Mar 082016
 
 March 8, 2016  Posted by at 10:05 am Finance Tagged with: , , , , , , , ,  


NPC Communist Party Young Communist League, Washington, DC 1925

China Exports Crash 25.4%, Imports Down 13.8% (ZH)
Conflicting China Policy Objectives Put Reform at Risk (Moody’s)
Despite Slowdown, China’s Oil Imports Surge (WSJ)
China’s Velocity Of Money Is Now The Lowest In The Entire World (ZH)
Central Banks Are Fixing To Ambush The Casino (David Stockman)
Brussels Seeks Further Reform To Seal Greek Bailout (FT)
Greece Clears Bailout Hurdle With Debt Relief Pledge (AFP)
ECB Solutions Create More Problems (CNBC)
Ontario Plans To Trial Universal Basic Income (Ind.)
Canada Prepares To Fight Inequality (BBG)
Mistakes Were Made (Jim Kunstler)
Germany Once Again Finds Itself In An Age Of Dislocation (MW)
Merkel Ally Fuchs: Syria, Libya Key To Solving Refugee Crisis (CNBC)
Turkey Makes Last-Minute Demands Over Refugees (FT)
EU And Turkey Close In On Refugee Deal (BBC)
EU Defies International Law To Push Back Refugees To Turkey (Mason)
Europe Must Share Refugee Burden With Turkey, Says UNHCR Chief (Reuters)
EU Making ‘Big Mistake’ in Turkey Deal, Kurdish Leader Warns (BBG)
Crisis-Hit Greeks Put Own Woes Aside To Help Refugees (AFP)

Yeah, the New Year break has an impact, but even on an annual basis exports fell 13.1%.

China Exports Crash 25.4%, Imports Down 13.8% (ZH)

Worse than expected is an understatement. Things are not getting better in China as Exports crashed 25.4% YoY (the 3rd largest drop in history), almost double the 14.5% expectation and Imports tumbled 13.8%, the 16th month of YoY decline – the longest ever. Altogether this sent the trade surplus down to $32.6bn (missing expectations of $51bn) to 11-month lows.

 

 

So much for that whole "devalue yourself to export growth" idea…

 

As Bloomberg notes,

China’s exports in yuan terms fell 20.6% year on year in February, down from a 6.6% drop in January, and missing expectations of an 11.3% fall. Imports were down 8.0%, an improvement from January’s 14.4% drop. The trade surplus came in at 209.5 billion yuan ($32 billion), down from 406.2 billion yuan.

The Chinese New Year holiday, which fell at the start of February in 2016 and in the middle of February in 2015, distorts the data in unpredictable ways. Holiday effects mean the outsize drop in February exports overstates the weakness in China’s factory sector. Even so, looking at a year-to-date figure for the first two months of the year, the picture is only slightly less gloomy. In the year through February, exports are down 13.1%.

The policy response has already been announced. The National People’s Congress set a target for 13% growth in money supply in 2016, up from 12% in 2015, and a 3% of GDP fiscal deficit, up from 2.3%. In other words: more lending and more public spending to provide a boost to demand. In the short term, that shores up confidence in the growth outlook. Medium term, of course, there is a price to be paid.

Stocks are mounting a modest rebound on this terrible data (moar stimulus hopes) but after $1 trillion of new credit in 2 months, is there seriously anyone left who thinks moar will help?

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“The depreciation of the RMB can therefore only be avoided by stepping back from the commitment to a more open capital account..”

Conflicting China Policy Objectives Put Reform at Risk (Moody’s)

Moody’s Investors Service says that China’s (Aa3, negative) policy makers appear to have set themselves three main policy objectives: maintaining reasonably high rates of GDP growth, reforming and rebalancing the economy, and ensuring financial and economic — and thereby social — stability. The Government Work Report delivered to the National People’s Congress on 5 March made explicit reference to each of these policy objectives. “However, against the backdrop of China’s slower economic growth, capital outflows and rising corporate stress, it will be increasingly difficult for these policy objectives to be achieved in unison,” says Michael Taylor, a Moody’s Managing Director and Chief Credit Officer for Asia Pacific.

“With the government having now given a strong commitment to a growth target of between 6.5%-7.0%, it seems unavoidable that one of the other policy objectives will assume lesser priority. The most likely near-term casualty is reform momentum.” “We believe that achieving even the lower end of the growth target for 2016 is likely to require further substantial monetary and fiscal stimulus, as evidenced by the 50-basis-point cut to the required reserve ratio in February and the government’s announcement of a 3% fiscal deficit for this year”, adds Taylor. “This level of policy support is likely to frustrate the government’s ability to achieve at least one of its other objectives.” Moody’s analysis is contained in its just-released report titled “China Credit: Conflicts Between Policy Objectives Raise Risk That Momentum on Reform Will Slow”.

Moody’s report points out that it will be difficult even to implement two of the three objectives at any one time. If the authorities choose to prioritize reform while trying to maintain a growth target of in excess of 6.5%, the consequence will be to sacrifice some degree of financial stability, and accept a larger level of RMB depreciation, more widespread defaults, and perhaps even some failures in the banking system. Alternatively, a combination of growth and stability is also achievable, at least for some time, but such a strategy will leave unaddressed the deep imbalances in China’s economy, such as elevated system leverage and excess capacity. The risk is that the support necessary to achieve 6.5% growth instead postpones the restructuring of the SOE sector by creating artificially favorable demand and maintaining accommodative financing conditions for loss-making, as well as viable SOEs.

In addition, the implementation of the accommodative monetary policy needed to support growth would lead to further downward pressure on the RMB and would likely delay much-needed deleveraging. The depreciation of the RMB can therefore only be avoided by stepping back from the commitment to a more open capital account, thereby substantially slowing the pace at which this and related reforms, such as more market-based credit allocation, would be enacted.

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Where would imports numbers be without this?

Despite Slowdown, China’s Oil Imports Surge (WSJ)

China imported 31.80 million metric tons of crude oil in February, equivalent to 8.0 million barrels a day, preliminary data from the General Administration of Customs showed Tuesday. Imports were 24.5% higher than the 25.55 million tons of crude shipped in during the month a year earlier and was up about 19% from 26.69 million tons in January. BMI Research analyst Peter Lee said the rise was likely due to robust crude imports in the beginning of February by local refineries in preparation for expected higher demand during the Lunar New Year holiday. Despite its economic slowdown, China remains a strong importer of crude, driven by the rise of independent refineries. Government efforts to fill the strategic petroleum reserves are also pushing China to import more foreign crude as domestic production is likely to slide by 1.5% this year, according to research firm ICIS.

According to the Chinese government’s forecast, the country’s reliance on foreign crude will likely rise to 62% this year. However, many analysts have said that as China moves to a more consumption and services-oriented economy, China’s oil demand will likely continue on a downtrend. Investment firm CLSA estimates that China’s crude imports will rise about 6% this year, lower than the 8.8% growth in the previous year when China shipped in a total of 336 million tons. The firm also expects the country’s oil demand to reach 2.5% this year. “A low single-digit growth might be the new norm for China’s oil demand,” said Nelson Wang, a CLSA China energy analyst. Refined oil product imports totaled 2.64 million tons, while exports totaled 2.99 million tons, the data showed.

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Here comes deflation.

China’s Velocity Of Money Is Now The Lowest In The Entire World (ZH)

[..] here, courtesy of Macquarie’s Viktor Shvets, is the best encapsulation of the predicament the world finds itself in. From volume 52 of “What Caught My Eye”

Rising leverage levels (whilst positive initially) eventually turn to “poison”, as incremental benefit diminishes and in order to maintain growth rates, economies require an ever increasing infusion of credit and ever declining cost of capital.

Although not perfect there is a well-defined relationship between the overall level of debt and velocity of money. Each economy is different (both in term of structure and efficiency) and therefore the degree of tolerance to rising debt levels and associated volatility also differs; nevertheless, as a generalization, the higher debt levels and the faster pace of debt accumulation tends to coincide with lower (and declining) velocity of money.

Then, after showing the declining velocity of money in all developed markets as leverage exploded higher, Shvets focuses on China:

The massive rise in China’s financial leverage is in a class of its own. As China embarked on a highly capital intensive growth strategy, its debt levels accelerated, driving velocity of money down. As can be seen below, China’s estimated debt burden has increased from US$1.5 trillion in 2000 to US$5.8 trillion in 2007 and exploded to over US$28 trillion by 2014 (and should have reached US$30-31 trillion in 2015).

The punchline: China’s velocity of money is now the lowest in the entire world, a world in which China provided 40% of the entire credit impulse since 2008!

In the last seven years, China has accounted for around ~40% of entire global incremental debt creation. Such a rapid accumulation of debt in less than a decade, when combined with the capital-intensive nature of the economy and a less sophisticated financial sector, drove China’s velocity of money to one of the lowest levels globally (~0.5x, i.e. below that of Japan).

 

And while we agree with the BIS and all those others who suddenly had an epiphany and confirmed what we have been saying for years about China’s debt load, the question remains: just who will propel the global debt-creation growth dynamo if China is taken out of the picture, and if 25% of the world is covered in debt-demand destroying NIRP?

We hope to get some answers just as soon as the massive short squeeze acorss global markets, the biggest in history, is over.

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“Markets are therefore unhinged from any connection to fundamental economic and financial reality, meaning that they are capable of an extended period of spasmodic deadcat bounces that will have only one end result.”

Central Banks Are Fixing To Ambush The Casino (David Stockman)

The casino is incorrigible. After a monumental short squeeze that has lifted the averages right into the jaws of danger, Goldman Sachs has the temerity to print the following: “Our model suggests SPX calls are more attractive than at any time over the past 20 years”. There must have been a mullets’ breeding frenzy awhile back because it’s hard to fathom how Goldman has any real customers left. Then again, its current preposterous call is just indicative of the horrible threat heading menacingly toward what remains of main street’s 401k investments. To wit, the Fed and other central banks have thoroughly falsified financial market prices and destroyed all of the ordinary mechanisms of financial discipline. Foremost among these are short sellers and a meaningfully positive cost of carry trades.

Markets are therefore unhinged from any connection to fundamental economic and financial reality, meaning that they are capable of an extended period of spasmodic deadcat bounces that will have only one end result. Namely, the naïve and desperate among main street investors who still, unaccountably, frequent the casino will presently be taken out back and shot yet another time. The market technicians are pleased to call this “distribution”. Would that someone on Wall Street man-up and amend the phrase to read ”distribution…….of losses to the mullets” and be done with the charade. The S&P 500 is heading through 1300 from above long before it ever again penetrates from below its old May 2015 high of 2130. And now that 97% of Q4 results are in, there is a single number that proves the case.

Reported LTM profits as of year-end 2015 stood at just $86.46 per S&P 500 share. That particular number is a flat-out bull killer. At a plausible PE multiple of 15X, it does indeed imply 1300 on the S&P 500 index. It also represents an 18% decline from peak S&P 500 reported earnings of $106 per share back in September 2014. And more importantly, it means that the robo-machines and hedge fund gamblers have traded the market back up to 23.1X earnings. That’s off the charts…….except for when recession has already arrived unannounced by the hockey stick factories of Wall Street. But here’s the thing with respect to the scarlet 23.1X numerals now painted on the casino’s front entrance. It comes at a time when the so-called historical average PE ratios are way too high for present realities. That is, in a world sliding into a prolonged deflationary decline, capitalization rates should be falling into the sub-basement of history.

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The Troika’s back in Athens.

Brussels Seeks Further Reform To Seal Greek Bailout (FT)

Eurozone finance ministers have moved to break a deadlock between Greece’s warring creditors by sending bailout negotiators back to Athens to agree a new set of economic reforms. Despite continued disagreement over how long the list of reforms must be, Jeroen Dijsselbloem, the Dutch finance minister who chaired the eurogroup meeting of his 16 counterparts, insisted there was “enough common ground” between the EU and the IMF to restart the negotiations. He said mission chiefs from the bailout monitors could arrive as early as Tuesday. “More work will have to be done in Athens,” Mr Dijsselbloem said after the Monday evening eurogroup meeting in Brussels. “It’s not going to be easy, we’re very much aware of that.”

Officials acknowledged that the IMF and the EU had not reached an agreement on how thorough the reforms must be, essentially putting off a final fight over the future of Greece’s third, €86bn rescue for at least another month. The IMF has hinted it is willing to walk away from the bailout if it deems the reforms inadequate, a move that would plunge Greece back into economic uncertainty. Without the IMF, a German-led group of creditor countries have said they would be unable to secure parliamentary approval for their participation in the EU’s rescue, potentially scuppering the deal. “An interim solution without the IMF would be very difficult for a number of countries, including my own,” Alex Stubb, the Finnish finance minister, said.

Euclid Tsakalotos, the Greek finance minister, acknowledged the talks would restart “despite certain differences”, which he hoped could be overcome in the negotiations. “I’m sure sensible people when they get across the table will come to sensible conclusions,” Mr Tsakalotos said as he left the eurogroup meeting. Under the terms of the new bailout, Greece must pass measures designed to take government finances to a primary budget surplus of 3.5% of economic output by 2018. A country’s primary balance is its revenues minus expenses excluding debt payments.

The IMF and the EU are at loggerheads over both the stringency of the new reform measures and how many of them must be adopted to hit the 3.5% target. Officials said the differences would only be sorted out at a later date. The IMF believes the reform measures on the table are insufficient and has pushed for more concrete and deeper cuts. Athens has caved in to an ultimatum from its creditors and agreed to rush through long-resisted economic reforms in return for a third bailout. Further reading Mr Dijsselbloem appeared to side with the IMF’s tough line, saying “the package of measures needs to become even more solid, needs to go even deeper than what’s been put on the table so far” — though when pressed whether he backed the IMF’s view, he insisted, “I’m not in anyone’s camp.”

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The big words are back.

Greece Clears Bailout Hurdle With Debt Relief Pledge (AFP)

Greece cleared a crucial hurdle in its massive bailout programme on Monday as eurozone ministers promised to consider debt relief to Athens, which is already under pressure from the refugee crisis. Bailout monitors from the EU and IMF will return to Greece as soon as Tuesday in an effort to complete a long-delayed review of the programme that could unlock rescue cash, European Economic Affairs Commissioner Pierre Moscovici said. “I am very happy that mission chiefs are going to Athens as soon as tomorrow,” Moscovici said after a meeting of the eurozone’s 19 finance ministers in Brussels, taking place in parallel to an EU-Turkey summit on the refugee crisis. Greek Prime Minister Alexis Tsipras secured Greece’s third bailout, worth a staggering 86 billion euros ($95 billion), last July after six months of bruising negotiations that shook the EU and nearly saw Athens thrown out of the single currency.

Along with its debt crisis the Greek state is now overwhelmed by the arrival of around a million migrants in a year. As refugees trek across Europe seeking new lives in Germany and elsewhere, the fresh crisis has increased the pressure on Athens’ eurozone partners to soften their demands of Greek austerity. Eurogroup chief Jeroen Dijsselbloem, who last year was one of Greece’s harshest critics, said eurozone ministers would now address debt relief, meeting a key demand of the Greek government that has been resisted by its pro-austerity partners. The EU forecasts that Greece’s debt will soar to 185% of GDP in 2016 – a level generally understood to be unsustainable. “We have a longstanding promise that if the Greek government fulfils its commitments … we will do what is necessary to make debt service manageable,” said Dijsselbloem. “Today… we made explicit that the discussion is on our table,” the Dutch finance minister said.

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They have absolutely no idea where their policies will lead. That’s a very thin premise to throw trillions around on.

ECB Solutions Create More Problems (CNBC)

What a difference a few weeks make. Market sentiment seems to have improved and the fears of imminent recession now appear a touch hasty. But the question of where markets head next continues to depend on policymakers’ ability to deliver bold and decisive action. Step forward “Super” Mario Draghi, the President of the ECB, who is widely expected to tinker with the euro zone’s financial plumbing this week in the face of weaker-than-expected inflation and six weeks of volatility weighing on business sentiment. Once again, with the market already pricing aggressive action, there’s a risk of disappointment just as there was in December 2015. Analyst expectations include a 10-20 basis point cut in the deposit rate, taking it further in to negative territory, an increase of €10 -20 billion in monthly asset purchases, more longer-term cash available for borrowing and even a further extension in the maturity of the programme.

The problem for the ECB is that all the available options come with complications. The most immediate of those hazards applies to negative deposit rates and the impact on bank profitability and consumer behaviour, as the Bank for International Settlements highlighted this past weekend. The BIS warned that it was impossible to predict how borrowers or savers would react to the increasing possibility of negative rates for an extended period of time. A negative deposit rate means that ordinary banks have to actually pay the ECB to deposit money, rather than receiving money as they would in a normal environment. The hope is that, instead of paying up, the banks will decide to lend the money instead. If they don’t lend, they have the choice of passing on the costs to depositors or suffer what is an effect tax on their business. And that’s at a time when profits are tough to come by.

A further complication is that it’s not just the euro zone that has resorted to negative rates, Switzerland, Denmark, Sweden and most recently Japan are all applying this monetary policy tool. Mohamed el-Erian told CNBC last week that the ‘system is not equipped to deal with negative rates all across the world.’ So while broader sentiment in the market recovers, I think it’s worth asking why the Stoxx Europe banks Index is still down 15% this year. Is this a sign that investors are growing increasingly concerned that the ECB has reached its limits and policy may now be doing more harm than good? And more importantly how cautious are the ECB?

