How Gold Is Mined: 08/01/2013

Saturday, August 31, 2013

The Market Is Falling More, And Interest Rates Are Really Starting To Shoot Higher

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ANALYST: The Bond Market Has Already Priced In Tapering, And Now The Question Is: How Much More Damage Will There Be?

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The Global Financial Markets Are Selling Off (DIA, SPY, QQQ)

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FORGET JACK BOGLE: AllianceBernstein Makes The Case For Active Portfolio Management

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AllianceBernstein's Vadim Zlotnikov Gives Us The Argument For Active Management (Business Insider)

After the financial crash there has been a loss of confidence in active management as passive investing strategies have outperformed. Vanguard's Jack Bogle has built his entire reputation on passive investing, or investing in stock market indices.

Yet there is an argument to be made for active management, according to Vadim Zlotnikov, chief market strategist at AllianceBernstein

"Active management relies on the assessment of economic value in determining pricing of securities and assets. The last four years you have seen a significant divergence between the economic value of assets and its price in the market.

"Active management is all about assuming that over long periods of time, pricing of securities and their values starts to converge. So the issue is not if it is going to work, it's when it's going to work. The time for it to work is when you have enough decline in the risk perception to at least believe that the future will exist and the future in some way, shape or form will be driven by historical rules. What has happened people have said is all these historical beliefs are no longer valid we're in a new world.

"If you start to have at least some comfort that historical economic rules are valid going forward, active management will deliver enormous returns. And you'll see that in some pick up in M&A, some pick up in LBO, because those are the long horizon economic buyers. They're not buying paper, they're obeying an underlying business and those are the guys that are willing to place capital against that arbitrage."

U.S. Target-Date Funds Saw 20% Growth In Assets Last Year (Reuters)

Assets in target date funds grew 20% in 2012, according to data from BrightScope. Target date funds are funds that pool together money from different investors that plan to retire around the same time, and in which asset allocation tends to become more conservative as this date approaches.

Target date funds had over $503 billion at the end of 2012, according to Brightscope. Recently, companies like Goldman Sachs and Oppenheimer Funds have exited the market, according to Reuters.

Here's The Chart That Predicts Recessions 'Without Fail' (Gluskin Sheff)

"If there is one metric that has worked so well over time it is household assessments of the labour market — the consumer sector tends to get it right," wrote Gluskin Sheff's David Rosenberg.

"Specifically, the University of Michigan survey component that measures consumer expectations on expected changes in unemployment rate. As the chart clearly illustrates, recessions start when this metric slips below 65 without fail. We will start to get worried then when it breaks below 75 (it is now 96) as it did in August 2007, December 200, and May 1990 — all gave us 2-4 months of preparatory time ahead of the fact."

Gluskin Sheff

FINRA Requests Information On How Brokerages And Their Top Representatives Are Using Social Media (WealthManagement.com)

Financial Industry Regulatory Authority (FINRA) is keeping an eye on how brokerages are using social media like Facebook, Twitter, and LinkedIn. The regulator sent letters to brokerages requesting information on how they monitor the use of scale media and if it complies with industry standards, according to WealthManagement.com.

The regulator also requested a list of the firm's "top 20 producing registered representatives (based on commissioned sales) who used social media for business purposes to interact with retail investors as defined in FINRA Rule 2210(a)(6) during the time period February 4, 2013 through May 4, 2013."

GUNDLACH: The Only Place Investors Will Make Money In The Coming Weeks Is 'The Most Hated Asset Class On The Planet' (CNBC)

While many on Wall Street expect Treasuries to continue selling-off after today's FOMC announcement. Jeff Gundlach think U.S. Treasuries are set to rally.

"No one's making any money anywhere, and I think that's because people think the conviction of central banks to continue the amount of monetary stimulus through bond purchases is less. And that's where we are right now. That's what's going to happen today again...

"I think, actually, rates are going to start falling. I think the place – the one place – that you're likely to make money in the next several weeks, maybe couple of months is actually, believe it or not, the most hated asset class on the planet: long-term U.S. government bonds.

"That's what I think is going to be the most successful investment, and what I'm really looking at to reach that conclusion is the fact that there is no inflation anywhere. There's no sign of inflation."

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We'll Get One Last Unconventional Economic Indicator Before Tomorrow's Fed Announcement (FDX)

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CHART OF THE DAY: The Cost Of Sitting On Cash

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Friday, August 30, 2013

10 Things You Need To Know This Morning

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ANALYST: The Next Leg Of Volatility Will Start In The Days Ahead

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ANALYST: We Expect Bernanke To Surprise Markets And Spark Another Big Sell-Off Today

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VINCENT REINHART: There's A Fundamental Flaw In The Message The Fed Is Trying To Send

Last week, the WSJ's ace Federal Reserve reporter Jon Hilsenrath wrote a piece on Fed strategy that got a lot of attention in markets.

The gist was: Just because the Fed may signal a reduction in asset purchases doesn't mean that an interest rate hike is getting closer.

Specifically Hilsenrath wrote:

Federal Reserve officials have been trying to convince investors for weeks not to overreact when the central bank starts pulling back on its $85 billion-per-month bond-buying program. An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly it won’t mean that the Fed is anywhere near raising short-term interest rates.

But in a note put out yesterday, Morgan Stanley Chief Economist Vincent Reinhart argues there's a flaw in this logic.

Fed officials have been trying to convince everyone that their asset purchase decision

• is data-dependent,

• could be made soon, but,

• once taken, does not put the balance sheet on a fixed course.

The logical conclusion they hope everyone draws from this is that, as it is a flexible instrument subject to an ongoing calibration of the costs and benefits, the onset of tapering does not convey information about the date of the first fed funds rate hike.

Such an inference, however, is flawed. As long as the Fed is using the two instruments to influence the economy, policy decisions on their setting depend on the Fed’s outlook for the economy. A change in one reveals something about a change in the Fed’s outlook, which therefore has implications for the other policy instrument. Asset purchases can be a data-dependent, flexible instrument, but they will also be informative. Logically then, the Fed’s tapering talk reveals some combination of their being more confident about the economic outlook and less convinced that additional QE is providing net benefits.

Basically, if both QE and rate decisions are data dependent, then you can't separate the two.

Probably the best defense of the Fed on this is that for a rate hike, the parameters are incredibly clear. Evan's Rule sets the levels at which the Fed would consider raising rates, and it won't raise rates before then. On the other hand, the pace of QE is clearly more subjective (and possibly also takes into account a desire to prevent excess speculation).

Anyway, between this confusion, and the latest comments from Obama hinting that Bernanke's time at the Fed is over, we should be in for one hell of a press conference today.

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ROSENBERG: Here's The Chart That Predicts Recessions 'Without Fail'

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Markets Are Going Nowhere Ahead Of Huge Day For The Fed

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Thursday, August 29, 2013

YARDENI: Earnings Growth Prospects Look Great, But There's One Big Problem

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Here Are The Warning Signs That Preceded The Last 3 Bond Market Crashes

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Huge Protests Continue In Brazil — Small Bands Of Radicals Break Into Stores And Loot

$('.icon-tooltip').tooltip();SAO PAULO (AP) — Tens of thousands of Brazilians again flooded the streets of the country's biggest city to raise a collective cry against a longstanding lament — people are weighed down by high taxes and high prices but get low-quality public services and a system of government infected with corruption.

That was the repeated message Tuesday night in Sao Paulo, where upward of 50,000 people massed in front of the city's main cathedral. While mostly peaceful, the demonstration followed the rhythm of protests that drew 240,000 people across Brazil the previous night, with small bands of radicals splitting off to fight with police and break into stores.

