HOLY RISK MISPRICING

 
First there was ZIRPS--sounds like something to pour over your morning hotcakes--and now there's NIRPS.

Gotta love those acronym folks.

It's been six months, as the Financial Times reports today, since the ECB coughed up "negative rates for deposits by commercial banks."

If anyone approached you a few yesteryears back and tried to sell you a five or six year zero or negative yield savings bond, can you give us what most likely would've been your succinct, decisive two-word response?

How about, screw you?
Finland yesterday provided worrying evidence of the lack of hope for economic growth and inflation when it sold one billion euros of five-year government bonds with a negative yield. 

Well, the people getting screwed today by all those wonderful QE programs and their derivatives of such are the people. Yield starved or otherwise, unless you're a savvy speculator well anointed in the foibles and follies of central bankers and their ignorance, anyone dumb enough to purchase one of these suckers is a sucker.

Unless anyone has forgot, when you buy a bond you're the lender and the entity, corporate, government or whatever, is the borrower. Anyone love their efficient governments enough to lend them free money?

Or to be more exact, pay them to lend them your money. It's deals like this that make gold glitter.

Two things we know of have zero yields at the moment--only one of which regularly catches hell from the MSM punditry--cash and gold.

In some fundamental churches when the preacher lays a cool one on the congregation, usually someone will stand up and shout out a big "Hallelujah!" Well, you should forget that. Just stand up and shout out a robust--"Mispricing of risk!"

C'mon now! Let's hear another one of those, this time with some real feeling,"Mispricing of risk!"

In next year's Super Bowl, instead of the Patriots and Seahawks, maybe we can have the ZIRPS versus the NIRPS. It just might set a new viewer record.

Instead of a trophy at the end of the game, however, the winner will be presented with a Big Bag.

GOLD WATCH

Gold’s prolonged bull market from 2002 took place against a backdrop of generally low (and sometimes negative) inflation.

Last time we checked there's been little shortage of what can be called one form of QE or another around the globe. Some might try to be kind or politically correct and label it unorthodox monetary policy.

That's the usual nature of language debasers worldwide. Simply call an elephant a big dog with an overgrown proboscis.

Despite what many believe gold usually does best during periods of deflation.

The charts below are from mining.com/charts-gold-price-inflation-you-win-deflation-they-lose.

Gold's status as a hedge against inflation is long-established, but a new research note by Julian Jessop, Head of Commodities Research at Capital Economics, finds the metal can also thrive in a deflationary environment.

THE BIG B IN NBC

Unlike MSM we don't like to kick people when they're down.

But when they hold themselves to pretentious standards as if they're better than the rest of us, a common trait among MSM glitterati today, we'll trade blows with them any time, any place they think their up to it.

As we noted in a recent "Our View," MSM and any objectivity or integrity they claim to have is highly questionable today. And here's why.

It was a dramatic account from the early stage of the Iraq War, one that placed NBC News anchor Brian Williams aboard a U.S. military helicopter that had drawn enemy fire. The story was told repeatedly by Williams and NBC.  

And it wasn't true. Stars and Stripes reported on Wednesday that "Williams arrived in the area about an hour later on another helicopter," one that "took no fire and landed later beside the damaged helicopter due to an impending sandstorm from the Iraqi desert."

 The damaging revelations may harm Williams' credibility. Media critics and Internet commenters immediately expressed doubt that Williams could have innocently misremembered what had happened on the reporting trip. 

NBC declined to comment on Wednesday night.

Williams was embedded with U.S. military forces on risky missions at the start of the Iraq War in 2003. A USA Today report at the time said he was "stranded in the Iraqi desert for three days after a Chinook helicopter ahead of his was attacked by a man who fired a rocket-propelled grenade." 

USA Today said "the grenade just missed, but it forced the group to make an emergency landing." 

A few days later, Williams said this on NBC: "Suddenly, without knowing why, we learned we've been ordered to land in the desert. On the ground, we learn the Chinook ahead of us was almost blown out of the sky." 

The story evolved over time. And last week Williams briefly retold it on the "NBC Nightly News," which he has anchored since 2004. It was part of an on-air tribute to a soldier who provided security for the downed crew. 

