Zero Hedge

Present Shock And The Loss Of History And Context

Tyler Durden — Thu, 23 May 2013 00:55:28 GMT

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

In his new book, Douglas Rushkoff examines the telescoping of time and context wrought by ubiquitous digital technologies.

One of the few observers who is able to articulate a coherent critical account of American culture is Douglas Rushkoff. His new must-read book is Present Shock: When Everything Happens Now (print edition) and (Kindle edition).

I have long found inspiration and insight in Rushkoff's work, especially his keen understanding of the pathologies of consumerism. In my 2009 book Survival+, I wrote:

Rushkoff's reply to an interview question on the consequences of ubiquitous marketing reveals how media/marketing has created an unquestioned politics of experience in which one's identity and sense of self is constructed almost entirely by what one buys:

"Children are being adultified because our economy is depending on them to make purchasing decisions. So they're essentially the victims of a marketing and capitalist machine gone awry. You know, we need to expand, expand, expand. There is no such thing as enough in our current economic model and kids are bearing the brunt of that.... So they're isolated, they're alone, they're desperate. It's a sad and lonely feeling....The net effect of all of this marketing, all of this disorienting marketing, all of the shock media, all of this programming designed to untether us from a sense of self, is a loss of autonomy. You know, we no longer are the active source of our own experience or our own choices. Instead, we succumb to the notion that life is a series of product purchases that have been laid out and whose qualities and parameters have been pre-established."

In my view, this is a brilliant analysis of the rot at the heart of the American project.

In his new book, Rushkoff examines the telescoping of time and context wrought by ubiquitous digital technologies. We're always accessible, always connected and every channel is always on; this overload affects not just our ability to process information but our culture and the way media and marketing are designed and delivered.

The title consciously plays off the influential 1970 book by Alvin Toffler, Future Shock, which posited that our innate ability to process change was limited even as the rate of change in our post-industrial world increased. That rate of change would soon overwhelm our capacity to process new inputs and adapt to them.

In Rushkoff's view, we've reached that future: the speed of change and the demands of the present are disorienting us in profound ways.

We all know what stress feels like: it often causes our view to narrow to the present stressor, and we lose perspective and the ability to "make sense" of anything beyond managing the immediate situation.

Rushkoff identifies five symptoms of present shock:

1. Narrative collapse - the loss of linear stories and their replacement with both crass reality programming and post-narrative shows like The Simpsons.

2. Digiphrenia – digitally provoked mental chaos as technology lets us be in more than one place at any one moment. As Rushkoff notes in this chapter: Our boss isn't the guy in the corner office, but the PDA in our pocket. Our taskmaster is depersonalized and internalized.

3. Overwinding – trying to squish huge timescales into much smaller ones, for example, packing a year’s worth of retail sales expectations into a single Black Friday event.

4. Fractalnoia – making sense of our world entirely in the present tense, by drawing connections between things with weak causal relationships, for example Big Data, which excels at identifying correlations but is utterly incapable of identifying cause amidst the correlations.

5. Apocalypto – the intolerance for presentism leads us to fantasize a grand finale, the cultural equivalent of a "market-clearing event."

As Janet Maslin of the New York Times wrote in her review: "How do we shield ourselves from distraction, or gravitate to what really matters?"

Studies have shown that our innate ability to remember people and identify their relationships with others is limited to around 100 people--the size of a village or combat company. We undoubtedly have similar innate limitations on how many channels of input we can absorb.

Clay Shirky (author of Here Comes Everybody: The Power of Organizing Without Organizations) calls this filter failure, his term for what used to be called information overload. Our filters become overloaded and we lose the ability to "make sense" of what's going on around us.

As the phenomenologists discovered in the 20th century, our basic coping mechanism is to separate the world (and inputs) into three basic categories: the focal point, the foreground and the deep background. Being unable to sort out which input belongs in the three spaces leads to disorientation and poor decisions.

The parallels between filter failure and stress are not coincidental, as we handle filter failure and present shock the same way we handle stress: we limit inputs and make a concerted effort to reorient our awareness and context, what some call "be still and know."

Another troubling parallel to present shock is addiction. People now respond to texts, emails, alerts and phone calls like rats in the proverbial cage with the lever that releases another tab of cocaine: they over-stimulate themselves to death but are incapable of restraining their impulse for more.

The "obvious" solution is to turn off inputs as a way of restoring our ability to live in a present without novelty and distraction. This is akin to withdrawal from a powerful opiate, and so we should not be surprised that there are now treatment facilities for kids who need to detox from digital inputs.

Rushkoff is especially attuned to the distortions in our experience of time created by digital media-communication present shock: "Time in the digital era is no longer linear but disembodied and associative. The past is not something behind us on the timeline but dispersed through the sea of information."

In effect, change no longer flows linearly like time anymore, it flows in all directions at once.

History and meaningful context are both fatally disrupted by this non-linear flow of time and narrative. Is it any wonder that we now read about young well-educated people who do not understand the meaning of "policy"? To understand policy requires a grasp of the histories and narratives that led to the policy, and the linear, causally-linked way that policy is designed to solve or ameliorate a specific problem or challenge.

If the causal chains of history and narrative are disrupted, then how can anyone fashion a meaningful context for actions and narratives, and effectively frame problems and solutions? If everything is equally valid in a non-linear flood of data, then what roles can authenticity, experience and knowledge play in making sense of our world?

These are knotty, complex issues, and you will find much to constructively ponder in Present Shock.

Japanese Bond Market Halted At Open As Bond Selling Purge Goes Global

Tyler Durden — Thu, 23 May 2013 00:18:59 GMT

Japanese government bonds (JGB) futures have been halted once again this evening as the market opens down over 1 point. 10Y yields smash 11.5bps higher to 1.00% and 5Y yields add 6bps to 47bps. These are quite simply unprecedented moves in what 'was' a safe asset class and impresses yet another VaR shock on the market (as we detailed here). What this means practically is that Japanese banks push further into insolvency land (as we explained here) today's move wipes out another 1.5% of blended Tier 1 capital off the entire Japanese banking industry. Since the 10Y JGB yield lows of 32.5 bps on April 5, the move is rapidly approaching a full percentage point, or the parallel shift amount that the IMF warned would lead to 10% and 20% MTM losses for regional and major banks respectively. Today's jump in 10Y yields continues the post-BoJ regime of greater-than-six-sigma moves... something no risk model can withstand for three weeks. Just a good job the BoJ didn't have anything at all to say about this totally disorderly fiasco yesterday.

JGB Futures plunge to two-year lows...

leaving yields spiking...

10Y yields have now tripled from the post-BoJ meeting lows (in 7 weeks!!)

JPY is being sold like there's no tomorrow (which for the Japanese may well be true)

Meanwhile the Nikkei 225 is tearing hiugher once again - now up ovcer 85% from its Oct 2012 lows...

Charts: Bloomberg

IRS' Lois Lerner Re-Subpoenaed After Accidentally Waiving Her Right To Plead The Fifth

Tyler Durden — Wed, 22 May 2013 23:52:28 GMT

"Never attribute to malice that which is adequately explained by stupidity"

Robert Hanlon

Perhaps, when one gets down to it, there was no actual intent of malice or ill-will on behalf of the IRS to persecute conservative groups (there was of course), and the bottom line is that all of the administration's IRS apparatchicks were just bloody stupid.

Such is the conclusion one derives after watching today's attempt by embattled IRS official Lois Lerner to plead the Fifth before the House Oversight Committee, which blew up spectacularly in her face, after she made an actual statement protesting her innocence, which it appears, was in itself a waiver of the waiver.

As a result, committee Chairman Darrell Issa has ordered Lerner to be hauled back, and to answer the questions she evaded earlier today, after now having effectively waived her Fifth Amendment right in retrospect, or else be charged with contempt!

The farce is becoming so blatant it is almost as if someone is utterly desperate to make a complete mockery of the entire IRS scandal, and in the process shake the administration to the core, which more than anything is being exposed as utterly incompetent to boot. Of course, the real question is what is the public's attention being distracted from.

Politico reports:

The California Republican said Lerner’s Fifth Amendment right to avoid self-incrimination was voided when she gave an opening statement this morning denying any wrongdoing and professing pride in her government service.

“When I asked her her questions from the very beginning, I did so so she could assert her rights prior to any statement,” Issa told POLITICO. “She chose not to do so — so she waived.”

She appeared before Issa’s committee this morning under the order of a subpoena and surprised many by reading a strong statement to the panel.

“I have not done anything wrong,” she said. “I have not broken any laws. I have not violated any IRS rules or regulations, and I have not provided false information to this or any other committee.”... the committee may ultimately pursue a contempt charge if Lerner continues to refuse to talk.

And just so there is no confusion:

During the incident, Issa did not flat-out say whether or not Lerner had indeed waived her rights but instead tried to coax her into staying by offering to narrow the scope of questions.

By the afternoon, Issa was taking a harder stand.

“The precedents are clear that this is not something you can turn on and turn off,” he told POLITICO. “She made testimony after she was sworn in, asserted her innocence in a number of areas, even answered questions asserting that a document was true … So she gave partial testimony and then tried to revoke that.”

He said he was not expecting that.

“I understand from her counsel that there was a plan to assert her Fifth Amendment rights,” he continued. “She went ahead and made a statement, so counsel let her effectively under the precedent, waive — so we now have someone who no longer has that ability.”

Watch the entire exchange here, andfast forward to the sixth minute for the legal objection:

Modern Life Is Making Us Dumber

George Washington — Wed, 22 May 2013 23:38:20 GMT

Humanity Is Getting Dumber

Scientists say that we have much smaller brains than our ancestors had 20,000 years ago … and we might have gotten stupider since agriculture became widespread.

Indeed, Huffington Post reports that we’ve probably gotten dumber than even our Victorian ancestors:

A provocative new study suggests human intelligence is on the decline. In fact, it indicates that Westerners have lost 14 I.Q. points on average since the Victorian Era.

******

As for Dr. te Nijenhuis and colleagues, they analyzed the results of 14 intelligence studies conducted between 1884 to 2004, including one by Sir Francis Galton, an English anthropologist and a cousin of Charles Darwin. Each study gauged participants’ so-called visual reaction times — how long it took them to press a button in response to seeing a stimulus. Reaction time reflects a person’s mental processing speed, and so is considered an indication of general intelligence.

