China Manufacturing Conditions Deteriorate, New Export Orders Fall at Fastest Rate Since March 2009

Sunday, June 30, 2013
In what should be no surprise to Mish readers, the HSBC China Manufacturing PMI™ shows Operating conditions deteriorate at quickest pace since last September, and new export orders plunge.
Key points

Output contracts for first time since last October
New export orders fall at the joint-fastest rate since March 2009
Job shedding intensified

Manufacturing PMI

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 48.2 in June, down from 49.2 in May, signalling a modest deterioration of business conditions. Operating conditions have now worsened for two successive months.

Chinese manufacturers signalled a first reduction of output for eight months in June. The rate of contraction was modest, and generally attributed to weaker client demand, as total new orders declined for the second month in a row. New business from abroad also fell in June, with the rate of contraction the fastest since last September, and the joint-sharpest in over four years. Anecdotal evidence suggested that reduced client demand, particularly from Europe and the US, led to fewer new export orders.


Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “Falling orders and rising inventories added pressure to Chinese manufacturers in June. And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions for SMEs. As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months.”
I frequently disagree with Markit economic comments but these comments from Hongbin Qu are spot on.

Mike "Mish" Shedlock 

Spying Out of Control: NSA Bugs EU Offices, Gathers Routine Info On US Citizens; Is NSA Surveillance Legal? Constitutional?

Just to show how far out of line NSA surveillance has gotten, the US is gathering routine information on US citizens and has also been bugging EU offices.

Der Spiegel reports "Senior European Union officials are outraged by revelations that the US spied on EU representations in Washington and New York. Some have called for a suspension of talks on the trans-Atlantic free trade agreement."

Please consider Spying 'Out of Control': EU Official Questions Trade Negotiations
Europeans are furious. Revelations that the US intelligence service National Security Agency (NSA) targeted the European Union and several European countries with its far-reaching spying activities have led to angry reactions from several senior EU and German politicians.

"We need more precise information," said European Parliament President Martin Schulz. "But if it is true, it is a huge scandal. That would mean a huge burden for relations between the EU and the US. We now demand comprehensive information."

Schulz was reacting to a report in SPIEGEL that the NSA had bugged the EU's diplomatic representation in Washington and monitored its computer network (full story available on Monday). The EU's representation to the United Nations in New York was targeted in a similar manner. US intelligence thus had access to EU email traffic and internal documents. The information appears in secret documents obtained by whistleblower Edward Snowden, some of which SPIEGEL has seen.

The documents also indicate the US intelligence service was responsible for an electronic eavesdropping operation in Brussels. SPIEGEL also reported that Germany has been a significant target of the NSA's global surveillance program, with some 500 million communication connections being monitored every month. The documents show that the NSA is more active in Germany than in any other country in the European Union.

German Justice Minister Sabine Leutheusser-Schnarrenberger, who has been sharply critical of the US since the beginning of the Prism scandal, was furious on Sunday. "If media reports are correct, then it is reminiscent of methods used by enemies during the Cold War," she said in a statement emailed to the media. "It defies belief that our friends in the US see the Europeans as their enemies. There has to finally be an immediate and comprehensive explanation from the US as to whether media reports about completely unacceptable surveillance measures of the US in the EU are true or not. Comprehensive spying on Europeans by Americans cannot be allowed."

Elmar Brok, chairman of the Foreign Affairs Committee in European Parliament added his opprobrium. "The spying has reached dimensions that I didn't think were possible for a democratic country. Such behavior among allies is intolerable." The US, he added, once the land of the free, "is suffering from a security syndrome," added Brok, a member of Chancellor Angela Merkel's conservative Christian Democrats. "They have completely lost all balance. George Orwell is nothing by comparison."

Green Party floor leader in European Parliament Daniel Cohn-Bendit went even further. "A simple note of protest is not enough anymore. The EU must immediately suspend negotiations with the US over a free trade agreement," he said. "First, we need a deal on data protection so that something like this never happens again. Only then can we resume (free-trade) negotiations."

The US has thus far declined to respond to the revelations printed in SPIEGEL. "I can't comment," Deputy National Security Advisor Ben Rhodes told journalists on Saturday in Pretoria, according to the German news agency DPA.
Evidence Overwhelming

The US has not officially acknowledged that fact but nor has the US denied it. But the evidence is overwhelming. "I can't comment". is the best the US can do.

The Financial Times comments on the mess in EU demands answers over claims US bugged its offices
A diplomatic row over communications surveillance deepened as European ministers reacted with disbelief and fury to reports that EU offices were bugged by US intelligence services.

Der Spiegel said it had gained partial access to a NSA document dated 2010, which was obtained by Edward Snowden, the NSA contractor turned whistleblower.

The document revealed the NSA had placed bugs and tapped into internal computer networks at the EU’s offices in Washington, as well as at the EU’s mission to the UN, according to Der Spiegel. The White House declined to comment.

In Germany, especially, where sensitivities over spying remain acute because of large amounts of snooping conducted before 1989 by the Stasi, the East German secret police, the revelations about extensive US surveillance have caused a political furore.

“It defies all belief that our friends in the US see Europeans as enemies,” Ms Leutheusser-Schnarrenberger said. “If EU offices in Brussels and Washington were indeed monitored by US intelligence services, that can hardly be explained with the argument of fighting terrorism.”

Although Germany and the US co-operate extensively on intelligence matters, the partnership is not as deep as that between the US and UK. Together with Australia, New Zealand and Canada, the UK enjoys a privileged status. However, Germany is classified as a “third-class” partner.

“We can attack the signals of most foreign third-class partners, and we do it too,” Der Spiegel quoted a passage in an NSA document as saying.

Meanwhile, Rafael Correa, Ecuadorean president, said on Sunday that Mr Snowden’s fate was in the hands of Russian authorities. The man who first brought the snooping allegations out in the open is thought to still be in a Moscow airport transit zone awaiting news of his asylum request from the South American country.

Legal But Unconstitutional

Washington Post writer Laura K. Donohue, professor at Georgetown University Law Center and director of Georgetown’s Center on National Security and the Law, says NSA surveillance may be legal — but it’s unconstitutional.
The National Security Agency’s recently revealed surveillance programs undermine the purpose of the Foreign Intelligence Surveillance Act, which was established to prevent this kind of overreach. They violate the Fourth Amendment’s guarantee against unreasonable search and seizure. And they underscore the dangers of growing executive power.

The intelligence community has a history of overreaching in the name of national security. In the mid-1970s, it came to light that, since the 1940s, the NSA had been collecting international telegraphic traffic from companies, in the process obtaining millions of Americans’ telegrams that were unrelated to foreign targets. From 1940 to 1973, the CIA and the FBI engaged in covert mail-opening programs that violated laws prohibiting the interception or opening of mail. The agencies also conducted warrantless “surreptitious entries,” breaking into targets’ offices and homes to photocopy or steal business records and personal documents. The Army Security Agency intercepted domestic radio communications. And the Army’s CONUS program placed more than 100,000 people under surveillance, including lawmakers and civil rights leaders.

After an extensive investigation of the agencies’ actions, Congress passed the 1978 Foreign Intelligence Surveillance Act (FISA) to limit sweeping collection of intelligence and create rigorous oversight. But 35 years later, the NSA is using this law and its subsequent amendments as legal grounds to run even more invasive programs than those that gave rise to the statute.

We’ve learned that in April, the Foreign Intelligence Surveillance Court (FISC) ordered Verizon to provide information on calls made by each subscriber over a three-month period. Over the past seven years, similar orders have been served continuously on AT&T, Sprint and other telecommunications providers.

Another program, PRISM, disclosed by the Guardian and The Washington Post, allows the NSA and the FBI to obtain online data including e-mails, photographs, documents and connection logs. The information that can be assembledabout any one person — much less organizations, social networks and entire communities — is staggering: What we do, think and believe.

To the extent that the FISC sanctioned PRISM, it may be consistent with the law. But it is disingenuous to suggest that millions of Americans’ e-mails, photographs and documents are “incidental” to an investigation targeting foreigners overseas.

Congress didn’t pass Section 215 to allow for the wholesale collection of information. As Rep. F. James Sensenbrenner Jr. (R-Wis.), who helped draft the statute, wrote in the Guardian: “Congress intended to allow the intelligence communities to access targeted information for specific investigations. How can every call that every American makes or receives be relevant to a specific investigation?”

