0 Debt Sells Like Hot Cakes as Corporations Raise Cash; Bernanke Fed Distortions

In five January business days, corporations sold $52.75 billion in debt according to Informa Global Markets. MarketWatch highlights that point in companies sell debt like hot cakes

Companies have flooded the market with new debt to start the year, even after the recent jump in Treasury yields, as they deem market conditions good enough and eager buyers plentiful enough to make deals go smoothly.

Companies have already sold $52.75 billion in debt this month — in five business days, according to the firm.

“Many issuers are taking advantage of the stable markets before their earning blackouts begin,” said Edward Marrinan, a credit strategist at RBS. “We expect more of the same today and see no reason for the extremely strong market tone to change anytime soon.”

Analysts expect companies to sell about $111 billion this month, according to a poll by Informa.

On the sovereign side, MarketWatch reports Mexico issued $1.5 billion in 30-year bonds at a record low yield of 4.19%. Turkey sold $1.5 billion in 10-year debt at a record low 3.47%

Flooding the Market With Debt

• Bank of America Corp. BAC sold $6 billion in debt on Tuesday
• Staples SPLS and Toyota Motor Credit each sold more than $1 billion
• Berkshire Hathaway Finance Corp. BRK.A issued $500 million
• Comcast Corp. CMCSA sold $2.95 billion in bonds.

Little to No "Net Cash"

As a result of these operations, cash on corporate balance sheets will rise. In turn, expect to see more nonsensical reports about "cash on the sidelines".

I have discussed this point many times before.

On May, 11, 2012, In Cash Cow Liquidity Comparison: Where's the Cash and Where's the Debt? A Look at the Top 50 Companies, I noted "net cash on hand at the top 50 companies is negative to the tune of $1.479 trillion. If one considers short-term investments to be cash equivalents, then net cash is negative $1.251 trillion. Only if long-term investments are included does the number go positive."

At the time of that report, cash was approximately $4.554 trillion and debt was $4.503 trillion.

Simply put there is no net cash on the sidelines. Companies are raising cash, but they are also raising debt.

Apple and Microsoft are two companies with genuine cash on the books. I will do a "Cash Cow" update again.

Bernanke Fed Distortions

By the way, this action is one of the severe distortions of  actions by the Bernanke Fed. In pushing rates low, those on fixed income have to accept pathetic yields on treasuries and corporate bonds.

This has had a net positive effect on equities but it has also royally screwed those needing income to survive. For further discussion, please consider Hello Ben Bernanke, Meet "Stephanie"

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift

After a somewhat lengthy hiatus, Curve Watcher's Anonymous is taking a good long look at the US treasury yield curve.

Treasury Yield Curve


click on chart for sharper image

QE Ending in 2013?

There have been three consecutive headfakes higher in treasury yields only to see yields plunge to new lows on repeated QE announcements by Bernanke.

Is the fourth time a charm? Certainly Bernanke is not about to hike interest rates as Greenspan did. But what happens to the long end of the curve if Bernanke simply ends QE later this year?

The question stems from Minutes of the December FOMC Meeting released last week.

While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program's efficacy and costs at upcoming FOMC meetings.

In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.  

Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

Extreme Complacency in Face of Bernanke Shift

Steen Jakobsen, chief economist for Saxo Bank in Denmark reflects on the minutes of the latest FOMC meeting in his post on Tuesday Two Ways to Be Happy.

There were two ways to be happy: improve your reality, or lower your expectations ― Jodi Picoult, Nineteen Minutes.

We all know which method the market uses to be happy!

I have to admit I am still fighting to understand what I think was a dramatic change in FOMC Minutes, which it should be said, the Ivory Tower Wall Street banks are busy ignoring, but a few points:

It does reflect a change from the Fed. Is Bernanke trying to protect his legacy as Bruce Krasting cleverly suggests in his piece: Ben Bernanke is facing a legacy problem. The argument here is that Bernanke leaves in just over a year from now and wants to leave US Monetary policy closer to a "neutral stance" relative to the present "emergency levels". Greenspan did the same for Bernanke as he hiked rates from 1% to 6% over 22 months, trying to unwind the easing of monetary policy following the 2000 IT bust. Anyone inclined to ignore bureaucrats' need for securing their legacy only has to look at how Greenspan spent two to three years trying to defend his record while at the Fed after he left (with no success).

The risk-on vs. risk-off paradigm has changed.

