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  • "Do you know what the loss would be on a 30-year Treasury if it went back ... just to the yield in force in 2011?" asks Jeff Gundlach, incredulous anybody would buy one (answer: 37%). If you need safety and yield, he says, buy Campbell Soup (CPB) instead. Listen to why the hot-shots at his firm would rather day-trade Facebook than divine the Treasury market. [View news story]
    Sailing Against The Headwinds On The QE Three

    Many people, use the 150 year U.S. annual growth rate in output per capita of 2%. The growth rate for the two decades from 1987-2007 was 1.8%.

    Professor Robert J Gordon of Northwestern University and CEPR research fellow in his Policy Insight No. 63 paper entitled "Is US economic growth over? Faltering innovation confronts the six headwinds". He is one of the world's leading experts on inflation, unemployment, and productivity growth. The full text can be downloaded here. http://bit.ly/OPxv12
    or a shorter abstract here: http://bit.ly/QjuXbY

    The six headwinds referred to in the title are:
    1. The end of the "demographic dividend".
    2. Rising inequality.
    3. Factor price equalization stemming from the interplay
    between globalization and the internet.
    4. The twin educational problems of cost inflation in
    higher education and poor secondary student performance.
    5. The consequences of environmental regulations and taxes
    will make growth harder to achieve than a century ago.
    6. The overhang of consumer and government debt.

    He goes on to explain the reasons for the slowdown and why it will continue with an exercise in subtraction.

    September 2012: An exercise in subtraction.
    "The benefits of ongoing innovation on the standard of living will not stop and will continue, albeit at a slower pace than in the past. But future growth will be held back from the potential fruits of innovation by six "headwinds" buffeting the US economy, some of which are shared in common with other countries and others are uniquely American. Future growth in real GDP per capita will be slower than in any extended period since the late 19th century, and growth in real consumption per capita for the bottom 99% of the income distribution will be even slower than that."

    How large might be the numerical effect of the six headwinds? A plausible set of numbers can be constructed to reduce the growth rate of real per-capita consumption of the bottom 99% of the income distribution down to 0.2% per year,

    "Baby-boomer retirement (the reversal of the demographic dividend) brings us down to 1.6% and the failure of educational attainment to
    continue its historical rise takes us to 1.4%. If inequality continues to rise as it did in the last two decades, income for the bottom 99% of
    the income distribution will grow about half a point slower than 1.4%, bringing us down to 0.9%. Globalization could continue to hollow out middle-level jobs, bringing the rate down to 0.7%. Higher energy taxes could bring the rate down to 0.5%. And a combination of consumer debt repayments, income tax increases, and reduced transfer payments, could plausibly reach the 0.2% annual rate."

    Why 0.2% you may ask. According to his paper he explains, "The particular numbers don't matter, and there is no magic in the choice of 0.2% as the long-run growth rate. That was chosen for "shock value" as the rate of growth for the UK between 1300 and 1700. Any other number below 1.0% could be chosen and it would represent an epochal decline in growth from the US record of the last 150 years of 2.0% annual growth rate in output per capita.

    The insights presented in this paper could very well explain why the FED is "agog" that the inflationary policies of QE1 and 2 have failed to produce the desired and expected results, and why the "all in" and "unlimited" QE3 will also fail as they do not address the real systemic problem.

    Professor Gordon makes a compelling case that the economy of the past 150 years is and was a singular event in human history, a 'pulse' as it were and is now in the process of reverting to its historical mean average of 0.2% without so much as a courteous "by your leave, sir".