"The helicopter we were traveling in was forced down after being hit by an RPG," Williams said on the broadcast. "Our traveling NBC News team was rescued and kept alive by an Armored Mechanized Platoon from the U.S. Army 3rd Infantry." 

After the tribute aired and NBC shared it on Facebook, people started to raise questions about its veracity. 

Lance Reynolds, who was quoted in news accounts about the March 24, 2003 incident, wrote on Facebook, "Sorry dude, I don't remember you being on my aircraft." 

Reynolds continued, "I do remember you walking up about an hour after we had landed to ask me what had happened. Then I remember you guys taking back off in a different flight of Chinooks from another unit and heading to Kuwait to report your 'war story' to the Nightly News. The whole time we were still stuck in Iraq trying to repair the aircraft and pulling our own Security." 

Another commenter, Joseph Miller, wrote, "Thank you Lance! I've been calling him out on this for a long time with no response. He was actually on my aircraft and we came in behind you about 30-45 minutes later." 

Some of the comments insulted Williams and called him a liar. He responded in a Facebook post on Wednesday afternoon. 

"You are absolutely right and I was wrong," he wrote to Reynolds, Miller and several others.
"In fact, I spent much of the weekend thinking I'd gone crazy," he wrote. "I feel terrible about making this mistake." 

William said he has "no desire to fictionalize my experience (we all saw it happened the first time) and no need to dramatize events as they actually happened, I think the constant viewing of the video showing us inspecting the impact area -- and the fog of memory over 12 years -- made me conflate the two, and I apologize." 

Williams is a card-carrying member of the MSM PC crowd, among the ones when other media say something unacceptable over the air, call for their resignations.

Let's just see how brave and bold NBC executives are on this one. 
http://money.cnn.com/2015/02/04/media/brian-williams-recants-iraq-story

A DIFFERNCE OF OPINION

We think it's healthy to often take the other side of certain trades and discussions, not so much to be cantankerous or adversarial but rather to stimulate critical thought and open up different points of view.

Here is an article from marctomarket.com about the Greece fiasco that we take issue with on numerous points. It's more of a compliment than a criticism, however, simply because we take the time to read and have respect for the writer's opinion. We simply disagree.

Greece needs about 10 bln euros by the end of the month.  The negotiations are fierce.  Although the ECB and Germany are clashed over the conduct of monetary policy, they seem to be in agreement, not to concede to Greek requests for debt forgiveness or a debt swap.  At least until the end of the month, German media is unlikely to repeat the slur, referring to the ECB as the Banca d'Italia's Frankfurt branch. 

In his critique of the Versailles Treaty that ended WWI, Keynes cautioned that the bleeding of Germany can only lead to ruin.  He urged the creditors of the day, not to be shackled by paper--contracts.  The current generation of European creditors appear so antithetical to what has become Keynesian economics that they are willing to ignore the important insight that there is a limit to people's willingness to turn their output to service foreign debt. 

Ironically, it appears that others have understood Keynes' insight.  Egypt has roughly the same rating as Greece.  Fitch and Moody's rate them identical (B and Caa1 respectively).  S&P rates Egypt B- and Greece B.  Saudi Arabia, Kuwait, and UAE have given Egypt more than $12 bln in aid, deposits for the central bank and petrol since 2013. News reports indicate that they will deposit another $10 bln in Egypt ahead of the large investment conference next month. 

Egypt, like Greece, is trying to repair its economy with structural reforms, and appealing to foreign investors.  It faces domestic strife between President Abdel-Fattah al-Sisi and former Islamist President Mursi and the outlawed Muslim Brotherhood.  The new government in Greece faces powerful resistance by its official creditors and the domestic oligarchs and chronic tax evasion. 

Saudi Arabia, Kuwait and UAE see a slippery slope.  The current Egyptian government is an important bulwark against a threat that could jeopardize the political stability of their regimes. As ironic as it may seem, Greece's official creditors are less enlightened.  Even at this late date, they pretend that Greece has to decide whether it wants to remain in the monetary union or not.    To remain in the money union, they insist Greece needs to respect current agreements, even though they have clearly failed.  