Executive Board Member Benoit Cœuré noted in a speech on 2 March that the ECB is well aware of the issue but pointed out that ‘many (banks) have overcome negative central bank rates and the ECB’s commitment to price stability has actually supported banking profitability. A green light for more action there, I think. No one has been more reticent about further stimulus than the Bundesbank President Jens Weidmann, who told me this month that the ECB was not a miracle-worker. And more is needed for euro zone policymakers. Yet even the German central banker drew a distinction between longer-term risks and support for the economy in the short term.

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Right on the US doorstep.

Ontario Plans To Trial Universal Basic Income (Ind.)

Ontario has announced it could soon be sending a monthly cheque to its residents as it plans to launch an experiment testing the basic income concept. While officials in the Canadian province are yet to release any specific details of the project – including how much will be given to residents who participate – the finance ministry has published a report confirming the government’s intention to roll out the experiment. The general concept of basic income involves a government handing out a flat-rate income to every single citizen within a country, either by replacing existing benefits or to top them up. Proponents of the idea say it would save on welfare administration costs, reduce the poverty traps of traditional welfare states, be fair to people who have jobs, and give people more autonomy in general.

In Britain, the think tank Royal Society for the encouragement of Arts, Manufactures and Commerce has proposed a system of universal income that would give a basic amount to fit, working-age people that it believes would still give a strong incentive to these people to work. It suggests providing an income of £3,692 for all qualifying citizens between 25 and 65, or £308 per month. “As Ontario’s economy grows, the government remains committed to leaving no one behind. Maintaining an effective social safety net is one part of the government’s broader efforts to reduce poverty and ensure inclusion in communities and the economy,” Ontario’s budget statement said.

It added: “The pilot project will test a growing view at home and abroad that basic income could build on the success of minimum wage policies and increases in child benefits by providing more consistent and predictable support in the context of today’s dynamic labour market. “The pilot would also test whether a basic income would provide a more efficient way of delivering income support, strengthen the attachment to the labour force, and achieve savings in other areas such as health care and housing supports. The government will work with communities, researchers and other stakeholders in 2016 to determine how best to implement a Basic Income pilot.”

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Interesting.

Canada Prepares To Fight Inequality (BBG)

[..] Canada is about to embark on an experiment whose outcome ought to matter deeply to U.S. Democrats and Republicans alike as they consider how to respond to Donald Trump’s angry coalition of the downwardly mobile. At issue is this: How far can a market-oriented country, if it were temporarily freed from short-term concerns about politics and budget deficits, push the fight against inequality – without sparking public alienation, a decline in work, a rash of tax avoidance, an exodus of talent or wealth, or some other unpleasant consequence? In other words, what are the practical limits of the inequality agenda? And how much can be done within those limits to satisfy, or at least mollify, the furies of economic insecurity?

Canada is perhaps the ideal setting for that experiment. Despite its image as a North American outpost of Scandinavian social values, the country has experienced a divergence in high and middle incomes similar to the U.S.’s, if not quite as severe. Unlike the U.S., Canada has already done the obvious things to remedy that: Its residents enjoy universal health care, reasonably generous social programs, paid family leave, a relatively high minimum wage, and college tuition that averages less than $5,000 a year. Yet that hasn’t been enough to reverse the trend (interrupted by the recession) toward ever-greater inequality. So the lingering question for progressives in both countries is this: What more is there to do? The short answer: quite a bit. In December, the Liberal government increased the tax rate on income above Canadian $200,000 ($150,800) and cut taxes on the middle class.

The Liberals have said their budget, to be introduced later this month, will introduce benefits to low- and middle-income families of C$6,400 a year ($4,825) for each child under 6, and slightly less for children ages 6 to 17. They also promise to reduce contribution limits for tax-free savings accounts and prevent single-income couples from splitting that income for tax purposes, reversing policies that disproportionately benefit the wealthy; increase monthly payments to low-income seniors (think of top-up payments to Social Security); fund the construction of more affordable housing; and make it easier for workers to form unions. In case that’s not enough, Prime Minster Justin Trudeau has asked Duclos to develop a national poverty-reduction strategy. Duclos has even mused publicly about introducing a guaranteed minimum income.

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“..if there is just a little more trouble in banking and financial markets before November 8, we can’t even be certain of holding the general election.”

Mistakes Were Made (Jim Kunstler)

[..] the US Department of Justice did nothing under six-plus years of Attorney General Eric Holder to prosecute criminal misconduct in banking. And then President Obama, who is ultimately responsible, did absolutely nothing to prompt that Attorney General into action or replace him with somebody who would act. Obama’s lame excuse back in the days when informed people were still wondering about this, was that the bankers had done nothing patently illegal enough to warrant investigation — a claim that was absurd on its face. Obama didn’t do any better with the regulating agencies that are supposed to make criminal referrals to the Department of Justice, especially the Securities and Exchange Commission (SEC) charged with keeping financial markets honest.

There was nothing that difficult about those criminal matters now fading in the nation’s memory: for instance, the bundled bonds (CDOs) of “non-performing” mortgages designed to pay off the issuers handsomely when they failed. A child of ten could have unpacked the Goldman Sachs Timberwolf bond caper. Eventually Goldman and others were slapped with mere fines that could be (and were) written off as the cost of doing business. What a difference it would have made if Lloyd Blankfein and a few hundred other bank executives were personally held accountable and sent to cool their heels in federal prison. As the politicians are fond of saying, make no mistake: this was Barack Obama’s failure to act. Likewise, regarding the Citizens United Supreme Court’s decision that equated arrant corporate bribery of public officials with “free speech;”

Mr. Obama (a constitutional lawyer by training) had a range of remedies at his disposal, foremostly working with the then-majority Democratic congressional leadership to legislate a new and clearer definition of so-far-alleged corporate “personhood,” its duties, obligations, and responsibilities to the public interest — and its limits! Not only did Mr. Obama fail to act then, but nobody in his own party even coughed into his-or-her sleeve when he so failed. And now, of course, nobody remembers any of that. The effects of all this fundamental dishonesty have thundered through our national life to the degree that American society is now divided into the swindlers and the swindled, loosing the monster of collective Id known as Trump on the public. This is what comes of attempting to divorce truth from reality, which has been the principal business of American life for several decades now. When truth and reality become de-linked, a society literally doesn’t know what it is doing.

With that goes the collective sense of purpose, replaced with bromides and platitudes such as Trump’s “make America great again,” and Hillary’s “In America, every family should feel like they belong.” Unbeknownst to the cable news hustlers, events are in the driver’s seat, not the personalities of the puppets and muppets in the spotlight. Come July, there may not be anything that could be called the Republican Party. And Hillary is the first leading contender for the highest office with a possible indictment looming over her. Yes, it’s really there percolating on the FBI’s front burner. Even if the machinery of justice trips over itself again on that, imagine how the questions behind it will color the final battle for the general election. We also fail to appreciate how, if there is just a little more trouble in banking and financial markets before November 8, we can’t even be certain of holding the general election.

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Back to the pre-Nazi era.

Germany Once Again Finds Itself In An Age Of Dislocation (MW)

“Germany is not an island. No country is in the same degree woven actively or passively into the world’s destiny. Germany’s geographical position, its lack of natural borders, condemn it to this role. The Germans, more than anyone, must think politically and economically well beyond their borders. Everything that happens afar sweeps through to the heart of Germany.” So wrote Oswald Spengler, a German writer-philosopher of the Weimar republic and the early-Nazi period, whose gloomy 1920s and 1930s prognostications made him a symbol of that age of dislocation. I first became aware of Spengler’s writings during the build-up to German unification. A mass exodus from East Germany into the Federal Republic from autumn 1989 onwards, a product of relaxation of Soviet control over eastern Europe and the realization that Marxism-Leninism was a bust, brought 300,000 people into the western part of the country.

Reunification followed in October 1990. During 1989, the population rose by 800,000 as a result of immigration from the eastern part of the country and the developing world. Germany was again at the epicenter of far-reaching geopolitical and migration upheavals. It’s not so different today. Germany took more than a million immigrants last year, with more on the way. Soviet uncertainties have been replaced by Russian ones. The European Union will either be dismantled or head for more centralization. Soul searching under Chancellor Angela Merkel has reached Spenglerian proportions. Here are four examples of how Spengler’s painful tales of wrenching interdependence are striking home.

• Real-life events have eclipsed Germany’s vision of leading the EU into a fresh wave of liberal democracy, efficient markets and economic prosperity. The euro has sown European division. Populist anti-European parties are on the march. If Britain leaves the EU — the vote in June is still astonishingly wide open — then no nation will be more negatively affected than Germany.

• Assembling enormous annual current account surpluses — a product of an undervalued currency and concentrating German resources on exports and savings — will not safeguard Germany’s future. The country has built up unrepayable claims on foreign countries that will be written off.

• Germany’s need for European solidarity over the migration crisis — which Merkel has made worse by overdoing the welcome — has exposed it to blackmail. Turkey, shifting daily to more authoritarianism, is asking for ever more money to keep refugees on Turkish soil. Greece, facing thousands hemmed in between the hemorrhaging south and an increasingly sealed-off north, is suffering a national emergency. So no one can press Athens into completing IMF-ordained reforms.

• To revive euro-area inflation, the European Central Bank will almost certainly cut negative interest rates further on March 10. The Bundesbank will acquiesce. This will have counterproductive consequences. The euro will be weak, exacerbating the German current account surplus; and European banks’ profitability (especially in peripheral countries) will come under fresh pressure, delaying recovery.

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But nothing is done about this.

Merkel Ally Fuchs: Syria, Libya Key To Solving Migrant Crisis (CNBC)

Germany is seeking a longer-term solution to the migrant crisis, a key ally of Chancellor Angela Merkel told CNBC, as European Union (EU) leaders came to a tentative deal with Turkey to stem the flow of people into Europe. Michael Fuchs, vice chairman of Merkel’s central-right party, the Christian Democratic Union, told CNBC’s “Squawk Box” that a solution to the crisis needed to be found at the source of the human influx. “We need to have a solution which is including Syria and also Libya because both countries are still filled with refugees which are trying to enter either via Turkey into Europe or directly from Libya into Italy,” Fuchs said. But he admitted that working with migrants’ home countries could be difficult. “One of the problems is, for instance in Libya, to whom to talk. There are three different groups fighting each other: who to talk to? They don’t have a foreign minister to talk to,” Fuchs said.

The comments came after the European Union and Turkey agreed on Monday night local time the outlines of a deal designed to stem the tide of migrants that has flowed into Europe over the past six months. Turkey agreed to take back migrants who crossed into Europe from its soil. In return, the EU may increase the €3 billion of aid already set for Turkey to deal with the migrant crisis; it could also ease visa requirements for Turks traveling to Europe, as well as potentially expedite Turkey’s talks to join the EU. Speaking in Hong Kong, where he was set to deliver a speech at the Asia Society, Fuchs underlined the need for a speedy resolution to the issue. “We have over a million refugees already in Germany, which is quite a lot,” he said. Those figures are likely related to the number of asylum seekers in the country. “We have to find solutions because it cannot be double or three times more, because then it’s coming to a difficult situation.”

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What a mess this is becoming.

Turkey Makes Last-Minute Demands Over Migrants (FT)

Turkey has made a host of last-minute funding and political demands that threaten to derail a controversial EU-Turkey deal to dramatically reduce migrant flows to Europe. Ahead of crunch summit between EU leaders and the Turkish prime minister on Monday, Ankara has called for a an increase to the €3bn in aid previously promised by Brussels, faster access to Schengen visas for Turkish citizens and accelerated progress in its EU membership bid. Although talks remain fluid, the wishlist represents the new price demanded by Ankara to help the EU handle the migrant crisis by facilitating the systematic return of non-Syrian migrants from Greek islands to Turkey. A deal of some kind is still expected at the end of the summit. But four diplomats involved in the talks said that Turkey’s revised demands would be extremely challenging and could blow apart a fragile EU consensus on the sweeteners offered to Ankara.

A deal with Turkey is crucial for reducing the flow of people entering Europe, according to EU officials. This has overridden concerns about the country s asylum system and human rights record. Turkish prime minister Ahmet Davutoglu said that the proposed deal demonstrated how indispensable the EU is for Turkey and Turkey for the EU. Speaking before the meeting, Mr Davutoglu added: “The whole future of Europe is on the table”. Last week Mr Davutoglu privately signalled to EU negotiators that Turkey would be willing to accept the systematic return of non-Syrian migrants to Turkey. In the final stages of the negotiation, however, Turkey made clear it would expect its EU agreement on migration to be improved. This includes moving forward a recommendation to grant visa privileges to Turkish citizens, which was expected in the autumn.

Turkey has yet to meet some of the most difficult conditions for visa access, including the recognition of Cyprus. Ankara also wants an increase in the EU’s proposed €3bn in funding, so that it covers municipal infrastructure costs as well as health, education and material support for Syrian refugees in Turkey. On top of these concessions, Turkey wants to speed up the already fast-tracked process of opening several new chapters in its EU membership bid. Cyprus in particular is also loath to make further concessions to Ankara in membership talks. One diplomat said the additional demands could make for a’ train wreck’. Another compared the haggling to a Turkish bazaar. According to draft conclusions for the meetings, EU leaders will declare that the western Balkans route used by more than 1m people to enter Europe has been “closed”, despite opposition from Berlin over such wording.

In Berlin’s view, the statement cannot say the Balkan route is closed when hundreds of people are still arriving via the Balkans in Germany every day. The dispute illustrates the split at the highest levels of the EU over how to cope with the migration crisis. While some such as European Council president Donald Tusk have advocated tough rhetoric to deter people from making the trip, other leaders such as German Chancellor Angela Merkel have called for a softer approach. Leaders will also discuss whether to push on with a plan to resettle refugees directly from Turkey into the EU. Turkey, which hosts 2.5m Syrian refugees, has long argued that such an agreement is vital if it is to cut down on the number of people heading to Greece. Ms Merkel, who has been the most vocal proponent of this plan, held late-night talks with the Turkish prime minister in Brussels on Sunday night. Despite pressure from Berlin, other member states have been unwilling to back such a scheme.

Read more …

ALL refugees will be forced back to Turkey. Imagine what scenes that will cause on the Greek islands.

EU And Turkey Close In On Refugee Deal (BBC)

The EU and Turkey say they have agreed the broad principles of a plan to ease the migration crisis at a summit in Brussels, but delayed a final decision. European Council President Donald Tusk said all irregular migrants arriving in Greece from Turkey would be returned. For each Syrian returned, Turkey wants the EU to accept a recognised Syrian refugee, and offer more funding and progress on EU integration. Talks on the plan will continue ahead of an EU meeting on 17-18 March. Europe is facing its biggest refugee crisis since World War Two. Most migrants come via Turkey, which is already sheltering more than 2.7 million refugees from the civil war in neighbouring Syria. Turkey tabled new proposals ahead of the EU summit on Monday, and there was uncertainty on whether any agreement would be possible.

However, European Council President Donald Tusk said leaders had made a “breakthrough”, and he was hopeful of concluding a deal next week. He said the progress sent “a very clear message that the days of irregular migration to Europe are over”. In a statement, EU leaders said they broadly supported a deal that included:
• the return of all new irregular migrants crossing from Turkey to the Greek islands with the costs covered by the EU
• the resettlement of one Syrian from Turkey to the EU for every Syrian readmitted by Turkey from Greece
• speeding up of plans to allow Turks visa-free travel in Europe, with a view to lifting visa requirements by June 2016
• speeding up the payment of €3bn promised in October, and a decision on additional funding to help Turkey deal with the crisis. Turkey reportedly asked for EU aid to be increased to €6bn.
• preparations for a decision on the opening of new chapters in talks on EU membership for Turkey

Speaking at a news conference after the summit, Turkish PM Ahmet Davutoglu said Turkey had made a “bold decision to accept all irregular illegal migrants… based on the assumption that for every one Syrian readmitted by Turkey from the Greek islands another Syrian will be resettled by Europe.” But he said it was important to see the refugee deal as a package, to include progress on Turkish integration within the EU. The BBC’s Chris Morris in Brussels says that, although this new initiative is bold, it could spark fierce argument and its implementation will not be easy. But, he says, the EU clearly needs Turkey’s co-operation if it is to begin coping with the migration crisis. German Chancellor Angela Merkel said the proposals could be a major step forward if realised, stressing that “irregular migration” needed to be turned into “regular migration”.

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Faustian deal.

EU Defies International Law To Push Back Refugees To Turkey (Mason)

It is waging war on an ethnic minority, its riot police just stormed the offices of a major newspaper, its secret service faces allegations of arming Isis, its military shot down a Russian bomber and yet Turkey wants to join the European Union. The country s swift descent into despotism poses yet another existential problem for the west. The sight of Europe’s leaders kowtowing to Turkey’s president, Recep Tayyip Erdogan, in the hope he would switch off the flood of refugees to Greece, was sickening. After the Turkish courts authorised police to seize the Zaman newspaper, tear-gassing its employees and sacking the editors, the new bosses immediately placed Erdogan’s smiling picture on the front page. He has a lot to smile about.

Erdogan’s mass support in Turkey is real. To the conservative heartlands, where Islam was suppressed for decades by one secular military regime after another, he initially seemed to have achieved an ideal stasis. The liberal, networked, progressive part of Turkey would leave the reactionary, religious, patriarchal part in peace, and vice versa. The Kurds would renounce guerilla warfare in favour of parliamentary opposition. Erdogan would lead the country towards EU accession, at a pace slow enough to allow the obvious failings in democracy to be ignored. But it has all gone wrong, and for the same fundamental reason that Assad’s regime in Syria collapsed: the unwillingness of educated youth to be ruled by simpletons running a “benign” police state.

