Friday, May 9, 2014

The economic recovery is founded on cheap credit and easy money – not real, sustainable growth, says economist

We can forgive Chancellor George Osborne for looking smug. His efforts seem to be paying off.
Wage increases are overtaking price rises. Unemployment is falling. House prices are soaring.
Consumers are in the shops again. Economists predict near-record growth, and the IMF says the UK is likely to be the fastest-growing economy in the developed world.
But actually, if you look more closely, these are all worrying signs.
Smug? We can forgive Chancellor George Osborne for looking smug. His efforts seem to be paying off.
Smug? We can forgive Chancellor George Osborne for looking smug. His efforts seem to be paying off.

This is fake, runaway growth, founded on cheap credit and easy money – not real, sustainable growth.
Interest rates have been kept at rock bottom for five years now, which is fine for an economy on its last legs but not one racing away.
And £375billion worth of virtual money has been created through quantitative easing. This is a hair-of-the-dog policy.

Starting in the Blair-Brown years, we had a huge party. The government spent wildly, as did consumers, all fuelled by cheap borrowing. It was a great party, until the money ran out.
But rather than suffer the hangover, we simply borrowed even more. That’s hardly ‘austerity’.
And when the inevitable hangover does come, it will be even worse.
We need to stop living in this fantasyland created by politicians and their hand-maidens, the financial regulators, and to start wising up to the things they don’t really want to tell you.
Warning: Dr Eamonn Butler has concerns about the economic recovery
Warning: Dr Eamonn Butler has concerns about the economic recovery

The first is to realise that the financial crisis was caused by government profligacy. When you are in a casino and the government is handing out free gaming chips and buying drinks at the bar, people are going to make some very bad bets.
And in the early 2000s, we did exactly that: buying new cars, big houses and a hugely expanded government that we simply could not afford.
Has the party stopped since the 2008 crash? Despite the ‘austerity’ talk, the government has hardly shrunk at all, and consumers are still borrowing to spend. We need to get real.
The Bank of England must raise borrowing rates and the government must slash its spending – and slash taxes on the back of that, allowing consumers to get by without getting deeper into debt and making it cheaper for firms to hire, invest and grow.
By 2018, public debt will be double where it stood under Labour.
The second thing is to restore sound money.
How easy it would be for all of us if, like the Bank of England, we had cash-creation machines in our basements. But like everything else, the more new money that is around, the less value it has.
That is why the pound has fallen so much and why foreign holidays are so expensive. Inflation is bound to pick up too, as all that quantitative easing eventually works through to prices.
The authorities are going to need real discipline to choke things off – but they must.
Third, we still need to fix the banks. All of that new, costly regulation has squeezed out small banks, leaving just a handful of too-big-to-fail giants – which can do what they like because there is no competition to restrain them.
We know where that landed us in 2007-08.
But this time, the government does not have any cash to bail them out. We need new banking competition, and fast.
Which is easy: just raise the solvency rules for bigger banks and they will soon break themselves into smaller ones.
There are many more things we must do, such as cut and simplify taxes, and remove obstructions to small-business growth. It is not going to be painless.
But if we want a real, sustainable recovery rather than raceaway growth that ends in an even bigger financial crash, we have to stop believing in the fantasy  that politicians are continuing to spin.
÷Dr Butler’s book, The Economics Of Success: 12 Things Politicians Don’t Want You To Know (Gibson Square £12.99,  e-book £8.99) Mail readers can order it free of postage from or call 08444 724 157.
Dr Eamonn Butler is director of the Adam Smith Institute

30,000 lobbyists and counting: is Brussels under corporate sway?

From mobile phone charges to nations' interests, these shadowy agitators are estimated to influence 75% of European legislation
European parliament
Power point: the European parliament is subject to intense pressure from corporate interests, and many MEPs use their inside knowledge to take up lucrative lobbying positions when they quit. Photograph: Michele Tantussi/Getty Images
When the Polish MEP Róża Thun was elected five years ago, she thought the job would be fairly straightforward. She hadn't reckoned with the lobbyists.
Take mobile phone charges. She saw the fact that EU citizens pay eye-watering sums in other EU states as an anomaly that needed fixing. But it wasn't that simple. "We had telephone companies and lobbyists who started to invade us," she recalls. "They obviously didn't want to reduce roaming charges because it would hit them in the pocket."
To stroll around the vast, ugly and permanent building site that is Brussels' European district is to brush up against the power of the lobbies. Every office block, every glass and steel construction within a kilometre of the European commission, council and parliament is peopled by Europe's biggest corporate names.
Thousands of companies, banks, law firms, PR consultancies and trade associations are there to bend ears and influence the regulations and laws that shape Europe's single market, fix trade deals, and govern economic and commercial behaviour in a union of 507 million.
Lobbying is a billion-euro industry in Brussels. According to Corporate Europe Observatory, a watchdog campaigning for greater transparency, there are at least 30,000 lobbyists in Brussels, nearly matching the 31,000 staff employed by the European commission and making it second only to Washington in the concentration of those seeking to affect legislation. Lobbyists sign a transparency register run by the parliament and the commission, though it is not mandatory.
By some estimates, they influence 75% of legislation. In principle, lobbyists give politicians information and arguments during the decision-making process. In practice, the corridors of the parliament often teem with individuals, who meet MEPs in their offices or in open spaces such as the "Mickey Mouse bar" (nicknamed so because of the shape of its seats) inside the parliament.
They explain their concerns, provide a "position paper", and send in suggestions for amendments to legislative proposals. Of course, the final decision is taken by MEPs. But examples are legion of the tail wagging the dog.
Lobbying is such a crucial part of the climate in Brussels that it has spawned manuals, a documentary (Who Really Runs the EU?) and even "the worst lobby awards". Not surprisingly, the biggest movers and shakers agitate for the biggest industries with the most to gain – and lose – from European legislation.


