Category Archives: Economy and Meltdown

Guest Post: Another Example Of Why Central Planning Is A Bad Idea


Submitted by Simon Black from Sovereign Man

Another Example Of Why Central Planning Is A Bad Idea

I’ve noticed something strange over the past few weeks, maybe you have too. It seems that every ‘contrarian’ website out there has joined together to collectively bash the Olympics and anyone who tunes in to watch.

This seems nuts. Nobody should feel guilty for wanting to see athletes in peak condition push the boundaries of human performance. I certainly don’t feel guilty about it. In fact I came to the UK several days ago specifically to catch some of the Olympics live.

Unfortunately it turned out to be much more difficult than I had expected.

As it turns out, the British government has centrally planned Olympic ticket issuance in a way that’s so remarkably inefficient it would make Karl Marx look like Steve Jobs.

There’s only one way to buy London Olympic tickets– through the ’official’ office that’s controlled by the government. They’ve even solidified their monopoly by making it a CRIMINAL OFFENSE for individuals to resell Olympic tickets.

The concierge at my hotel, an affable Italian named Paulo, explained to me that the police even came around to warn (i.e. threaten) him against helping hotel guests find tickets.

Paulo directed me to the government’s official website so I could buy tickets the legal way. I quickly found out how Byzantine it is– there are all sorts of ridiculous hoops to jump through; if you’re a resident of the UK, you follow one procedure. If you’re a resident of the EU, you follow another. If you’re a resident of other countries, you follow yet another.

Then after creating an online profile and giving them all sorts of personal information, they’ll actually MAIL (i.e. snail mail) the physical tickets to the address you give them in your profile… and only to the address of your legal residency. It doesn’t matter if you’re traveling.

The alternative is that you could spend a couple of hours going to one of the ticket offices, all of which seem to have been strategically chosen for being in the most inconvenient locations possible.

Even if you can get through that maze, they’ve really screwed up their inventory management. Nobody seems to have any idea what tickets are available at any given time. An event may be ‘sold out’ at 10am, then have hundreds of seats available by noon.

The government’s central planning of Olympic ticketing has been a complete failure, perhaps best evidenced by the THOUSANDS of empty seats at many of the events.

  Another example of why central planning is a bad idea...

Annoyed beyond belief, I asked the concierge at my hotel if there were any alternatives. He said, ‘maybe’, told me to write down my phone number, and wait.

Within a few minutes, my phone started ringing off the hook with calls from ticket brokers; since the government made it illegal for these guys to sell tickets, they’ve been pushed into dodgy underground boiler rooms for the past two weeks as if they’re Prohibition-era bootleggers trying to move a shipment of hooch.

Negotiating ticket prices with these guys, I couldn’t believe we were talking about a sporting event… it seemed more like an arms deal. One guy asked me three times if I was a cop, and another refused to give me his phone number when I said I needed to call him back.

Totally crazy. The government has managed to monopolize an entire industry and screw it up with Soviet-level inefficiency… then make it a criminal offense for the private sector to fix it.

 Another example of why central planning is a bad idea...

This is typical of how a government operates. They take a very cavalier attitude because they don’t care about results, they only care about maintaining control. As a result, they run their operations based on the premise that people really have no choice.

With regard to Olympic ticketing, this is mostly true. My choice was either to go through the system legitimately (albeit painfully), deal with some dodgy backroom ticket broker at three times the price, or just watch it on television.

In our regular lives, though, we do have a choice. A single government need not have a monopoly over our lives.

As human beings, we are fundamentally free. We can choose where we live, where our money lives, where we pay taxes (and how much we pay), where to structure our companies, where to hire our employees, which regulations to adhere to, etc.

You can hold your savings in one country, store gold in another, own property in another, have legal tax residency in another, live in another, have a business in another, etc. This is what I call planting multiple flags… essentially using the system against itself.

And it is, by far, one of the most effective ways to take your freedom back and end your home government’s monopoly over your life.

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Guest Post: QE Forever And Ever?