The IMF itself has admitted it under-estimated the fiscal multiplier and over-estimated Greek growth.  It resists a mid-course correction.  The ECB and Germany seem particular sensitive to its slippery slope: whatever concessions are made to Greece will likely be demand by others.  Both Portugal and Spain hold elections later this year.   Spain's Podemos is polling strongly and share Syriza's predilections, even though Spain is among the fastest growing in the euro area. 

Below the surface, there is a sense in official circles that Greece can leave and not pose systemic risk to EMU.  This a grave risk.  Officials have repeatedly been surprised by the market's reaction.  Remember Lehman?  The Swiss abandonment of its franc cap? 

A Greek exit would demonstrate once and for all that EMU is reversible.  If Greece leaves and has a deep recession, high inflation and an intense banking crisis, as would be expected, it would be a severe cost to its creditors.  If it finds that its only friends are adversaries of Europe, like Russia, which has already offered assistance, would EMU members really be better off?  Negotiating with Greece, devising a new and sustainable course will

Let's take the Keynes point first that  creditors "should not become shackled by paper--contracts." 

Contracts are far as we understand them have something called consideration. They also usually have covenants, stipulations both sides agree to when signing.

Leave out the concept of duress for a second, which incidentally usually increases because of the wretched financial state the prospective borrower has allowed himself to get into.

The current generation of European creditors appear so antithetical to what has become Keynesian economics that they are willing to ignore the important insight that there is a limit to people's willingness to turn their output to service foreign debt.  

Greece is a notorious debtor with a fiscal responsibility record you won't find in Webster's anytime soon under exemplary. Any opposition to Keynesian style economics is good not bad opposition. Where is the responsibility on a nation to run it's affairs so it won't have to be frequently asking for handouts?

If there is a "limit to people's willingness to turn their output to service foreign debt," there should also be a limit to how many times a country can water up that the handout trough. And that's what this really is,another handout.

Moreover, comparing Greece's current situation to post-WWII Germany is about as disingenuous as disingenuous gets. The two are hardly analogous.

The next point that the economic globe will somehow burst open and disintegrate if Greece goes off the euro or in fact exits the EU is more negative clap trap to kick the can of economic reckoning farther down the road.

Concerns about fallout if Greece gets its hat are over-rated. Nobody knows for sure what for sure will happen. Uncertainty is as much a part of lending as it is of life. 

A creditor who doesn't expectt to be repaid is a sick creditor. A borrower that knows it can't or has no intention of repaying its loan is a crook.

Implying that the market's reaction to a Greek exit from the EU will surprise to the negative like those with the Lehman and recent Swiss franc sideshows is also questionable.

The real market surprise might be three or four sustained global Halleluiahs!

Then there is the argument the writer makes about reversibility. 
A Greek exit would demonstrate once and for all that EMU is reversible.

It's a bit ironic that the author doesn't view violating the covenants of the borrowing as having the same moral hazard. We can borrow and mismanage all we want because in the end they'll cut us some slack. It appears that the definition of precedent is much like beauty.


Then there's the slippery attempt to slide one by based on the various rating agencies' debt ratings comparing Greece and Egypt. 
The suggestion here is that these rating agencies are infallible which we all know by experience, to use a kind term, is stretching things a bit. 

Lastly, the so-called German media slur "referring to the ECB as the Banca d'Italia's Frankfurt branch," reminds one of a salient, never-changing point: Truth always comes with a bite.





 



  

THE POLITICAL DANGER

Here is an age-old problem when it comes to politicians and politics, not to mention taxpayers and what they really get for their money.

In some circles it's known as what can be a very dangerous practice, extrapolating the future based on the past.

For the first time in a long time North Dakota’s political leaders are going to be faced with difficult decisions when it comes to governing the state.

http://bakken.com/news/id/231742/dropping-oil-prices-might-mean-better-governance/

“We don’t run the state on oil revenue,” Governor Jack Dalrymple told the editorial board of the Williston Herald in December. At the time he was trying to address skepticism of his executive budget which built aggressive spending on top of an optimistic revenue outlook.