Sure, the Fed is not going to reduce its balance sheet. Sure, the Fed can come back and do more, but.... the put is much weaker now on the market. Actually, as of now the Fed's balance sheet size is stalling, even getting smaller, and clearly from the minutes we gathered that some of the FOMC members are genuinely concerned about the size of the balance sheet. My take is that "everything being equal the put on the market is now trading at less than 50 delta forward vs. 75 delta before these minutes.

The markets are clearly reacting to this.

The move in the 30 Y US bond yield is quit dramatic(at least relative to recent years lack of upside risk). We saw 2.46% in July 2012 and are now trading at 3.08%. The move is even more puzzling considering that recently the US economy is going nowhere, if anything it's stalling.

I have commented earlier this week - Overconfidence is the new black - about the extreme complacency of the market. We entered 2013 with the notion that nothing could go wrong. The FOMC was accommodative, 2013 was going to be a transition year where investing was supposed to be on autopilot. But already in the second week of the year and, at least in momentum terms, the world's biggest monetary experiment is flagging. The market will deny it for probably a week or two more, but even in finance there is gravity.

Bernanke's Legacy Problem

Bruce Krasting notes Ben Bernanke Is Facing A Legacy Problem

The surprise of the week was not the goofy ending to the cliff. It was the minutes from the Fed.

The meeting in question took place on 12/12, just 23 days ago. Some very major announcements came as a result of that meeting. A new, and much more aggressive Fed policy was revealed.

The Fed said it would keep its foot on the monetary gas pedal until unemployment fell to 6.5%, and maybe even lower than that. The economic forecasts that the Fed released showed a consensus estimate for unemployment staying above the magic 6.5% until at least 2015. So that set a bar for any changes in monetary policy years into the future.

And then we get the minutes from the meeting where all these dramatic steps were taken. The minutes read completely different. What the hell happened?

Why would the Fed send one signal on December 12 and quite a different one on January 4? When it comes to the Fed, there is always a motive for its actions. The motives are not always clear.

I do believe this development is connected to the “legacy” issue. Bernanke’s term at the Fed will set many historical precedents. To a significant extent, history will judge Bernanke on what he did while chairman of the Fed. But the books will also look at what happened after he left.

I believe that Bernanke would very much like to leave his successor with a Fed that had policy choices. As of today there are no options left.  Just more useless QE. I doubt that Bernanke wants to exit with the Fed’s foot planted firmly on the gas pedal. The next guy does deserve a cleaner plate than now exists.

Is the Legacy factor influencing Bernanke? I think it has some sway in his thinking. Consider what Greenspan did before he left. After years of soft monetary policy he ratcheted up the Federal Funds rate 17 times in 22 months.

Clearly, Greenspan tried to get monetary policy back to neutral before he left, I don’t see any reason why Bernanke would think differently. Are we watching a repeat of history? At a minimum, his legacy, and where he wants the Fed to be when he leaves,  is part of Ben’s thinking today.

Reading the Fed’s tealeaves is a bit of a fool’s game. The chances of being right are about 50-50. But for the sake of discussion, assume that the Fed was telling the truth this past week. Monetary policy will change over the course of the year. It will go from 4th gear and full gas, to “neutral”.

Reflections on the Fed's Balance Sheet

Bruce notes that there are two schools of thought regarding the Fed's balance sheet.

1. The size of the Fed's balance sheet is what matters most when it comes to measuring economic stimulus
2. The direction of the Fed's balance sheet (the daily, weekly, monthly flows) is what matters most

Bruce opines that most Fed watchers believe that size is what matters. He sides with ZeroHedge that the flow is what counts. I agree as well, especially at policy turning points.

Neither Zerohedge, nor I, nor Bruce, think the Fed is going to reduce its balance sheet by selling assets. It would put too much upward pressure on interest rates. Steen Jakobsen is in that camp as well.

Yet, if we are correct that flow is what matters, then the Fed going from huge balance sheet additions to a neutral stance, ending QE would be a big thing. This holds true whether the Fed winds down slowly (the most likely scenario) or the Fed halts abruptly (which could put an even larger shock on the system).

Guessing Game

Of course, all of us may be in fantasy land. Perhaps Bernanke has no intention of halting QE in spite of what the minutes suggest. That was indeed my first thought when I read them.

However, if it's not a headfake, both the stock market and the bond market could be in for quite a rough ride given the extreme complacency and the "belief bubble" that the Fed can do no wrong.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

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0 Reader Questions on the 1 Trillion Coin Proposal: Where's the Money Come From? Will It Cause Inflation?

