print paper futures contracts representing many tonnes of gold and dump them them into the market during periods of light or nonexistent trading. This drives down the gold price despite rising demand for the physical metal. This manipulation is done in order to counteract the effect of the expansion of money and debt on the dollar’s exchange value. A declining dollar price of gold makes the dollar look strong.

This post was published at Paul Craig Roberts on December 17, 2014.

“Q4 GDP Below 2%, December Payrolls Under 200,000″ Markit Warns As Service PMI Crashes To 10-Month Low

Jon

“Another bumper month of non-farm payroll growth looks unlikely in December, with private sector payroll growth unlikely to breach the 200,000 mark,” warns Markit after The US Services PMI plunged to 53.6, missing expectations of 56.3 by the most on record. This is the 6th straight month of declines. Job creation slumped to 8-month lows. The Composite (Services & Manufacturing) PMI plunged to its lowest level since October 2013. Still exuberant? Still hopeful? Here’s Markit’s summary,“A sharp slowing in service sector activity alongside a similar easing in the manufacturing sector takes the overall rate of economic expansion down to the weakest since October 2013. The extent of the slowdown suggests that economic growth in the fourth quarter could come in below 2%“

This post was published at Zero Hedge on 12/18/2014.

Housing Bubble 2 Goes Nuts: San Francisco Home Sales Plunge 20%, Prices Soar 27%

Jon

San Francisco is known for its mindboggling booms and breathtaking busts as the hot money from all over the world ebbs and flows amidst startup frenzies and IPO manias.
And now the hot money is flowing. It has created a delirious craziness in the housing market, surrounded by an environment where app makers without revenues but with big dreams and the word ‘disrupt’ in their description are worth billions and draw so much cash from investors that they struggle harder to burn through it all than to disrupt anything.
So I read with fatalist amusement in SF Curbed that the most expensive home on the market in early November is still on the market. At the time, SF Curbed described it this way:
Raw food chef Roxanne Klein and her entrepreneur/guitar-CEO husband, Michael Klein, have put their neoclassical-revival mega-manse on the market for $39 million. The couple have only owned the seven-bedroom, 16,000-square-foot home, located at 2701 Broadway, for two and a half years, having picked it up from real-estate mogul Ron Zeff for $27 million back in 2012…. The ask is a full $12 million above the last sale price, though the present owners haven’t so much as changed the paint in the au pair suite.
Why fatalist amusement? The asking price is 44% higher than when the home was sold two-and-a-half years ago.
So Fed Chair Yellen, in her press conference after the FOMC meeting today, said she’s surprised that housing hasn’t recovered more than it has. But for those who were on the receiving end of the Fed’s free money, the housing market recovered just fine.

This post was published at Wolf Street by Wolf Richter ‘ December 18, 2014.