David Cameron visits Total Oil shale drilling site David Cameron visits the Total Oil shale drilling site in Gainsborough, Lincolnshire in January. Photograph: Getty Images It is a fertile time to be an energy lobbyist in Brussels. Vladimir Putin's stranglehold on Europe's gas supplies and campaign to dismember Ukraine have thrust energy to the top of the international and European agenda.
When Barack Obama visited EU headquarters in March, he had stern words in public – and even stronger remarks in private, according to senior diplomats – for Europe's leaders, telling them they had to risk the wrath of their voters and go for fracking and shale gas to help immunise Europe against Russian blackmail.
In a letter to Downing St in November, Ivan Rogers, the UK's ambassador to the EU, laid out a strategy for leaning on the commission to get it to adopt a minimalist position on shale exploration, entailing no new EU legislation. A week later David Cameron wrote to the commission chief, José Manuel Barroso, insisting on the light-touch regulation.
America's shale revolution, entrenching low energy prices in the US, is having a big impact, leading to a bonanza for the fracking lobbies in Brussels.
From shale to climate-change policies, from car exhaust rules to renewables, from carbon-capture technologies to carbon-trading schemes, the energy lobby is highly active and successful in Brussels, with companies such as BP and Shell maintaining big operations aimed at shaping policy. "In a nutshell the energy-intensive lobbies say they are not competitive, especially vis-a-vis the US, because of shale and the low prices there," says an industry insider engaged in Brussels lobbying. "They argue that we're much too focused on renewables and climate change and that we should be much more open like the US."
The most effective lobbying in Brussels centres on the gamekeepers-turned-poachers, the revolving door of senior commission officials, diplomats, and MEPs who retire or quit public office and instantly take up offers to translate their contacts and inside knowledge into lucrative lobbying work, often by moving to an office across the street.
Take Jean de Ruyt, a Belgian who knows Brussels inside out. As ambassador to the EU, the career diplomat in effect ran Belgium's EU presidency four years ago, then retired, took up a job with a US law firm and is now a leading figure in the shale lobby.
His No 2 as ambassador is now chief of staff to Herman Van Rompuy, the president of the European council steering EU summits.
For the shale lobby, Ukraine and Putin may represent less of a crisis than a huge opportunity. "The Ukraine crisis is seen as a blessing, giving the shale-gas lobby the perfect chance to say if you want to get rid of dependence on Russian gas…" said Antoine Simon, who analyses the politics of the extractive industries for Friends of the Earth.


Woman smoking cigarette Lobbies in Brussels rushed to launch a counteroffensive against an EU tobacco directive. Photograph: Bernhard Classen/Alamy In February the EU approved a new tobacco directive, which is designed to make smoking less attractive, particularly to young people. The lobbies in Brussels did not scrimp on resources as they rushed to launch a counteroffensive. About 200 representatives of three of the biggest tobacco companies, Philip Morris International, British American Tobacco and Japan Tobacco, spent four weeks in the city, hogging hotels and spending more than €3m (£2.5m) on an action plan to weaken future regulation in two parts: persuading the European commission, and trying to convince MEPs and national governments.
Juan Páramo is a spokesman for Mesa del Tabaco, which represents the Spanish tobacco industry. He says he met Spanish MEPs "on various occasions" to explain the impact the directive would have on a "key" sector for Spain.
"Lobbies aren't how they are depicted in the movies, but you have to be careful with your strategies," says Andrés Perelló, a veteran socialist MEP and a member of the environment, public health and food safety committee. He is used to contending with industries relating to cars, fuel or medicine – which are all heavily exposed to regulatory changes – but he cannot think of a single industry that piles as much pressure on as the tobacco sector. He has no problem with lobbies when they stick to an "adequate" code of conduct. He has also rejected many of their manoeuvres. "We are always ready to have a dialogue, we don't feel pressurised by anybody," he says. Any time a lobbyist comes to see him is "totally transparent", he says, and one of his assistants always takes notes of these meetings. "To be clear," he adds.
Another MEP felt pressurised by the visits, which he says were "very cordial, and absolutely threatening". He says the lobbying did not affect his final vote. "It didn't taste good, but all of these procedures were legal," he says.
With something as sensitive as tobacco regulation, health associations act as a sort of anti-lobby. "Faced with the tremendous pressure of the tobacco monopolies, nurses have had to do something they were not at all used to: lobby for public health," says Francisco Rodríguez, president of Spain's national committee for the prevention of smoking.
Nonetheless, far from the influence of the ordinary channels, the map of pressures on an oligopolistic market as important as tobacco brings with it all kinds of intrigues behind the scenes. Confidential documents published by the Guardian in September shows how the giant of the sector, Philip Morris International, managed to postpone a vote by MEPs on the anti-smoking directive. "It was quite disgusting," says a high-level parliamentary source.


EU flags are seen out outside European commission headquarters in Brussels European Union flags outside the European commission headquarters in Brussels. Photograph: Yves Herman/Reuters One of the principal instruments in Brussels is diplomatic lobbying by member states. "The big embassies make a conscious effort to stay in contact with the strongest national delegations in parliament," says Florent Saint Martin, associate professor at Sciences Po, and a former MEP assistant who founded his own lobby consultancy. French MEPs receive detailed memos from the general secretariat of European affairs, an intergovernmental structure in Paris. A European affairs minister acts as the official correspondent with the European parliament.
"It's not so much as explaining how a vote should go," says Jean-Paul Gauzès, a French MEP and a financial specialist, "but about providing explanations on the texts which will be voted upon, and on defending the French interest in them."
"It's now possible for us to check in with an MEP to counter or amend a text we consider to be against our interests," says Alexis Dutertre, a permanent representative for France to the EU. "However, having 28 member states today is more difficult than having six, 12 or 15 to win a majority, or build a minority blocking other states with." Colleagues are supposed to spend as much time at the European parliament as in the European council, the bread-and-butter work of the European diplomat.
But the relationship between diplomat and MEP could be under pressure if the far-right parties gain seats at the European elections. "A Front National delegation will cause a really big problem because they are absent, to the point of being incontrollable," predicts Olivier Costa, director of political studies at the College of Europe in Bruges. Costa believes France's position is coming to resemble that of the UK, which has its fair share of Eurosceptic MPs.
"If the Front National win 20 seats, we'll only be able to count on some 50 useful MPs," says a French spokesman. "That will rank us alongside the next level down of populated countries, such as Spain and Poland."

Big tech

Facebook's data centre in Lulea A man walks past a logo created from pictures of Facebook users in the company's data centre in Lulea, in Swedish Lapland. Photograph: Jonathan Nackstrand/AFP/Getty Images One of the most prominent Brussels lobbyists is Erika Mann of Facebook. She spent 15 years with the German Social Democrats before walking through the "revolving door" to the lobbyists.
The latest figures in the official EU lobby register reveal Facebook spent less than €500,000 on lobbying in Brussels in 2012. That's surprisingly low: Facebook invested about $2.8m (£1.7m) in the first quarter of 2014 alone in the US. But US tech companies such Facebook, Google, Amazon and Microsoft rarely work as individual companies but more in corporate alliances. Jan-Philipp Albrecht, the German Green MEP responsible for the data protection reform act in parliament, estimates that more than half of companies that contact him are from the US. Other MEPs say the pressure is unprecedented.
In February 2013 the website found some MEPs were not only inspired to make amendments suggested by US firms, but copied and pasted huge passages of text sent by lobbyists. Understanding who is doing the lobbying is not always straightforward: not all lobbyists are open about their allegiance – some even send their "suggestions" on paper with no clear letterhead.
Mann is more candid, always present in the debate, a regular on the public speaking and debate circuit, even turning up to European parliament sessions. It's hard to say how influential she has been after just a few months in the job. But one thing is for sure: the longer negotiations run on, the longer lobbyists kick about to try to influence proceedings. With data protection, as with everything in Brussels, "nothing is approved until everything is approved".