Several people asked me to comment on the $1 trillion coin proposal endorsed by New York Times columnist and Nobel Prize winner Paul Krugman.

I did so yesterday in a satirical post Krugman Supports the $1 Trillion Coin; Why Stop There? I Support the $1 Quadrillion Coin.

In response to the above article, I have received several emails wondering where the money comes from. For example reader Tom writes ...

Hello Mish,

Thank you for your hard work and honest voice in producing this blog, I follow it daily. There is something that I do not understand in the platinum coin proposal. Where does the treasury come up with the trillion to purchase the platinum? Is this money printed from thin air? If the treasury had a spare trillion to purchase platinum they would not need to give it to the fed, simply use the trillion to finance more worthless deficit spending, a blatantly bad idea given the very low return we are now experiencing on stimulus.

Thanks,
Tom

Fictitious Accounting Entry

Hello Tom.

The proposal is nothing but a fictitious accounting entry. There is no trillion dollars. Certainly the treasury would not buy a trillion dollars worth of platinum. Indeed, that would be impossible, at least at today's pricing.

Rather, the proposal was to take a coin (size is irrelevant), and stamp "one trillion dollars" on it.

Questions of legality have arisen as noted in my article.

It's important to note that Krugman (correctly) never proposed spending the coin. It would take an act of Congress to spend it.

Thus, the proposal was to value the coin at one trillion dollars simply as an accounting entity. In other words, the Treasury would take a coin worth essentially nothing, that could not be spent, and value it on the books as one trillion dollars.

Accounting Fraud

My personal opinion is that it would be fraud to place a one trillion dollar value on a coin that could not be spent (in this case, because the money was already spent. In higher denominations, the money would not be spent until Congress authorized such spending).

Regardless, actual future spending would be precisely what Congress authorized to be spent, no more no less.

No Inflationary Effect

There would be zero inflation as a result of minting such a coin. Indeed, it would not cause inflation if the Treasury minted a 1,000 quadrillion coin. This is an important point.

Debt Ceiling Nonsense

The entire exercise is to avoid another nonsensical discussion about whether or not Congress will bump up the debt ceiling. I say "nonsensical" because we all know that Congress will indeed cave in and bump up the debt ceiling.

On that score, Krugman actually has a point. However, (ignoring legalities and accounting fraud) there certainly is a huge need for discussion in Congress about the deficit and debt levels.

That is why I am against the coin idea even if it is legal (which I doubt).

However, in case I am legally wrong, I repeat what I said earlier (the treasury should mint a one quadrillion coin), simply to highlight the absurd nature of the idea.

With that, I repeat my proposal for this picture on the front of the coin.



The back of the coin should be equally obvious.
Paul Krugman Prays for America.



Mike "Mish" Shedlock
http://economic-trends.blogspot.com

Addendum

Here are a few thoughts from Pater Tenebrarum at Acting Man

I would point out though that whether it is inflationary depends on the precise mechanics of the operation. Congress could limit spending according to whatever it decides, so it need not be inflationary. But that depends on an unknowable future. As a rule, once government bureaucrats discover "innovative" financing methods, they try to make use of them to the hilt. The whole debate is actually a great illustration of the utter absurdity of our monetary system.

When I suggested minting a quadrillion dollar coin would not be inflationary, it was under my stated provision that Congress would still limit spending to amounts authorized. Of course, monetizing a trillion dollars every year is in itself an inflationary practice in isolation (with or without mind games involving platinum coins). The coin is irrelevant in that regard.

Pater catches the key point of both my articles in his concluding sentence "The whole debate is actually a great illustration of the utter absurdity of our monetary system." And that is precisely why I proposed Alfred E. Neuman on the coin.

0 Social Security Trends: Beneficiaries, Total Costs, Number of Workers, Ratio of Workers to Beneficiaries

Inquiring minds are digging into social security trends including the numbers of beneficiaries, average costs, total costs, number of workers, and the ratio of workers to beneficiaries.

First, let's take a look at the CNS News report Social Security Ran $47.8 Billion Deficit in Fiscal Year 2012.

The Social Security program ran a $47.8 billion deficit in fiscal 2012 as the program brought in $725.429 billion in cash and paid $773.247 for benefits and overhead expenses, according to official data published by Social Security Administration.

The Social Security Administration also released new data revealing that the number of workers collecting disability benefits hit a record 8,827,795 in December--up from 8,805,353 in November.

With that backdrop, let's look at the actual data to see the underlying trends.