Submitted by Pater Tanebrarum of Acting Man blog,

The Extraordinary Becomes Normal

The lunatics are running the asylum. This is the only conclusion one can come to when considering the nonchalance with which what was once considered an extraordinary policy with a firm ‘exit’ in mind is now propagated as a perfectly normal ‘tool’ to be employed at the drop of a hat.

We refer of course to so-called ‘quantitative easing’ (QE), which really is a euphemism for money printing – even if not necessarily all of the central bank credit created ends up as part of the money supply. In fact, the experience of the Bank of Japan and the Bank of England with ‘QE’ was and is that it simply increases excess reserves and depresses already low interest rates a little further. Such excess reserves may be regarded as the tinder for an inflationary expansion of the money supply, but as long as no new credit is pyramided atop them, they may as well not exist.

 

However, the Fed has been quite successful in boosting the money supply with the two iterations of ‘QE’ it has implemented thus far, in spite of both private sector lenders and private sector borrowers not prepared to add to the existing debt pile. We believe this is due to two factors: for one thing, the Fed also buys securities from non-banks. This not only increases bank reserves, it also increases deposit money directly. For another thing, commercial banks seem eager to increase their holdings of treasury bonds and are thus helping to finance a government that seems perfectly willing to engage in deficit spending on an astronomical scale. The banks have not only replaced the bonds they sold to the Fed during ‘QE’, they have expanded their holdings of treasury securities at an unprecedented pace.

For a rigorous explanation of the mechanics of ‘QE’, we refer readers to an earlier article on the topic which discusses them in detail: ‘QE Explained‘ (we have written this as a reference article, as we thought at the time that many of the explanations that were forwarded elsewhere were not satisfactory).

 


 

Treasury and agency (GSE) securities held by commercial banks. Since agency bonds are these days issued by state-owned entities under ‘conservatorship’ they are effectively liabilities of the US treasury – perhaps not de iure, but de facto. Big expansions of bank holdings of treasuries usually tend to go hand in hand with recessionary periods and heavy deficit spending by the government – click chart for better resolution.

 


 

By contrast, the commercial banks have cut back on their holdings of ‘other securities’ since the 2008 ‘GFC’. The last time this happened was after the property bust of the late 1980’s and the S&L crisis that followed in its wake – click chart for better resolution.

 


 

We have little doubt that if the Fed were to start ‘QE3’, it would once again succeed in boosting the rate of money supply growth. We also have little doubt that ‘QE’ will be tried again, even if the timing remains uncertain. One reason to expect more of the same is that in recent months, a slowdown in US true money supply growth has taken place. Not as rapid a slowdown as we thought we would see when ‘QE2’ ended, but that can probably be ascribed to dollars fleeing the euro area. A recent example is provided by Royal Dutch Shell’s decision to remove its money from euro area banks and deposit it with US banks instead.

To put numbers on this, over the past quarter growth in ‘narrow’ money TMS-1 has slowed to 5.9% annualized and growth in the ‘broad’ money measure TMS-2 has slowed to 6.6% annualized. This may strike many people as plenty of inflation, but consider that the year-on-year growth of these two money supply measures stood at 11.9% and 13.4% respectively as of June 30 (even the year-on-year growth rates, although still hefty, represent a marked slowdown from the peak).

An economy that has become addicted to constant injections of new money is likely to falter very quickly once the money supply growth rate slows down. Although it is not knowable in advance what rate of money supply expansion is the new threshold for upsetting the economic apple-cart, it is probably higher than it used to be during the credit expansion of the pre-GFC boom period.

At the time, the year-on-year growth of TMS-2 slowed to low single digits (slightly above 2%) before an economic crisis struck – see the chart below.

What this chart also shows is that ‘QE2’ was preceded by a quick slowdown in money supply growth after the conclusion of ‘QE1’. At the time, the ECRI WLI fell to territory that indicated an imminent relapse into recession was likely. The Fed quickly resumed its printing duties.