***

In the late 19th Century, visual reaction times averaged around 194 milliseconds, the analysis showed. In 2004 that time had grown to 275 milliseconds. Even though the machine gauging reaction time in the late 19th Century was less sophisticated than that used in recent years, Dr. te Nijenhuis told The Huffington Post that the old data is directly comparable to modern data.

Other research has suggested an apparent rise in I.Q. scores since the 1940s, a phenomenon known as the Flynn Effect. But Dr. te Nijenhuis suggested the Flynn Effect reflects the influence of environmental factors — such as better education, hygiene and nutrition — and may mask the true decline in genetically inherited intelligence in the Western world.

This new research was published in the April 13 issue of Intelligence.

There are several theories for why we are getting dumber, including the following (the first 2 come from the HuffPost article):

(1) Dr. Jan te Nijenhuis points to the fact that women of high intelligence tend to have fewer children than do women of lower intelligence. This negative association between I.Q. and fertility has been demonstrated time and again in research over the last century.

(2) “The reduction in human intelligence … would have begun at the time that genetic selection became more relaxed,” Dr. Gerald Crabtree, professor of pathology and developmental biology at Stanford University, told The Huffington Post in an email. “I projected this occurred as our ancestors began to live in more supportive high density societies (cities) and had access to a steady supply of food. Both of these might have resulted from the invention of agriculture, which occurred about 5,000 to 12,000 years ago.”

(3) Humans evolved to eat a lot of Omega 3s:

Wild game animals have much higher levels of essential Omega 3 fatty acids than domesticated animals. Indeed, leading nutritionists say that humans evolved to consume a lot of Omega 3 fatty acids in the wild game and fish which they ate (more), and that a low Omega 3 diet is a very new trend within the last 100 years or so.

In other words, while omega 3s have just now been discovered by modern science, we evolved to get a lot of omega 3s … and if we just eat a modern, fast food diet without getting enough omega 3s, it can cause all sorts of health problems.

So something just discovered by science can be a central fuel which our bodies evolved to use.

Omega 3s – in turn – boosts intelligence and help prevent cognitive decline.

(4) Exercise boosts intelligence … and our ancestors got a lot more exercise than we do!

In addition, high levels of cortisol – the chemical released by the body when one is under continuous, unrelenting stress – and poverty can physically impair the brain and people’s ability to learn.

On the other hand, relaxing activities like meditation and prayer have been shown to increase brain mass and connectivity in certain areas of the brain.

Hunter-gatherers had more leisure time – and a more playful attitude – than we do today.

(5) Toxic chemicals in the environment can reduce intelligence. Examples include flame retardant, lead (found in many lipsticks), certain pesticides (and see this and this), and fluoride.

Deleveraging, Releveraging And Finding The New Saturation Point

Tyler Durden — Wed, 22 May 2013 23:31:17 GMT

Submitted by F.F.Wiley of Cyniconomics blog,

Do you need a break from public policy buzzwords? Are you happy to go back to the days when cliffs were discussed occasionally on the National Geographic channel but not analyzed ad nauseum on CNBC? Are you tired of reading about austerity, austerians, anti-austerians and austeresis?

Okay, I may have made up the last one, but you’ve come to the right place.

Well, sort of.

I won’t do away with buzzwords altogether, but I’ll recycle an old one that’s faded from public discussion. Before cliff took its new meaning and austerity spawned a new branch of etymology, we had deleveraging.

It wasn’t that far back that everyone wanted to know: How much longer will deleveraging constrain growth? And the presumption seemed to be that deleveraging was a good thing. Most people agreed on these two points:

With debt having reached a saturation point during the housing boom, deleveraging needs to occur.
The economy will be on a stronger footing once it’s behind us.

Today, it still seems reasonable to ask how much longer deleveraging will play out. But after four years of painfully slow expansion, we should start by asking how much progress has been made. Is deleveraging well on its way, just getting started, or somewhere in between?

Or, as stated in the Length Fallacy Challenge that I introduced in March (see diagram): How long have we been deleveraging?

As in the other articles in the Challenge, I’ll share data that helps to answer the question, and then I’ll choose from the options on the right-hand-side. In later articles, I’ll explain how the answers tie together and offer my interpretation on what they mean for our economy.

Tracking economy-wide debt from the Great Recession to today

To keep it simple, my charts consider only three points in time:

December 2007 (the beginning of the Great Recession)
June 2009 (the end of the Great Recession)
December 2012 (the most recent data)

Chart 1 shows that households and nonfinancial businesses reduced their aggregate debt from 175% of GDP in December 2007 to 163% in December 2012. But this fall in private sector borrowing was more than offset by increased government borrowing. Total debt for households, nonfinancial businesses and government is now significantly higher than it was at the start of the Great Recession. It jumped by 19% of GDP while the recession was underway and then edged up another 6% through December 2012, for a total gain of 25%.

(This is a slightly bigger increase than you would find if you worked with only the Federal Reserve’s oft-cited Flow of Funds Accounts, with the difference explained by the government category. The Fed’s total excludes IOUs awarded to government trust funds – following the precedent set by the Office of Management and Budget – even though these IOUs fit every reasonable definition of debt, as I discussed here. I’ve added the IOUs back into the totals.)

If we relied on these figures alone, we would say the economy has more debt than it did five years ago.

But what about the financial sector, which isn’t included in the first chart?

Financial institutions have clearly reduced leverage since the end of the housing boom, primarily by cutting back shadow banking. As shown in Chart 2, their debt fell from 116% of GDP in December 2007 to 88% in December 2012.

Once again, though, the drop in private debt is at least partially offset by the public sector. And the public sector is comprised of the one bank that the Fed doesn’t include in its financial sector totals: Itself. In other words, the most powerful bank of all.

Now, you may question my aggregation of the Fed’s liabilities with private bank debt, on the basis that the Fed doesn’t issue traditional debt when expanding its balance sheet. But the Fed’s increasing leverage is every bit as powerful as traditional debt issuance, and more, since it allows private banks to increase their leverage. The excess bank reserves that the Fed creates out of thin air are economically similar to callable loans. They even pay interest these days.

The Fed’s balance sheet expansion has lessened but hasn’t prevented a drop in financial sector leverage, which is now lower than it was at any time in the Great Recession. But from the first chart, we saw that debt for the rest of the economy is now higher than it was during the Great Recession. This leaves us one more step: adding up the figures from the two charts.

Here are the totals across all sectors:

I can see two possible interpretations for Chart 3. The first is that debt fell after the end of the Great Recession, and therefore, the economy has slowly deleveraged. The deleveraging began in the fourth quarter of 2009, and since then, debt fell at an average annual rate of 6% of GDP. This interpretation is mildly encouraging, but I don’t agree with it.

Consider that the leverage added during the Great Recession is almost entirely explained by public policies, including unprecedented amounts of peacetime deficit spending and central bank balance sheet expansion. And that these public policies were intended as emergency and temporary measures. At least, that was the story at the time and it remains so today, even though both the government’s deficit and the Fed’s balance sheet are still abnormally large.

What I’m saying is that the economy hasn’t fundamentally deleveraged by simply reversing the jump in debt during the Great Recession. That increase in debt was reactive and intended to be short-lived. A better test is whether debt is lower today than it was when we hit the wall at the start of the recession. The last chart shows that it’s not.

Finding the new saturation point

According to this second interpretation, the discussion about deleveraging is far from over. Debt reached its saturation point in 2007, and we resolved that predicament by pushing the saturation point higher, which is what happens when you replace private with public borrowing.

Today, we’re relying more than ever on the “full faith and credit” of the U.S. government – the last line of defense when it comes to preserving our hugely levered economy. We’ve made room to take on more debt, but we don’t know how much room.

I’ll put it in Hollywood terms by taking you back to the 1979 classic, Alien (but don’t click on the links if you’re squeamish):

You’re standing with Warrant Officer Ripley (Sigourney Weaver) and the rest of the Nostromo’s crew and you’ve just had your first encounter with the “facehugger” alien. That was the global financial crisis. You’re now recovering and planning your next move. The alien’s still out there, you just don’t know exactly where it is and in what form. In other words, the next crisis could be worse. (But you’re hoping the alien doesn’t reappear in the same way as the facehugger’s spawn.)

I know, overdramatic, but it seems to fit. And you have to admit: If there were an alien version of the financial sector, or at least our too-big-to-fail banks, the facehugger might be it.

In other articles in this series, I’m taking a shot at locating the alien, by estimating the point where public debt reaches saturation. (See here, for example.)

But getting back to the question, “How long have we been deleveraging?” – I’ll answer “zero years.” As in, what deleveraging? We haven’t even gotten started yet.

Try This Experiment Yourself...

Tyler Durden — Wed, 22 May 2013 22:48:13 GMT

Submitted by Tim Price via Sovereign Man blog,

James Montier’s bible on behavioural finance, ‘Behavioural investing’, points out two recent discoveries by neuroscientists that have relevance to all investors:

1) We are hard-wired to think short-term, not long-term
2) We also seem to be hard-wired to confirm to the herd mentality

A particularly intriguing experiment used by Montier to illustrate these points relates to our tendency towards ‘anchoring’.

In his words, anchoring is “our tendency to grab hold of irrelevant and often subliminal inputs in the face of uncertainty.”

Feel free to follow the experiment yourself:

1. Write down the last four digits of your telephone number.
2. Is the number of physicians in London higher or lower than this number?
3. What is your best guess as to the number of physicians in London?

The idea of this experiment is to see whether respondents are influenced by their phone number while estimating the number of doctors in London. The results of the experiment can be seen below:

As the chart indicates, respondents with last-four telephone digits above 7-0-0-0 suggested, on average, that there were just over 8,000 doctors in London. Those with telephone digits below 3-0-0-0 suggested 4,000 doctors.

As Montier concludes, “This represents a very clear difference of opinion driven by the fact that investors are using their telephone numbers, albeit subconsciously, as inputs into their forecast.”

So our thesis goes as follows. In the absence of reliable knowledge about the future, investors have a tendency to anchor onto something – anything – to help them predict future market returns.

And what better anchor to use for future market returns than prior ones?

This is where the story gets more intriguing.

When looking at the UK stock market in discrete 20-year blocks, the period from 1980-1999 is the only one in the last 300-years in which inflation-adjusted returns averaged between 8% and 10% per year.