Illegal And Unconstitutional

New York Times op-ed contributors Jennifer Stisa Granick and Christopher Jon Sprigman make the case that the NSA Actions are both illegal and unconstitutional in their article The Criminal N.S.A.
THE twin revelations that telecom carriers have been secretly giving the National Security Agency information about Americans’ phone calls, and that the N.S.A. has been capturing e-mail and other private communications from Internet companies as part of a secret program called Prism, have not enraged most Americans. Lulled, perhaps, by the Obama administration’s claims that these “modest encroachments on privacy” were approved by Congress and by federal judges, public opinion quickly migrated from shock to “meh.”

 It didn’t help that Congressional watchdogs — with a few exceptions, like Senator Rand Paul, Republican of Kentucky — have accepted the White House’s claims of legality. The leaders of the Senate Intelligence Committee, Dianne Feinstein, Democrat of California, and Saxby Chambliss, Republican of Georgia, have called the surveillance legal. So have liberal-leaning commentators like Hendrik Hertzberg and David Ignatius.

This view is wrong — and not only, or even mainly, because of the privacy issues raised by the American Civil Liberties Union and other critics. The two programs violate both the letter and the spirit of federal law. No statute explicitly authorizes mass surveillance. Through a series of legal contortions, the Obama administration has argued that Congress, since 9/11, intended to implicitly authorize mass surveillance. But this strategy mostly consists of wordplay, fear-mongering and a highly selective reading of the law. Americans deserve better from the White House — and from President Obama, who has seemingly forgotten the constitutional law he once taught.

 Edward J. Snowden, the former N.S.A. contract employee and whistle-blower, has provided evidence that the government has phone record metadata on all Verizon customers, and probably on every American, going back seven years. This metadata is extremely revealing; investigators mining it might be able to infer whether we have an illness or an addiction, what our religious affiliations and political activities are, and so on.

The law under which the government collected this data, Section 215 of the Patriot Act, allows the F.B.I. to obtain court orders demanding that a person or company produce “tangible things,” upon showing reasonable grounds that the things sought are “relevant” to an authorized foreign intelligence investigation. The F.B.I. does not need to demonstrate probable cause that a crime has been committed, or any connection to terrorism.

Even in the fearful time when the Patriot Act was enacted, in October 2001, lawmakers never contemplated that Section 215 would be used for phone metadata, or for mass surveillance of any sort.

Representative F. James Sensenbrenner Jr., a Wisconsin Republican and one of the architects of the Patriot Act, and a man not known as a civil libertarian, has said that “Congress intended to allow the intelligence communities to access targeted information for specific investigations.” The N.S.A.’s demand for information about every American’s phone calls isn’t “targeted” at all — it’s a dragnet. “How can every call that every American makes or receives be relevant to a specific investigation?” Mr. Sensenbrenner has asked. The answer is simple: It’s not.

 Let’s turn to Prism: the streamlined, electronic seizure of communications from Internet companies. In combination with what we have already learned about the N.S.A.’s access to telecommunications and Internet infrastructure, Prism is further proof that the agency is collecting vast amounts of e-mails and other messages — including communications to, from and between Americans.

The government justifies Prism under the FISA Amendments Act of 2008. Section 1881a of the act gave the president broad authority to conduct warrantless electronic surveillance. If the attorney general and the director of national intelligence certify that the purpose of the monitoring is to collect foreign intelligence information about any non­American individual or entity not known to be in the United States, the Foreign Intelligence Surveillance Court can require companies to provide access to Americans’ international communications. The court does not approve the target or the facilities to be monitored, nor does it assess whether the government is doing enough to minimize the intrusion, correct for collection mistakes and protect privacy. Once the court issues a surveillance order, the government can issue top-secret directives to Internet companies like Google and Facebook to turn over calls, e-mails, video and voice chats, photos, voice­over IP calls (like Skype) and social networking information.

Leave aside the Patriot Act and FISA Amendments Act for a moment, and turn to the Constitution.

The Fourth Amendment obliges the government to demonstrate probable cause before conducting invasive surveillance. There is simply no precedent under the Constitution for the government’s seizing such vast amounts of revealing data on innocent Americans’ communications.

 One of the most conservative justices on the Court, Samuel A. Alito Jr., wrote that where even public information about individuals is monitored over the long term, at some point, government crosses a line and must comply with the protections of the Fourth Amendment. That principle is, if anything, even more true for Americans’ sensitive nonpublic information like phone metadata and social networking activity.

We may never know all the details of the mass surveillance programs, but we know this: The administration has justified them through abuse of language, intentional evasion of statutory protections, secret, unreviewable investigative procedures and constitutional arguments that make a mockery of the government’s professed concern with protecting Americans’ privacy. It’s time to call the N.S.A.’s mass surveillance programs what they are: criminal.
Criminal is Correct Viewpoint

There is no doubt that actions by the NSA are both illegal and unconstitutional.

Yet, instead of going after the perpetrators of crimes, the US is going after Edward Snowden, the former U.S. intelligence contractor who leaked the documents detailing the illegal surveillance to various news agencies.

Rand Paul on Snowden

Finally, please consider Rand Paul: Clapper Lied, Snowden Told the Truth.
Senator Rand Paul told CNN yesterday that NSA whistleblower Edward Snowden will be historically viewed as a truth teller whereas Obama national security director James Clapper will be judged as a liar for telling Congress that the NSA was not spying on Americans.

“I would say that Mr. Snowden hasn’t lied to anyone,” Paul told CNN’s Candy Crowley. “He did break his oath of office, but part of his oath of office is to the Constitution, and he believes that, when James Clapper came in March, our national director of intelligence came and lied, that he [Snowden] was simply coming forward and telling the truth that your government was lying. This is a big concern of mine, because it makes me doubt the administration and their word to us when they talk to us, because they have now admitted they will lie to us if they think it is in the name of national security.”

Paul is referring to Clapper’s March testimony in front of the Senate intelligence committee, during which he claimed that the National Security Agency did “not wittingly” collect data on Americans’ communications.

Following Snowden’s revelations about the PRISM program, Clapper tried to clarify his remarks by stating, “I responded in what I thought was the most truthful, or least untruthful, manner by saying ‘no.’”

“Mr Clapper lied in Congress in defiance of the law in the name of security – Mr. Snowden told the truth in the name of privacy, so I think there will be a judgment because both of them broke the law and history will have to determine,” added Paul.
So, who is the criminal here, and who is the hero? One is wanted on charges of treason, the other is not wanted or charged with anything.

Mike "Mish" Shedlock

Bill Gross Discusses the "Tipping Point" For Bonds; Does He Miss the Boat?

Saturday, June 29, 2013
Bill Gross did not see this major selloff in bonds coming. He discusses the setup in his recent Investment Outlook called The Tipping Point.

Much of the article is about how he almost tipped a ship while in the Navy. He uses the tipped ship metaphor to talk about the position in bonds.

Gross says "Markets just had too much risk, and in PIMCO’s opinion, too much hope for a constant QE and for the growth that it would produce. In effect, the ship was top heavy with too little ballast. Guess I should have known, huh?"

That's water over the dam at this point so the question Gross asks now is "Well where does the ship go from here?"

Here is a snip of Gross' explanation.

Should you as a bond investor jump overboard and risk the cold money market Atlantic Ocean at near zero degrees? We don’t think so – and not because we want to keep you on board – we just don’t think so. Why not?

1) The Fed’s forecast of the economy which prompted tapering panic is far too optimistic. If 7% unemployment is tapering’s final port of call, we simply think that we’re much further away than the Fed’s compass would suggest. We argue for structural headwinds – demographic, globalization, and technology influences – that have had and will continue to have dampening effects on domestic and global growth. The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, “Mr. Chairman are you serious?” Growth will be negatively influenced.

2) Inflation, according to the Fed’s own statistics is running close to a 1% pace. The Fed has told us that they “target,” “ target” 2% and for the next 1–2 years are willing to accept even 2½% until they reverse engines. Fed Governor Bullard of the St. Louis Fed was in our opinion correct where he dissented from the majority decision several weeks ago, citing the distant shores of 2%+ inflation and the seeming inability to even move in that direction. 

3) Yields have adjusted by too much. While T.V. and the press focus on 10-year Treasuries at 2.55% as their guiding star, subjective stabs by yours truly or anyone else are difficult day to day. ... To my eye, Fed Funds will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth. But the beauty of this North Star Fed Funds sextant is that it can be rather directly observed in futures markets, either for Fed Funds or for Eurodollars, which are a close companion. Right now, Fed Funds futures markets are predicting a 75 basis point yield in 2015, and Eurodollars validating a similar conclusion. That would suggest a mispricing, despite the obvious caveat of professional observers that some of the 75 is a surcharge for potential volatility. In any case, if frontend curves are up to 50 basis points cheap, then intermediate curves – the 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%.

