2013 Review and 2014 Forecast – Part I: The Last Bubble

Photo Credit: Glenn Cantor

• Stock market crash, right on schedule. Time to Short?
• Is the Yellen Fed doing a Roy Young?
• China’s Great Wall of Money crumbles. Who will be America’s IMF this time?
• Why do they call them Emerging Markets? Because it’s hard to get your money out in an Emergency.
• Gold says, “I’m not dead yet!”

What? You thought it could go on forever? The asset bubbles and re-bubbles and re-re-bubbles?

How many times can your reflate a torn up rubber raft?

Time to chuck it out and get a new one.

Except that there isn’t a new one. This is it. The only one we got and we’re all in it together.

And, gosh, looking back on it, over the past 20 years, maybe we shouldn’t have taken it through Class V rapids twice loaded with beer kegs.

But here we are, cheek to cowl, in this giant, flaccid, half inflated economy, damage from the last two runs shoddily patched, headed over the rapids again. Without so much as a roll of duct tape.

While the usual bearish crowd was busy capitulating over the past six months and calling for continued growth and a good year for the markets in 2014, maybe not as booming great as 2013, I’ve been following the data and it takes me to a different place, to an epic and virtually unstoppable calamity.

Not that I didn’t try to build an optimistic case to counter my June 2013 forecast The Post-Market Economy – Part II: The Crash of 2014, it’s just that the data kept dragging me off that run.

The ineludible obstacle in the path of any hopeful line of argument is the fact that the current recovery from the 2008 credit crisis that followed from the condition of over-indebtedness and risk-polluted credit markets has since 2009 been achieved by means of credit inflation which has produced even greater over-indebtedness.

Credit risk pollution, rather than pooled in an obscure corner of the credit markets and seeping into the global financial system by way of pension funds, this time around has been injected into the foundation of the endogenous credit structure by means of the Fed’s “yield curve shaping,” a polite term used by academics in place of the rude but more truthful term “long-bond price fixing.”

I don’t blame anyone for wanting to turn and look the other way. God knows we’ve been through enough, especially those citizens of the world who have not benefited from the regressive reflation policies of central banks. These have primarily benefitted the asset holding classes. A recent Gallup poll reveals 58% of Americans think the economy is getting worse, and I doubt they are in any mood to hear bad news about the future. Economic doomertainment is out of fashion, and that fact alone tells you that popular sentiment is still dower. In hard times, American Idol-type hopertainment makes a comeback.

It’s not all bad news. Fortress America economic and policies are working their magic on the trade deficit, and are creating a beneficent spread between U.S. and world oil prices that is providing a big assist to the recovery. But to spy objects of economic beauty you have to crane your neck to see over the ugly fact that as recently as the year 2000 only $2.4 of new debt creation was needed to produce $1 of GDP growth and today that ratio is $4.6 to $1. Credit-financed growth is fun while it lasts, but historically has proved most miserable in reverse gear.

If you have a strong stomach and a firm grip, grab your helmet and jump in for a guided tour of the Last Bubble. But don’t close your eyes. You can’t read that way.

CI: Let’s get right to it: the stock market. What happened in 2013 and what’s in store for 2014? You noted the tops of the last two bubbles precisely, the first in March 2000 and the second November 2007. May 2011 you said the stock market was set to top-out at the end of 2013 then crash. Is it “Time to short” again?
EJ: The “time to short” calls in March 2000 and November 2007 were a luxury of knowing three things: 1) the process that was producing the asset bubble, 2) the events that were likely to end them, and 3) the monetary and fiscal policy response to the liquidity crisis, negative wealth effects, and recessions they produced. The difficulty with this particular asset price inflation — I won’t call it a “speculative bubble” because it isn’t — is that it was manufactured explicitly to produce positive wealth effects. It’s the result of the Fed’s large-scale long-bond price fixing operation known as QE.

That makes this asset price inflation fundamentally different than the previous two. The stock market has been about QE since late 2008 and is still about QE and, or of course, about Janet Yellen. The Bernanke Fed’s policy of spurring aggregate demand with positive wealth effects using QE succeeded to a far greater extent than he’s been given credit for. But it’s a short-term fix, intended to “prime the pump” until the “engine of the economy” catches, or so goes the Keynesian model for counter-cyclical monetary policy. Philosophically it is in the traditional of the Keynesian reflation prescription of deficit spending, and it should be noted that whether the treasury bonds are on the Fed’s or the Federal Government’s balance sheet they are still claims on the real economy. In reality it’s all fiscal stimulus. Whether the liability to the economy is on central bank or central government account will be a precious distinction when the cows come home.

CI: So… “Time to short?”
EJ: With respect timing of a correction, this second instantiation of the original asset bubble is as predictable as the previous two. The difficulty is that the nature of this asset price inflation is unlike the other two and without precedent. The trigger for the crash of this last and perhaps final asset inflation since 1995, well, I’ve been talking about that here for years. It ends with the Fed’s misguided and arrogant bond price fixing operation and with the transition of the Fed chair position to Yellen. The question is do we get a more or less continuous mean regression to the sans-asset-inflation level as in 2000 and again in 2008 or something else.

CI: In 1999 your forecast for the NASDAQ crash was 80%, with no recovery to tear 2000 peak for ten years or more. In 2007 you said the S&P500 destined to correct 40% in 2008. This time?
EJ: The difficulty in forecasting the extent is lack of precedent. The market correction in 2008 resulted from the stock market pricing in the recession that the mortgage credit bubble collapse and American Financial Crisis (AFC) was causing. The 2008 correction process was roughly analogous to the Nikkei crash in 1990 that priced in the recession caused by the collapse of Japan’s 1980s property bubble. My estimate of a 40% decline in the DJIA in 2008 was guided by that, and other inputs. But this asset inflation is without precedent, and the pre-conditions, too, are unique, so I think an estimate of the extent of decline is educated guesswork. My estimate in 2011 was for the early 2014 DJIA correction on the order of 60%, and I’ll stick with that.

CI: Let’s review that 2011 Real DJIA forecast.
EJ: In May of 2011 I saw the stock market coming out of the AFC in a second reflation of the original 1995 to 2000 asset bubble that motivated me to start iTulip in 1998. My forecast for the Real DJIA looked like this mid-2011. Basically I expected QE-fueled asset price inflation to carry the market up until the end of 2013.