Consumer protection

Compared with these other formidable pressure groups, consumer protection is the poor relation of the lobbying family. The only voice for consumers in Brussels is Beuc, the Bureau of European Consumer Organisations. It has 35 employers and almost half its budget comes from the EU itself, making negotiation tricky.
If, for example, a consumer is tricked by a dodgy tour operator, there is little the EU can do. Beuc has acted in a few cases for consumers, mobile phone roaming charges and food labelling being among them. "Our task is to balance the industrial lobbies," says Johannes Kleis, a spokesman for Beuc. But in terms of fighting industry lobbies, it's David v Goliath. "One regret is that we have only recently started looking into consumer issues in financial services," Kleis says. While this may be handled at a nation-state level, Kleis says it's not enough "given that the market is global".

To Fix U.S. Economy, We Must First Fix The Way We Educate America’s Workers

Tom Nugent
Ever found yourself wondering why the U.S. economy continues to stagnate . . . more than five years after the “Great Recession” of 2008?
As an investigative reporter and a teacher who’s spent more than 20 years helping both high school and college students learn how to write, I’ve often been puzzled by the ongoing economic morass of recent years.
Fact: America used to be a world-class center of economic innovation — a “can-do” Land of Opportunity where workers and managers traditionally put their heads together in order to come up with enterprising solutions that made life better for everyone.
So what went wrong? How did the supremely competent society that rebuilt Europe after World War Two and then put the first human on the moon end up fumbling its way through an economic debacle that shows few signs of ending in 2014?
For me, the answer to that scary question arrived during a shocking afternoon a few years ago, as I volunteer-taught a 12th-grade class in journalism at the local public high school where my two daughters were students.
On that deeply disturbing afternoon, I witnessed a scenario that spoke volumes about the decline in our economy and the paralysis that seems to have overtaken our workforce.
It happened when the director of the school’s new “Writing Lab” dropped by our Journalism 101 classroom to introduce the kids to a brand-new computer system. The high-tech machines were supposed to be the Next Big Thing in education . . . and we were assured that with the push of only a few buttons, the students would be able to write their stories electronically and then quickly publish them online.
But that didn’t happen.
Instead, the beleaguered IT manager spent the entire 50-minute writing period in a hapless quest to make the computers work. After countless failed attempts (“Okay, now try typing a question mark at the end of the link and then hit ENTER twice!”), the bell mercifully rang and the kids headed off to their next class — without having written a single word.
Changing the Way Schools Prepare Students for the Workforce
I thought of that moment a few weeks ago, when I heard about a recently launched, not-for-profit organization — the Digital Learning Alliance (DLA) — that about a year ago kicked off a nationwide campaign to help fix our economic (and unemployment) woes.
The DLA solution: tap into the managerial savvy and the engineering know-how to be found at some of America‘s most successful, blue-chip digital technology and education companies (IBM, McGraw-Hill Education and Follett Corporation, among several others) in order to help all of America‘s schools (kindergarten through college) build the kind of truly effective, state-of-the-art education technology programs that can best help students succeed. These programs, when effectively implemented, will help lessen the workload of teachers and make them more effective at educating students with 24×7 metrics, intervention, and instructional support.
At the DLA, operated by retired leaders in education and technology, the energizing motto is crystal-clear: “Education IS Economics!”
Says DLA co-founder and president Dane Goodfellow, a former longtime executive at IBM and a nationally recognized expert in digital learning, “There’s no doubt that America‘s current inability to drive consistent economic growth hinges primarily on our inability to train skilled high-tech workers who can compete in the global economy.
“To solve that problem, we have to completely transform the way in which schools use state-of-the-art technology tools to educate the workers of tomorrow.”
While pointing to a recent Harvard University study showing that American public school students currently trail 31 countries in math proficiency and 16 in reading proficiency, Goodfellow cites a study which warns that by 2020, more than 80 million workers will be unqualified for the high skill jobs of the 21st century and could go unfilled in the U.S. — simply because American workers don’t have the high-tech skills required for them.
To change that frightening equation, the IBM digital guru and his technology-savvy colleagues at the DLA have put together a comprehensive “road map” that is currently helping federal educators in Washington — along with influential legislators in 44 states — to radically re-design and rebuild their digital-technology systems from top to bottom.
Says the upbeat and fiercely determined Goodfellow, who has pledged his expertise indefinitely and vows to lead the DLA campaign “for as long as it takes” to bring about the necessary change:
“Solving America‘s economic problems by changing the way our schools prepare students for the workforce is critically important right now. We simply cannot afford to allow the decline in education to continue.
“The future of our kids and our grandkids depends on getting this right!”
To help encourage your state legislator to interact with Digital Learning Alliance, or to bring digital learning solutions demonstrating positive outcomes to the attention of DLA, contact
Investigative journalist Tom Nugent has reported for the New York Times, Washington Post, Chicago Tribune and many other publications. 


How to Buy Foreign Currency

How to Buy Foreign Currency – Holding a portion of ones portfolio in relatively stable foreign currencies is an important part of diversifying away from the U.S. dollar.
It is important to distinguish “holding” currency from “trading” currency. “Holding” a currency is what you do everyday when you have a checking or savings account, a brokerage account, or a retirement account. All of these accounts are held and settled in one currency (usually the U.S. dollar if you live in the United States). But the act of “trading” currencies is much different. “Trading” currencies refers to a specific and speculative action in which you bet for, or against, one currency during a short period of time. This concept is similar to trading stocks, only in this case, the financial instrument being traded is a pair of currency futures.
This article discusses how to buy foreign currency for the purposes of “holding” currency, not for short-term “trading” of currency.

#1 Buy and Hold the Physical Currency

Buying physical foreign currency is as simple as picking up the phone and calling your local bank. Almost all larger banks have a foreign exchange department where you can trade in your home currency for another currency. The fees on this vary, so you will have to contact your bank for more details. This is usually the most expensive way to purchase foreign currency.
Bank of America Offers Foreign Currency Purchases
Image source: Bank of America

#2 Buy a Foreign Currency CD

Several years ago, an FDIC-insured bank called Everbank began offering their clients access to foreign currencies through the familiarity of Certificates of Deposit (CDs). The Foreign Currency CDs are unique in that your principal is FDIC-insured up to $250,000 against a bank failure. However, your principal is not insured against loss in the foreign exchange markets. Typically, you will need a minimum of $10,000 to open one of these accounts, and they are IRA eligible. I encourage you to look at Everbank’s website. It has some wonderful resources for those who are thinking about diversifying into foreign currencies. You can learn more about Everbank and their foreign currency CD’s here.
Everbank Offers CD’s for Several Foreign Currencies
everbank-foreign-currencyImage source: Everbank