Turns out he was wrong. At least in terms of the last couple of bienniums, the state has been run on oil revenues, and with oil prices in a rout those revenues are disappearing.

Less than seven weeks after Dalrymple delivered his executive budget to lawmakers we have a new revenue outlook. It came in about $5.5 billion below the forecast Dalrymple used.

Projections for sales and income taxes, which go into the state’s General Fund, are now $680 million lower through the end of the coming biennium in June of 2017. The state is expected to lose another $4.8 billion in oil and gas tax revenues during that same period.

The General Fund is capped at no more than $300 million in oil and gas tax revenues a biennium, with the rest of those funds (aside from the share going to local governments) flows into the state’s special funds.

That’s a big swing, in just a few weeks, for a state with just 720,000 citizens.

It portends a few things for our state. It means the oil boom is over. It means the state’s policymakers must figure out what the “new normal” is post-oil boom.

It means the era of easy governance in North Dakota is over.

I do not intend to belittle the problems the state has faced over the last several years. Issues like strained infrastructure and rising crime have presented real problems for the state’s leaders.

But let’s face it. Those problems are a lot easier to address when the booming oil industry is driving before it an economy kicking off tax revenues which grew at almost exponential levels.

In short, it’s easy to govern when you can throw money at your problems. It’s easy for the state’s leaders to pat themselves on the back when they didn’t have to say “no” very often.

And “no” was most certainly not a word anyone at the capitol in Bismarck has used often for some time now.  In the current 2013-2015 biennium the state’s total appropriations (not counting federal dollars) amounted to nearly $10.4 billion, an almost 47 percent increase over the 2011-2013 biennium and an almost 98 percent increase over the 2009-2011 biennium.

That’s a whole lot of saying “yes.”

But the era of “yes” is over in North Dakota for the foreseeable future. That’s going to test the mettle of our current crop of leaders.

AROUND THE WEB

The beat continues.
The Reserve Bank of Australia joined the chorus of central banks to ease policy.  The 25 bp rate cut was not a major surprise but it did catch many a bit off-guard as recent data and the pace of the Australian dollar's decline had prompted many to push out the expectation to next month. 

The Aussie's drop dragged down the New Zealand dollar almost as much.  The Kiwi fell through $0.7200 late in the Asian session and is straddling that area in the European morning.  The $0.7220-$0.7740 area looks like the proximate ceiling. 

marctomarket.c

Market likes what it hears.

bloomberg.com/news/articles/2015-02-03/greece-said-to-drop-writedown-request-amid-eu-opposition

Oil up rigs down
MADRID (MarketWatch) — Crude-oil futures extended gains Tuesday, with prices rallying on speculation that a sharp decline in U.S. drilling activity will result in supply cuts.

What's New
BP has reported its quarterly profits and as usual in such a complex business it’s an object lesson in how corporate profits can be, within certain boundaries, rather whatever you might want them to be. This is one of the reasons why the taxation of corporate profits is such a difficult exercise. What exactly is a profit in a complex business? Thus we find that taxable profits are calculated in an entirely different manner to the profits that get reported to the rest of us through the corporation’s accounts. And there’s really no way to deal with this other than to have those two near completely different systems to calculate what the profits are.

Fed Smokes From Different Pipe

Since 2007 nearly every Fed economic forecast has been on the optimistic side.
In an attempt to explain, a new Federal Reserve Bank of San Francisco dives into the Persistent Overoptimism about Economic Growth.
http://globaleconomicanalysis.blogspot.com

More of the beat going on
Denmark’s central bank said on Tuesday that it sold Danish kroner in record amounts in January to weaken the currency and protect its peg against a falling euro.
The Danish central bank, Nationalbanken, said it bought foreign currency worth 106.3 billion Danish kroner ($16.34 billion) last month as part of its market interventions.
The bank said its total foreign-exchange reserves rose by 106.6 billion kroner to 564.1 billion kroner when market interventions and central government’s net borrowing were included. 

http://www.wsj.com/articles/denmark-increased-krone-sales-in-january-to-protect-peg

OUR VIEW

 

Mainstream media wonders why they catch such hell from so-called conservative, cantankerous Americans.