The revolts that swept Turkey’s cities in June 2013 were triggered by the inability of Erdogan and his old-man’s form of Islam to tolerate the basic microfreedoms that the younger generation want: the right to drink alcohol on campus, the right to uncensored social media, the right to protest peacefully about the same things European kids protest about in the case of Gezi Park, the bulldozing of green space for a shopping mall. Since then, Erdogan has overcome all obstacles. The protest was suppressed by the simple method of firing US-made tear gas canisters into the crowd and laying waste to the urban areas of the Kurdish minority, who had joined the struggle.

Then Erdogan got himself made president. And having narrowly lost his parliamentary majority in June 2015, he regained it late last year after a campaign that left the offices of the pro-Kurdish HDP party burned out in several cities. Simultaneously, the Turkish military provoked an end to a three-year ceasefire with the Kurdish PKK, unleashing the army into the Kurdish towns of southern Turkey on a scale that has left some the mirror image of burned-out Syrian towns just across the border.

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The UN should speak out a lot louder and clearer. It’s UN laws that are being violated here.

Europe Must Share Refugee Burden With Turkey, Says UNHCR Chief (Reuters)

The United Nations refugee chief said on Monday he was “very concerned” about what solution European leaders were debating and called for countries to share the burden with Turkey by taking in hundreds of thousands of Syrian refugees. Filippo Grandi, UN High Commissioner for Refugees, told an event at the Geneva Graduate Institute: “In the joint action plan, the most important thing is to help Turkey bear the burden, responsibility by taking people … not in the thousands or tens of thousands but in the hundreds of thousands.” Turkey offered the European Union greater help on Monday to stem a flood of migrants into Europe but raised the stakes by demanding more money, accelerated membership talks and faster visa-free travel for its citizens in return.

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“The world has gone very silent on what’s happening in Turkey, and that’s saddening and also short-sighted. If the war in Turkey continues like this, you’re also going to have refugees from Turkey.”

EU Making ‘Big Mistake’ in Turkey Deal, Kurdish Leader Warns (BBG)

The EEU is making an historic mistake in its haste to conclude a refugee deal with Turkey, overlooking human rights violations that risk plunging the bloc’s largest membership candidate into civil war, said Selahattin Demirtas, leader of the nation’s most prominent pro-Kurdish party. The EU is turning a blind eye to an opposition crackdown in Turkey that’s polarizing society and complicating efforts to find a political solution to the nation’s Kurdish conflict, Demirtas said in an impromptu interview en route to Brussels. European leaders are expected to ink an agreement with Turkey on Monday that will offer faster EU membership negotiations and visa-free travel in exchange for stopping refugees from crossing the country to enter Europe. “The EU is trying so hard not to upset Erdogan, and that’s a big mistake,” Demirtas said.

“The world has gone very silent on what’s happening in Turkey, and that’s saddening and also short-sighted. If the war in Turkey continues like this, you’re also going to have refugees from Turkey.” Demirtas’s own experience show how fast things are changing. Less than a year ago, he was celebrating a momentous electoral result that marked him as a rising political star, dealing a blow to Erdogan’s attempts to concentrate more power in his office. But on Sunday night, sitting alone on the front row of a Turkish Airlines flight, Demirtas had a possible jail sentence on his mind. Erdogan has called on parliament to strip HDP lawmakers of their immunity to try them for their links to the Kurdish PKK, considered a terrorist group by Turkey, the U.S. and EU. PKK gunmen resumed their 30-year-old insurgency after the collapse of the political peace process last year.

Turkish Prime Minister Ahmet Davutoglu said on Sunday that parliament would take up the subject after budget talks. “There’s a very high risk it will happen,” said Demirtas, with a copy of “Remaking Society” by decentralization advocate Murray Bookchin perched on his armrest. “I don’t see this as a big risk for me personally. But for the country, it is.” Demirtas was speaking two days after Turkish government trustees took over one of Turkey’s primary opposition newspapers in a dramatic raid that sparked clashes between protesters and police. The seizure reflects a broader intolerance of dissent that has also undermined the HDP, who are now largely excluded from mainstream media coverage. “Of course this affects us,” Demirtas said. “We were a party on the rise, and now we can only try to protect our position.”

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“..A friend of mine says that we stopped being human as soon as we became citizens ourselves..”

Crisis-Hit Greeks Put Own Woes Aside To Help Refugees (AFP)

Their own wages and pensions have been slashed by the debt crisis, but thousands of Greeks are putting their economic woes aside to help desperate refugees trapped in the country by the Balkan border blockade. People old and young, from couples with babies to pensioners and teenagers, came to Athens’ Syntagma Square on Sunday loaded with bottles of water, medicine, pasta, nappies and clothes. Panayiotis, a 32-year-old accountant, was just one of those determined to help. “Greek people know what it is to be a refugee,” said Panayiotis, a volunteer with the Red Cross at the Sunday donation organized by a social solidarity network.

“My grandmother came from Turkey in the 1920s. She had to leave everything there and she arrived in Thessaloniki with nothing. A lot of people in Greece have grandparents who experienced this exodus. This is maybe why we are helping those people,” he said. With Greek state services overwhelmed by the arrival of around a million people in a year – most en route to countries in northern Europe – the support of volunteers and private donations has been invaluable in helping aid groups manage the crisis. Like Panayiotis, many donors say they are motivated by the suffering of family relatives who became refugees themselves in the 20th century when Turkey progressively expelled a sizeable Greek minority from Istanbul and Asia Minor.

Giorgos and his wife have came to Syntagma Square with bags of food and clothes after seeing television images of migrants stuck at Idomeni on the Greek side of the Greek border with Former Yugoslav Republic of Macedonia (FYROM) where over 13,000 people are camping in miserable conditions waiting to cross. FYROM is only allowing a few hundred people through every day, while thousands more continue to arrive from Turkey. “The only thing we want is to help those people. We saw them on TV in Idomeni. A friend of mine says that we stopped being human as soon as we became citizens ourselves,” said the 70-year-old pensioner.

Read more …

Jun 032015
 
 June 3, 2015  Posted by at 2:02 pm Finance Tagged with: , , , , , , ,  


Jack Delano Mike Evans, welder, Proviso Yard, Chicago & North Western RR 1940

We’ve been entertaining ourselves to no end the past couple days with a ‘vast array’ of articles that purport to provide us with ‘expert’ opinion on the question of whether we are witnessing a bubble or not. Got the views of Goldman’s David Kostin, Robert Shiller, Jeremy Grantham, Jeremy Siegel, Howard Marks.

But although these things can be quite amusing because while they’re at it, of course, the ‘experts’ say the darndest things (check Bloomberg ‘Intelligence’s Carl Riccadonna: “You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery.. Ultimately everyone’s benefiting.”), we can’t get rid of this one other nagging question: who needs an expert to tell them that today’s markets are riddled with bubbles, given that they are the size of obese gigantosauruses about to pump out quadruplets?

Moreover, when inviting the opinions of these ‘authorities’, you inevitably also invite denial and contradiction (re: Siegel). And before you know what hit you, it turns into something like the climate change ‘debate’: just because a handful of ‘experts’ deny what’s right in front of their faces as tens of thousands of scientists do not, doesn’t mean there’s a valid discussion there. It’s just noise with an agenda.

And though the global climate system is infinitely more complex than the very vast majority of people acknowledge, fact remains that a plethora of machine-driven and assisted human activities emit greenhouse gases, greenhouse gases trap heat and higher concentrations of greenhouse gases trap more heat. In very similar ways, central banks’ stimuli (love that word) play havoc, and blow bubbles, with and within the economic system. Ain’t no denying the obvious child.

But even more than the climate ‘debate’, the bubble expert articles made us think of a Jerry Seinfeld episode called The Opera, which ends with Jerry doing a stand-up shtick that goes like this:

I had some friends drag me to an opera recently, you know how they’ve got those little opera glasses, you know, do you really need binoculars, I mean how big do these people have to get before you can spot ’em?

These opera kids they’re going two-fifty, two-eighty, three-twenty-five, they’re wearing big white woolly vests, the women have like the breastplates, the bullet hats with the horn coming out.

If you can’t pick these people out, forget opera, think about optometry, maybe that’s more you’re thing.

As far as we can figure out, all you need to know today about bubbles is displayed right there in front of you if you’re able to simply imagine what asset prices would be like without the $40 trillion or so in global stimulus measures the central banks have gifted upon the banks and forced upon the rest of us.

Does anyone honestly think that prices for stocks and bonds and houses and commodities would be anywhere near where they are now without all that zombie money?

How can you even pretend that anything at all has a fair valuation these days? Central banks buy bonds up the wazoo, and there’s no way that does not drive up prices like they’re being chased by the caucasian Baltimore police force department.

Home prices have stabilized for one reason only: the beneficiaries of QE money have done one of two things: either buy up homes wholesale themselves, or sign some poor greater sucker into a loan to procure a leaking and peeling American dream at inflated ‘value’.

As for stocks, they’re supposed to reflect the state of the economy, and their record setting highs obviously do nothing of the kind, because economic performance is just as obviously many lightyears away from any record high.

In fact, the only thing that’s ‘positive’ about the economy is home and share prices. And that is because corporations engage in M&A and in buybacks the size of which people just 10 years ago would have not deemed possible, or even legal, and because that drives up share prices to levels where the many millions of greater fools get tempted to participate. Just watch China.

The flipside of this, as they will find out soon enough, is that QE and ZIRP and that entire alphabet soup completely destroy price discovery. And that means that nobody knows what anything is really worth, everyone’s just guessing, there is no correlation left to the work that has gone into producing anything, let alone to the practical value of what’s being produced.

These companies that buy their own shares can do so with credit borrowed at very low rates, so low their actual activities don’t even have to generate anywhere near an economically viable profit. They can simply borrow it.

Where and when then will these grossly bloated monstrosities burst? The clue would seem to be closely related to what Martin Armstrong had to say:

Velocity of Money Below Great Depression Levels

Ever since the repeal of Glass-Steagall by Bill Clinton in 1999, this “new” way of making money by transforming banking from Relationship to Transactional Banking has destroyed the economy in ways we are soon to discover. The VELOCITY of money has fallen to BELOW Great Depression levels. This is the destruction of Capitalism, and I fear the response against the banks on the next downturn will lead to authoritarianism.

Taking interest rates NEGATIVE will not reverse this trend – it will accelerate the trend. This is all part of Big Bang. We seriously need to understand the nature of the problem or we will lose all rights and freedom because of what the bankers have set in motion. Transactional Banking only benefits the banks and fails to create a foundation for economic growth. This is not about Fractional Banking, this is all about the destruction of Relationship Banking which creates small businesses and employment.

The collapse in the VELOCITY of money illustrates the collapse in liquidity in the markets, which will erupt in higher volatility we have not seen before. The VELOCITY of money declines as HOARDING rises. This is how empires, nations, and city-states decline and fall.

Armstrong uses the following graph to make his point, which is a series that depicts (not seasonally adjusted) GDP/St. Louis Adjusted Monetary Base.

I’ll add the MZM graph (Money Zero Maturity = all money in M2 less the time deposits, plus all money market funds). It’s not as dramatic, but more commonly used (do note that the timescale is different):

It’s obvious that what ails the US economy, and all western economies, is that people are not spending. That’s what brings velocity of money down. And that’s also what causes deflation, and by that we don’t mean falling prices only.

Ergo: when Armstrong states that “The VELOCITY of money declines as HOARDING rises”, he’s half right, but only half. I’ve explained before that this is also where Bernanke’s preposterous claims about an Asian savings glut a few years ago failed in dramatic fashion.

In that same sense, I wrote recently that the ‘savings rate’ in the US is calculated to include debt payments. If you pay off your mortgage or your payday loan, that is jotted down as you saving, even hoarding your money. Just one in a long range of mind-numbing accountancy tricks the US utilizes to hide the real state of its economy. Makes one wonder what the double seasonally adjusted savings rate might be.

This issue shirks uncomfortably close to the contribution of each dollar of added debt to a country’s GDP, which in the west by now must shirk just as uncomfortably close to zero. And once it is zero, the game’s up.

That puts into perspective Jon Hilsenrath’s quasi-funny letter yesterday in the Wall Street Journal, which Tyler Durden presented with: “..to our best knowledge, this is not the WSJ transforming into the Onion.”

Dear American Consumer,

This is The Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case. You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?

The most glaring problem with this letter is -though granted, there’s quite a few- that Americans are not actually saving. Of course some of them are, but that’s not what drives the savings rate. Americans are paying off debt. They have no choice. They’re maxed out. They don’t want to lose their homes, or not feed their kids. The only jobs created have been low-paid ones. While home prices have been QE’d into a suspended state of Wile E. style false stability.

This is how you gut a society. It’s 101. Central banks’ largesse has indulged the rich with more than they can spend, while the rest get less than they need to spend to survive. Home prices are so high they keep people from spending, says Bloomberg.

That’s where the rubber hits the road. That’s where the asset bubbles hit the real economy. And they haven’t even started to burst yet, for real. When they do, the brunt of that will be borne by the real economy as well.

What will bring down our western economies is that people simply no longer have money to spend. While consumer spending in the US is still close to 70% of GDP. That won’t be solved by handing money to banks, or by keeping asset prices from reverting to their market values. Quite the contrary.

Jun 022015
 
 June 2, 2015  Posted by at 9:49 am Finance Tagged with: , , , , , , , , , ,  


Lewis Wickes Hine Berrie pickers, Seaford, Delaware. ‘Seventeen children and five elders live here’ 1910

Velocity of Money Below Great Depression Levels (Martin Armstrong)
From Whence Cometh Our Wealth – Labor Or Printing Press? (David Stockman)
Fed’s QE Policy Helped Most Where Needed Least (MarketWatch)
The Winners and Losers of the Fed’s QE
“The Fed Has Been Horribly Wrong” Deutsche Bank Admits (Zero Hedge)
Easy Access to Money Keeps US Oil Pumping (WSJ)
Rate Hike Needed To Pop Bubbles: Robert Shiller (CNBC)
“By Almost Every Measure Stocks Are Overvalued” Warns Goldman (Zero Hedge)
China Stocks Nearly A Quarter Overvalued: Credit Suisse (CNBC)
Don’t Trust Asia’s Booming Stock Markets (Pesek)
Four Recent Bubble Warnings That You Need To Worry About (Jesse Colombo)
Robert Shiller: ‘There Is A Bubble Element To What We’re Seeing’
Goldman Sachs Asked Two Famous Economists If Stocks Are in a Bubble (Bloomberg)
Greece Said To Offer Pension Reform As Debt Talks Near Crunch (Reuters)
Greek Crisis: 2,400 Hours Of Brinkmanship (CNBC)
Audit: Dutch and EU Taxpayers Likely To Lose All Money Lent To Greece (NLTimes)
In Conversation With John Nash On Ideal Money (Yanis Varoufakis)
Russia Accuses EU of Stirring Political Tensions Over Blacklist (Bloomberg)
New York City Task Force to Investigate ‘Three-Quarter’ Homes (NY Times)
At Least 3,900 Medicare Millionaires Revealed in U.S. Data
HSBC Poised To Unveil Thousands More Job Cuts (Sky)
US Supreme Court Hands Defeat To Struggling Homeowners (MarketWatch)
Germany Dominance Over As Demographic Crunch Worsens (AEP)
Let God Be A ‘She’, Says Church Of England Women’s Group (Guardian)

“This is the destruction of Capitalism, and I fear the response against the banks on the next downturn will lead to authoritarianism.”

Velocity of Money Below Great Depression Levels (Martin Armstrong)

The New York banks have been my adversary, to say the least. Alan Cohen, the court receiver put in charge of running Princeton Economics, was simultaneously on the board of directors of Goldman Sachs. When the SEC said the contempt should end, Cohen lied to the court to keep the contempt going, without even receiving a complaint or charges since the original charges were dropped. The New York banks destroyed banking when Robert Rubin of Goldman Sachs managed to get the Clinton Administration to repeal Glass-Steagall. Even Mario Draghi, head of the ECB who is taking interest rates negative, was a vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002–2005). So, the tentacles of NY spread wide and far.

The corruption in New York controlling Congress, the Justice Department, and the courts, has allowed the NY bankers to rise to the top of the world from a power elite perspective. They even control much of the media and Hollywood. This power that has transformed banking has been emulated by other banks around the world, insofar as Transactional Banking has displaced Relationship Banking as the “new” way to make money. However, the banks outside the USA do not control their governments as fully as they do in the USA. Who does Hillary run to for money? The NY bankers. Yet, the battle over the banking industry’s reputation is emerging everywhere but New York. It intensified last Friday in Australia when two of Australia’s top regulators took a simultaneous shot at the “culture” at the heart of the nation’s largest financial institutions.

The banking industry suffers from Narcissistic Personality Disorder (NPD), which typically only affects 1% of the population, but they all seem to be working at the top of the banks. NPD is when someone has unrealistic fantasies of success, power, and intelligence. That seems to be a qualification to be on the board of the major New York banks. Ever since the repeal of Glass-Steagall by Bill Clinton in 1999, this “new” way of making money by transforming banking from Relationship to Transactional Banking has destroyed the economy in ways we are soon to discover. The VELOCITY of money has fallen to BELOW Great Depression levels. This is the destruction of Capitalism, and I fear the response against the banks on the next downturn will lead to authoritarianism.