So there you have it, fellow passengers and paying clients. Don’t jump ship now. We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone.

Emphasis by Bill Gross

A Tipping Point That Won't Tip

Gross' message is clearly "the ship has reached a tipping point but don't worry, the ship won't tip". Let's discuss each of Gross' three main points.

1) "The Fed's forecast is far too optimistic".

I certainly agree with Gross that the Fed (and almost everyone else) is overly optimistic.

But what if growth is not the Fed's only concern? What if the Fed is concerned about the bubbles it has blown in stocks and bonds? What if the Fed is concerned about renewed speculation in housing?

Perhaps that scenario is far-fetched, perhaps not, but at least some Fed governors have those concerns.

2) "The Fed's inflation target is 2%"

OK, the Bernanke Fed has an inflation target of 2%.  But Bernanke will soon be gone. Will the next Fed have the same target? Any target? Given that Janet Yellen is likely the next Fed Chairperson, it is likely but not a given.

And how does one measure inflation? Will the Fed ignore housing like it did between 2002 and 2007? Will it ignore all brewing bubbles?

3) "Yields have adjusted too much"

Have they? Let's assume that Gross is correct.

Gross emphasizes the yield on a 10-year note belongs at "2.20% instead of 2.55%".

Lovely! Let's once again assume Gross is right. The upside is 35 basis points. And what is the downside if Gross is wrong?

Is this what things have come to? That's it's necessary to speculate on a gain of 35 basis points because that is fair value? And where was Gross on "fair value" when the yield was 1.5%?

If it is correct to play for 35 basis points now, why was he in bonds when the yield was 70 basis points too low? Can you have this both ways?

And why is this suddenly a "3–5% for both stocks and bonds" when he tweeted "@PIMCO The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 - 3% future."

So, is this a 3-5% world or a 2-3% world?

Questions abound and answers are few.

I actually suspect Gross may have this correct, but what is the risk-reward if he is wrong? What if the bond revolt continues? What if the Fed has lost control? That's what Gross does not discuss, and that's where he missed the boat.

For further discussion, please see Calmer Waters for the Bond Market? Gold? Worst Over?

Mike "Mish" Shedlock

9 Tips Guaranteed to Make You Want to Shop Online!

Shopping online can be very enjoyable but one must exercise common sense and some good tricks to get out ahead. Shopping on the internet should start here. This guideline is created to help you enjoy the experience of shopping online - you may even make some cash and pick up some savings tips too:

1. Use Contact Us Button - ALWAYS!
If you are interested in purchasing a product or service online - first contact the site using their "contact us" button. If you do not get a response with 24 - 48 business hours - be very wary about doing business with that site. Even for well known sites - you still need to see what their customer service is like so don't bypass this step. Being big does not necessarily mean good customer service. The response should not be an automated one advising you to check site's FAQ for your answer. The trick is to make your query one that will have to be answered by a REAL person. I have developed the mindset that " if they don't respond to my query within 24 - 48 hours" - I won't buy!

2. Join Their Affiliate Program
If you have a website - and wish to purchase anything online first check to see if the site you plan to purchase from offers an affiliate program. If they do, this provides the perfect opportunity for you to see how they will treat you and anyone that you refer down the road. Joining the affiliate program provides a threefold opportunity:

First: Testing Customer Service PRE-SALE. This is another way of testing customer service by applying for the affiliate program. If you get a friendly response within 24 - 48 business hours and you get a comfortable feel about the site, proceed to join their affiliate program. Next purchase the item you set out to purchase in the first place BUT from YOUR link on YOUR site.

Second: You get paid for purchasing and that is just a sweet bonus! You will usually get back either a percentage of your own purchase or a set $ amount. Check to see how long your cookies take to expire. The longer of course is the better - the best are cookies that never expire. If you have a busy site you may be able to market the product and make great commission before your cookie expires.

Third: Testing Customer Service POST-SALE. You are now in the position of a customer of this site as well as an affiliate. As a customer you can evaluate - was the service and item as advertised? Was service friendly? Did the product arrive timely? Was the quality as advertised? Was there a thank you email for the purchase? Did you receive an electronic receipt? Was there follow up contact to enquire about delivery etc. As an affiliate - Was your affiliate account credited with the commission within the time set out in their affiliate contract? If you get all the right answers you can now proceed to confidently market that product on your site because you are now your own living , breathing credible testimonial.

Many first time online shoppers are wary about flashing out their credit card to charge it and they have many reasons to be. Countless stories about online credit card fraud abound. Be careful, exercise common sense. The credit card companies are also very vigilant and pro-active in protecting their customers but that should not preclude you from indulging in your own due diligence. Follow these tips and you will minimize your risk.

a. First get a credit card that you use exclusively for online shopping.
b. Keep the limit $500 or below.
c. Only purchase at sites that looks like a real person(s) is/are behind it - i.e misspellings, out of date content -example advertising a salon trade show for 2006 in 2008 are dead give ways of unmanned sites.
d. Beware of squatter sites - sites that are not really involving in retail but host a lot of retail links.
e. Your first line of defence if you are not sure, is to use the - "contact us link" if there is none - leave right away.

When shopping online you will undoubtedly get a lot of email contact from the sites that you do business with. In no time your email inbox will be cluttered with these emails. These are important emails please do not delete them. Here is what I recommend - create a folder in your email program for EVERY company that you do business with and SAVE all their contact with you in their respective folder. This way anything you receive such as guarantee of service, warranty, commission promised, receipts, contract terms , etc you can access easily and quickly should a dispute arise later.

This trick is especially good if you are given passwords and username to log into a site a while ago and now need it. Yes - most, if not, all sites have a password/username retrieval process but why wait on their reply if all you need to do is to check your own folder? This tip is also good for correspondences from lawyers, school teacher etc. If it is important file it.

This tip helped me recently when I had to retrieve information from an electronic receipt I received from David Notestine of last April. I was able to locate the receipt and contacted the company to take advantage of the service I purchased back then. This is also a company I contacted pre sale got a personal reply within 24 hours. I purchased and also joined their affiliate program. See I do practice what I preach!

There are many legitimate sites in cyberspace that are very honourable and would never attempt to swindle you therefore an article like this they would welcome. They may even post on their sites for their customers. However there are so many many sites that are set up just to do the very opposite. These are the ones that this tip is intended to warn you of. If you are asked to provide your Social Security Number (USA) or your Social Insurance Number (Canada) you might want to reconsider doing so. I have had the experience of signing up for work-from-home programs promising great wealth working from home completing surveys, some clerical stuff etc etc but you have to provide the Social Security info for your self and your family members etc to be paid. I did! Luckily nothing happened to my identify to my knowledge unless there is a Desemal Thomas in the USA that is not YET affecting my identify here in Canada. This took place in my newbie days on the internet when I trusted everybody. Unless you want a clone of yourself - Rule of thumb - LESS is MORE. No social security numbers, no full date of birth, bank account information, give only what make sense. Less information = more protection.

Stay away from the temptation - (speaking from experience). Temptation can that burn a LARGE hole in your credit card. If these folks touting the rich life on the waterfront properties, the yacht, the 5 star vacations did have the get rich-overnight-formula why would they want to share it with you a total stranger? It would be so guarded by these people - you would have a better chance of getting some of the royal jewels from Fort Knox than them sharing it with you. Don't fall for the manufactured testimonials - do you know any of these people featured there? Do you know anyone who knows anyone featured there? What proof do you have that it is real? Follow your Gut instinct? Beware!

If you have heeded all the tips provided above and still have that feeling that something is just not right after you have made a purchase.

a. Contact your credit card provider IMMEDIATELY - request that they not accept the payment and you MUST not accept the good or service. You cannot have it both ways.
b. Check your credit report for any unusual activities and file a dispute of any item on your credit report that you did not authorize.
c. Make checking your credit report a consistent habit - some credit card companies offer credit monitoring service.

In spite of the tip in #6 you CAN make money online. I am not selling you any program - NO! This is how it works.

The premise is - if you have purchased products and service online and you are pleased with it you may want to share it to others. Why not make some money doing so. There are folks who do make a tidy sum of money online doing just that. Selling as a middleman/women! That is what affiliate/reseller programs are about. You are marketing someone else's products or services. Instead of the vacuum salesman going door-to-door in the old days - the vacuum salesman now simply sets up a site and calls himself a "RESELLER" and get to work getting traffic to his site to purchase the vacuums from him.