    The most frightening aspect of this journey back to medieval times is that we will be taking 19000 nuclear warheads with us which is playing out as a preview of "Coming Attractions" on a television set near you. The sad fact that we still have unresolved racial, ethnic, religious, and financial inequities will make the journey more dangerous.
    Sep 15 03:57 PM | 7 Likes Like |Link to Comment
  • U.S. stock index futures hug the flatline in what promises to be another scintillating day of trade as markets await The Chairman in Jackson Hole on Friday. European shares post moderate losses even as Mario Draghi makes clear the ECB is ready to act. [View news story]
    It may be because as Paul Volcker, chairman of the Board of Governors, in a speech he gave in 1984:

    "Industrial nations, including our own, nowadays rely heavily—sometimes too heavily—on their central banks and on monetary policy to achieve our economic goals: to promote growth and employment, to blunt the forces of inflation, and to maintain financial stability. At times, the pursuit of those objectives requires speed and flexibility in decision-making, and that flexibility is one of the virtues of monetary and credit policy. But through the necessary process of adaptation and change runs another, more constant, threat—the need for a sense of discipline. In the broadest sense, all of economics—I am tempted to say all of life—teaches us that our collective desires always exceed the means to achieve them. And history has taught us, again and again, that the creation of money is no substitute for productivity, for savings, and for investment in enlarging our economic welfare. Yet the temptation is always there to try—with the ultimate result of destructive inflation that, in the end, only undermines those goals."

    Sound like Deja Vue all over again?

    Minneapolis Fed:
    http://bit.ly/OpLjQm
    Aug 29 07:28 AM | 7 Likes Like |Link to Comment
  • ECB Chief Mario Draghi writes that fulfilling the ECB's mandate of ensuring price stability and a single monetary policy "sometimes requires us to go beyond standard monetary policy tools" and "may at times require exceptional measures." Draghi's comments, made in an article in Germany's Die Ziet, may well turn up ECB bond-buying speculation to fever pitch. EU markets, though, shrug and stay lower. [View news story]
    While ECB Chief Mario Draghi considers the use of exceptional measures, he may want to consider the words of Paul Volcker, chairman of the Board of Governors, in a speech he gave in 1984:

    Industrial nations, including our own, nowadays rely heavily—sometimes too heavily—on their central banks and on monetary policy to achieve our economic goals: to promote growth and employment, to blunt the forces of inflation, and to maintain financial stability. At times, the pursuit of those objectives requires speed and flexibility in decision-making, and that flexibility is one of the virtues of monetary and credit policy. But through the necessary process of adaptation and change runs another, more constant, threat—the need for a sense of discipline. In the broadest sense, all of economics—I am tempted to say all of life—teaches us that our collective desires always exceed the means to achieve them. And history has taught us, again and again, that the creation of money is no substitute for productivity, for savings, and for investment in enlarging our economic welfare. Yet the temptation is always there to try—with the ultimate result of destructive inflation that, in the end, only undermines those goals.
    http://bit.ly/OpLjQm
    Aug 29 06:51 AM | 7 Likes Like |Link to Comment
  • Why The U.S. Is Europe: Central Bank Deficit Funding Thinly Veiled [View article]
    Colin;
    Thanks for a well written article on the machinations of the central banks.

    There is an inconvenient truth underlying what makes these moves both possible and necessary. Everyone knows that the problem is jobs and technology transfer to emerging and growth markets in a continual competitive effort to be the low cost producer. The political solutions proposed are variations of punishing corporations who outsource jobs or rewarding them for moving profits and jobs back to the U.S. International efforts to force EM producers to adopt expensive pollution and environmental controls are resisted on the grounds that the developed world faced no such constraints during their formative years.

    The real solution which no one mentions is for wages and living standards for workers in the developed world to decrease until they are once more competitive again. That, in fact, is what is happening and as Mr. Bernanke says will continue until the job numbers improve.

    Sep 29 08:49 AM | 6 Likes Like |Link to Comment
  • Is Frontier Communications Only Worth $2.50 A Share? [View article]
    Thanks for the very interesting, informative and well written article Global Value Investor. Although the negative outlook that you present seems to be already factored in to how the market is pricing FTR. You seem to be taking a "Damned if you do, damned if you don't" approach. The company took on some debt to triple the size of the business and cut dividends to help service that debt. Why is that bad?

    Here are a few of the more optimistic views some have.

    Quoted from the 2012 Proxy Statement available at the company website.