We think the story gets more intriguing still, because a good part of those returns was somewhat illusory in nature.

More specifically, given that they occurred during a once-in-a-century period of extraordinary credit creation, those market returns were in large part borrowed from the future.

This is the same way that governments have been funded, and their colossal bond markets serviced– by essentially loading the ultimate cost and the final reckoning onto the next generation.

So it seems that investors are not anchoring their predictions of future market returns to the past, because, as the data shows, long-term real returns have been quite low.

Instead, investors are anchoring their predictions to the very recent past that they have direct experience with, i.e. the twenty-year period between 1980 and 1999, even though this period was an anomaly compared to the last 300-years.

If this thesis is even half correct, investors piling into stocks now on the premise of recapturing some of those 8% – 10% real annual returns, are being at least somewhat delusional.

The credit bubble has burst. Messily. The stock market has not necessarily woken up to the fact. This does not detract from the sensible analysis of equity market opportunities.

But for any investment, its most important characteristic is its starting valuation. Buy attractive equities at sufficiently undemanding multiples and you should rightly expect to do well.

Investors, however, seem to be anchoring their market predictions to recent returns of the past, therefore buying ‘the index’ expensively, inclusive of a grotesque bubble of credit. One can expect this to end in a train wreck.

Eric Holder Admits To First Americans Killed By Drone Strikes

Tyler Durden — Wed, 22 May 2013 22:04:42 GMT

In a letter to Congress (below), AG Eric Holder admitted that the administration deliberately killed American Anwar al-Awlaki (the radical Muslim cleric) in a drone strike in September 2011 adding, as the NY Times reports, "the decision to target Anwar al-Awlaki was lawful, it was considered, and it was just." As RT notes, there was collateral damage, as it has been widely reported but rarely acknowledged in Washington that two other US citizens - Samir Khan, and al-Awlaki's teenage son, Abdulrahman al-Awlaki - were executed in that same Yemen strike. With Holder’s latest admission, however, a fourth American - Jude Mohammed - has also been officially named a casualty of America’s continuing drone war; bringing the total 'known' Americans killed under the US Drone War to 4 since 2009.

Via NY Times,

One day before President Obama is due to deliver a major speech on national security, his administration on Wednesday formally acknowledged that the United States had killed four American citizens in drone strikes in Yemen and Pakistan.

...

The American responsibility for Mr. Awlaki’s death has been widely reported, but the administration had until now refused to confirm or deny it.

The letter also said that the United States had killed three other Americans: Samir Khan, who was killed in the same strike; Mr. Awlaki’s son Abdulrahman al-Awlaki, who was also killed in Yemen; and Jude Mohammed, who was killed in a strike in Pakistan.

...

According to former acquaintances of Mr. Mohammed in North Carolina, he
appears to have been killed in a November 2011 drone strike in South
Waziristan, in Pakistan’s tribal area. Mr. Mohammed’s wife, whom he had
met and married in Pakistan, subsequently called his mother in North
Carolina to tell her of his death, the friends say.

...

“These individuals were not specifically targeted by the United States,” Mr. Holder wrote

...

Via Russia Today,

“The administration is determined to continue these extensive outreach efforts to communicate with the American people,” continued Holder. “To this end, the president has directed me to disclose certain information that until now has been properly classified..."

...

As part of the vaguely defined ‘War on Terror,’ the US has reportedly waged drone strikes outside of Afghanistan where the Taliban once harbored al-Qaeda. In recent years, those strikes have targeted towns in neighboring Pakistan, as well as Yemen, Somalia and perhaps elsewhere.

But despite growing criticism over escalating use of drones, the president and his office has remained adamant about defending the operations. It’s “important for everybody to understand that this thing is kept on a very tight leash,” Obama said last January, adding that his administration does not conduct "a whole bunch of strikes willy-nilly.”

Full AG Letter:

ag-letter-5-22-13

Greek Prostitution Soars By 150% As Youth Unempoyment Hits 75% In Some Areas

Tyler Durden — Wed, 22 May 2013 21:35:08 GMT

With Greece suffering the biggest economic depression in decades, all so a few rich men can preserve their wealth and not have their EUR-denominated savings wiped out (even if the alternative means finally being able to rebalance externally using the Drachma instead of forcing internal rebalancing via unemployment and plunging wages), it was only a matter of time before we found out just how humiliating the conversion of the entire economy to a "gray", non-tax paying one would be for the citizens of Greece.

As the NYT reports, in just the past two years, the numbers of Greeks engaging in prostitution as a last course source of income has more than doubled: according to the National Center for Social Research, the number of people selling sex has surged 150 percent in the last two years.

Furthermore, with every business in which there is exploding "competition" and rich client scarcity, it is not just any prostitution, but very deflationary prostitution:

“Five euros only, just 5 euros,” whispered Maria, a young prostitute with sunken cheeks and bedraggled hair, as she pitched herself forward from the shadows of a graffiti-riddled alley in central Athens on a recent weeknight.

Many prostitutes have been selling their services for as little as 10 to 15 euros, a price that has shrunk along with the income of clients afflicted by the crisis. Many more prostitutes are taking greater health risks by having unprotected sex, which sells for a premium. Still more are subject to violence and rape.

Now a new menace has arisen: a type of crystal methamphetamine called shisha, after the Turkish water pipe, but otherwise known as poor man’s cocaine, brewed from barbiturates and other ingredients including alcohol, chlorine and even battery acid.

And with a surge in prostitution come the drugs, and the danger of an epidemic of blood-transmitted diseases, like HIV:

A hit of shisha, concocted in makeshift laboratories around Athens, costs 3 to 4 euros. Doses come in the form of a 0.01-gram ball, leaving many users reaching for hits throughout the day. They include prostitutes, whom Mr. Tzortzinis photographed in a seedy central neighborhood of Athens called Omonia, next to a large police station.

Shisha is most often smoked. But it is increasingly being taken intravenously; because of the caustic chemicals it contains, a rising number of users are winding up in the emergency room. Health experts say the injections are also adding to an alarming rise in H.I.V. cases around Greece, which surged more than 50 percent last year from 2011 as more people turn to narcotics.

For Mr. Tzortzinis, who grew up in the area, seeing women give themselves for as little as 5 euros underscores one of the many horrors of Greece’s drawn-out crisis.

Unfortunately for the country which is terrified to just say no to Europe due to the indoctrinated dread of what would happen if it left the Eurozone, this is only the beginning as the problem is far deeper, and it goes to the root of everything: an entire generation going to waste.

But while the Greek still soaring unemployment rate is no surprise to anyone, it is the youth unemployment that is the problem. And as the Telegraph reports, in some areas of Greece, youth unemployment has now hit a inconceivable 75%.

Western Macedonia in Greece had the highest level of youth unemployment in the European Union, with the number of 16 to 24 year-olds out of work jumping to 72.5pc in 2012 from 52.8pc in 2011, according to Eurostat. Total youth unemployment in Greece stood at 55.3pc last year, more than double the EU average of 22.9pc.

The region, located in northern Greece, has been hit hard by the economic crisis, with total unemployment rising from 12.1pc in 2007 to almost 30pc in 2012 due to de-industrialisation and the migration of labour intensive industries to neighbouring countries, where wage demands are lower.

According to a report by the European Commission in December, more than a fifth of firms stopped trading in the region between 2008 and 2011.

Europe's response to this pandemic of unemployment?

Europe's leaders have called for more action to tackle joblessness in Europe. Earlier this month, European Commission president Jose Manuel Barroso urged Europe's leaders to come up with "a more ambitious plan to fight youth unemployment" at a next month's EU summit.

"We must give revive hope, specially for young people," he said. "We cannot wait for long, we are all aware this is urgent."

And when hope is not enough, and when these same young people end up as prostitutes, drug addicts or, worst, infected with HIV, maybe they should also hope that a cure for the disease is somehow discovered (and which they can afford).

Why? Just so the 0.001% uberwealthy can continue to get richer and richer courtesy of a year after year of flawed monetary and fiscal policy, even as the real world around them burns.

"We Are Experiencing More Than Just A 'Soft Patch'"

Tyler Durden — Wed, 22 May 2013 20:57:48 GMT

Submitted by Lance Roberts of Street Talk Live blog,

"The economy is amazing right now - employment is recovering, innovation is going and housing is reviving. What's not to love?" This was a statement I heard in the media to justify the recent rise in the stock market. In this past weekend's newsletter I went into significant detail in dismantling the bullish arguments with one point being the consistent weakness in the economic data.

The most recent release of the Chicago Fed National Activity Index (CFNAI) is the last of the components released each month that comprises the Economic and Employment Composite indexes. The April data for the CFNAI was not good with the manufacturing component confirming what we had already seen in most of the regional Federal Reserve manufacturing surveys. The overall CFNAI index plunged from to a negative 0.53 from a negative 0.23 in March. In both months, manufacturing production fell, down 0.4 percent in April following a 0.3 percent decline in March.

However, as opposed to recent media headlines boasting of the strength of consumer spending and housing, the consumer & housing sector was the second largest drag on national activity in April dropping from negative 0.15 in March to negative 0.17 in April. Employment also did not confirm the recent BLS report, which we suspected would be the case, as the employment component has fallen from a positive 0.35 in February to a positive 0.1 in March to ZERO in April. This is certainly not a trend that supports the much hoped for job growth in the near future.

Let's take a look at the two composite indexes to see what they are telling us about the economy and the most likely direction of the data in the months ahead. Both indexes are weighted average of the CFNAI, ISM, several Federal Reserve manufacturing surveys, the NFIB Small Business survey, Chicago ISM and the Leading Economic Indicators. The only difference between the two indices is that the employment composite is comprised of the employment components of the above as opposed to the overall activity components.

STA Economic Output Composite Index (EOCI)

The EOCI index fell sharply to 26.08 in April from 30.35 in March as the brief surge in activity from "Hurricane Sandy" finished working its way through the system. The chart below compares the EOCI index to real, inflation adjusted, GDP on a quarterly basis.

There are a couple of important takeaways with this index. The first is that both positive and negative trends in the EOCI index track very closely to the ebb and flow of GDP. The second is that historically when the EOCI index was below 30 the economy was either in, or about to be in, a recession. Currently, the economy is not running in recessionary territory, as of yet, but the trend of weakness in the macro economic data is somewhat concerning.