Mass protests have been mushrooming across Brazil since demonstrations called last week by a group angry over the high cost of a woeful public transport system and a recent 10-cent hike in bus and subway fares in Sao Paulo, Rio and elsewhere.

The local governments in at least four cities have now agreed to reverse those hikes, and city and federal politicians have shown signs that the Sao Paulo fare could also be rolled back. It's not clear that will calm the country, though, because the protests have released a seething litany of discontent from Brazilians over life's struggles.

Yet, beyond complaints about the cost for bus and subway rides, protesters haven't produced a laundry list of concrete demands. Demonstrators mainly are expressing deep anger and discontentment — not just with the ruling government, but with the entire governing system. A common chant at the rallies has been "No parties!"

"What I hope comes from these protests is that the governing class comes to understand that we're the ones in charge, not them, and the politicians must learn to respect us," said Yasmine Gomes, a 22-year-old squeezed into the plaza in central Sao Paulo where Tuesday night's protest began.

President Dilma Rousseff, a former leftist guerrilla who was imprisoned and tortured during Brazil's 1964-85 dictatorship, hailed the protests for raising questions and strengthening Brazil's democracy. "Brazil today woke up stronger," she said in a statement.

Yet Rousseff offered no actions that her government might take to address complaints, even though her administration is a prime target of demonstrators' frustrations.

The protests have brought troubling questions about security in the country, which is playing host this week to soccer's Confederations Cup and will welcome Pope Francis in July for a visit to Rio de Janeiro and rural Sao Paulo.

Brazil's media has scrambled to cover the sprawling protests — coverage that in some cases raised the ire of protesters, in particular that of the powerful Globo TV network. Whenever what appears to be a Globo helicopter swoops over a demonstration, protesters hiss, raise their fists and chant slogans against the network for what they say was its failure to widely show images of a violent police crackdown on protesters last week in Sao Paulo.

Brazilian demonstrations in recent years generally had tended to attract small numbers of politicized participants, but the latest mobilizations have united huge crowds around a central complaint: The government provides woeful public services even as the economy is modernizing and growing.

The Brazilian Tax Planning Institute think tank found that the country's tax burden in 2011 stood at 36 percent of gross domestic product, ranking it 12th among the 30 countries with the world's highest tax burdens.

Yet public services such as schools are in sorry shape. The Organization for Economic Co-operation and Development found in a 2009 educational survey that literacy and math skills of Brazilian 15-year-olds ranked 53rd out of 65 countries, behind nations such as Bulgaria, Mexico, Turkey, Trinidad and Tobago, and Romania.

Many protesting in Brazil's streets hail from the country's growing middle class, which government figures show has ballooned by some 40 million over the past decade amid a commodities-driven economic boom.

They say they've lost patience with endemic problems such as government corruption and inefficiency. They're also slamming Brazil's government for spending billions of dollars to host next year's World Cup soccer tournament and the 2016 Olympics while leaving other needs unmet.

A November report from the government raised to $13.3 billion the projected cost of stadiums, airport renovations and other projects for the World Cup. City, state and other local governments are spending more than $12 billion on projects for the Olympics in Rio. Nearly $500 million was spent to renovate Maracana stadium in Rio for the World Cup even though the venue already went through a significant face-lift before the 2007 Pan American Games.

Attorney Agatha Rossi de Paula, who attended the latest protest in Sao Paulo along with her mother, called Brazil's fiscal priorities "an embarrassment."

"We just want what we paid in taxes back, through health care, education and transportation," said the 34-year-old attorney. "We want the police to protect us, to help the people on the streets who have ended up with no job and no money."

Although a single group set the protests in motion with its demonstrations last week calling for lowered transit fares, the mass gatherings are showing no evidence of any central leadership, with people using social media to call for marches and rallies. Groups of Brazilians also staged small protests Tuesday in other countries, including Mexico, Portugal, Spain and Denmark.

A cyber-attack knocked the government's official World Cup site offline Tuesday, and the Twitter feed for Brazil's Anonymous hackers group posted links to a host of other government websites whose content had been replaced by a screen calling on citizens to come out to the streets.

Tuesday night's march in Sao Paulo started out peacefully but turned nasty outside City Hall when a small group lashed out at police and tried to invade the building.

Different groups of protesters faced off, one chanting "peace, peace" while trying to form a human cordon to protect the building, the other trying to clamber up metal poles to get inside. At one point, one person tried to seize a metal barrier from another who was trying to use it to smash the building's windows and doors.

The air was thick with police pepper spray and smoke after demonstrators set a TV satellite truck and a police lookout booth on fire.

___

Associated Press writers Jenny Barchfield in Rio de Janeiro, Marco Sibaja in Brasilia and Jill Langlois in Sao Paulo contributed to this report.

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MICHELLE MEYER: Housing Affordability Has Peaked (ITB, XHB)

The recent surge in mortgage rates has hit mortgage refinance applications pretty hard.

The weekly MBA purchase applications announcement out Wednesday morning should give us more of an insight on the issue.

Bank of America's Michelle Meyer writes that with rising home prices and mortgage rates, housing affordability has peaked. She does however think that housing is a "better investment."

But this is just one of five hot housing topics that Meyer thinks investors need to watch.

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The Massive Shift In The Global Financial Markets In One Chart

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Japan Opens Up 1.6%, As Fed Day Officially Begins

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Wednesday, August 28, 2013

Weyerhaeuser Is More Than a Housing Play

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The Global 'Super-Rich' Picked Up One Million More Members Last Year

luxury, millionaire, celebrating, champagne, toast, drinking, alcohol, wealth

Andreas Rentz/Getty Images

$('.icon-tooltip').tooltip();A million more people joined the ranks of the global super-rich last year, almost a third of them in Asia, as soaring stock markets helped bolster the fortunes of wealthy investors.

The number of "high net worth individuals" climbed by 10% in 2012, taking the total worldwide to 12m, according to research by Royal Bank of Canada and consultancy Capgemini.

Between them, these twelve million people owned assets worth $46.2tn (£29.5tn) – more than three times the entire annual output from the US economy, and a 10% increase on 2011.

A high net worth individual is defined as anyone with $1m (£641,000) or more in "investable assets". The definition excludes the value of a main home and of any "consumer durables" such as cars.

World markets were volatile in the first half of 2012, as the eurozone crisis deepened; but after ECB president Mario Draghi promised to do "whatever it takes" to protect the single currency in July, and the Federal Reserve unleashed a drastic third round of quantitative easing in September, share prices recovered strongly, boosting the wealth of those with investments.

The findings are likely to increase concerns that the benefits of central banks' radical policies to rekindle economic growth have accrued overwhelmingly to those at the top of society, while unemployment remains stubbornly high in many countries and incomes have been under severe pressure.

Britain is home to the fifth-largest group of super-wealthy individuals, according to the report, with 465,000 super-rich individuals, up from 441,000 in 2011.

The wealth report came as the latest UK inflation figures showed that with the consumer price index running at 2.7% in May wages for average British workers have now failed to keep up with prices for more than three years.

Frances O'Grady, general secretary of the TUC, said, "economic stagnation has caused incomes to fall for most ordinary families but the wealth of the super-rich just keeps on growing. Unless this inequality is tackled Britain could experience a pretty joyless recovery, with the majority of the population seeing little or no benefit when economic growth returns."

The US regained its place at the top of the league table in the report, as the home to 3.73m high net worth individuals, up by more than 11.5% on 2011, as the recovering property market helped repair the damage to wealthy investors' housing portfolios inflicted by the downturn of the past five years.

The Asia-Pacific region was just behind the US, with a population of 3.68m super-rich investors – up by more than 9% on the year.