    • On July 1, 2010, the company completed its acquisition of approximately 4.0 million access lines across 14 states and related business assets from Verizon Communications Inc., which tripled the size of the company. During 2011, the company made significant progress on the integration of the acquisition and began to improve financial metrics and customer retention.
    • In 2011, we lowered access line churn by 8.3%, delivered $5.2 billion in revenues and $1.7 billion in operating cash flow, achieved $552 million in acquisition synergies, built-out High-Speed Internet
    availability to over 415,000 additional homes and added 45,200 new high speed customers.
    • In October 2011, we converted the entire acquired business to the company’s legacy financial and human resources systems and four of the thirteen states of the acquired business to our legacy customer
    and operating systems. In March 2012, the company commenced the conversion of the remaining nine states of the acquired business onto the company’s legacy customer and operating systems. The
    completion of the conversions will significantly enhance the company’s ability to effectively manage the business and reduce costs.
    • Despite the ongoing challenging economic environment, we continued to deliver solid operating performance, both on an absolute and a relative basis. Our performance against the financial metrics we use to measure our executives was 93.9% of the targets, on average, established by the board of directors in February 2011. However, as this was below target, compensation payouts were reduced accordingly. See “Cash Compensation—Annual Bonus” below.
    • For 2011, we modified the Frontier Bonus Plan, the company’s annual cash incentive bonus plan, to more strongly align executive compensation with annual performance. We instituted a performance
    threshold below which no incentive cash bonuses will be awarded. In addition, we incorporated performance leverage into the bonus plan. As a result, we increased upside potential for above-target
    performance and decreased bonus payouts for below-target performance. This design increases the incentive for executives to exceed targets. See “Cash Compensation—Annual Bonus” below.
    • Consistent with our compensation philosophy, 82% of our CEO’s 2011 compensation was “at risk” and contingent upon performance against specified company and individual goals, and of that amount, 74% was in the form of restricted stock. Similarly, for the other named executive officers as a group, 76% of their total compensation was at risk, and of that amount, 72% was paid in restricted stock. See “Compensation Mix” below.
    • Consistent with executive compensation best practices, we amended our stock ownership guidelines to increase the amount of stock our Senior Leadership Team members are expected to own. See “Equity Compensation—Stock Ownership Guidelines” below.
    • At our 2011 Annual Meeting of Stockholders held on May 12, 2011, stockholders voted in favor of our executive compensation program, with over 93% approving our executive compensation program,
    philosophy and disclosure.

    If FTR falls to $2,50 any time soon I am sure there will be no shortage of buyers, including me.

    Why is Paul Tudor Jones Buying More Frontier Communications and not Facebook?
    http://bit.ly/OHd44R
    Jul 15 01:23 PM | 5 Likes Like |Link to Comment
  • Underlying Disaster In Europe Accelerating: Spain's Finances Collapsing [View article]
    That is the same as here in the U.S.
    Sep 25 06:18 PM | 4 Likes Like |Link to Comment
  • Underlying Disaster In Europe Accelerating: Spain's Finances Collapsing [View article]
    Thanks Led; I love irony. I like to take an argument to its logical conclusion. Like if 0% interest is good then negative interest would be even better. :>) Did I do that right?
    Sep 25 05:20 PM | 4 Likes Like |Link to Comment
  • Set Long Positions Now Ahead Of ECB And FOMC Actions [View article]
    NO SENIORITY

    Draghi also said the ECB was prepared to waive its senior creditor status on bonds it purchased - meaning it would be treated equally with private creditors in case of default.

    The central bank hopes that by removing private investors' concern about being paid back last in the event of a sovereign default, they will not head for the exits if the ECB intervenes and buys bonds.

    The ECB assumed preferred creditor status in Greece's debt restructuring earlier this year, leaving private investors to suffer a writedown in the value of their Greek sovereign bond holdings while the paper it held was untouched.

    In another potential sop to the Bundesbank, Draghi said all bond purchases would be "sterilized" by taking in an equivalent amount in deposits from banks to avoid any risk of inflation.