Data Notes

• Social Security data from Social Security Online.
• Employment data from St. Lois Fed Total Nonfarm Employees.
• OASI is the retirement fund (What people normally think of as Social Security)
• DI is the Social Security Disability Fund

Social Security Beneficiaries December 2012

OASI Trust Fund
Retired Workers & Dependents	Retired Worker	36,719,288
	Spouse	2,280,332
	Child	612,087
	Subtotal	39,611,707
Survivors	Child	1,907,097
	Aged Widow(er)	3,937,958
	Young Widow(er)	153,628
	Disabled Widow(er)	255,472
	Parent	1,427
	Subtotal	6,255,582
	Total OASI	45,867,289
DI Trust Fund
	Disabled Worker	8,827,795
	Spouse	162,881
	Child	1,900,220
	Total DI	10,890,896
	Total OSASI + DI	56,758,158

Social Security Beneficiaries, Costs, Employment

Year	Beneficiaries	Average Monthly Benefit	Total Annual Cost	Employment	E/B Ratio
Dec-67	22,979	$73.92	$20,383,201,682	66,900	2.9114
Dec-68	23,886	$85.24	$24,432,839,002	69,245	2.8989
Dec-69	24,709	$86.47	$25,638,687,737	71,240	2.8832
Dec-70	25,701	$101.35	$31,257,463,769	70,790	2.7544
Dec-71	26,817	$113.22	$36,435,282,006	72,108	2.6888
Dec-72	28,066	$138.70	$46,712,482,840	75,270	2.6819
Dec-73	29,514	$143.99	$50,996,092,215	78,035	2.6440
Dec-74	30,576	$163.02	$59,813,483,661	77,657	2.5398
Dec-75	31,862	$179.29	$68,549,741,469	78,017	2.4486
Dec-76	32,835	$194.95	$76,815,361,682	80,448	2.4500
Dec-77	33,923	$211.16	$85,958,416,484	84,408	2.4882
Dec-78	34,453	$229.86	$95,032,473,435	88,674	2.5738
Dec-79	35,013	$258.37	$108,555,575,502	90,669	2.5896
Dec-80	35,526	$300.75	$128,213,644,374	90,936	2.5597
Dec-81	35,930	$340.84	$146,956,770,724	90,884	2.5295
Dec-82	35,778	$372.10	$159,755,010,234	88,756	2.4808
Dec-83	36,034	$393.15	$170,001,091,973	92,210	2.5590
Dec-84	36,439	$412.21	$180,244,135,062	96,087	2.6370
Dec-85	37,027	$429.35	$190,768,953,436	98,587	2.6626
Dec-86	37,683	$438.76	$198,407,802,022	100,484	2.6665
Dec-87	38,171	$461.35	$211,323,314,397	103,634	2.7150
Dec-88	38,613	$484.01	$224,268,374,172	106,871	2.7678
Dec-89	39,141	$511.89	$240,431,129,294	108,809	2.7799
Dec-90	39,825	$544.52	$260,224,095,454	109,120	2.7400
Dec-91	40,587	$568.55	$276,908,006,552	108,262	2.6674
Dec-92	41,504	$588.90	$293,296,976,201	109,416	2.6363
Dec-93	42,243	$607.48	$307,943,241,597	112,204	2.6561
Dec-94	42,882	$628.14	$323,229,663,108	116,055	2.7064
Dec-95	43,386	$648.77	$337,772,228,816	118,208	2.7246
Dec-96	43,736	$672.81	$353,113,695,411	121,002	2.7666
Dec-97	43,971	$692.82	$365,565,297,977	124,357	2.8282
Dec-98	44,246	$707.39	$375,585,941,872	127,359	2.8785
Dec-99	44,595	$730.53	$390,940,040,819	130,533	2.9270
Dec-00	45,415	$767.35	$418,187,686,581	132,481	2.9171
Dec-01	45,877	$795.69	$438,050,881,510	130,720	2.8493
Dec-02	46,444	$815.05	$454,253,081,458	130,175	2.8028
Dec-03	47,038	$840.62	$474,497,794,254	130,259	2.7692
Dec-04	47,688	$871.80	$498,889,778,321	132,316	2.7746
Dec-05	48,434	$915.71	$532,222,768,675	134,814	2.7834
Dec-06	49,123	$955.53	$563,260,007,133	136,882	2.7865
Dec-07	49,865	$987.03	$590,618,750,824	137,982	2.7671
Dec-08	50,898	$1,054.38	$643,995,009,294	134,379	2.6401
Dec-09	52,523	$1,064.41	$670,869,765,261	129,319	2.4621
Dec-10	54,032	$1,074.33	$696,579,633,240	130,346	2.4124
Dec-11	55,404	$1,122.89	$746,557,638,566	132,186	2.3858
Dec-12	56,758	$1,152.79	$785,163,217,034	134,021	2.3613

Notes for Above Table
Employment and beneficiary numbers are in thousands.
I computed the total annual cost as monthly benefit * 12 * number of beneficiaries. That method will tend to overstate annual costs slightly vs. totaling every month individually. Thus, the total cost may vary slightly from other published figures.

