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Financial Skeptic Bulletin, March 2013

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This is the month of the top of bond bubble of 2013. Few understand that size of the risks ahead ;-) Warren Buffet was one of those few, although not many paid attention to his warning (I found his interview only on August 8, 2013 so it is not included in the "main line" of news I collected). As Merle Hazard pointed out in his PBS interview (The Fed's Terminal Dilemma When to Begin 'the Great Unwind' , August 7, 2013)

Buffett says in the clip that he thinks it will be "interesting" when the Federal Reserve gets to the unwinding stage of the stimulus it has applied. Prompted by the interviewer, he admits that "interesting" is just a euphemism.

"It's very easy to buy," Buffett says, referring to the trillions of dollars worth of bonds that the Fed has purchased to support the economy since the 2008 crisis.

"Now when you start selling, you know, you, at that point, you start sopping up reserves," he adds. "And that's a much different action than buying." (The reserves are the trillions of dollars that the Fed has printed, or rather, created de novo, to buy bonds since the crisis.)

"All over the world, everybody that manages money is waiting to catch the signal that the Fed will reverse course," Buffett says. "In the end, there have an awful lot of people (wanting) to get out of a lot of assets if they think the Fed is going to tighten a lot...

(W)e've never had the degree of disgorgement that might be called for down the line, and who knows how it'll play out. But it'll be noticeable..."

Buffett What Will Happen When Fed Reverses Course

...a jndoe just mentioned in his headlines that bernanke has warned about the risks of pelg back too soon, how that could damage the economy. and i would to go back to something you just told us in the last break. you said, i think it will be when they get to the unwinding stage of the fed balance sheet. when you say interesting, what do you mean? and i say that because you called 2008 interesting, too. that's a euphemism. the

Buffet: it's very easy to buy. you've got the treasury issuing securities like crazy and you just sop them up, you know, if you buy 58 billion a month. and you just credit bank reserves. the fed has about a trillion one or something like that of currency in circulation. you could just put more currently in circulation. but basically, you credit bank reserves. so if year going to have 3 trillion of assets, you need to create a trillion eight or trillion nine of bank reserves. they pile up. they don't like it because they're losing money. but they don't have good place toes put out a lot of money now.

When you start selling, at that point, you start sopping up reserves. and that is a much different action than buying. you saw just a whiff about, i don't know, who or three weeks ago, the wiff of the fact they might start tightening up. with the FOMC minutes? all over the world, everybody that manages money is waiting to catch the signal that the fed will reverse course. and, you know, there's a -- i think they're on a hair trigger.

So i think the fed will try to get little signals here and all of that. but in the end, there are an awful lot of people that want to get out of a lot of assets if they think the fed is going to tighten the lot.

Listen, at least to my knowledge, we've never had the degree of dis-georgement that might be called for down the line. And who knows how will play out. But it will be noticeable, put it that way.

Have you done anything differently at berkshire to prepare for that?

No. it's interesting, becky. Charlie Munger and I have not buying stocks and businesses for 50 years. In that entire time, we've never had a discussion of macroeconomic factors of whether to buy ourselves securities. it just doesn't get into our consideration. if i were to buy a farm, i would not be thinking about what the fed were going to do. if i were buyingapartment house or buying a business outright i wouldn't. but when i buy a piece of a wonderful business like coca-cola or american express, it is not a matter for consideration. charlie and i will get into businesses, but not talk about the government. but that may be because you run berkshire so conservatively. you are constantly making sure you have a huge amount of cash on hand in case the 100-year problem comes along. exactly. you've already guaranteed against this, anyway. well, we don't know when a hundred year problem is going to come.

It can come tomorrow, it can come a hundred years from now. we are always going to deal from strength. but in terms of making the decision whether to buy oriental trading today or pass, whether to buy heinz today, we do not get into macroeconomic discussions at all. Everybody thinks we do. they think we sit there and decide what emerging countries are going to be better. That doesn't get into the decision making. but just to differentiate what you do versus what everybody else does, that may guarded against it. yeah.

And because we think the important thing is to be in the right business at the right price. price is all important. and if you read cheery headlines and you're willing to pay a much higher price, you're making a mistake. And if you read depressing headlines and you say I won't buy at any price, you're making a mistake.

That's why i wrote that op-ed in 2008. Price takes care of the future. and it may be that you read terrible headlines for six months to a year, whatever it is. I refer in the annual report, i bought my first stock in the spring of 1942 when we were losing the war in the pacific, but i bought a very cheap stock and i thought we were going to win the war eventually.

If i had waited three months, as my sister pointed out to me, i could have bought it a lot cheaper. but that isn't the question. The question is whether i got a lot for my money and whether i've got to staying power to wait until things change.

I know you don't look at the macro issues. i know you don't pay attention to where the stock price rise.

But you did look at that op-ed when you thought the prices were low, you look at where the indices are now which is near all-time highs. does it make you nervous, does it make you less likely to say buy, buy, buy, in terms of what you're looking at in your port yol fello? if you ask me whether stocks are cheaper than other forms of investment, in my view, the answer is yes. we are buying stocks now because -- we're buying them not because we expect them to go up. we're buying them because we think we're getting good value for them. all right. joe,

Note: Despite doom and gloom stock market went from 1260 to 1460 in one year. This new stock and bonds bubble was supported by Fed.

Some positive points

Some negative points:

This is a bond bubble environment plain and simple. Stock are also overvalued, but bonds are really in bubble territory.

The "recovery" is now the worst in US history, having just dipped below the heretofore lowest on record.

If there was any debate whether the Fed's policies have helped the economy or just the market (and specifically the Bernanke-targeted Russell 2000), the following two charts will end any and all debate. As the following chart from the St Louis Fed shows, as of the just completed quarter, US GDP "growth" since the "recovery" is now the worst in US history, having just dipped below the heretofore lowest on record. (It's Official: Worst. Recovery. EVER)

"...the formal debt/GDP is now 103.8% and growing fast."

Previously, when calculating debt/GDP metrics for the US, we naturally assumed some GDP growth in Q4. Following today's GDP data we now know what Q4 GDP is. We also know that, at least on a preliminary basis, it posted a decline on an annualized basis. This means that we now have an official print for US Debt/GDP as of December 31, 2012. The numerator, or debt: $16.432 trillion, or the debt ceiling, which as we know was breached on the same day, and which has yet to be formally raised. The denominator, or GDP: $15.829 trillion. This means that the formal debt/GDP is now 103.8% and growing fast.[Jan 30, 2013] US Ends 2012 With 103.8% Debt To GDP by Tyler Durden

Shrinkage: US Economy Declined By -0.1% In Q4

A stunner out of the BEA which just reported a Q4 GDP of -0.1% that was leaps and bounds below the 1.1% estimate, and a plunge from Q3's 3.1%. The factors: Private Inventories, Exports and Government Expenditures all of which contracted, by -1.27%, -0.81%, and -1.33%. The silver lining was in Personal Consumption Expenditures which added 1.52% to the negative print, most of it however driven by a surge in spending ahead of the fiscal cliff. Ironically, this was the biggest government-driven detraction from growth since Q1 2011, when GDP led to a -1.49% cut in the GDP, same in Q4 when government spending on defense fell the most since 1972. The solution is simple: print moar drones. Enter Mali. And since everything is now AMZN-ing, we can't wait for the spin that the GDP's margins were actually better than expected, leading to a 200 point surge in the DJIA.[Jan 30, 2013] Shrinkage: US Economy Declined By -0.1% In Q4

The Removal Of 'Event Risk'

The removal of "event risk" is the bottom line which defines the markets currently and which is why there is such a large disparity between economic fundamentals and the markets' collective reaction.

