Perverse Incentives

China Bans Margin Calls; Limits Pension Funds To Buying Stocks Only

"What do you do when two policy rate cuts, $19 billion in committed support from a hastily contrived broker consortium, and a promise of central bank funding for the expansion of margin lending all fail to quell extreme volatility in a collapsing equity market? Well, you can simply ban selling, which is apparently the next step for China. According to Caijing, the country's national social security fund is now forbidden from selling (but is welcome to buy). The pension selling ban comes just days after China moved to curtail margin calls in a similary ridiculous attempt to stop the bleeding by simply making selling against the rules." Continue reading →

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Puerto Rico’s Crisis Deals a Blow to Municipal-Bond Funds

"In a low-interest rate world, Puerto Rico’s bonds have offered investors juicy yields over the past several years. Puerto Rico’s $3.5 billion in general-obligation bonds issued in 2014 initially had a yield of 8.7%. The yield on 10-year U.S. Treasury notes, by contrast, hovered between 2% and 3% last year. But now investors are getting a fast lesson on the risk that comes with those sorts of high yields. More than half of all U.S. municipal-bond funds, or 298 of 565, have invested in Puerto Rico’s debt, according to the most recent fund holdings compiled by Morningstar." Continue reading →

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Europe’s Pain is the World’s Gain

"Last week the ECB announced that it was cutting its headline lending rate to 0.15 percent and taking its deposit rate to negative 0.10 percent. That means banks must pay the ECB to hold their money, a move the ECB hopes will spur lending. It will also make $545 billion worth of inexpensive loans available to banks with the caveat that they lend more to the private sector. First tranche euro zone banks will be permitted to borrow up to 7% of the value of their corporate loans with additional tranches of funding [on the way]. While the goal of easing is to improve economic conditions at home, the money will ultimately flow to where it can find the greatest returns, as our own experience has shown." Continue reading →

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Economy Tanks … and Stocks Soar?

"Negative 1 percent. That’s how much the U.S. economy managed to 'grow' in the first quarter, according to the government’s revised estimate. After more than $800 billion in stimulus spending from Washington. After more than $3 trillion of QE from the Federal Reserve. After six-plus years of record-low interest rates … record levels of monetary intervention in the U.K., Japan and Europe … and the biggest bailouts in the history of the world. It’s much worse than the 0.1 percent gain the Commerce Department originally reported. It was twice as bad as the 0.5 percent decline economists were expecting. And it’s the worst reading since the first quarter of 2011." Continue reading →

Continue ReadingEconomy Tanks … and Stocks Soar?

Bill Bonner: This Hugely Popular Investment Is About to Blow Up

"In a normal world, savers have the choice of staying in cash or quasi-cash and receiving a fair rate of interest. No more. The interest they receive on a 10-year Treasury note is barely over 2.5%. But the real rate of consumer price inflation – according to the most exhaustive survey, done by the MIT, the Billion Prices Project – is 3.91%. What kind of world is it where an honest householder loses nearly 1.5% a year on his savings? It is an odd, rigged-up and dangerously windy one. Investors are stretching out their sails to get higher yields. As a result, bond prices have gone up, reducing yields on bonds rated CCC – below investment grade – to the lowest levels ever recorded." Continue reading →

Continue ReadingBill Bonner: This Hugely Popular Investment Is About to Blow Up

Bailout Banks Made Riskier Loans: Study [2011]

"The government bailout made banks appear safer but actually caused them to take on more credit risk, according to a University of Michigan study released Wednesday. According to a working paper by finance professors Ran Duchin and Denis Sosyura of the university of Michigan's Ross School of Business entitled Safer Ratios, Riskier Portfolios: Banks' Response to Government Aid, banks participating in the government's Capital Purchase Program as part of the Troubled Assets Relief Program, or TARP, 'significantly increased their investments in risky securities,' by 10%, 'displacing safer assets, such as Treasury bonds, short-term paper, and cash equivalents.'" Continue reading →

Continue ReadingBailout Banks Made Riskier Loans: Study [2011]

Bill Bonner: Is Bad News Good News for US Stocks?

"Everyone knows that even a little cutback in the Fed’s buyback program should mean falling stock and bond prices. A trillion dollars a year is a lot of money – in fact, it’s 7% of GDP. Imagine a corporation with annual revenue of $100 billion. Imagine that it buys back its own shares at the rate of $7 billion a year. Then try to imagine what would happen to the share price when the largest single buyer drops out. It doesn’t take a genius to figure it out. Even Fed economists can see it. That’s why they won’t taper. And everybody knows it. That’s why bad news is now good news. And good news is good news. Everything Is Good News!" Continue reading →

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French Study Investigates Danger Of Speed Limit Fixation

"In jurisdictions with automated speed enforcement, cruise control can save drivers from receiving a nasty surprise in the mail. A study released July 30 from the Vinci Autoroutes Foundation concluded that this reliance on cruise control can actually make driving more dangerous. These findings are consistent with those of the late Paul Smith, founder of the Safe Speed road safety campaign, who calculated that each time a driver looked down to check his speedometer in a 200 yard speed camera zone -- each glance takes about 1.1 seconds -- he loses 13 percent of the time available to observe the road for hazards. The UK Department for Transport lists driver inattention as the cause of 25% of accidents." Continue reading →

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Home Depot Sending 20,000 Part-Timers to Health Exchanges

"Home Depot Inc. (HD), the world’s largest home improvement retailer, plans to end medical coverage for about 20,000 part-time employees and direct them to government-sponsored exchanges scheduled to open next month as companies revamp benefits to fit the U.S. Affordable Care Act. Employees with fewer than 30 hours a week will no longer be offered limited liability medical coverage, Stephen Holmes, a spokesman, said today by telephone. About 5 percent of Atlanta-based Home Depot’s 340,000 employees are enrolled in that plan. United Parcel Service Inc. (UPS), Trader Joe’s Co. and other employers have been cutting benefits ahead of next month’s roll-out." Continue reading →

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Private Probation Firm Illegally Extended Sentences, Judge Finds

"Last week, a Georgia county judge ruled that Sentinel Offender Service had illegally extended the sentence of Mantooth and potentially thousands of others who were required to pay the firm monthly probation fees, and was illegally ordering electronic monitoring for misdemeanor offenders — prohibited by state law — while charging probationers for their own monitoring. Other named plaintiffs in the pair of cases were hauled off to jail and/or subjected to electronic monitoring for alleged probation violations six years after their probation had ended for minor offenses like possession of marijuana and no proof of insurance." Continue reading →

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