The chart below shows these corollary trends a bit better with the EOCI index, smoothed with a 3-month average, compared to the annual rate of change in nominal GDP.

What is most concerning is that while the asset prices are inflated with artificial interventions that trend of economic data has clearly peaked for the current cycle. Either the mainstream economists and analysts are correct and the economy is about to turn substantially stronger and play catch up with asset prices or asset prices will revert to catch up with the fundamentals of the economy. The latter is much more likely the case from a historical perspective.

STA Employment Composite

If you strip the employment components out of the EOCI index and weight them into their own composite index we find that the hiring intentions of employers is clearly weakening. The chart below shows the Employment Index smoothed with a 4-month average and compared to the annual rate of change in Total Non-Farm Employees.

As with the EOCI index above - employment activity clearly peaked in early 2012 and has begun to wane. The recent uptick in the employment index, remember this is a 4-month moving average, is due to the effects from the uptick in economic activity from "Hurricane Sandy." This index will turn down in the next couple of months as the recently monthly data points have declined.

What is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken. This is well within the context of historical trends and time frames. While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise.

As we discussed recently:

"A wave of "disinflation" is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets.

The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like "Humpty-Dumpty", the broken financial transmission system, as represented by the velocity of money, can't be put back together again."

The real concern for investors, and individuals, is the actual economy. We are likely experiencing more than just a "soft patch" currently despite the mainstream analysts rhetoric to the contrary. There is clearly something amiss within the economic landscape and the recent decline in the economic, employment and inflation data are telling us just that.

Stunned Stocks Slide On Soaring Volume; Worst Swing Day In 5 Weeks

Tyler Durden — Wed, 22 May 2013 20:14:18 GMT

Today saw the largest high to low drop intraday (down over 2.3%) in the S&P 500 for five weeks as it fell back to the 'Tepper Top'. Volume was the 3rd highest of the year. As expected, high-beta muppets were hurt most; Trannies were the worst performer in the major equity indices (down 1.6% on the day and 2.5% from the Bernanke highs early on); homebuilders dropped 3.7% from their earlier highs, and Morgan Stanley slumped 4% from its earlier highs. VIX (up most in 5 weeks at 14.0%) and credit markets (biggest widening in 4 weeks and HYG dropped by its most in 6 months from its intraday highs) saw major weakness (extending the bearish divergence with stocks). The USD rallied back to unchanged on the week and commodities slipped lower (gold and silver end the day slightly higher on the week). What's so special about today? The S&P 500 dividend yield just equilibrated with the 10Y yield for the first time since April 2012... where would you rather 'reach for yield'...

Quite a day...

Small bounce into the close but not a pretty day...

Exuberance - the S&P 500 broke above its six-month trend channel today... final straw?

as the S&P 500 broke down to Tepper's Top

Bonds and Stocks yield the same...

'Most-Shorted' names recovered the week's squeeze and slumped back to in-line with the Russell...

The USD rallied back to unchanged on the week - which weighed on commodities in general...

Charts: Bloomberg and Capital Context

This seemed to sum it up nicely...

Four Signs That We're Back In Dangerous Bubble Territory

Tyler Durden — Wed, 22 May 2013 19:41:17 GMT

Submitted by Chris Martenson of Peak Prosperity blog,

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous.

With equity and bond markets at or near all-time record highs, with all financial assets consistently shrugging off bad – or worse – news as the riskiest of assets continue to find consistent upward bids, we find ourselves in familiar and bubbly territory.

I can summarize my thoughts in one sentence: How could this be happening again so soon?

In times past, it took one or more generations between bubbles for people to financially recover and forget the painful lessons before they would consider doing it all again. Yet here we are, working our way through our third set of bubbles in less than two decades, which must be some sort of world record.

I will confess to my biases right up front: I have always been deeply skeptical of both the practice of running up debts at a faster pace than income (the common practice of the entire developed world over the past several decades) and the idea that the solution to too much debt is more debt, enabled by cheaper money courtesy of thin-air money printing.

In short, instead of seeing central banks as sophisticated stewards of intricate monetary policies, I view them as serial bubble-blowers and reckless debt-enablers whose only response, when confronted with the inevitable consequences of their actions, is to serve up more thin-air money at an even cheaper rate. And when that doesn't work, then they simply try even more of the same, but in larger quantities.

While I think central banks are populated by earnest people with impressive credentials who have rationalized their actions as being necessary and in service of the greater good, I also think that the biggest ones hold an entrenched set of institutional views that are dogmatic, fail to incorporate the idea of economic and resource limits, and are seemingly immune to healthy introspection.

Somewhere along the way, I would have hoped they might have noted that each new crisis is larger than the one before – necessitating an even larger response that begets an even larger crisis next time, etc., and so on. A corporate bond hiccup in 1994 led to monetary loosening that enabled the development of the Long Term Capital Management (LTCM) fiasco of 1998, which was followed by the tech bubble, and then the housing bubble, and here we are with a now global equity and bond bubble that is larger than all the prior bubbles combined. Much larger.

It was famously said that the market can remain irrational longer than you can remain solvent. And if the trading maxim, don't fight the Fed, is worth heeding, then surely one should absolutely not take on all of the central banks at once, either. So, the risk I run here in seeing things through my 'common sense' filter is that perhaps this time the Fed, et al., have got it right, and a true and lasting recovery is at hand.

With that caveat, in this report I lay out the five most worrisome signs that horrific market losses await the unwary, the careless, the reckless – and those who possess all three characteristics (i.e., your average central bank).

These are not normal times. The degree of separation between reality and today's financial markets is extreme, which means they have a tremendous degree of potential energy stored up that could erupt in a downward cascade at any time.

While we can’t predict the exact time or trigger of a market avalanche back down to reasonable levels, I can definitely advise that you do not want to be standing in the valley when it happens.

Four Signs That We're Bubbling

Here are the four things that convince me that we are in truly bubbly territory:

Sign #1: Junk Bond Prices at Record Highs

The Fed, et al., have been buying up all of the 'safe' bonds, with the twin intents of driving down interest rates and chasing investors into riskier assets. With lower yields comes (hopefully) more borrowing; and when investors move towards riskier assets, this drives up the equity markets – which, as the thinking goes, will paint a rosier picture of the economy plus boost consumer confidence and spending.

Along with this, however, we find speculators and investors, starved for yield, chasing the junkiest of the junk.

Indeed, the prices of these "assets" have recently been driven to all-time record highs, which means that their yields have hit record lows.

And not just "low" prices, but a brand new record low in all of financial history.

Sign #2: Junk Sovereign Debt Being Chased to New Highs

It was just over a year ago when Greece ten-year debt was yielding a whopping 30%, reflecting the poor economic fundamentals of the country and concern that the European Central Bank (ECB) might stop loaning Greece the principal and interest payments needed to prevent another default.

Oh yes, and let's not forget that just a year prior, more than $130 billion had been lost by Greek bond investors, which created a ripple effect across Europe, including recently crippling Cyprus' key banks.

Today? Greek ten-year debt is under 10%.

Greece Bulls Charge Into Corporate Bonds

May 15, 2013

Investors are returning to Greece, lured by receding fears that the troubled country will leave the euro and the high returns offered by many of its battered assets.

It is a remarkable turnaround. Only a year ago, Greece was toxic territory for investors. A debt restructuring had just wiped out more than €100 billion ($130 billion) in government bonds. The stock market stood at one-tenth its 2007 levels. A political earthquake had the country poised for a chaotic election.

But now the markets have turned. Months of relative calm in Europe – and the pressure to go somewhere, anywhere, for yield in a low-interest-rate world—has investors taking another look. The Athens stock market has rallied more than 80% in the past 12 months, with the Athex Composite Index rising 0.8% on Tuesday. Greek government bonds have been on a tear since June.

The real story here, about speculators – not ‘investors’ – returning to Greece, is that the world is so utterly starved for yield that even Greek debt seems reasonable now. In Greece, even as the trend towards buying Greek debt was building, the country's economy (as measured by unemployment and GDP) deteriorated sharply.

As compared to 2008, Greek GDP in 2012 shrank by 20%, and current trends continue to show 5%-6% shrinkage in 2013:

(Source)

In what sort of a world does serious economic contraction, spiking unemployment, extremely high levels of debt-to-GDP, and falling bond yields go together? A bubbly world, that's where.

Sign #3: It's Not Official Until It's Denied

The poster child for a bubble market has to be Japan, where the main stock index of the island nation, the Nikkei, is up an astonishing 70% in the past six months (!) in a vertical index rise that is well outside of our personal experience:

This isn't some penny stock, but the entire stock index for the world's third largest economy. Of course, the 'reason' for this rise centers on the actions the Bank of Japan is taking to debase its currency. The people of Japan are realizing that they cannot trust their cash and had better put it to use somewhere besides their bank accounts before its purchasing power is drained away.

After such an obviously unstable spike in the market, what's left to do but officially deny that it's in a bubble?

Stock Boom Isn't a Bubble, Says BOJ's Kuroda

May 15, 2013

TOKYO—The Bank of Japan's governor played down worries that the stock-market boom is a bubble and that a weak yen will stir cost-push inflation, signaling his resolve to press ahead with the bold monetary easing that has fueled stock prices and driven down the currency.

Grilled by lawmakers during a session of the upper-house budget committee, Haruhiko Kuroda flatly rejected an opposition-party member's argument that the recent rapid rise in the Tokyo stock market is out of line with Japan's real economy.

"At this moment I do not think they are in a bubble," Mr. Kuroda said.

Driving this bubble is the determined resolve of the BoJ to make the yen worth less, perhaps even someday worthless. For a major world currency, the chart below is quite startling.

If something is not official until it's denied, then the Japanese stock market is most definitely in a bubble. It should be noted that there are similar examples of stock indexes making new highs on bad news and weak fundamentals the world over, so we're not just picking on Japan alone here.

Sign #4: Making Up Crazy Excuses

My final sign of that we are in bubble territory is when the folks who consider it their job to make sense of the high and spiking prices offer up thin, sometimes stretched-to-the-breaking-point, rationalizations for why the current price action make sense.

In the late 1990s, when the third most recent Fed bubble was cooking along, stratospherically valued technology shares were justified with strange metrics such as 'impressions' and 'eyeballs' and other contorted valuations contained in no standard finance methodologies.