Short and sweet; risk has subsided or at least that is the common perception. This does not mean that the collective thinking is correct or even that it will be the "collective thinking" for long.

The lack of a "fear factor" will push "relative valuations" in new directions which will impact the Dollar/Euro ratio causing even greater financial issues for Europe and higher Treasury yields will impact not just bonds with credit risk but equities as a matter of comparison.

Yields in Europe, which went down because of the Draghi promise coupled with our great slosh of capital and the "delay, defer and postpone" mindset of the Europeans may begin to rise again because of other factors which primarily would be their "relative valuations" against their American counterparts. The lack of "event risk" has two sides and two sets of consequences.

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Old News ;-)

[Mar 27, 2013] 'Declining Wealth Brings a Rising Retirement Risk'

The financial elites lust after Social Security money, and would love to have it transferred over to them for 'safekeeping'. The "news isn't good" about the shift from defined-benefit to defined-contribution pension plans:
March 27, 2013
Declining Wealth Brings a Rising Retirement Risk, by Bruce Bartlett, Commentary, NY Times: ...[In] defined-benefit ... pension plans..., workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations. Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. ...
Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn't good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.
Not surprisingly, retirement saving has taken a back seat to more pressing concerns – coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. ...
This problem is much more severe for black Americans. ... The wealth gap isn't only racial, it's generational...
What's really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse.
Republicans in Congress have pressed for years to convert Social Security, a classic defined-benefit pension, into a defined contribution plan, and also to convert Medicare into a voucher program. These changes would shift even more of the financial risk in retirement onto families that have yet to adapt to fundamental changes in employer pensions and the economy over the last 30 years. The future doesn't look pretty.

Members of Congress appear to be eager to cut retirement benefits even further to show they can make the hard choices (and the president seems to be on board). They should raise the payroll cap instead, but the "hard choice" that would hit the people who can afford it isn't under consideration. It's not hard to imagine why.

Darryl FKA Ron said...

The "news isn't good" about the shift from defined-benefit to defined-contribution pension plans:

[The new is great for corporations and investors, just not for retirees from ordinary wage and salary jobs. It's great news for the rich and great news for the poor. The rich will have even higher profits and income and the poor will have a LOT more company pretty soon.]

Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn't good.

[Don't worry it will get a lot worse over the next decade or so. The more equities that are cashed in by pension funds and 401Ks to draw down savings for income, then the lower equity prices will fall. After decades of pumping up equity prices with demand for savings, now things will begin to turn the other way. Why do you think that equities have rebounded after economics shocks so quickly in recessions past? It was not just corporate profits driving prices back up. It was also demand. Retirees draw down savings a lot faster than they saved. We save for forty or more years in order to have roughly fifteen to twenty years of retirement income, if that. Our savings rate is dependent upone our earnings. So, high income old boomers will stop saving and start retiring. The demand for equities from lower payed younger workers will not be able to pick up the slack. Hedge funds will run short sells to the floor. Then all the wealthy investors will pick up bargains off the floor. This price slump will help younger savers for as long as it lasts. Eventually, enough boomers will die off that equity price inflation will return.]

save_the_rustbelt said in reply to paine ...

This is old but ugly news.

In the few spare moments I have away from obamacare I tinker with redesigning def con plans, no brilliant solutions yet.

Ah, there is a new law prof paper on SSRN, really good analysis, now where did I put the darn thing......

save_the_rustbelt said in reply to save_the_rustbelt...

found it

Lawrence A. Frolik (Pittsburgh), Rethinking ERISA's Promise of Income Security in a World of 401(k) Plans

ken melvin said...

The whole model is problematic: an investor class, CALPERS and the workers, price of housing, asset inflation, ...

Cynthia said in reply to ken melvin...

The market is not the economy and can stay irrational longer than you can stay liquid. At some point, corporations will reach the law of diminishing returns in employment reduction and will NOT be able to continue pushing through price increases without the bottom line being affected. When that happens, and it will at some point in time if the economy continues to contract to where the market will more accurately reflect the economy, and it won't be pretty. I hope the market is "forward looking" and foretelling a better economy, but I think it's safe to view that with a jaundiced eye. It is fun while it last though, no doubt, unless you're one of the poor bastards that got reduced out of a job.

When in doubt follow the copper market. What is that canary doing?

ken melvin said in reply to Cynthia...

Yeah, I think that we're beginning to see the end of the WalMart model; I'm not sure what will follow. The race to the bottom means at some point the workers can no longer afford to buy and there goes the whole of it, the middle class, all of it.

save_the_rustbelt said...

A finance prof I work with, a guy really grounded in reality, has named the past ten years the

Decade of 0% Returns

Not exactly the 8% we were promised.

Ellen1910 said in reply to anne...

VFINX 7/31/2000-7/31/2010 AAR -0.86%
VWESX 7/31/2000-7/31/2010 AAR 7.81%

I guess it depends on what you're looking at and when you look.

Barry said...

Mark: "Members of Congress appear to be eager to cut retirement benefits even further to show they can make the hard choices (and the president seems to be on board). "

No, because the members of Congress don't make hard choices - or at least, hard for them. The financial elites lust after Social Security money, and would love to have it transferred over to them for 'safekeeping'.

D Surber said...

Don't forget the billions in wealth stolen when defined benefit plans were converted to 401ks. Twice in my career I have sat in meetings and watched my employer rape my coworkers through such a conversion.

Employees who were literally months from being fully vested in the defined benefit plan had their retirements wiped out. Both companies valued the accrued but not vested benefits at some pathetic dollar amount while vested employees received several times as much for only a few months more service.

Because there were so many more unvested employees, the company reaped a huge windfall by pocketing the "excess". Both companies chose to make the conversion during big stock runups when there were large "excess" savings in the pension plan.

Of course the "excess" was a financial fiction but that didn't stop corporate execs from pocketing the cash through outsize bonuses.

Perspective said in reply to Perspective...

I wish everyone with strong opinions about taxation/spending had the opportunity to live as a broke family and as a $300k+ family in LA/SF/NY/CHI. I think that perspective would change these "absolutes" that are so easily thrown-around (that a household making $250k should be paying tens of thousands more in taxes). The answers aren't easy. Life is hard and complicated.

Reply Wednesday, March 27, 2013 at 10:26 AM

paine said in reply to Perspective...
i've seen that range
i've live that range
i'm more absolute
its about economic class struggle

about people as classes not as "personhoods"

ya each of us has a unique identity more or less
each of us deserves equal respect and compassion
as individuals

and so ....????

i see no modification of the class struggle

D Surber

I'm in both ranges and I would gladly pay tens of thousands more in taxes to fund education for the workers whose payroll taxes will be funding my Social Security and Medicare. To pay for firefighters who will stop the next Oakland Hills Fire before it destroys my home. To pay for bridges and dams that won't collapse. Et cetera.