Or Mr. Vacuum Salesman puts a banner on his site from the manufacturer of the vacuums and gets paid REFERRING clients to buy the vacuums directly from the manufacturer. Find a decent set of affiliate programs from sites such as Commission Junction, Share a Sale, Clickbank among others.

They key is that you have to generate TRAFFIC to sell to! That is it straight and simple. If your website is not even ranked on Google chances of a customer finding you online via search engine is very very slim. Most people start out with a regular site with one central product or service and once they build credibility and a decent size customer base they introduce these add -on services and products. It will take time but if you remain consistent you can make money online and elevate your enjoyment of the internet.

Don't be afraid to purchase on the internet - it is a fun place. Do your research, compare, read un-solicited customer feedback then buy. Some sites have customer feedback that you know is real because it is so raw in its content and both good and bad reviews are posted. Believe me, you will know if it rings true. Exercise common sense and happy shopping - it can be fun.


Do I Need Professional Indemnity Insurance

A professional indemnity insurance policy is a financial product to compensate the insured (your business) in the undesirable event of damages accrued from a claim being made against the business due to contravention of duty within the policy period for neglect, error, or omissions. Still not sure? In its most basic form, this insurance policy covers your business for a loss that may arise from negligence caused by your business while carrying out such business. Professional indemnity insurance policies have a tendency to vary greatly in the amount of cover the policy provides.

There are a number of instances in which a business may have need to call upon their professional indemnity insurance policy. The first possibility is that a business provides a service to the purchaser, and due to a negligent act, a negligent omission, or other type of negligent error, carries out the work in a slipshod manner, which may lead to further issues arising down the road.

The same scenario could also apply to advice given by a business. PI insurance also protects against allegations of the supply of false, or otherwise generally misleading information. The third most common situation that may require the use of a PI insurance would be the unknowing or otherwise accidental encroachment of the intellectual copyright of another, be it an individual, a business, or other organisation. Intellectual material is also considered property, and the same copyright laws protect it.

A PI insurance policy may have a variety of aspects of coverage, but there are also particular elements that for a number of reasons have been excluded from the policy. Often, the insurance policy will include protection against claims made against your business from a civil liability case, claims that have arisen from the loss of documents, or if documents have been damaged. Legal costs such as those that may arise in the defence case include, but are not limited to, the hiring and retaining of lawyers, the court costs, hiring of professional witnesses or experts of the industry, and so forth, may or may not be included dependent on your selected policy.

Other elements not covered will usually include elements pertaining to war and terrorism (including nuclear activity), pollution unless considered as a breach of duty of the business, potential claims known about when the policy was first purchased, and claims that should be covered under an additional policy, such as buildings, contents, or employers liability.

Any physical products (except possibly software and programming products used for the business that have been amended in some way) are not covered by PI insurance. The insurance policy will also not cover any fines and penalties, or claims from by an insurance company unless a judgement has been received declaring otherwise. Certain warranties set by your business may also affect the coverage provided by your PI insurance, such as a guarantee of outcome, whether express or implied.

So who may need to have a professional indemnity insurance policy? The most common industries where businesses shop for an insurance quote are those whereby a service is provided as opposed to a physical product. This includes businesses in the fields of accounting or other financial services, graphic design firms, marketing and internet marketing businesses, and surveyors, and management or consultancy businesses.

Other, more product based rather than service based, businesses, may be better with a shop insurance quote. It is always possible to get a shop insurance quote and compare the two to see which will provide your business with the most appropriate coverage. Bear in mind that it is very easy to shop for professional indemnity insurance online. It is recommended to get a few quotes for comparison, and ensure you select a policy that is comprehensive enough for your requirements. For example, some policies are more inclusive and will cover the bracket of 'any civil liability'.

FHA Swamped By Defaults; Congressional Report Shows FHA Could Suffer Losses as High as $115 Billion; Shut Down Fannie, Freddie, FHA

Friday, June 28, 2013
An alleged "worst case scenario" shows the FHA could lose as much as $115 Billion. Since these worst case scenarios are always famously optimistic, the best course of action would be to shut the agency down.

I was quoted as saying just that by the Heartland in Congressional Report Raises Spectre of FHA Bailout.
The Federal Housing Administration's (FHA) losses over the next 30 years could be much higher than originally projected, according to the findings of a congressional committee. The dismal forecast has some bracing for another taxpayer-financed bailout.

The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) is reporting that a worst-case scenario stress test conducted last year estimated the FHA could suffer losses as high as $115 billion. That forecast is significantly worse than the one reported by independent auditor Integrated Financial Engineering Inc., which projected losses of $65 billion for the 79-year old agency.

Swamped by Defaults

The primary cause of the FHA's troubles is the plague of underwater mortgages that has struck the housing sector in recent years. During the late housing bubble, the FHA lost market share as more private lenders sold “subprime” loans to home buyers. But with the collapse of the housing market in 2007-08, much of that business returned to the FHA. While the agency has played a major role in propping up home prices, it has also been overwhelmed by defaults.

John Ligon, senior policy analyst at the conservative Heritage Foundation, writes:

The FHA has a core mission of providing targeted support to creditworthy low- and moderate-income, minority, and first-time homebuyers. The FHA cannot responsibly achieve these intended objectives when it is expanding its market share and competing with the conventional market for high-cost mortgage loans.

According to Ligon, the only way the FHA can avoid a bailout is to reduce its market share by lowering maximum loan limits to $325,000 over the next four years, raise credit requirements for borrowers, and institute “burden sharing” with loan originators by reducing insurance coverage from the current 100 percent to 50 percent by 2016.

While these reforms may improve FHA's balance sheet over the long term, they would also reduce market liquidity, which in turn could cause home prices to fall. Thus homeowners with little home equity now could find themselves underwater on their mortgages, which could trigger more defaults.

But it is precisely this apparent dilemma that government-sponsored enterprises like FHA have created with their meddling into the market that has some calling for a more radical approach.

‘Shut Down Fannie, Freddie, FHA’

“I would shut down Fannie Mae, Freddie Mac, the FHA, HUD, and such similar programs and agencies,” says Mike “Mish” Shedlock, a market analyst and host of the Web site Mish's Global Economic Trend Analysis. “The more money government threw at housing, the less affordable housing became until the bubble popped.”

He says numerous government agencies and programs “should be shut down and things would be far better off because government can never allocate money better than the free market.”
Mike "Mish" Shedlock

Calmer Waters for the Bond Market? Gold? Worst Over?

Curve Watchers Anonymous has its eyes on the bond market as the quarter comes to a close today. It's been a very bad stretch for US treasuries as the chart below shows.

Yield Curve as of 2013-06-28

click on chart for sharper image

  • $TYX: 30-Year Long Bond Yield - Green
  • $TNX: 10-Year Treasury Note - Orange
  • $FVX: 05-Year Treasury Note - Blue
  • $IRX: 03-Mnth Treasury Bill - Brown

The above chart shows the monthly close for the treasury symbols, except the current month is month to date (with the close coming up today).

$TNX Daily

That last candle is a feed error. The 10-year yield did not swing 50 basis points today.

So, while things have calmed down a bit over the past week, the 10-year yield has climbed from 1.614% to 2.551%, a rise of 93.7 basis points since the beginning of May.

Impact on Housing

The selloff in mortgage backed securities has been even worse. Mortgage loans have risen by as much as 175 basis points.

For details, please see 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability?

Gundlach Sees Calmer Waters Ahead For Bond Market

MarketWatch reports Gundlach Sees Calmer Waters Ahead For Bond Market
“From the frying pan into the fire.”

That phrase came up repeatedly during Jeffrey Gundlach’s ad-hoc webcast Thursday as the DoubleLine Capital chief executive sought to calm shaken bond investors.

His comments reflected the role that the bond market’s biggest names have recently taken on in soothing fears about the asset class after a panicked global selloff in recent weeks. Pimco’s Bill Gross also advised investors Thursday against jumping ship.

For those thinking of fleeing bonds for greener pastures, Gundlach’s webcast fittingly started with a review of gold GCQ3 +1.05% , which has taken a dive in recent days.

“Gold looks like death,” he said.

Nonetheless, the choppy seas of the bond market are giving way to smoother waters, he said. The 10-year Treasury note 10_YEAR +1.94%  yield fell 6 basis points Thursday to 2.475% after hitting a high of 2.66% last week.