#3 Buy Currency ETFs

You can gain direct exposure to many foreign currencies today through ETFs, which stands for exchange-traded funds (or similar ETNs, which stands for exchange-traded notes). These ETFs trade just like a stock, and you can purchase them through your brokerage account or IRA just like you would purchase a stock. Similar to mutual funds, ETFs have fees, but they tend to be much lower than mutual funds.
You can buy single-currency ETFs, for example, the CurrencyShares Australian Dollar Trust ETF (Ticker Symbol: FXA). You can also buy ETFs that offer exposure to a basket of foreign currencies. For example, the WisdomTree Emerging Currency Strategy (Ticker Symbol: CEW) offers exposure to select emerging market currencies. Note that many of the currency basket ETFs may carry additional risk due to low trading volume.
My favorite way to buy foreign currency is through ETFs. I have found that ETFs provide a fairly liquid and low-cost way to gain exposure to any foreign currency I want to buy. Plus, I can complete the entire transaction conveniently online from my brokerage account or IRA. Since I buy these ETFs regularly, I decided to create the Global Currency Monitor, which is a monthly PDF report on my top nine stable foreign currencies. In the monthly report, I provide a rating (buy, sell, or hold) on the euro, the Japanese yen, the Canadian dollar, and six other currencies. If you are looking to add foreign currencies to your portfolio, you can learn more about the Global Currency Monitor here.
Until tomorrow,
Jerry Robinson

Bank of America Shareholders Press Officials After $4 Billion Error

CHARLOTTE, N.C. — This year’s annual meeting was supposed to be a victory lap for Bank of America, with many of its mortgage problems receding and its deposits and credit card business growing.
Instead, executives and board members faced pointed questions from shareholders on Wednesday about a costly error in the way the bank calculated its financial health. The $4 billion error forced Bank of America to suspend its planned dividend increase and raised broad issues about oversight inside the bank.
Speaking for the first time about the problem since it was disclosed last week, Charles O. Holliday Jr., the bank’s chairman, gave a full-throated defense of the way executives have responded to the $4 billion capital miscalculation.
Bank of America, the nation’s largest retail bank, disclosed the problem to regulators shortly after an employee, who is not a senior executive, discovered it while preparing a routine quarterly financial report.
“I believe very strongly that this bank is not too big to manage,’’ said Mr. Holliday, who has been the bank’s chairman since 2010.
Despite hundreds of new regulations intended to reduce the threats that large financial institutions pose to the global economy, the biggest banks are facing new questions about their size and complexity.
The error stemmed from how Bank of America accounted for certain losses on bonds that it acquired when it bought Merrill Lynch in the depth of the financial crisis. The miscalculation had gone undetected for several years.
As a result of the error, Bank of America has $4 billion less capital than it had represented to the Federal Reserve on this year’s stress test. The bank’s shares are down nearly 5 percent so far this year.
On Wednesday, its chief executive, Brian T. Moynihan, expressed disappointment in what he called the bank’s “capital adjustment” but suggested that it was a momentary breakdown in the otherwise efficient operation of a sprawling bank.
Bank officials said they were conducting a “third-party review” of how the problem happened, but declined to name the firm conducting the review.
“This was an error that we found and fixed,’’ said Mr. Moynihan, whose $14 million pay package was backed by shareholders on Wednesday.
Shareholders also re-elected all five members of the board’s audit committee and supported the rehiring of the independent auditor PricewaterhouseCoopers, though the vote was nonbinding.
This week, the giant pension fund California State Teachers’ Retirement System said that it was voting against four of the five candidates for the bank’s audit committee, which is led by Sharon L. Allen, a former chairwoman of the auditing firm Deloitte. The fund said the mistake raised concerns about “board oversight.”
The issue is also testing the patience of smaller investors like Thomas Ashe Lockhart, who has owned the bank’s shares for about 40 years.
“Anybody involved in this shouldn’t get a raise,’’ Mr. Lockhart said in an interview after the meeting.
The miscalculation related to the complex Merrill debt instruments – called structured notes — comes as Mr. Moynihan seeks to showcase progress on one of his top goals: simplifying the bank.
Mr. Moynihan described the many ways he had pared down the bank including selling off private equity investments and winding down its troubled mortgages from 1.4 million that were at least 60 days delinquent at the peak, to about 277,000 today.
He said the bank was extending new mortgages and credit cards, but only directly instead of going through third parties, which is helping improve credit quality and efficiency.
But the bank still faces billions of dollars of legal costs to settle cases with federal prosecutors over its sale of mortgages that quickly defaulted. Executives have declined to detail how much they are reserving for those cases because it could hurt their negotiating position.
In the years since the financial crisis, Bank of America — and its shareholder meeting – has been a lightning rod for critics. As it serviced the hundreds of thousands of defective mortgages that it inherited through its acquisition of Countrywide Financial, Bank of America became in many ways the face of the banking system’s bumbling actions during the foreclosure crisis.
But at this year’s meeting, the focus of the questions was not primarily on mortgages. A few homeowners and advocates even came to the meeting to praise the bank for finding ways to lend to lower-income people.
Still, Mr. Moynihan faced criticism from environmental groups about the bank’s lending to coal companies and even questions from the 13-year-old daughter of a former bank employee, who she said had been laid off and whose job was sent overseas.
Mr. Moynihan acknowledged that the cost cutting across the company had been a difficult process, but said the bank did not ship jobs to other countries. “We don’t do that,’’ he said.

“It’s The Economy Stupid” Liberals Killing Jobs In California

Is the Great Recession Finally Over?

Yellen & Putin Putting Pressure On Gold: Jim Wyckoff | Kitco News

Fed chair Janet Yellen testifies and gold finds itself below $1,300 on Wednesday as Jim Wyckoff joins Kitco News to give his take on the metal’s price action. Wyckoff says that Yellen’s testimony was being closely watched this morning to gauge where the central bank sees the U.S. economy heading. “What she did say was that the U.S. economy is on the upswing…and that served to put some downside pressure on gold,” he adds. Wyckoff says that Russian president Vladimir Putin’s comments today also added some pressure on gold because the marketplace deemed his message to favor de-escalating tensions in Ukraine. Wyckoff also comments on the ECB meeting on Thursday and says policymakers will need to figure out how to deal with the ‘extremely’ low inflation rate in the euro-zone, which has raised concerns of deflation. Tune in now to get Wyckoff’s market ratings for both gold and silver on this edition of “Technically Speaking.” Kitco News, May 7, 2014.
Join the conversation @ The Kitco Forums and be part of the premier online community for precious metals investors: – Or join the conversation on social media: @KitcoNewsNOW on Twitter: — Kitco News on Facebook: — Kitco News on Google+: — Kitco News on StockTwits:

Banks And Hedge Funds Make Curious Deal On New Structured Toxic-Waste Securities

Wolf Richter
The Federal Reserve Board announced in its Senior Loan Officer Survey for the first quarter that banks experienced “stronger demand” for commercial loans, and that they “eased their lending policies.” They eased everything: premiums charged on riskier loans, loan covenants, collateralization requirements…. The primary reason for the lower underwriting standards was “more-aggressive competition from other banks or nonbank lenders.” Fewer banks cited a more favorable economic outlook. And then there was an “increased tolerance for risk.”
It shows. The bank-lending bubble before the financial crisis peaked in October 2008, with total credit outstanding at all commercial banks at $9.56 trillion. When it all fell off a cliff, some of it turned into toxic waste and was written off or shuffled to the Fed in a maddening series of bailouts. It hit bottom in February 2010. Since then, it has been rising. In November, it started soaring at a similar rate as in mid-2008, the time when all heck was breaking loose. And by April 23, total bank credit hit the lofty all-time record of $10.6 trillion:
But much of this borrowed money isn’t making it into the real economy, into plant and equipment, inventories, etc. It’s siphoned off by M&A activities and other forms of financial engineering, or by Wall Street alchemists to create some sweet-smelling substances, once again.
Turns out, banks have a problem, and these alchemists are going to help solve it. Banks carry on their books $136 billion in triple-A rated Collateralized Loan Obligations, the Wall Street Journal reported. These CLOs are similar to the triple-A rated mortgaged-backed Collateralized Debt Obligations that turned into toxic waste during the financial crisis. But unlike their subprime-mortgage-backed brethren, CLOs are backed by junk-rated corporate loans, some of them malodorous “leveraged loans.”
PE firms use leveraged loans as a device to suck cash out of their overleveraged portfolio companies. These companies borrow money that they then, instead of investing it in productive assets, pay out as a special dividend to their owners. The procedure leaves the company deeper in the hole, the PE firm loaded with new cash, and the bank with a “leveraged loan.” The bank can then package that loan with other low-rated corporate debt into an enticing CLO.
Total outstanding CLOs in the US amount to $300 billion, of which $136 billion languish on the books of banks. So far this year, $35 billion in CLOs have been created, just a notch behind the $36.5 billion created in the same period in 2007, on the eve of the great bank implosion. An additional $16 billion are in the pipeline.
New regulations, designed to keep banks from imploding again, force banks to sell some of these CLOs over the next few years. But that has been tough. The threat of these regulations alone has put downward pressure on prices.
Our heroes at these banks have come up with an ingenious solution: lend money to hedge funds so that they buy these CLOs from the banks. A number of banks, including RBC Capital Markets, Société Générale, and our local bank here, Wells Fargo, are doing just that. To make the deals more attractive, banks have lowered rates and lengthened the terms of the loans – in line with the looser underwriting standards that the Fed reported in its quarterly survey.
Some banks have offered to lend as much as nine times the amount that the buyer would invest in the CLO. The risk? Even a minor downdraft in the market, multiplied by leverage, can produce breath-taking losses for hedge funds and force them to put up more cash or other collateral or dump some of these securities back into the lap of the bank … and we’re right back to 2008, of forced selling into a suddenly illiquid market.
But there is an advantage: by lending hedge funds money to take these CLOs off their books, banks are hoping that they will create enough artificial demand to pump up prices, thus generating some paper profits, though banks would remain exposed to these CLOs via the loans. The advantage to hedge funds? If their collective buying does drive up prices even a little, their profits will be multiplied by leverage. At least until reality sets in.
These dizzying layers of leverage and risks, all based on junk-rated loans by already over-leveraged companies aren’t a problem, the Wall Street Journal tells us to soothe our tattered nerves. Because this time it’s different: “Overall, borrowed money is mostly being used to buy triple-A-rated CLOs, say bankers and investors. That contrasts with the run-up to the 2008 crisis, when huge sums were borrowed to finance bets on assets such as subprime mortgages….” Indeed, these mortgages had been sliced and diced and packaged into CDOs, whose infamous triple-A rating didn’t keep them from turning into toxic waste overnight.
For years, nothing could slow the tsunami of junk debt. But suddenly, something happened, and investors in leveraged-loan mutual funds, where the crappiest junk debt accumulates, ran scared and started pulling their money out. Consequences were immediate. Read….Biggest Credit Bubble in History Cracks, Trips Up The Smart Money

Austerity Suicides: Desperate Greeks 'don't want to die, they want to ki...

U.S. wastes $2.9 billion growing GMOs banned in China

(NaturalNews) A new report from the National Grain and Feed Association reveals that over a million tons of genetically modified corn coming from the US has been blocked at Chinese imports since late 2013.

The US agriculture industry has since then taken a $2.9 billion hit, as the GMO corn shipments are turned down. According to the report, US corn exports to China are down 85 percent since January, when compared to figures obtained in early 2013.

The GMO corn, manufactured from Syngenta AG, is named Agrisure Viptera corn. It has been waiting for approval in Beijing for the past four years. With only industry-ran safety studies to go by, Chinese regulators continue to mull the decision to approve it.

GMOs failing to feed the world; the call for nutritious whole food is beckoning

Claiming to "feed the world," biotechnology giants like Syngenta market GMOs to countries around the world, slowly gaining more control over nature, seed and food production. This mad science experiment waged on whole foods is actually reaping the grief, not abundance; GMOs are constantly rejected around the world, turned to waste, or sold to the highest bidder.

In fact, the lack of safety studies on GMO food give many countries no choice but to bar the lab-engineered food up front, as they evaluate whether or not it's safe for their own agriculture.

It's now apparent that humanity's innate call for nutritious whole food is crying out to be heard. It can be seen and felt in the malnourishment of chronically ill patients dying in hospitals around the world. It can be seen in the frightening rise in cancers and diseases. Lab-engineered food is not the answer. Whole food nutrition is.

China rejects 1.45 million tons of GMO corn, strangles US agriculture

The Chinese trade disruptions began in November 2013, as the world's third-largest corn buyer began rejecting an unapproved strain of seed known as MIR 162. The National Grain and Feed Association reports that since then China has rejected nearly 1.45 million tons of corn. This tops a modest Chinese estimate reporting that the country rejected at least 900,000 tons of the MIR 162 variety.

US corn exporters like Cargill Inc. and Archer Daniels Midland Co. have taken a huge hit, shouldering between $225 and $427 million in financial losses.

The trade disruptions have resulted in an astounding 28 percent drop in earnings for Cargill for the first quarter of 2014. The loss will be felt all the way down to farmers. With corn prices expected to depress by 11 percent per bushel, at least $1.14 billion will be lost when US corn farmers begin to tally up their earnings for the past nine months.

Experts predict that China has an ample supply of corn stocked up and will likely block further US imports in 2014, making the billion-dollar losses reach full economic effect by the end of 2014.