 


 

The year-on-year growth rates of TMS-1, TMS-2 and M2, via Michael Pollaro – a slowdown is underway ever since the Fed’s ‘QE2’ program ended, but has been mitigated by money fleeing the euro area – click chart for better resolution.

 


 

Fed credit outstanding and the 12 month change in Fed credit – as can be seen, the Fed is no longer actively inflating – click chart for better resolution.

 


 

‘Open-Ended QE’

On Tuesday, Boston Fed president Eric Rosengren, a noted ‘dove’, made waves by arguing in favor of an open-ended asset purchase program by the Fed, a kind of QE of undetermined size and without an expiration date, only limited by the attainment of certain macro-economic goals. This method is to be preferred to a ‘fixed limit’ QE operation according to Rosengren, as it would end the ‘market’s fixation with when the program will end’.

Rosengren has no vote at the FOMC this year, but he is still regarded as an influential member (he is slated to rotate into a voting slot next year). In fact, all the ‘doves’ should be considered influential considering who helms the Fed’s governing board in Washington, namely Ben Bernanke and Janet Yellen (we have briefly discussed Mrs. Yellen’s views yesterday).

Rosengren also argued that the Fed should not shy away from more easing just because it is an election year – a sign that the political implications of Fed action this year have been a topic of discussion at the central bank. His remark on that particular point is not without irony as can be seen below:

As reported by Bloomberg:

 

Federal Reserve Bank of Boston President Eric Rosengren said the central bank should pursue an “open-ended” quantitative easing program of “substantial magnitude” to boost growth and hiring amid a global slowdown.

The Fed should set its guidance based on the economic outcomes it seeks and focus on buying more mortgage-backed securities, Rosengren said today in a CNBC interview. Without new stimulus, the jobless rate would rise to 8.4 percent at the end of this year and economic growth wouldn’t exceed its 1.75 percent average in the first half of the year, he said.

“What I would argue for actually is to have it open-ended, that we focus on economic outcomes,” Rosengren said. “It would be setting a quantity that you’re going to continue to buy until you get the economic outcomes that you want.”

[…]

“We’ve found that the economy has not grown as fast as we’d hoped and as a result I think it is an appropriate time to take stronger action,” Rosengren said. “A nonpartisan Federal Reserve should not be worried about the political cycle, it should be worried about the business cycle.”

 

(emphasis added)

This latter remark is ironic because the Fed’s actions are the root cause of the business cycle – its suppression of interest rates after the bursting of the tech mania in 2000 was what set the stage for the housing boom and its aftermath.

What makes it all the more astonishing to hear Rosengren articulate this latest idea of ‘monetary inflation without limit’ is that it is so utterly bare of introspection regarding what has happened up to the current juncture.

It seems to us that it should be glaringly obvious that when the Fed boosted money growth last time around to help battle a recession, it set in motion the very boom that has cost us so dearly. And now the ‘dovish’ faction wants to continue doing it all over again, only on a much bigger scale?

Apart from his sole focus on short term outcomes, an important point that seems not be considered by Rosengren is the question of what should happen if the ‘open-ended’ QE policy were to fail to achieve its stated goals. He seems to assume that it will succeed in lowering unemployment and creating ‘economic growth’ as a matter of course. No other outcome is apparently conceivable. However, the effects of monetary easing on the economy are circumscribed by the state of the pool of real funding.

It goes without saying that money printing cannot create a single molecule of real wealth. If it could, then Zimbabwe wouldn’t be a basket case, but a Utopia of riches. However, money printing does have both short and long term effects. In the short term, it can divert resources into bubble activities – all those economic activities that would not be considered profitable in the absence of monetary pumping. These activities of course create demand for factors of production, including labor, and tend to prettify the ‘economic data’ for a while – just as the housing bubble was widely regarded as an example of smooth ‘non-inflationary’ economic growth until it burst.