Forecast is for the inflation-adjusted Real DJIA to rise to slightly over 100 until the end of 2013.

A Dec. 30, 2013 update to the April 2011 chart, below.

The Real DJIA reached just over 100 before starting to correct in Jan. 2014.

CI: This may be more than a correction, then? I mean, really? A 56% decline?
EJ: In mid-2011 I projected what I called the Extended Asset Price Inflation Case. That’s the green line. The Real DJIA was to climb from 83 at the time to just over 100 by the end of 2013. Early in 2014 it begins to price-in a mid-gap recession later in the year. The first chart was published April 2011 as the watermark indicates. The update was generated from the same excel file. The DJIA data are from the Dow Jones & Co. and the inflation adjustments updated using the latest data from the Real DJIA web site that we’ve been using since 2006.

CI: So the crash you forecast in mid-2011 for early 2014 is happening? Wish you’d reminded me of this chart sooner!
EJ: That would appear to be the case. However, a crash of the full extent of 56% shown spells complete disaster for the U.S. economy. I seriously doubt that the Yellen Fed will stand by, or at least I hope they understand the danger. The correction is a delayed reaction to the beginning of the end of the Fed’s bond price fixing operation, which ending I have warned for years was to produce chaos in the bond market as market participants thrashed around trying to figure out what the market price of a long bond is without the Fed’s interference in the market. By the way, a member asked me about this in December in the Ask EJ section here, which is why the update has a Dec. 30, 2013 watermark on it.

CI: So why not short it? If you got the timing right.
EJ: I’ve found over the past 15 years that it pays to wait for the second break after the initial correction in a crash process, if that indeed what this is. There are cross-currents, such as capital flight from emerging markets into the U.S., possibly stronger than expected GDP and employment numbers for Q4 2013. That’s why I’m reluctant to short it just yet. But I think it’s a mistake to think that the declines in the indexes as normal market fretting over a transition to tighter monetary policy as the economy picks up. In Part II we take a closer look at additional indicators, such as VIX.

CI: Have you tried to build the case for that, for the market to correct, the “healthy correction” that everyone has been hoping for, followed by more gains as the economy picks up?
EJ: Yes but it’s just not credible. The markets are far more precarious now than at any time since I started iTulip in 1998. At time of the peaks of the two speculative bubbles in 2000 and 2007, the over-priced assets at risk were confined to narrow classes of assets, the macro-economy was less fragile, inflation was higher, and so on, as I cover in the next part. Additionally the Fed has already used up interest rate policy as a anti-deflation policy tool. The Fed is now limited Zero Interest Rate Policy (ZIRP) options, namely, loading securities onto its balance sheet.

What if the Fed reverses taper and re-starts asset-price inflation? Only if the markets are convinced
that the Fed and Congress can via fresh stimulus can prevent the economy from falling back into recession.
Traded Value percent GDP usually rises and fall with the market. This time firms used low yields to
issue debt and use the cash to buy back stock and propel prices upward, no trading involved.

CI: In 1998 and in 2006 “bubble or not” was hot topic of debate. Today seems like everyone thinks the markets are a bubble. Robert Shiller last week said he thought the stock market was a bubble but also said he was buying stocks anyway.
EJ: Which doesn’t make much sense. Maybe he thinks it’s reached a permanently high plateau. After working this problem since 1996 when I started to do research for iTulip before I launched it in 1998, my frame of reference is the sweep of the past 16 years. I don’t see the markets today as a bubble but as a last-ditch, maybe final, effort to get the economy back to the inflated level it got to in 2000 as a result of an extraordinary infusion of credit into the economy around 1994.

The original 1995 to 2000 asset bubble has now been reflated twice.

CI: Call it a re-re-bubble?
EJ: The attention today is on the second reflation of the original asset bubble shown in red in the chart above. That second reflation shown in yellow/green is topping out now, but the important feature to note in the chart is the the area in blue. The series of market extremes within that area was produced by the distortion of the credit structure produced by a set of interacting processes related to the operating of the global monetary system. Remember, the Fed expanded its balance sheet from 5% to 24% of GDP, and deficit spending reached 10% of GDP in 2009, and the Chinese lent us $1 trillion to make this happen. If there is a “next time” after this latest reflation fails, then what does that mean for the Fed’s and U.S. government’s balance sheets? The Fed’s balance sheet isn’t really infinite, despite what Greenspan used to assert. Can it be expanded to $10 trillion or $20 trillion to hold corporate bonds and junk bonds and all of the other debt that grew out of the Fed’s yield curve manipulations?

CI: Okay, I’m properly terrified.
EJ: Both the speed and extent of the Fed’s response is key, and that depends on their fully understanding the danger, as Bernanke did before that last crisis, and have an actionable plan as Bernanke did and in fact published in a famous November 2002 Deflation: Making Sire “It” Doesn’t Happen Here speech. I go deeper into this in Part II but this is key: inflation is dangerously low today versus 2000 or 2007 at previous market peaks. The conditions are far more similar to 1929 when inflation was already very low before the market crashed.

CI: You’ve met Yellen. Do you thing she understands this?
EJ: I met her very briefly, not long enough by any stretch of the imagination to inform an opinion of how she’ll respond to a second AFC and mid-gap recession. I seriously doubt she’ll do a Roy Young.

CI: What’s a Roy Young?
EJ: It’s a Fed chairman move that causes the banking and credit markets to collapse, followed by a failure to meet the exploding demand for money that occurs in a debt deflation.

The Fed has popped every bubble, starting with the 1920s stock market bubble. A 1% rate hike from 5% to 6% by
the Fed when Roy Young was chairman did the trick.

The moral of the 1920s is this: A central bank that fails to nip an asset bubble in the bud in times of low inflation is asking for trouble. When the bubble gets out of control, measures taken to finally bring it down can also bring down the credit structure and economy. Everyone forgets that it was the Fed that popped both the housing bubble and the stock market bubble. Both times inflation was well over 3% and rising, and the Fed Funds rate over 5.5% at market peaks. Now the Fed Funds rate is virtually zero and the CPI has trended down from 3.9% in 2011 to 1.5% in Dec. 2013. For the first time since we started in 1998 the deflationist camp is in a strong starting position.