Europe, where the economy of the single currency zone has now been in recession for 18 months, was home to 3.4m high net worth individuals, but saw a smaller rise in their number, of 7.5%, in 2012.

The researchers also sub-divide the millionaires according to their wealth. There was an increase of 11% in 2012 in the number of people classified as "ultra high net worth individuals", the creme de la creme of the super-rich. These 110,000 people are worth $30m or more, and hold assets worth more than $16tn between them.

A middle group of just over a million people, the "mid-tier millionaires", held $10tn-worth of assets between them; and a much larger group of 10.8m people, which the report refers to as the "millionaires next door", held assets worth $1m-$3m.

The data also underlines the stark geographical divide in the distribution of wealth across the world, with just 140,000 of the 12m super-rich living across the entire continent of Africa. That was an increase of almost 10% from 2011; but still fewer than in Italy, Australia or Brazil.

RBC and Capgemini's analysts forecast that the super-rich will continue getting richer, with the total wealth held by this group expected to expand by 6.5% a year over the next three years.

The super-rich emerge from the survey conducted as part of the research as a relatively conservative group. They managed their assets cautiously in 2012, while fewer than half of them said they trusted financial markets; and fewer than 40% trusted regulators.

The authors said the super-rich respondents to the survey, "exhibited a clear bias toward safety and wealth preservation, allocating nearly 30% of their financial wealth into cash and deposits." This careful approach applied to millionaires of, "all ages and wealth levels, suggesting that the overall lower level of trust in the financial markets may be playing a role."

This article originally appeared on guardian.co.uk

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Your Ultimate Preview For The Most Anticipated Fed Announcement In A Long Time

REUTERS/Kevin Lamarque

The whole world has been anxiously waiting for this moment.

The Federal Reserve will wrap up its 2-day Federal Open Market Committee (FOMC) meeting today.

At 2:00 PM ET, it will publish its FOMC statement as well as an update to its economic forecasts.

Then at 2:30 PM ET, Fed Chairman Ben Bernanke will hold a press conference, which will include a Q&A with economics reporters.

Expectations

Economists expect the Fed to announce no change in its benchmark interest rate target, which is currently at 0% to 0.25%. Furthermore, they expect no change in its quantitative easing (QE) program, which consists of the Fed buying $85 billion worth of bonds each month to keep interest rates low.

However, there is little agreement on when the Fed will begin to scale back its easy monetary policy.

Recently, there has been tons of speculation that the Fed will soon taper, or gradually reduce, QE. This has been the source of volatility in the global financial markets as real interest rates have finally started to make a big up-move.

"There is no direct way to quantify what the market is pricing in for the size of the Fed’s remaining asset purchases," said Bank of America Merrill Lynch's David Woo. But he added that "QE tends to push real yields lower but inflation breakevens higher (Chart 7)."

BAML, David Woo

As such, everyone will listen very carefully for changes in language that may signal if and when tapering will begin.

In particular, the updated economic forecasts will scrutinized very carefully. Here's the WSJ's Jon Hilsenrath:

The evolution of these forecasts is a critical issue. Fed officials are unlikely at this meeting to change their $85-billion-per-month bond-buying program—launched to boost growth by pushing down long-term interest rates and pushing up asset prices, and spurring spending, hiring and investment.

But what they say about the economy will send important signals about what they expect to do in the future. If they maintain confidence in their economic forecasts, it could signal they think they're on track to begin pulling back the program later this year.

Here's what Wall Street's top economists expect from the Fed tomorrow (emphasis added):

Goldman Sachs' Jan Hatzius: "While Chairman Bernanke is likely to reiterate in the post-statement press conference that the QE tapering decision is data dependent, we expect him to dissuade markets from frontloading too much of the entire monetary tightening process—not just the end of QE but also the normalization of the funds rate—as soon as the committee takes the first step in that direction."Morgan Stanley's Vincent Reinhart: "However, do not be too surprised to see some movement in the dots depicting the desired fed funds rate year-by-year. Relative to the majority call that the first rate move is in 2015, one participant or so might pull the date of first tightening forward in light of the vigor to spending in the face of fiscal headwinds. On the flip side, one or two might shift to 2016 given that inflation, which is very inertial, has moved so far below the Fed’s 2 percent goal. View the latter as a modest protest that market participants should not get too ahead of themselves in expecting tightening."Bank Of America Merrill Lynch's Michael Hanson: "We expect the FOMC statement and revised forecasts to at least partially acknowledge the recent slowing in the data, and for Bernanke’s press conference remarks to be on net dovish. Still, we expect the Fed to leave the door open to tapering before year end. And the markets could interpret a neutral-sounding directive as a tacit endorsement of the repricing of Fed policy. Our base case remains that persistently low inflation and slower growth in Q2 and Q3 will delay any cut in the Fed’s monthly QE3 purchase pace until 2014."UBS's Drew Matus: "Without a need to provide further details to market participants – the rise in yields has been manageable so far and the equity market is higher than it was at the time of the last FOMC meeting – we believe the Fed will choose to avoid “rocking the boat” rather than riling up complacent US markets. Although we believe the likely date for the initial taper remains Q1 2014, we do believe it is a close call for the Fed given the recent statements by Fed officials. The deciding factor for the timing of the initial taper will likely be the path of inflation. All else equal, continued disinflation would delay Fed actions to normalize policy."Deutsche Bank's Carl Riccadonna: "We do not expect Mr. Bernanke to yet show confidence that the time to taper QE is near, but the most important aspect of his media Q&A will be whether he signals that an H2 taper remains plausible. Of course, he could go one step further by signaling if it was likely given the Fed’s updated economic projections, but we expect he will refrain from being so explicit given lingering uncertainty over the near-term economic outlook."Societe Generale's Aneta Markowska: "The current state of affairs in the real economy suggests that the FOMC is unlikely to come to any new or different conclusions regarding the appropriate course for monetary policy. Economic data since the last FOMC meeting can only be described as lukewarm: not hot enough for the Fed to send a stronger tapering signal, and certainly not weak enough to even contemplate increasing the pace of asset purchases."High Frequency Economics' Jim O'Sullivan: "While Mr. Bernanke is unlikely to back away from anything he said on May 22, we expect he will emphasize that any change in policy will be dependent on the data; that they are not ready to move yet; that tapering is not tightening, just less easing; that the rate of purchases could also be increased; and that actual tightening is still a long way away. He will likely also highlight the tameness in infla- tion; he does not want 2013 to be a repeat of 1994."

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FEDEX: People Aren't In A Rush To Send Packages Overseas (FDX)

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CITI: Here's Why The Fed Wants To Slow Down QE, Even Before The Economy Hits Its Goals

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Markets Are Holding Steady Ahead Of The Fed

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Tuesday, August 27, 2013

ART CASHIN: What Happens Today Really Depends On How Good The Fed Reporters Are

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In One Sentence, Here's What Bernanke Wants To Accomplish Today

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FORGET THE TAPER: Here Are The Only 29 Questions Journalists Should Ask Bernanke Today

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HSBC Slashes Chinese Growth

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BOB JANJUAH: Ben Bernanke Is Scared

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Analyst Says Amazon Should Buy Ocado To Win At Grocery Delivery

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Monday, August 26, 2013

IT'S WORKING: The Shale Boom Has Given America Tons Of Political Leverage In The Middle East

Many have been skeptical of the true extent of the shale revolution's impact on the U.S. economy, beyond localized effects like lowering mid-continent crude prices and reducing costs for industrial petroleum product manufacturing.

But in a new note, Standard and Poor RatingsDirect's Peter Rigby says it's actually given the U.S. a tremendous amount of political leverage.