"How do you put a dollar figure on it? I expect everything they have with us to be washed out," said Karl Setzer, grain solutions leader for MaxYield Cooperative in Iowa. Setzer expects US corn prices to depress by 10 to 20 cents per bushel.

Furthermore, the National Grain and Feed Association warns that Syngenta's newest, untested strain of corn, Agrisure Duracade, may not be accepted worldwide either, especially in China. Traders estimate that US agriculture could expect potential losses of $3.4 billion by the end of 2014 as the new Duracade corn is introduced for the first time in America and rejected in countries around the world. Traders are calling for seed manufacturers like Syngenta to shoulder some of the losses, as the rejection of GMOs wages on.

As the rejection of GMOs continues around the world, one can almost hear humanity collectively crying out, beckoning for pure, unadulterated and highly nutritious whole food.

Sources for this article include:

The Destabilizing Truth: Only the Wealthy Can Afford a Middle Class Lifestyle

by Charles Hugh-Smith
The “middle class” has atrophied into the 10% of households just below the top 10%.
The truth is painfully obvious: a middle class lifestyle is unaffordable to all but the top 20%. This reality is destabilizing to the current arrangement, i.e. debt-based consumerism a.k.a. neofeudal state-cartel capitalism, so it is actively suppressed by the officially sanctioned narrative: that middle class status is attainable by almost every household with two earners (a mere $50,000 annual household income makes one middle class) and middle class wealth is increasing.
It’s not that difficult to define a middle class lifestyle: just list what was taken for granted in the postwar era of widespread prosperity circa the 1960s, four decades ago.
In What Does It Take To Be Middle Class? (December 5, 2013), I listed 10 basic “threshold” attributes and two somewhat higher thresholds for membership in the middle class:
1. Meaningful healthcare insurance (i.e. not phantom “insurance” with deductibles that cost thousands of dollars a year that offers no non-catastrophic care at all)
2. Significant equity (25%-50%) in a home
3. Income/expenses that enable the household to save at least 6% of its income
4. Significant retirement funds: 401Ks, IRAs, etc.
5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job
6. Reliable vehicles for each wage-earner
7. The household does not rely on government transfers to maintain its lifestyle
8. Non-paper, non-real estate assets such as family heirlooms, precious metals, tools, etc. that can be transferred to the next generation, i.e. generational wealth
9. Ability to invest in offspring (education, extracurricular clubs/training, etc.)
10. Leisure time devoted to the maintenance of physical/spiritual/mental fitness
The higher thresholds:
11. Continual accumulation of human and social capital (new skills, markets for one’s services, etc.)
And the money shot:
12. Family ownership of income-producing assets such as rental properties, bonds, etc.
The key point of these thresholds is that propping up a precarious illusion of consumption and status signifiers does not qualify as middle class. To qualify as middle class, the household must actually own/control wealth that won’t vanish if the investment bubble du jour pops, and won’t be wiped out by a layoff, college costs or a medical emergency.
In Chris Sullin’s phrase, “They should be focusing resources on the next generation and passing on Generational Wealth” as opposed to “keeping up appearances” via aspirational consumption financed with debt.
I then added up the real cost of these minimum thresholds and arrived at a minimum of $106,000 annual household income–double the median household income in the U.S. According to Census Bureau data, only the top 20% earn this level of income.
Here is a chart of the real income of the lower 90% and the top 10%, which by definition cannot be “middle class”:
The top 10% takes home 51% of all household income:
This suggests that the “middle class” has atrophied into the 10% of households just below the top 10%. Households in the “bottom 80%” are lacking essential attributes of a middle class lifestyle that were once affordable on a much more modest income.
Note that this $100,000+ household income has no budget for college costs, lavish vacations, boats, weekends spent skiing, etc., nor does it budget for luxury vehicles, SUVs, oversized pickup trucks or private schooling. Savings are modest, along with living expenses and retirement contributions. This is a barebones middle class budget.
So how have we maintained an increasingly unaffordable lifestyle? With debt: Wages have risen modestly while debt has increased enormously.
As I have described many times, the Federal Reserve’s “solution” to the widening gap between income and expenses was to financialize the middle class’s primary asset: the home. I have explained this in depth: The Fed’s Solution to Income Stagnation: Make Everyone a Speculator (January 24, 2014)
But turning everyone into a speculator via financialization had an unintended consequence: widening wealth inequality. It turns out most people are poor speculators, believing “this time it’s different” again and again. In addition, financialization favors those with the most capital: this is the essential take-away from Thomas Piketty’s book Capital in the Twenty-First Century.
The conclusion is inescapable: What’s the Primary Cause of Wealth Inequality? Financialization (March 24, 2014).
As a consequence, net worth (i.e. ownership of assets and wealth) of middle income households has been reduced to a sliver:
The widening wealth gap cannot be entirely explained away as the result of some innate force of capitalism; the rich have gotten richer as the direct result of central state/central bank policies introduced since the heyday of the middle class forty years ago.
So where does this leave us? To answer that, we need to examine the systemic causes of the higher costs and reliance on speculative bubbles that have eaten the middle class alive. We’ll address those tomorrow in Part 2.

Jim Grant: The Fed's Beliefs Are Widely Discredited

U.S. Subprime Loan Crisis: 2008 vs. 2014 – The Financial World Has A Short Memory