CI: What can the Fed do?
EJ: The Fed can always expand its balance sheet even further, and I think that will be part of the strategy, but the Federal government will have to open its wallet again, too. The Fed is already holding claims on the U.S. economy amounting to nearly 25% of GDP as a consequence of doing so much of the heavy lifting to halt debt deflation after the AFC.

How much more can the Fed’s balance sheet hold? 100% of GDP? More?

CI: Are you a deflationist now?
EJ: I’ve been pointing out for years that these policies, starting with the NASDAQ bubble when I was writing about that in the late 199s, are taking us down a dangerous road. The fact is the economy has not recovered from the last recession and if the markets crash now we are almost certain to have the mid-gap recession that I forecast last year for this year. Ultimately the debt deflates and my worry has always been, as spelled out in the Janszen Scenario since 1998, that the debt will ultimately be deflated against the exchange rate value of the US dollar and that will be anything but deflationary.

CI: A mid-gap recession is a recession that happens before the output gap created by the previous recession closes, right?
EJ: Correct. The Congressional Budget Office broke the Real Potential GDP data series that we’ve been using here for years and this required us to formulate our own. It clearly shows that the output gap from the past recession remains open. This explains the low inflation environment.

Real GDP vs iTulip Real Potential Output (iRPO) identifies bubble-related output surpluses A and B.
First policy makers enabled the housing bubble to re-create the conditions of high employment
and low inflation of the NASDAQ bubble before it. When that failed the Fed used QE to try to get
the economy back on the historical potential output growth trend but has failed.

CI: QE didn’t work?
EJ: It did exactly what it was supposed to do but I think the financial media have done a poor job of explaining how QE works.

CI: Can you summarize?
EJ: Sure. The theory behind QE is that if the central bank can inflate financial asset prices on household balance sheets then households will go out and spend between 5% and 15% of capital gains on current consumption, the so-called wealth effect. The two assets that make up approximately 80% of household balance sheets are equities and home values, the other smaller contributors being such assets as pension funds, cash deposits, and so on, totaling up to the other 20% or so. Clearly the big bang for the asset inflation buck is inflating equity prices and home values. QE has increased personal consumption by approximately $200 billion per year since 2008.

QE inflated household balance sheets by approximately $11 trillion over five years. This translates into
approximately $1 trillion in incremental personal consumption expenditures or $200 billion per year.

CI: If the market crashes won’t household balance sheets shrink again and won’t the benefits of the Fed’s asset price inflation be lost?
EJ: Yes the wealth effect works both ways, positive and negative. If financial assets take a hit then so will consumption. In any case, if you read the Fed papers on QE it isn’t a long-term solution to boosting demand. It wears off pretty quickly. The long-term solution is rising incomes not capital gains, and that means jobs. You can’t run a consumer economy on capital gains, you need incomes.

As you can see that in the chart above, there is a lag between the start of each QE program, a decline in interest rates, and a rise in financial assets on household balance sheet, then a correction in assets, then the next QE. The last QE sent rates down from 3.6% to 1.2% added $10 trillion to the value of financial assets. If that reverses quickly before unemployment declines to, say, 5% then the economy is in a world of hurt. So the Fed has created a bizzaro world where the stock market is at all-time real highs due to its own asset reflation policy and it’s forced to back off even though the labor market isn’t strong enough yet to provide the incomes to substitute for capital gains to drive consumption. By withdrawing QE now the Fed is in effect causing a correction in the asset inflation that it created for the purpose of closing the output gap with capital gains as a substitute for employment income. In a way Yellen by continuing with Bernanke’s taper policy is doing a Roy Young.

CI: What about all of the households that got out of stocks and are sitting on piles of cash? There are well positioned for a major correction, right?
EJ: Much has been said about retail investors staying out of the stock market after the AFC and it’s partly true.

Households are sitting on $800 billion in cash versus $100 billion before the AFC.

Still, cash is less that $1 trillion of the $64 trillion in total financial assets or 1/64th of the total. Corporate equities make up $25 trillion.

CI: How does the Fed’s asset purchases of bonds inflate stock prices? They aren’t buying equities.
EJ: The inflation doesn’t come about directly though equity purchases but through the bond market. The way that artificially low yields inflate equity prices is complex and we’ll talk more about it in Part II, but one channel is the flood of cheap credit into the corporate bond market.

Low interest rates compelled firms to borrow $407 billion per year since 2009 vs $133 billion per year in the previous recovery. Firms used the cash for acquisitions, stock buy-backs, and are hoarding more than ever.

CI: You’ve pointed out in the past that the Next Bubble can be identified as that asset which kept on rising right through the last asset-bubble era recession. What asset was that this time?
EJ: Again, I prefer to call this an asset bubble because it lacks the speculative fervor of a speculative bubble, but if you’re looking for an asset that never took a breather even through the AFC it’s corporate debt. From 2007 before the crisis to today corporate debt liabilities grew from 24% to 37% of GDP. Before that, during the era of falling interest rates since 1983 that created the FIRE Economy and for 24 years until 2007 corporate debt to GDP doubled from 12% to 24% of GDP. Then it grew 36% in six years.

Corporate balance sheets may have a lot of cash on them but offsetting this is a record level of debt.

CI: Problem?
EJ: It’s entirely logical for corporations to take advantage of low yields but the fact is that the corporate sector is now heavily leveraged and if the economy rolls over debt repayment competes with other uses for working capital, like capital investment and payroll. It could exacerbate the next recession.

CI: We’ll get your conclusions on the stock market and economy in Part II. I have to ask about gold. The “stocks and houses” business media had a field day in 2013. Best gold doomer article was Gold: Turns a wealth destroyer, bites dust. What happened in 2013? What’s in store for 2014?

EJ: My June 2013 article explains the the valuation of gold as governed by Good as Gold for Oil or GAGFO pricing. I figured if the trends that began in 2011 that improved the GAGFO value of the USD continued in 2013 then the gold price was going to keep falling. The chart below is from the article, per the watermark created May 22, 2013.

CI: If I’m reading the May 22, 2013 chart above right it says gold at $1200 by the end of 2013?
EJ: Yes, if the trends I hypothesized as the cause of the gold price decline since 2011 continued, which they did, then the model indicates a gold price of $1200.

CI: The gold spot price on Dec. 30, 2013 was $1,205.50.
EJ: Close enough.