Notice I'm not willing to pay yet more trillions to Haliburton, Blackwater, Lockheed, etc for wars of aggression. Nor am I willing to pay trillions to imprison millions in the failed War On Drugs. Or trillions to pay bonuses to bankers who destroyed the world economy. I guess that makes me a taker.


Ah, and there's the rub. You're willing to pay more, but you don't want it directed in the trillions of directions it's wasted. So why pay more? Why not demand the military industrial complex be reduced billions?

Before you demand I pay a dollar more, I demand that you stop building war machines the military has publicly stated they don't want or need. Talk to me then...

Darryl FKA Ron :

that a household making $250k should be paying tens of thousands more in taxes

[Given you arithmetic skills then it is difficult to imagine the payroll tax cap would affect you.]

anne said in reply to Perspective...

I love the unchallenged judgment from the Left. If someone from the Right suggests that maybe, someone receiving welfare or Food Stamp benefits shouldn't be spending $40 on their nails every two weeks, that's not only insensitive but racist.

[ Not necessarily racist unless that is the intent, but a sickening stereotype and I realize now how typical the comment is. Would such a comment be sickening from the left or sickening from the right? I have no idea.

Where is my nail polish, Jeeves? ]

paine said in reply to Perspective...

an extra 10 k ?

its less then a 7% tax
to hit ten k in extra payroll taxes

230 k income
and that's just one earner
most households have two now eh ?
or can have two

where are u coming from here ?

paine said in reply to paine ...

a little non computive there
don't you think
Perspective ?

Perspective said in reply to paine ...

I was throwing a round figure in there with some assumptions to make a point. If we're talking about two married people each making $150k for a total of $300k, it would be more than $10k due to the Pease phase-down of their itemized deductions, .9% Obamacare Tax on $50k of their AGI, the 3.8% ObamaCare Tax on their investment income, and now 6.2% on another ~$100k of income for SSI.

Let's not forget, that the Senate Democrats' budget includes more taxes for these households too, not least of which is dramatically limiting the mortgage interest deduction (which I support BTW).

Darryl FKA Ron said in reply to Perspective...

But when someone on the Left suggests that people making $113k+ "can afford to pay much more in taxes," nobody questions this assumption. That person/family has bills and obligations too. This is America, so they're likely living paycheck-to-paycheck as well.

[OK, so I did the math considering a single earner making enough to pay $10K more in SSA payroll tax from lifting the cap and got $274,290. I will give you this much. In certain zip codes in NYCity, parts of Mass and CA, then a household could be living paycheck to paycheck. Of course, you might suppose that someone anywhere in the country might be living paycheck to paycheck on over a quarter million per year, but then you would have to question what someone that stupid did to make that much money? Ok, a family with more than five children would not be just overflowing with disposable income at that income. But a normal size family at that income should not be so cash flow strapped that the cap lift will kill them. It has been done before to levels higher than just inflation parity. Remember this is more than five times average household income and some of those households have five kids as well.]

Perspective said in reply to Darryl FKA Ron...

It won't kill them. I fully agree. However, the same argument could be said for raising the Medicare Tax or SSI tax 1%-2% as each is currently constructed. This won't kill middle class families.

EMIchael said in reply to Perspective...

Exactly how many people do you know that are receiving "welfare or foodstamp benefits" that pay $40 every two weeks to have their nails done?

Perspective said in reply to EMIchael...

Ah, that is where my perspective colors my political viewpoints (and makes me party-less). I was born and raised in South Los Angeles in a broken low-working class home. I know the people and especially the culture very well.

Perspective said in reply to EMIchael...

I often wonder if academics on the Left have ever been around low-income families and communities. The Right absurdly thinks that everyone has the opportunity to pick themselves up by their bootstraps regardless of the terrible family/community into which they were born.

But the Left equally absurdly thinks that every under-privileged family is doing everything possible to improve their lot in life, or at least the children's lot. They're both patently wrong.

Matt Young said...

Benefits are defined by the ability of the middle class taxpayer to make the payments. So do not tell us that you deplore the destruction of the middle class, then demand the middle class start making more payments, that it seems is a contradiction way beyond anything normal.

Also, the middle class has discovered the magic theories of economics, and we do not buy it. At the end of the magic the middle class still ends up with the bill, as we all know.

[Mar 25, 2013] Have The Russians Already Quietly Withdrawn All Their Cash From Cyprus

The claims about "hot Russian money" and Cyprus being some tax haven island nearly singularly floated on pillars of dirty laundry seemed to be blown massively out of proportion by the Main Stream Proxy Mouthpiece Media from the start, and rightfully warranted a very healthy dose of skepticism all along (which the actual data now shows was a justified skepticism).
Zero Hedge


Lest there be any doubt that the entire global fractional reserve fiat (whatever fiat, so long as it's conjured & distributed by a central Modern Money "Mechanic/Creature") financial system is a giant criminal racketeering enterprise:

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

I was never supportive of this whole destructive exercise in idiocy that was ostensibly implemented to "save" Cyprus from the moment it was spoken of (in whatever variation of confiscation schemes that it was). The claims about "hot Russian money" and Cyprus being some tax haven island nearly singularly floated on pillars of dirty laundry seemed to be blown massively out of proportion by the Main Stream Proxy Mouthpiece Media from the start, and rightfully warranted a very healthy dose of skepticism all along (which the actual data now shows was a justified skepticism).

This was all another case (in a long history and volume of such cases) of a blood letting of average citizens in a nation that claims to be an allegedly sovereign one (but which clearly has a deeply captured political and regulatory structure), on the altar of the global banksters, after all, just as many initially surmised.

Continental Europeans will see the Cypriotic Treatment, in all types of variations on the basic scam. Unless someone could prove that this isn't and hasn't been some intentional knocking over of dominos, cascade now beginning, that should be any rational person's presumption.

As a brilliant, truth-y philosopher, observer of "the system," & comedian once said:

"They're coming for whatever you have. And they'll get it eventually. They'll get it all."


I bet the Cyprus bank officials were more than happy to move that Oligarch money for the right "fee", even thought the banks were supposed to be closed. The first deal was stealing 10%. The final deal was stealing 40% up to 70%. Something tells me the Cyprus bank officials would be happy with 10%, and probably the Russians too. 10% of 40B Euro (supposed held by depositers over 100,000E) can buy you out of a lot of trouble. So what if they are breaking a few laws. The rule of law doesn't exist for bankers anyway.


Akak they made it clear insured deposits were to be left alone. That was their whole stupid theme today. How can tomorrow's theme be "insured deposits to be confiscated to make up for uninsured deposits having transferred out"?

Al Huxley

You're assuming there has to be some kind of coherency and historical continuity in the story Fonz, in which case your point would be valid. But as the media and politicos show time and again, they have absolutely no problem changing today's story without ever referencing or even considering whether it contradicts yesterday's story. They refuse to acknowledge the issue, so from the media's perspective it doesn't exist. 'We've always been at war with Eastasia'.


EU assholes bureaucrats want to create European Soviet Union.

Shit, these Russians had this shit for almost 70 years. So, they know how to play this game.

A Nanny Moose

It's all fun n' games, till someone loses an eye.