Specifically, it can impose sanctions on Iran without the ricochet effect of spiking crude oil prices.

The Boston Company has made a similar argument — that U.S. crude production may not be causing prices to go down, but has dampened market volatility.

In a follow-up email to Business Insider, Rigby elaborated on his point:

...as Iranian supply came off the global market, new US supply was coming on line to contribute to meeting global demand.

So even though US supply, for all practical purposes, does not go onto the global market, it contributes to global supplies. The price is still global, which the US pays, adjusted, of course, for transportation and crude quality differentials.

So, all else being equal, had the embargo gone into effect without that new 1 million barrels per day from the US, there would have been upwards price pressure on crude.

One million barrels is not an insignificant amount, as evidenced by the changing crude oil shipping patterns that are emerging.

Rigby cautioned that the Saudis still hold all the cards.

But it looks like the U.S. is finally getting some leverage.

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A 5-Second Guide To What Traders Are Talking About This Morning

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Bombardier Sells $1 Billion Worth Of Planes To A Private Jet Service

VistaJet

VistaJet has placed a $1 billion order for 20 Bombardier Challenger 350 jets.

Private jet charter company VistaJet has placed an order for 40 Bombardier planes, it announced this morning at the Paris Air Show. The transaction consists of 20 firm orders and 20 options for the Challenger 350, a super midsize jet that can fly eight passengers more than 3,600 miles on a full tank.

VistaJet buys its own planes and offers seats to its customers for hourly rates, then sells the jets before their warranties are up.

The Challenger order comes on the heels of a much larger purchase in November, when VistaJet placed a firm demand for 56 Bombardier Global jets, worth $3.1 billion. That was the largest single transaction in business aviation history.

Of the 20 (or 40) new Challengers, 40% will be used to replace older jets VistaJet plans to sell. The rest represent a growth of its fleet, which is currently at 37 planes. Business is very good for VistaJet, founder and chairman Thomas Flohr said in an interview in Paris today.

The private jet market has been weak since 2008, but the fact that fewer people are buying their own planes works to VistaJet's advantage.

"A lot of people learned the lesson that owning is an airplane is not like owning a car," Flohr said. For people who fly under 400 hours a year, "it makes absolutely no financial sense to own an airplane." That kind of traveler is the ideal VistaJet client.

The company does not disclose many price figures, but a representative told us, "A flight between London and Moscow is roughly equivalent to burning through four Hermes handbags."

According to the Wall Street Journal, a flight costs $15,000 per hour.

The interiors of the VistaJet Challenger 350s will be modeled after the company's Global jets, on a smaller scale. There is a jump seat for the Cabin Hostess, so passengers can enjoy privacy, and the jets will be equipped with Wi-Fi.

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William And Kate's Royal Baby Could Send A $380 Million Jolt Into The British Economy

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The Chart That Eviscerates Five Terrible Talking Points About Taxes

Discussions of tax progressivity tend to have a low ratio of signal to noise. The following chart should clear up a few things.

Business Insider, data from Tax Policy Center and Institute on Taxation and Economic Policy

Here are the big takeaways: Our tax code is highly progressive. Almost everybody pays something. Even the poorest 20 percent of American households (who make on average about $11,000) pay 13 percent of their incomes in tax. The wealthiest 1% pay a rate of 43%, about 3.5 times as much.

Now that you've seen the chart, I have a few instructions:

1. Stop talking about "non-payers" or "the 47 percent" or using any other talking point about how a worrisomely large share of Americans don't pay taxes. Don't call people who don't pay federal income tax "lucky duckies." Almost everybody pays taxes.

2. Stop ignoring state and local taxes. In his paper "Defending the One Percent," Harvard economist Greg Mankiw responds to liberal claims about tax regressivity by citing Congressional Budget Office data showing that, as of 2009, the bottom quintile of earners paid just 1% of their income in federal tax while the top 1% paid 29%. But state and local taxes are modestly regressive, partly offsetting the figure Mankiw cites.

3. Stop fretting about the progressivity of any specific tax. There are good reasons for some taxes to be more progressive than others. Particularly, the federal government is in a better position to levy a highly progressive income tax than states or localities are. If the whole tax system isn't progressive enough, worry about that. Don't fixate on the fact that some component, such as Social Security payroll tax, has a regressive structure.

4. Stop talking about a flat income tax like it were some especially fair and natural thing. Conservatives often talk about flat taxes as being fair because everyone pays the same share of their income. Setting aside whether that's actually fair, it isn't even true; a flat tax on income would combine with other components of the tax code to make our overall system regressive.

5. Stop fixating on Warren Buffett. Buffett likes to talk about how his tax rate is lower than his secretary's. That's misleading. Buffett's tax return doesn't reflect the corporate income tax paid by the companies he owns equities in. Exactly who bears the burden of corporate income tax is a controversial topic, but the most common view is that a majority is borne by owners of capital, while a minority of the tax gets shifted to workers in the form of lower wages. If you distribute the burden of corporate income tax according to that assumption, you find that effective tax rates keep going up as you get into the top 1% and top 0.1%. It is not typical for the ultra-wealthy to pay lower tax rates than the affluent workers under them.

Data for the chart above are drawn from calculations by the Tax Policy Center and the Institute on Taxation and Economic Policy.

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10 Things You Need To Know This Morning

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Why Disney Beats Warner Bros. At Superhero Movies

Marvel

$('.icon-tooltip').tooltip();Looking at the recent popularity and profitability of Disney’s Marvel movie franchises, I’ve frequently wondered why Time Warner, the parent company of DC Comics, has failed to replicate that success with its characters.

Whereas Disney was able to brilliantly weave all of its Marvel movies together into a web that culminated with The Avengers - now the third-highest grossing movie of all time - Time Warner has had mixed results with its biggest comic book franchises.

Although Christopher Nolan’s gritty Batman trilogy generated high returns for Time Warner over the years, its attempt to reintroduce Superman fell flat. Other movies such as Green Lantern, Jonah Hex and Catwoman have been disastrous.

With some of the most recognizable characters in comic book history, why has Time Warner failed to pull all of its biggest characters together into a long-discussed Justice League movie? Why is Time Warner sitting on top of a gold mine but having so much trouble rounding up the miners?

Warner Bros. vs. Buena Vista

In a previous article, I discussed how fast Disney’s media empire is growing compared to Time Warner, which was once the largest media conglomerate on the planet. Last quarter, Time Warner’s Film and TV entertainment division, Warner Bros., reported a 4% decline in revenue to $2.7 billion. Its net income grew 23% to $263 million, roughly 60% of which was attributed to its films. By comparison, Disney’s studio entertainment division posted 13% top line growth to $1.3 billion, which means that its Buena Vista studio is actually larger than Warner Bros.’ movie studio.

In 2011 and 2012, Warner Bros. faced a major problem - two of its core franchises, Harry Potter and The Dark Knight - were coming to an end. At the same time, Disney’s Marvel heroes were united in a series of profitable standalone movies that culminated in The Avengers, which has grossed $1.5 billion to date. Let’s compare the box office revenue of Marvel and DC films over the past few years.

Source: http://www.boxofficemojo.com/

Although Marvel’s returns look impressive, only two of these films were directly produced by Disney’s Buena Vista studios - Iron Man 3 and The Avengers. After Disney acquired Marvel in 2009, Marvel’s prior agreements with Comcast’s Universal and Viacom’s Paramount, which had previously produced its films, eventually ended. Starting with The Avengers, Disney’s Buena Vista took complete control of all of its related franchises. Meanwhile, all of the mentioned DC Comics films were directly produced by Warner Bros.