They wonder why their credibility in general continues to decline in the public's eye. Here are a few tips. 

Save your adjectives and ad hominem for your editorials. Trying to mask your personal invectives as straight news is an insult to public intelligence.

It's disingenuous and needless. Report don't characterize. You and your grown-up overseers ought to know the difference. It's an overt act of journalistic high dudgeon toward the masses.

In the main it's because they indiscriminately roll out their epithets for those who dare question them. And they do this under the phoney guise of objectivity rather than the agenda their pushing.

A case in point comes from a recent letter hedge fund guru Paul Singer sent to his investors that CBNC, the leftest media outlet, ran a story on yesterday.

The conservative, cantankerous hedge fund manager thinks economic stimulus in Europe isn't likely to work and that the U.S. political system will remain dysfunctional, even with Republican midterm gains.

 Before we get to that, we don't have a camel in this race. We simply track the news everyday and absorb as much as we can all the while trying to ascertain who we can believe and who we can't.

This article taken as noted from a letter Singer sent to his shareholders describes him as conservative and cantankerous at least in part for his opinion about QE European style likely failing.

Another big name money manager, Bill Gross, over the weekend in a Financial Times interview offered a similar opinion.  Now we don't know if Gross is conservative or cantankerous, but we suspect MSM likes Gross a bit more than Singer. 

"Too little, too late"  is how Gross describes the plan. And Gross' former Pimco colleague, Mohammed El Erian, recently voiced his doubts about the plan, not that we'd expect the CNBC  left wing lemmings to note that.

Along the way, even at the recent annual financial grand party at Davos, others, on the left and in the middle, had some doubts about the program. The point here is a simple one, MSM could do it's job without the ad hominem.

Another case in point was a recent story about those dastardly, nasty rich Koch brothers tossing money at upcoming 2016 elections. That might be some serious comedy material if one didn't know the names of Soros, Steyer and Buffett, to name a few on the left, who toss gobs of their money around to influence elections.

Suggesting to a media steeped in Keynesian and quasi-Keynesian apologists that QE European style might fail is viewed as economic treason.

As for Singer's comment about the dysfunctional U.S. political system remaining unchanged even with the recent Republican victories, many Americans--perhaps even a majority--from what we read now believe that might be the only life jacket the good ship USA has left.

Greed might not be good. But gridlock is.

People get it. The point this writer and MSM need to learn is that they can report without the epithets. 

Save them for your in-laws.

That's our view. We hope you know yours.






 

SOCIAL SCIENCE INSANITY

Social science insanity, will it ever stop?

The short answer is no so long as people put up with it. The long answer is the same because people are far too tolerant about invasions of their lives and integrity.

If you don't know what a psychometric test is, you probably haven't applied for a job recently. 

The tests are a mumble jumble of questions without either incorrect or correct answers--something only a bunch of well meaning, extremely misguided social scientists could think up-- that employers no doubt cough up huge sums of money to administer to help weed out potential unwanted or troublesome prospective employees.

That's okay you say. Well, maybe and maybe not. Now banks are starting to use them if you don't have the kind of credit report--and we're not talking numbers or phony scores here---they want to grant you a loan.

What these tests are is another tentacle, this time corporate, of George Orwell's 1984.

It's another example if you take all the corporate lemmings, strip them naked and stand them on their heads, they all look alike.

A piece in today's Financial Times, "Emerging markets Personalty tests can help to assess loan risk," states: "A mini-boom in psychometric testing is improving financial inclusion in emerging markets, providing an alternative for applicants who do not have traditional credit records."

The article then names a couple of companies, one in London and another in the United States, "that are helping bring banking to the 'unbanked.'" We suggest you take that PR promo for what it is, we're from the corporate world and we're here to help the needy.

"Schemes are up," the writer claims, "and running in Peru, India and other countries in Latin America, Africa and Asia."