The bank manager with a gun held to his childs head: "Yes sir, no pin neccessary. How much did you need transferring?.. certainly".

toys for tits

An interesting article from Der Spiegel:

The verdict of Russian state television on Europe's effort to save Cyprus was damning. The last week "will enter the history books of the EU as a destructive one," said Dmitry Kiselev, the presenter of the popular news program Vesti Nedili on the Rossiya channel.

Kiselev heaped criticism on the forced levy to be imposed on bank deposits in Cyprus. He said the last time a Western European government proceeded so recklessly was when Adolf Hitler expropriated the Jews.

Nazi propaganda at the time described the money held by Jewish people as "dirty," said Kiselev. That was precisely how Europe was talking about Russian assets deposited in Cyprus, he added.


In the meantime it has emerged that the Kremlin might be willing to provide Cyprus with financial assistance after all. President Vladimir Putin ordered his government to support the efforts of the Euro Group, made up of euro-zone finance ministers, said Kremlin spokesman Dmitry Peskov. Russia plans to extend the terms of the €2.5 billion loan Moscow granted to Cyprus in 2011.

"President Putin considers it possible that the efforts of the Cypriot president and of the European Commission could be supported," said Peskov. Last Friday, Moscow declared that negotiations with Cypriot Finance Minister Michalis Sarris had been concluded without an agreement.

Russia Criticizes EU Over Cyprus Bailout Terms - SPIEGEL ONLINE


It was a deliberate wipeout attempt of the Cyprus and Russian middle classes. And Legarde et al., knew it.

On March 18, Reuters wrote: Big Russian Money Out of Cyprus.

"Sources in the wealth management, advisory and banking industry in Nicosia say Russia depositors are typically smaller savers and entrepreneurs. Fiona Mullen, a British economist in Cyprus, said Russians she encounters tend to be buying 300,000-euro homes, not the palaces favored by oligarchs in London.

"'There is a lot of Russian business done through Cyprus,' she said. 'It's so difficult to do business in Russia, you've got to bribe so many people, that it's easier to do it through Limassol. It's kind of the back office for Russia.'

"A business adviser said of his Russian customers: 'Clients would be well off, but not the private jet kind.' Most did not use Cypriot banks to keep money but as a conduit for funds.

"Cyprus charges foreigners no tax on dividend income and capital gains. A double taxation treaty with Russia provides attractive incentives for Russians to use Cypriot banks..."


The insured deposits were going to be paid on the assumption that all the Russian money was going to be confiscated. That's the problem.

The cost to the Troika went way the hell up and have been shown as chumps. What is Merkel going to do, run to the Russian Embassy and yell "YOU CHEATED!". Crips.

It's dawning on the ECB and everyone else for that matters, that there is no financial controls and when things get serious, everyone looks out for themselves. You think Russia give a flying you know what about ECB "Rules". Nyet


Why would Merkel run to the Russians? The banks were open in London as per the article. They should be yelling at London...except London was probably leaving those banks open to make sure they were off the people to kill list.

So again...if the big money (Russia) was allowed to leave....and the little money is insured...whose deposits are getting clipped...and what the hell was the whole point of this?


Or there was an express agreement with the russians... Do you really think they're going to just sit there and take it in the ass? All wars are proxy wars for the major powers... a shit ass bank run in BFE skanky europe is no different...

Apparently the ECB blinked on that one...

Buck Johnson

That's what I was thinking after hearing this. Everthing depended on the big whales aka Russian billionaires still having their money in those banks to be taken. And therefore there would be no cuts to the populace. With that gone (which I can't believe the ECB was so stupid but then again they did start this hair brained scheme in the first place), I guarantee that there isn't enough money of unsecured cyprus people that can cover those bilions and if so, it will destroy what is left of their economy and they will be in a depression real soon. Especially since people will have a run on the bank and take their money out which increases the need for more money to bailout the country.


"The common peasantry will get their insured deposits, but there won't be much to do with them now that the Cypriot economy will be plunging into an abyss of depression for the next decade at least."


"looks like the middle class gets hosed again"

My hope would be that the U.S. common peasantry would take a good look a this because the same damn money shuffle is happening here. Everyone is throwing heat at the EU and the Ruskies (niether of which I am a fan of) but the gig is, the cypriots got comfy and complacent and allowed their rulers and banks free reign. Sound familiar? Like maybe who caused the fucking economic problems we still suffer from here? And is playing the same game but at a faster clip?

But then that would be my hope. Unfortunately there be a whole heap of people out there never heard of Cyprus.

Been watching all these threads and see very few postings on how all this will/is impacting us.

Zero Hedge has posted numerous articles re the wealthy getting wealthier and the crooks/bankster (U.S.) getting more brazzen w/ their crimes and only place I see any real anger is on this site. In the streets there still blaming it on blacks and illegal immigrants.

Our time is coming and unfortunately for the most part our citizenry is incapable of comprehending or accepting or doing anything about reality.

Yo Cognitive Dissonance I need some freaking meds!


Call me cynical, but could it be that the bulk of the deposits were long gone due to fraud, illegal reinvestment, risk loss and banker profligacy? I think that there is so much fraud, the books were seriously cooked. It would explain why the banks would leave subsidiaries in other countries open, so they can say, "They took it all. See? Look at these [fake] transactions."

I'm sure there was much capital flight ex-post facto, but the Cyprus banks may have intentionally left the spigots open as cover to the funds already misappropriated or otherewise gone. I know it's hard to imagine that our illustrious financiers would ever think of running a second set of books as it became serious. Login or register to post comments Mon, 03/25/2013 - 18:25 | 3374432 toys for tits toys for tits's picture The EZ told the Cypriots that Greek bonds were safe, so one bank bought 3 billion euros worth. After the Greek haircuts they're worth 700 million.

This is just one example and shows that the Troika is doing nothing to stop the contagion but instead just keeps passing it from one jurisdiction to another.


its standard practice...look at the$600m transfer from lehmans europe to lehman bros in the US, on the fateful september weekend that they failed, via JP Morgan of course..but we won't hear anything more about that, particualrly since it was the europeans that lost the money and the US that gained.


A little like passing gold amongst each other in underground vaults. Audit it all at once (fantasyland, I know) and they would have difficulty showing piles of tungsten in many places at once, just as they would be unable to do with unhypothecated customer funny money.


I call BS. If this is true, the tranche of bailout money can't be delivered and the whole deal falls apart.

We will know very soon.


"Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it." -mark Twain


IMHO, the whole thing's a set-up. All the negotiations and beggings during previous week is just to give time for the Russians to pull their money out. Then comes the "DEAL"....but within 12 hours, all hell break loose. Next step: now there's REALLY no money left, will the Eurogroup cave and fork over the $$s or will they kick Cypus out, which is part of the 'master' plan anyway.


The ECB and EU don't care about the depositors money - all they care about is the Cypriot debt being held by the other EU countries - they did not want to see that defaulted on because that would mean real losses - not for Cyprus - but for the EU banks. The ECB is happy to bail out the EU banks by covering the Cypriot debt - then handing out austerity and the IOU to the Cypriot people for the next 30 years.

Dewey Cheatum

Howe's picture I think it is more a case of burying bad derivative trades that if exposed will cascade through the whole EU banking system causing an outright collapse. I bet they are scared shitless if the graveyards where the most toxic dead bodies are exhumed. Looks like Greece and Cyprus are ground zero looking at it from the outside.