CI: What’s in store for 2014?
EJ: Wait, let’s unpack exactly what happened from 2011 to the end of 2013 to bring gold down from the 1800s to the 1200s. Two developments have improved the GAGFO value of the USD, the budget deficit and trade deficit. Since 2011 the rate of increase in government outlays has declined as GDP grew versus both growing together as typically happens, including a 1% of GDP cut in defense spending. More significantly for gold there’s been a radical reduction in the oil trade deficit. Of these two factors the oil trade deficit contributed by far the most to the decline in the gold price in 2011 and 2012. As oil imports declined, the accumulation of excess USD reserves by oil producing countries, which UST reserves they hedge with gold, also declined. Then in 2013 funds dumped their gold ETFs. They did this in order to not look stupid for holding gold instead of more equities for another year as stock prices went up and gold went nowhere. It was this selling of gold via ETFs that sent gold prices down in 2013.

CI: Is gold coming back to life in 2014?
EJ: Oil trade deficit improvement or not, other factors of the GAGFO value of the USD matter, specifically the budget deficit and the Fed’s balance sheet, both of which are claims on the real economy. Somewhere, no one knows exactly where, there is a threshold which when passed causes foreign holders of UST to assess that repayment of the current debt plus the additional debt need to reflate the economy is, over the average duration of all of the bonds, mathematically impossible. If that threshold is surpassed in this next crisis then the markets as we see them today are indeed the Last Bubble. If we have another market crisis like we had in 2008 or worse, those of us with exposure to the equity markets will be glad we have gold to hedge the risk of a fresh crisis.

2013 Review and 2014 Forecast – Part II: Global Manic Depression

manic depression (noun): the condition of an economy stuck in an
output gap that was created by a recession that was produced by
the collapse of an asset bubble, which output gap the central bank is
attempting to close by stimulating the economy with a new asset bubble.

• US macro good news, bad news — mostly the latter
• Fed fails to fill the output gap with asset price inflation
• The Fed broke my yield curve (recession indicator)
• We don’t need your stinking oil
• GAGFO or bust
• Stock market peak and here we go again

In 2007 I debated respected deflationists like Steve Keen who agreed with me that a credit crisis and recession were imminent. However, he and they were convinced that a price deflation and debt default spiral was to follow. It was my view that the Fed was going to throw everything and the kitchen sink at the credit markets and halt the deflation process.

That was then.

Back then I could point to the Fed’s plans going back to 2003 to prevent a repeat of The Great Depression. In 2008 as in the early 1930s the faulty credit structure of the American financial system was vulnerable to crisis and the Fed knew it, thus the extensive planning. Both credit crises happened for similar reasons: unregulated investment banks made a preposterous number of bad loans in the money markets, in the 1930s in the stock market and in the 2000s in the housing market. In the 1930s instance the extreme demand for money in debt deflation quickly overwhelmed the liquidity provisions of the System, then limited by the statutory restrictions of the gold standard. In 2008 and 2009, sans the golden handcuffs the Fed was able to expand its balance sheet by trillions of dollars to reflate at will.

The deflation debate in 2007 was far ahead of the mainstream economics “conversation.” The context of the inflation versus deflation debate was a credit crisis and deep recession that at the time few believed was likely but that we assumed was inevitable. The inevitability of a credit crisis was doubted by the mainstream business and economics community well into 2008 when my Harper’s article “The Next Bubble” was published. Also, the idea that monetary policy had made the U.S. economy asset price inflation dependent was viewed at the time as controversial.

Since then much has changed. The predicted credit crisis occurred and the Fed used most if not all of the policy measures described in its playbook to prevent a run-away debt deflation spiral. In 2013 Bernanke at press conferences defended QE as an effective tool of economic policy because it “inflated asset prices.” The solution to the credit crisis was the same: more credit. But more credit means more debt, and more debt means a bigger crisis later.

Through the past two asset price booms, busts, and reflations since the late 1990s the Fed has trained the markets to wait for the next crash as a buying opportunity for the inevitable reflation. Market consciousness today is infused with a manic depressive, bi-polar rationalization of the irrational conditions of the credit system.

The 1998 Janszen Scenario theorizes that at the end of this asset price inflation, deflation, reflation cycle lurks a final deep deflationary process to cap the asset price inflation era, to which monetary authorities and legislatures respond again with a final credit expansion. But, that rather than expanding the purchasing power of bonds it causes a loss of faith in the monetary units in which the bonds are denominated. A global US dollar, euro, and yen bond and currency crisis follows.

With the advent of QE I theorized that the trigger for this final act of the play that started its run in 1995 is the Fed itself. QE distorts the very foundation of the global credit structure, US Treasury bond, which foundation replaced gold in the early 1970s. With QE the Fed has achieved the impossible under the gold standard. It has taken away the last reliable measure of credit risk from the markets and put it into the hands of technocrats.

Adjusting interest rates on the short end of the yield curve via open market operations has long been accepted as the Fed’s primarily policy tool for meeting its mandate to maintain a stable price level in the economy. Generally short in duration, adjustments to the Fed Funds Target Rate in either direction up or down lasting six months to two years at most, these interventions in the money markets are known to the markets as temporary. But QE by the world’s reserve currency issuer has been going on since late 2008, for more than five years. That is not an intervention. It is price fixing, pure and simple. It is the Fed using its balance sheet against the collective balance sheet of market participants to set the price of the bonds that form the base of the credit structure the way gold used to, except that no one country could control the price of gold. No single country issued gold.

Here’s the thing. After five years of long bond price fixing, how can market participants know the market price of a 10-year UST?

The Fed Funds Target Rate is an afternoon sea fishing excursion a mile from the dock, the shore in clear view and the passengers on the boat able to judge the distance from the shore and the time to return to it (yield to maturity). QE is a week spent floating in the ocean in dense fog. All around the passengers as far as they can see is grey, then dark, then grey again. Then the Fed decides to turn the ship toward shore (taper). As the shore comes into view, passengers are finally able to judge their distance from shore. The reality of their position will invariably come as a shock, as either too close or too far, for a week of orientation — a continuum of price signals — has been lost.

The rational response for the passengers of the ship to the epiphanous bond price discovery? Panic.

The slowing of the Fed’s bond price fixing operations in the fall of 2013 has so far sent two bodies overboard: the U.S. Muni market and emerging market bonds.