With sequels on the way for Thor, Captain America and The Avengers, Disney has already signed the majority of its main stars into multi-film deals. Meanwhile, Time Warner’s only big DC Comics release is its Superman reboot, The Man of Steel, which is scheduled to be released this June. Meanwhile, Nolan’s Batman trilogy has concluded, and further possible sequels will not star Christian Bale. Green Lantern, meanwhile, was so poorly received by critics and the audience that any future release will likely be another reboot. Jonah Hex andWatchmen inhabit different parts of the DC Universe altogether, which are not related to Superman or Batman.

A lack of integration is destroying the DC movie universe

The impressive thing about Marvel’s ability to connect its franchises together into a cohesive Marvel movie universe is that it was done with the lack of several of its key franchises. Prior to Marvel’s acquisition by Disney, the movie rights to Spider-Man were sold to Sony’s Columbia Pictures division, while the rights to X-Men, Fantastic Four and Daredevil were all sold toNews Corp.'s 20th Century Fox. In other words, Marvel assembled the Avengers universe, led by Iron Man, with one hand tied behind its back.

Meanwhile, Time Warner has all the movie rights to its main DC characters but seemingly no way to assemble them into a single universe. While Marvel’s films have Samuel L. Jackson’s Nick Fury popping up in different films to recruit the Avengers, Christopher Nolan’s Batmanfilms were not connected in any way to Green Lantern or Superman. In fact, both Nolan’s Batman and the new Superman film, directed by 300 and Watchmen director Zack Snyder, actively attempt to be grittier and more grounded in reality than their campier source material. It’s as if the directors dread the concept of Batman teaming up with Superman or Green Lantern, which occurs frequently in the print comics and cartoons.

Without the willingness to create a film where Batman and Superman team up, representing a merging of the more realistic and more magical sides of the DC universe, then a Justice League film, which could consist of Green Lantern, Wonder Woman, Flash and Aquaman, would be impossible. This has worked before in Warner Bros.’ animated series, but a live action version would be a monstrous undertaking. With Christian Bale and Christopher Nolan out of the picture, a new Batman must be cast, and new films featuring Wonder Woman and the other characters would have to be made.

In other words, if Time Warner wants to replicate Marvel’s success, it has to create an overarching story over multiple franchises with long-term plans to converge them all into a single movie.

Not all is lost yet

If The Man of Steel proves to be successful, then Time Warner shouldn’t simply let the film continue into another self-contained trilogy that eventually concludes with both the main star and director leaving the franchise. It needs to use its sequels to tie together the rest of the DC Universe just as Disney has with The Avengers. With Superman usually being regarded as the leader of the Justice League, then its sequels could open up a whole new exciting universe of comic book films, as dynamically connected as the books on which they are based. If Time Warner is successful, then the returns could be enormous, as seen in this breakdown of Time Warner’s business segments in fiscal 2012.

Source: Time Warner Annual Report

If Time Warner can unveil a full-fledged DC movie universe in the next two or three years, then its Film and TV gains can easily offset any weakness in its lagging Publishing segment. In addition, returns from its Hobbit trilogy should also boost the segment’s top and bottom line growth even more.

Therefore, Time Warner needs to hurry and round up the miners to start digging into its DC Comics goldmine.

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Sunday, August 25, 2013

Greece's Decision To Kill Its Version Of PBS Was Catastrophic

REUTERS/Yannis Behrakis

Last week, the Greek government shut down public broadcasting station ERT to prove it was serious about austerity.

This was the equivalent of Washington finally acting out on its threat to cut funding to PBS or NPR.

But in Greece, the move has brought the masses to the streets.

And it now it appears to have mortally wounded Greek PM Antonis Samaras.

It's another classic example of how small incidents can spiral into much larger crises (we are seeing this play out in Turkey).

It's hard to argue that ERT didn't need some reform: its 2,600 employees, three domestic television channels as well as radio stations cost Greek taxpayers 300 million euros ($400 million) a year, according to Reuters. By comparison, PBS operates every single one of its affiliates with just a bit more money (along with viewer support). A government spokesman said it had become a "typical case of ... incredible waste".

What has the country up in arms was the manner in which the decision came down. The move did not require legislative approval, but Samaras appears to have consulted no one else in his coalition. The leaders of the coalition's junior parties said it would not abide by "faits accomplis" and called seizure "a coup."

Guardian correspondent Helena Smith says Samaras' decision instantly caused the goodwill he'd built up over the past year or so to vaporize:

His shock decision to close ERT has been met with as much criticism from conservatives and challenges to his rule from within his own New Democracy party cannot be ruled out.

Smith spoke with one analyst who predicted that while the coalition will survive for now, it won't make it through another test, and likely won't survive to see the end of 2014.

The government is totally dysfunctional. There are just too many accumulated problems, the deficit, the real economy, the recession, privatisations, restructuring of the public sector, for any government to solve," says the political analyst Giorgos Kyrtsos. "The scenario of snap elections happening is no more than 10-15 percent. But whether the government will survive the next six months is another issue. Some other problem will emerge that it can't deal with. I give it an 80 percent chance of collapsing over the winter of 2013-14.

Greek bond yields had already been trending higher in the past few weeks. This did not help:

We told you about how the same guys who put on the Eurovision song contest had helped Greek public broadcaster ERT broadcast a guerrilla signal to keep it going while its fate was decided.

Today, a court ruled a rump-ERT must be able to broadcast until a new public station is established.

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ANALYST: Now That The Cheap Money Is Coming To An End, We Can See The Bubble To End All Bubbles

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It's Hard To Look At These Photos From Indonesia And Brazil And Not Worry About A Much Bigger Emerging Market Blowup

The protests in Turkey continue to dominate the attention of media, but today there were two other protests in red-hot emerging markets that warrant your attention, especially since the basic narratives are fairly similar.

In Indonesia and Brazil — where governments are hoping to pursue fiscal consolidation — protests have turned violent.

In Indonesia the issue is the initial driver of protests is the removal of a fuel subsidy.

In Brazil, it's over an increase in bus fares, as well as general frustration over inequality, and the money being spent on next year's World Cup.

Both — along with other emerging markets — are experiencing slowing economies, sharply weakening currencies, rising interest rates, and generally a squeeze related to both financial and structural conditions.

The following four images, and descriptions, are from the AP.

The first two are from Indonesia:

A student protester fires a firework at the riot police during a rally against the government's plan to raise fuel prices outside the parliament building in Jakarta, Indonesia, Monday, June 17, 2013. Indonesia's parliament is expected to approve a budget that will slash government fuel subsidies, a move that will save the government billions of dollars but has already sparked angry protests opposing increased gasoline prices.

Student protesters hurl rocks at the riot police during a rally against the government's plan to raise fuel prices outside the parliament building in Jakarta, Indonesia, Monday, June 17, 2013. Indonesia's parliament is expected to approve a budget that will slash government fuel subsidies, a move that will save the government billions of dollars but has already sparked angry protests opposing increased gasoline prices.

And from Brazil:

Protestors march in Rio de Janeiro, Brazil, Monday, June 17, 2013. Protests in Sao Paulo, Rio de Janeiro and other Brazilian cities, set off by a 10-cent hike in public transport fares, have clearly moved beyond that issue to tap into widespread frustration in Brazil about a heavy tax burden, politicians widely viewed as corrupt and woeful public education, health and transport systems and come as the nation hosts the Confederations Cup soccer tournament and prepares for next month's papal visit.