Read more …

Stockman comments on the Shorpy picture I posted yesterday in the Debt Rattle.

From Whence Cometh Our Wealth – Labor Or Printing Press? (David Stockman)

It is hard to believe that in these allegedly enlightened times this question even needs to be asked. Are there really educated adults who believe that by dropping helicopter money conjured from thin air, the central bank can actually make society wealthier? Well, yes there are. They spread this lunacy from the most respectable MSM platforms. And, no, I’m not talking about professor Krugman and his New York Times column. At least, he pontificates from a Keynesian framework that has a respectable, if erroneous, intellectual heritage. What I am talking about here is the mindless bunkum issued by so-called financial journalists who swish around Wall Street and Washington exchanging knowing tidbits with policy-makers, deal-makers and each other.

Call it the bubble finance “narrative”, and recognize that its gets more uncoupled from economic facts, logic and plausibility with each passing day in the casino. The estimable folks at The Automatic Earth put a bright spotlight on this crucial matter this morning, even if not by design. Their trademark daily vintage photo was a 1911 picture of a family including all the kids picking berries in the field; they were making GDP the old fashioned way. In the usual manner the site’s “debt rattle” list of links to timely reads followed, and the first was a Bloomberg View opinion piece called“QE For The People: Monetary Policy For The Next Recession” by one Clive Crook. It was actually a case for literally dropping central bank money from the skies to enable policy-makers to better “support demand and keep their economies running”.

In thoughtfully supplying a photo of a helicopter in full flight to accompany Crook’s discourse, the Bloomberg graphics department crystalized the essential economic issue of our times. Namely, whether wealth is made by the Berry Pickers or the Money Printers.

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That’s what it’s designed for.

Fed’s QE Policy Helped Most Where Needed Least (MarketWatch)

The first round of the Federal Reserve’s controversial bond-buying program helped most in parts of the country that needed it least, new research released Monday showed. Conversely, metro areas hit hardest by the recession received the smallest amount of Fed stimulus. At issue was the Fed’s desire with its first round of asset purchases to boost mortgage activity. Mortgage originations, mostly refinancing existing loans, did boom after the Fed announced in November 2008 that it would purchase $500 billion of agency mortgage-backed securities and $100 billion of direct obligations of Fannie Mae and Freddie Mac.

But the research, conducted by a team of economists from the University of Chicago and the New York Fed to be presented at a Brookings Institution conference, found mortgage refinancings increased mainly in parts of the country with the fewest underwater homeowners. Loan-to-value ratios varied widely across regions, the study found. Refinancing activity increased most in places where there were few mortgage holders with a loan-to-value ratio above 0.8%, areas including Buffalo, N.Y., and Philadelphia. Most places that experienced large declines in home prices had loan-to-value ratios well above that level, including Las Vegas, Miami and Orlando. So the smallest refinancing response for “QE1” took place in the locations that were hit hardest by the recession.

Areas where borrowers refinanced the most in early 2009 were the same areas in which car purchases increased the most. A separate paper to be presented at the Brookings conference said the Fed’s quantitative-easing programs did not exacerbate income inequality. Josh Bivens, research and policy director of the Economic Policy Institute, said it’s not even clear whether the Fed’s programs were slightly regressive or progressive. While stock-price gains benefited the top 1%, home prices increases helped the bottom 90%, he said. But Bivens warned that the Fed would foster inequality if it rushes to tighten monetary policy before the labor market returns to full employment. “The recent debate about the proper future path of Fed tightening in the next couple of years … is one in which distributional concerns should rightly be front and center,” Bivens said.

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Unbelievable: Carl Riccadonna, chief U.S. economist at Bloomberg Intelligence: “You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery..” “Ultimately everyone’s benefiting.”

The Winners and Losers of the Fed’s QE

The jury’s still out on how history will treat the Federal Reserve’s unprecedented stimulus program. After the central bank pushed its main policy rate to zero in December 2008, it started buying hundreds of billions of government debt and mortgage-backed securities to keep longer-term interest rates low. That became known as quantitative easing. The real punch of the strategy wasn’t in the quantity of money the Fed was putting in the banking system. It was in the amount of bonds it was taking out of the market, which forced yields down. Total assets on the Fed’s balance sheet today stand at $4.5 trillion compared with $891 billion at the end of 2007.

Some argue the policy brought the U.S. economy closer to full employment and helped stimulate growth. Others say it exacerbated inequality by inflating the prices of financial assets. At the very least, we can say it created some winners and losers, using data from a batch of papers released this morning from the Brookings Institution. (Ben S. Bernanke and Donald Kohn, the former Fed chairman and vice chairman, are both Brookings fellows.)

Who Wins
• Middle-aged, middle-class households, according to a paper by Matthias Doepke, Veronika Selezneva and Martin Schneider. These folks are more likely to have mortgages, and as borrowers they’d benefit from lower interest rates as well as policies that boost inflation. For example, a woman takes out a fixed-rate mortgage to buy a home. As inflation rises over time, the value of the house increases while the cost of the debt does not.
• The equity class. Households that owned financial assets, especially stocks, made out very well thanks to QE. Markets tend to react positively to expansionary policy, and lower interest rates also send more people into the stock market in search of higher returns. The stock market more than doubled from when the Fed started its first round of quantitative easing back in 2008 through the end of asset purchases in October. “Generally, the higher the income level, the greater the exposure to the financial markets in general and equity markets in particular,” said Carl Riccadonna, chief U.S. economist at Bloomberg Intelligence. [..]

To be sure, the issue is nuanced. In the end, the record will probably be kind to quantitative easing, said Bloomberg’s Riccadonna. “You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery,” he said. “Ultimately everyone’s benefiting.”

Read more …

Depends what you think the intentions were.

“The Fed Has Been Horribly Wrong” Deutsche Bank Admits (Zero Hedge)

The reason why Zero Hedge has been steadfast over the past 6 years in its accusation that the Fed is making a mockery of, and destroying not only the very fabric of capital markets (something which Citigroup now openly admits almost every week) but the US economy itself (as Goldman most recently hinted last week when it lowered its long-term “potential GDP” growth of the US by 0.5% to 1.75%), is simple: all along we knew we have been right, and all the career economists, Wall Street weathermen-cum-strategists, and “straight to CNBC” book-talking pundits were wrong. Not to mention the Fed.

Indeed, the onus was not on us to prove how the Fed is wrong, but on the Fed – those smartest career academics in the room – to show it can grow the economy even as it has pushed global capital markets into a state of epic, bubble frenzy, with new all time highs a daily event across the globe, while the living standard of an ever increasing part of the world’s middle-class deteriorates with every passing year. We merely point out the truth that the propaganda media was too compromised, too ashamed or to clueless to comprehend. And now, 7 years after the start of the Fed’s grand – and doomed – experiment, the flood of other “serious people”, not finally admitting the “tinfoil, fringe blogs” were right all along, and the Fed was wrong, has finally been unleashed. Here is Deutsche Bank admitting that not only the Fed is lying to the American people:

Truth be told, we think the Fed is obliged to talk up the economy because if they were brutally honest, the economy what vestiges of optimism remain in the domestic sectors could quickly evaporate.

But has been “horribly wrong” all along:

At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood. … the idea that the economy is “ready” for a removal of accommodation and that there is any sense in it from the perspective of rising inflation expectations and a stronger real growth outlook is nonsense.

And the kicker: it is no longer some “tinfoil, fringe blog”, but the bank with over €50 trillion in derivatives on its balance sheet itself which dares to hint that in order to make a housing-led recovery possible, the Fed itself is willing to crash the housing market!

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Textbook: How QE distorts markets and ends up destroying them.

Easy Access to Money Keeps US Oil Pumping (WSJ)

Wall Street’s generous supply of funds to U.S. oil drillers helped create the American energy boom. Now that same access to easy money is keeping them going, despite oil prices that are languishing around $60 a barrel. The flow of money into oil has allowed U.S. companies to avoid liquidity problems and kept American crude production from falling sharply. Even though more than half of the rigs that were drilling new wells in September have been banished to storage yards, in mid-May nearly 9.6 million barrels of oil a day were pumped across the country, the highest level since 1970, according to the most recent federal data. Helped by a ready supply of money, the flow of oil from the U.S. could keep crude prices low for the remainder of 2015 and beyond.

It wasn’t supposed to happen this way. As crude prices began to plunge last year, many energy experts predicted a repeat of 1986 when U.S. oil companies lost their funding and the industry collapsed into a yearslong bust. Without money, companies had to slow or even stop drilling for the crude that helped create a global glut. Many were forced to sell out to rivals or go bankrupt. But the gloomy scenario of that downturn hasn’t played out on a large scale this time. That is because banks, private- equity firms and institutional investors have continued to pour money into the sector even as oil companies slashed billions of dollars in spending from their budgets and laid off more than 100,000 workers. “What makes this downturn different is there is a lot more capital available,” says Pearce Hammond at investment bank Simmons & Co.

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Bubbles pop anyway. They always do.

Rate Hike Needed To Pop Bubbles: Robert Shiller (CNBC)

The U.S. Federal Reserve should consider lifting interest rates sooner rather than later to tackle speculative bubbles in the housing and stock markets, Nobel Prize-winning economist Robert Shiller told CNBC on Monday. “I’m thinking they (Fed policy makers) ought to be considering that, because that is the mistake they made in the past,” the Yale University professor told CNBC Europe’s “Squawk Box” when asked whether he believed the Fed should raise interest rates soon or later on. “They didn’t deal with the housing bubble that led to the present crisis. There’s a suggestion in my mind that they should be raising rates now, (but) unfortunately the latest news looks a little weak on the demand side,” Shiller added.

Friday’s economic news painted a dim picture for the U.S. economy: gross domestic product declined at a 0.7% annual rate in the first quarter of the year compared with an initial estimate of 0.2% growth. The University of Michigan’s consumer sentiment for May, meanwhile, marked a fall and the May Chicago Purchasing Manager’s Index dropped unexpectedly. Against a weaker tone in economic data, markets have pushed back expectations for the first U.S. rate rise since 2006 from June to later this year. “If I was asked to testify before them (the Fed) I might reconsider, but there is a tendency for central banks to ignore speculative bubbles until it’s too late,” Shiller said, talking about the need for higher interest rates. “It may already be too late. Stock markets in the U.S. are quite high and prices in the real estate market are getting high.”

The Dow Jones hit a record high last month, lifted by a perception that disappointing economic news would encourage the Fed to keep interest rates low for longer than anticipated. Shiller said that some parts of the U.S. — such as San Francisco and California — were in “bubble territory,” with house prices growing rapidly. Shiller, who won the Nobel prize for economics two years ago for research that has improved the forecasting of long-term asset prices, said a recent boom around the world was driven by anxiety. “I call this this the ‘new normal’ boom – it’s a funny boom in asset prices because it’s driven not by the usual exuberance but by an anxiety,” said Shiller. “This is an anxiety driven world – the whole world is driven by anxiety. It is anxiety about the aftermath of the global financial crisis, it’s anxiety about inequality and about computers replacing jobs,” he added.

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Do you really need a hundred sets of numbers to figure that out?

“By Almost Every Measure Stocks Are Overvalued” Warns Goldman (Zero Hedge)

Over the weekend, we first reported that none other than Nobel prize winner Robert Shiller said that in his opinion, unlike 1929, this time everything – stocks, bonds and housing – was overvalued. Curiously, none other than Goldman’s chief equity strategist, David Kostin echoed this sentiment when in his latest weekly note to clients he said that “by almost any measure, US equity valuations look expensive. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 98th%ile of historical valuation since 1976. For the overall index, the aggregate forward P/E multiple equals 17.2x, a rise of 63% since September 2011, compared with the median expansion of 48% during 9 previous P/E expansion cycles.

Financial metrics such as EV/EBITDA, EV/Sales, and P/B also suggest that US stocks have stretched valuations. With tightening on the horizon, the P/E expansion phase of the current bull market is behind us.” Don’t tell that to the SNB, the BOJ or any of the other central banks once again buying Emini futures hands over fist with freshly printed money and a complete disregard to cost basis or downside and losses. Of course, for Goldman to say all of this, it means either the bank is already full to the gills with ES puts, or is just hoping to buy up the S&P to 3000 and above. Here is what else Kostin says on record valuation: US equity valuations are also historically extended when adjusted for the extremely low interest rate environment.

For example, during the past 40 years when the real interest rate (10-year Treasury less core CPI) was between 0% and 1%, the S&P 500 forward P/E multiple averaged 11.2x, well below the current level. Moreover, since 1921 (94 years) when real interest rates have been 0%-1%, the trailing P/E multiple has averaged 13.5x, which is 27% below the current trailing S&P 500 index multiple of 19x. Valuation looks even more striking in the context of current profit margins—the highest in history. Since 2011, margins for S&P 500 (ex-Financials and Utilities) have hovered around the current 9% level. Information Technology has been the driving force for the overall margin expansion.

Profits are highly sensitive to small changes in margins: every 50 basis point shift in S&P 500 margin translates into a roughly $5 per share swing in EPS. Given the current P/E multiple, a $5 shift in EPS would translate into a swing of nearly 90 points to the valuation of the S&P 500. The current P/E expansion cycle has lasted 43 months, the second longest since 1982, but will likely end when interest rates rise. After each of the three prior “first” Fed hikes, P/E multiples contracted by an average of 8%. In the meantime, we expect the 2% dividend yield to generate the entirety of the total return we forecast the S&P 500 index will deliver during the next 12 months. We expect the market will rise to 2150 around mid-year but fade after Fed liftoff in September and end the year at 2100.

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The opposite of sound.

China Stocks Nearly A Quarter Overvalued: Credit Suisse (CNBC)

Whether China shares are in a bubble depends on which data bit catches the fancy, but the market has outstripped its fundamentals and is 23% overbought, Credit Suisse said. “Margins, profitability and value creation continue declining as productivity growth lags real wage growth and product selling prices are eroded,” Credit Suisse said in a note Friday. “Moreover, equity market price momentum has decoupled away from earnings revisions which remain deeply embedded in negative territory.” Its models indicate the market is 23% overbought and has potential downside of 15% in U.S. dollar terms by year-end. The mainland’s shares have rallied sharply this year, despite a brief drop into correction territory last week.

The Shanghai Composite is up around 50% year-to-date, even after last week’s one-day 6.5% plunge. The Shenzhen Composite is up around 111% year-to-date. Credit Suisse attributes the rally to factors including the People’s Bank of China injecting liquidity through its easing measures, retail investors re-allocating assets to stocks and away from bank savings, wealth management products and property. Apart from some restrictions on margin trading, the securities regulator also appears to be letting the rally ride, the bank noted. But is it a bubble? “The evidence for is largely participation and technicals related,” the bank said. “The evidence against is principally valuation related.”

Supporting the bubble view, new share-trading account openings remain elevated and the markets’ average daily trading value has surged to records, it noted. In addition, technical indicators such as deviations from the 200-day moving average and the relative strength index are now comparable to the 2007 A-share bubble, it said. The Shanghai Composite hit its all-time high of 6124 in October of 2007, as the Global Financial Crisis was brewing. However, while the current relative valuation of the mainland-listed A-shares and Hong Kong-listed H-shares is elevated, it remains far below peaks hit in 2008, Credit Suisse noted. Other metrics, such as earnings yield-to-bond-yield, price-to-earnings and price-to-book, are actually significantly more favorable than their 2007 levels, it noted.

Some are more certain about which indicator will call a bubble. “Looking at the market cap to GDP (gross domestic product) ratio as a measure of risk in equity markets, it now seems to us that the recent sharp rise in the Chinese market is the first sign of a bubble without the support of fundamentals,” Societe Generale said in a note Monday. The ratio grew by 124% over the past 12 months, similar to the climb in 2006-2007, it noted. “The Chinese equity market should therefore be closely monitored this summer,” it said.

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“..everyone caught in the same crowded trades needs to get out fast.” And won’t.

Don’t Trust Asia’s Booming Stock Markets (Pesek)

Could a lack of liquidity soon cause Asia’s stock markets to crash? That question might seem fanciful at first glance. Central banks in Frankfurt, London, Tokyo and Washington, by keeping policy rates near or below zero, have been responsible for the arrival of unprecedented waves of cash on Asian financial markets. It’s no accident that Shanghai stocks are up 137% over the last 12 months even as the Chinese economy has slowed; that the Nikkei stock exchange is up 41% surge even as deflation returns to Japan; and that South Korea’s Kospi index is near record highs even as that country’s exports are slumping. But, as economist Nouriel Roubini recently pointed out, macro liquidity, of the sort created by central banks, can easily be accompanied by illiquidity on financial markets.

And when that’s the case, he writes, it creates a “time bomb” by intensifying traders’ tendency toward adopting a herd mentality. Consider last week’s sudden 6.50% drop on the Shanghai stock market. Those panicky hours resembled other “flash crash” moments of recent years: a 10% plunge in U.S. stocks in less than one hour in May 2010; the Fed “taper tantrum” in spring 2013; the Oct. 14 jump in U.S. yields; and last month’s mini meltdown in 10-year German bonds. The common thread between each episode was a sudden wave of fear among traders that, even with unprecedented liquidity injections from central banks, markets might still be too illiquid. And today’s fears about market illiquidity are, in fact, justified.