    The ECB's insistence on countries agreeing to strict conditions before it buys their bonds fed doubts about whether Spain would seek help, and led to disappointment with the new ECB bond-buying programme among some investors.

    Draghi said bond buys would be tied to "strict and effective conditionality" and focused on debt maturities up to 3 years.
    http://reut.rs/RijwVZ

    Correct me if I am wrong here. Presumably this means the ECB will take in deposits from member nations and pay .75% interest. They will then use these deposits to invest in some of the worlds highest risk sovereign bonds as measured by yields without seniority status. The 'deposits' would of course be frozen for three years as collateral for the bond purchases.

    This makes me wonder why any of these investor nations would want to make 'deposits' at virtually zero interest rate, have their capital locked up until such time as 'junk bond rated' sovereign debt bonds are matured.

    Didn’t we just go through this. It sounds like a bank is taking deposits and making high risk bets which if they fail will have to be covered by taxpayers.

    What could possibly go wrong?
    Sep 7 06:44 AM | 4 Likes Like |Link to Comment
  • Set Long Positions Now Ahead Of ECB And FOMC Actions [View article]
    I wonder what would happen if all the central banks actually did what they have been threatening to do and then nothing happened, or worse, it produced negative results? Would we then all start waiting for QE4? My understanding is there is already a ton of liquidity sitting on the sidelines. Would more liquidity force business to borrow near zero interest money to scale up production and hire more people when they can't sell what they already have. The consumer is only buying guns and ammunition and the wealthy are building fortified castles with panic rooms on far away mountain tops. When I read the daily news about markets are flat-lined waiting for a signal from the central banks I can smell the fear.
    Sep 5 07:40 PM | 4 Likes Like |Link to Comment
  • Underlying Disaster In Europe Accelerating: Spain's Finances Collapsing [View article]
    Dana; "But the only way to repay anything is with growth. Austerity doesn't do it."

    Did you man to say the only way to repay anything is with inflation? If we have 'growth' based on profits why would we be printing money?

    The countries in Europe who are not 'growing' also do not have a printing press.
    Sep 28 08:34 AM | 3 Likes Like |Link to Comment
  • More on Case-Shiller: For the 3rd consecutive month, all 20 tracked cities posted monthly price gains. Not seasonally adjusted, prices rose 1.6% in July from June, following a 2.3% gain in June from May. On a Y/Y basis, Atlanta remains the outlier - by a wide margin - on the downside, with prices off 9.9%. Phoenix leads the gainers, up 16.6% Y/Y. (full report, .pdf) [View news story]
    How wonderful. Almost a 4% gain in two months from May to July. That works out to be a 24% yearly increase. If this continues I will be a millionaire soon. And they said printing money wouldn’t work.
    Sep 25 11:45 AM | 3 Likes Like |Link to Comment
  • "Do you know what the loss would be on a 30-year Treasury if it went back ... just to the yield in force in 2011?" asks Jeff Gundlach, incredulous anybody would buy one (answer: 37%). If you need safety and yield, he says, buy Campbell Soup (CPB) instead. Listen to why the hot-shots at his firm would rather day-trade Facebook than divine the Treasury market. [View news story]
    Tomas; The freedom you are referring to was inaugurated 237 years ago before the 3 industrial revolutions which precipitated the phenomenal growth this paper refers to. At that time there was virtually no economic growth before 1750. American style democracy is an artefact of the industrial revolutions and likely will not survive in a negative growth environment for many of the same reasons you mention. Poor and old people use their vote to elect politicians who will make unsustainable promises to benefit them much to the chagrin of the ruling class who are taxed to fulfil those promises.

    This paper does not suggest that everyone should be dirt poor and miserable. There has never been a time in history that I can think of when there has not been an extremely rich and extremely poor population and no reason to think that would change.