Average Monthly Social Security Benefit



Total Annual Cost of Social Security 1967-Present



Social Security Beneficiaries vs. Total Non-Farm Employment



Ratio of Workers to Social Security Beneficiaries



Social Security Benefits Analysis

• The ratio of workers to beneficiaries peaked in 1999 at 2.927 to 1.
• The ratio of workers to beneficiaries was 2.361 to 1 at the end of 2012.
• The ratio of workers to beneficiaries is falling fast and will continue to fall fast for a decade as the baby boomer population ages.
• The average payout and the number of payouts are both rising fast
• Total Social Security payouts (a multiplication of two rising numbers) are on an unsustainable exponential growth path.

The system is currently running a deficit. Trends say that deficit is going to worsen with each passing year unless benefits are cut and/or taxes are hiked.

0 Eurozone Unemployment Hits Record High 11.8%; Spain 26.6%; Greece 26%; Youth Unemployment top 56% in Greece and Spain

Inquiring minds are investigating miserable unemployment stats in Europe as reported this morning by Eurostast.

The euro area (EA17) seasonally-adjusted unemployment rate was 11.8% in November 2012, up from 11.7% in October. The EU27 unemployment rate was 10.7% in November 2012, stable compared with October. In both zones, rates have risen markedly compared with November 2011, when they were 10.6% and 10.0% respectively. These figures are published by Eurostat, the statistical office of the European Union.

Eurostat estimates that 26.061 million men and women in the EU27, of whom 18.820 million were in the euro area, were unemployed in November 2012. Compared with October 2012, the number of persons unemployed increased by 154 000 in the EU27 and by 113 000 in the euro area. Compared with November 2011, unemployment rose by 2.012 million in the EU27 and by 2.015 million in the euro area.
Compared with a year ago, the unemployment rate increased in eighteen Member States, fell in seven and remained stable in Denmark and Hungary.

The largest decreases were observed in Estonia (12.1% to 9.5% between October 2011 and October 2012), Latvia (15.7% to 14.1% between the third quarters of 2011 and 2012), and Lithuania (13.9% to 12.5%).

The highest increases were registered in Greece (18.9% to 26.0% between September 2011 and September 2012), Cyprus (9.5% to 14.0%), Spain (23.0% to 26.6%) and Portugal (14.1% to 16.3%).

In November 2012, the youth unemployment rate was 23.7% in the EU27 and 24.4% in the euro area, compared with 22.2% and 21.6% respectively in November 2011. In November 2012 the lowest rates were observed in Germany (8.1%), Austria (9.0%) and the Netherlands (9.7%), and the highest in Greece (57.6% in September 2012) and Spain (56.5%).

EU Unemployment by Country

Country	Unemployment Rate	Eurozone 17
EU 27	10.7
Eurozone 17	11.8	Y
Austria - AT	4.5	Y
Luxembourg - LU	5.1	Y
Germany - DE	5.4	Y
Netherlands - NL	5.6	Y
Romania - RO	6.7
Malta - MT	6.9	Y
Belgium - BE	7.4	Y
Czech Republic - CZ	7.4
United Kingdom - UK	7.8
Denmark - DK	7.9
Finland - FI	7.9	Y
Sweden - SE	8.1
Estonia - EE	9.5	Y
Slovenia - SI	9.6	Y
France - FR	10.5	Y
Poland - PL	10.6
Hungary - HU	10.9
Italy - IT	11.1	Y
Bulgaria - BG	12.4
Lithuania - LT	12.5
Cyprus - CY	14.0	Y
Latvia - LV	14.1
Slovokia - SK	14.5	Y
Ireland - IE	14.6	Y
Portugal - PT	16.3	Y
Greece - EL	26.0	Y
Spain - ES	26.6	Y

Things are bad in aggregate and getting worse every month. Bad does not even begin to describe the misery in Spain and Greece.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com