Here I make the argument that, philosophically, the Fed’s decision to reduce asset purchases is equivalent in form and degree of misjudgment to the error made by Fed chairman Roy Young in the 1920s to tighten monetary policy at a time of an asset price peak and low inflation, when the underlying credit structure was fragile, to put it politely, perverse to put it bluntly.

In a careful study of the six economic eras of the last century I show that incoming Fed chair Janet Yellen Fed faces a unique set of challenges. The next crisis will be far more difficult to manage than the last, and there is neither evidence of a plan nor evidence of awareness that a plan is needed. The apparent obliviousness of the risks presented to the global economy by Bernanke’s post-American Financial Crisis policies lends a sense of unreality to the economic scene in 2014. more…

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An $18 Million Lesson in Handling Credit Report Errors – NYTimes.com

Your Money



Steve Dykes for The New York Times

Julie Miller’s credit score topped 800, until Equifax mixed up her credit file. A jury gave her $18.4 million in damages.





Even after sending more than 13 letters to Equifax over the course of two years, Julie Miller could not get the big credit bureau to remove a host of errors that it inserted into her credit report.

Some paperwork associated with Julie Miller’s ordeal. She wrote to Equifax more than 13 times.



That indifference should surprise no one who has ever tried to deal with any of the three big credit reporting agencies, Equifax, TransUnion and Experian. “You feel trapped, like you are in a box,” said Ms. Miller, a 57-year-old nurse who works in a dermatologist’s office. “You have no control over this, and you can’t call them up and say, ‘You’re fired.’ ”

So she tried suing. That worked.

A jury in Federal District Court in Portland, Ore., last week awarded her a whopping $18.4 million in punitive damages, which, according to consumer lawyers, is the largest individual case on record.

If you think this has taught Equifax and the other credit reporting companies a lesson, you are a lot more optimistic than close observers of the industry. They say that despite the huge judgment, little is going to change for the millions of Americans who discover errors in their credit reports.

The credit bureaus are willing to tolerate these errors — and settle with consumers out of court — as a cost of doing business, according to credit experts and lawyers who work on these cases.

“Their business model is to keep doing the same thing over and over again,” said Justin Baxter, the lead lawyer on Ms. Miller’s case. “They can buy off a number of consumers with small dollar amounts and get rid of the vast majority of cases. To Equifax, that’s the cost of doing business.”

Ms. Miller made every effort to fix her report, exactly as consumers are advised to do. She initiated the company’s dispute process about seven times, and in most instances, Equifax would spit back a form letter saying it needed more proof of her identity. So she sent her pay stub and her phone bill. When that didn’t work, she sent her pay stub and her driver’s license. And when that failed, she sent her W-2 form and an insurance bill — at least three times.

But nothing ever changed: Ms. Miller, a model financial citizen who once had the credit score to prove it, had become mixed up with another, much less creditworthy Julie Miller. After she was denied a line of credit from KeyBank, she discovered 38 collection accounts on her credit report, none of which belonged to her, along with an inaccurate Social Security number and birth date. Her financial life was no longer her own.

Mixed files, as they are known in the credit industry, most frequently involve people who share common names with individuals who have similar Social Security numbers, birth dates or addresses. These errors are notorious for being among the most difficult to fix, credit experts said, and require human intervention to untangle the mess. But given the huge number of disputes, the process to address them is largely automated. And that is the excuse the industry advances to consumers who get stuck in its web.

The bureaus often outsource thousands of disputes daily to workers overseas. Those workers, often overwhelmed by the sheer volume of cases, are largely told to translate the problem into a two- or three-digit code that defines the gist of the problem (account not his/hers, for instance) and feed it into a computer.

But that process won’t untangle a mixed credit report. The reason files become mixed to begin with can be traced back to the computer formula the bureaus use to match credit data to a specific person’s credit report. It allows credit data, say a late payment on a credit card, to be inserted into a person’s file even if the identifying information isn’t an exact match. In other words, the system might add a late payment to the credit report of someone like Julie Miller even if the Social Security number is off by two digits or a birth date is off by two years, but enough of the other identifying information matches. That’s roughly what happened to Ms. Miller.

Partial matches aren’t always wrong, of course. Solid estimates on the number of mixed files are hard to find, though a 2004 study from the Federal Trade Commission said that partial matches occurred in about 1 to 2 percent of credit files, citing data from the bureaus. That might not sound like much, but when you consider that there are 200 million individuals with credit files at each of the big three bureaus, that translates to two million to four million consumers.

Other estimates put the number of actual mixed files at less than 0.2 percent to nearly 5 percent. The F.T.C.’s report said that mixed files were not always harmful to consumers because most credit account information was positive.


To that I say: Consumers with mixed files are supposed to take comfort in the fact that their credit report doppelgängers, on the whole, are likely to pay their bills?

There is a reason the bureaus operate this way. They would rather err on the side of including too much information in your credit report than leave information out, according to consumer lawyers and advocates. They also need to account for typos and small errors that can cause the credit agencies to leave out information — both good and bad credit behavior. Financial services firms are paying the bureaus to receive the most complete financial profile possible, even that means sacrificing a bit of accuracy. (The F.T.C.’s report said that lenders might actually prefer to see all potentially derogatory information about a potential borrower, even if it can’t all be matched with certainty.)

“The bureaus would rather accept the possibility of some mixed-file risk rather than the possibility that a debtor who owes a debt gets away with it,” said Leonard Bennett, a consumer lawyer in Newport News, Va., who said he has about 20 active mixed-file cases in any given month.

The dispute process is supposed to catch the people who fall through the cracks. But as people like Ms. Miller can attest, it doesn’t always work. The Fair Credit Reporting Act, the law that governs the big bureaus, requires the agencies to provide a reasonable investigation. Ms. Miller’s lawyer said their litigation revealed that there was no investigation at all. (It’s worth noting that Ms. Miller had problematic credit reports at the other two bureaus, but those agencies resolved the matter.)

“They testified that they get something like 10,000 disputes a day, so they don’t have the time to look at each one,” Mr. Baxter said. “Whether it is because the person has too many disputes to process or they choose not to, that is where the system falls apart.”