    The change is being described is a transformation of the world economy as depicted here in this graph from Goldman Sacks recently.
    http://bit.ly/LZVYyw
    Sep 15 08:29 PM | 3 Likes Like |Link to Comment
  • "Do you know what the loss would be on a 30-year Treasury if it went back ... just to the yield in force in 2011?" asks Jeff Gundlach, incredulous anybody would buy one (answer: 37%). If you need safety and yield, he says, buy Campbell Soup (CPB) instead. Listen to why the hot-shots at his firm would rather day-trade Facebook than divine the Treasury market. [View news story]
    RJKRJK; If you mean like believing the earth is the centre of the universe, that the earth is flat, that economic growth has been regarded as a continuous process that will persist forever, that the forest the early settlers found in America would last forever, that electricity when first discovered was believed would be to cheap to meter, or the CEO of IBM saying he thought there might eventually be a market for about 5 computers in the whole world, or Bill Gates comment that 64K of floppy disk space should be enough for any one. Is that what you mean by being wrong by a country mile?

    We as a specie have always been overly optimistic and wrong about just about everything. We disregard natural forces such as entropy, the laws of thermodynamics and diminishing returns. It is not just academia but politicians, clergy, royalty all buying in to ideas that are wrong and in hindsight foolish. We have a long history of burning people at the stake who challenge these long held beliefs.

    I hope that answers your question sir.
    Sep 15 07:51 PM | 3 Likes Like |Link to Comment
  • "Do you know what the loss would be on a 30-year Treasury if it went back ... just to the yield in force in 2011?" asks Jeff Gundlach, incredulous anybody would buy one (answer: 37%). If you need safety and yield, he says, buy Campbell Soup (CPB) instead. Listen to why the hot-shots at his firm would rather day-trade Facebook than divine the Treasury market. [View news story]
    Tack; What is it exactly that you think is nonsense? Do you disagree with any or all of the six headwinds Professor Gordon describes in his paper? As far as I can tell all of the six are covered extensively in the news and here on SA daily and almost universally acknowledged to be problems with the economy.

    If you accept the six as problems facing the economy which of them do you feel can be solved by money printing and adding debt?

    If you are a part of the 1% you will be sitting around in your castle while the 99% tend to your gardens very much like the early 20th century in the U.S. Not so long ago.
    http://bit.ly/S03HCm
    Sep 15 06:09 PM | 3 Likes Like |Link to Comment
  • The most interesting part of a George Soros treatise on the EU crisis is its brief preamble in which the author says the world has changed since he penned the essay. Merkel's siding with Draghi over the Bundesbank's Weidmann on the subject of bond purchases was a "game-changing event," writes Soros. Taking full advantage, Draghi has "promised unlimited purchases" of troubled nations' sovereign debt. "The continued survival of the euro is assured." [View news story]
    George Soros is making the case for inflation to solve the problems of the EU and the Developed Markets.

    "To make matters worse the Bundesbank remains committed to an outmoded monetary doctrine that is deeply rooted in German history. Following World War I, Germany had a traumatic experience with inflation; consequently it recognizes only inflation as a threat to stability and ignores deflation, which is the real threat today."

    He goes on to say:

    "That is, when too many heavily indebted governments are reducing their budget deficits at the same time, their economies shrink so that the debt burden as a percentage of GDP actually increases. Monetary authorities worldwide recognize the danger. Federal Reserve Chairman Ben Bernanke, Bank of England Governor Mervyn King, and even Bank of Japan Governor Masaaki Shirakawa have all engaged in unconventional monetary measures to avoid a deflationary debt trap."

    How does the whole world inflating their currency at the same time help anyone? Inflation primarily hurts the middle class and the poor with increased prices for necessities like food and gas which are excluded from cost of living increases and trail by years. This simply takes more money from the consumer who drives the economy and continues the downward spiral. It increases the obligations of government to provide a safety net for increasing masses of unemployed with decreasing revenues.

    Unless a solution is found that will give consumers jobs and money to spend we will continue on this death spiral. People who have no money or jobs do not pay taxes now, inflation will only create more of them who are dependent on government for survival.
    Sep 9 05:19 PM | 3 Likes Like |Link to Comment
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