In the 2000s, when the second most recent Fed bubble was cooking along, housing prices were justified with trite slogans such as "they're not making any more land, you know" and bizarro claims that housing had never gone down in price over time – which it most certainly had.

Today is no different. We're seeing the same sorts of 'explanations' to justify high prices fueled by central bank printing. Perhaps the central cheerleader for the benefits of perpetuating central banking policy errors is Paul Krugman, who recently swept aside arguments for an equity bubble by saying something that Irving Fisher might recognize:

O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits— which are, after all, what stocks are shares in — are more than two-and-a-half times higher than they were when the 1990s bubble burst.

Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher.

(Source)

This sounds reasonable until you consider the context of this argument about corporate profits, of which an economist like Krugman ought to be fully aware. Corporate profits are in very, very unusual territory (one could even say record territory), and to say that equities are fairly valued now because of their relationship to corporate profits is to argue that such profitability is a new and permanent feature of life.

The economist Irving Fisher somewhat famously and regrettably opined in 1929 (right before the stock market crashed) that a new corporate model and economic era was in play that had led to a "permanent plateau of prosperity." The rest is history.

In life and investing, there's nothing quite so powerful as reversion to the mean, which in the case of corporate profits is nearly 50% lower than where they currently are. By the time that economists are dismissing the notion of an equity bubble by pointing out heightened corporate profits, without providing any of the necessary context, we are in full-blown rationalization mode – which is another bubble indicator.

Also, the fact that Mr. Krugman is citing "low bond yields" as a justification for moving into stocks rather delightfully skips over the reality that it is the central banks themselves that are responsible for those low bond yields. Krugman presents the information as if such intervention were a normal market condition to which investors were rationally reacting, rather than a completely fake circumstance engineered by central banks conducting the biggest monetary experiment in human history.

Next, we have this tidy explanation from Goldman Sachs, groping for reasons to explain why stocks always seem to go up no matter what:

"while equity prices respond more to dovish surprises than hawkish surprises, the results suggest that equity prices typically go up regardless of whether the Fed policy surprise is positive or negative (“good news is good for equities, and bad news is good for equities”). But it is not at all clear why the equity market should systematically buy into this pattern."

(Source - Zero Hedge)

This is at least as honest an appraisal of the situation as I can find. Goldman Sachs is basically waving its hands in the air and saying that it's somewhat puzzling why markets should be acting this way. An even more honest statement would continue by noting that such periods of irrational exuberance are quite often found during bubbles, and that bubbles have a bad habit of destroying wealth.

As is common in life, such justifications merely expose the 'human factor' of bubbles. Bubbles require a belief system to be installed in the beholder, and two things that beliefs are exceptionally good at are gathering supporting data and rejecting contradictory data (if such data is even seen in the first place).

The human mind does this all the time with respect to our own level of ability, our luck, our good looks, our children's performance – you name it – this is just part of our innate mental programming.

The really odd part in this story is that once upon a time, bubbles were separated by a generation or more, so that the lessons (and pain) of the prior one could be culturally forgotten before the next one could take hold. Yet here we are, working on our third bubble in a row – larger than the prior two that just happened within the past 15 years. (Of course, with a wide enough lens, we might say that each bubble was just a subset of the largest credit bubble in all of history that began building some 40 years ago).

For some reason, we are forgetting the lessons of the past faster than ever before. Such willful ignorance invites a series of reality-based reversions more punishing than ever before, too.

My advice: Keep a journal. These are interesting times; possibly not to be repeated in many, many generations.

Conclusion to Part I

There are abundant signs that the world's equity and bond markets are ignoring risk and chasing yield to dangerous extremes. Various denials and justifications are being offered to rationalize these behaviors as sensible or prudent. Taken together, this tells me we are once again in bubble territory, and that, as with all bubbles, this one will end badly. Or rather, these bubbles (plural) will end badly together.

I'm sure that most market participants have it in their minds to dance as long as the music is playing and to be among the first to reach the exits when the music stops. However, everybody is thinking this, and given that only the most well-connected of market players have the opportunity to exit first (literally in the blink of an eye), very few will actually make it through the doorway unscathed.

As is always true in life, the point of a bubble is to separate the most people from the most wealth. The wealth doesn't actually vanish; it's just simply transferred from the last purchasers to those who sold before the bursting.

I truly have no idea how much longer all this craziness can continue. I suspect the answer is a lot longer than anybody suspects, myself included. But I also know that reversals tend to happen quite quickly, all on their own, with very little warning. This leads to my personal motto: I'd rather be a year early than a day late.

In Part II: Protect Your Wealth in Advance of the Bubble's Bursting, we detail our rationale that all this ends in a wrenching market crash (Phase I), which will be followed by even larger, more desperate, and unusual central bank actions (Phase II) that will initially set the stage for what seems like a recovery but ultimately terminates in the largest currency crisis of modern times, if not human history (Phase III).

The difficulty will be avoiding being whipsawed throughout, losing wealth at every step. After all, the primary outcome of every attempt at money printing in the past has been a massive wealth transfer from a very large proportion of the afflicted society to a much smaller one.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

In the meantime, trade safe. My advice here is to use extreme caution whether investing or speculating, whichever you are involved in.

With One Hour Of Trading To Go, The Ghost Of Divergences Past Arrives

Tyler Durden — Wed, 22 May 2013 19:11:29 GMT

As the world of equity asset-gatherers is desparate to point out the 'bubble' talk must mean bonds, we offer a few charts as a gentle reminder of reality... And as Doug Kass noted the last two times the S&P 500 hit all-time high and closed down more than 1% from that high were 10/11/07 & 3/24/00... 330 Ramp Capital has their work cut out today with volume already near the highest of the year in the S&P 500 e-minis.

Where's the bubble?

Credit has been nervous for 2 weeks...

as has VIX...

Charts: Bloomberg

180 Seconds After The FOMC Release, Hilsenrath Parses Fed Minutes

Tyler Durden — Wed, 22 May 2013 18:51:50 GMT

What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.

So what did Hilsy have to say this time? This:

Federal Reserve minutes from its April 30-May 1 policy meeting suggested it is heading toward some difficult debates on when to pull back its bond buying program.

Below are key passages in the minutes and how to read them:

1) “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.”

WHAT IT MEANS: The Fed will debate at its June 18-19 meeting whether to reduce its $85-billion per month bond-buying program, but officials don’t appear near a consensus on the matter. Fed chairman Ben Bernanke suggested in testimony to Congress earlier in the day that he wanted to avoid moving prematurely toward pulling back.

2) “Several participants pointed to the improvement in interest-sensitive sectors, such as consumer durables and housing, over the recent period as evidence that the purchases were having positive results for the economy.”

WHAT IT MEANS: The Fed talks about the costs and benefits of its policies. So far, they think the bond buying program is still helping the economy.

3) “Economic data releases over the intermeeting period were mixed, raising some concern that the recovery might be slowing after a solid start earlier this year, thereby repeating the pattern observed in recent years. Various views on this prospect were offered, from those participants who put more emphasis on the underlying momentum of the economy, noting the strengthening in private domestic final demand, to those who stressed the growing fiscal restraint or the other headwinds still facing the economy.”

WHAT IT MEANS: Fed officials are hesitant about their next step on monetary policy in part because they’re especially uncertain about how the economy unfolds in the next few months, in the face of tighter fiscal policies.

4) “Both headline and core PCE inflation in the first quarter came in below the Committee’s longer-run goal of 2 percent, but these recent lower readings appeared to be due, in part, to temporary factors; other measures of inflation as well as inflation expectations had remained more stable. Accordingly, participants generally continued to expect that inflation would move closer to the 2 percent objective over the medium run.”

WHAT IT MEANS: The Fed’s favored inflation measures have dropped well below its 2% target, but officials aren’t deeply concerned about it yet.

Trust Hilsenrath to miss the most important part of the minutes, which was this - the first "on the FOMC record" admission by some that the Fed is officially blowing a bubble:

"a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability."

WHAT IT MEANS: It is self-expanatory

Post-FOMC: A Market Scorned

Tyler Durden — Wed, 22 May 2013 18:23:54 GMT

Well that escalated quickly... the S&P is now 30 points off its earlier highs and it seems (for once) that it is stocks and none of the other risk-assets that are taking the brunt of the disappointment. And no, it wasn't the mention of a June taper that spooked markets: as the Fed itself said that will be a function of the economy, and as everyone knows there bad news and good news are both goods news. What spooked the market is that finally someone on the FOMC is not only acknowledging asset bubbles, but putting it in writing: "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability." Now this is a problem because unlike the economy where QE may or may not trickle down to the unemployment rate (it won't as QE is causing it but fear not - more QE is just around the corner to fix a problem caused by QE) asset bubbles only get bigger and bigger and bigger, until QE has to be not only tapered, not only stopped, but actually unwound. And with some finally on the record, the blame will be cast squarely at those who ignored the first warnings.

Post-FOMC Performance: ES 1658 -8.5, 10Y 2.01% Unch, Gold $1361.25 -$2.25, DXY 84.28 Unch

FOMC Minutes: This Is What It Sounds Like When Doves Cry, And When Others Start To See An Asset Bubble

Tyler Durden — Wed, 22 May 2013 18:02:45 GMT

It appears (as we noted here) that the size of the balance sheet, difficulty of the exit, frothiness of markets, and not-totally-dismal labor headlines have even the doves a little more hawkish about the possibility of an exit at some point - though obviously the minutes are clear that the 'flow' can increase (as well as decrease) based on the data.

FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
FED'S BROAD PRINCIPLES ON EXIT `STILL VALID,' FOMC MINUTES SHOW
SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE
SOME SAID "CONDITIONS IN CERTAIN FINANCIAL MARKETS WERE BECOMING TOO BUOYANT"

Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the 'flow' not the 'stock' that matters - as we have been vociferous about for years. But what is worst, is that now that some at the FOMC are openly seeing asset bubbles, Bernanke is facing a mutiny on his hands!

The exit seems closer than many expected...

Pre: ES 1666.5, 10Y 2.01%, Gold $1363.50, DXY 84.28

The key section from the Minutes:

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee’s economic objectives. Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.

And this:

A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then.