Cypriot savers with smaller deposits at Laiki will see their accounts transferred to the Bank of Cyprus; however, in the UK the two banks will remain separate.

Bank of Cyprus UK customers have been told they will be completely unaffected by the bailout, as the bank operates as a separate entity incorporated in the UK.

In contrast, Laiki Bank's UK operation is set up as a branch of the Cypriot parent bank, so the situation is less clear-cut.

I see confusion!!!!

One eyed man

My understanding is that to get the highest interest rates (> 10%) people had to agree to deposit their money for a fixed term (typically 5 years). So my guess is that most of the uninsured money left in Cyprus was in accounts of that form.

But now the real fun begins. My guess is that the Cyprus banks have lots of bad assets that are still being carried on the books at far more than their actual values. In order to settle accounts, these assets will need to be sold at their real values and the size of the haircuts will get larger and larger. People with uninsured accounts are going to end up looking like Kojak.


Serious Question: WHAT exactly were the EU rulers trying to punish Russian billionaires for?

I guess I missed an episode...


I don't think they were, NC. I think they picked Cyprus because they could carry out their financial experiment more easily there. Make people believe that its all dirty money anyway, so were doing the world a service by punishing an unpopular country (Russia) anyway. A bit more palatable that way.

Diesel Boom messed up so bad today. And the fact that subsidiary banks were open all last week in London blows the lid off what theri real intentions were all along.

[Mar 25, 2013] SP 500 Futures Intraday - Buy the Rumour Sell the News Pop n' Flop

Cyprus was really the most important event of the month.
Jesse's Café Américain

This is what I would call a 'fluffy' market.

I would not bet on that just yet. The Fed continues to ply their cronies at the Banks and Funds with $80+ Billion of easy money per month.

It is a bubble, but bubbles are notorious bear-busters since they have an internal logic of their own

I think gold is fundamentally undervalued relative to the financial and currency risks, but values are not very relevant to the kleptocracy at this time of papier-mâché economies, except as a rival to their control frauds and a reflection of their general perfidy.

In that sense Cyprus was a watershed event, despite its seeming insignificance, as the MF Global style confiscations of the oligarchs become official government policy.

[Mar 22, 2013] Cyprus Update

Calculated Risk


There is an interesting dichotomy building on this site.

Either the goal posts have moved and we need to stop looking at the old means of measuring economic health and concentrate on new metrics the mostly talk about risk, or the goal posts have not moved and we take the apparent (weak) recovery at face value.

Comrade Alexei Mikhailovich:

Duke wrote:

Those on these boards seem to be quite negative.

And it always will be. save for a handful that would rather look at data. Every Cyprus or community bank is the next butterfly wing that will destroy the world.


Duke wrote:

Either the goal posts have moved

It's not an either/or For instance, you neglected the possibility the goal posts are in the wrong place to begin with or have no place on the baseball diamond.


CR knows Ben has his back [against the wall]. He also knows GDP has Ben backing it. And equities.

What does it come to? Nothing but a reinstatement of the status quo with a larger underclass, and a shrinking standard of living for many folks.

What's to be upset about if you are basically the type that is winning and are a selfish narcisstic arsehat? It's glorious.

Now, for those of us with empathy, a conscience, and a sense of justice and dignity, the whole thing is appalling.

Hence, I think there is a feeling that the doom should come, and it should cast its wrath upon these arsehat types. But ya know, if it creates any damage at all, well, guess who it's going to rain on?

So it goes...

Medvedev lambasts EU over Cyprus levy

Mr Medvedev said the eurozone's bailout proposals risked "undermining trust in financial institutions as a whole", and not just in Cyprus. Criticising the EU for showing the same disregard for small savers that the Soviet Union once did, the premier said if an "unprecedented" confiscation of assets in Cypriot banks went ahead, Moscow might reconsider its double taxation treaty with the island.

Of Russia's top banks, VTB, Gazprombank, Sberbank and Alfa Group all denied they were part of negotiations to invest in financial assets in Cyprus. "Now is not the best time," a person close to VTB said. Gazprom denied reports that it was considering investments in Cyprus offshore gas developments.

The Russian prime minister did not rule out possible support for Cyprus but said talks would continue with European Commission officials, including president José Manuel Barroso, in a pre-planned meeting in Moscow starting later on Thursday.

In the most detailed comments yet from Moscow on the bailout plan voted down by the Cyprus parliament on Tuesday, Mr Medvedev said the EU and Cyprus had acted "like an elephant in a China shop".

In depth

Cyprus bailout

International lenders have agreed a €10bn rescue of the debt-laden island contingent on the raising of €5.8bn from a Cypriot bank deposit levy

"All possible mistakes that could be made have been made by them," he added. "The measure that was proposed is of a confiscation nature, and unprecedented in its character. I can't compare it with anything but ... decisions made by Soviet authorities ... when they didn't think much about the savings of their population. But we are living in the 21st century, under market economic conditions. Everybody has been insisting that ownership rights should be respected."

Mr Medvedev also criticised the decision to freeze the Cypriot banking system, and not just withdrawals from troubled banks, warning that if this continued for any length of time it could "result in losses ... even bury the whole banking sector of Cyprus. It will cease to exist," he said.

Hitting out at claims led by Germany that Cyprus is widely used by Russian entities for money laundering, Mr Medvedev said "not all of them are actually trying to hide behind the special Cypriot jurisdiction, it is just a convenient form of work".

"We have got an agreement on avoiding double taxation" with Cyprus, Mr Medvedev added. "I don't know whether we need this agreement any more. Maybe we could pose the question of disowning this agreement after such a confiscation."


@Yorkie - So the ECB Ultimatum is not a politically motivated issue? Who do you believe? We are talking about 17billion. Why all the sudden the hard line from the ECB, the backpedalling from the Eurocrats. The ECB, and the Eurocrats messed up and continue to. Bunglers.


The ECB has never defined what it considers insolvent, for example. The Greek and Irish central banks used the facility heavily in the past to support their banks, which were also largely insolvent, as the member states grappled with unsustainable debt.


Europe's rules explicitly state that deposits below €100,000 are safe – a rule deliberately enhanced in the wake of the Lehman's collapse to boost confidence.

In one moment of madness, the shroud has unravelled. If confidence is all bluff, Brussels just revealed a dud hand.

The Europeans are now furiously back-pedalling. Eurocrats are briefing that they had insisted the levy be imposed only on the uninsured. Cyprus has angrily denied the claim, saying it was never given an option. But, even if Brussels did oppose a tax on Cypriot grannies, it is guilty of an appalling moral and economic failure.

Cyprus should never have been allowed to impose a tax that amounted to a breach of the rules.


@ Mansourov - thanks for the good saying! I have another on that is not quite so elegant. The fish stinks from the head.

@ Yorkie - a foreign central bank (ECB) is about to break its promise to EZ residents of a bank guarantee up to 100k in deposits. So with their inept handling of the crisis the EZ leader (including those of Cypriots) has put £1.7 BN of British citizens savings at risk this week.