A policeman lies injured on the ground after clashing with demonstrators during a protest in Rio de Janeiro, Brazil, Monday, June 17, 2013. Officers in Rio fired tear gas and rubber bullets when a group of protesters invaded the state legislative assembly and threw rocks and flares at police as protesters massed in at least seven Brazilian cities Monday for another round of demonstrations voicing disgruntlement about life in the country, raising questions about security during big events like the current Confederations Cup and a papal visit next month.

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Markets Are Rising In The Calm Before The Storm

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Markets Are Confused And Stupid, And Apparently People Don't Know How To Read

Price action in the stock market today tells you everything you need to know about the cognitive dissonance investors are experiencing right now.

Since around 2 p.m. ET, when the FT published a preview of this week's FOMC monetary policy meeting by the pink paper's Federal Reserve correspondent, Robin Harding, U.S. stocks have taken a sharp turn lower. The headline was "Fed likely to signal tapering move," and the knee-jerk reaction was to sell stocks.

What is amazing about the market's reaction to the article is the lack of market-moving news actually presented to it.

Here's the lede: "Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85bn-a-month in asset purchases when he holds a press conference on Wednesday, but balance that by saying subsequent moves depend on what happens to the economy."

Now, anyone who follows the Federal Reserve (which in the investment community is pretty much everyone) will recognize both of these likelihoods as eventualities that have more or less already occurred. The Fed has been candid about the possibility of tapering back stimulus this year, but has also firmly stated that the outlook for tapering is completely dependent on the economic data.

This is thanks to the introduction of the Evans Rule in December, which ties the outlook for Fed monetary policy directly to specific numerical thresholds in labor market and inflation indicators.

Yet, just as they did last week when WSJ reporter Jon Hilsenrath suggested in a short blog post that Ben Bernanke would strike a dovish tone at the upcoming FOMC press conference, markets reacted forcefully to the Harding headline today.

With Hilsenrath's blog post, the problem is the same: no news, no quotes, no anonymous sources – nothing of interest, really, to anyone in the market who's been keeping up with the Fed.

Hilsenrath's post is more akin to "stating the obvious" – all he says is that when the Federal Reserve does decide to taper back the bond purchases it makes under its quantitative easing program, that won't mean that the central bank is anywhere near raising interest rates.

Again, anyone who was around in December when the Federal Reserve introduced the Evans Rule should already understand that this is simply codified into U.S. monetary policy.

Yet stocks and bonds, which have faced weakness over the past few weeks as taper fears have seeped into the market, both used the opportunity presented by the Hilsenrath blog post to rally.

Arguably, the Federal Reserve had a lot more use for leaking information to journalists just a few years ago, but that was before it launched a new communications regime focused on increasing transparency in monetary policy decision-making.

Now, with the introduction of the Evans Rule, investors should be focused on the data, not the musings of Jon Hilsenrath and Robin Harding.

(Of course, Hilsenrath and Harding remain must-reads for anyone serious about following the Fed. But it's strange to think that they are still moving markets in the way that they are.)

Harding said as much in a tweet after his article went up today and markets reacted:

Glad people are reading my Fed preview. I've been in the September taper camp for a while and I'd stick with that. http://t.co/IGytwIYvzZ
— Robin Harding (@RobinBHarding) June 17, 2013

But people need to chill out. The Fed does not leak anything to any journalist to steer markets - especially during blackout.
— Robin Harding (@RobinBHarding) June 17, 2013

Where does that leave us? As Pawel Morski put it in a tweet:

Pump a chimp full of amphetamines, put him in front of a Bloomberg and see if he doesn't fit straight in.
— Pawel Morski (@Pawelmorski) June 17, 2013

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The Brazilian Market Has Had A Horrendous Year

Riots have broken out in Brazil. Notionally they have to do with an increase in bus fares, but they have to do with bigger issues related to inequality, and how much the government is spending on things like hosting the World Cup.

The Brazilian economy is not well.

All you have to do is look at a chart of the Brazilian stock market (the Bovespa) and see what a horrendous year it's had. It literally had its year peak on the first day of trading, and since then has fallen about 20%.

From Bloomberg

What's going wrong in Brazil?

Basically inflation is still sky high, growth is slowing, employment is sputtering, and the country's' Balance of Payments is deteriorating, which is eating into its foreign exchange reserves, imperiling the Brazilian Real (the currency) which like other emerging market currencies has done badly.

In a note that came out yesterday, Barclays predicted a Brazilian sovereign downgrade in early 2014.

From the note:

Brazilian policymakers have changed gears again this year. The backdrop is set by an economic recovery that is not taking off and inflation that remains high. The trade-off between inflation and activity has been deteriorating since 2010, but now the problem is that high inflation is beginning to erode real wages and is taking a larger-than-expected toll on consumption. Even if presidential elections are still 16 months away, politics is gradually taking centre stage. And in our view, it is the fear that the erosion of real income will continue to dampen President Dilma’s popularity (between March and May, it fell 8pp, to a still-high 57%, according to Datafolha) ahead of the 2014 presidential elections that elevated controlling inflation to the government’s top priority.

For more on the Brazil protests, see here -->

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Saturday, August 24, 2013

Consumer Prices Rise Just 0.1% In May

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BRIAN BELSKI: 'Investors Should Prepare For More Back-And-Forth Action This Summer'

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Brian Belski: 'Investors Should Prepare For More Back-And-Forth Action This Summer' (BMO Capital Markets)

BMO Capital Markets' Brian Belski maintains his 1,575 S&P 500 year-end target. In a new note, he writes, "To be clear, we continue to believe US stocks are the most attractive fundamental asset in the world, a quality that should define performance and allocations for the next several years." He also writes that U.S. stocks are "in the midst of their next secular bull market."

But he is worried that investors are using "very little analysis, process and common sense (at least on a near-term basis)" in making investment decisions and that they are ignoring the "downside risk associated with stock prices disconnecting from fundamentals."

With recent disappointing consumption, manufacturing and employment data, Belski writes that investors should "prepare for more back-and-forth action this summer – not just up and not just down – as the market sifts through what is likely to be choppy fundamental and economic data in the coming months."

FINRA Regulator Resigns After A Charitable Bingo Fraud Is Revealed (Bloomberg)

A letter from former securities broker David Evansen to Richard Ketchum, CEO of FINRA, and Susan Axelrod, executive vice president at FINRA, is believed to have prompted the resignation of FINRA official Mitchell C. Atkins.

Atkins was a regional director and head of FINRA's District 7 in Boca Raton, Florida. Evansen's letter showed that Atkins had pleaded guilty to charitable bingo fraud in 1993. "Evansen said he looked into Atkins’ past after he decided Atkins and his staff weren’t considering his communications about an enforcement case against him," Bloomberg reported.

There Has Been A Paradigm Shift In Many Investors' Attitude Towards Gold (Societe Generale)

After talking with clients, the opinion of Société Générale analysts hasn't changed. They think the gold sell-off, along with concerns about Fed tapering, have caused "a paradigm shift in many investors’ attitude towards gold."

"This is likely to result in continued large-scale gold ETF selling this year and next ... ETF gold selling has averaged about 100 tonnes per month since the April sell-off. We expect continued ETF selling to exceed higher demand for jewelery/bars and coins. Therefore, we have revised lower our Q4 13 gold forecast to $1,200/oz."

Societe Generale

Brokerages Are Giving Advisors Bigger Payouts To Craft Financial Plans (The Wall Street Journal)

Many advisors don't create financial plans for their clients. But brokerages have found that clients with financial plans are less likely to move their business to a competitor. With that in mind, the Wall Street Journal reports that more brokerages are trying to get their advisors to begin financial planning and are throwing cash at their advisors to do so.