What else could she have possibly done? I asked the credit bureaus. Equifax declined to comment, and would only say that it was “very disappointed in the jury verdict” and was exploring its options, including an appeal. The other two agencies didn’t offer much guidance either, though TransUnion pointed out that the credit reporting industry resolved 70 percent of consumer disputes within 14 days.

Ms. Miller, however, had to endure repeated phone calls from debt collectors, who threatened to sue. She couldn’t co-sign a credit line for her son who was in his freshman year of college, and she said she put off refinancing her mortgage. It also meant that she couldn’t co-sign a car loan for her disabled brother. And plans to build a workshop on their property, which required a loan, would have to wait.

The jury’s giant award to Ms. Miller is generous and goes a long way toward compensating her for those lost opportunities. But lawyers say the initial awards are often reduced after being reviewed by the trial judge. An out-of-court settlement for the typical mixed-file case might be $50,000 to $250,000, depending on the case, while settlements for other errors may be far less.

Will Ms. Miller’s award have any lasting effect on the industry? Mr. Bennett, the consumer lawyer, is one of the optimists. “This case will change the calculus,” he said. “If they have to pay $2.5 million every time one of these folks gets to court, they might have to reconsider their procedures.”

It’s more likely, though, that the Consumer Financial Protection Bureau, which began overseeing the large credit bureaus last September, will have more impact. It has broad authority to perform on-site examinations, check records and examine how disputes are handled. Consumer advocates have long suggested that the credit agencies tighten up the way they match up data with consumers reports and strengthen the dispute process.

“Big punitive penalties may help force the bureaus to upgrade their 20th-century algorithms and incompetent dispute reinvestigation processes,” said Ed Mierzwinski, consumer program director at the United States Public Interest Research Group. “But C.F.P.B.’s authority to supervise the big credit bureaus is one of the most significant powers Congress gave it.”

Nearly every expert I spoke with conceded that Ms. Miller had few options. “She had two choices, and they both stunk,” said John Ulzheimer, a credit expert who has served as an expert witness on more than 140 credit-related lawsuits. “She could live with it, or she could hire an attorney.”


Refinancing Mortgage: The Secret To Saving Thousands On Your Mortgage |



Have you conducted a home loan health check lately? You might be surprised if you find out that despite getting a pretty good loan back then, there is still some room for you to save. The solution does not lie on your current home loan. What you might want to do is try to look at what’s out there for you if you wish to find ways to reduce your monthly mortgage costs.




A lot of people today are actually dealing with higher interest rates, which mean they have to pay bigger interest payments. The situation is the perfect time to find a better deal in the market. And once the opportunity to refinance to a better mortgage product reveals itself, you don’t let it pass. However, you do need to consult with your lender or a separate mortgage expert regarding your situation. Refinancing mortgage, just like other home loan solutions, has advantages and disadvantages. Before you can refinance, you will have to deal with the refinancing costs which will be comprised most likely of exit fees and several other charges your lender might impose.


Benefits of Refinancing to a New Loan


Refinancing to a new loan has other advantages aside from the obvious fact that of allowing people to lower their mortgage costs. Refinancing loans allows you to use the equity stored in your home as guarantee for a new loan. You can use the loan to fund the renovation and of your property. You can also purchase an investment property if you want using the funds you get from the refinancing home loan. Last but not the least, refinancing allows you to easily consolidate your loans as well as unsecured debts (e.g. credit card and personal loan) into one so you won’t have to pay high interest rates. The best thing about debt consolidation is that it makes debt management easy because you only have to manage a single account.


You can take advantage of refinancing when the interest rates are down. Once you have secured a loan, you can lock it in fixed rate for 15 to 30 years in order to preserve the low interest rate. When the rates go up, you’ll be saving a lot compared to those with variable rate loans. However, refinancing to a variable rate loan is the better option if you are not permanently settling in your home.


Refinancing mortgage takes you back to step one when you first applied for a mortgage. And if you remember, you need to have a cautious approach because you do not want to defeat the purpose of your refinancing. Simply put it, it’s buying your first all over again, which means you might encounter the same obstacles and procedures.

By  Robert  Charlson

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Secure Your Future With 9 Rock-Solid Dividend Stocks

Motley Fool Stock Advisor

Face it, you want it all. You want to have your cake and eat it too.

You want the reliable income and stability that dividend-paying stocks provide, but you also want to beat the market.

Sound like a pipe dream? It’s not.

According to Ned Davis Research, between 1972 and 2010, dividend-paying stocks returned 8.6% versus just 1.4% for companies that didn’t pay a dividend. That’s an astonishing outperformance that means the difference between turning a $100,000 portfolio into $2.4 million versus just $174,000.

And for those worried about the storm clouds in today’s global economic picture, Ned Davis also showed that during periods of market decline between 1970 and 2000, dividend payers outperformed their stingy counterparts by 1.5% per month.

Here’s why they trounce the market so impressively

For one, since dividends are paid in cash, when you invest in a dividend-paying stock you can be more confident that the company you’re investing in actually makes cold, hard cash. That may sound simplistic, but many companies report accounting profits without actually banking any cash.

In addition, the beauty of many dividend stocks is the long-term dependability of the companies backing them. This allows investors to take advantage of compounding returns over long periods of time. Long-time dividend investors are surely on board with Albert Einstein, who supposedly called compound interest “the most powerful force in the universe.”

Back by popular demand

In a previous Motley Fool report, we offered readers the opportunity to download a dividend-focused special report that delivered a 13-stock dividend portfolio. That report was downloaded by almost half a million investors across the globe!

Due to the overwhelming popularity of that report, we decided to revisit the wonderful world of dividends to bring you a new, ready-to-trounce-the-market dividend-stock portfolio.

In this report you’ll find nine dividend stocks that will not only let you sleep like a baby, but can also help put your portfolio on the path to market-beating returns.

While you certainly don’t have to buy all nine of these to get the most out of the power of dividends, these have been specifically chosen from a range of industries and a range of dividend strategies so that, taken as a group, they create a complete dividend portfolio.

5 All-Around Dividend Rock Stars

Not every band is of Rolling Stones caliber, and not every dividend stock is of Procter & Gamble [NYSE: PG] caliber.

In fact, there is a special group of dividend stocks that Standard & Poor’s keeps track of that it calls the “Dividend Aristocrats.” These dividend payers don’t just pay a dividend. They’re not just any old company that’s had a few dividend increases. No, these dividend maestros have — as S&P puts it — “followed a policy of increasing dividends every year for at least 25 consecutive years.”