As Roubini pointed out, “many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found.” High-frequency traders and their algorithmic programs account for a growing share of transactions, as do open-ended funds that can exit markets quickly. Meanwhile, banks, which traditionally intervened to stabilize financial markets, are playing a reduced role in trading. These shifts are turbocharging investors’ natural tendency to herd mentality. For now, central banks are reducing stock market volatility by keeping bond yields low. But when surprises occur, Roubini argues, “the re-rating of stocks and especially bonds can be abrupt and dramatic – everyone caught in the same crowded trades needs to get out fast.”

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I don’t need a warning.

Four Recent Bubble Warnings That You Need To Worry About (Jesse Colombo)

I’ve been sounding the alarm in recent years about dangerous new bubbles that have been inflating since the Global Financial Crisis. As I wrote in a viral report last month, I believe that record low interest rates and central bank stimulus programs are the main fuel behind these bubbles and that they will lead to a crisis that is even worse than 2008. In the meantime, these bubbles are creating artificial economic strength and activity that is manifesting itself in the form of our economic recovery. While it often feels lonely and frustrating to warn about such a poorly understood truth, I’m not the only person who has made these observations. Here are four recent bubble warnings made by prominent economists and businesspeople:

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Source: VectorGrader.com

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Huh? “I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations.”

Robert Shiller: ‘There Is A Bubble Element To What We’re Seeing’

There isn’t a full-on stock market bubble breaking out, but it sort of looks like it. In an interview with Goldman Sachs’ Allison Nathan this weekend, Yale professor and Nobel Laureate Robert Shiller was asked if the stock market is currently in a bubble. Shiller wouldn’t go so far as to say we’re definitely in a bubble, but said there are some things about today’s current market that look an awful lot like one. Here’s Shiller: “I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element what we see. But I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations.”

On Saturday, Business Insider’s Henry Blodget argued that stock prices right now look awfully high and said he thinks returns going forward are going to be lousy. In that post, Blodget cites Shiller’s CAPE ratio, or cyclically adjusted price-to-earnings ratio, a measure of inflation-adjusted earnings over the last 10 years, which is currently at around its third-highest level ever. The only times Shiller’s CAPE ratio was higher was ahead of the 1929 and 2000 stock market crashes. The Shiller CAPE ratio is about equal where it was before the 2007 crash. In his comments to Goldman Sachs, however, Shiller again echoes something he’s said in the past, which is that the current stock market rally is driven in part by fear. And this behavior makes the current boom a bit different from a “classic bubble,” and is part of what keeps Shiller hedging when characterizing the current market environment.

Shiller again: “In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.” In 2000, Shiller published the first edition of his famous book “Irrational Exuberance” right at the top of the Nasdaq bubble. And so when Shiller talks about bubbles people listen. It seems then, to Shiller, that though we’re not in a classic bubble, the US market is at levels where we should be worried, at least a little bit, about how expensive stock are right now.

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Because Goldman didn’t know?

Goldman Sachs Asked Two Famous Economists If Stocks Are in a Bubble (Bloomberg)

When asked how worried he is about the prospects for the market over the next six months, Professor Shiller says that his concern has risen with the market and that there could very well be a correction in the next year, although the timing of such market events is inevitably difficult. He advised people to both save more and diversify their investments because their portfolios probably won’t do as well as they had hoped — even over the longer-term. Next Goldman talks to Wharton Professor Jeremy Siegel, who has continued to be on the bullish side with his buy and hold strategy.

Professor Siegel says he believes stocks are only slightly above their historical valuations today and the level is “completely justified” due to low interest rates. To those that claim the stock market is in a bubble, Professor Siegel says he is in complete disagreement. “In no way do current levels that are nowhere near those highs (of March 2000) qualify as a bubble,” he says. Professor Siegel adds that there isn’t much that would dissuade him from holding equities over the medium term and recommended investors allocate 50% of their portfolios to the U.S., 25% to non-U.S. developed markets and 25% to emerging markets.

Of course Shiller and Siegel are also well-known friends so there is at least one place where they are in agreement and that is the bond market. Both economists said it was fair to say bonds are overvalued and some concern is justified, although neither of them would commit to calling it a bubble. Shiller said that historically, the bond market doesn’t tend to crash like the stock market. Siegel steered away from calling it a bubble due to his expectation that both short- and long-term rates will remain low.

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Something tells me Moscovici hasn’t been paying attention. Or this serves to discredit Syriza. Either way, there’s nothing new on the table.

Greece Said To Offer Pension Reform As Debt Talks Near Crunch (Reuters)

Greece’s leftist government has put forward first proposals for pension reform as debt talks with international creditors reach a crunch point this week with Athens’ cash running out, the European Union’s economics chief said on Tuesday. The report came after the leaders of Germany, France, the EC, the IMF and the ECB agreed at an emergency meeting in Berlin on Monday night to work with “real intensity” to try to wrap up the long-running negotiations in the coming days. [..] EU Economy Commissioner Pierre Moscovici said in a radio interview the talks were making progress at last, citing what he said were new Greek proposals on pensions, a core issue for the creditors, who are demanding some cuts and a crackdown on early retirement to make the complex system financially sustainable.

“We are starting to work in depth on pensions. The Greek government has made some first proposals and the pros and cons are being considered,” Moscovici told France Inter radio. Greek officials played down talk of new pension proposals and EU officials close to the talks have said progress is very slow and they remain a long way from convergence. “Greece has been flexible for a long time on pension reform, willing to scrap incentives for early retirement and proceed with merging pension funds. This is what is still on the table,” a Greek government official said.

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2400 hours Greece could have spend improving its economy.

Greek Crisis: 2,400 Hours Of Brinkmanship (CNBC)

I frequently hear the point made that Tsipras’ support is dwindling. Support for his stance may have halved in recent polls, but we shouldn’t underestimate his popularity at home and the lack of appetite to accept further austerity. The opposition pro-Europe New Democracy party have not seen any gains in support even as the economy dwindles. Tsipras has got plenty of reasons to drag this out. European Commissioner for Economic and Monetary Affairs Pierre Moscovici reiterated to CNBC that there is no Plan B. Maybe the European Commission don’t need to consider one but investors, governments and central banks do. Last week, ECB vice President Victor Constancio warned CNBC of the turbulence that will ensue if a deal isn’t reached quickly.

Even if you believe a Greek default or exit can be contained and the euro zone will survive, isn’t the greater fear here what this will mean for sentiment, risk assets and markets? U.S. equities are trading around record highs after a lackluster earnings season and as data on Friday confirmed U.S. GDP contracted by 0.7% in the first quarter. Second-quarter data is already showing signs of recovery but it follows Fed Chair Janet Yellen saying she’s still looking to raise rates this year in any case. We can’t rely on bad news being good news for stimulus any more. We should also consider whether Janet Yellen’s more afraid of potential market turbulence created by the start of rate rises or that something else like a Grexit blows any U.S. recovery off course and she’s not taken the opportunity to raise rates while she had it.

It isn’t just about the U.S. China’s Shanghai market snapped a seven-day winning streak on Thursday last week falling 6.5%. The tech-heavy Shenzhen Composite, which had more than doubled this year alone, lost 5.5% – its third-biggest fall in five years. The Chinese Central Bank providing liquidity to offset the growth slowdown with one hand and trying to temper enthusiasm with the other. Japanese equities meanwhile are also trading at 15 year highs despite the concerns regarding the efficacy of Abenomics. Japan’s central bank governor Haruhiko Kuroda told CNBC last week he’s not concerned about brewing bubbles.

That’s just the equity markets. Never mind for the bonds markets. With all the liquidity sloshing around you’d be forgiven for questioning investors ability to gauge fair value any more. Even without the Greek woes it is enough to make any risk taker cautious. So while investors grapple with value, economic recovery and the calibration of extraordinary monetary policy the question is whether Greece could trigger a more significant reassessment of current pricing? Maybe, maybe not. But each day these negotiations drag on that risk becomes more likely and investors would surely be wise to expect decent volatility while we wait.

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Note: “Research shows that only 11% of the bailout money ended up in the Greek economy..” Ergo: taxpayers should blame the banks and EU politicians, not the Greeks.

Audit: Dutch and EU Taxpayers Likely To Lose All Money Lent To Greece (NLTimes)

Dutch taxpayers will probably not recover any of the money used for Greece’s financial rescue, said Kees Vendrik, chairman of the Court of Audit in the Netherlands. Dutch people should be realistic about repayment given the current situation, Vendrik told on a television program Radar Extra. “As it now stands, I have to be honest, it’s going to be very difficult,” Vendrik said. In 2010, the former Finance Minister Jan Kees de Jager expressed full confidence in Greece repaying the money with interst that the Netherlands lent. Greece received emergency assistance twice. The country received €110 billion in 2010 and €130 in 2012.

The Dutch contribution to the amount was €11.9 billion, according to Statistics Netherlands (CBS). Last year, Vendrik was chairman of the Dutch delegation that participated in an international program to support Greek investigators. In that role, he offered his Greeks colleagues assistance in audits there. Vendrik did not research the financial situation in Greece, but he understands the situation in which the country now finds itself, a spokesman for the organization said.

[From Algemeen Dagblad: Vendrik stated that in all likelihood the entire €240 billion in bailout money will not be paid back. Research shows that only 11% of the bailout money ended up in the Greek economy; the rest went to international banks who had loans outstanding in Greece]

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Behind the theory.

In Conversation With John Nash On Ideal Money (Yanis Varoufakis)

A conversation I was privileged to have with John Nash in June 2000 is posted below as a small tribute to a great man. (The conversation was motivated by a talk John Nash Jr gave in Athens in 2000 entitled IDEAL MONEY. The text of the conversation below was published in 2001 as a chapter in a volume, available only in Greek, entitled Game Theory: A volume dedicated to John Nash, edited by K. Kottaridi and G. Siourounis)

Yanis Varoufakis: Professor Nash, in your talk on Ideal Money, June 2000, at the Old Parliament House in Athens, you commented, in relation to the Eurozone, that membership of a club makes sense only if it is exclusive. (Greeks know this well enough since the earlier consensus among experts that Greece would not be allowed in, made the project of entry into the Eurozone particularly popular here.) Then you strengthened your claim by suggesting that if everyone joins an alliance, the alliance is absurd. But is it? Does a Grand Alliance not gain meaning if its establishment entails unanimous agreement by all members regarding its institutions? Is it not akin to a Grand Bargain over the precise mechanism for distributing gains? (Something like agreeing on the properties a cooperative solution should possess?) And if so, does a Grand Alliance not make sense as a framework for conflict resolution?

John Nash Jr: The words ‘club’ and ‘alliance’ do not have the same meaning. This is why in game theory we use a third word which also differs conceptually from the first two words: ‘coalition’ . It is of course true that it is possible to have a coalition between all the nations (or the states) of the world. The Universal Postal Union, with its Berne headquarters, is a good example. Mind you, it would be far fetched to refer to this union as a ‘club’ . I am not sure I can recall the precise phrase I used in my talk. Nevertheless, a truly Grand Coalition, that includes everyone , is an important and natural concept of game theory. It is the means by which an efficient (in the context of Pareto s definition) agreed resolution to disputes can be imagined following mutual concessions.

Yanis Varoufakis: Regarding your specific proposal (that is, a new Gold Standard based not on Gold but on a basket of suitably weighted material commodities), is your ‘ideal money’ meant as a proxy for transferable utility (such that the outcome of exchanges can become genuinely independent of the way payoffs are calibrated)?

John Nash Jr: The value of effective transferable utility is obvious. However, as far as contemporaneous transactions within the walls of a domestic economy are concerned, the transferability of values can be eased equally well by ideal and non-ideal money. But when it comes to inter-temporal, long-term transactions, e.g. mortgages, the difference between ideal money and typical European currencies would be somewhat intense, if not dramatic.

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Nothing new about the list. Political ploy.

Russia Accuses EU of Stirring Political Tensions Over Blacklist (Bloomberg)

Russia said it’s “deeply disappointed” by the EU’s response to being sent a blacklist of 89 people barred from entering the country. The list was sent “in confidence” to the EU’s permanent representative office in Moscow after “repeated requests” so that they could inform those banned after “several cases when we have been obliged to refuse entry,” Deputy Foreign Minister Alexei Meshkov told reporters in Moscow on Monday. Russia began compiling the blacklist more than a year ago and “a separate decision was taken in each case, with concrete reasons,” Meshkov said. “The list was handed over at the technical level” through consular officials and “we didn’t consider it some sort of political step,” he said.

The European External Action Service, the 28-nation EU’s diplomatic arm, said in a statement on Saturday that Russia had responded to demands for transparency by providing the “confidential ‘stop list’” of 89 people barred from the country. The EEAS called the list “totally arbitrary and unjustified.” When the EU crosses “all boundaries” by its actions, “how can one trust such partners?” Meshkov said. The ban is in response to EU measures targeting officials from Russia imposed over the conflict in Ukraine, Russian Foreign Ministry spokesperson Maria Zakharova said, accusing the bloc of seeking confrontation over the issue. Russia showed compromise by sharing the list and she was “shocked” at European efforts to make political capital out of it, she said on her Facebook account.

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That’s a moral low alright.

New York City Task Force to Investigate ‘Three-Quarter’ Homes (NY Times)

Mayor Bill de Blasio said on Sunday he had formed an emergency task force to investigate so-called three-quarter houses in New York City for potentially exploiting addicts and homeless people by taking kickbacks on Medicaid fees for drug treatment while forcing them to live in squalid, illegal conditions. Mr. de Blasio’s announcement came a day after The New York Times published an investigation examining the abuses of the operator of some of the most troubled three-quarter houses. The mayor also called on the state to increase the shelter allowance it gives single people receiving public assistance. The allowance, which has been $215 a month since 1988, has left many homeless people with no options beyond three-quarter housing.

“We will not accept the use of illegally subdivided and overcrowded apartments to house vulnerable people in need of critical services,” Mr. de Blasio said in a statement on Sunday. Thousands of people live in three-quarter homes, which fall somewhere between regulated halfway houses and permanent housing. Also called sober or transitional homes, three-quarter homes are an offshoot of the murky world of outpatient substance abuse treatment for the poor. The number of such homes has grown over the past decade, as the administration of the previous mayor, Michael R. Bloomberg, pushed to reduce homeless shelter rolls. No one has an exact number of three-quarter homes, which are considered illegal because they violate building codes on overcrowding.

And no government agency regulates them, even though the city Human Resources Administration pays landlords the monthly $215 shelter allowance and the state Office of Alcoholism and Substance Abuse Services pays millions of dollars in Medicaid money for the residents’ outpatient treatment. The Times story focused on one landlord, Yury Baumblit, a two-time felon accused by tenants and former employees of treating poor people as instruments for bilking the government. Tenants said that reputable hospitals and nonprofit organizations had referred them to Mr. Baumblit’s operations, as had city shelters.

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Transparency is a good thing.

At Least 3,900 Medicare Millionaires Revealed in U.S. Data

A small group of doctors accounted for a large chunk of Medicare payments once again, data released today by the U.S. government show. Medicare paid at least 3,900 individual health-care providers at least $1 million in 2013, according to a Bloomberg analysis of data from the Centers for Medicare & Medicaid Services. Overall, the agency said it released data on $90 billion in payments to 950,000 individual providers and organizations. On average, doctors were reimbursed about $74,000, though five received more than $10 million. The U.S. has been increasing transparency for Medicare, which accounts for the largest portion of federal spending after defense and Social Security.

CMS also released information Monday about $62 billion in Medicare payments to hospitals and outpatient facilities in 2013, reflecting more than 7 million discharges. Monday’s data exclude the privately run program known as Medicare Advantage, which accounted for about 30% of beneficiaries last year, and the drug prescription benefits of Medicare Part D. Payments in the drug program were released for the first time earlier this year. Some payments were sent to organizations rather than individuals. There are about 897,000 active physicians in the U.S., according to the Kaiser Family Foundation.

The two highest-paid doctors in 2013 are now under legal scrutiny. Cardiologist Asad Qamar, who was No. 1, has since been accused by the Justice Department of billing for unnecessary tests and cardiovascular procedures. He received about $15.9 million in payments in 2013. In a video released in January, Qamar called the government’s claims baseless. “I assure you that these accusations are a fiction,” he said.

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They will be free to seek honorable employment.

HSBC Poised To Unveil Thousands More Job Cuts (Sky)

HSBC will next week set out plans to cut thousands more jobs across its global workforce as it tries to reassure shareholders that its focus on costs remains undiminished after a series of reputational crises. Sky News understands that Stuart Gulliver, HSBC’s chief executive, will set out a revised target for headcount reductions that will be implemented by the end of 2017 at an investor day next week. The precise job cuts number that will be outlined by Mr Gulliver on June 9 was unclear on Monday, although insiders said that it was likely to be between 10,000 and 20,000. One source said the numbers were still being worked on and had yet to be finalised.

Europe’s biggest lender employed 258,000 people at the end of last year, but it has already abandoned a target set two years ago to reduce its employee base to between 240,000 and 250,000 by 2016 because of the fast-changing nature of bank regulation. It is understood that the headcount reductions figure announced next week will exclude the potential impact of the sale of HSBC’s operations in Brazil and Turkey, where the bank does not disclose how many people work for it. Sky News revealed in April that HSBC had hired Goldman Sachs to find a buyer for the Brazilian business, which is expected to be worth several billion dollars.

The new jobs figure will also not take account of a possible eventual separation of HSBC’s UK arm, which Mr Gulliver said last month was conceivable because of a requirement for big UK lenders to create separate ring-fenced entities by 2019. Shareholders will be anxious for an update next week on the methodology for reviewing the location of its headquarters, which will conclude by the end of the year. Hong Kong, where HSBC was domiciled until its takeover of the Midland Bank in the early 1980s, is seen by analysts as the likeliest destination if it does decide to relocate.