“I do think the worst is over. Now we have corroborative evidence from the markets,” Gundlach said.

With the markets settling, there are deals to be had.
Markets Settling? Worst Over?

For starters there is scant evidence the treasury market is settling. Yield on the 10-year note is up to 2.517% today from 2.475% yesterday.

The weekly action looks no different that similar consolidation action in the middle of May and the middle of June. After similar-looking consolidation periods, yields blasted higher each time.

Given action in the $HUI, a better case can be made that gold is settling.

$HUI 2-Hour Chart

That's a pretty dramatic reversal in unhedged miners.

Is the bottom in? I don't know, nor does anyone else. Nor do I know whether or not a short-term top in treasury yields is in.

End of Treasury Bull Market

What I do know is that Bill Gross proclaimed on May 10, Bull Market in Bonds Is Over.

Bill Gross said the three-decade bull run in bonds ended last week when the 10-year Treasury yield hit 1.67%. The manager of the world’s largest bond fund stressed that a bear market in bonds won’t start until economic growth and inflation pick up — an arrangement that he doesn’t expect to see immediately.

"Tweet" from Bill Gross on May 10

"@PIMCO The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 - 3% future."

Let's assume Bill Gross is correct. And if he is, then there is little value in bonds. There was negative value in them at the time Gross made that tweet.

It's hard enough to navigate a cyclical bear market. And it's a brutal mistake for investors to believe they can navigate a secular bear market in anything, especially on the long side.

Since 1980, treasuries have been in a secular bull market. Investors have not known anything else. Might not Gross be wrong when he says "a bear market in bonds won’t start until economic growth and inflation pick up."

I think he already is, by any reasonable definition. If the bull market is over, a bear market has started.  

It remains to be seen if the secular bull market in gold is over, but if I believed that, I would not be heavily in gold.

Mike "Mish" Shedlock

Unpaid Interns Get Scrutiny; Reader Mailbag on Internships

Reader Mailbag

Reader "CM" writes ....
Hello Mish

Just two weeks ago, our human resources department blocked us from taking on an unpaid summer intern. The college student did not have any professional experience, but was trying to do something productive with his summer. My colleague decided to give him a shot. HR blocked the internship for fear of breaking the law.

How ridiculous is that? A college student with no professional experience wants to work as an intern and we would like to extend him an offer, but we didn't take him on for the summer yet due to the concern that we would be breaking the law.

Unpaid Interns Get Scrutiny

It's easy to explain why HR nixed the deal.

A federal judge in New York recently ruled moviemakers violate labor laws if they do not pay interns.

Bloomberg reports Sleeping-Giant Issue of Unpaid U.S. Interns Gets Scrutiny
[Student internships], especially common in competitive industries like journalism, finance and filmmaking, could change if the appeals court upholds the ruling of a federal judge in New York who found that moviemaker Fox Searchlight Pictures Inc. violated labor laws by not paying two of its interns. Cases have also been brought against Hearst Corp., Conde Nast Publications and the Public Broadcasting Service’s Charlie RoseShow.

“This question of whether private-sector internships violate the minimum wage laws has been sort of a sleeping-giant issue for many years,” said David Yamada, director of the New Workplace Institute at Suffolk University Law School in Boston. “The absence of payment is done with a wink and a nod. Interns know they better not make any trouble about this.”

Half Unpaid

According to a survey by the National Association of Colleges and Employers, a Bethlehem, Pennsylvania-based recruiting and research group, more than 63 percent of graduating seniors in 2013 either had an internship or a co-op, a position more closely tied to an educational curriculum. About 48 percent of those were unpaid, according to the survey.

To critics, unpaid internships are an abuse of the labor system, a way for employers to take advantage of desperate job seekers. Supporters, including some former unpaid interns, see it as a way to get training and career contacts.

Eric Glatt, 43, The lead plaintiff in the case against Fox Searchlight, Glatt had left a job at the insurer American International Group Inc. in New York to pursue a career in film. After earning a certificate in film editing, he eventually took two temporary positions on the set of the movie “Black Swan,” where he spent much of his time learning the art of making copies.

Taken Advantage

“I knew I was being taken advantage of,” Glatt, now a law student at Georgetown University in Washington, said in an interview. “I just didn’t think there was anything I could do about it.”

If Pauley’s decision is challenged and later affirmed by the U.S. Court of Appeals in Manhattan, the case might be considered in conflict with the Ohio federal appeals panel, raising the possibility that the issue could end up before the U.S. Supreme Court.
‘Legal Uncertainty’

The ruling in the Fox Searchlight case “creates a significant legal uncertainty,” said Samuel Estreicher, professor of labor and employment law at New York University. He said he would advise employers not to use unpaid interns in light of the decision.

Who Took Advantage Of Whom?

Glatt's complaint is absurd. He was extremely lucky to get experience on the "Black Swan" movie set. He brought no experience to the table. And it is crystal clear he does not even want a career in movie editing, something very valuable he may have learned as an intern.

Thousands of people would have welcomed the opportunity he got. And if he did not like the offer, then he should not have accepted. So who took advantage of whom?

Should that ruling be upheld, look for internships to become a thing of the past. That's unfortunate for college students struggling to gain work experience.

Mike "Mish" Shedlock

The Tar Pits Are Calling

Thursday, June 27, 2013

Giant Eagle. Ask a small child where hot dogs come from and he will answer the name of the last place he rode around in a shopping cart. This is the beginning of a conversation about farms, animals, and possibly soy beans.

The H.R. Department. Ask a government bureaucrat or one of our elected officials where a health insurance policy comes from and they might tell you that all of that paperwork originated with Marge in H.R. And this is the beginning of a conversation about how many of us get our health insurance, from agents servicing individuals, small businesses, and the self-employed.

This blog, Health Insurance Issues With Dave, has been published for over 4 years. The original posts were more personal and had less graphs and links. But this now appears in three formats and has readers around the country, so there is usually less of me and more of a straightforward presentation. At the risk of shocking or irritating a few of my readers, today’s post will be more personal, more like the originals.

Let me be clear – I am very concerned. I’m concerned about the country and how we manage the self-inflicted mess we are about to encounter and I am concerned about me.

Now before our friends on the right get excited and our friends on the left, agitated, we need to state that there is plenty of blame to go around. Neither side has listened to the other. For good or ill, the Patient Protection and Affordable Care Act (PPACA) is the law of the land. One side has done everything it can to undermine the legislation without any concern for the impact their actions might have on their constituents. The other side lacks the fire power to execute this massive transition and is too stubborn to pull back to get this right.

Stubborn – Incompetent – Unconcerned About the Collateral Damage

Too be honest, it is easier to pick on the Democrats, the Department of Health and Human Services, and the President because they are doing something. It may be Grade C work, but if you are comparing them to Mitch McConnell and John Boehner, then C beats incomplete any day of the week. In fact, when it comes to the health care debate, the Republican leadership is simply AWOL.

Last week’s post dealt with the federal government’s invitation only webinar. The facilitator was asked for some specifics about the “Metal Plans”. She quickly pooh poohed the question. From the start, the PPACA has presumed that there would only be a couple of plan options. Since it is pretty obvious that none of the people who wrote the law have ever actually shopped for insurance, they had no idea what they were creating. They envisioned a system so simple that even an untrained navigator could help the computer illiterate enroll in coverage.

I have been given an advance peek at one company’s plans for the new exchange. To comply with the law, these policies are far more complicated and limiting than the current plans. Provider networks are shrinking. Simple deductible / 100% plans are disappearing. Determining the right policy for an individual or family may take more time, not less, in the future.

To counter this reality, Secretary of Health and Human Services Kathleen Sebelius excitedly announced this week the creation of a new website and telephone call center. The number is 1.800.318.2596. The website is Sure the Government Accountability Office (GAO) has found that the federal government and many of the states are “behind schedule”. Sure we have less than 100 days till the exchanges are supposed to be up and running. But we have a website and a call center all prepared to tell us how wonderful everything is going to be.

I went to the website. It is information light and propaganda heavy. At one point I found this nugget on the small business page: Insurers can no longer charge more for women. Of course we know that in the small business market, women are charged more than men at some ages and less than men at other ages. In other words, the rates reflect the risk. If the government was interested in presenting facts instead of simply selling, the page would note that rates will now be gender neutral. I would tell you more about the site, but they still have work to do on it. My computer froze while on the site and I had to reboot to get back to work.

I’m worried about us because these people are in over their heads. They’ve got the pitch memorized but they don’t understand the product. And they don’t know enough to care.