But without doubt, the punchline:

a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant, pointing to the elevated issuance of bonds by lower-credit-quality firms or of bonds with fewer restrictions on collateral and payment terms (socalled covenant-lite bonds). One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability.

Finally, after years of creating them, at least some at the Fed are seeing bubbles and more importantly, putting it in the transcript!

Full minutes (link):

Easy Come, Easy Go - Equities Turn Red

Tyler Durden — Wed, 22 May 2013 17:45:16 GMT

There appears to be only three words that matter any more and they all begin with the letter 'T' - Tepper, Tuesdays, and Tapering. It seems today, the apparent start of Bernanke's gentle communication policy that he might possibly maybe one day will remove the punchbowl is being modestly priced out of stocks. The S&P and Nasdaq are now down 1% from post-Bernanke 'Moar' euphoria.

"Hawks, Doves, Owls And Seagulls" - Summarizing The Fed's Bird Nest

Tyler Durden — Wed, 22 May 2013 17:41:18 GMT

With part two of today's Fed-a-palooza due out shortly in the form of the May 1 FOMC meeting minutes, here is an informative recap of the current roster of assorted birds at the FOMC via Bank of America. Of course, since every decision always begins and ends with Ben, and soon his replacement Janet, all of below is largely meaningless.

Hawks, doves, owls and seagulls

Speeches by FOMC participants often get a fair bit of attention, and that has been particularly true of late. The markets are very sensitive to any hint that the Fed might scale back QE3 soon. Unfortunately, given the diversity of views on the FOMC, it is not always easy to separate the signal from the noise when Fed officials speak. The best advice is to listen to the voters (Table 1), especially the core members: Chairman Ben Bernanke, Vice Chair Janet Yellen and New York Fed President Bill Dudley (and vice chair of the FOMC).

While FOMC participants are typically split along a hawk/dove spectrum, in the current group there are several Fed officials with more nuanced views. For example, there are some arguably hawkish (or formerly hawkish) participants who nonetheless favor additional accommodation. Conversely, there are those who are typically thought of as doves yet who advocate scaling back QE more quickly. These conflicting cross-currents only add to the market’s confusion.

To understand most Fed officials’ policy preferences, it helps to step back and consider their philosophical bases — which for many goes back to their training in economics. Specifically, many of the divisions on the FOMC reflect differences between “freshwater” and “saltwater” schools of thought in economics — so named for the location of the US graduate schools (inland versus the coasts) where each has been most prevalent. In brief, freshwater economists emphasize market efficiency, rational expectations and policy ineffectiveness, while saltwater economists see market failures, multiple equilibria and a role for countercyclical
demand management.

Oceans apart

Some key differences between these two schools of thought as they relate to monetary policy are listed below:

Monetarists versus New Keynesians: The basic modeling framework for freshwater economists is often monetarist, where the key responsibility of a central bank is long-run price stability. Saltwater economists use a New Keynesian framework that suggests policy can help stabilize markets.
Inflation vs. unemployment: Freshwater economists see inflation as having a clear priority in the Fed’s dual mandate, and are skeptical that unemployment (or slack more generally) has much to do with inflation. Saltwater economists see reducing unemployment as its own objective in the short-run. Both sides agree that a central bank should credibly commit to a long-run nominal anchor, like an inflation target.
Structural vs. cyclical labor market factors: Freshwater economists tend to see a significant portion of current unemployment as structural; equivalently, they see underlying equilibrium unemployment rate as relatively high right now — and not amenable to monetary policy stimulus. Saltwater economists believe that the labor market suffers mostly from cyclically weak labor demand. Some have suggested that policy needs to be very easy to prevent persistent cyclical unemployment from becoming structural. They forecast the NAIRU (the unemployment rate consistent with steady inflation) to be relatively low (perhaps 5%); saltwater types think it is higher.
Transmission mechanisms. Monetarist channels of greater liquidity and credit creation are key for freshwater views; these are seen as currently ineffective in promoting growth but a risk for higher inflation. The New Keynesian view associated with a saltwater approach emphasizes low interest rates stimulating demand and higher asset values allowing for balance sheet repair and creating a wealth effect.
Inflation expectation risks: Freshwater adherents see inflation as determined by the pace of money printing and policy credibility; they worry that large central bank balance sheets risk rising inflation expectations. Saltwater economists counter that persistent low inflation and large output gaps risk inflation expectations deteriorating below long-run inflation targets.
Costs vs. benefits of QE: Freshwater economists are skeptical of any benefits from QE for real activity, and worry about the potential costs in terms of inflation and financial instability. Saltwater economists see unconventional policy as simply an extension of easing when at the zero lower bound; the way it should work is similar to “normal times.” Both sides are uncertain of the efficacy of continued QE, but saltwater economists tend to be more optimistic of its effectiveness.

From theory to practice

Freshwater programs are associated with universities such as Chicago, Minnesota and Rochester. Saltwater views are more common at institutions such as MIT, Princeton and Yale on the East Coast, and Berkeley on the West. A similar pattern is found at the regional Federal Reserve Banks: those on the coasts tend to have saltwater orientations, while those inland skew more toward freshwater views. But in both cases, there are interesting exceptions that we discuss below.

For most FOMC participants, the freshwater/saltwater divide mirrors the hawk/dove categorization — Chart 1 plots a fairly standard spectrum for the current FOMC participants. Thus, for example, the steady hawks have strong freshwater connections. The research records of Philadelphia’s Charles Plosser and Richmond’s Jeffrey Lacker belie the East Coast locations of their Banks. While Dallas’s Richard Fisher and Kansas City’s Esther George are not trained as economists, they hail from solidly freshwater Banks. The backgrounds and affiliations of each FOMC participant are listed in Table 2.

These four members have cast the majority of dissents in recent years (in addition to George’s predecessor at Kansas City, Thomas Hoenig, who also was a serial dissenter). They have been critical of QE since its first round, and have lately called for its early end, arguing the costs exceed the benefits. Of this group, only George is a voter this year, and we expect her to dissent at least until the Fed starts to taper QE3. As Chart 2 shows, a core group of hawks have been a persistent source of dissents during Bernanke’s time as chairman — nearly 60% of FOMC meetings have not been unanimous since he took the helm in 2006.

At the other end is the more dovish majority. This group includes Chairman Ben Bernanke, Vice Chair Janet Yellen, and New York Fed President Bill Dudley, as well as Boston Fed President Eric Rosengren. All are voting members this year. We expect the other Board members who are not trained as economists — Sarah Bloom Raskin, Elizabeth Duke, Jerome Powell and Daniel Tarullo — to vote with the majority, as all have indicated support for the current policy stance within the past few months. And while some in the market have speculated that Governor Jeremy Stein has a hawkish streak after his 7 February speech on “Overheating in Credit Markets,” we note that he characterized his discussion as “an extended hypothetical” and concluded that any potential losses are “confined” and a “relatively limited” source of systemic risk.

Neither fish nor fowl

Other Fed officials do not fit into this hawk/dove categorization quite so neatly. Atlanta’s Dennis Lockhart and Cleveland’s Sandra Pianalto are typically centrists who vote with the majority; lately Lockhart has been generally supportive of the current QE plan, while Pianalto has raised some concerns. Neither is a voting member this year, but Pianalto will be a voter in 2014.

The “owls”

Three Midwestern Fed bank presidents are less hawkish than their counterparts at Dallas or Kansas City, despite their freshwater training: Chicago’s Charles Evans, Minneapolis’s Narayana Kocherlakota, and St. Louis’s James Bullard. Both Evans and Bullard are voters this year, while Kocherlakota votes in 2014.

We consider them the “owls” in our classification, given their tendency to make model-based arguments around policy — and to have taken more dovish policy positions recently. All three have given their support to QE3 purchases, for example, and Evans and Kocherlakota both have enthusiastically promoted the use of economic thresholds for forward guidance.

St. Louis’s James Bullard

Bullard is arguably the most traditionally hawkish of the owls, describing himself as the “north pole of inflation hawks” — despite regularly drawing on New Keynesian models in his research. He also has been the most vocal advocate of making small changes to the purchase pace for QE. In his most recent speech on 21 April, he said that QE “remains the best monetary policy option” in the current situation and recommended continuing at the current pace.

Note that Bullard is regarded as having been early in calling for QE2, although he also has been an opponent of forward guidance — so his track record as a barometer of where the rest of the FOMC may go has been mixed. Bullard has argued for beginning to taper QE3 as the unemployment rate gets close to 7% and growth rises to around 3 ¼%. While he has seen these outcomes as possible by the end of this year, the March projections by the FOMC suggest most of his colleagues don’t expect to hit those criteria until later next year.

Minneapolis’s Narayana Kocherlakota

Kockerlakota has a relatively short history on the FOMC — he became President of the Minneapolis Fed in October 2009 and first voted in 2011 — but it has been
a colorful one. In 2011 he twice joined Fisher and Plosser in hawkish dissents: against introducing a calendar date for forward guidance in August, then against additional accommodation in the form of Operation Twist in September. However, in September 2012, Kocherlakota had a road-to-Damascus conversion. He completely changed his song, and called for the Fed to adopt a “liftoff plan”: keep rates low until the unemployment rate hits 5.5% — provided that inflation was no more than 25 basis points above target. Since then, he has said that more stimulus would be “desirable.”

In our view, Kocherlakota is the owl most likely to change his feathers and become more hawkish again. However, we would not expect that to happen while inflation is running (well) below the Fed’s long-run 2% objective. If the outlook for PCE inflation one- to two-years ahead were running above 2.25% or so, we would then expect him to revert to a hawkish stance. But as of now, that looks rather unlikely for next year, when he is once again a voter.

Chicago’s Charles Evans

Evans has been the most avidly and consistently dovish of the owls, supporting aggressive Fed easing as a voter in 2009 and 2011 — and dissenting twice, in November and December 2011, in favor of additional policy accommodation. In late 2011, Evans developed and refined what would ultimately become the threshold approach to forward guidance that the FOMC as a whole adopted in December 2012. Evans’s advocacy for this approach was cited by Kocherlakota as a strong influence over Kocherlakota’s own thinking.