Alexandre Mansourov


your despise of politicians may be even sympathized. But let me provide you with a good saying: Everyone is thinking of themselves as being strategists when it comes to looking at a battle. Now, you see there is a huge difference between a battle which is tactical, and a war, which is strategical.

When evaluating what others do, we normally tend to think that we could have done it better. This is only our perception. I know some say that perception is reality. But this is not necessarily true. Only in the eyes of the beholder. But thank you for a career advice. I find it flattering in fact

Alexandre Mansourov:

@ middle class greek: I have no idea where you are getting your figures from. Please have a look: http://www.laikiba...alReport2011EN.pdf

Note 45 of Laiki's financials shows that in terms of their customer breakdown, Laiki was heavily investing in corporates, NOT a sovereign (56% of credit assets in pure corporates). True though that some sovereign (let's name them: Greece) accounted for 60% of Laiki's losses during 2011.

Overall 41% of Laiki's credit assets were sitting in Greek assets. Another 31% of assets were invested in Cyprus. So all in all Laiki had 72% os its assets in Greece and Cyprus. And sovereign has never been their major assets.

Corporates and private individuals. Taken the sheer size of its banking sector, how on Earth would you expect Cypriot government to take this hardship on them and not on the depositors/lenders??

The Stock Market Is a Debt-Fueled Bubble by Steve Keen

Stocks fell into the red ahead of the closing bell Tuesday and while the S&P 500 (^GSPC) went on to end its seven-day streak of gains, the Dow Jones Industrial Average (DJI) still managed to eke out its sixth straight day of posting an all-time record high.

Related: Stocks Have Hit New Highs Every Day For a Week–Time for a Crash?

To point out the very obvious, it's not likely to continue forever. But according to economist and author of the book Debunking Economics, Steve Keen, it stands to get much, much worse in the next one to two years.

Keen tells The Daily Ticker the U.S. stock market is a giant bubble. But the key factor inflating it may not be what you think, according to the economist (i.e. he's not pointing fingers at the Fed…at least not directly).

Related: Buffett Scolds CEOs for Not Deploying Stockpiles of Cash

Keen has his eye on margin debt. This is the money people borrow from their stockbrokers to expand their holdings of shares. Keen says the ratio is now 70%, meaning with $300,000 you can borrow $1 million worth of shares.

Here's where it gets interesting. Steve has found a relationship between the change in margin debt and the level of asset prices. Even more importantly, he points to a correlation between the acceleration in margin debt and the rise in asset prices.

If his theory holds true, this means we're relying on the acceleration of margin debt to drive rising share prices. And when that acceleration slows down, equity prices will fall.

Related: Don't Fight the Tape But "It's Not Going to End Well": Todd Harrison

"Nothing can accelerate forever," Keen tells The Daily Ticker. "At some point the acceleration stops, and when it does the market breaks."

Keen says margin debt levels in the U.S. now are similar to where they were in 2000 and 2007.

"So I think you haven't got a lot of head room there," he notes.

As far as the breaking point, Keen, who is credited with predicting the global financial crisis, says, "given such a high level of margin debt-to-GDP, I think that comes in the next one or two years."

He sees what he believes is a stock market bubble bursting in the U.S. the way Japan's did in the 1990s. The bubble popped in late 1989, and the Nikkei (^N225) fell 63% in less than three years, but didn't hit bottom until 2003.

"I think we're in a long slow bleed, much longer and slower than the Japanese stock market crash, but there's similar dynamics," he predicts.

"In 500 years time people will look back and see this as the biggest debt-financed bubble in human history and ask, 'why didn't we realize it,'" Keen says. "But we think it's normal."

Keen is currently working on a new program for modeling the economy to include private debt, often overlooked by economists, called Minsky.

Lauren Lyster is the host of The Daily Ticker and Hot Stock Minute. You can follow her on Twitter at @LaurenLyster.

[Mar 17, 2013] Market Is 'a Bit Bubbly' With Risks of Big Movements by Robert Shiller

This is a risky environment in stocks right now... Might be forming bubble.
Yahoo! Finance

There hasn't been a day recently in which we have escaped headlines about the Dow (DJI) breaking records. The blue-chip index extended its winning streak to 10 days Thursday, which hasn't been seen since 1996. Meanwhile, the broader S&P 500 got within 2 points of its record close of 1565.15. On Friday the market experienced a slight pullback that finally threatened the upswing of the past two weeks.

But Robert Shiller, professor of economics and finance at Yale University and co-creator of the S&P/Case-Shiller Home Price Index, tells The Daily Ticker that all of it amounts to "numerology."

"This is a pretty unusual event, but that doesn't mean anything," Shiller says of the records, pointing to the fact that the market is not at a record high when adjusted for inflation, and that the S&P Composite Index (^GSPC) has had more than 1,000 closing record highs since 1928.

Shiller for his part, keeps a record of stock valuations that is not based on the stars. And right now, it's showing stocks are overvalued and the market could be headed down. In fact, Shiller's "cyclically adjusted price-earnings ratio," or CAPE, is approaching a level not seen since the last stock market bubble in October 2007, just before it burst. The CAPE stands at 23 compared to a historical average of 15. At the same time, it reached a high of 46 at the height of the big boom of the 1990s.

So what are investors to make of it?

"The CAPE ratio has predicted long-term returns," Shiller explains. The other side of it, though, is "when CAPE gets high, the market does tend to go down. It's a simple value proposition – what goes up must come down."

"I don't have an alarmist view about this," he adds. "The market is high but it's not horrible."

He describes a different feeling leading up to the tech bubble bursting, for example.

"I think it was a strong 'new era' feeling," Shiller says of the dot-com fervor driving the bubble. "People got overexcited about something they thought was life-changing. We're not in that circumstance now. We're bruised and battered and hoping to come out of this all right, so it's a different environment, which seems less likely to me to lead to a real bull market. But you never can be sure."

In terms of the bubble mentality of excitement and people pouring into the market because they are afraid of missing out, Shiller says, "Some of that is happening now but the question is how enduring it will be."

So in terms of whether we have a bubble, no bubble or the forming of a bubble, he says it's "quite a risky environment right now" and it could be any one of those. "It has been a bit bubbly, but I kind of give them all equal probability," he says, warning of "big movements one way or the other."

Related: The Stock Market Is a Debt-Fueled Bubble: Steve Keen

An over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral. by Charles Hugh-Smith of OfTwoMinds blog,


I have endeavored to lay out the global endgame in four recent entries:

For those seeking a summary, here is the global endgame in fourteen points:

  1. In the initial "boost phase" of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

  2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy. Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.
  3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

    In other words, financialization is untethered from the real economy of producing goods and services.

  4. Initially, financialization generates enormous profits as credit and leverage are extended first to the creditworthy borrowers and then to marginal borrowers.

  5. The rapid expansion of credit and leverage far outpace the expansion of productive assets. Fast-expanding debt-money (i.e. borrowed money) must chase a limited pool of productive assets/income streams, inflating asset bubbles.
  6. These asset bubbles create phantom collateral which is then leveraged into even greater credit expansion. The housing bubble and home-equity extraction are prime examples of theis dynamic.

  7. The speculative credit-based bubble implodes, revealing the collateral as phantom and removing the foundation of future borrowing. Borrowers' assets vanish but their debt remains to be paid.