And I’m worried about me. I have been doing this since 1979. The things I know and the work I am capable of doing, is no longer valued and may not be compensated. I have about 500 clients. Most of them have employees. They are all impacted by these changes. Some will save money. Some of my clients are about to take a hit. Each needs a personal strategy. Each needs time, my time. And the truth is that none of my peers knows, today, how much time we will be able to spend with our clients.

Tuesday I talked with an agent who is abandoning the individual market. Too much time. Too much effort. Too little money after the last round of commission cuts. He wants to spend all of his time working with businesses with 50 or more employees. He is a fifteen year veteran of this business. His clients will notice his absence. He can’t be replaced by a volunteer from the local union hall. And neither can I.

On October 1, 2013 we will not enter the gates of insurance heaven nor fall into a dark abyss. No, it will be something in between, mediocre, messy, but just close enough to warrant, at least initially, a C.

And I will fight on for me and for my clients. But I would have to be deaf or in denial if I said that I didn’t hear the tar pits calling.   DAVE

Michael Pettis on the China Liquidity Crunch; China Bulls Beware

Michael Pettis at China Financial Markets commented on the liquidity crunch and spike in SHIBOR a few days ago via email.

His comments came in before China intervened to quiet the markets as noted in China Acts to Calm Markets; Stock Market Rebounds From 6% Plunge After Central Bank Pledges More Liquidity; Wet Nurse Action.

Nonetheless his comments are still relevant and much worth a review. What follows is a guest post from Micahel Pettis.

Pettis Guest Post

Special Points

  • Short-term rates in the interbank lending market rose steadily over the past two weeks and then suddenly soared Thursday amid rumors of the market’s having frozen up and one or more large banks having missed payments.
  • For the past ten years China’s soaring credit has been accommodated by rapid money expansion as the PBoC was forced to monetize large net inflows on the current and capital account. This year, however, while credit continued to expand at historically unprecedented rates, net foreign exchange inflows seem to have dried up, especially after the authorities clamped down some time in May on the over-invoicing of exports that had been used to bring “carry trade” money illegally into the country.
  • The tension created by accelerating credit expansion (much of it supporting activities that were not generating sufficient cashflow to repay the associated debt) and decelerating money creation has created liquidity strains for much of the past year. Last weeks’ events were likely to have been simply an exacerbation of those strains.
  • I believe talk in the market of China’s experiencing its own “Lehman moment” are very much exaggerated. There is liquidity in the system and the PBoC still has the tools needed to alleviate a short-term liquidity crunch before it leads to a banking crisis. Government credibility is high, and given the wide-spread assumption that the government stands behind the banks, I do not expect anything approaching a bank run.
  • There are however two important lessons to be drawn. First, we are likely to see similar stress in the banks many times again (and have seen it before) as a financial sector wholly addicted to cheap and plentiful credit struggles to accommodate Beijing’s determination to control credit growth.
  • Second, the way the crisis was handled should make it clear that volatility in the financial sector is suppressed by administrative measures. This, however, may increase the risk of a future gapping in confidence and volatility.
  • During the coming week I believe that a significant amount of Wealth Management Prodiucts (WMP) will mature, and because of asset/liability mismatched this WMP must be rolled over. Beijing, correctly in my opinion, continues to be eager to clamp down on risks within the shadow-banking sector. This is likely to create further stress in WMP placement, which, if mismanaged, could create a run on WMP.
  • If there is indeed a reduction in the amount of funding available for WMP, the money will have to flow into some other sector. Given the large size of the WMP market, these flows might be significant, although it is not yet clear to me where they will go.
Probably the main lesson of last week is that systems in which volatility is suppressed often seem less volatile, but this is only true when shocks are small. Large shocks tend to result in increases in volatility that far exceed expectations.

I have always argued that China’s lack of transparency wouldn’t matter too much during the bull phase of the market. It is when market sentiment turns negative that we see the real cost of a lack of transparency. When investors and businesses are nervous, they are likely to over-interpret bad news and to fill in knowledge gaps with the most alarming of the various plausible scenarios.

Lack of transparency, in other words, is a kind of positive feedback mechanism that exacerbates volatility. It can increase buying appetite on the upside (limited information gives us greater scope to assume best-case scenarios) and it hurts prices on the way down (uncertainty rises dramatically and worst-case scenarios become plausible).

This means not only that non-transparent markets are likely to be more volatile, but also that this volatility can be suppressed when adverse shocks are small and exacerbated when adverse shocks are large. Markets lacking transparency, in other words, are more likely to experience lower volatility during normal times and more likely to “gap” when conditions change. Market participants may not have access to negative information until the negative information has accumulated and there is no longer any way to prevent it from becoming widely known, in which case the decline in the market can be sudden and even out of proportion to the value of the negative information.

This is why I think we need to watch carefully what happens this week. It is not clear to me how widely Chinese depositors knew about or understood the events of last week. Although they were discussed in the specialized financial press, the accounts tended to be very “factual”.

By this I mean that the articles provided the raw data – money market interest rates surged during the week and peaked on Thursday – but there was little attempt to explain why this happened, or to discuss the seemingly credible rumors of bank defaults, or to analyze the terrific stress in the payments system. To the extent that the press covered the events, they were more likely to focus on the fall in the stock market than on the liquidity squeeze among the banks.

If the foreign and Hong Kong press makes a big deal about trying to understand what happened last week, concerns may filter back into the mainland and may affect behavior. The impact on the behavior of market participants might be very limited, as it usually is when transparency is limited, but the risk is that when it does affect behavior we are more likely to see significant “gapping” in market behavior.

The most important effect is likely to be on demand for wealth management products. I believe that there is RMB 1-2 trillion of WMP coming due before the end of June, and most if not all of this will have to be rolled over. Already it seems that WMP rates are rising. Several friends received SMS offers on their mobiles (this happens a lot in China) for short-term WMP deposits at 6%, which is 100-200 bps higher than we have seen in the past and higher than the 5% cited in the People’s Daily article. Until recently, the average rate on WMP seems to have been around 4.3%.

So what can we conclude from the events of last week? The good news is that the new administration seems far more determined than the previous to rein in credit growth and restructure the economy. Clearly the PBoC’s refusal to provide liquidity to bail out the interbank market reflects Beijing’s tougher stance on speculative excesses. The bad news is that the credit system is so distorted and over-leveraged that any attempt to rein in credit growth creates enormous stress in the system.

By the way I seriously discount much the overexcited talk in the market about how the PBoC engineered the freeze the markets in order to punish the banks and to force discipline onto the financial system. Clearly there is some truth to this argument, and the PBoC certainly did refrain from bailing out the liquidity needs of the banks for the past two weeks as rates rose, but we shouldn’t let lack of information lead us into conspiracy theories.

I suspect the PBoC never expected this to happen the way it did and they were caught as flatfooted and confused as everyone else. Remember that the PBoC has almost no experience of any kind of financial market condition except that of soaring money creation and credit expansion. Until last year they have never had to deal with a stable or even contracting money supply, and consequently they have had little experience in dealing with these kinds of conditions. This was new for everyone.

In fact there is an important lesson here for the PBoC, and investors more generally. Chinese financial markets often seem less volatile than one would expect for a poor, developing country, largely because of administrative measures that intentionally or unintentionally suppress normal volatility. These kinds of systems, however, are not less volatile. They seem less volatile because small shocks have minimal impact. Larger shocks, however, tend to cause a much greater than expected surge in volatility. Perhaps last week was a case in point.

Going forward we will probably see more of this in China. Volatility will be suppressed for periods of times only to erupt in greater than expected volatility from time to time. This is not only a China problem, of course. One can easily argue that the Fed’s actions under Alan Greenspan seemed to induce a “great moderation”, but only temporarily, and when the great moderation became less moderate, the economy was always likely to be more disorderly than expected. The euro, similarly, sharply reduced volatility in peripheral Europe for many years until it suddenly exacerbated it. Of course no student of Hyman Minsky would be surprised by any of this.

Beyond the lesson of unexpected surges in volatility, this coming week is likely to be important. One of my colleagues tells me that according to Fitch there is RMB 1.5 trillion of WMP coming due in the next ten days. I want to confirm this number but haven’t yet had the time to do so, although this information is from a credible source, so I assume it is correct. This matters because there may be real trouble rolling over some of these WMP and we know that there is likely to be a huge maturity mismatch in the funding of WMP. The demand for short-term funding might be quite high this coming week and it will be interesting to see how the PBoC reacts.