Evans is a voter again this year. In his most recent public remarks on 20 May, he sounded more optimistic about the outlook for growth and employment, although he said he would like to see at least a few more months of data before thinking about tapering. Evans also repeated his condition of several months of greater than 200,000 in monthly payroll growth as a marker for a “substantial” improvement in the labor market. He observed that the Fed is missing on both its employment and inflation objectives, and said the Fed needed more time to assess the effects of policy. He also noted that it was important that policy makers did not become complacent given the still powerful headwinds facing the economy. On net, we interpret Evans’s remarks as suggesting the earliest he would support tapering would be early fall, and mid-year slowdown would reset the clock.

The “seagulls”

Whereas the owls are dovish-sounding FOMC participants who have hawkish (freshwater) backgrounds or inclinations, the “seagulls” are saltwater doves who have flown far from shore and are starting to sound more hawkish. While some might put Stein or the latest remarks by Evans in this category, we currently see one main member of this group: San Francisco Fed President John Williams.

San Francisco’s John Williams

Before becoming the president of the San Francisco Fed, Williams worked as a staff economist at the Board of Governors in Washington DC and at the San Francisco Bank. Much of his research has been in a New Keynesian framework. And he has been relatively dovish in his speeches since becoming president in 2011. Lately, however, he has been talking about a possible early end to QE3.

In his most recent speech on 16 May, Williams discussed the progress made since QE3 began, noting that the labor market has “improved considerably” but not yet “substantial improvement” — that will take “further gains.” However, he went on to say that “assuming my economic forecast holds true” and “appreciable improvement” occurs in “various labor market indicators” in “coming months,” then the Fed “could reduce somewhat” the purchase pace “perhaps as early as this summer.” “If all goes as hoped,” the Fed could then conclude QE3 “sometime late this year,” according to Williams.

There are a lot of conditionals in those statements, and they require a lot of things to go right. In effect, Williams has outlined more of a “best case” than a “base case” for tapering and ultimately concluding QE3. He has had a similarly optimistic outlook for the past few months, while acknowledging many of the downside risks that have kept his more dovish colleagues cautious and less willing to advocate for a quick end to QE3. That, in our view, makes his current views less representative of the FOMC majority. Given the markets typically view the San Francisco Fed as particularly dovish, he also may be trying to create a more balanced impression and avoid being labeled an über-dove. Most importantly, however, he is not a voter again until 2015.

Birds of a feather

A number of current FOMC participants do not fit so easily into a simple hawk/dove division. While it is still possible to broadly characterize the 19 Fed officials at the FOMC meetings along such a spectrum (as we have done in Chart 1), that can increase the risk that the views of certain members are misconstrued as giving greater insight into the likely policy choices of the Committee than is warranted. As we noted at the outset, most attention should be given to the core of the Committee: Chairman Bernanke, Vice Chair Yellen and New York Fed President Dudley. In addition, it pays to focus mostly on the FOMC voting members — and the current group skews dovish, in our view. Fade the hawks, but also be cautious about interpreting the owls and seagulls — they sometimes fly far from the majority.

ZiG ZaG BeN...

williambanzai7 — Wed, 22 May 2013 17:20:48 GMT

The system is circling the bowl

So Ben has established control

He's helping the rich

By flipping a switch

And they're handed wealth that he stole

The Limerick King

HOW IT REALLY WORKS

Bernanke is headed to space

He's seeking an alien race

He needs some fresh meat

For financial defeat

Their fiat he plans to debase

The Limerick King

And The Most Beloved Stock By Hedge Funds Is...

Tyler Durden — Wed, 22 May 2013 17:08:45 GMT

Following the first quarter rout in AAPL stock, some wondered if there would finally be rotation at the top floor of the hedge fund hotel of stocks held by most hedge funds. The answer is no: as of March 31, AAPL still retains the title of stock with the largest number of hedge fund investors at 188, more than GOOG with 184 and above AIG with 180.

Most held as of March 31:

And as of December 31:

The quarterly hedge fund holdings of AAPL stock: the trendline is clearly broken now.

And as bonus: here are the largest hedge funds in the US ranked by equity assets:

Hyperinflation – 10 Worst Cases

Pivotfarm — Wed, 22 May 2013 17:02:09 GMT

Originally posted http://www.tothetick.com/hyperinflation-10-worst-cases

I have a neat little app on my smartphone that I like to look at when I’m feeling bored. It won’t change anything in my life, but it makes me think as I see the numbers clocking up, and then suddenly stopping for a few seconds. It’s the app that tells me the how much the National Debt of each country stands at in real-time. As I sit down at my computer screen the USA National Debt amounts to $17 041 241 xxx xxx. Forgive the x’s…they’re not kisses…I tried to get the last six digits, but, there’s no point, they’re moving too fast! Speedie Gonzalez has got into that app! It works out to $54 087 per person. That’s the same value as 3 408 248 816 XXX Big Mac Meals.

Inflation is hot property today, hyperinflation is even hotter! We think we are modern, contemporary, smart and ready to deal with anything. We’ve got that seen-it-all-before, been-there-done-it attitude. But, we are not a patch on what some countries have been through in the worst cases of hyperinflation in history. Here’s the top 10 list of worst cases in history. We’ll start with the worst first…let’s think positive!

1. Hungary 1946

Inflation at its peak reached a staggering figure of 13.6 quadrillion % per month! That’s 13, 600, 000, 000, 000, 000%. The largest denomination bill was a 100 Quintillion note. Prices ended up doubling every 15 hours at the time.

2. Zimbabwe 2008

Prices doubled here every 24.7 hours in November 2008 and inflation reached levels of 79 billion-odd %. They eventually stopped using the official currency and switched to the South African Rand or the $US. A loaf of bread ended up costing $35 million. This is the most recent case. It was Mugabe’s land-redistribution program that caused this.

3. Yugoslavia 1994

In just the one month of January 1994 inflation rose by 313 million %. Prices doubled every 34 hours (which is nothing compared to Hungary). The currency ended up getting revalued 5 times in all between 1993 and 1995, all to no avail. The cause? A recession triggered by overseas borrowing and an on-going political struggle in the 1980s and the following decade.

4. Germany 1923

Adolf Hitler rose to power as a consequence of hyperinflationary pressure (at least one of the reasons). Prices doubled every 3.7 days and inflation stood at 29, 500%. Germany was crippled with the reparation payments after the Treaty of Versailles and the end of World War I.

5. Greece 1944

Prices started rising by 13, 800% in October 1944 and they doubled every 4.3 days. The trouble was the debt incurred by World War II.

6. Poland 1921

Prices rose in 1921 by 251 times in comparison with those of 1914. They doubled every 19.5 days. The Zloty was introduced as the new currency in 1924 in an attempt to start afresh. Inflation stood at 988, 233% in 1924.

7. Mexico 1982

Mexico had a rate of inflation of 10, 000% in 1982 (due mainly to too much social expenditure).

8. Brazil 1994

Inflation was 2, 075.8% at its worst in 1994. The Real was adopted in 1994 and it managed to calm inflation down.

9. Argentina 1981

The highest denomination bill was the one million pesos note. The Peso was revalued three times.

10. Taiwan 1949

This was a knock-on effect from China and the Chinese Civil War. The New Taiwan Dollar was issued in June 1949. The monthly rate of inflation stood at 399%

Inflation can be creeping (mild or moderate inflation) or galloping. We can talk of Hyperinflation and stagflation (inflation and recession). Deflation is not better. We have so many names for it.

Hyperinflation means prices doubling in such a short space of time that we can’t keep up with it all. Hyperinflation comes about at times of trouble, war, conflict, upheaval, change on unprecedented levels. It comes about because we still haven’t learnt how to control it. History repeats itself, we hear people say. Thankfully, it doesn’t repeat itself too often. Fingers crossed.

But, in the time it took for me to write this, the US National Debt is now worth $17 041 308 85xx xxx, that means 3 408 261 915 xxx Big Mac Meals!

Mortgage Applications Have Biggest May Collapse Since Financial Crisis

Tyler Durden — Wed, 22 May 2013 16:58:33 GMT

It seems that the recent rise in interest rates, instead of the typical (pre-depression) behavioral tendency to make people nervous and rush to lock in low rates, has once again stalled any hope of an organic housing recovery occurring. While the reams of hard data show that the housing recovery remains a fast-money investment-driven enigma (here, here, and here) - as opposed to real confidence-driven house-buying; we are still told day after day that housing is the backbone of the economy (despite construction jobs languishing and affordability plunging again). The fact of the matter is that the last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began. But that doesn't matter because housing must be recovering because the homebuilder ETF is up 2% today...

January and February we saw the rate rises (blue line dropping) spark a renewed (more behaviorally normal) interest in locking in low rates and buying... but since then the relationshio has invferted once again as the Bernanke put on bonds has now found its way into the real world. The last 2 weeks have seen rates rise and mortgage apps plunge...

at the fastest rate for this time of year since the crisis began...

What could possibly go wrong?

Charts: Bloomberg

Argentine Inflation: It’s Tough When All You Get Is Lies

testosteronepit — Wed, 22 May 2013 16:41:15 GMT

Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter

The issue of inflation is complex everywhere. Official rates are disputed. People can’t reconcile them with what they see at the store. There are different formulas and data sets, resulting in different rates, and everyone picks and chooses what suits their needs. But nowhere is the issue as “complex,” infested with lies, and shrouded in obscurity as in Argentina.

The debacle took on hilarious overtones when a Greek reporter, in her soft, harmless-looking manner, began to crucify Economy Minister Hernan Lorenzino during an interview at his office: “I have a very simple question for you, which seems very complicated these days: how much is Argentine inflation at this moment?” His response was an epic journey into obfuscation that got him entangled in such verbal spaghetti that the video, when it was released in April, went viral instantly. “We never speak about inflation, not even with the Argentine media,” an unseen aide explained after the minister had skedaddled.

But his jab at official inflation was on target. The interview took place late last year. By April, inflation, as reported by the Instituto Nacional de Estadista, was 10.5%, down from 10.6% in March, and from 11.1% in January, its recent peak, nicely heading once again in the right direction, after having been below 10% for much of 2012. But it’s a joke – though not nearly as hilarious as Lorenzino’s verbal spaghetti.

In early 2007, the staff at the statistical agency were booted out and replaced with political appointees who would toe the line on inflation and other inconvenient statistics. Since then, official inflation has been decided by edict.