Quoting the CEO of one company, "We are doing something completely different, that is actually a sensible way to evaluate risk," the Times reports. But what this really is besides the above-mentioned invasions, is another cockeyed attempt to punish the many to catch the few.

"Tests aim to assess applicants' creditworthiness by revealing personality traits that have no obvious right answer."

Lenders using the screening tests claim it' shown "up to a 50 per cent reduction in defaults." The key key words in that sentence are "up to."  

Given the current global situation and the persistent flatness of wages,one might suggest a better use for that money by banks would be to give  your current employees a raise and hire more to give your customers decent service.

WIFTY IS AS WIFTY DOES

There's an old saying that where one smells smoke there's something funny going on.

That brings us the the current EU situation in general and the Greek situation in particular. We've said before and it's a known fact that Greece lied to meet its requirements to get into the EU and that those Brussels' bureaucrats turned the other cheek.

And most likely in the investment world when you find something funny going on you'll find Goldman Sachs.

As a recent Barron's article noted "Using methods pioneered by its neighbors, Greece slipped into the euro zone in 2001. One of the ways it masked its true state of financial affairs was with a set of wifty currency swaps engineered by Goldman Sachs."

If you're not familiar with the term wifty, it means impractical, flighty or unfocused. 

There was a reason they didn't want to focus on Greece's true financial situation at the time, France and Germany. Both had some blemishes on their balance sheets. Both were spending beyond their means. It's one thing to be a spendthrift, another to be called out for hypocrisy.

Goldman Sachs has its tentacles everywhere. A good number of central bankers running centrals banks around the globe have Goldman ties.

"Registering short-term profits allowed Greece to pretend it had  a small deficit, although unwinding the swaps would produce large deficits. (Goldman laid off its bet on other suckers and eventually sold its position to a private bank....in Greece.)"

In 2009 the rooster came home to roost as Greece politicians paid a trip to the confessional and admitted "...to a national debt of more than 130% of GDP and spending that exceeded revenue by more than 12%."

Much of the hand wringing over the possibility of Greece leaving the EU is just that, hand wringing. The scaremongers will, as is their stock in trade, spread their fears about a possible domino effect. 

But the truth is the Greek economy is one great big nothing burger. It'll be an international yawn should they exit the euro.

The market's reaction to all this was to catch the fast train toward Exitville as the term contagion started rolling off investor lips and MSM lackeys spread the news.

The real take always in all this is that pipe dreams are not always the province of the Pied Piper. Bureaucrats and politicians often puff from the same pipe.

And whenever you smell something funny, look for the tracks of a big Wall Street investment banker. Chances will be better than good it'll be Goldman Sachs.

ONE AND DONE

As sports fans get ready today for the big game, investors should get ready for a one-and-done move later this year.

Last week's Federal Reserve buffet didn't serve up much. The main course featured a larger portion of patience with a dollop of we're doing okay, but a strong dollar, slow global growth and a paucity of inflation is why dessert still consists of icing less cake.

Once again forecasting fell short as the economy clocked in at 2.6% 4Q annual rate of growth, down 0.6% from the 3.2% forecast. In the 3Q  the economy perked along a 5%, much of the slack this time owing to a pullback in business investments despite some signs of a pick up in consumer spending.

Meanwhile, on the geopolitical front which appears at least to be a certain complacency in the energy market, the Bank of Russia cut rates two percent and any quick resolution to the Ukraine situation dimmed considerably as fighting escalated there and talk about more sanctions by the West bandied about.

It's sort of become a popular rendition of don't ask, don't tell. Don't look, don't worry. Editorials in the Financial Times and the Wall Street Journal this past week called  for sending a message to Russia by arming the Kiev government again at what is now not just the rebels but apparently by some reports regular Russian troops. So the possibility of jingoism could grow.

The one and done will be a token raise of interest rates later this year as the Fed tries desperately not to lose investor confidence and assure they have an idea what they're doing. Of course, they don't. Having created this financial maze, they continue to look for an exit that doesn't blow their cover.

Meanwhile, unlike each Super Bowl, the beggar-thy-neighbor war continues and will most likely turn out to be something else than a one-and-done.