You should be. Because when a company has a 25-plus year streak of paying and raising its dividend, you better believe investors are feasting on impressive compounding returns.

Meet the aristocrats

As you might expect, the Dividend Aristocrats are an elite group.

In fact, of the 500 companies in the S&P 500 index, only 54 of them currently qualify for the title. And while most of the companies on that list could make solid investments, there are some that stand out above the rest of the pack.

The five stocks below are some of the greatest businesses in existence.

They each have what we Fools like to call a “moat,” that is, a competitive advantage that allows them to consistently earn above-average returns. Their inclusion on the Dividend Aristocrat list shows their consistent dedication to returning cash to investors. And while it’s tough to find businesses of this quality at bargain-basement prices, all trade at attractive valuations.

Company Business Dividend Yield 10-Year Average Annual Dividend Growth
ExxonMobil [NYSE: XOM] Global energy champ 2.8% 9.6%
Johnson & Johnson [NYSE: JNJ] Diversified health-care products powerhouse 2.8% 11.2%
PepsiCo [NYSE: PEP]
Snacks and beverages giant 2.7% 13.6%
Procter & Gamble [NYSE: PG] Branded consumer goods leader 3.0% 10.8%
Wal-Mart [NYSE: WMT] Low-price retail kingpin 2.4% 18.1%

Source: S&P Capital IQ.

ExxonMobil sells products — oil and natural gas — that are commodities. For the most part, the crude oil Exxon pulls out of the ground is the same as the oil that, say, Chevron [NYSE: CVX] does.

So what makes Exxon so great? It’s the sheer scale that the company has, but it’s also got a long history of wise capital allocation and investment in technology to keep it at the forefront of the industry. And because the company continues to put its money to work in places where it can earn high returns, there should be more good times ahead for investors.

Many health-care companies that focus on patented drugs face grave problems because they’re starting down the barrel of big patent expirations. Not so at J&J. The company has a highly diversified business that spans consumer brands like Tylenol all the way to products that surgeons rely on in the operating room. J&J has faced challenges in recent years but it’s a highly innovative company, and its decades of success have proven its mettle in staying at the forefront of the health-care industry.

Above, PepsiCo was very purposely listed as a “snacks and beverage giant.” Because the company has Pepsi in its name, it’s easy to forget that it also houses the massive Frito-Lay snacks division. Heck, it may also be easy to forget that the Gatorade empire is PepsiCo’s Gatorade empire. Sure, Coca-Cola [NYSE: KO] is a fantastic company, but it’d be a big mistake to overlook the might and staying power of PepsiCo.

Gillette, Tide, Pampers, Oral-B, Mr. Clean, Crest, CoverGirl, Tampax, Old Spice. If you know these brands, then you know Procter & Gamble. Since 1837, P&G has been creating products that consumers want to use. And use again. And use again. And use… OK, you get the picture. Recently, P&G has faced tough questions from investors as its growth engine appeared to have stalled. However, hopes are high that growth will reignite after the company brought back former CEO A.G. Lafley to lead the company again. The good news for investors is that the core of P&G’s empire is strong enough that it continues to generate monster profits — and pay those handsome dividends — as it revs that growth engine back up.

Finally, when it comes to price, Wal-Mart can’t be beat. When you consider that competitive advantage is all about a company’s ability to bring more value to its customers than competitors, you realize what a big deal this is. Wal-Mart will continue to dominate the retail landscape simply because its customers are consistently able to stretch their dollar further in Wal-Mart’s stores.

Your portfolio, starring…

In creating your dividend portfolio, you could go with the five stocks above and stop there. You might be a bit under-diversified, but you wouldn’t be in bad shape.

Below you’ll find two “dividend divas.” They’re more temperamental than the stars above, but can deliver in a big way.

2 High-Yield Dividends Divas You Can Buy

When you’ve got a company that can consistently grow its dividend by double-digit percentages every year — as most of the five companies you just read about have — a 2% dividend can go a long way.

But there are some companies out there whose stocks have yields that make that 2% payout look like a joke. Some have yields two, three, or even five times what you can currently get from a 10-year Treasury bond.

Before you get too excited about these massive yields, it’s important to understand that a huge dividend is not a free lunch. The dividend yield is right out in the light of day where everyone can see it, so if it were so obvious that the yield was a steal, investors would flock to the stock and the yield would fall.

Instead, the stocks that have the biggest yields are often stocks that investors are looking at askance. Investors may believe there are risks to the businesses behind the stocks that may make it difficult for them to keep up their dividends.

Some, not all

While the crowd may be on target with their pessimistic assumptions in some cases, in others they be sorely mistaken and missing out on some really great dividends.

Now that your dividend portfolio has a solid base of five rock star Dividend Aristocrats, let’s jazz it up with two high-yield divas that could spice up your returns.


As smartphones become an ever-more-powerful hub for consumers to communicate, shop, and otherwise interact, service providers like AT&T will stay in demand as providers of the wireless highways that the data travel over. And investors in this important service provider can currently pocket a 5.3% annual dividend.

The wireless business has been where it’s at for telecoms in recent years, and AT&T is one of the major powerhouses. As is usually the case though, the status quo makes no promises to stay put. And we’ve seen some evidence of the changing landscape as Verizon [NYSE: VZ] took the plunge and agreed to buy Vodafone‘s [NYSE: VOD] ownership stake in Verizon Wireless for $130 billion. This could put pressure on AT&T to make some moves of its own.

But let’s not forget that wireless isn’t AT&T’s only business. In fact, it was only 46% of the company’s 2012 revenue. Though wireline phone service may be a slowly-dying business, broadband and other data services aren’t, and AT&T is building stronger customer relationships through offerings like AT&T U-verse, which offers bundled digital TV, internet, and voice services.

Currently, that sweet 5.0% dividend comes from AT&T paying out just over 50% of its free cash flow — which is a very sustainable ratio. In other words, take that sustainable payout ratio along with the stable business, and it sure looks like Ma Bell’s dividend is a good buy.

New York Community Bancorp [NYSE: NYCB]

If you want dividend growth, you may want to look elsewhere — New York Community Bancorp hasn’t raised its dividend since 2005. However, with investors nervous about the economy and banks in particular, Mr. Market has knocked NYCB’s stock down to a level where its $1 dividend gives you a serious 6.2% yield.