2008 – Subprime mortgage crisis
The U.S. subprime mortgage crisis was a nationwide banking emergency that triggered the recession of 2008, through subprime mortgage delinquencies and foreclosures, resulting in the devaluation of the attendant securities.
These mortgage-backed securities (MBS) and collateralized debt obligations (CDO) initially offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused massive defaults.[1] While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.[2]
There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others.[3] A proximate cause was the rise in subprime lending. The percentage of lower-quality subprime mortgagesoriginated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.[4][5] A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages.[2] These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.[2][6] Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.[7]
2014 – New US subprime boom – but this time it is for cars
According to the credit agency Experian, the total amount owed on car finance in the US had risen to $750 billion by late last year.
An estimated 36% of those loans have been made to subprime borrowers. So are the banks storing up serious trouble for the future – and maybe even another financial crisis?
American subprime lending is back on the road
A few short years ago, “subprime” was almost an expletive. During the financial crisis, mortgages linked to subprime borrowers – or those with poor credit history – caused devastating losses; so much so that many asset managers declared they would never touch subprime again.
But the financial world has a short memory, particularly when easy money and innovation collide. In recent months subprime lending has quietly staged a surprisingly powerful return, not in relation to real estate, but another American passion – cars. Some wonder how long it will be before this new boom causes another wave of casualties, not just among naive consumers, but investors too.
The Next Subprime ‘Time Bomb’ Is Ticking (Here’s How You Could Profit from It)
Driving Toward a New Economic Cliff
I became aware of this potential time bomb last year. A close friend was financially destroyed by the subprime mortgage crisis. He is an investor and was overleveraged on more than a dozen investment properties. He was finally forced to declare bankruptcy to get out from under the mountain of debt.
Within a week of the bankruptcy filing, he started getting letters from companies like Wells Fargo (WFC) and General Motors (GM). While my friend was used to getting nasty letters from banks and finance companies, these letters were very different. These were not demand letters challenging his bankruptcy, threatening lawsuits or anything the least bit negative. Believe it or not, these letters were pre-approval letters for auto credit!
In fact, one financial company actually sent my bankrupt friend a check for $30,000 to be used at any participating auto dealer for the car of his choice. He took the check and bought a used BMW.
Here They Go Again: Wall Street Is Offering Debt-On-Debt-On-Debt!
Here’s how the daisy chain of debt works— short form. LBO’s issue debt—loads of it. Leveraged buyouts are now being priced at typical top-of-the-bubble ratios of 10X cash flow (“adjusted EBITDA”). The portion of these LBO debt towers that consists of bank term loans and revolver facilities is sold to freshly minted financial conduits called CLOs (for Collateralized Loan Obligations) which are not real companies and which do not have any money!
No problem. What happens is that credit hedge funds and Wall Street trading desk hit a computer key, open a new spreadsheet window, wrap it in legal boilerplate, provide this newly minted CLO with a credit line and then start bidding for available LBO paper in the junk loan market. When they have accumulated enough offers, they slice and dice the resulting portfolio of LBO loans, and issue multiple tiers of debt– with these new slices being rated from AAA to junk against the loans listed on the spreadsheet.
So we now have a spreadsheet, a part-time “portfolio manager” and hundreds of millions of the latest CLO toxic waste. For 95 weeks running, there was no want of buyers for this CLO issued paper. In its infinite wisdom, the Fed drove interest rates on CDs and high quality paper to nearly zero—–so the scramble for “yield” was on. Soon Grandpa was being forced to buy a high yield mutual fund in order to pay the light bills….

Why We Are On The Verge Of Another Subprime Crisis 


Do 2 Year Treasury Rates Guide the Gold Price?

Today’s AM fix was USD 1,291.25, EUR 926.03 and GBP 761.13 per ounce.
Yesterday’s AM fix was USD 1,311.00, EUR 942.08 and GBP 772.54 per ounce.
Gold fell $18.40 or 1.41% yesterday to $1,289.40/oz. Silver slipped $0.25 or 1.28% to $19.31/oz.
After rising to near its highest level in three weeks early yesterday at $1,315/oz, gold experienced its biggest intraday price fall in three weeks yesterday, falling to $1,290/oz by close of New York trading. Silver likewise retreated from the $19.70/oz level to the $19.20/oz range.
The price weakness in the precious metals was attributed to apparent de-escalation of tensions in the Ukraine conflict after Russia promised that military exercises near the eastern Ukrainian border would be scaled back, and Putin called for separatists in the south-east of Ukraine to postpone an independence referendum planned for May 11th.
Gold and silver prices were also undermined by remarks from Janet Yellen, the Fed Chair, who appeared yesterday before the U.S. Congress in testimony about the U.S. economic outlook. While Yellen didn’t say anything unexpected and reiterated that short-term interest rates would remain near zero, her confirmation that the U.S. economy would still be supported was interpreted as a positive for risk assets.
The Governing Council of the European Central Bank meets today in Brussels to decide whether to alter their closely watched benchmark and deposit rates. Consensus economist estimates indicate no changes, with the benchmark rate expected to stay at 0.25% and the deposit rate to stay at zero.
Gold is now trading again in a very narrow trading range below $1,300/oz, and the market does not seem to want to commit to push the gold price significantly in any one direction, with investors appearing to be waiting on the sidelines.
Global Macro 360
Today we feature incisive analysis on the gold price from 
Global Macro 360, the excellent new daily research service by economist, broadcaster, and author David McWilliams.
Spot Gold Price in U.S. Dollars – (Global Macro 360)
With the U.S. Dollar Index (DXY) down near a 2 year low and 10 year bond yields touching 2.6%, McWilliams highlights that on previous occasions when the USD has touched these levels, gold investors have got burnt, since their expectation that the USD would weaken further, and that the gold price would rally, did not materialise.
Likewise, there is no real conviction that 10 year yields will fall below 2.6%. Indeed, economic polls suggest that the 10 year yield is expected to rise for the remainder of this year, as is the shorter 2 year yield. Last time short-term rates spiked, the gold price fell through $1200. This fear of rate hikes is likely to be keeping bullish gold sentiment on the sidelines.
Spot Gold Price in U.S. Dollars & U.S. 2 Year Treasury Yield – (Global Macro 360)
Note: The U.S. Dollar Index (DXY) measures the dollar’s performance against a basket of six major currencies.
GoldCore has partnered with Global Macro 360 to offer GoldCore readers a discounted 6 month or yearly subscription membership to David McWilliam’s daily market insights. Follow Global Macro 360 for more in depth economic analysis on the global macro economy, including the gold price.

Paul B. Farrel: 10 Peaking Megabubbles Signal Impending Stock Crash http://investment

Yes, “the bull market may come to an end any time,” warns Jeremy Grantham, founder of the $117 billion GMO investment giant. An unpredictable collapse. Risky valuations, 10 bubbles peaking, and black swan megatrends: The bull “could be derailed by disappointing global growth, profits sagging as deficits are cut, a Russian miscalculation, or, perhaps most dangerous and likely, an extreme Chinese slowdown.”
Yes, Grantham’s hedging his near-term: Betting the S&P 500 could rally past 2,250 before the 2016 presidential election, “depending on what new ammunition the Fed can dig up.” But then, a black swan will ignite “around the election or soon after, the market bubble will burst” and “revert to its trend value, around half of its peak or worse.”
Yes half. The S&P 500 will collapse to about 1,125. This Fed-driven rally “will end badly.” Repeating the dot-com losses of 2000-2003. Repeating Wall Street’s $10 trillion losses in 2007-2009.
Another GMO investment strategist, Edward Chancellor, is even more skeptical of all these explosive short-term risks. An expert in speculative bubble risks, Chancellor warns investors of a ticking time bomb. His team tracks market bubbles. They’re feeding off one another, gaining momentum, fusing, expanding into a dangerous critical mass that can trigger and ignite an S&P 500 explosion way before the 2016 elections.
“It is important for the Fed, as hard as it is, to try to detect asset bubbles when they are forming,” Fed boss Janet Yellen told the Senate last fall. Then two months ago, Yellen said she didn’t see any speculative “excesses,” that stocks were in line with “analysts estimates of future earnings.” Bad news, Chancellor warns, future earnings are a “notoriously unreliable measure of market value.” Besides, everyone knows the Fed is has big “trouble identifying bubbles.”