As it were,  monetary pumping can not always be expected to produce even such short term improvements in the vaunted ‘data’. If the economy’s pool of real funding is stagnating or shrinking, there will simply be no wealth available that can be diverted into bubble activities. All currently existing economic activity is already funded – and it is important to realize that what funds it is not ‘money’, but real goods. Money is merely the medium of exchange that enables both economic calculation and the smooth functioning of the market.

To describe with a simple example what we mean, consider a very primitive island economy. Say that there are three fishermen who want to build a new boat to improve their productivity and hence increase their wealth. Building the boat takes time, during which they can no longer catch fish. They must therefore have enough food stored to see them through the boat building period – otherwise they will simply begin to starve and never be able to finish the project. If they hire additional helpers and pay them with money, then these helpers will also require food, shelter and so forth during the time it takes to build the boat. Unless someone else produces food in sufficient quantity to sell it to them, or they have a big enough store available, the project will come to grief. In other words, an adequate pool of real funding is a sine qua non if such an investment project is to succeed. It would obviously not help at all if these men increased the size of the money supply. 

It is not different in a modern complex market economy – all economic activities require real funding in the end. The allocation of these inputs will only be rational when money is sound – any interference with the money supply and interest rates by a central planning agency will by necessity falsify prices and paint a false picture of the savings and consumption schedules of consumers and the size of the pool of real savings available for investment purposes.

It will therefore set bubble activities into motion – activities that fail to generate wealth, because they only appear to be profitable. If no wealth can be diverted into such activities because the pool of real funding is exhausted, then all that will happen is that additional money will raise prices, but it won’t be possible to conjure even a short term mirage of an improving economy.

Of course the market economy is highly flexible and new wealth is created all the time, in spite of all the obstacles the economy faces. It is conceivable though that a point in time will come when the Fed pumps and there is no longer an effect that would fit its conception of economic recovery.

We must infer from Rosengren’s idea of implementing open-ended QE until  certain benchmarks in terms of unemployment and ‘growth’ are achieved, that in case they remain elusive, extraordinary rates of money printing would simply continue until the underlying monetary system breaks down.

Perhaps he should be cheered on to shorten the waiting time.

 


 

Boston Fed president Eric Rosengren: in favor of money printing without a fixed limit.

(Photo credit: Wendy Maeda)

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And You Thought Q2 Earnings Were Bad?


In a world of slow stagnating growth, foreign exchange variations can have a dramatic impact on top and bottom lines – especially in a market where hedges are flummoxed by government-influenced gap-after-gap and mismatch. As Goldman notes the headwinds of FX into Q2 are acute and have been painful for multi-nationals – with several high-profile companies missing and or adjusting down forecasts due to the rise of the US dollar. In spite of all the focus on Q2 earnings, we remind investors that Q3 and Q4 will also see significant currency headwinds – an impact we (and Goldman) believes is far from priced in for many companies in the market – a total top-line drag of over 5% YoY.

The year-over-year impact of FX rates has become a drag on growth for the typical multinational in 2012

YOY changes assuming current spot rates of 1.23 USD/EUR, 1.56 USD/GBP and JPY/USD 78.60 hold through the rest of the year

 

Via Goldman Sachs:

  • Our model estimates that FX boosted the top line of a typical multi-national company by nearly 2.5% in 2011, but that the yoy changes should result in close to a 2.6% headwind this year – a total expected yoy drag of more than 5%.
  • We emphasize the continuation of the FX drag as we enter 3Q, where we model relative 7% yoy deterioration due to FX, based on current spot rates.
  • During the on-going 2Q reporting season several multi-national companies have cited FX as a considerable headwind.

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A Primer To Intraday Market Moves


While we have looked in the past at the incredible dominance of FOMC days when it comes to stock market performance, recent intraday performance of the major equity indices has had a somewhat repetitive and rhythmic structure. We know volumes surge, pause, and surge; Tradestation has dug one step deeper into the actual performance structure intraday and found some fascinating trends. From the extremely clear final-hour ramp to the oscillating bull-bear opening moves (and the European close positive bias) across almost 30 years of price behavior in bull and bear markets. The afternoons dominate market performance in bull markets and the morning session dominates the weakness in bear markets – so fade the opening rally, buy the dip, cover half into Europe, hope into the close appears the ’empirical route of least resistance’ – for now.