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“The true economic impact of the Supreme Court’s decision may not be seen until the next economic downturn..”

US Supreme Court Hands Defeat To Struggling Homeowners (MarketWatch)

Underwater homeowners who file for Chapter 7 bankruptcy protection are still on the hook for secondary loans tied to their properties, the Supreme Court said Monday. In a nine-to-zero decision, the court said in Bank of America, N.A. v. Caulkett that borrowers whose homes are completely underwater — debtors owe more on a mortgage than the home is worth — cannot void or “strip off” a junior lien when they file for Chapter 7 bankruptcy. A junior lien, such as a home-equity loan, is taken after a first mortgage, and uses a home as collateral. In the case, two borrowers each had two mortgages on their homes, with Bank of America holding the junior liens. Both borrowers were underwater and filed for Chapter 7 bankruptcy two years ago. The borrowers wanted to “strip off” the junior mortgages, shedding those debts.

On Monday the Supreme Court cited a decision from a prior case, Dewsnup v. Timm, finding that lenders still have a secured claim, “regardless of whether the value of that property would be sufficient to cover the claim.” The decision “is a clear victory for mortgage lenders” said Isaac Boltansky at Compass Point Research & Trading. “It clarifies the path to recoveries for second lien holders in bankruptcy,” “This decision will undoubtedly make the bankruptcy process more difficult for impacted borrowers.” [..] Given the current economy — home prices are rising and the labor market is strengthening — the court’s decision “is likely to be muted in the near-term,” Boltansky said. But that doesn’t mean that there won’t be consequences, he added. “The true economic impact of the Supreme Court’s decision may not be seen until the next economic downturn,” Boltansky said.

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Getting old fast. “The German government expects the population to shrink from 81m to 67m by 2060..”

Germany Dominance Over As Demographic Crunch Worsens (AEP)

Germany’s birth rate has collapsed to the lowest level in the world and its workforce will start plunging at a faster rate than Japan’s by the early 2020s, seriously threatening the long-term viability of Europe’s leading economy. A study by the World Economy Institute in Hamburg (HWWI) found that the average number of births per 1,000 population dropped to 8.2 over the five years from 2008 to 2013, further compounding a demographic crisis already in the pipeline. Even Japan did slightly better at 8.4. “No other industrial country is deteriorating at this speed despite the strong influx of young migrant workers. Germany cannot continue to be a dynamic business hub in the long-run without a strong jobs market,” warned the institute.

The crunch is aggravated by the double effect of a powerful post-war baby boom followed by a countervailing baby bust – the so-called “Pillenknick”. The picture in Portugal (nine) and Italy (9.2) is almost as bad. The German government expects the population to shrink from 81m to 67m by 2060 as depressed pockets of the former East Germany go into “decline spirals” where shops, doctors’ practices, and public transport start to shut down, causing yet more people to leave in a vicious circle. A number of small towns in Saxony, Brandenburg and Pomerania have begun to contemplate plans for gradual “run-off” and ultimate closure, a once unthinkable prospect. Chancellor Angela Merkel warned in a speech in Davos earlier this year that Germany will lose a net 6m workers over the next 15 years, shrinking gradually over the rest of this decade before going into free-fall.

The IMF expects the decline in the 2020s to be more concentrated – and harder to handle – than the gentler paces of decline seen in Japan so far. Britain and France are in far better shape, with an average of 12.5 births per 1,000 in from 2008-2013. The IMF expects both countries to overtake Germany in total GDP by the middle of century and possibly even by 2040, implying a radical shift in the European balance of power. Germany’s leaders are themselves acutely conscious that their current hegemonic position in Europe is largely a mirage, certain to fade as more powerful historical currents come to the fore.

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I’m all for it. A great idea. Male dominance leads to mayhem.

Let God Be A ‘She’, Says Church Of England Women’s Group (Guardian)

A group within the Church of England is calling for God to be referred to as female following the selection of the first female bishops. The group wants the church to recognise the equal status of women by overhauling official liturgy, which is made up almost exclusively of male language and imagery to describe God. Rev Jody Stowell, a member of Women and the Church (Watch), the pressure group that led the campaign for female bishops, said: “Orthodox theology says all human beings are made in the image of God, that God does not have a gender. He encompasses gender – he is both male and female and beyond male and female. So when we only speak of God in the male form, that’s actually giving us a deficient understanding of who God is.”

Stowell said discussions over terminology arose out of a Westminster faith debate on whether the consecration of female bishops would make a difference in the Church of England. The matter has been discussed within the transformation steering group, a body that meets in Lambeth Palace to “explore the lived experience of women in ordained ministry”. The group has issued a public call to bishops to encourage more “expansive language and imagery about God”. The Rev Emma Percy, chaplain of Trinity College Oxford and a member of Watch, said the effect of using both male and female language would be to get rid of “the notion that God is some kind of old man in the sky”. She said many people in the church had been having this debate for a long time. “It’s just the church moves slowly.

[The debate] caught the imagination now because we’ve got women bishops so in a sense the church has accepted that women are equally valued in God’s sight and can represent God at all levels. We want to encourage people to be freer, and we want to get the Liturgical Commission to understand that people are actually quite open to this and there is room for richer language to be used.” In her role at the university, Percy said she had noticed people had become more open to modern terminology. “In the last two or three years we’ve seen a real resurgence and interest in feminism, and younger people are much more interested in how gender categories shouldn’t be about stereotypes. We need to have a language about God that shows God can be expressed in lots of diverse terms,” she said.

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Sep 052014
 
 September 5, 2014  Posted by at 2:32 pm Finance Tagged with: , , , , ,  


Arthur Rothstein ‘Fruit tramps’ living in tents, Yakima, Washington July 1936

Looking around us today, it would – or at least could – seem obvious that we live in a new world. Which we don’t recognize – as being new – because we don’t want that world. We instead want more of what we used to know, with icing and a cherry on top. We want to go back, not forward, though we don’t phrase or see it that way. The underlying issue is that the ‘forward’ we do want is not available, and we have no problem fooling ourselves into believing we can still achieve it.

We want a world controlled by America, with Europe as a sort of hunchbacked sibling obediently limping in its footsteps. That is familiar, and that feels safe. Like it was in days gone by, went things seemed to go well for us. We want what we had back then, we just want more of it. We want growing economies, and better lives for our kids than we had, just like our parents did. When there’s a crisis, we want it solved, so we can return to what we had, and add to it.

Because we so obviously and one-dimensionally want this and only this, it’s very easy for those who try, to make us do whatever it is they like, as long as they hold forth the promise of delivering our ideal world of more of the same and then some. There’s no-one who promises a world of less, or a world that is genuinely new, not just in name, who stands a chance of being taken serious, much less of being voted into office.

There’s not an economist who doesn’t promise a return to growth, or to prosperity, if only some model (s)he believes in is followed. More stimulus, less stimulus, the ideas and theories and models seem to run the gamut, but actually they’re all the same. They’re goal-seeked. Economics as a whole, as a field, is. There are no theories that seek not to return us to growth. As if eternal growth is a natural law or a god given right.

We are already paying a huge price for having these contorted and convoluted images presented and sold to us as real, and for us to buy into them. In Japan, Shinzo Abe is busy unleashing an economic Fukushima upon his people, just so their country can return to growth. In China, the amounts of credit with which markets are flooded just so the illusion of growth can be maintained are stupendous.

Europe can’t wait for its crisis to be finally over, so more of the same, plus a bunch of added gadgets, is there for everyone to grab onto. In the US, the media-induced consensus is that the return to growth has already been realized. Hail the centra; bankers. More of the same, in various stages of ‘development’, can be seen in many other countries across the globe. All geared towards additional growth, towards hopes and dreams.

But everywhere, save perhaps in a few very poor places, the illusion of growth can only be bought with debt. And debt, how ironic, is the opposite of growth once there is too much of it. So they just have us believe there’s no such thing as too much.

A report from two St. Louis Fed economists this week blames low inflation levels in the US on ‘consumers’ hoarding money. With 40+ million Americans on food stamps, they could think of nothing else than a local version of Ben Bernanke’s insane notion of ‘excessive savings’ in China holding back the world economy.

Without even considering the option that people simply don’t have money to hoard. That they instead are buried in debt. That the money pumped into the system only reaches the top part of it, and gets stuck there. If people don’t spend, it must be because they have tons of cash sitting in their mattresses, not that they don’t have it. A sadder picture of the state of economics could not be painted. What even more sad is that these are the kind of yokels who determine economic policy.

We don’t stand a chance. At first, I liked to see them address velocity of money in their inflation ideas, but then found they had no idea what it was or meant. US velocity of – base- money is at a record low. People are not spending. The same goes for Japan and Europe. But that’s not because people are wallowing in endless piles of cash. It’s because they’re at the end of the line.

A somewhat related piece has PIMCO bond manager Bill Gross explain how it all works according to the book he talks:

Two variables figure in the monetary straitjacket Gross describes: credit creation and credit velocity. The former must constantly expand at a high enough rate to pay interest on previously issued liabilities so as not to trigger the need for the sale of existing assets. If the current rate on outstanding debt in the U.S. is 4.5%, the Fed should target credit expansion of at least 4.5% per year.

Nevertheless, credit expansion has averaged just 2% for the past 5 years and only 3.5% in the past year. U.S. underachievement in credit creation is to blame for today’s economic stagnation, where the economy struggles to reach 2% real GDP growth.

A second variable of monetary policy is the velocity of money. Gross says no central banker knows how fast money should be changing hands in the economy and must therefore only dial the level up or down cautiously in order to avert a credit collapse.

But as a general rule, he writes, “the projected return on financial assets (relative to their risk) must be sufficiently higher than the return on today’s or forward curve levels of cash (overnight repo), otherwise holders of assets sell longer-term maturities and hold dollar bills in a mattress — lowering velocity and creating a recession/debt delevering.”

Now you know: The US doesn’t create enough additional debt. That’s why the economy is doing so poorly. Where is other times the economy was founded and built on production, on people working and producing things, it’s now debt that makes it tick.

And since people don’t have money, contrary to what the St. Louis Fed guys claim, they will need to borrow, says Gross. But they don’t. Not even at historically low rates. And if people don’t have money, and don’t borrow, they don’t spend, and you’re not going to get either growth or inflation.

By the way, why inflation at certain levels has achieved such a mantra-like status is beyond me, certainly in the way it’s supposed to be manipulated by central bankers. I always thought a central bank’s main task was to make sure just enough ‘money’ was in circulation in an economy to let it function. Not to set a goal for inflation levels. Which undoubtedly is why they predictably always fail to achieve whatever goal it is they set.

Of course, as per Bill Gross just now, central bankers must tamper in a similar way with the velocity of money (consumer spending) and ‘dial the level up or down cautiously’. As if Bernanke can make Americans spend more, or less, as and when he sees fit. How crazy do ideas get? Is that mere wishful thinking, is it goal seeking, or is it an elementary lack of intelligence?

It’ll take us forever and a day to pay down our debts and achieve some, any, kind of growth again. But that should not be the end of the world, it’s merely a transition to a new world, which has already dawned (just not on us).

We’re in a new world, one without – economic -growth, but we see it through old eyes, and it’s ruled through old politics. If we don’t recognize the dangers of that discrepancy in time, we’re going to enter an era – we may already have – of many more botched western interventions like the ones in Ukraine and Iraq. Where our leaders, who always were power hungry to begin with, turn out to be blood thirsty as well, when it comes to re-establishing the power structures of old, which belong in times gone by, and which will never come back.

The task of – central – governments, central bankers, and certainly alliances like NATO, should be to make sure as few people get hurt in this transition as possible. They should be the keepers of the peace, and the protectors of the weak as well as the natural environment in their part of the world. So far, they’re 180º off in every single respect.

As long as we insist on seeing the world through our old eyes, focused on growth and on more of whatever we feel we need even more of, we will continue to pick the leaders who promise us that. That may have been sort of fine 50 years ago, but in today’s world it can only lead to destruction, bloodshed, poverty and misery.

We’ve seen our world change, and we’ve failed to keep to up with the changes. We don’t want to be content with less, no matter how much we already have. What we possess has become our self-image, and the one we portray upon the world. But be careful: it we don’t change that, fast, it’ll lead us to places we don’t want to go.

Draghi Sees Almost $1 Trillion Stimulus as QE Fight Waits (Bloomberg)

Mario Draghi signaled at least €700 billion ($906 billion) of fresh aid for his moribund economy and left a fight with Germany over sovereign-bond purchases for another day. Pledging to “significantly steer” the European Central Bank’s balance sheet back toward the €2.7 trillion of early 2012 from 2 trillion euros now, the ECB president yesterday announced a final round of interest-rate cuts and a plan to buy privately owned securities. His mission: to revive inflation in the 18-nation euro area. Fully-fledged quantitative easing as deployed in the U.S. and Japan wasn’t enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more. The latest round of measures pushed the euro below $1.30 for the first time since July 2013 and sent European bond yields negative. The steps “probably reflect that President Draghi does not have unanimity, or a large enough majority for quantitative easing,” said Andrew Bosomworth, portfolio manager at PIMCO. and a former ECB economist.

“The ECB is ready to do more if more is needed.” The ECB’s fresh monetary easing may help encourage companies and households to spend rather than save. It could also attract greater participation in a targeted lending program for banks that was unveiled in June and starts this month. Banks can borrow from the ECB for as much as four years at a small premium to the benchmark rate. The rate cuts mark the bottom line for conventional monetary policy. Declaring that the ECB can now reduce them no more, Draghi committed to buying so-called asset-backed securities and covered bonds in the hope that will funnel cash into an economy which stalled in the second quarter and where lending has been shrinking for more than two years.

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Don’t worry, someone’ll issue more.

Bond Drought Seen Challenging Draghi’s ABS Stimulus Plan (Bloomberg)

To appreciate the challenge Mario Draghi faces reviving Europe’s ailing economy by buying asset-backed securities, listen to Frank Erik Meijer. As head of ABS at Aegon Asset Management, which oversees €240 billion ($311 billion), Meijer says it takes him about three months to buy 1 billion euros of securities. “The number that’s circulating the market is €500 billion, but where is he going to get it from?” said Meijer, who is based in The Hague. “Existing bonds are unavailable so he might have to ask banks to create new ones.” The European Central Bank president’s plans are being greeted with skepticism by investors who have seen the €1.2 trillion market contract more than 40% since 2010 as regulators cracked down on the debt blamed for deepening the financial crisis. The securities are also typically bought by pension funds, insurers and banks who hold them until maturity.

Draghi said yesterday the ECB will buy a broad portfolio of “simple and transparent securities” that will include ABS and covered bonds as he seeks to free up bank balance sheets and stimulate lending. While declining to disclose the size of the program, he said it would have a “sizable” impact and details would be revealed after policy makers meet in October. “The news is clearly positive but the ECB will have to be careful not to alienate the existing investor base in ABS,” said Patrick Janssen, a fund manager at London-based M&G Investments, which oversees €21 billion of ABS. “There is a risk of us being crowded out.” The ECB is aware of the possibility of pushing investors from the market as it buys bonds. In a March paper, the bank’s researchers found that the U.S. Federal Reserve’s so-called quantitative easing program forced investors out of those sectors where the central bank had intervened.

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Crazy. And damaging. Ireland and other broke nations should not borrow for free, and then do just that at breakneck speed. It’ll break their necks.

Draghi’s Bond Rally Means Bailed-Out Ireland Can Borrow for Free (Bloomberg)

Four years ago, Ireland had to be bailed out by its European Union partners. Today investors are paying to lend it money. Ireland joined nations from Germany to Austria and Finland as its two-year note yield dropped below zero for the first time. Irish 10-year bond rates also dropped to record lows along with Italy’s after European Central Bank policy makers yesterday cut their key interest rate and signaled at least €700 billion ($906 billion) of aid to support the flagging euro-zone economy. A report today confirmed the region’s economic recovery ground to a halt in the second quarter. Negative yields reflect “ECB policy but also reflect a mounting belief in the lack of positive prospect for the European economy,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s investment banking unit in London. “This is good news for the periphery.”

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Draghi Reaches The Dead-End Of Keynesian Central Banking (Stockman)

Europe is not growing much because most of its economies have been crushed under a mountain of debt, taxes, welfarism and statist dirigisme. Yet somehow the foolish pettifogger running the ECB thinks that driving the cost of money to the “lower bound” (i.e. zero) will help overcome these insuperable—and government made—barriers to prosperity. Yet in today’s financialized economies, zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end. You see, Mario, no Frenchman worried about his job is going to buy a new car on credit just because his loan cost drops by a trivial $2 per month, nor will a rounding error improvement in business loan rates cause Italian companies parched for customers to stock up on more inventory or machines.

In fact, at the zero bound the only place that today’s microscopic rate cut is meaningful is on the London hedge fund’s spread on German bunds yielding 97 bps—-which are now presumably fundable on repo at 10 bps less.Needless to say, when your only tool is a hammer, everything looks like a nail. And when you are a Keynesian with a hammer, it is presumed that nothing much was hammered before yesterday. That is to say, the whole mindless drive by the ECB toward the zero bound, which Draghi pointedly claimed to have achieved this morning, presumes that balance sheets—–the accumulated record of past actions—don’t matter. Instead, its all about the credit “flow” today and tomorrow. Accordingly, lower interest rates—no matter how trivial the change—are ritualistically presumed to stimulate more borrowing in the real economy, and therefore more spending, income and virtuous circle of Keynesian growth.