  8. Since financialization extended credit to marginal borrowers (households, enterprises, governments), much of the outstanding debt is impaired: it cannot and will not be paid back. That leaves the lenders and their enabling Central Banks/States three choices:
    • The debt must be paid with vastly depreciated currency to preserve the appearance that it has been paid back.
    • The debt must be refinanced to preserve the illusion that it can and will be paid back at some later date.
    • The debt must be renounced, written down or written off and any remaining collateral liquidated.
  9. Since wages have long been stagnant and the bubble-era debt must still be serviced, there is little non-speculative surplus income to drive more consumption.
  10. In a desperate attempt to rekindle another cycle of credit/collateral expansion, Central Banks lower the yield on cash capital (savings) to near-zero and unleash wave after wave of essentially "free money" credit into the banking sector.
  11. Since wages remain stagnant and creditworthy borrowers are scarce, banks have few places to make safe loans. The lower-risk strategy is to use the central bank funds to speculate in "risk-on" assets such as stocks, corporate bonds and real estate.
  12. In a low-growth economy burdened with overcapacity in virtually every sector, all this debt-money is once again chasing a limited pool of productive assets/income streams.
  13. This drives returns to near-zero while at the same time increasing the risk that the resulting asset bubbles will once again implode.
  14. As a result, total credit owed remain high even as wages remain stagnant, along with the rest of the real economy. Credit growth falls, along with the velocity of money, as the central bank-issued credit (and the gains from the latest central-bank inflated asset bubbles) pools up in investment banks, hedge funds and corporations.

    The net result: an over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

Here are three charts that illustrate #14:

Eurozone credit since the inception of the euro. This is roughly equivalent to TCMDO (Total Credit Market Debt Owed) in the U.S.

[Mar 12, 2013] Download Conversion Factors

Oregon State University

The tables for 1774 to estimated 2022 and the conversion factor tables for 2010, 2011, and estimated 2012 were revised March 4, 2012, for both pdf and Excel files.

Conversion factor tables for other years will be revised soon, using updated inflation estimates from the OMB and CBO.

Excel file with column-format conversion factors 1774 to estimated 2022 (revised to reflect final 2011 CPI): CPI (1982-84 Dollars), 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, estimated 2012, CPI-U-X1 (2010 dollars), and CPI-U-RS (an experimental measure, using 2010 dollars, and updated CPI-U-RS data from the Bureau of Labor Statistics). This file provides both conversion factors for each of those inflation measures and also inflation rates using CPI-U for years starting 1774, CPI-U-RS for years starting 1947, and CPI-U-X1 for years starting 1950.

Inflation assumptions: Inflation conversion factors for 2012 and later years assume 1.95% in 2012, 1.70% in 2013, 1.75% in 2014, 1.85% in 2015, 2.05% in 2016, 2.15% in 2017, and 2.20% in 2018-2022. These are averages of OMB and CBO inflation estimates as of January and February 2012.

For ease of printing, the Excel file is available also in pdf format: Conversion factors 1774 to estimated 2022 (pdf format) (revised to reflect final 2011 CPI.)

Data prior to 1913 are estimates; data for 1913 to the present involve data from the Bureau of Labor Statistics, though the specific methods of data collection have changed during that period. Use special caution concerning data prior to 1913.

I strongly recommended that all dollar figures using these conversion factors for years prior to 1913 be rounded, e.g., $14,663 becomes $14,700, and preferably-especially for early years-to $15,000. Similarly, round dollars derived for years 1913 to the present to, for example, $14,660.

Stating dollar figure conversions in dollars and cents nearly always suggests more precision than the data allow.

[Mar 10, 2013] 'Public Thinking is Inscrutable'

The important fact is that we haven't set a nominal stock-market record in six years. And we haven't set one in 13 years if we use the inflation-corrected S.& P. Composite total-return index.

Robert Shiller:

Yes, We're Confident, but Who Knows Why, by Robert Shiller: The recovery in housing, the stock market and the overall economy has finally gained sustainable momentum - or so it is said. ... These vital signs make many people believe that we've turned the corner on the economy... Hope is a wonderful thing. ...
For years, I've been troubled by the problem of understanding the social psychology and economic impact of confidence. There hasn't been much research into the emotional factors and the shifts in worldview that drive major turning points. The much-quoted consumer sentiment and confidence indexes don't yet seem able to offer insight into what's behind the changes they quantify. It also isn't clear which factors of confidence drive the separate parts of the economy. ...
Clearly, confidence can change awfully fast, and people can suddenly start worrying about a stock market crash, just as they did after 2007. ...
For example, why is a record high in the United States stock market a reason for optimism? Nothing is remarkable about reaching a market record... The important fact is that we haven't set a nominal stock-market record in six years. And we haven't set one in 13 years if we use the inflation-corrected S.& P. Composite total-return index. That this index may be about to set a record means only that we haven't made any real money in the stock market in 13 years, which hardly seems a reason for confidence.
But public thinking is inscrutable. We can keep trying to understand it, but we'll be puzzled again the next time the markets or the economy make major moves.

[Mar 03, 2013] Buffett as a leading indicator By Martin Hutchinson

Asia Times

Warren Buffett's political pronouncements are intellectually vacuous hot air, yet I suspect he retains excellent investor's instincts about the future trajectory of the US economy.

So when he manifestly overpays in a US$28 billion acquisition of the food producer H J Heinz, we should listen and ponder what the deal tells us about where we are going. On cool reflection, the answer to that question is manifestly a survivalist one. For Warren Buffett it's clear: when Cash is Trash, Beans are Queens!

As in many of his transactions, Buffett has negotiated a favorable structure in the Heinz purchase: $8 billion of his $12.5 billion commitment takes the form of 9% preferred stock, which will pay him a fixed dividend of more than four times the current 10-year Treasury bond rate.

[Mar 03, 2013] The 'Great Rotation'? More Like The Great Lie

Seeking Alpha

Stocks funds saw a large increase in assets of 5.2% from December to January but Bonds also saw in increase in assets. (Click on table to enlarge)

[Mar 01, 2013] Chris Martenson: A Steep Stock Market Decline Is Coming - Ritholtz On Risk On/Risk Off

'Life is a school of probabilities.'

Walter Bagehot

...and the tuition is paid in their miscalculation, especially through unintended consequences.

I had this from Adam Taggart this morning. This is in no way an endorsement of Chris' conclusion, since I am loathe to make predictions rather than forecasts. But I respect his work, so I thought I would pass it along to see how it plays out.

Quite a bit of his analysis is correct and I cite him often. I find this market to be 'thinly bought' with steady rises on fairly cynical buying, with declines that are steep and sharp.

The fundamentals are very wobbly both in US but especially in Europe. China is unstable and Japan is in transition. Political leadership is bad to say the least.

So I would say that the right trigger event to a market correction is something that I can see playing out. However I would add the caveat that the nature of the trigger event will shape that correction, especially in the inter-market relationships and actions. This includes type of event and location.

Chris' scenario works well with a supply/price shock in energy, or a new sovereign financial failure in Europe.

It does not play out as well with a US based trigger event, a trade war, or some stronger erosion with confidence in the dollar reserve currency system, or a civil dislocation. Odds-wise Europe and China are better bets for the locus of the next crisis than the US.