UBS Wealth Management Americas is now giving advisors a payout that would be 50% of the charge of the plan, as long as the plan is over $1,000, and 15% credit to the advisor's expense account, the WSJ reports.

Stan Druckenmiller Explains Why Hedge Fund Managers Don't Like Ben Bernanke (Goldman Sachs via Zero Hedge)

In an interview with Goldman Sachs, American hedge fund manager Stanley Druckenmiller explained why hedge fund managers don't like Fed chairman Ben Bernanke. Via Zero Hedge:

"It has become harder for me, because the importance of my skills is receding. Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left.

"Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?"

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Stan Druckenmiller Gave A Startlingly Blunt Reason For Why Hedge Fund Managers Don't Like Bernanke

It's no secret that a lot of hedge fund managers on Wall Street have no love for Ben Bernanke or his monetary policy. Journalists, economists, and pundits have mused on the reason why more times than anyone can count.

For their part, hedge fund managers usually say that they fear Bernanke's policies will lead to rampant inflation — a massive problem in the United States in the 1970s when many of them were coming of age.

That danger, however, remains to be seen in our economy as, in fact, deflation continues to be a risk.

So why do hedge fund managers hate Ben Bernanke? In an interview with Goldman Sachs, Stan Druckenmiller, a known Bernanke detractor gave a candid explanation we never thought we'd hear from a hedge fund manager.

He was answering a question about whether or not investing had become more difficult in recent years (via ZeroHedge):

It has become harder for me, because the importance of my skills is receding. Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left.

Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?

In short, Stan Druckenmiller is now in a world he doesn't recognize, and it's making him feel useless.

Earlier in the interview he acknowledged that he "understood the need for QE1 because the U.S. economy faced a potential meltdown." That implies that the precarious, low-growth situation we're in now isn't a good enough reason (in Druckenmiller's eyes) to continue a policy that makes him and many of his peers feel like aliens in their own home.

It is, however, good enough for Japan. Druckenmiller has called Abenomics "appropriate."

The problem with that is simple — it goes against all the "best advice" and the "golden rules" and the maxims traders have passed down about the market for years.

You've heard them all: "Adapt or die." "Have an unquenchable thirst for knowledge." "Don't trade on emotions or ideology."

Those aren't all direct quotes, but you get the picture. Hedge fund managers aren't supposed to be upset about market factors they can't control, even if those factors are controlled by a person. They're supposed to understand the market that exists and come up with the appropriate strategy.

Wall Street is not a 'shoulda, coulda, woulda,' kind of place.

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The Chinese Credit Bubble In Four Charts

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STOCKS RALLY: Here's What You Need To Know

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Sell-Off Gets Worse As Taper Fears Seize The Market

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Friday, August 23, 2013

Obama Drops A Big Hint That Bernanke Isn't Coming Back

$('.icon-tooltip').tooltip();WASHINGTON (Reuters) - President Barack Obama hinted in an interview aired on Monday that he may be looking for a new chief of the U.S. Federal Reserve Bank, saying current Chairman Ben Bernanke has stayed a lot longer than he had originally planned.

Obama, speaking to Charlie Rose, host of a PBS interview program, compared Bernanke to longtime FBI Director Robert Mueller, who agreed to stay two years longer than he had planned and is to leave in the coming months.

"Well, I think Ben Bernanke's done an outstanding job. Ben Bernanke's a little bit like Bob Mueller, the head of the FBI - where he's already stayed a lot longer than he wanted or he was supposed to," Obama said.

Asked whether he would reappoint Bernanke if he wanted to keep the job, Obama did not answer directly.

"He has been an outstanding partner, along with the White House, in helping us recover much stronger than, for example, our European partners, from what could have been an economic crisis of epic proportions," Obama said.

Bernanke, who has tried to nurse along the ailing U.S. economy through the 2008 financial crisis, is widely expected to step down when his second term as chairman expires at the end of January.

Obama is said to be considering a number of monetary experts for the job, including Fed Vice Chair Janet Yellen, former Obama and Clinton aide Lawrence Summers, and former Treasury Secretary Timothy Geithner.

An announcement could come as early as this fall, to give the Fed nominee time to get through Senate confirmation by the time Bernanke's term is up.

(Additional reporting by Jeff Mason; Editing by Lisa Shumaker)

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ROUBINI AND BREMMER: Welcome To The 'New Abnormal' Where Emerging Markets Will Fail To Emerge

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China Stimulated Its Economy Like Crazy After The Financial Crisis ... And Now The Nightmare Is Beginning

China is seeing slower economic growth.

Concerns are building over a massive credit bubble, and some say it is no longer an engine of global growth.

Excess capacity — in which demand for products is less than potential supply — continues to be one of China's biggest problems.

An excellent piece by Jamil Anderlini in today's Financial Times looks at how excess capacity and subsidies are threatening specific industries and imperiling the Chinese economy.

A major contributor to this excess capacity problem: China's investment-led growth-model role in the nation's excess capacity problem.

This IMF chart shows the contribution of investment to GDP growth from 2000 on.

IMF

China's massive 4 trillion yuan stimulus, unleashed after the Lehman Crisis to stem massive unemployment, only made the excess capacity problem worse.

PIMCO's Raja Mukherji pointed out that local governments in China launched their own stimulus at the time with about 13 trillion yuan in investments.

"China’s 2008 economic stimulus programs may have been necessary for stabilization, but they appear to have been too large, too intensively focused on fixed assets and too heavily concentrated on construction," Mukherji wrote in a 2012 note.

"All this stimulus led to massive increases in domestic capacity for steel, cement and aluminum – while demand from export markets fell and property deflated amid financial tightening. As a result, these industries experienced massive excess capacity."

What is excess capacity and why is it a problem?

Chinese policy makers have been concerned about excess capacity since 2005.

In the 2012 Central Economic Work Conference — in which officials assess the current state of the economy and draw on this to set the tone for the next year's macroeconomic policy — fixing overcapacity was once again made a priority as China begins to rebalance its economy.

The IMF's Article IV assessment published in 2012 put China’s average capacity utilization about 60% at the end of 2011, from 80% at end-2007. Capacity utilization is a way of gauging slack in the economy.

This chart from SocGen draws on the IMF report to show the decline in capacity utilization:

Societe Generale

The IMF said at the time that China had suffered excess capacity and utilization rates that were constantly below 80% since the 2000s. In 2007, strong external demand helped push the utilization rate higher, but this took a hit again after the Lehman crisis.

While GDP growth recovered quickly after the crisis, the IMF found that China has been growing below potential since 1997, and that the problem isn't just cyclical.

China can't count on external demand to close output gap, neither can it unleash more stimulus, Societe Generale's Wei Yao wrote in a 2012 note.

Excess capacity impacts many Chinese industries including chemicals, ferrous and non-ferrous metals, and newer industries like renewable energy. China's solar power industry has been hit by anti-dumping and anti-subsidies investigations.

The inventory of finished goods sub-index in China's manufacturing PMI report, climbed to 50.2 in March. This showed that excess capacity conditions were deteriorating. This has since fallen below 50 but not enough to for concerns to wane.

Recently, we saw China's biggest steelmaker Hebei Iron & Steel Group and other local steel companies halt production at some of their plants in the face of declining demand, falling prices, and rising inventory.

The excess capacity in Chinese industries has weighed on producer prices too, which were down 2.9% in May. The decline in producer prices shows that China is growing below potential, and CLSA's Christopher Wood who has been tracking PPI writes that "this is as good an indicator as any of the deflationary excess capacity in the system, which is why local fund managers are fond of tracking the correlation between PPI and nominal GDP growth and also more recently with the A share market."

What does this mean for the economy. And how can it be fixed?