Stay tuned. This is not a "Lehman moment" and we are not likely to see a sudden crisis, but it certainly indicates just how strained the money markets have become. Some questions:

1. If there is indeed enough money in the system, as the PBoC says there is, and the problem was just that the big banks were hoarding money, where did that hoarded money show up? Was it in higher excess reserves at the PBoC, or higher central bank bill purchases, or somewhere else? We will need to wait for the next PBoC data release in July to see whether excess reserves went up in June, although we will only get month end numbers, which won’t tell us much about what happened last week.

2. Why hasn't this received more attention in the mainland press? Are they trying to prevent Chinese depositors from knowing how risky things are? If the foreign press makes this into a big deal, eventually ordinary Chinese are going to find out. How will they react? Will they close out WMP positions?

3. If demand for WMP drops, where will the money that until now went into WMP show up? I can only think of the following: more outflows from China, higher deposits in the banks, stock markets, real estate markets, cash hoarding.

This coming week is quarter end, and we are likely to continue seeing tough liquidity conditions in the markets. I will be watching interbank interest rates closely, of course, as well as trying to get a sense of what the perceptions might be among ordinary households. I will also be watching WMP closely. I think we can safely discount warnings that China’s financial system is about to collapse. For many years it was impossibly difficult to convince many people that China’s growth model was leading inevitably to a serious debt problem, and it is sort of ironic that it has become equally hard to convince people nowadays that we are not going to see a financial collapse.

Because of limited investment alternatives, a more-or-less closed capital account (unless you are rich or powerful), and resilient government credibility, we are unlikely to see bank runs among the large banks or a financial collapse (which is ultimately just a kind of bank run). The huge maturity mismatches in the banking system are effectively “hedged” by the inability of bank depositors to leave the system. But one way or another we do have to write down the huge hidden losses in the country’s balance sheet, and this will mean not a collapse but rather many years of Japanese-style slow growth as the system grinds its way though its excesses.

Pettis Guest Post End

China Bulls Beware

The last sentence above is worth repeating "One way or another we do have to write down the huge hidden losses in the country’s balance sheet, and this will mean not a collapse but rather many years of Japanese-style slow growth as the system grinds its way though its excesses."

Those still bullish on base commodities because of demand for China, and those who think China will pass the US in GDP this decade are about to find out how wrong they are.

Mike "Mish" Shedlock

22% Think Obamacare Will Make Their Situation Better, 42% Say Worse

A new Gallup poll shows Americans Wary of Health Law's Impact.
Americans are more negative than positive about the healthcare law's future impact on their family and on the U.S. in general. Forty-two percent say that in the long run, the law will make their family's healthcare situation worse; 22% say it will make it better. And almost half believe the law will make the healthcare situation in the U.S. worse; 34% say it will make it better.

Question: In the long run, how do you think the healthcare law will affect your family's healthcare situation and the healthcare situation in the US? Will it make things better, not make much difference, or will it make things worse?

These data are from a June 20-24 Gallup poll, conducted as the Obama administration and its supporters are trying to raise awareness of the Affordable Care Act. A new nonprofit group, Enroll America, just launched a campaign, "Get Covered America," to help the uninsured in particular learn about the new law and how to sign up for health coverage, which everyone is required to carry starting in 2014.

It is possible that once Americans start to learn more about the law -- and see it in action, with the uninsured able to start shopping for coverage Oct. 1 -- they will change their perspective on its potential impact.

The uninsured are slightly more likely than the insured to think the law will make the healthcare situation for their family and for the U.S. better. But even the uninsured are divided as to whether the law will make their healthcare situation and the country's better or worse.

Majority Disapproves of the Affordable Care Act

Fifty-two percent of Americans say they disapprove of the 2010 Affordable Care Act, while 44% approve. Last fall, 48% said they approved of the law and 45% disapproved. Americans have generally been divided in their views of the law since it was passed in 2010, in response to slightly different question wordings.

The healthcare law itself elicits highly partisan responses, with Republicans nearly unanimously disapproving (89%) and a smaller but still large majority of Democrats (76%) approving. Democrats' and Republicans' views are essentially unchanged from November 2012. It is independents whose views have changed -- they have become more likely to disapprove now. The majority of independents (52%) approved of the law last fall, while now a majority disapprove (53%).

Those without health insurance -- a group that most benefits from the new law -- are slightly more likely to see it as having a positive effect, but even they are not ardent supporters.
If people were more aware of the impact Obamacare had on part-time hours I suspect the poll showing would be much worse. Still, it's significant that independents have changed their minds.

And if premiums soar as expected, even Democrats may wake up.

Mike "Mish" Shedlock

Destruction of French Manufacturing Placed Squarely on Euro

Inquiring minds are digging into a 23 page report by Dr Eric Dor, Directeur IESEG School of Management, Université Catholique de Lille, regarding the consequences of monetary union on the destruction of French manufacturing industry.

Eric Dor writes "The launch of the euro brought about an impressive decrease of manufacturing production in France and huge losses of market shares."

Since the launch of the euro, French and German industrial productions have extremely diverged. French manufacturing production decreased while German manufacturing industry very strongly increased. The decrease or stagnation of exports of French products contrasts with the strong increase of German exports. France lost market shares on the foreign markets. This evolution is a direct consequence of the flaws of the monetary union as it has been organized. Also, due to sharp differences in the average degree of sophistication of French products, sharing a common currency with Germany inevitably had to lead to a loss of competitiveness of France on foreign markets.

Manufacturing industry production in France

The detailed data computed in this paper shed light on the magnitude of French disindustrialisation since the launch of the euro. Before EMU, the rates of growth of French and German industrial production were close to each other. For example, from January 1995 to December 1998, the cumulated rate of growth was 5.5% in France and 6.4% in Germany. However, since the launch of the euro, from January 1999 to April 2013, French industrial production decreased by 11.4% while German industrial production increased by 32.8%!

Even before the financial crisis, from January 1999 to December 2008, the divergence was obvious. French manufacturing production only increased by 3.4% while German manufacturing industry increased by 32.4%. The crisis was destructive for France, where manufacturing production decreased by 15.2% from January 2009 to April 2013, while Germany resisted with a decrease limited to 1.5%. The data on manufacturing industrial production also show that since the start of EMU, the UK has performed better than France, which is clearly close to the distressed economies of the periphery, like Spain and Italy.

Disaggregated data of Cumulated growth of industrial production in % show that the divergence between France and Germany occurred in nearly all sectors of industrial activity.

The shortcomings of the monetary union were known from the start

The responsibility of those who pushed ahead with the EMU project is enormous, because many of them were aware of the flaws of its design. This awareness is very well documented by Geert De Clercq (2011).

It must be pointed out that it was known by experts that the mechanics of the common currency would lead to a likely implicit funding of the southern countries by northern countries. Before joining the ECB in 1998, Otmar Issing himself had published a paper where he warned that a single currency would require transfers of cash between the member countries and that it would cause political tensions. While the enormous TARGET related claim of the Bundesbank on the rest of the Eurosystem has recently raised major concerns in Germany, such a likely phenomenon had been very early identified, even before the launch of the Euro, for example by Garber.

The consequences for France

While France did not experience a real estate bubble and an excessive private sector indebtedness that could compare with those of other European southern countries, the competitiveness of the country and the profitability of its industry have dramatically deteriorated since the launch of the euro. As a result the trade deficit has continuously increased and the losses of productive capacity in the industry have been huge.
The PDF paper is 23 pages long and is loaded with charts like these.

Cumulated Industrial Production

click on any chart for sharper image

Trade Balances


Euro Exacerbated Existing Imbalances

To be completely fair, problems in France (Spain, Greece, Italy, etc) cannot be pinned entirely on the euro. However, it is 100% certain the euro exacerbated existing problems, and in a major way.

Instead of being a savior, the Euro has been more like an anchor to most of the economies in the eurozone.

Mike "Mish" Shedlock

Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?

Wednesday, June 26, 2013
Over the past week I received numerous emails regarding my June 13 post Mish Buys a Basket of Miners.

People want to know if I am still in the trade. Others taunted they will buy when I sell. Well good luck with that idea, because this is an investment not a trade.

One reader proposed "My prediction is when the Fed finally stops printing, gold will drop to $750 and when they start raising rates gold will drop to $500. What do you say about that?"

I answered "Your prediction seems as silly as those who knew gold would be at 2400 or even 3000 by now. No one can accurately predict such things."

I bought with the intention of holding for a lengthy period, stating "I believe precious metal miners represent true value, but I cannot state when the market will come to the same conclusion."