 

 

Active traders make their livelihood in the charts of the intraday session, scanning the markets for recognizable patterns that are persistent and profitable over time. However, the intraday session is influenced by numerous factors. For example, trading activity has been known to increase prior to and after economic and earnings announcements. Developments in technical analysis can also influence price momentum, market swings and trend continuation. And then, of course, there’s always the completely unforeseen event that throws the market completely out of whack. While a certain degree of price movement will always be random, these and countless other factors come together to create observable trading biases. In this note below, the author will focus on trends and reversal points in the intraday session, with the goal of identifying bullish and bearish biases that active traders can put to use in their trading.

Intraday Bias Studies

In this section of the paper, intraday price trends of the S&P 500 Index are spotlighted using data as far back as 1987. Some of this information was conveyed in the March 8, 2011 Analysis Concepts paper, “Mapping the Intraday Price Movement in the S&P 500 Index” (http://www.tradestation.com/education/labs/analysis-concepts/mapping-int…). In this paper, a similar study is constructed from a finer interval resolution (60 minute increments) with a variation in the construction of return calculations. Another difference is that basic plus (+) and minus (-) signs are used to depict whether the hour was positive or negative in percentage terms. This creates a clearer visual representation of the hourly trends that makes them easier to identify. All results are created from average returns; these average returns are calculated on an hourly interval but are generated from 30-minute bars between 10 a.m. and 4 p.m., which includes pre- and post-market trading (price changes from the 4 p.m. bar to the 10 a.m. bar).

 
At first glance in Table 2 (below), what stands out is the number of positive periods at the 10 o’clock hour and in the 4 p.m. hour, with the bulk of the returns from the 10 a.m. hour coming from the pre-market session. The actual return from 9:30 a.m. to 10 a.m. is positive, though Table 2 also shows a bullish bias in the 4 p.m. hour as stocks make their way to the close. Going back to 1987, 21 of 25 occurrences had average returns that were positive for the 4 p.m. interval. Also of interest is the weakness that typically occurs in the 11 a.m. hour (10 a.m. to 11 a.m.). Again, for data going back to 1987, there were 18 occurrences where returns were negative for this interval. The market seems, on average, to take a breather in the 11 a.m. hour after its initial morning run-up. Another interesting statistic is that if stocks close higher on average into the 3 p.m. hour, their probability of moving higher into the 4 p.m. close is 70%.

Next, going back to September 11, 1984, trading biases in the S&P 500 Index intraday session are analyzed during longer-term bullish and bearish market cycles. As mentioned earlier, what really stands out in the data is a positive bias in the 4 p.m. hour of each bullish and bearish market cycle. Also, notice the positive and negative biases in the 10 a.m. hour, correlated to each bull and bear market cycle. Additionally, note that three of four bear market cycles had a negative bias on average from the 10 a.m. hour into the 2 p.m. hour.

 


Bull and Bear Market Intraday Return Relationships

Depending on how one categorizes them, the markets can experience cyclical periods of bull and bear runs for various lengths of time. A more traditional approach is to classify these events in percentage terms. Therefore, the rule applied here states that if the market advances or declines by more than 20 percent, this will constitute a bull or bear move. Price movement of this magnitude is recognized by many financial market professionals as a change in market cycle.

 

Figure 7 (above) represents the compounded total return of the S&P 500 Index for the first, second, and third periods (9:30 to 11:40, 11:40 to 1:50, and 1:50 to 4:00) of the trading session within each successive bull and bear market from 9/1/1983 to the present time. In analyzing the data, the information is evident. First, the 9/1/1983 to 8/21/1987 and 12/4/1987 to 3/24/2000 bull markets, which occurred in the first two decades of the data, had most of their returns formulated from the last third of the trading session (1:50 to 4:00). At the same time, the 10/4/2002 to 10/12/2007 bull market, along with the current one, have had greater returns occur in the first third of the day’s session (9:30 to 11:40).