There are risks for NYCB. For instance, banks have to set aside money based on how much of their loans they believe will end up turning sour. The amount that NYCB has set aside is a fairly small percentage of its currently-nonperforming loans, so if management turns out to be wrong in its estimates, that could put a drag on earnings.

But the bulk of NYCB’s loans are not on over-leveraged single-family homes in Las Vegas that were given to minimum-wage earners. Instead, much of NYCB’s loan book consists of conservative loans on low-rent apartment buildings in New York City whose value is based on the actual cash flows that the buildings generate.

Some investors may see “bank” as a four-letter word, but if you’re looking for big dividends, NYCB may be your ticket.

Seven down…

Your dividend portfolio is now at seven stocks — five dependable dividend “rock stars” and two higher-yield divas. Next up is a look at a couple of lesser-known dividend stocks that have what it takes to become stars someday.

2 Dividend Up-and-Comers You Don’t Want to Miss

To stretch the music metaphor just a little bit further, if the first five stocks were reliable rock stars and the next two were high-yield divas, the next two we’re going to take a look at are the yet-to-be-discovered stars of tomorrow.

Though it can be tough to find solid dividends among the small-cap ranks — many small companies prefer to reinvest all of their cash in growth — it’s a big mistake to skip over this part of the market. And because smaller companies tend to get less exposure than larger ones, many investors miss these companies and allow the more intrepid investors to scoop them up at bargain prices.

Better than Goldman

At this point it may be nearly impossible for some people to think about Goldman Sachs [NYSE: GS] and other investment banks without thinking about their part in the financial crisis. It’d be understandable if some investors get the urge to shake a fist every time they hear Goldman’s name. But let’s not be too quick to lump every investment bank in the same category as the too-big-to-fail screw-ups.

Greenhill & Co. [NYSE: GHL] is an investment bank. It’s a high quality investment bank that lands the same caliber of people (or better) than the folks at Goldman, Morgan Stanley [NYSE: MS], or JPMorgan Chase[NYSE: JPM]. But you probably haven’t heard of Greenhill.

Why? Because Greenhill does not fancy itself a financial master of the universe.

It does not have massive trading operations that threaten the ongoing existence of the company or the health of the U.S. financial system. Instead, Greenhill focuses primarily on advisory services. That is, it provides companies with advice on mergers and acquisitions, raising capital, and other special financial situations.

And while the name Greenhill may not ring bells for you, the projects it’s worked on will no doubt be familiar. The deals that Greenhill is currently working on (or recently wrapped up) include SUPERVALU‘s [NYSE: SVU] multiple deals with Cerberus Capital; Linn Energy‘s [Nasdaq: LINE] $4.4 billion acquisition of Berry Petroleum [NYSE: BRY]; GrainCorp’s consideration of Archer Daniels Midland‘s [NYSE: ADM] unsolicited $3.8 billion takeover offer; Actavis‘ [NYSE: ACT] $8.5 billion acquisition of Warner Chilcott [Nasdaq: WCRX]; and it’s also advising the city of Detroit’s General Retirement System and the Police and Fire Retirement System in connection with the city’s financial struggles.

The beauty of this business is that while Greenhill spends significant money on its people, the business itself doesn’t require much capital. That means that when the company’s business is raking it in, there is plenty of cash available to pay shareholders.

Not a minor player

While hospitals do sanitize and reuse some equipment, the high standard for sterility and cleanliness means that there are a great many items that get used once and pitched. These items include gloves, disposable scalpels, respiratory tubing, umbilical cord clamps, medicine cups, and bandages.

Meanwhile, with the cost of health care rising and everybody trying to cut costs wherever they can, hospitals and other health-care providers want to find the most effective and cost efficient way to stay stocked up and ready to serve their patients.

Enter Owens & Minor [NYSE: OMI]. Owens & Minor is a distributor of medical and surgical equipment, as well as a provider of outsourced logistics and inventory management services. The company works with 1,400 suppliers and has access to over 200,000 medical-surgical products, including products from its own private-label MediChoice line. In a business where getting it right is absolutely critical, it says a lot that the company has a 98% customer satisfaction rating across roughly 4,000 customers.

For investors, the proof of its success is in black and white in the numbers. Going back to 2008, the company had an average return on capital of nearly 12%. Between 2000 and the 12 months ending in June 2013, it grew earnings per share 162%. And the dividend? Owens & Minor has raised its dividend every year since 1997 and has more than doubled its payout since 2006.


Credit Suisse brings fourth jumbo RMBS to market | 2014-01-31 | HousingWire


81% of loans come from Shellpoint’s New Penn

Credit ratings agency DBRS assigned mostly triple-A to a prime, jumbo residential mortgage backed securitization issued by Credit Suisse [CS]. The trust is called CSMC Trust 2014-IVR1. The triple-A credit enhancement is 6.85%.

This is the fourth deal issued by CS since the housing recovery began.

The deal is backed by 398 prime residential mortgage loans with a total principal balance of $287 billion.

The originators for the mortgage pool are primarily New Penn Financial at nearly 81%.

The loans will be serviced by Select Portfolio Servicing.

Wells Fargo [WFC] will act as the master servicer.

DBRS notes the deal bears some semblance to pre-crisis jumbo RMBS.

The representations and warranties are backstopped by a wholly owned subsidiary of Credit Suisse.

“DBRS views the representation and warranties features for this transaction to be consistent with recent DBRS-rated CSMC prime jumbo transactions, and of stronger quality than that of two previous Credit Suisse prime jumbo transactions (CSMC 2012-CIM3 & CSMC 2013-TH1),” said DBRS in its presale report.

“However, the relatively weak financial strength of certain originators coupled with the sunset provisions on the backstop by DLJMC still demand additional penalties and credit enhancement protections,” DBRS warned.

Jacob Gaffney
Jacob Gaffney is the Executive Editor of HousingWire and HousingWire.com. He previously covered securitization for Reuters and Source Media in London before returning to the United States in 2009. While in Europe for nearly a decade, he covered bank loans and the high yield market, in addition to commercial paper, student loan, auto and credit card space(s). At HousingWire, he began focusing his journalism on all aspects of the housing and mortgage markets.
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