New megabubbles bigger than ‘20s Gilded Age and ‘90s dot-com mania

While the Fed hesitates, GMO is clear. Why? The formula is simple: “When an asset has moved two standard deviations from its long-term real price trend” the markets are in a bubble. That fits “the 1929 bubble, the Nifty-Fifty boom of the 1960s, and the dot-com mania in the late 1990s.”
So Chancellor reviews the “typical features of asset bubbles” throughout history, concluding “most of the conditions under which earlier bubbles have appeared are present in the U.S. markets today,” including “the soaring performance of IPOs.” Long-term stock investors beware.
In short, despite Wall Street’s relentless happy talk and optimism, another crash is dead ahead. A crash that may be as devastating to America as the 1929 Crash, the Sixties Nifty-Fifty boom, the dot-com crash of 2000 preceding a 30-month recession, and $10 trillion market losses in the 2008 bank-credit collapse.
Here are the 10 high-risk bubbles GMO sees as warning signals that another costly crash is dead ahead:

1. This-time-is-never-different bubble

Throughout history, market mania is “rationalized with the argument that history is no longer a reliable guide to the future.” In the 1920s it was a “new era.” In the ‘90s a “new paradigm.” Today Wall Street’s doing it again: “U.S. profit margins are currently at peak levels and the profit share of GDP in the United States is more than two standard deviations above its long-term mean based on data going back to the 1920s.”

2. Moral-hazard bubble

“Speculative bubbles tend to form when market participants believe that financial risk has been underwritten by the authorities.” Remember the “Greenspan Put:” In the late 1990s Wall Street was convinced the “Fed would support falling markets.” Greenspan “wasn’t going to act against the bubble in technology stocks.” Fed policy hasn’t changed much, they “put a floor under asset prices, encouraging investors to take on more risk.” As a result, household wealth has “rebounded to a near-record level of 472% of GDP, nearly 100% above its long-term mean.” And today, banks still expect “perpetually low interest rates.”

3. Fed’s 24/7 easy-money bubble

Chancellor tells us: “Great speculative bubbles have generally been accompanied by periods of low interest rates.” For over a decade Greenspan’s policies “inflated the U.S. housing bubble.” Then after the 2008 banking collapse, Bernanke’s cure was “more of the same,” while “real interest rates have been maintained at negative levels.” In addition, quantitative easing kept long-term rates artificially low, inflating home prices and growth-stock valuations, further inflating high-risk asset bubbles.

4. Perpetual growth bubble

Back in the ‘90s dot-com bubble, tech stocks were experiencing rapid “S-curve” growth while investors were “encouraged to value the “real options” of Internet stocks from future income streams yet to be conceived. Same today. Hot stocks in social networking, electric cars, biotechnology, Internet, “have been boosted by similar wishful thinking.” Warning, throughout history, future earnings estimates kill future bubbles.

5. Zero-valuation asset bubbles

Since the 17th century Dutch tulip mania, “most speculative markets” have had no income to anchor a speculator’s imagination. Today’s electronic age makes it worse.Bitcoin “soared by 5,500%” in 2013. In fact, Chancellor warns most “recent stock market darlings — Netflix, Facebook, Tesla, and Twitter — have little or nothing in the way of profits.” Even with margins dropping, Amazon was up nearly 60% in 2013. It’s still “the poster child for a market more obsessed with growth than profitability.”

6. ‘Gilded Age’ bubble revival

Throughout history “asset price bubbles are associated with quick fortunes, rising inequality, and luxury spending booms,” warns Chancellor; excessive, out-of-control “conspicuous consumption.” Since the 2009 bottom, the art bubble, “evident before the financial crisis, has returned.” Example, a Jeff Koons “Balloon Dog” sculpture auctioned at $58 million, even though it was one of five he had made in a factory. “The same month, a painting by Francis Bacon sold for $142 million, the highest price ever paid for any work at auction.” Yes, the Gilded Age of the late ‘20s is back. More bad news.

7. New junk-bond-mania bubble

Another dangerous trend: “Manic markets are often marked by a decline in credit standards,” says Chancellor. The real estate bubble exploded Wall Street’s love of subprime mortgages, “but it hasn’t diminished the appetite for low quality U.S. credit.” Today investors are buying “the lowest yields for junk bonds in history.” Quality is deteriorating. “Last year, nearly two out of three corporate bond issues carried a junk rating.” Even Fed boss Yellen has “expressed concern about the manic leveraged loan market.”

8. ‘Irrational Exuberance’ bubble sequel

Yes, ‘90s “Irrational Exuberance” is roaring back: “Market sentiment have become very elevated over the past year.” The IPO market “has become particularly speculative.” First-day trading on new IPOs were up an average 20%. “Twitter rose 74% on the day it came to the market.” Yet, most of the recent IPOs not only had no profits, many, especially biotechs, haven’t “even got around to generating anything by way of revenue.”

9. Corporate-insider-trading bubble

“Other sentiment measures have been telling the same story” according to Chancellor’s GMO research team: Corporate insider trading, a “reasonably good indicator of management’s view on the intrinsic value of their companies” recently “climbed to near record levels.” Equity mutual funds “picked up lately.” And “margin debt as a share of GDP is close to its peak level.” All scary stuff.

10. Composite market sentiment index

GMO’s composite index of 20 sentiment indicators has “reached an extreme level, fast approaching two standard deviations above its long-run average.” Since the 1950s that extreme has only been exceeded twice, in 1968 during the “Great Garbage Market” and in the late ‘90s dot-com mania.
“Great bubbles tend to coincide with strong credit growth,” says Chancellor. So far that’s missing. We need it before a “full-blown stock market bubble,” and right now “the credit cycle is not close to a peak.” So unfortunately, the Fed will probably passively watch while a “full-blown stock market bubble” builds to critical mass.
In short, Yellen will do exactly what Greenspan and Bernanke did earlier … fail to plan ahead … passively endure more irrational exuberance mania … waiting for the ticking time bomb to blow up … before finally stepping in … cleaning up their mess … again … bailing out incompetent banks … while letting the taxpayers suffer through the third major crash this century… third recession … third megatrillion loss of Main Street’s retirement market cap.
But beware, while as yet GMOs market sentiment indicators don’t provide “a sure-fire signal that the U.S. stock market is about to collapse,” investors “shouldn’t take much comfort from this.” This cocktail of valuations, sentiment and global macro trends has been quite accurate in “forecasting future equity returns.”
Bottom line: “Anyone who bought U.S. stocks in the past when sentiment was at today’s elevated level, lost money.”
So prudent investors please listen, very, very closely: It doesn’t matter whether the markets crash or merely suffer a major correction, GMO is warning us the S&P 500 has a high probability of falling to “negative real returns over one-year, three-year, and seven-year periods.” And that sure sounds like another way of saying a major crash is dead ahead.

Paul B. Farrell is a MarketWatch columnist based in San Luis Obispo, Calif. Follow him on Twitter @MKTWFarrell.