Will the next crisis spring from a private financial occurrence like a bank failure, or a sovereign failure? Will the unholy Trinity of Fed-Banks-Government falter? Or will it be more political than financial, although the two are remarkably intertwined in this corporatist world of ours.

Note the time frame which is reasonably broad enough to encompass any number of events. I would add another month or two, although I would expect that the signs of trouble would be pretty apparent by August, even to the extent of a bubble like environment more obvious than today.

And of course we cannot dismiss the possibility that nothing dramatic will happen, and things will stumble along as they have been, from small crisis to ray of hope, and back. But with increasing levels of background hysteria as I have said we would see. This could get a bit ugly before it is over.

I do think the monied interests are looting, on a somewhat wider than normal scale, and some recent market action is the buying up of lifeboats at artificially low prices by given the appearance of normalcy. But really, who can say what will happen? In a market where stocks trade on their own supply and demand like commodities, rather than their underying fundamentals, the very act of betting against such manipulation creates the opportunity for insiders to manipulate even more. And this applies to all financial paper assets, including highly leveraged paper commodities with serious real world consequences, as we had seen in Enron's egregious manipulation of the energy markets.

I am not faulting Chris' analysis in any way. I am just loath to stick myself to a forecast of a less probable event, given the wide number of variables that can take the storm in this direction or that. With regard to the intensity of the storm, as the unknown aphorist once said:

"Great designs have linear consequences. Bad designs have exponential consequences."
Have I given you enough possibilities to effectively make no firm prediction, thereby stressing the need for portfolio diversity and flexibility? I hope so. I would rather make money than be 'right,' except for the longest term wager of all, which too many neglect.

However I am on alert, and will try to get to know what to watch, and then watch it.

I have lost quite a bit of money underestimating the willingness of frightened men in positions of power to engage in financial shenanigans, outright fraud, and seemingly irrational support for the rationally unsustainable. And I hope never to forget that lesson. Fiat is a powerful drug.

But there will be no sustained recovery until the financial system is reformed, and so we will continue on in a state of fragility, as so eloquently expounded upon by Taleb.

La voilà.

"Chris Martenson is issuing an official warning of a major stock market correction within the next few months. He's only done this once before in 2008.

He's seeing a convergence of both technical and fundamental data that are flashing oversized risks to the downside for asset prices, despite the Federal Reserve's money printing mania which is showing signs of hitting diminishing returns.

He expects the fall in equity prices to happen within the May-September window.

This downdraft will be characterized by lots of volatility, formed by market routs and Fed-inspired rescues, alternating until some form of bottom is reached. Along the way there will likely be a flight for "safety" into the dollar and Treasury paper, but only during the first stage of this crisis.

Once a bottom is reached -- he expects anywhere from 40% to 60% lower than the current ~1500 level on the S&P 500 -- the process will begin to be dominated by rising government borrowing which will cause interest rates to begin to rise.

When that happens, expect capital to flee the paper market for hard assets. In particular, that's when the upwards price revolution in the gold and silver markets will kick into high gear."

Warning: Stocks Likely to Crater From Here

In a related vein, Barry Ritholtz has posted this very illustrative 'risk-on, risk-off' chart. As the 'risk-on' phase continues, the pricing of risk becomes increasing divergent from reality.

I would like to add the obvious that gold tends to move inverse to this, except when 'risk on' is being fomented by a general increase in liquidity that is causing most asset prices to rise. Then we have that odd phenomenon when gold and stocks move in a correlated manner. And similarly, when there is a general liquidation gold falls with stocks.

Gold often moves most strongly higher in a 'risk off' trade not driven by panic selling of everything, and moves lower in a 'risk on' trade driven by a mispricing of risk. I know that this may seem like thin beer, but it is what it is, and it explains why gold acts as a safe haven, but sometimes does not. Bonds have exhibited similarly odd behaviour.

As for stocks, it depends on the character of the market and the nature of the trigger event, to say whether we might have a crash, or just one hell of a correction, within some longer term trend.

So in other words, not all selling, like risk, is of the same character. You have to know the market behind the price, especially when price is used to mislead. If markets were rational and efficient, Wall Street would not have to cheat so much to win so often. Much financial innovation is merely engaged in the increasingly elaborate mispricing of risk in the service of fraudulent outcomes.

"Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design ... The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version."

John Kenneth Galbraith

Politicians, like financiers, can make great personal progress towards power and wealth during new eras of innovation like supply side economics, privatization, globalization, and deregulation. What is particularly damaging is when the government, through monetary actions and/or regulatory inaction, extend and pretend if you will, supports this divergence between the promise, the risk, and the reality for its own ends.

The resulting reversion to the norm can have the impact of a thunderclap. So government becomes complicit in the control fraud which it abets, perhaps for certain policy ends, so that finally only those without conscience can abide it. And that is the genesis of the credibility trap, and the ascent of the careerists, and white collar sociopaths.

"All the truth of my position came flashing on me; and its disappointments, dangers, disgraces, consequences of all kinds, rushed in in such a multitude that I was borne down by them and had to struggle for every breath I drew."

Charles Dickens

As Market Heats Up, Trading Slips Into Shadows

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"



As the stock market continues to climb, trading has increasingly migrated from established bourses like the New York Stock Exchange to private platforms, including dark pools, that are largely hidden from public view. The shift is helping big traders hide what they are doing in the markets, and regulators are worried that the development could obscure the true prices of stocks and scare away ordinary investors.

lawyerliz wrote on Sun, 3/31/2013 - 5:47 pm

The stock mkt has always been rigged. Now, it's hopelessly rigged. My sense, based solely on anecdotal information, is that we aren't gonna have a recession for a while. With Hst, the stock market is a signal of nothing.

skk wrote on Sun, 3/31/2013 - 6:03 pm (in reply to...)

lawyerliz wrote:

With Hst, the stock market is a signal of nothing.

RD said - the Fed is policifying to the data not let the data tell them how to conduct policy. well he wdn't use an ugly word like policyfy but I will.

Its a very important distinction. usually you don't need to make it cos you can't control the data - that's kinda axiomatic - independently drawn and identically distributed is how your data flows in month to month to month.. when it isn't you should adjust your stats.

other ways of saying this are - you are saying you are doing y=F(x) but make sure you aren't doing y = F(y) - a third way of saying it don't control what you are measuring.

Arghhhh what's the use. how long has it taken for CR to put in the confidence interval numbers on new residential construction - even then its in fits and starts and he's in the biz -- truly upton sinclair's comment

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

has to be kept in frame by me.

I really shdn't slag off meine keine hoste so I'll STFU.

lawyerliz wrote on Sun, 3/31/2013 - 6:12 pm

This ordinary investor is scared. I know when I'm totally over my head. I know I can't! compete. Time not to bother to try.

josap wrote on Sun, 3/31/2013 - 4:27 pm

The Coalition will this week begin recruiting thousands of workers for the organisation, which is to be headed by a dedicated "Lights Tsar".

Employees will be tasked with going door-to-door to businesses and homes to manually switch off unnecessary lights. Staff at the agency will be able to issue penalty notices to repeat offenders and will be armed with binoculars and other equipment to allow them to ascertain whether rooms are empty or in use. Government to appoint 'Lights Tsar' to get Britain switching off - Telegraph



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