In Figure 8 (above), we can see that in bull markets, the positive returns that the market experiences on average come from all three periods of the intraday session. However, the returns are highest in the first (24.33 percent) and third (74.52 percent) periods, with the second period still being positive at 14.44 percent. We should point out the return impact of the 268.84 percent in the third period of the 12/4/1987 to 3/24/2000 bull market. Even if we cut this number down by some factor, the returns are still significant for this period.

As we look at the sequence of returns in bear markets, they are also very interesting. They typically start with painful selling in the first third of trading, as Figure 9 (above) illustrates. The average bear market return shows that from the 9:30 to 11:40 period, the return was -29.69 percent. In bear market cycles, however, the market selling becomes less pronounced as the day progresses. The second period of trading returned -9.60 percent on average, while the third period returned -1.07 percent on average.  

 

So in bear market cycles, there seems to be some good opportunity to either short early in the first third of the trading session or buy on weakness somewhere in the last third of the session.  

 

Source: Tradestation Labs Analysis Concepts

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Guest Post: US Midwest Hit By Perfect Gasoline Storm


Submitted by Daniel Graeber of OilPrice.com,

 

Retail gasoline prices in the U.S. Midwest were as much as 50 cents higher than in the rest of the country. By Monday, the price of a gallon of regular unleaded jumped 13 cents from last week in Detroit to settle at $3.99.  The spike in retail gasoline prices follows a series of pipeline spills in Wisconsin and refinery shutdowns in Chicago and elsewhere. The impact of the string of industrial incidents on consumers in the region may be short-lived, but retail prices rarely decline as fast as they increase.
 
The American Automobile Association, in its daily gasoline report, states a gallon of regular unleaded gasoline in Detroit cost $4.05, up from the $3.69 average just one week ago. Chicago drivers, meanwhile, were paying on average $4.39 per gallon, a 10 percent increase from last week. According to AAA, the national average for a gallon of regular unleaded is $3.62.  While that’s a far cry from the national spikes early this year, the regional blow has irked many area residents wary of high consumer prices and pipeline incidents.
 
An industry analyst said much of the region was hit by “a cluster of bad luck.” Last month, pipeline company Enbridge reported a leak on a pipeline in Wisconsin. A section of the Lakehead oil pipeline system ruptured there, cutting off oil supplies to Chicago-area refineries. U.S. Transportation Secretary Ray Lahood said the incident was “absolutely unacceptable” and forced Enbridge to keep the line closed until authorities review a restart plan for the entire 467-mile pipeline.
 
In Michigan, the state’s governor last month issued a fuel emergency in response to the rupture of pipeline that released 1,000 barrels of unleaded gasoline in eastern Wisconsin. Gov. Rick Snyder’s emergency declaration lifted the restrictions placed on long-haul truckers so they could deliver retail petroleum products. Less than two weeks later, Enbridge confirmed that 1,200 barrels of oil spilled from Line 14 in central Wisconsin. A nearby resident said the pipeline “blew like an oil well.”
 
Enbridge maintains that “better than 99.999 percent” of the time, there are no problems with its vast network of oil pipelines in the United States. When accidents do happen, however, they’re costly. Last year’s oil spill in Michigan, on the same network as the Wisconsin leak, was the costliest onshore incident in U.S. history and EPA authorities are still reporting sheen in some of the waterways soiled by the release. Refineries, meanwhile, have shut down at a time when the region is using “summertime gasoline,” a blend not manufactured very much outside of the Midwest.
 
Patrick DeHaan, a petroleum analyst at reporting Web site gasbuddy.com, told a Chicago newspaper that the regional spike in gasoline prices is temporary and likely “the last hiccup” for the summer. Nevertheless, gasoline prices rarely experience a 10 percent decline overnight.
 
“As we all know, (retail prices) only move down by pennies per day,” he said.

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