What's changed? The answer is "nothing". So am I selling? Of course not, and it seems silly to even ask.

Anti-gold sentiment is amazing, but sentiment alone is not a good timing factor. It can always get worse.

A Plague of Gold Bears and The 'Tapering' Myth

Acting Man touched on the sentiment theme in A Plague of Gold Bears and The 'Tapering' Myth.

Readers may recall that in 2010 and 2011, after largely ignoring the fact that gold had been going up for more than a decade, virtually all the major mainstream banks and brokers suddenly turned bullish on gold. It was a huge warning sign as we now know with the benefit of hindsight (and as a few people suspected at the time). At the time target prices for gold were all of a sudden raised by all these worthies. Not even one of them sounded an alarm.

These days, not a day passes when they are not ganging up on gold, practically falling over each other with ever more bearish forecasts. Here is the harvest from just the past two days:

Gold to Drop Even Further as Fed Increases Real Rates: Goldman Sachs

Deutsche Bank cuts gold, silver forecast for 2013

Credit Suisse cuts gold, silver, Brent forecasts

"Paradigm shift" to send gold sliding to $1,200 an ounce: SocGen

And last but not least, what is probably the funniest headline yet delivered by all these newly minted gold bears:“UBS Says QE's End May Render Gold 'Obsolete'”

A major theme of these forecasts is, you guessed it, the Fed's alleged imminent 'QE tapering', and/or 'raising of real interest rates'.

To the latter we would point out that real interest rates (nominal interest rates relative to inflation expectations) have indeed risen lately, but it was certainly not the Fed's fault. They are rising in spite, not because of the Fed. In fact, their recent rise, which has surely sent a few 'players' scrambling for cash (and many imaginary bank profits into the nether reaches of money heaven), is a strong reason to suspect that monetary pumping will not only not be 'tapered', but may well end up being increased. But that is of course speculation and is neither here nor there. Instead, we want to point out a different error in the thought process described above.

Keep in mind by the way, that the same banks that are bearish on gold due to the 'tapering' mirage are bullish on stocks inter alia because 'tapering' is thought to be 'still far away'. In reality, all they are doing is extrapolate recent trends, while making up 'reasons' for these extrapolations that are meant to make it sound as though they actually knew why markets are doing what they are doing.

It is really quite remarkable: for ten years while gold did nothing but go up, most of these these guys were largely silent. Their gold price forecasts were on average dead wrong with unwavering regularity – they kept predicting price declines. Then, as it approached its peak, they suddenly turned bullish and finally raised their price targets (again, on average). Now that it is going through the first major correction since the bull market began, its decline is accompanied by inordinate sound and fury. No other market has produced such a flurry of widely and loudly telegraphed grave dancing.

Grave Dancing

I invite you to read the rest of the article because it's worth a closer look.

Curiously, Just as Acting Man discussed above, talking heads say the stock market is up today because the lower GDP print means the Fed will not taper bond purchases, yet tapering is bad for gold.

For discussion of ECB and Fed tapering as well as the unexpected slowdown in US GDP, please see Draghi Announces ECB Exit From Easing Remains Far Off; Think the Fed Has an Exit Strategy?

What's the Real Long-Term Driver for Gold?

Most analysts are totally clueless about gold and gold markets. They cite jewelry, mining production, central bank sales, and all sorts of other irrelevant factors in their analysis.

If you really want to understand what gold is all about, I suggest you read an interview on Gold Switzerland with Robert Blumen: “What’s really key for the price formation of gold?

Blumen discusses assets vs. consumption, mine supply, jewelry, marginal demand, the alleged (and nonexistent "gold deficit"), and sentiment.

Blumen does not offer much commentary on the GATA price manipulation thesis other than say it's "plausible". I suggest most of what GATA says is at best strongly over-hyped, including the GATA alleged "gold deficit" (a point on which Blumen agrees).

Rather than excerpt the interview, I simply suggest you read the article in entirety, save this one humorous anecdote at the end:

"People who say [gold is in a bubble]did not identify the equity bubble, did not believe that we had a housing bubble, nor have they identified the current genuine bubble, which in the bond market. But now these same people are so good at spotting bubbles that they can tell you that gold is in one. Most of them did not identify gold as something which was worth buying at the bottom, have never owned a single ounce of gold, have missed the entire move up over the last dozen years, and now that they’re completely out of the market, they smugly tell us for our own good that gold is in a bubble and we should sell."

Unsafe At Any Price

Indeed, sentiment has soured so much that MercBloc president Dan Dicker says Gold Is Unsafe at Any Price

I leave it to the reader to decide if that headline is even more ridiculous than UBS Says QE's End May Render Gold 'Obsolete'

Mike "Mish" Shedlock

The Benefits Of Christmas Shopping Online

I recently did a radio interview with a station based out of Arkansas and we were discussing the differences between doing your Christmas shopping at the local mall versus shopping online. I made the point that many consumers still like to go the mall to get some of that Holiday vibe and the sense of giving that is such a large part of the Christmas spirit. The DJ that was interviewing me then pointed out that you lose a lot of that warm and fuzzy feeling when you have to fight the crowded parking lot and the rush of finding gifts when you only have a limited amount of time to spend at the mall.

Don't Fight Those Crowds

In this case, the DJ was a big proponent of online shopping and online coupons, hence this is the reason I was on his show, but he brings up some good points. People are starting to use online shopping as a strong alternative to fighting the crowds at local stores and malls. This is evident by the fact that online shopping in 2006 has really gone through the roof and is up 23% over 2005 numbers as consumers are starting to catch on to the convenience and great deals that can be found online.

Information At Your Fingertips

As I pointed out in the interview, the main benefits of doing your Christmas shopping online are two-fold. First, the amount of information and research at your disposal on the Internet is quite impressive. This includes buying guides, user reviews of products, and price comparisons at different online stores. All of these are not going to be readily available to you when you walk into a brick and mortar store to do some shopping. Secondly, many online retailers offer coupon codes that can get you things like free shipping, or 10%, 15% , or sometimes 20% off your purchase. These coupon codes are typically only for online usage. Free shipping coupons in particular are very popular around the Holidays, as many consumers are afraid to shop online thinking the shipping charges will outweigh any benefits.

Keep Your Sanity

So this Holiday shopping season I would urge you to try shopping online and to keep a running total of the savings you received when using online coupons. For me personally, the time wasted in busy parking lots and long lines in stores also has a value, but it is hard to put a dollar figure on time wasted. Nonetheless, I found the holiday season to be much more enjoyable and peaceful when I avoided busy malls and shopped exclusively online. Happy Holidays and Merry Christmas to you and your family!

© 2007, Kyle James

Draghi Announces ECB Exit From Easing Remains Far Off; Think the Fed Has an Exit Strategy?

The Financial Times reports ECB exit from easing remains far off, Draghi says.
Speaking to committees in the French lower house of parliament, Mr Draghi said there were still downside risks to growth in the eurozone economy and the ECB was ready to take fresh action if needed.

"On our policy stance, let me say that it's been accommodative in the past, it is accommodative in the present time and will stay accommodative for the foreseeable future," Draghi said.

"Our exit – as Benoit Coeure [ECB executive board member] said a couple days ago – remains distant. At the same time we have an open mind about all other possible instruments that we may consider proper to adopt . . . we stand ready to act again when needed."
Taper Talk on "Strength" of US Economy

Bernanke says the US economy is solid enough that the Fed can begin tapering its balance sheet purchases later this year.

Given the stock and bond market bubbles the Fed has created, the Fed of course should taper (not that it should ever have expanded its balance sheet in the first place).

4th Quarter GDP barely crossed the zero line with 0.4% growth. That growth was via questionable GDP deflators.

Today, 1st Quarter GDP came it at 1.8% annualized, a dramatic downward revision from an estimate of 2.4% released last month. In turn, 2.4% was a downward revision from the first estimate of 2.5%.

GDP Trends

click on chart for sharper image

The above chart is courtesy of Doug Short at Advisor Perspectives who reports GDP Q1 Third Estimate at 1.8%: A Surprising Downward Revision

Note the linear regression trend of lower GDP over time.

Taper vs. Exit

There is absolutely no chance the Fed has any real "exit" strategy other than to hold its entire bloated balance sheet to maturity.

If the Fed "tapers" its purchases, it will not be because the economy is picking up steam, but rather because the Fed is clueless about the prospects for the economy, or perhaps out of very belated concern over the stock and bond market bubbles that it has created (nothing the Fed would ever admit of course).

Mike "Mish" Shedlock