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It lost a lot more just in falling share prices today.

BP Found Grossly Negligent In Gulf Spill, Costs To Top $50 Billion (Bloomberg)

BP acted with gross negligence in setting off the biggest offshore oil spill in U.S. history, a federal judge ruled, handing down a long-awaited decision that may force the energy company to pay billions of dollars more for the 2010 Gulf of Mexico disaster. U.S. District Judge Carl Barbier held a trial without a jury over who was at fault for the catastrophe, which killed 11 people and spewed oil for almost three months into waters that touch the shores of five states. “BP has long maintained that it was merely negligent,” said David Uhlmann, former head of the Justice Department’s environmental crimes division. He said Barbier “soundly rejected” BP’s arguments that others were equally responsible, holding “that its employees took risks that led to the largest environmental disaster in U.S. history.” The case also included Transocean and Halliburton , though the judge didn’t find them as responsible for the spill as BP. Barbier wrote in his decision today in New Orleans federal court that BP was “reckless,” while Transocean and Halliburton were negligent.

He apportioned fault at 67% for BP, 30% for Transocean and 3% for Halliburton. U.K.-based BP, which may face fines of as much as $18 billion, closed down 5.9% to 455 pence in London trading. “The court’s findings will ensure that the company is held fully accountable for its recklessness,” U.S. Attorney General Eric Holder said. “This decision will serve as a strong deterrent to anyone tempted to sacrifice safety and the environment in the pursuit of profit.” The ruling marks a turning point in the legal morass surrounding the causes and impact of the disaster. Four years of debate and legal testimony have centered on who was at fault and how much blame each company should carry. BP is “subject to enhanced penalties under the Clean Water Act” because the discharge of oil was the result of its gross negligence and willful misconduct, Barbier held. BP said it “strongly disagrees” with the decision and will challenge it before the U.S. Court of Appeals in New Orleans.

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Yup.

BP Ruling ‘Wakeup Call’ as Risks Mount in Oil Search (Bloomberg)

A U.S. judge’s watershed ruling means the final cost to BP Plc for the 2010 Gulf oil spill may eclipse $50 billion, wiping out years of profits and highlighting the risks of drilling as the industry pushes into more dangerous areas such as deeper waters and ice-bound Arctic fields. Yesterday’s court decision that BP acted with gross negligence in the Gulf of Mexico disaster may hamstring the company financially as the industry’s search for resources becomes more expensive and dangerous. Companies including Exxon Mobil and Shell are also facing increasing pressure to show investors they can still grow as production declines. As producers scour the globe for oil and natural gas, the ruling shows they’ll be held accountable for mistakes that may be inevitable given the complexity of the work, said Edward Overton, professor emeritus at Louisiana State University’s department of environmental sciences in Baton Rouge.

While the judge has yet to rule on how much oil was spilled, a key factor in determining additional fines, millions of barrels of crude from the well harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands. If $50 billion isn’t “a wakeup call to do it right, to slow down, to make sure all your i’s are dotted and t’s are crossed in terms of safety — not just for BP but also for the industry — I don’t know what is,” he said. The companies have little choice in the chase for big, new discoveries as access to resources continues to be limited. Exxon, BP, Shell, Chevron Corp. and Total SA earned more than $1 trillion in total profit during the past decade, almost all of which has been spent in the search for new pools of oil and natural gas.

Since 2004, the five companies have tripled capital spending and their combined output has fallen by 1.4 million barrels a day, according to data compiled by Bloomberg. Problems have arisen as companies drill deeper and in more perilous conditions. Shell last week submitted a plan for drilling in Alaska’s Arctic, after a vessel ran aground in 2012. The ultra-deep Davy Jones well in the Gulf, among the most expensive ever drilled, has yet to produce what operator Freeport-McMoRan Copper & Gold Inc. has said may be trillions of cubic feet of gas. The complexity of deep drilling or navigating Arctic waters means that further accidents may be inevitable, said Ed Hirs, an energy economist at the University of Houston. “People may say this will never happen again, but it probably will, although it will happen in a different way,” said Hirs, who also founded his own production company. “It happened again in space travel, which is similar in complexity and scale.”

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Not going to happen.

‘Bold Action’ Needed On Europe Unemployment (CNBC)

European employment targets are “unrealistic” and “bold action” is needed to boost job creation, according to a report published by the Ambrosetti Forum ahead of the open of its international economics conference. About 5.6 million jobs have been lost across the 28 countries that belong to the European Union (EU) since the global financial crisis of 2008, Ambrosetti’s economists say. “The economic crisis produced growing unemployment levels in the EU, which now requires bold action from policymakers to boost labor demand as well as to implement labor market structural reforms,” the economists wrote in their “Labor market scenario in Europe” report. Europe’s high unemployment, low price rises and stagnant growth is likely to be a hot topic at this year’s Ambrosetti Forum—the annual get-together of heads of states, top business people and academics at Lake Como in Italy.

The Organization of Economic Co-operation and Development warned this week that unemployment in its member countries will remain well-above pre-crisis levels until 2016 at the earliest. Unemployment averaged 10.3% across the EU in July—the same as in June. Nearly one-quarter (24.5%) of Spaniards were unemployed during the month, along with 12.6% of Italians and 11.5% of Irish citizens. With statistics like these in mind, the Ambrosetti report’s authors cast doubt on the likelihood of the EU meeting its target of creating 20 million new jobs by 2020. “This seems a particularly unrealistic target for Spain, Italy and France: they need to create 4.4 million, 2.5 million and 2 million new jobs respectively,” they wrote.

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Break it will.

Fears Resurface Over Europe Breakup (CNBC)

On Thursday morning, the European Central Bank surprised markets with a raft of stimulative measures including cuts in interest rates and the commencement of asset purchases. The news sent the euro currency much lower, but currency expert Boris Schlossberg of BK Asset Management identifies another reason why the euro could call even further: fresh concerns over a European Union breakup. ECB president Mario Draghi, in announcing the measures, mentioned that the vote was not unanimous. The strongest economy in the eurozone, Germany, is widely expected to have dissented. “It’s a very, very tenuous union in many ways, and we see the conflict come to the forefront anytime we have these issues,” Schlossberg said Thursday on CNBC’s “Futures Now.”

At this point, German unease over ECB stimulus “could become a very, very serious problem,” he said. “We’ll be watching the conflict very carefully in the fall and into the winter to see just how serious the Germans are in their opposition to this move.” Ironically, Schlossberg notes that it was the very reticence of the Germans that forced the ECB into action. The central bank is “the only institution within the eurozone that is able to act in concert. There is is simply no other way for Europeans to stimulate growth, because they have all these disparate governments with different points of view.” But while Schlossberg expects the euro/dollar to fall all the way to 1.2850, he does note that it is “extremely oversold,” and could bounce in the near-term.

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European Businesses Call For No More Sanctions (RT)

The Association of European Businesses has urged the governments of the European Union and Russia to protect foreign investors from any “further retaliatory measures.” The Moscow-based lobby group represents the interests of more than 600 European businesses in Russia, and has written a letter to all 28 heads of state and governments of the EU, as well to the Russian and Ukrainian leadership stressing that among its members “are global companies with businesses in sectors which would be directly affected by these measures.” The group has requested a meeting with European Commission President Jose Manuel Barroso in Kiev next week. “The introduction of such measures could lead to a serious decline in production and jobs, affecting not only manufacturers, but also suppliers and retailers working in these sectors,” the letter, published Thursday, reads. The lobby group says it’s politically neutral, but is interested in keeping business between the two functional.

“All this would harm not only the business of the companies concerned, but also fiscal revenues through the loss of tax and duty payments,” the letter said. Sanctions are putting a brake on business activity in Europe which is plugged into the Russian economy. Trade between Russia and the EU is $440 billion and thousands of companies do regular day-to-day business in Russia. The EU has imposed three rounds of sanctions against Russian individuals and business, most recently expanding the blacklist to include sanctions against key industries- energy, banking, and weapons. Russia retaliated with an embargo on agriculture products from the EU, which could cost $6.6 billion per year in lost exports. EU ministers will meet on Friday to discuss new sanctions against Russia for its perceived role in the Ukraine conflict.

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UK Says New Russian Sanctions Could Be Lifted If Ceasefire Holds (Reuters)

Britain’s Foreign Secretary Philip Hammond said on Friday the West would push ahead with new sanctions against Russia over the crisis in Ukraine but said these could be lifted should a proposed ceasefire take hold. NATO demanded on Thursday that Moscow withdraw its troops from Ukraine, and the European Union and the United States are preparing a new round of economic sanctions against Russia for its incursion. “There will be another step up of the pressure today when the EU meets in Brussels to decide on the next round of sanctions,” Hammond told Sky News from Wales where NATO leaders are meeting. “Our economies are fundamentally more robust and resilient than the Russian economy and if Russia ends up in an economic war with the West, Russia will lose.”

However, he said measures against Russia could be eased if a proposed ceasefire between Ukraine and pro-Russian rebels expected to be agreed later on Friday takes hold. “If there is a ceasefire, if it is signed and if it is then implemented, we can then look at lifting sanctions off but … there is a great degree of scepticism about whether this action will materialise, whether the ceasefire will be real,” Hammond told BBC TV. “We can always take the sanctions off afterwards, I don’t think we want to be distracted from our determination to impose further sanctions in response to Russia’s major military adventure into Ukraine.”

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Exactly.

‘West Should Take Responsibility for Escalating Ukrainian Crisis’ (RIA)

Western leaders meeting at this week’s NATO summit are almost wholly responsible for the ongoing crisis in Ukraine, Jan Oberg, co-founder of the Sweden-based Transnational Foundation for Peace and Future Research, told RIA Novosti on Friday. “The US, NATO and European Union carry at least 80% of the responsibility for Ukraine’s crisis due to the foreign-provoked regime change in Kiev and the EU ultimatum to Ukraine about either joining the EU or the eastern Customs Union,” Oberg said. “And over the longer term – because of NATO’s expansion from the Baltic republics to Tbilisi.

These policies lack statesmanship, are reckless in the perspective of promises given to ex-Soviet president Mikhail Gorbachev when the old Cold War ended and can be seen only as provocative in the eyes of Russia,” he added. NATO leaders gathered in Wales on Thursday, September 4, for two days of talks focused on Ukraine and the rapid rise of Islamic extremists in Iraq and Syria. They have criticized Russia, calling its influence on the conflict in eastern Ukraine “destabilizing.”

Read more …

The battle for financial control.

Russia Sees Serious Threat In FATCA (RT)

Russia’s financial system is “threatened” by America’s new tax law that demands foreign banks report on all American citizens’ banking activities, the Russian Federal Financial Monitoring Service said Thursday. The head of the financial monitoring authority Yury Chikhanchin likened the one-sided data exchange to turning Russian banks into spies for the Americans. “Essentially, our financial institutions are becoming tax informants for the American economy. As similar systems start spreading to other countries, they can bring serious risks to our financial system,” Chikhanchin said at a banking forum in Sochi. FATCA requires foreign banks to provide information on American clients, who have over $10,000 in deposits, to the US Internal Revenue Service (IRS). If a bank does not comply; it can be subject to a 30% fine. Before client information is sent to America, it will pass through the Central Bank of Russia and other local financial or government agencies, which still have the right to keep the information private.

On June 30, just before the deadline, Russia signed a law that allows Russian banks to share the tax data of American clients with US tax authorities, but participation isn’t mandatory. The law simply gives Russian banks the ability to work with FATCA, but does not deem it obligatory. In Russia, only 10% of capital in the financial system is owned by foreigners or foreign entities. Participating Russian banks had to register by May 5, 2014. The Russian financial watchdog believes the American tax law is itself a form of sanctions. The head of the authority believes that such mechanisms can exist, but should be multilateral. Originally Russia planned a bilateral information exchange with the US over FATCA after the law was passed in 2010 but the US Treasury Department suspended negotiations with Russia in March 2014 over the Ukrainian conflict.

Read more …

Yikes.

Obviously Not A Bubble (Zero Hedge)

Via John Hussman… no bubble, no consequences…

Read more …

Dallas Fed Chief Repeats Gross Portrayal Of Yellen As ‘Hindu Goddess’ (MW)

Dallas Fed President Richard Fisher knows a good phrase or two when he hears one. So at a speech in front of the U.S.-India Chamber of Commerce and Ambassador S. Jaishankar, Fisher of course trotted out this description of Federal Reserve Chairwoman Janet Yellen’s speech at Jackson Hole, Wyo. on the labor market.

Bill Gross, one of our country’s preeminent bond managers, made a rather pungent comment about our efforts. He noted that President Harry Truman “wanted a one-armed economist, not the usual sort that analyzes every problem with ‘on the one hand, this, and on the other, that.’” Gross claimed that Fed Chair (Janet) Yellen, in her speech given recently at the Fed’s Jackson Hole, Wyo., conference, introduced so many qualifications about the status of the labor market that “instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”

In keeping with the theme of the night, Fisher also pointed out — in calling Texas a job-creating juggernaut — that the term juggernaut is derived from the word Jaganmatha, a title of Krishna. Fisher repeated his concern about the central bank’s policy, saying “we have overshot the mark” on interest rates.

Read more …

NZ should focus on feeding itself, not the Chinese.

New Zealand Greens See Road to Ruin in Rivers of Milk (Bloomberg)

New Zealand Prime Minister John Key sees milk and oil driving economic growth for years to come. The Green Party says he’s running a “pollution economy” that’s destroying the country’s clean-green brand. The debate about the future shape of New Zealand’s economy is at the heart of the campaign for the Sept. 20 election, in which the Greens could prove pivotal in denying Key a third term in office. The ruling National Party’s growth plan relies on increasing export earnings from the dairy and fossil-fuel industries, which generate more than NZ$18 billion ($15 billion) a year and employ 60,000 people. Oil prospectors scouring marine sanctuaries and cow urine polluting rivers are at odds with New Zealand’s “100% Pure” tourism pitch and the pristine scenery depicted in the Lord of the Rings and Hobbit movies. “We’re doing exactly the wrong thing,” Greens co-leader Russel Norman said in an interview. “People want food that is clean, green and safe. New Zealand has a great opportunity to provide that. Instead, we’re pursuing a pollution economy.”

New Zealand’s 180,000 kilometers (112,000 miles) of rivers are a vital source of water for the dairy industry, which has expanded from pastures in the North Island’s Waikato region into the rolling hills and patchwork plains of the South Island. The number of cows has almost doubled in the past 20 years to 4.8 million. Effluent from the animals has discolored waterways, while the nitrogen from their urine is soaking through the soil to contaminate groundwater, spoil rivers and choke lakes with algal bloom, a parliamentary report said last year: “The large-scale conversion of more land to dairy farming will generally result in more degraded fresh water”. “New Zealand does face a classic economy versus environment dilemma.” Norman, 47, says dairy farming focused on volume is destroying New Zealand’s environmental credentials and hurting the industry itself. “It’s very shortsighted to maximize production of milk powder,” he said. “We need to accept we’re never going to feed the world and focus on selling to people who want high-value products. The long-term future of dairying is dependent on protecting the brand.”

Read more …

I know I say this a lot, but: Not surprised.

Secret Network Connects Harvard Money to Payday Loans (Bloomberg)

Alex Slusky was under pressure to put the money in his private-equity fund to work. The San Francisco technology financier had raised $1.2 billion in 2007 to buy and turn around struggling software companies. By 2012, investors including Harvard University were upset that about half the money hadn’t been used, according to three people with direct knowledge of the situation. Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday-lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI LLLP. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600 percent interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

Slusky’s fund, Vector Capital IV LP, bought into Cane Bay a year and a half ago, according to three people who used to work at Vector and the former Cane Bay employees. One ex-Vector employee said the private-equity firm didn’t tell investors the company is in the payday-lending business, where borrowers repay loans out of their next paychecks. Vector’s investment in Cane Bay shows the continuing allure of the payday-loan business, even after most states from California to New York restricted or banned it to protect consumers. The crackdown has driven borrowers online. Internet payday lending in the U.S. has doubled since 2008 to $16 billion a year, with half made by lenders based offshore or affiliated with American Indian tribes who say state laws don’t apply to them, according to John Hecht, an analyst at Jefferies Group LLC in San Francisco.

Read more …

Jan 172014
 
 January 17, 2014  Posted by at 4:40 pm Finance Tagged with: , ,  


National Photo Co. Federal Clothing Store, Washington, D.C 1925

The time has come. The Automatic Earth has been talking about the inevitability of deflation for years, but the concept only now goes mainstream. Which is a shame, because a lot could have been done to try and mitigate the damage it’s going to do.

Although it’s as inevitable as the laws of thermodynamics, the notion that record debts will always lead to record debt deflation is hardly discussed; you have Steve Keen, Mike Shedlock, and Nicole and yours truly here at The Automatic Earth, and that’s about it (I’m sure I miss one or two, apologies, but I can’t think of any). And although put together we have a reasonable readers base, blogs and websites are still no more than fringe sources compared to the main media where everyone lacks either the intelligence or the courage or both to even think about the notion, no matter how close its certainty may be to that of thermodynamics. They won’t have their world view disturbed by reality.

Well, reality is here. And we can have our 15 minutes of fun watching them try to explain away their expert blinders. Sure, Japan was recognized as being in deflation, but that’s far away, and moreover, no sooner does PM Abe play double or nothing all on red with another huge chuck of public debt, or everyone’s ready to claim he beat the deflation beast. Yeah, we’ll see about that. The next region the pundit choir, all in unison in case they need to claim everyone else was wrong too, declares to be “under the threat” is Europe. Nary a word yet about the US.