Local governments have only contributed to China's excess capacity woes.

"The problem is that much of the so-called 'blind' and 'redundant' investment that Beijing would like to eliminate has the strong support of local governments, whose primary concern is with generating GDP growth in their jurisdictions, regardless of whether the means of achieving it make any economic sense," wrote Mark DeWeaver in a Project Syndicate column.

China has no quick fix to this problem. In a 2013 presentation, Xu Lejiang, president of China Iron & Steel Association (Cisa) identified four ways of resolving excess production capacity:

"As to how to resolve the problem of excess production capacity, Central Economic Work Conference raises "4 batches": consuming one batch by creation and expansion of domestic demand, transferring one batch to overseas by speeding up going out process; integrating one batch by optimization of organizational structure; eliminating one batch by rigorizing environmental security energy consumption admittance standards.

"As for steel industry specifically, in resolving steel overcapacity contradiction we must respect the laws of market, rely on market-based instruments and eliminate a number of capacity through market competition. Although at first there will be loss of some resources in this process, it can't be avoided, iron and steel enterprises must work hard. We should also go out actively and transfer industrial chain; actively promote the merger and reorganization of steel industry, improve the variety and quality of products and enhance market competitiveness and viability."

This basically means "faster depreciation and slower new investment growth," for China, according to Yao. And that in turn means sectors that are already struggling with excess capacity will feel more pain as they begin to deleverage and consolidate.

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MISS: Housing Starts Climb To Just 914,000 In May

May Housing starts missed at 914,000.

Consensus was for 950,000, against 853,000 for April.

Still, we're way up from last year's 806,000 figure for May.

Building permits also fell to 974,000 versus 975,000 — down from 101,700 prior.

Here's the full release:

NEW RESIDENTIAL CONSTRUCTION IN MAY 2013

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new residential construction statistics for May 2013:

BUILDING PERMITS
Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 974,000. This is 3.1 percent (±0.9%) below the revised April rate of 1,005,000, but is 20.8 percent (±1.3%) above the May 2012 estimate of 806,000.

Single-family authorizations in May were at a rate of 622,000; this is 1.3 percent (±1.1%) above the revised April figure of 614,000.

Authorizations of units in buildings with five units or more were at a rate of 325,000 in May.

HOUSING STARTS

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent (±10.1%)* above the revised April estimate of 856,000 and is 28.6 percent (±14.4%) above the May 2012 rate of 711,000.

Single-family housing starts in May were at a rate of 599,000; this is 0.3 percent (±8.7%)* above the revised April figure of 597,000.

The May rate for units in buildings with five units or more was 306,000.

HOUSING COMPLETIONS

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 690,000. This is 0.9 percent (±13.4%)* below the revised April estimate of 696,000, but is 12.6 percent (±13.7%)* above the May 2012 rate of 613,000.

Single-family housing completions in May were at a rate of 546,000; this is 4.2 percent (±13.9%)* above the revised April rate of 524,000. The May rate for units in buildings with five units or more was 135,000.

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A 6-Second Video Shows Just How Huge Last Night's Protests In Brazil Were

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Walter Energy: The Next Coal Casualty?

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Thursday, August 22, 2013

In 2 Charts, You'll Understand Why This Week's Fed Meeting Is The Most Hotly Anticipated One In A Long Time

The Federal Reserve's next meeting is this week.

It's a 2-day meeting that concludes on Wednesday, and it's safe to say that it's the most anticipated such meeting in a long time.

Two charts help to convey this.

One is simply a search of the financial news headlines for the word "tapering" which refers to the notion that the Fed will start buying fewer bonds each month as part of its QE program.

Business Insider/Matthew Boesler, data from Bloomberg

Mentions of tapering (red line) have exploded since the start of May, reflecting the growing chatter of this possibility.

There's virtually no way the Fed announces anything official on this front, but any hint that it gives about what it's thinking with regard to the future of QE will be watched closely.

Now on the real economic front, the big story in global markets has been the turn in interest rates.

Whether it's real interest rates, nominal US Treasury rates, or mortgages, there's been a sharp turn up since the start of May.

Rates are still low by historical standards, but this sharp turn represents a break from post-crisis trends.

The question is whether this is a head fake or if this is really "the big one" so to speak. What the Fed says about its future actions and its forecast for the state of the economy will help answer this question.

FRED

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35 Years Of Failed Economic Forecasts In One Chart

John Mauldin takes down the business of economic forecasting in his new weekly letter.

"If you look at the history of the last three recessions in the United States, you will see that the inability of economists and central bankers to understand the state of the economy was so bad that you might be tempted to say they couldn't find their derrieres with both hands," wrote Mauldin. "Economists have yet to correctly call a recession."

For those who don't have time to read Mauldin's lengthy letter, there's one chart that sums up his thesis nicely. It comes from Societe Generale, and it shows economists' consensus forecasts for GDP growth. As you can see, it never goes negative during this 35 year span.

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10 Things You Need To Know This Morning (DIA, SPY, QQQ, SFD, AAPL)

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Jakarta Indonesia protesters REUTERS/Beawiharta

Student protesters react as police spray foam to extinguish burning tires during a demonstration against the government's plans to raise fuel price, outside the parliament in Jakarta June 17, 2013.

Good morning. Here's what you need to know.

Markets in Asia were higher in overnight trading. The Japanese Nikkei 225 rose 2.7% and the Hong Kong Hang Seng advanced 1.2%. European markets are higher across the board, led by France, up 1.7%. In the United States, futures point to a positive open.The big story for markets this week will be the Federal Reserve's FOMC monetary policy meeting, which concludes Wednesday and is followed by an afternoon press conference with Chairman Ben Bernanke. Many expect the FOMC to strike a dovish tone after bonds have sold off aggressively due to fears over tapering back of monetary stimulus.Heads of state are gathered at a G8 summit in Northern Ireland today to discuss, among other things, a transatlantic trade deal between the U.S. and the E.U. Negotiations are expected to launch this afternoon with a press conference, but the mood is tense after France won an exclusion for the French film industry from the deal on Friday, despite the objection of the U.S.According to new data from Eurostat, the E.U. trade surplus narrowed to 9.2 billion euros in April from 15.9 billion euros in March. The E.U. trade surplus with the U.S. rose to 22.3 billion euros in the first quarter, while its trade deficit with China declined to 33.6 billion euros.Credit rating agency Fitch is out with a report calling China's credit bubble unprecedented in modern world history. "The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Fitch's Charlene Chu.Protesters took to the streets in Indonesia and engaged with police ahead of a parliamentary vote to slash government fuel subsidies, forcing a hike in gasoline prices. More than 18,000 police officers were deployed in Jakarta to curb the protests.WSJ reports that Starboard Value LP, an investment fund that holds a 5.7% stake in Smithfield Foods, will deliver a letter Monday urging the board of directors to split up the company as opposed to accepting an offer from Chinese firm Shuanghui International Holdings. The $4.7 billion deal, if it goes through, would be the biggest ever takeover of a U.S. company by a Chinese company.Apple disclosed that it received requests for data on around 10,000 user accounts from the U.S. government. The company said in a statement that it had asked the government if it could disclose the number and said it was "providing it here in the interest of transparency."The Empire State Manufacturing Survey beat expectations, coming in at +7.84 vs 0.0.NAHB's monthly gauge of homebuilder sentiment is released at 10 AM. Economists expect the index will advance to 45 from last month's 44 reading. Follow all of the data LIVE on Business Insider > Follow 10 Things Before the Opening Bell and never miss an update! Get updates in your Facebooknews feed.

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Protests erupt in Indonesia, two important data releases, and all eyes on Bernanke this week.

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