Private economists, brushing off these figures with a nervous smile, kick around 25% as the current annual inflation rate. Mid-May the government nodded. With elections coming up in October, President Cristina Fernández de Kirchner has to hand some goodies to her base to buy their votes. So during the impeccably timed wage negotiations, she personally met with leaders of six unions representing 2 million workers, and struck the same kind of deal she’d made with the Railway and Bus Drivers’ unions, a deal that might get close to preserving purchasing power: wages would be increased by 24%! The closest to an official and somewhat realistic CPI that Argentina has.

To pour some oil on the fire, Torcuato Di Tella University (UTDT) – a non-profit private university in Buenos Aires – publishes the Inflation Expectation Survey. It measures what the public expects inflation to be over the next 12 months. For much of 2006, when the surveys began, median inflation expectation was 10%. The just-released index for April came in at 30%; and average inflation expectation rose from 34.2% to 34.9%.

UTDT concedes that the public has a tendency to overestimate changes in consumer prices. Nevertheless, it’s another ray of light in an obscure environment where the government has done its darnedest to replace any visibility with lies. Yet ordinary people, managers, and investors alike need to make decisions daily based on their understanding of inflation. And they’re making those decisions – just not the way the government wants them to.

The impact on the peso has been, let’s say, noticeable. In 1999, when I first traipsed around Argentina, the peso was interchangeable with the dollar one-to-one. ATMs would distribute both, depending on the button you pushed. Quite impressive. But Argentina seemed expensive, compared to other Latin American countries. And the economy was bogging down. Something was amiss.

The peso mirage ended in 2001, when people cleared out their bank accounts, converted pesos to dollars, and sent them overseas. To stop this torrent, the government froze all bank accounts; only small amounts of cash could be withdrawn. The people didn’t accept this quietly, which led to the declaration of a state of emergency, and more riots. In January 2002, the government lifted the dollar-peso parity, and set an exchange rate of 1.4 pesos to the dollar. People with money still frozen at the bank had been robbed.

And it never stopped. In early May on the black market, the peso fell through yet another floor: for the first time ever, it took over 10 pesos to buy a dollar. People have been scrambling to convert every peso they didn’t need at the moment into dollar bills. The official exchange rate is 5.25 pesos to the dollar. But it too is a lie, for most people. In one of those ironies that follow reckless deceitful governance, the government is running out of dollars and few people can buy them at the official rate – though the country is awash in dollar bills.

Since I write so much about financial fiascos, debacles, and nightmares, I’ve been asked about ways to protect assets in this environment. Thankfully, I don’t give financial advice. Even if I did, I wouldn’t have all the answers. But I just finished reading an excellent book on precisely that topic, so I decided to review it. Read.... Diplomatic Immunity For Your Assets In Interesting Times!

Goldman: "Our View Is That Tapering Is Announced At The December FOMC Meeting"

Tyler Durden — Wed, 22 May 2013 16:32:45 GMT

And yet another post-mortem opinion, this time from the man who meets every month or so with Goldman's the NYFed's Bill Dudley at the Pound and Pence in FiDi: that of Goldman's Jan Hatzius.

The most notable statement made by Bernanke during the Q&A session was that the FOMC could potentially cut the pace of QE purchases "in the next few meetings," although this was predicated on a continued improvement in the outlook for the economy and confidence in the sustainability of that improvement. He also stated that the purchase pace will depend on incoming data and that the FOMC could either raise or lower the pace of purchases in the future. Our view continues to be that the December meeting and subsequent press conference is the most likely time that the Committee would announce QE tapering, although September is a possibility if the economy picks up more than we expect in coming months.

2. On the strategy for winding down the Fed's portfolio, Bernanke noted that the Fed could exit without selling securities (in contrast to the June 2011 exit principles which prescribed asset sales), consistent with the recent trend in Fed communication on this topic.

3. Bernanke's prepared remarks were very much in line with recent communications from the Fed leadership. He acknowledged the gradual improvement in the labor market, but stressed that the labor market remains weak and allocated a considerable amount of time to discussing fiscal drag. Bernanke reiterated an argument which he has made in the past, that raising interest rates prematurely could choke off the recovery, ultimately resulting in a longer period of low interest rates.

But... but... Hilsenrath just said attempting to predict the tapering, pardon, the slow down of $80 billion in monthly flow is futile and meaningless!? (incidentally we think it will be September: just after the Bernanke-free Jackson Hole meeting and right around the time the US debt ceiling is hiked again, following much theatrical kicking and screaming from all sides).

Or is this just another "distract with BS" script, while the oligarchy continues to quietly convert paper assets that have never been more expensive into oh so very cheap real ones?

Hilsenrath Hits The Tape: Ignore Everything I Said Two Weeks Ago

Tyler Durden — Wed, 22 May 2013 16:00:32 GMT

The last time the WSJ' Jon Hilsenrath was relevant was two weeks ago (in a flashback to those days before QEternity when infinite QE was not assured and Jon's input was actually relevant), when following an article of his, and due to his "proximity" with the New York Fed, many assumed that the Tapering suggested by Hilsenrath was being telegraphed by Bernanke to the market. Turns out it was nothing but yet another baffle with bullshit headfake by a central planning regime that is now merely engaged in observing market responses to indirect stimuli: if reduce monthly flow by $20 billion then X (-1%); if cut QE off entirely then Y (-50%?), and so on. Moments ago the same Hilsenrath just released another piece, which effectively refuted everything his previous piece suggested, and in fact made his position as Fed mouthpiece absolutely irrelevant, courtesy of the following disclosure: "this time, when the Fed shuts off bond buying, it won't be... predictable." He goes so far as to say that the term "tapering" is no longer even applicable! Funny that, considering on May 11, none other than Hilsenrath said: "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy."

The irony here is that Hilsenrath is correct, but for another far simpler reason: the Fed simply can not shut down bond buying, at least not voluntarily, without crashing bond the stock market, and the perception that the economy is doing well (it isn't), just because the S&P hits new all time highs day after day.

The Fed will of course "shut down" bond buying when like in the summer of 2008 simple inflation is raging in commodities, and when a bank has to be sacrificed to induce a deflationary vortex. However, for now thanks to the epic planning in keeping the Brent vigilantes largely in check (now that the Bond vigilatnes are long dead), and since the market has a few more thousand points higher to go before everyone has no choice but to acknowledge how ridiculous the asset bubble has become, there is, to paraphrase Tim Geithner, "no risk."

From the WSJ:

When the Fed ended a buying program in 2011, it shut it off all at once. When it shut off another bond buying program in 2009 and 2010, it did it in predetermined, predictable and “tapered” steps. When the Fed raised short-term interest rates from 2003 to 2006, it raised them in gradual and very predictable steps.

This time, when the Fed shuts off bond buying, it won’t be abrupt and it won’t be predictable. The term “tapering” — which implies a predictable gradual process — probably doesn’t describe the plan very well any more, and you’re unlikely to hear Fed officials describing it like that. Instead, the Fed will take a step and then see what happens. Officials also want to avoid the market blowup that happened in 1994, when it took one step and the market assumed that meant a succession of additional steps.

“A step to reduce the flow of purchases would not be an automatic, mechanistic process to end the program,” Mr. Bernanke said. In other words, if the Fed takes a step to reduce the program and the economy falters, it could sit still for a while or even dial purchases back up.

The Fed effectively wants the markets to experience the same uncertainty it experiences about policy and the economy when officials walk into a meeting, and it wants to condition the market to avoid jumping to conclusions about what it will do next. As officials keep saying, it will depend on the economy.

Perhaps the biggest insult here to sentient creatures everywhere, is that people have now become merely lab rats in the greatest behavioral conditioning experiment of all time, not only as regards to buying stocks on both bad and good news, or any utterance out of Bernanke's mouth, but an experiment designed to force everyone to simply stop thinking logically - the logic being that since every central bank is engaged full bore in reflating everything, than the economy left on its own is simply horrendous - and BTFD.

Swedish Youth Riots Enter Third Day

Tyler Durden — Wed, 22 May 2013 15:32:33 GMT

Sparked by the police shooting of a machete-wielding 69 year-old man, traditionally calm-and-collected Sweden is suffering amid its third night of riots. It seems underlying tensions from high youth unemployment and rising nationalism against the nation's large immigrant population have been catalyzed by this seemingly unrelated event. As the Daily Mail notes, immigrant ghettos have been created where unemployment is high and there are few opportunities for residents with left-leaning commenters adding that the riots represented a 'gigantic failure' of government policies, which had underpinned the rise of ghettos in the suburbs - "We have failed to give many of the people in the suburbs a hope for the future." An anti-immigrant party, the Sweden Democrats, has risen to third in polls ahead of a general election due next year, reflecting unease about immigrants among many voters. What is driving this tension? After decades of practicing the 'Swedish model' of generous welfare benefits, the country has been reducing the role of the state since the 1990s, spurring the fastest growth in inequality of any advanced OECD economy. Given Sweden's 24.7% youth unemployment, we wonder just what will happen to the 60% of unemployed youths in Greece and Spain when school lets out this summer?

Brief clip below provides more color...

This can't end well!

Via The Daily Mail:

The disorder has intensified despite a call for calm from Prime Minister Fredrik Reinfeldt.

Last night, rioters attacked the police station in the Jakosberg area in the northwest of the city and set fire to 30 cars.

...

Groups of youths also smashed shop windows and burned down a 19th Century cultural centre.

Gangs of up to 60 set fire to a school and a nursery and hurled rocks at police and firefighters.

...

While average living standards are still among the highest in Europe, governments have failed to substantially reduce long-term youth unemployment and poverty, which have affected immigrant communities worst.

Some 15 per cent of the population is foreign-born, the highest proportion in the Nordic region.

...

Among 44 industrialized countries, Sweden ranked fourth in the absolute number of asylum seekers, and second relative to its population, according to U.N. figures.

...

Via Al Jazeera:

Around 200 people hurled rocks at police and set cars ablaze in a Stockholm suburb...

...

Around 80 percent of the roughly 11,000 residents of the suburbs are first- or second-generation immigrants.

...

Many local residents see the shooting as an example of police brutality, and the violence has stirred debate in Sweden.

...

Horniak claimed he witnessed police firing warning shots in the air and calling a woman a "monkey."

"I got upset yesterday because I saw police attack innocent people, they beat a woman with a baton," he said.

Horniak's claims of racist remarks were backed up by the organisation Megafonen, which represents citizens in Stockholm's suburbs.

...