And moreover, the only way they think they can now see deflation is in consumer prices, which are nothing but a consequence of what deflation really is: a drop in the combination of money and credit supply, multiplied by the velocity of money. Or, if you will, you can broaden this to include GDP, and thereby arrive at the quantity theory of money: Inflation x Real GDP = Money x Velocity.

For money supply in the US, it’s best to look at John Williams’ Shadowstats, because as we know M3, the “really broad” money supply, is no longer published by the Fed. Here’s John’s latest update:



And since there is no reason to assume M3 velocity is shockingly higher than M2 velocity, it seems pretty safe to use a FRED graph for the latter:



What we see if we take the period since the start of Williams’ data, 2003, is that both M2 and M3 money supply have actually fallen a little, while M2 velocity has plunged by 25% or so. Yes, that means, admittedly painted in broad strokes, that the average American spends 25% less than they did in the late 90’s! If you insert that knowledge into the quantity theory of money, Inflation x Real GDP = Money x Velocity, it becomes clear that either GDP or inflation, and probably both, must have gone down quite a bit.

By the way, looking at Europe, it’s clear they, unlike the US, certainly tried to boost one side of the equation, as the other one crumbled. It’s almost funny.



And from a slightly different and more recent angle:



Whether we talk about Europe or the US or Japan (where wages have been falling even faster than prices – the true sting of deflation -, for many years): when people buy less stuff, there is less need for workers to produce it and sales(wo)men to sell it to them. So they will be out of work and have less money to buy stuff, which creates even less need for workers and sales(wo)men, and so on. Deflation really is, sorry but there is no better word, a bitch. And as Japan can tell you, one that’s very hard to get rid off. Deflation is a bitch that really makes herself at home. And Japan has had the luck until 5 years ago that they were suffering deflation in a world where there was still demand for their products. Europe and the US obviously won’t be so lucky.

But if people have less money to spend, they can borrow, right? After all, isn’t that what we’ve all done all the time? And hey, to be fair, it’s not for lack of trying by the head honchos. Over the past 5 years, governments, certainly in the US and UK, have tried very hard to get people to buy homes again (with debt). But that doesn’t fight deflationary forces, since it doesn’t really raise the velocity of money, it may even bring it down: In essence, it puts more debt on people’s shoulders (which will instead conveniently be labeled ‘assets’ as long as prices keep rising), and more debt means less spending elsewhere. Cristmas sales were, overall, gloomy again. And that when people can still buy with plastic.

Another example: QE doesn’t enter in to the real economy, so it doesn’t increase the velocity of money. A large part of QE creates reserves that banks hold at the Fed, with the emphasis on hold, while, as Professor Steve Keen recently suggested in private – dinner – conversation, the part that reaches the shadow banking system is pumped into the stock markets, because shadow banks don’t have accounts with the Fed and they need to put it somewhere. Still, that has little effect on the velocity of money, though one might argue resulting – temporary – higher valuations tempt more people to buy stocks.

But it’s not about stocks, either, the velocity of money is something that takes place in the street, it’s not something that is controlled by 300 Wall Street bankers, but by 300 million Americans, the ones that make up 70% of GDP. Even if those bankers spend 100 times more on food and clothing than Joe No Blow, the effect will be negligible. It’s not about banks or bankers, it’s about what those 90 million Americans who are no longer part of the labor force spend on a daily basis on food and clothing and heat, and the 40-odd million on foodstamps, and the fast growing segment of the population that depends on incomes at the level of burger flippers and WalMart greeters. The lives all these people find themselves in, and let’s not forget the record low labor participation rate, drag down the velocity of money ever more.

It’s perhaps this complete lack of control the financial system has over the velocity of money that had former Fed Governor Laurence Meyer make the following utterly incredible remarks last July at CNBC. You really should hear this specimen. I guess it’s accepted “policy” that anything you don’t have control over, you just pretend doesn’t exist. As per Meyer: “The word ‘velocity’ doesn’t appear in my vocabulary; the issue is the amount of lending by banks”.

He also asserts that velocity is not a useful concept because it is “too variable”. What on earth is that supposed to mean? That we’re only supposed to take note of things that are constant? For some reason this reminds me of Homer Simpson’s stern declaration that “In this house, we obey the laws of thermodynamics”. Equally convincing at first bite, equally absurd two seconds on. It also reminds me of Steve Keen’s debate with Paul Krugman, in which the latter sought to entirely deny the role of banks in money creation. Sure, just pretend it doesn’t exist, that’s all you need.

Former Fed Governor Meyer: Velocity of Money Means Nothing

Former Federal Reserve Gov. Laurence Meyer told CNBC Tuesday [July 9, 2013] that velocity of money – the rate at which capital is transacted in an economy – shouldn’t concern markets, and he dismissed the metric as a guide in setting central bank policy. The concept is not very useful, Meyer said. “Monetary policy is about affecting rates, which affect financial conditions and affect aggregate demand.”

Velocity of money refers to the rate at which money in circulation is spent on goods and services, and economists use it to determine the expected rate of inflation. An economy with a higher velocity of money can expect a higher rate of inflation.

But Meyer, who now works with Macroeconomic Advisors, said that velocity is “just a definition” that doesn’t help predict much of anything. “Monetary policy is determined by basically a strategy that is embedded in policy rules. I can’t tell you what the money supply is or how fast it’s growing – I don’t care.” he said. “The word ‘money’ is never said in our office [and] probably not by the staff at the Fed,” he added. “Money doesn’t appear in any modern macro model. We have got to get over that, OK? We’re beyond that now.”

It’s not all that easy to silence me, but Larry Meyer managed to do it there for a minute or two. If this is how economic policy in America is decided, it’s no wonder there are 42 million people on foodstamps in what was once the richest nation on earth. Play that 6 minute video! Ben Bernanke is/was a little less absurd in this regard, but only a little, because as scared as he said he was of deflation, he’s always maintained he had it all under control. Sadly, there are debt levels at which debt deflation becomes like thermodynamics, events that can’t be stopped.

And pumping money into banks through QE does nothing to raise the money supply, only the monetary base (something I suspect Ben knows very well, which would mean he’s lied throughout his tenure about stimulating the economy), and Ben and Timothy and Jack Lew’s refusal to restructure bank debt hasn’t exactly helped either, to put it mildly. Bernanke’s claim, when seen in this light, that he had the deflation threat under control, is like saying he had the power to stop the waves from hitting the shore. And I think he’s known that, too, all along. The Buddha of banking my a**. I find it hard to believe he gets to leave as some sort of hero. The man should be under investigation.

But yeah, the press has en masse started to talk about deflation in the EU these days (good luck trying to spot a European politician who agrees, though). Try “deflation” as a search term in Google news, and you’re inundated with articles that include the term. Most still with pundits claiming “they” won’t let it happen, but it has certainly become a very popular word, almost overnight.

I don’t want to bother you with a long string of such pieces, but let me lift out some that I think are interesting. This morning, Royal Dutch Shell issued a strong profit warning, and cited “weaker refining conditions caused by industry overcapacity and weak demand”. The introduction of a new CEO is of course the ideal moment to announce bad news: he can’t be held responsible, he’s cleaning the slate. But I still smell deflation in this. Overcapacity, weak demand, money’s not rolling.

Shell issues shock profit warning as results plummet

Royal Dutch Shell’s new boss Ben van Beurden has admitted the oil firm’s performance was not what he expected from the group in 2013 as he issued a shock profit warning just two weeks after taking over at the helm. Van Beurden – who succeeded Peter Voser as chief executive on 1 January – said the firm’s fourth-quarter figures were expected to be “significantly lower than recent levels of profitability”.

Its fourth quarter underlying earnings are now expected to almost halve to around $2.9 billion. This is set to leave full-year results 23% lower at $19.5 billion. Shell blamed lower oil and gas prices and “weak industry conditions” in downstream oil, as well as higher exploration expenses and lower upstream volumes. Its recent third-quarter figures were badly hit by a 49% drop in downstream profits as a result of weaker refining conditions caused by industry overcapacity and weak demand.

On Wednesday, the incomparable Ambrose Evans-Pritchard took it upon his genius mind to link oil to deflation as well, in his own equally incomparable style (when he starts venting his opinion, you know it’s time to go walk the dog. Ambrose makes a lot of sense here:

Coming ‘oil glut’ may push global economy into deflation

One piece of the jigsaw puzzle is missing to complete the deflation landscape across the West: a slide in oil prices. This is becoming more likely each month. Turmoil across the Middle East and parts of Africa has choked supply over the past two years, keeping Brent crude near $110 a barrel despite a broader commodity slump. Cotton and corn prices have halved, as has the UBS index of industrial metals. Such anomalies rarely last. “We estimate that crude oil is now the mostly richly priced commodity in the world,” says Deutsche Bank in a fresh report.

Michael Lewis, the bank’s commodity strategist, said markets face an “new oil supply glut” as three forces combine. US shale will add 1 million barrels a day (b/d) to global supply for the third year running; Libya will crank up shipments after a near collapse in 2013; and Iran will come out of hibernation. “This will push OPEC spare capacity to levels last seen in the depths of the financial crisis in 2009,” he said.

America is on track to overtake Saudi Arabia as the top global producer of oil by 2016. It will account for more than half of non-OPEC world supply this year. The US Energy Department says US oil imports will drop to 5.5 million b/d by next year, half the level a decade ago. This turns the world’s 89 million b/d market upside-down.

Deutsche Bank said Saudi Arabia may have to slash its output by a quarter to 7.5 million b/d this year to stop the bottom falling out of the market. The Saudis no longer have such money to spare. They are propping up an elephantine welfare nexus to keep a lid on explosive tensions in the Eastern Province, home to Saudi oil and its aggrieved Shia minority. A cut of this size would push the budget into deep deficit.

This comes as Iran makes its peace with the West. Its 30-year vendetta with the US – Iran’s natural ally in many ways – no longer makes sense. President Hassan Rohani is no doubt pushing his luck by describing the nuclear deal as a “surrender” to Iran by the great powers, but let him have his flourish to save face. “It does not matter what they say, it matters what they do,” retorted the White House. [..]

Meanwhile, Libya is picking itself up from the floor after separatist militia forces reduced the country to anarchy last year, blockading key export terminals. The oil minister said this week that crude output has tripled since the summer to more than 600,000 b/d as the El Sharara field comes back on stream. Libya may add 1 million b/d to global supply this year.

Bank of America says a simultaneous return of Iran and Libya could add up to 3 million b/d. Just a third of this “positive supply shock” could shave $20 off the world oil price, unless OPEC’s fractious cartel can slash output quickly enough to offset it. We should expect hot words at OPEC summits, and plenty of cheating. [..]



Oil bulls says global economic recovery is strong enough to soak up any rise in supply. Perhaps, but Simon Ward at Henderson Global Investors says the world money supply rolled over in November and is now flashing amber warnings.

His key gauge – real six-month M1 – for the G7 rich states and E7 emerging market economies has slowed to 2.3% from 3.7% last May. It acts as an early warning indicator, six months ahead. This suggest that global growth may soon fade. “Global risks are rising. The cycle already looks mature by historical standards,” he said. The growth of broad M3 money in the US has slowed to 4.6% even before Fed tapering cuts off stimulus. In the eurozone it is has been near zero for the past six months.

The latest data from China are very weak, with M2 growth falling to 13.6% in December from 14.2% in November as the authorities tighten. It is the change in pace that matters. China looks eerily like the US in 2007 when broad money buckled. The sheer scale of money creation in China has worldwide implications. Zhang Monan from the China Foundation says the money supply is 200% of GDP, and 1.5 times larger than the US money supply in absolute terms. She said debt deflation is now setting in as the central bank tries to rein in credit.

As readers know, my view is that China is riding a $24 trillion credit tiger that it cannot control. Fresh data show that fixed investment surged to $5 trillion last year, more than in the US and Europe combined. This implies yet more excess capacity, transmitting a deflationary impulse worldwide.

A sudden slide in oil prices against this background may not be entirely benign. [..] The risk is that it will “unhinge” inflation expectations as the headline rate keeps dropping. Half of Europe already has one foot in deflation, with prices falling over the past five months once austerity taxes are stripped out. Any shock at this point could start to frighten the horses. [..]

To avoid confusion, let me be clear that the dangers of dwindling oil supplies in the long-run have not gone away. Easy reserves of crude are being depleted. New fields are more costly. Peak oil may have the last laugh. Yet this should not be confused with the short-term risks of deflationary shock.

I recently attended a Transatlantic Dialogue on Energy Security with senior military officers in London and Washington. The message was that shale will come and go – with US tight gas peaking by 2017 – creating a false sense of security as the deeper strategic threat continues to build. That is broadly my view as well. Much drama can intrude along the way.

Sorry for the long quote (the original is quite a bit longer still), but I think Ambrose had something in just about every word I quoted. He even made sure to include that shale oil is no more than a short-term fad, albeit with the potential (and this is because of speculation) to disrupt an entire industry (re: Shell’s losses announced today and its $2.1 billion write-down of shale “assets” last year).

And it’s good for people to ponder the notion that lower gas prices are not – only – a good thing. With the potential to drag down even CPI (consumer inflation) numbers below zero, they can create panic, a huge loss of trust in both political and economic systems, and a severe slide in markets. Shell accounts for close to 19% of the Amsterdam Stock Exchange (AEX), to name an example. In general, seeing deflation as beneficiary is not a very smart thing to do.

Albert Edwards had a noteworthy take on deflation as well, as quoted by Business Insider.

We’re On The Cliff Of Deflation And Markets Don’t Seem To Care

Societe Generale’s Albert Edwards has warned for some time that we are on the precipice of deflation. But in his new note to clients, he seems utterly bemused. Markets just don’t seem to care. “Markets remain stoic about the risks of outright deflation in the US and eurozone for one very simple reason,” he writes.

“They simply do not believe a recession that would trigger outright deflation is on the horizon. Quite the reverse – they believe with all their heart that we are at the start of a self-sustained recovery. That is despite the fact that the US recovery is already noticeably longer than average, and that the classic signs of old age, such as rapidly slowing productivity growth and stagnant corporate profits, can clearly be seen.”

Market expectations of inflation — via the 10-year bond market — have “remained entrenched” above 2% for more than a year, Edwards writes. “A chasm is growing between reality, both on a core and headline basis, and expectations,” he says. “If investors begin to doubt the economy recovery then they will no longer be able to ignore the lurking deflationary threat. Rapid market moves would ensue.”

There’s only one reason for stocks to be as high as they are at present, and it’s obviously not to be found in the real economy it allegedly reflects, but in stimulus from governments and central banks (Greek stocks were up 19% in Q4?!). Take away QE et al and all stock prices will be reflecting is unemployment numbers and foodstamps. I’m quite amused by people who say that since QE has had little effect on the real economy, tapering can’t possibly do much damage. You think? I say: take it away, Janet!

In the end, central banks are powerless when it comes to fighting deflation. Certainly when they have become so politicized and bought up by industry, as the Fed has, that they refuse to restructure debt. When that’s accepted policy, it’s merely a matter of time before the debt drags everything down that’s not bolted fast. The only sensible thing to do when there’s too much debt is to restructure it. But yes, I know, that would sink a too big bank or two, and a bunch of properties in Connecticut and St. Barth’s. And if you got the power to sink an entire nation instead and save your friends, hey …

Of course the reason the Fed does no restructuring and defaulting is to provide more time for private debt to be transferred to the public. If one thing defines Ben Bernanke’s tenure, it’s that. And when that process is deemed to be no longer sufficiently beneficial, we all better make sure we found ourselves adequate shelter from the storm.

I’ll close with a piece Zero Hedge posted from Phoenix Capital Research, where they don’t belive in mincing their words:

Three Points That Refute All Talk of Recovery

For well over five years now we’ve been told that the US was in recovery and that as most the biggest risk was a potential double dip or worse a slow down to the recovery. The reality however was that the US never experienced a real recovery (unless you work at one of the “chosen” firms on Wall Street). Housing has re-entered a bubble driven by liquidity, not first time homebuyers entering the market.

The key relationship for housing is home prices relative to income, NOT nominal prices. Stocks are valued relative to earnings. Homes have to be priced relative to incomes. Today, the median US income is $51K. The median home price is $328K. So homes are priced at 6.4X incomes. To put this into perspective, in 2007, the housing bubble was only marginally higher than this with homes priced at 6.8X incomes. So housing, which is alleged to be in a recovery, is not much more affordable today than it was in 2007… at a time when home prices were more overpriced than at any point in the last 100 YEARs.

Speaking of incomes, they remain WELL below their 2007 peaks… which were in fact below the 2000 peaks. In fact, the median income in the US today is effectively the same as back in 1987.



Again, NO recovery to be seen here. Indeed, the number of people of working age who actually HAVE jobs is back to levels not seen since the 70s. Gotta love that recovery… when the percentage of people working is the same as it was back when the US was in a recession four decades ago!



At the end of the day, the entire economic landscape is very simple to understand. The economy grows when people make more money and spend that money on things including homes. Lower incomes= lower spending= lower economic activity. Sure, you can reflate a credit bubble in which spending rises briefly due to people having easy access to credit… But at the end of the day, all this does is set the stage for another economic collapse when people once again default on their credit card payments/ mortgage payments.

That day of reckoning is coming… It’s just a matter of time.

Amen. Deflation is here to stay, and it’s going to hurt you much more than you care to think.


This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!